Kimmunications

What Dara Torres Can Teach Us About Investing

Don't you just love the Olympics? I don't watch much television, but I was glued to the set last Friday night, watching the opening ceremonies. The pageantry and the technology on display were simply breath-taking.

I've always admired Olympic athletes for their dedication and discipline. It takes long hours at the gym, on the track and in the pool, each and every day, to reach elite status. And every Olympic games, I look forward to the stories behind the athletes, the tales of triumph and overcoming adversity.

This year, my favorite story has to be that of Dara Torres, the 41-year-old swimmer who helped her relay team win a silver medal. This is her fifth Olympic games. She first competed in the Los Angeles games of 1984 -- the year before her fellow Olympian, Michael Phelps, was even born!

Can you imagine the discipline it took for Torres to maintain her elite status as a swimmer? She's battled through countless surgeries and grueling training sessions over the years, and she's arguably better than she's ever been -- last year, she set an American record in one of her events. And did I mention she had a baby just two years ago? Think of all the times she could have easily given up and walked away. And yet, she persevered.

Dara Torres is a success story because of her discipline. And the same commitment to discipline can do for investors what it does for elite athletes.

Success in investing comes from creating a plan and sticking to it every day. That sounds awfully complicated, but it really isn't -- provided you have a solid system in place.

Systematic investing strips away the complex external variables and tells you exactly what to do and when. A huge rally or one-day drop in the stock market may cause your emotional brain to make rash decisions that you'll regret later, but a system will help keep you on the right track. In the event you suffer an investing "injury," a system will help you recover faster. By sticking to your system, you're more likely to avoid the mistakes that send other investors permanently to the sidelines.

Dara Torres' system of disciplined training has made her the oldest Olympic swimming medalist in history.  A disciplined system of investing – be it dollar-cost averaging or the Snider Investment Method®-- may make you a successful investor at any age.

SOURCE:

1. Clarey, Christopher. "With Silver, Torres Sets Age Record for Medalist," The New York Times, 10 August 2008. [accessed 12 August 2008]

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Kim Snider is the President and Founder of Snider Advisors, an investment adviser registered with the SEC, focused on teaching individual investors a sensible, long-term investment approach focused on maximizing cash flow. For more information on Snider Advisors or the Snider Investment Method, please visit snideradvisors.com. Her book, How to Be the Family CFO: Four Simple Steps To Put Your Financial House in Order, will be in bookstores October 1, 2008.

Snider Advisors makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 888-6SNIDER to request the Snider Investment Method® Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments, including the Snider Investment Method™ are subject to risk, including possible loss of principal.

Lessons from the investment bank disaster

I saw last week that Merrill Lynch and Citigroup were in the news again for the exotic mortgage-backed investments that have helped to screw up the credit markets.  Merrill sold off nearly $31 billion of the investments for just 22 cents on the dollar. Citigroup is expected to write down $8 billion because of its involvement in these crazy investments.

Lots of analysts and reporters are talking about how these losses reflect the trickiness of the financial markets and how these collateralized debt obligations were risky ventures from the start. But I don't think that's really the lesson to take from these announcements.

It didn't take a genius to see what was happening. The big investment banks created a bubble, not unlike the tech bubble of a few years back. Everybody knew that eventually the bubble would burst and that things would get ugly. Everybody knew these investments were risky. But the investment banks ran into them head-on. Why? Because of their compensation system. There was the potential to make huge sums of money in commissions, so they were incentivized to take on huge amounts of risk. 

The investment banks also felt bullet-proof. They figured that they were too big to fail, and that the government would bail them out if they got into trouble. In other words, you and I would be on the hook if things went south.

A money manager at one of these investment banks has an incentive to take as much risk as he can with other people's money. He gets paid for gathering assets, and the more assets he brings in, the more he gets paid. The way to bring in more assets is to show outstanding performance over a short period of time and get publicity in the major financial magazines. The way to show outstanding performance in the short term is generally to take on excessive amounts of risk.

By taking that extra risk, the money manager puts his clients in position to lose a lot more down the road -- but the manager doesn't care. Why should he? He doesn't get penalized as a manager for the losses his clients get; he gets paid for the assets he brings in.   

This shows the systemic problem behind Wall Street's compensation structure. Whether you're talking about these exotic investments such as CDO's or the way that fund managers handle your funds, it doesn't matter. Wall Street types are incentivized to put their interest ahead of yours, and they do not suffer the same consequences as you do when you lose money.

These managers are paid handsomely and are widely regarded as the best in the business. They're supposedly geniuses. But if they can screw up their own companies so bad, do you really want them managing You, Inc.? 

The moral is clear. When Wall Street appears in genius mode, raking in huge profits on mysterious products and complex trades, the secret isn't genius at all. It's that hubris is running wild, and so is risk. And whether it's tomorrow or five years hence, risk will jump from the shadows, knife in hand, to cut genius down to size.

-- Shawn Tully, editor-at-large, Fortune Magazine

If you've been reading my blog or newsletter for a while, you probably know that I have six principles underlying my investment philosophy. Number One is "Most investments are designed to make Wall Street rich, not you," and everything else just cascades down from that.

I think the credit and liquidity problems we're seeing now is a fallout from the greed on Wall Street, and it's a prime example of why I advocate managing your own money. You are uniquely qualified to do it, assuming that you are properly educated. The good news is that it's not hard to learn. It's not a big mystery that takes years and years to decipher.

Even if you choose to have someone else manage your money, you still need to be educated. A properly educated investor is subject to the least amount of conflict-of-interest and can better distinguish between a good investment and a clever sales pitch.

Educating investors is what I do, and helping people succeed is what I love. If you're ready to take the reins of your own portfolio, or if you just want to be a more educated investor so you can make better, more informed decisions, let's chat. Give me a call at 214-245-5236, 1-888-6SNIDER, or send me an email.

SOURCES:
1. Story, Louise, "Write-Down Is Planned at Merrill," The New York Times, 29 July 2008. [accessed 30 July 2008]
2. Dowell, Andrew and Ed Welsch, "Merrill Deal May Cause Banks to Revalue Debt," The Wall Street Journal, 30 July 2008. [accessed 04 August 2008]
3. Tully, Shawn, "Wall Street's Money Machine Breaks Down," Fortune, 12 November 2007. [accessed 01 August 2008]

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Kim Snider is the President and Founder of Snider Advisors, an investment adviser registered with the SEC, focused on teaching individual investors a sensible, long-term investment approach focused on maximizing cash flow. For more information on Snider Advisors or the Snider Investment Method, please visit snideradvisors.com. Her book, How to Be the Family CFO: Four Simple Steps To Put Your Financial House in Order, will be in bookstores October 1, 2008.

Snider Advisors makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 888-6SNIDER to request the Snider Investment Method® Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments, including the Snider Investment Method™ are subject to risk, including possible loss of principal.

You May Be in Good Financial Shape and Not Know It

Yes, many people are staring retirement in the face and aren't even close to being prepared. Yes, our economy is in a funk right now. And yes, everyone is feeling the pinch of higher prices for gas and food. Don't you think it's time to turn away from all the gloom and doom and think something positive?

I'll start with this: You may very well be on your way to a secure financial future, no matter what you keep reading in the media. 

The press likes to focus on doom and gloom, and it likes to tell us time and time again that millions of Baby Boomers are heading toward retirement without nearly enough saved up. They'll emphasize the findings of the latest EBRI Retirement Confidence Survey, which says that most workers aren't confident they'll have enough to retire on. All this may be true, but by focusing solely on the unprepared, it strikes fear in the minds of everyone, including the millions of Baby Boomers who actually DO have plenty of resources to get them through retirement.

I'll admit; I'm just as guilty as the next guy. For the last several years, I've trotted out tons of statistics to try to scare people into shaping up their retirement portfolios. What I've found, however, is that I've been scaring the wrong people.

The fact that you read my articles tells me that you are trying to be on top of your financial situation. The ones who are truly ill-prepared aren't likely to be seeking advice from someone like me. They're probably blissfully ignorant of their financial situations.

I meet with people all the time to go over their individual circumstances, and I've found that most of them fall into three categories:

1. Those who have enough to retire comfortably on (sometimes a lot more than enough), but don't think they're in good shape. Most of them just need to learn how to structure their portfolios to target a sustainable income stream.
2. Those who could have enough, they just need to adjust their spending or their income, and sometimes both. They typically have enough time to get back on the right track; they just need someone to point them in the right direction.
3. Those who really don't have enough, but they think they do. They spend like they have lots of money to burn, when they really don't. They typically need a dose of tough love! They'll probably have to work longer, cut their expenses to the bare nub and save like crazy – not the advice they want to hear.

If you're worried about whether you're adequately prepared, then let's talk.  Let's have a conversation about your situation and your goals. I won't try to hard-sell you on Snider Advisors or the services we offer; I truly just want to help you and maybe calm your fears. The sooner you find out where you stand, the sooner you can make the necessary adjustments – and the less painful those adjustments will be. Give me a call at 214-245-5236, toll-free at 1-888-6-SNIDER, or shoot me an email. You might be better positioned than you think.

SOURCES:

1. Helman, Ruth, et al. “Americans Much More Worried About Retirement; Health Costs a Big Concern,” Issue Brief, Employee Benefits Research Institute, April 2008. [accessed 29 July 2008]
2. Hurt III, Harry. “Who Wants to Retire Later? (Don't Laugh)” The New York Times, 20 July 2008. [accessed 28 July 2008]

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Kim Snider is the President and Founder of Snider Advisors, an investment adviser registered with the SEC, focused on teaching individual investors a sensible, long-term investment approach focused on maximizing cash flow. For more information on Snider Advisors or the Snider Investment Method, please visit snideradvisors.com. Her book, How to Be the Family CFO: Four Simple Steps To Put Your Financial House in Order, will be in bookstores October 1, 2008.

Snider Advisors makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 888-6SNIDER to request the Snider Investment Method® Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments, including the Snider Investment Method™ are subject to risk, including possible loss of principal.

Time to Tackle Some Widespread Myths

I was going through my magazines the other day, and one little graphic jumped out at me. It showed the results of a survey of working 56-65 year-olds who were asked about their retirement plans. What it told me was that there are still a lot of misconceptions out there on how to plan, save and invest for the future.

The mainstream press doesn't do much to shatter these myths. So I'm going to go point-by-point through the survey results, and I hope I'll be able to set many people straight.

Finding: 43% of those surveyed believe they'll be able to withdraw 10% or more of retirement savings each year without exhausting their capital.

Reality: The widely accepted "safe" withdrawal rate is more like 4%-5% per year from a well-diversified portfolio of stocks and bonds, according to several studies. As with most of investing, the term "safe withdrawal rate" comes with a disclaimer: 4%-5% is merely a figure based on historical data that provides a high probability you won't outlive your money.

How can that number be so low if the stock market, on average, returns 10.4% a year? It's because the 4%-5% figure takes into account the fluctuations of the stock market as well as inflation -- an often overlooked piece of the retirement income puzzle.  First, the "safe" withdrawal rate assumes you aren't 100% invested in stocks; you have at least some assets in bonds and cash, which carry lower returns. Second, the average market return is an oversimplification of how the market really works. If the S&P 500 is up 10% one year and down 10% the next, the "average" return is 0, but you would end up with less money. Third, you have to take into account inflation. If you assume that the historical rate of inflation is 3.5% per year, your portfolio's returns have to grow that much just to keep up, and your withdrawals have to increase at the same rate so you don't lose purchasing power.

This is why I say that you have to target double-digit returns with your investments.* To be able to withdraw 4% a year, keep up with inflation (3.5%) and pay your taxes (assuming a 25% bracket), you'll need to aim for at least 10% a year -- more if you want to withdraw more, if inflation is higher than 3.5%, or you're in a higher tax bracket. I wrote an article on bonds a while back that explained the math behind this statement.

Remember, this is a target of at least 10% so you can potentially withdraw 4% a year. Most retirement portfolios aren't set up to target double-digit returns, which means withdrawing 10% is well beyond a pipe dream for most people.

Finding: 49% of those surveyed believe their income needs will drop by half after they retire.

Reality: I meet with retired clients all the time to go over their financial situations. Rarely do I see cases where their spending has declined in retirement. In fact, the opposite is true more often than not -- they typically spend more!

That's just from personal experience, but academics are finding similar results. Researchers at the University of Michigan found that in the aggregate, pre-retirement spending and post-retirement spending are about the same. Other studies suggest that spending initially goes up in retirement and doesn't begin to decline below pre-retirement levels until the retiree gets much older.

Although your job-related expenses may decrease and you may have paid off your mortgage, you have to take into account other expenses such as travel and healthcare. The cost of healthcare, and the cost of healthcare insurance, is rising at twice the rate of inflation.

Finding: 38% of those surveyed believe that long-term care is covered either by health insurance, Medicare or disability insurance.

Reality: Medicare covers few long-term care services, and people must meet strict income and asset requirements to qualify for Medicaid. Health insurance and disability insurance generally doesn't cover the cost of long-term care. And those costs can be huge.

A private room in a nursing home today costs about $70,000 a year.  Since 1990, the price has been increasing at an average of 5.8% a year. If you have enough millions in the bank to cover these kinds of costs, you probably don't need long-term care insurance. For everyone else, it's a different story.

Finding: 60% of those surveyed believe that at age 65 they will have a 25% chance or less of living beyond age 85.

Reality: The odds are more like 50%, and the expected joint life expectancy of a healthy 65-year-old couple is 30 years. That means there's a good chance that one member of the couple will live to age 95. Which brings us to the next point…

Finding: 56% of those surveyed say the greatest financial risk for retirees is longevity risk.

Reality: I'm glad to see they got this one right. But it tells me that a large number of people aren't connecting the dots: They think they can withdraw 10% or more per year and have much lower expenses, but they're still worried about outliving their money. They don't seem to realize how one affects the other.

But you aren't like that now, are you? You now know that to successfully make it through your golden years, you need to save prodigiously and invest wisely. And you need to plan. If you feel you're already on the right path, then congratulations! If not, it may not be too late. Email me or give me a call at 214-245-5236, and perhaps we can work together to get you back on track.

SOURCES:
1. "Taking a pass on financial reality," Investment News, 30 June, 2008.
2. Bengen, William P. "Determining Withdrawal Rates Using Historical Data," FPA Journal, [accessed 21 July 2008].
3.  Cooley, Philip L., Carl M. Hubbard and Daniel T. Walz. "Retirement Savings: Choosing a Withdrawal Rate That is Sustainable," AAII Journal, February 1998, Volume XX, No. 2, [accessed 21 July 2008].
4. Easterling, Ed. "Waiting For Average," Crestmont Research, [accessed 21 July 2008]
5. Hurd, Michael D. and Susann Rohwedder. "Changes in Consumption and Activities at Retirement," Michigan Retirement Research Center Research Brief, July 2005, [accessed 22 July 2008].
6. "Facts on Health Care Costs" (National Coalition on Health Care, 2007) [accessed 22 July 2008]
7. "The Importance of Personal Financial Protection" (American Society of Pension Professionals & Actuaries, 2006),[accessed 22 July 2008]

*Double-digit returns is an objective, not a guarantee

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Kim Snider is the President and Founder of Snider Advisors, an investment adviser registered with the SEC, focused on teaching individual investors a sensible, long-term investment approach focused on maximizing cash flow. For more information on Snider Advisors or the Snider Investment Method, please visit snideradvisors.com. Her book, How to Be the Family CFO: Four Simple Steps To Put Your Financial House in Order, will be in bookstores October 1, 2008.

Snider Advisors makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 888-6SNIDER to request the Snider Investment Method® Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments, including the Snider Investment Method™ are subject to risk, including possible loss of principal.

Wickedly Funny YouTube Subprime Video

In general, my articles tend to be fairly serious. But, I think every once in awhile some humor is in order. As Mignon McLaughlin said, "A sense of humor is a major defense against minor troubles."

 

There is far too much doom and gloom these days. I am as aware as anybody of the number of people losing their homes, the high price of oil, the falling dollar and the volatile stock market. But I think the press drives us to unhealthy extremes of sentiment, especially when it comes to the economy and the stock market.

 

It scares me, the extent to which the press, which is largely ignorant of economics or finance, takes a stand that is so transparently intended to sensationalize rather inform, influences the day-to-day sentiment of tens of millions of otherwise bright people.

 

Let me give you an example. A day or two ago, the press started putting out headlines suggesting markets were reacting to a "fear of stagflation." All of a sudden, my inbox was flooded with emails mentioning stagflation, as if it were an invading army amassing on our border. "Should I change my portfolio given we are about to go into a period of stagflation?" Aggghhh!

 

The popularity of so-called fake news shows, like The Daily Show or The Colbert Report, (I hope) show us that Americans are pretty fed up with what passes for journalism today. Or maybe that is just me projecting how fed up I am onto everyone else. Who knows.

 

Good satire turns the words of the subject against them, and simply by reformulating them, shows us the absurdity of the original statement. In keeping with that sentiment, I offer you a spot on version of recent financial events from John Bird and John Fortune from the South Bank Show.

 

At last, British humor I can relate to! Thanks to Joe Mikus for the heads up on this one. FYI - run time is about 8 minutes.

 

 

Kim Snider Financial Communications makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk, including possible loss of principal. Individual results may vary.

Guest column: The "R" Word

I am traveling this week, so I decided to take a bit of a shortcut and run a guest column by one of my favorite writers, Nick Murray. Many people have been writing me in recent weeks about the possibility of a recession and what changes they should make to their portfolio.

We believe you never make changes to your portfolio based on what you think the market or economy will do. You only have a 50-50 chance of being right. For every economist, journalist or Chief Market Strategist who says Armageddon is coming, there is another one who says the exact opposite. Or, as the Nobel prize winning economist Paul Samuelson said, "The stock market has forecast nine of the last five recessions."

Personally, I have no opinion about whether we will go into recession or not or, if we do, how deep or long-lasting it will be. I have no control over it and I wouldn't do anything different if I knew the answer. So for me, there is no point wasting brain space on it.

Nonetheless, I thought this piece by Nick Murray might give you a different viewpoint than the one so prevalent in the press these days. Food for thought …

	The "R" Word, by Nick Murray (Originally published in Nick Murray Interactive - Vol. 8, Issue 2, February, 2008 As a measure of how utterly debased and stupid the rhetoric about the alleged imminence of a recession has been of late, nothing compares to a comment mined from an AP wire "story" that appeared in mid-January. In it, the chief market strategist for a foreign financial institution which shall be nameless – a chap who apparently has no background in economics, and/or to whom English is a second language – opined that "it's possible that the recession may only last one quarter." And you know that this is an accurate quote, because you know that neither I nor anyone else could make it up. Herewith, some rational observations about the economic phenomenon called "recession." The first, as in any rational discourse (thereby excluding all journalism on the subject), is of course a definition of the term: a method of calibrating it, which is a bit different from a method of screaming apocalyptically about it in the cadences of Chicken Little. A recession, as defined by the National Bureau of Economic Research – and therefore by anyone who has actually taken an entry-level college course in basic economics, as opposed to financial reporters who are former weather girls of either gender from a television station in Ames, Iowa – is two consecutive quarters of negative GDP growth. That is, a recession is a minimum six-month period in which the economy actually contracts. A "one-quarter recession" is therefore – like a water landing, a short-sleeve dress shirt, or a new tradition – actually an oxymoron. (A "growth recession," on the other hand, is a period of economic growth that is slower than the previous period of economic growth. Since the latter is nowhere near scary enough for use by former weather girls of either gender, journalism has adopted the term "growth recession.") The National Bureau of Economic Research will also be happy to disclose to you that there have been ten such episodes since the end of World War II. The average lasted approximately ten and a half months, and carried the economy down slightly less than two percent. (Over the last quarter century, as the economy has deepened, and our monetary tools for fighting slowdowns have improved, the time lapse between recessions has lengthened, and both their duration and depth have moderated. Indeed, since November 1982, the economy has only been in recession for 16 months out of about 300. But never mind that. It smacks too much of good news – or, as it is sometimes referred to, "truth.") A ten-month, two percent contraction on an average of every six years suggests that recessions punctuate – on average – economic expansions occupying the other 60-odd months. Forgive me, but this seems to me to be a very small price to pay for an accretion of national wealth which is ongoing, and which has produced the wealthiest society that ever existed on the earth. It is, in other words, nothing more or less than a part of the cycle, and the net effect of that cycle is the unprecedented betterment of humankind. (Why, even Americans on food stamps have 44-inch plasma TVs and are morbidly obese. Think of it: this society is so rich that even its poorest members eat too much! But I digress.) Once again: there either is or is not going to be a recession in this country. (As I write, the Chairman of the Federal Reserve is expressing to a congressional committee the Board's opinion that there is not, but what does he know?) The Fed has unequivocally declared its intention to fight such an occurrence with all the monetary weapons at its command. And both the legislative and executive branches have expressed strong interest in implementing some sort of fiscal stimulus. This is in keeping with the obvious truism that the more advance warning a recession gives you – as opposed to the last one, spawned by the sudden bursting of the tech bubble – the easier it becomes to fight it off. If there is a recession, on average the equity market – being a discounter of the future, rather than a reflector of the moment – will turn up about halfway through it, while journalism is trumpeting each new negative statistic to the skies as evidence of deepening Armageddon. Thus, the people who panicked out in fear of a looming recession will – by the time it's officially declared over – have to buy their portfolios back at higher prices than those at which they sold. With the obvious exception of the deity Himself, the stock market is the universe's ultimate ironist. And if there is a recession – and I, along with Dr. Bernanke, hereby repeat that I don't believe there will be – you may rest assured that its proximate cause will not have been oil, or subprime mortgage write-downs, or any of the usual suspects, all of which are quite adequately discounted in a 1350 S&P. It will, I'm perfectly convinced, have been journalism. I expect journalism to be alarmist, declinist, economically illiterate, repetitive, stupid and single-mindedly devoted to demonstrating that not only is the glass half-empty, but that this time it's irreparably shattered into a million pieces. But journalism's "coverage" of the economy and the markets in the last several months has been something altogether new in my 40-year career. It's made Chicken Little look like Pollyanna. And it may yet succeed in frightening the whole country into sitting down hard on its wallet. Thus, if we do have a recession, I hope journalism will have the minimal grace to report it as what it will surely be: a self-fulfilling prophecy. © 2008 Nick Murray. Reprinted with permission. Nick's lovely little book for investors, Simple Wealth, Inevitable Wealth, is available on his website www.nickmurray.com, click on "Books." We warmly recommend it.)

Kim Snider Financial Communications makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk, including possible loss of principal. Individual results may vary. Individual performance depends on individual savings, investment time frame and market conditions. Diversification does not ensure a profit or protect against loss in a declining market.

Bad Profits

You may have heard that A.G. Edwards is merging with Wachovia. When finalized, this deal will make Wachovia the second-largest brokerage firm behind Merrill Lynch. But is another example of bad profits. Many A.G. Edwards clients are going to get screwed in the deal. Many A.G. Edwards clients will end up moving their accounts or paying higher fees and making smaller returns.

 

Big full-service brokerage firms are trying to move their customers away from a commission-based model and into so-called managed accounts which charge a percentage of assets (typically 1% to 3% annually) instead of a commission on each transaction.

 

An article, in this weekend's edition of the Wall Street Journal, noted:

 

	Wachovia, the Charlotte, N.C. bank, has a large business in managed accounts and is expected to encourage A.G. Edwards clients - the bulk of whom are in traditional brokerage accounts - to switch.

 

A fee based on assets is all well and good if the account is truly managed, but for the most part, they are not.

 

The reason to pay a fee is for valuable advice - advice you cannot get elsewhere. But all brokers give basically the same self-serving advice. This is evidenced by the recent court ruling that a broker cannot hold himself out to be a financial advisor.

 

Brokers are salesmen. Salesmen get paid commission on the products they sell. Financial advisors should be paid fees for their advice.

 

You may be thinking its semantics, but it is not. There are real implications for investors. Most people will pay far less in commissions than in fees, even at the bloated commission rate charged by full-service brokerage firms. Moving to a fee-based structure will cost more but you don't get anything more in return - in fact, you may actually get less. Which is exactly why the brokerage firms are doing it.

 

In a conference call with analysts, the head of Wachovia, told them:

 

	… managed accounts are considerably more profitable than traditional accounts, adding, "We think we can accelerate A.G. Edwards's profit growth here."

 

I think this is yet another glaring example of bad profits in the financial services industry. Bad profits are defined by Fred Reicheld, a fellow at Bain & Company and author of "The Ultimate Question", as profits which boost short-term results by exploiting customers.

 

Examples of bad profits include cell phone pricing plans that trap customers into wasting pre-paid minutes or incurring outrageous overages. How about airlines that change their fares hundreds of times each day so no one knows what the "real" fare is? Have you ever returned a rental car with less than a full tank of gas and been charged triple the market price for gas? Those are examples of bad profits.

 

Many companies, including mine, are rapidly gaining market share and a loyal following by doing the opposite - which is to say, looking for sources of good profits - those that come from adopting customer friendly policies, being totally transparent about where profits are made and providing real value to the customer.

 

The financial services industry in general, and the investment business in particular, are famous for bad profits. I sum this reliance up with the warning, "Most investments make the person selling them rich, not you."

 

Examples of bad profits are everywhere. I can think of hundreds of them. Sad, isn't it? It is a lot harder to come up with examples of good profits. Have you experienced bad profits in the financial services industry? How about examples of good profits? If so, tell us about them. Leave them, along with any other thoughts, in the comments section below.

 

SOURCE (Direct quotes are highlighted and indented from text):

 

Kim, Jane K. “Edwards Clients Might Regret Wachovia Deal.” Wall Street Journal, June 2, 2007, Money & Investing section, B1.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Mortgage Mess

I am still traveling so this will be short and sweet. I'd like to point out an excellent article by Laura Rowley over on Yahoo Finance. It is titled, "Footing the Bill for the Subprime Fiasco."

And while we are on the topic of messes, you might also have a look at Scott Burns' article on the federal deficit. (Free registration required) According to government figures, the entire deficit problem boils down to unfunded liabilities in the Social Security and Medicare programs. He goes on to point out t"if the federal government confiscated all the land in the United States along with all of its improvements – buildings, highways, plants and equipment, and other durable assets built on it – and sold them at auction to foreign investors, it would still fall more than $20 trillion short in present value of the monies required to satisfy its future budget."

Give these a read and let me know what you think. Gotta go. I have a plane to catch!

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

10-11-2006: Items of interest for the Family CFO

Investing And Retirement

 

In an effort to shore up U.S. workers' retirement savings, the Labor Department has proposed new rules making it easier for companies to automatically enroll employees in 401(k) and other retirement plans. Retirement policy think tanks like the Center for Retirement Research and the Employee Benefit Research Institute have been advocating this for years based on studies that have found it increases participation. (MarketWatch.com)

 

Ben Stein talks about a fundamental principle of successful investing -- whether you are talking real estate or paper assets -- you buy, not bail when markets are going down. Conversely, rising markets are the time to sell, not blindly follow the herd. (Yahoo Finance)

 

Any fool can lose money on an investment. Any fool can make money in rising markets. The trick is how to make it every day -- day in and day out -- no matter what. Robert Kiyosaki makes the case for cash flow in, Learn To Invest Like a Pro.

 

How many opportunities have a 50% expected rate of return with no risk? Scott Burns talks about the impact of deferring Social Security benefits, even just a few years. (Dallas Morning News)

 

Scott Burns also talks about the increasing number of lawsuits against companies, for failing to live up to their fiduciary duties as sponsors of 401(k) plans. At issues are high fees which over time drag down performance. Suits have been filed against Bechtel Corp., Caterpillar Inc., Exelon Corp., General Dynamics Corp., International Paper Co., Lockheed Martin Corp., Northrop Grumman and United Technologies Corp. Can more be far behind? (Dallas Morning News)

 

Mutual funds have always reported their performance as a time-weighted return. Morningstar has announced it will begin reporting the dollar-weighted return which more accurately reflects the money investors made in that fund and are typically lower than the time-weighted return. You should read Mark Hulbert's article for a nice run-down of the difference between the two and the implications to investors. (MarketWatch.com)

 

The LA Times reports on "pension envy." While private-sector pensions are being slashed, leaving pre-retirees to fund a 30 year retirement on their own, public sector employees still enjoy rich pensions. The problem is, many of them, like private sector pensions, are under-funded. Guess who has to pay for the under-funding? Taxpayers. The same tax-payers who are having their retirement funds cut. Some taxpayers are getting really pissed off about it. (LA Times)

 

Managing Lifetime Risks

 

Does Tony Soprano need more life insurance than Mike Brady? If you answered yes, you are not alone and it could be costing you money. A survey, by the KRC Research firm, which asked people to choose which of five TV dads needs the greatest amount of insurance, illustrates a mistake many folks make when it comes to insurance: focusing on the chance that they will die instead of examining the financial losses their family would suffer if they do. (MarketWatch.com)

 

No question healthcare costs are the big X factor in retirement planning. But, it is not totally out of your control. Robert Powell, editor of Retirement Weekly, gives us a rundown of seven steps outlined by the CEO of AARP, in his new book, that America and Americans can do to mitigate health-care costs in retirement. (MarketWatch.com)

 

 

Market Sentiment and Investor Psychology

 

Barry Ritholtz comments on the re-appearance of Dow 36,000 author James Glassman. He was on CNBC last week. Can anyone really take CNBC seriously anymore? What a farce. If there has ever been a better contrarian indicator of sentiment, I haven't seen it. (The Big Picture)

 

Something I learned later in life than I should have is that our psyche plays itself out in how we handle our money. Laura Rowley gives us a nice article on the three aspects of Money Maturity. Are you mature or immature when it comes to money? Read this article to find out. (Yahoo Finance)

 

The Economy 

 

Jim Mahar gives us an overview of the speech, by Fed Chair Ben Bernanke, on how the aging Baby Boomers will affect the economy. (Finance Professor.com)

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Financial Advisor Symposium: Investing for Retirement in a Low-Return Era

Investing for Retirement in a Low-Return Era

2nd Annual Financial Advisor Symposium - Las Vegas, NV

Rob Arnott, Research Affiliates - April 27, 2006

 

The Arithmetic of Returns

 

Any investment has three components of return

Yield

Real growth in earnings

Multiple expansion

 

Real rate of return on stocks will be3% (the return over and above inflation) over the next five years

Real rate of return on bonds will be 2% over the next five years

TIPS will have 3% real rate of return

REITS will have 2.5% real rate of return

 

No place to hide! No major markets are priced to deliver the 5% or higher returns we all seek

You can't earn an investment return on money you haven't saved

Hope is not a strategy

 

Is this the end of the storm or the eye of the storm for equities?

 

• Earnings Quality Far Lower Than Investors Believe
  • Non-expensed stock options
  • Unrealistic pension return expectations
• Valuation Still High by Historical Standards
• Equity Risk Premium - still not far from zero
• Demographics - Require Lower future returns

 

Arnott believes these factors point to early stages of a secular bear market. "It is very dangerous for us to invest our clients money in a fashion that this scenario leads to ruin. We must invest their money so that they can weather this sort of scenario."

 

Historically, secular bear markets have lasted fifteen to twenty years. Doesn't mean you prepare your clients to prosper in a twenty year bear market but instead you prepare them so they survive a twenty year bear market. You prepare them so that they are going to be OK either way, meaning you have to give up some of the upside if the bear market doesn't materialize. That is not the case in an equity-centric model like the one we have adhered to historically.

 

Demographics - People Are Living Longer

 

We have gone from a life expectancy of 43 years at the beginning of the century to 78 at the end of the century

 

We have gone from a world in which most people didn't make it to retirement to one in which most do, it is expected to last fifteen to twenty years, and there are more of us than ever.

 

The big pension story of the first quarter century will be the abrogation of the pension promise. America cannot afford for people to retire at 65. People are living longer, they are healthier and therefore will have to work longer. What will make us work longer, as a generation, is that our assets will not last long enough to allow us retire at 65.

 

What Do We Do To Improve Returns

 

Stocks and bonds are not the only choices

Unconventional assets can be priced to offer better returns

Seek alpha - find managers who can beat their markets

Avoiding losses is just as important, if not more, than beating the market

Include alternatives in the asset mix

 

"Markets do not reward you for being comfortable." Move some money to areas which are out of favor or not mainstream. They are usually priced more attractively to reward you for moving away from the herd.

 

Which Risk Do You Want To Control?

 

"It's not assets that define wealth. It is what spending stream or standard of living those assets can support."

 

2001-2005 was only a bear market for those with an equity-centric portfolio

 

High risk strategies are on the tails. Risk is a double edged sword. In order to get return, you have to be willing to take some risk, but contrary to popular belief, risk does not guarantee you a higher return. It often creates a lower one, with potentially big negatives.

 

"The essence of investment management is the management or risk, not the management of returns" ~Benjamin Graham

 

"Investing is a "loser's game" in which the winner is often the investor who makes the fewest errors." ~Charley Ellis

 

Beating Andre Agassi at tennis very is easy. All you have to do is keep the ball in play and not make any mistakes. You have to ask yourself, "Who is on the other side of the trade and why are they willing to lose so that I can win?" Few people approach investing from this perspective. Instead they analyze markets, companies, news, fundamentals, etc. In other words, I don't have to outrun the bear. I only have to outrun you.

 

Rob Arnott and Anne Casscells; "Will we retire later and poorer?" Journal of Investing; Summer, 2004

 

Retirees don't actually consume money. They consume goods and services. As we save for retirement, we are saving assets in hopes they can eventually provide goods and services.

 

The way society will impose a stable support ratio is simple supply and demand. Asset prices will move to a price where the average 65 year old will look at their assets and say, "We don't have enough. We have to work a little longer."

 

When companies retain most of their earnings, 10 year earnings growth is negative. When companies retain a little, earnings growth is positive. The idea that today's low dividend rates are going to help us out with earnings growth in the future is not borne out by the data.

 

What if we took your liquid investable assets and divide it by your life expectancy? That is how much they have to spend. Anything you spend beyond that is speculation that future return will be greater than 0%.

 

If plan spending that way, your customer will never run out of money. It is also not what a customer wants to hear.

 

Going back to the idea of "Who is on the other side of your trade?", those that have the greatest confidence that they can pick stocks and pick stocks well are those that are probably the worst stock pickers. Those that have the least confidence are probably the best.

 

Commodities have a modest place in an investors portfolio as an insurance policy only - with no expectation for profit. If Saudi Arabian oil was wiped out by a dirty bomb for two years - 20% of the world's oil went offline - what would happen to commodities and what would happen to stock prices? Commodities are a hedge because they are non-correlated but should not be bought as speculative.

 

BIOGRAPHY:

 

Robert Arnott is chairman of Research Affiliates, LLC, and editor of Financial Analysts Journal. Recently, he introduced the concept of Fundamental Indexation, built on a theoretical foundation that challenges some of the core assumptions of modern finance. Previously, Mr. Arnott joined forces with PIMCO, serving as a sub-advisor, to offer the first global asset allocation product to make active use of alternative markets, beyond conventional stocks, bonds, and cash. Prior to this, he developed quantitative asset management products and teams as chairman of First Quadrant, LP, global equity strategist at Salomon (now part of Citigroup), president of TSA Capital Management (now part of Analytic), and vice president at The Boston Company (now PanAgora). Mr. Arnott has received five Graham and Dodd Scrolls/Awards, awarded annually by the CFA Institute, and two Bernstein-Fabozzi/Jacobs-Levy awards, awarded by the Journal of Portfolio Management and Institutional Investor, for the best articles of the year. He has authored over 70 refereed articles for journals such as the Financial Analysts Journal, the Journal of Portfolio Management, and the Harvard Business Review. Mr. Arnott has also served as a visiting professor of finance at UCLA, on the editorial board of the Journal of Portfolio Management and two other journals, and on the product advisory board of the Chicago Board Options Exchange and two other exchanges.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Dallas County District Attorney

I am so pleased to see that Vic Cunningham has received the endorsement of the Dallas Morning News for Dallas County District Attorney. Vic is one of three Republican candidates for District Attorney and is now apparently the front runner.

 

Why do I care? Vic is a graduate of the Snider Investment Method Workshop who has been using the Snider Investment Method for over two years. As such, he is a member of our very extended family and I am thrilled to sit on the sidelines and watch as he pursues his ambition. After all, that is what the Snider Investment Method is all about - allowing people the financial freedom to pursue their dreams.

 

For those of you who are registered voters in Dallas County, you may be familiar with Vic. He is a former state district judge who presided over the "Texas Seven" trials. Those were the capital murder trials of the seven escaped convicts who killed officer Aubrey Hawkins a few years back. He was also singled out by D Magazine as having handed down the most fitting punishment in 2005.

 

Vic will be my guest on the radio show this weekend. We will be talking about both the DA's race as well as the Snider Investment Method. Tune in for that this Saturday at noon on KRLD NewsRadio 1080 AM in the Dallas Fort Worth area.

 

The primaries are March 7. Get out and vote. You can't complain if you don't take part in the process - financial, political or otherwise.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

America's Pension Time Bomb

Another provocative article from Fortune:

 

Some of the nastiest conflicts in America's future have recently begun to reveal themselves. Let's call them, broadly, the pension wars.

 

They will be fought on a wide range of battlefields, involving not just workers and their employers but also governments at all levels, regulators, accountants and taxpayers. And these wars will be bitter -- because the combatants will be desperate.

 

A hint of what's to come could be seen in the New York City transit strike. Most of America didn't notice exactly what sparked the first such strike in 25 years, costing businesses, individuals and the city hundreds of millions of dollars. The answer is pensions. The transit authority and the workers were agreed on virtually everything except how much new employees would contribute toward their pensions--6 percent of wages vs. 2 percent -- and neither side felt it could give an inch on that.

 

The reasons illustrate the larger problem. The transit authority, like many private and public employers, is watching its pension costs rocket as longer-living retirees increase in number. That burden will become unbearable. On the other side, union members are watching employers nationwide dumping or cutting their pensions just as Social Security starts to look shaky. They figure retirement security is the one thing they cannot sacrifice. Result: war.

 

One of my Snider Method graduates sent me this article. It was sent to him by another of my graduates. Both are pilots. Both worked for airlines (two different ones) that have declared bankruptcy and ditched their long-standing promises to their employees. I suspect both feel the gist of this story more acutely than the rest of us. The rest of us ignore it at our own peril.

 

The hard reality is that for decades we haven't told ourselves the truth about pensions. Now, as the first baby-boomers turn 60, we must finally confront reality -- and absolutely no one will like it. In New York last month, transit workers and management compromised; employees will make small contributions toward health insurance premiums but will keep one of the richest retirement deals around.

 

Soon those compromises simply won't be affordable. And that's when the pension wars will explode.

 

Perception of this issue tends to be very polarized. One side thinks the other are alarmists. The other side thinks the optimists are dolts. Where do you fall? Or have you given it any thought at all? Leave your comments below.

 

TIP OF THE HAT:

 

Once again to Harold Nelms for the heads up and to Bob Klauer for putting Harold on to it.

 

SOURCE:

 

1. Geoffrey Colvin. "America's Pension Time Bomb" Fortune; 13 January 2006.

http://money.cnn.com/2006/01/13/news/economy/pension_fortune/index.htm

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Nick Murray on Crises

"It is axiomatic, in the study of economics and markets, that the more warning a 'crisis' gives you, the less chance it has of actually being something you have to worry about.

The converse is also true. The crisis that takes you down is the one you’re not looking for."

~ Nick Murray

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

The Great Retirement Ripoff

The October 31, 2005 cover of Time Magazine looks at "how companies are leaving millions of Americans at risk of an impoverished retirement and how Congress let it happen." The title of the story? The Broken Promise.

 

Corporate promises are often not worth the paper they're printed on. Businesses in one industry after another are revoking long-standing commitments to their workers. It's the equivalent of your bank telling you that it needs the money you put into your savings account more than you do--and then keeping it. Result: a wholesale downsizing of the American Dream.

 

The Time article lays much of the blame for the approaching crisis at the feet of politicians who it says have catered to big business interests at the expense of workers by passing laws that allow them to reneg on their promises of lifetime benefits to their workers:

 

A TIME investigation has concluded that long before today's working Americans reach retirement age, policy decisions by Congress favoring corporate and special interests over workers will drive millions of older Americans--a majority of them women--into poverty, push millions more to the brink and turn retirement years into a time of need for everyone but the affluent. The transition is well under way, eroding efforts of the past three decades to eliminate poverty among the aging. From taxes to health care to pensions, Congress has enacted legislation that adds to the cost of retirement and eats away at dollars once earmarked for food and shelter. That reversal of fortunes is staggering, and even those already retired or near retirement will be squeezed by changing economic rules.

 

Just recently, two more major airlines - Northwest and Delta - have declared bankruptcy. These followed earlier filings by United and U.S Air. In the last few weeks, Delphi, a major auto parts maker which had a pension plan that was $11 billion underfunded, has also declared. Many believe General Motors may be next.

 

To Elizabeth Warren, a Harvard law professor who specializes in bankruptcy, this is just going to get worse, as ever more companies see the value to their bottom line of "scraping off" employee obligations. "There's no business in America that isn't going to figure out a way to get rid of [these benefit promises]."

 

The Pension Benefit Guaranty Corporation was created to insure private pension plans. As industry after industry foists its underfunded bankrupt plans on the insurer, the PBGC has slowly but surely sunk into the red.

 

In the meantime, pension plans that companies are dumping are so short of assets that the PBGC's financial position is rapidly deteriorating. In 2000, the agency operated with a $10 billion surplus. By 2004, the surplus had turned into a $23 billion deficit. By the end of this year, the shortfall may top $30 billion. As the Government Accountability Office put it earlier this year: "PBGC's accumulated deficit is too big, and plans simply do not have enough money in the system to back up the long-term promises many employers have made to their workers."

 

It is projected that the PBGC will run out of money in 2013 - just as 76 million Baby Boomers crest the hill of retirement.

 

So it is that in the end, all but the most affluent citizens will have two options. They can join Joy Whitehouse in the can-collection business, or they can follow in the footsteps of Betty Dizik of Fort Lauderdale, Fla., who is into her sixth decade as a working American.

 

She doesn't have much hope that Washington will be able to help seniors like her. "They don't understand what it's like to worry: Are you going to be able to make it every month, to pay the telephone bill, the electric bill? How much are you going to have left over for food and other expenses?" Her key to getting by each month is forcing herself to live within a strict budget. "You learn to live very carefully," she said. Although Dizik really would like to retire, she can't. "I will be working the rest of my life." Soon, she will have lots of company.

 

What are your thoughts? We can argue about whether promises were made or broken and whether that is right but that seems pretty clear. The real question, I think, is what are the implications - both at an individual level and a societal level? What should we as individuals be doing? What do you think? Leave your comments below.

 

SOURCES:

 

1. Bartlett, Donald L., James B. Steele. "The Broken Promise" TIME 31 October 2005, pp. 32-47.

http://www.time.com/time/archive/preview/0,10987,1122017,00.html (Subscription required)

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Can Decisions That Turn Out Well Be Stupid?

Can decisions that turn out well be stupid? A similar question is can decisions that turn out badly still be the right decision? In a comment posted to my article on Living in Lake Wobegon, one of my readers asks:

 

How can a decision be a "stupid choice" when it turns out well, and how can something that turns out badly be a "smart choice"? I understand "stupid habits" and "smart habits", but should every new investor expect to lose money at first, or is it possible to avoid that phase of the game?

 

This was in response to my explanation of outcome bias which said: