Jul 15 2010

Is it Luck or Skill?

Sometimes it is difficult to tell the difference between luck and skill.  This is particularly true in the stock market.

What clouds the issue is our natural tendency to rely on results (“what happened”) to tell us if we made a smart decision instead of determining whether the process for making the decision actually worked.  This becomes even more difficult when the situation involves a high degree of risk.

Take Donald Trump for example.  “The Donald” is reputed to be a financial genius. Despite his obvious talent, is his reputation the result of a series of brilliant decisions, or has he simply been lucky?  His successes in New York City real estate are the stuff of legend but they are somewhat offset by the huge losses posted by his New Jersey casino investments not to mention the recent difficulties with his condo projects in Florida and Dubai. Were these results due to his decisions, lady luck, or a combination of the two?

This distinction is important when “experts” give investment advice.  Often the “expert” earned a reputation by making a big bet on the market that turned out to be correct.  His followers now expect his advice to lead to similar profitable results.  But what if the original “win” was merely a lucky guess?

A long time ago, a client proposed a high risk strategy and asked for my advice.  I told him not to do it.  As it turned out his bet would have paid off and he called to tell me I was wrong.  I responded that despite the fact that he would have won the bet this time, continuing to make such high risk bets would eventually lose him a lot of money.  The advice was correct even if, as in this instance, he would have won the bet. I posed the following question to him: “If you were considering taking your retirement money to the race track to bet on the daily double and I advised against it, would you consider that to be bad advice even if your horses came in?” 

Not surprisingly, we disagreed about what was the correct answer. 

I have often heard people say “I’d rather be lucky than smart” but simply relying on luck is a poor substitute for a logical investment strategy.

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Jul 08 2010

DFAS to Stop Savings Bond Allotments

Due to changes at the Treasury Department in how they will issue U.S. Savings Bonds, DFAS will stop all Savings Bond allotments effective 31 July 2010.  The Treasury Department will issue bonds through their TreasuryDirect web site or you can buy bonds from financial institutions.

See the TreasuryDirect web site at http://www.treasurydirect.gov/tdhome.htm.

For more information from DFAS, see http://www.dfas.mil/news/ussavingsbondallotments.html.

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Jul 07 2010

What’s a TSP/401k/IRA Investor to Do?

I recently returned from trips in New York and Chicago after listening and talking to numerous mutual fund and private money managers. I went to these meetings and conferences not just looking for the golden nuggets but expecting to find them. If only.

Discussions were all over the map. We are living in strange times. No one has a grip on the current economic environment. When looking into a complex situation, depending on their area of specialization, you get positive and negative opinions. Common themes surfaced; interest rates, inflation, taxes, future laws and regulations, the country’s budget, the world’s budget issues, and finding opportunities in this confusion.

As an investor with similar goals and means as you, here’s what I came away with: “The more things change, the more they stay the same.” While some of the individual pieces have changed in this economy, in a big picture way, this country and world have always gone through turbulent and confusing times—and always will.

For those of us who continue to work and invest through our employer plans, I believe even more in the philosophies and strategies we have shared on the pages of this blog and in our presentations. You can be successful if:

• You understand some of the history of our country and our economy.
• You take the emotion out of your investment plan.
• You use strategies that take advantage of known market conditions.
               o  Average down, Proper Allocation, Re-balance

You can read about the details of these points in past blog posts.

•  The Average Investor, Part 1, Part 2, Part 3, Part 4.
•  In a Bear Market
•  Market in Perspective
•  Before You Pull the Trigger

If you are closing in on retirement (within 5 years), you have it a bit more challenging. It is possible that stocks won’t have a strong rebound within this period and bond values may take a hit. Continue your systematic investing by maxing out your contributions. If stocks continue their volatile ways, wild swings up and down but basically remaining flat over time, systematic investing will allow you to pick-up more shares in the down times. When stocks return to their normal course, you will be glad you have more shares. Consider a balanced allocation among your stock and bond positions and add alternative investments to a portion of your allocation.

TSP members, you are very limited in the alternative world. This is one reason why I recommend you roll your TSP into an IRA after you leave the Service. Pick an IRA with investment options and low cost. You have to go with your I, S and G funds. For illustration: C 35%, F 35%, S 10%, I 10%, G10%.

For you folks with more choice, consider adding REITs, international stocks, international bonds, cash, short-term bonds, dividend paying stocks, high-yield bonds. These would be added to a base of balanced stock-bond holdings.

Not to throw cold water on anyone’s dreams but some of you may need to delay your retirement plans to build more assets. Y’all be careful out there.

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Jun 28 2010

Post 9-11 GI Bill Livecast on 6/29!

Please join us for a Post 9-11 GI Bill Livecast on 6/29 at 12 Noon Eastern Time…

During this 45-minute live video cast, we will be sharing the latest information on the Post 9-11 GI Bill and giving you key action tips to make the most of this valuable benefit for currently serving service members, retirees and veterans.

Bookmark this link:

Post 9-11 GI Bill Livestream

You will have the opportunity to submit questions live and have those answered during the Q & A portion of the live cast.  Please note that your computer will need the most recent version of Adode Flash for optimum performance, which you can download here.

We hope to see you there!

Phil Dyer, CFP, RLP, CPCC

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Jun 07 2010

Have You Fled to Bonds for Safety? Be Warned.

Bonds funds are being purchased at a blistering pace for the last several years.  The ups and downs of our stock funds have left us gun-shy about the use of stocks in helping us create the wealth we need for the future.  The purchase of bonds to counteract volatile stocks in combination with our nation’s and the world’s economic policies are setting up the next bubble that will pop in the future.  Bonds.

Bonds are tricky because they lure us into a false sense of security.  They’re always safe, right?  You can count on them to produce a steady return of interest payments.  Or said another way, they provide a consistent positive return, right?  This is true if you own individual bonds and hold them to maturity–assuming they are quality bonds and the bond issuer is financially solid.  With a bond fund however, you own a portfolio of bonds and those bonds’ values fluctuate with the bond market.  Since it’s the value of your account that tends to matter the most, when the value of those bond funds starts to drop, will you wish you had a smaller allocation percentage in bond funds.

Bond values are influenced by things like inflation and rising interest rates and the quality of the issuer.  Inflation eats away at your return.  If you’re getting 4% interest on your bond and the inflation rate rises to 5%, your value will drop.  If interest rates rise, the value of your bonds decreases.  Who wants your 4% bond if new bonds offer 5%?  What happens if people question the financial stability of the bond’s issuer?  Two things; the added risk due to the issuer’s financial problems decreases the bond’s value and people jump ship so the value of the bond drops.

Given the examples above, what do you believe are the chances of inflation and interest rates rising in the future?  What about the financial stability of the governments or corporations who issue bonds?

What is a person to do? 

If you still contribute to your funds on a regular basis–as a 401k at work.  You should be fine over the long haul.  Regular contributions take advantage of a strategy known as ‘dollar cost averaging’ or ‘averaging down.’  This strategy works by buying more shares of funds as the price of the funds drop.  You know, buy low.  Buying low lowers your average share cost which enhances your account value as the bond market values return.  If you average down, market downward swings are your friend provided you have a time line that allows the market to return before you need the money in retirement.

If you are close to or in retirement.  Consider the need to minimize the potential losses by diversifying your portfolio.  Ask yourself, if your bond funds go down in value can you afford to the take the hit in your account value?  If the answer to this question makes you nervous, you might want to talk to your advisor about alternatives to your bond funds to spread the risks.  Maybe it’s just a matter of diversifying the types of bond funds you own.  Not all bonds funds react the same to the factors listed above.  There are other vehicles besides stocks and bonds that could help cushion the impact of a negative bond environment.

MOAA does not sell investment products and we do not provide financial planning from our staff.  We act as financial counselors and educators helping people become savvy consumers.

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