Tuesday, March 24, 2009
Obama: Feeling Our Financial Pain?
Check out Cathy Pareto's quotes in the latest Ben Steverman article in BusinessWeek.
Friday, March 20, 2009
Should You Fire Your Financial Adviser?
I take no credit for the following, but it's worth sharing. This is an article by Brett Arends from last week's Wall Street Journal.
Just about everyone has lost money, no matter who manages their investments. But there's a right way – and a very wrong way – to lose.
When it comes to rogue money managers, crooks like Bernie Madoff get all the publicity. But cowboys, charlatans and clowns are far more common, and do most of the real damage.
There are about 270,000 portfolio managers and investment advisers working in America these days. Tens of millions of Americans have a "finance guy" (or "finance gal") of various types to handle their money. Many are wondering these days if they made a bad mistake. I presume most financial advisers are ethical and competent. But I hear from a lot of readers and I must say I am shocked at the way so many have been advised.
It's not simply that they've lost money. Everbody lost money last year, even Warren Buffett.
How can you tell if you should fire your finance guy? Based on emails I've received from reader, here are 10 things that should tip you off.
He didn't just lose money, he lost money stupidly. Everyone had a bad year. But only a fool was still treating Fannie Mae preferred stock as a "conservative investment" when it was 40 cents on the dollar.
He won't return your calls. No, he can't sit on the phone with each client for an hour a day. But this is your money. If he's totally inaccessible during a crisis, he does not take you seriously.
He's rude. Granted, email has given rise to a global rudeness epidemic. But if your money manager isn't polite to you, it suggests he has poor character and can't handle stress. Both are disqualifications for the job.
He hides behind jargon. Don't be fooled. The best money managers speak, and write, in plain English. Like Warren Buffett, Jeremy Grantham, and John Hussman. Jargon is just an attempt to snow you. What's he hiding? Insecurity.
He has blind faith in an automatic "system" for investing. Bah. No such "system" can ever work. If it did, everyone would adopt it, and who would be left to underperform? Successful investing is an art as well as a science. It's pragmatic. It involves judgment.
He wouldn't change course last year. Prices have rarely changed so much in a year. How can the right things to own now be the same as the right things twelve months ago? They can't.
He passes the buck. It's true the government, and those running the big financial institutions, have made a lot of mistakes that have really damaged the markets. But they didn't invest your money. So how can your losses be all their fault? They can't.
He had your money in an inappropriate portfolio for your age and position. There's a reason a 70-year-old shouldn't have all her money in stocks. Any competent money manager knew those reasons a year ago - not just now. Wisdom after the fact doesn't count.
He whines that "this has never happened before." But that's always true of the future. Tomorrow is always unknown. A wise investment strategy takes that into account.
He tries to bully you. I am constantly amazed at the number of people who give in to bullies, thinking they are confident or strong. They are stupid, nasty, insecure and weak. Your money deserves better.
Write to Brett Arends at brett.arends@wsj.com
Just about everyone has lost money, no matter who manages their investments. But there's a right way – and a very wrong way – to lose.
When it comes to rogue money managers, crooks like Bernie Madoff get all the publicity. But cowboys, charlatans and clowns are far more common, and do most of the real damage.
There are about 270,000 portfolio managers and investment advisers working in America these days. Tens of millions of Americans have a "finance guy" (or "finance gal") of various types to handle their money. Many are wondering these days if they made a bad mistake. I presume most financial advisers are ethical and competent. But I hear from a lot of readers and I must say I am shocked at the way so many have been advised.
It's not simply that they've lost money. Everbody lost money last year, even Warren Buffett.
How can you tell if you should fire your finance guy? Based on emails I've received from reader, here are 10 things that should tip you off.
He didn't just lose money, he lost money stupidly. Everyone had a bad year. But only a fool was still treating Fannie Mae preferred stock as a "conservative investment" when it was 40 cents on the dollar.
He won't return your calls. No, he can't sit on the phone with each client for an hour a day. But this is your money. If he's totally inaccessible during a crisis, he does not take you seriously.
He's rude. Granted, email has given rise to a global rudeness epidemic. But if your money manager isn't polite to you, it suggests he has poor character and can't handle stress. Both are disqualifications for the job.
He hides behind jargon. Don't be fooled. The best money managers speak, and write, in plain English. Like Warren Buffett, Jeremy Grantham, and John Hussman. Jargon is just an attempt to snow you. What's he hiding? Insecurity.
He has blind faith in an automatic "system" for investing. Bah. No such "system" can ever work. If it did, everyone would adopt it, and who would be left to underperform? Successful investing is an art as well as a science. It's pragmatic. It involves judgment.
He wouldn't change course last year. Prices have rarely changed so much in a year. How can the right things to own now be the same as the right things twelve months ago? They can't.
He passes the buck. It's true the government, and those running the big financial institutions, have made a lot of mistakes that have really damaged the markets. But they didn't invest your money. So how can your losses be all their fault? They can't.
He had your money in an inappropriate portfolio for your age and position. There's a reason a 70-year-old shouldn't have all her money in stocks. Any competent money manager knew those reasons a year ago - not just now. Wisdom after the fact doesn't count.
He whines that "this has never happened before." But that's always true of the future. Tomorrow is always unknown. A wise investment strategy takes that into account.
He tries to bully you. I am constantly amazed at the number of people who give in to bullies, thinking they are confident or strong. They are stupid, nasty, insecure and weak. Your money deserves better.
Write to Brett Arends at brett.arends@wsj.com
Monday, March 16, 2009
Enough is enough already! It's time for outrage and populist action!
I'm waiting for the revolution to start. The day that we, as Americans, get disgusted enough to act and tell our government that we've had enough! Once upon a time in the not-so-distant sixties, people voiced their opinions, vocalized their discontent, their frustrations, they marched, protested, organized....until eventually those people were heard and government had no other choice but to act.
Where is that passion today? Where are our voices?
It is incomprehensible to me, that after the endless supply of stories revealing corporate and/or government mismanagement, corruption, greed, and flat out abuse, the stories have failed to mobilize the public into action.
The latest revelation in a series of financial corruption fiascos is AIG, who (by the way) has received over $170 billion of government funds (er....our money!), had been slated to pay out over $100 billion (of that money) to high level employees and the employees of some of their counterparties.
As reported on Yahoo Finance "Along with Merrill Lynch, Bank of America and Citigroup, the prime beneficiaries of the AIG bailout bonanza include European banking giants Societe Generale, Deustche Bank and Barclays. But at $12.9 billion to date, Goldman Sachs is at the top of the list AIG bailout beneficiaries. This only reinforces the perception the AIG bailout was really a bailout of Hank Paulson's former firm." Hank Paulsen and and his cronies (that includes Tim Geithner) strike again--saving their wealthy banker friends at our expense. When does this end?
Are you sick and outraged yet? I am!!
Are our current leaders brave enough to do something about this? Somehow, I doubt it. Are many of these guys in bed with the perpetrators? I tend to believe so.
"Ben Bernanke, Tim Geithner, Larry Summers, NY Fed President (and ex-Goldman economist) William Dudley, Rep. Barney Frank, Sen. Bob Corker and others have each expressed anger and outrage over the AIG bonuses and payments to counterparties.The real question is what they, and President Barack Obama, are going to do about it?"
As usual, lots of talk--no corrective action. Who the hell is watching our money? Where is the oversight in these giant bail out packages?
Same old story, the fat cats get fatter, and the common folk get leaner. Let's mobilize people.
Where is that passion today? Where are our voices?
It is incomprehensible to me, that after the endless supply of stories revealing corporate and/or government mismanagement, corruption, greed, and flat out abuse, the stories have failed to mobilize the public into action.
The latest revelation in a series of financial corruption fiascos is AIG, who (by the way) has received over $170 billion of government funds (er....our money!), had been slated to pay out over $100 billion (of that money) to high level employees and the employees of some of their counterparties.
As reported on Yahoo Finance "Along with Merrill Lynch, Bank of America and Citigroup, the prime beneficiaries of the AIG bailout bonanza include European banking giants Societe Generale, Deustche Bank and Barclays. But at $12.9 billion to date, Goldman Sachs is at the top of the list AIG bailout beneficiaries. This only reinforces the perception the AIG bailout was really a bailout of Hank Paulson's former firm." Hank Paulsen and and his cronies (that includes Tim Geithner) strike again--saving their wealthy banker friends at our expense. When does this end?
Are you sick and outraged yet? I am!!
Are our current leaders brave enough to do something about this? Somehow, I doubt it. Are many of these guys in bed with the perpetrators? I tend to believe so.
"Ben Bernanke, Tim Geithner, Larry Summers, NY Fed President (and ex-Goldman economist) William Dudley, Rep. Barney Frank, Sen. Bob Corker and others have each expressed anger and outrage over the AIG bonuses and payments to counterparties.The real question is what they, and President Barack Obama, are going to do about it?"
As usual, lots of talk--no corrective action. Who the hell is watching our money? Where is the oversight in these giant bail out packages?
Same old story, the fat cats get fatter, and the common folk get leaner. Let's mobilize people.
Wednesday, March 11, 2009
What's Driving Gold?
Much attention has been given to the rise in the price of gold in recent weeks, leading investors to wonder, what are the current factors driving gold? The easy answer to that question is --fear. We have already witnessed an eight year bull run in gold, but many believe that it’s bull run is far from over. What is gold’s role in the credit crisis? Is buying the metal a better investment than investing in gold mining companies? Is it too late to cash in on the growth?
Before we can answer these questions, let us first review what role a gold investment might play in your portfolio. Investors buy gold for a number of reasons, including:
• To hedge against inflation.
• To hedge against a declining dollar.
• As a safe haven in times of geopolitical and financial market instability.
• As a store of value.
• As a portfolio diversifier.
Falling under the precious metals asset class, gold is a monetary metal whose price is determined by various factors. Among these factors are: inflation, fluctuations in the dollar and U.S. stocks, currency-related crises, interest rate volatility, global geopolitical tensions and increases or decreases in the prices of other commodities.
In the credit crunch of deflation, gold and currencies are hoarded and the purchasing power of both rises. But, gold also thrives in inflationary environments. That is because of gold's unique property with a dual role as both money and a commodity. Think of gold as money, and money is hoarded in deflation so gold naturally tends to go up. The point here is that gold does well during extreme economic environments. Let's dissect some of the benefits of owning gold in the paragraphs that follow.
Inflation
As inflation goes up, the price of gold goes up. Since the end of World War II, the five years in which U.S. Inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those five years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%. The environment in the 1970’s was not unlike the environment today. The common denominators in both periods are huge budget deficits, loose monetary policy, soaring oil prices (2008) and the open-ended costs of war (Vietnam vs. Iraq/Afghanistan).
Store of Value
According to the World Gold Council, gold has maintained its value in terms of real purchasing power in the very long run in the US, Britain, France, Germany and Japan. Despite price fluctuations gold has consistently reverted to its historic purchasing power parity with other commodities and intermediate products. Gold is tangible, it’s a physical asset that brings a sense of comfort when intangible assets, like stocks, are evaporating. But, while they do maintain a store of value, it is worth noting that gold, like stocks and other investments, is also subject to price fluctuations.
Safe Haven
Many investors are diversifying away from traditional equities and into gold because of the continued uncertainty surrounding the financial markets. Gold has long been considered a safe haven, or “crisis commodity”. Of course, as investors flock to safety investors the price of gold is pushed even higher. Historically, as people begin to distrust their paper assets (ie. Currency), this positively influences the price of gold too, as we’ll discuss in the next paragraph.
Currency Hedge
Not all citizens have full faith in their local currency, at times, this might even include the U.S. Dollar. So, what do they do? They buy hard assets like gold (a tangible and physical item or object of worth). Although it’s no secret that U.S. Dollar is world’s reserve currency and the main medium for global trade, the U.S. Dollar, like the Euro, Yen or other global currency, is really nothing more than paper, or fiat money. Fiat money is money that is intrinsically useless and is used only as a medium of exchange. There is no physical asset that backs the U.S. Dollar today (or other global currencies for that matter) since its gold backing was stripped in 1971. But since gold is purchased using your local currency, in this case the dollar, then any decline in the value of the dollar causes the price of gold to rise.
Diversification
While all the other rationales for owning gold are viable, perhaps the most important reason to consider gold in your portfolio is for its diversification benefits. Gold, like many other commodities, typically has an inverse relationship to the market. Assets with perfect negative correlation to other assets in a portfolio help investors hedge away their risks, in effect they reduce volatility while enhancing performance. Gold and other tangible assets have historically had a very low correlation to stocks and bonds. Because the price of gold increases in response to events that erode the value of traditional paper investments like stocks and bonds, it’s worth considering a fair allocation to this asset as part of a diversified plan. The "right" allocation will depend upon your specific circumstances and risk tolerance, but a good gauge might be between 3% to 8%.
Owning Gold
The gold market is highly liquid and there are many ways that investors can own gold. The most traditional way of owning gold is via gold bullion like gold bars and coins. When buying the physical asset, many people buy gold coins, considering the potentially higher storage costs or risks associated with owning gold bars. Gold coins can be easily purchased directly from the U.S. Mint or from authorized dealers and precious metals firms. Depending on where you purchase the coins and the current demand levels, you may have to pay a premium (above the current spot price of gold) to acquire the coins.
Another way to access gold is through futures contracts or products like gold ETF’s (ie. Ticker: GLD) which offer investors a relatively cost efficient and secure way to access the gold market. A Gold ETF is an exchange traded fund with gold being the principle and only commodity being traded. Gold ETFs are listed and traded on the stock exchange and investors get units for their holding in the gold ETF. The returns on gold ETFs are more or less same as that of the spot price of physical gold. It’s worth noting that the IRS treats gold as a collectible for long-term capital gains tax purposes, therefore, gains recognized by individuals from the sale of gold ETF’s are subject to a capital gains rate of 28% if held for more than a year.
Finally, investors can also consider having gold exposure through gold mining stocks and funds. Some argue that this is more tax and cost effective, in that, there are no storage fees, theft concerns and gold mining stocks also benefit from lower capital gains rates. On the flip side, owning stocks in a mining company is really not the same as owning the actual gold.
In closing, gold’s recent rise is really no surprise given the recent financial uncertainty in the global markets. As fear and investor trepidation permeate the markets, investors look to physical assets to help them preserve their wealth. Times of crisis help fuel the demand for gold and, arguably, the easy access allotted by gold funds or ETF’s has further pushed up gold’s price in recent years. To a certain extent, the demand for gold, mostly by investment funds, is feeding on itself.
While some analysts suggest that the price of gold is being inflated by a flood of new investment money (implying it might be overvalued), others predict even further price growth down the road. Either way, the argument can be made that gold offers sufficient benefits (inflation protection, currency hedge, portfolio diversifier) to warrant at least some representation in your collection of assets.
Before we can answer these questions, let us first review what role a gold investment might play in your portfolio. Investors buy gold for a number of reasons, including:
• To hedge against inflation.
• To hedge against a declining dollar.
• As a safe haven in times of geopolitical and financial market instability.
• As a store of value.
• As a portfolio diversifier.
Falling under the precious metals asset class, gold is a monetary metal whose price is determined by various factors. Among these factors are: inflation, fluctuations in the dollar and U.S. stocks, currency-related crises, interest rate volatility, global geopolitical tensions and increases or decreases in the prices of other commodities.
In the credit crunch of deflation, gold and currencies are hoarded and the purchasing power of both rises. But, gold also thrives in inflationary environments. That is because of gold's unique property with a dual role as both money and a commodity. Think of gold as money, and money is hoarded in deflation so gold naturally tends to go up. The point here is that gold does well during extreme economic environments. Let's dissect some of the benefits of owning gold in the paragraphs that follow.
Inflation
As inflation goes up, the price of gold goes up. Since the end of World War II, the five years in which U.S. Inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those five years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%. The environment in the 1970’s was not unlike the environment today. The common denominators in both periods are huge budget deficits, loose monetary policy, soaring oil prices (2008) and the open-ended costs of war (Vietnam vs. Iraq/Afghanistan).
Store of Value
According to the World Gold Council, gold has maintained its value in terms of real purchasing power in the very long run in the US, Britain, France, Germany and Japan. Despite price fluctuations gold has consistently reverted to its historic purchasing power parity with other commodities and intermediate products. Gold is tangible, it’s a physical asset that brings a sense of comfort when intangible assets, like stocks, are evaporating. But, while they do maintain a store of value, it is worth noting that gold, like stocks and other investments, is also subject to price fluctuations.
Safe Haven
Many investors are diversifying away from traditional equities and into gold because of the continued uncertainty surrounding the financial markets. Gold has long been considered a safe haven, or “crisis commodity”. Of course, as investors flock to safety investors the price of gold is pushed even higher. Historically, as people begin to distrust their paper assets (ie. Currency), this positively influences the price of gold too, as we’ll discuss in the next paragraph.
Currency Hedge
Not all citizens have full faith in their local currency, at times, this might even include the U.S. Dollar. So, what do they do? They buy hard assets like gold (a tangible and physical item or object of worth). Although it’s no secret that U.S. Dollar is world’s reserve currency and the main medium for global trade, the U.S. Dollar, like the Euro, Yen or other global currency, is really nothing more than paper, or fiat money. Fiat money is money that is intrinsically useless and is used only as a medium of exchange. There is no physical asset that backs the U.S. Dollar today (or other global currencies for that matter) since its gold backing was stripped in 1971. But since gold is purchased using your local currency, in this case the dollar, then any decline in the value of the dollar causes the price of gold to rise.
Diversification
While all the other rationales for owning gold are viable, perhaps the most important reason to consider gold in your portfolio is for its diversification benefits. Gold, like many other commodities, typically has an inverse relationship to the market. Assets with perfect negative correlation to other assets in a portfolio help investors hedge away their risks, in effect they reduce volatility while enhancing performance. Gold and other tangible assets have historically had a very low correlation to stocks and bonds. Because the price of gold increases in response to events that erode the value of traditional paper investments like stocks and bonds, it’s worth considering a fair allocation to this asset as part of a diversified plan. The "right" allocation will depend upon your specific circumstances and risk tolerance, but a good gauge might be between 3% to 8%.
Owning Gold
The gold market is highly liquid and there are many ways that investors can own gold. The most traditional way of owning gold is via gold bullion like gold bars and coins. When buying the physical asset, many people buy gold coins, considering the potentially higher storage costs or risks associated with owning gold bars. Gold coins can be easily purchased directly from the U.S. Mint or from authorized dealers and precious metals firms. Depending on where you purchase the coins and the current demand levels, you may have to pay a premium (above the current spot price of gold) to acquire the coins.
Another way to access gold is through futures contracts or products like gold ETF’s (ie. Ticker: GLD) which offer investors a relatively cost efficient and secure way to access the gold market. A Gold ETF is an exchange traded fund with gold being the principle and only commodity being traded. Gold ETFs are listed and traded on the stock exchange and investors get units for their holding in the gold ETF. The returns on gold ETFs are more or less same as that of the spot price of physical gold. It’s worth noting that the IRS treats gold as a collectible for long-term capital gains tax purposes, therefore, gains recognized by individuals from the sale of gold ETF’s are subject to a capital gains rate of 28% if held for more than a year.
Finally, investors can also consider having gold exposure through gold mining stocks and funds. Some argue that this is more tax and cost effective, in that, there are no storage fees, theft concerns and gold mining stocks also benefit from lower capital gains rates. On the flip side, owning stocks in a mining company is really not the same as owning the actual gold.
In closing, gold’s recent rise is really no surprise given the recent financial uncertainty in the global markets. As fear and investor trepidation permeate the markets, investors look to physical assets to help them preserve their wealth. Times of crisis help fuel the demand for gold and, arguably, the easy access allotted by gold funds or ETF’s has further pushed up gold’s price in recent years. To a certain extent, the demand for gold, mostly by investment funds, is feeding on itself.
While some analysts suggest that the price of gold is being inflated by a flood of new investment money (implying it might be overvalued), others predict even further price growth down the road. Either way, the argument can be made that gold offers sufficient benefits (inflation protection, currency hedge, portfolio diversifier) to warrant at least some representation in your collection of assets.
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