TAG | Portfolio
18
The Four Investment Risks You Can't Avoid
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The Four Investment Risks You Can’t Avoid
by Alexander Green, Chief Investment Strategist
Monday, October 18, 2010: Issue #1368
We’re making money hand over fist – locking in significant double- and triple-digit gains – in our Oxford Trading Portfolio, Seven Deadly Sins Portfolio, Oxford All-Star Portfolio, Momentum Portfolio, Insider Portfolio and our New Frontier Portfolio.
Yet I still talk to investors every day who tell me they’re completely out of the market. When I ask them why, they always give me some variation of the same answer: They just can’t take the risk.
These investors need to wake up and smell the java. There has never been – and never will be – a time when stocks aren’t volatile and the economic outlook isn’t uncertain.
Yet nothing gives a better return over time than great stocks…
Four Wealth-Building Barriers
What these investors may not realize is that by sitting out the stock market rally, they’re taking four significantly greater risks:
- Purchasing Power Risk
Low inflation isn’t a problem now, but it’s like having a slow leak in your swimming pool. At some point, you’re likely to jump off the diving board and hit concrete.
Even low inflation is slowly draining your purchasing power. You may feel safe sitting in cash, but you’re virtually guaranteeing that inflation will outpace your asset growth. And thanks to our gargantuan budget deficit, we may face sharply higher inflation in the years ahead.
- Interest Rate Risk
Ben Bernanke and Co. took short-term interest rates to near zero. The average money market account now pays a microscopic .05%. (It will take your money more than 1,400 years to double at that rate.)
And if the Fed decides to raise rates by even one point, it will knock 3% off the value of your Treasury bonds, essentially erasing a year’s worth of returns. Bonds are not a great bet right now.
- Timing Risk
Every market timer would like to believe that he or she will be in the market for the rallies and out for the corrections. Never did the phrase “more easily said than done” ring truer.
I still talk to investors every week who are waiting for the market’s “final capitulation.” Final capitulation? The Dow is up 70% from the lows of last March. This is a bull market by any definition. Yes, it will end at some point. But if you didn’t catch the lows last year, what are the odds you’ll pick the top of this bull, which may last for years?
- Shortfall Risk
This is your single greatest investment risk – the possibility that you won’t have enough money to reach your financial goals or support yourself the way you’d like in retirement.
Talk to elderly investors who are counting nickels and the story is virtually always the same. They didn’t save enough and (depending on personality type) they were either too conservative or too aggressive with their money. It’s a sad thing when your golden years are tin-plated and it’s way too late for a do-over.
So what’s the solution?
Think Ahead and Grow Rich
In short, don’t let the perma-bears and the gloom-and-doomers talk you out of achieving your financial goals.
Yes, you should own some gold, some bonds, even some real estate. But if you don’t own stocks, where are you going to generate the returns you need to live the lifestyle you want?
No one can say where the stock market will be 15 days or 15 weeks from now. But think about your retirement. Fifteen years from now, the market will almost certainly be a lot higher.
So stop fretting over the short-term outlook and start putting money to work in great stocks to meet your long-term goals. Financial freedom is about managing investment risk… not avoiding it.
Good investing,
Alexander Green
8
How to Insure Your Financial Freedom
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How to Insure Your Financial Freedom
by Alexander Green, Chief Investment Strategist
Friday, October 8, 2010: Issue #1362
If there’s one word that encapsulates the world’s current investment environment, it’s this: uncertainty. For example…
- A raft of economists and market analysts look at the sharp climb in Treasury bonds and claim that we’re in for a period of deflation, perhaps like Japan experienced in the 1990s… or worse.
- Other economists point to the historic rally in gold that has pushed the price through the $1,300 per ounce mark and forecast higher inflation.
- Over the first half of the year, the Eurozone looked like it was coming apart at the seams and the euro got slammed. But in the third quarter, the currency staged an impressive rally, climbing 11.5% against the U.S. dollar.
- Will the dollar rise or fall from here? It’s hard to say. We’re in the midst of an international currency war. Governments and central banks around the globe are trying to force down their currencies in a beggar-thy-neighbor attempt to gain a competitive advantage over their trading partners.
Nobel Prize-winning economist Robert Mundell recently noted on Bloomberg TV that this “is a terrible thing for the world economy” and that, “We’ve never been in this unstable position in the entire currency history of 3,000 years.”
So what are investors doing to combat it?
The Ultimate 2-for-1 Investment: Upside Growth and Downside Protection
Is it any wonder that so many investors are hiding in cash, earning an average .05% return on their money? (Note that an investment compounding at this rate takes 1,440 years to double.)
But wouldn’t it be great if you could own an investment that allows you to participate in global growth if the world economy recovers and protects 100% of your portfolio if it doesn’t?
Such an investment already exists. In fact, Erika Nolan and Shannon Crouch just wrote a book about it. It’s called The Insured Portfolio: Your Gateway to Stress-Free Global Investments.
Protect Your Wealth and Assets from the Ravages of the Market
I’ve known Erika and Shannon – and respected their global expertise – for years. You may have met them yourself at one of our many conferences. They head up The Sovereign Society, an offshore asset protection and international finance organization. Their specialty is showing investors how to preserve wealth, protect assets from frivolous lawsuits, diversify outside the U.S. dollar and enjoy tax-privileged growth.
As a former Wall Street executive myself, I can assure you that the average broker, insurance agent or money manager knows nothing about this area. Erika and Shannon have decades of experience in the field and have teamed up with Marc-Andre Sola, a Swiss attorney, to provide the best and latest information on offshore asset protection and estate planning.
If you’re young, just starting out in the investment game and have yet to accumulate much, you can safely give this information a miss. But if you’ve accumulated a substantial nest egg and are concerned about potential losses from volatile markets, high inflation, a weak dollar or potential litigants, The Insured Portfolio offers battle-tested strategies you cannot afford to ignore.
You’ve Worked Hard for Your Money… And Here’s the Best Way to Make Sure You Keep It
Look at it this way: If you’re a high-net-worth individual, you’ve probably succeeded against intense competition in your field. (That’s not easy.) You’ve paid a high percentage of your income in taxes. And you’ve saved a substantial amount of your after-tax income instead of spending it.
Are you willing to let violent markets, misguided and self-interested politicians or rapacious lawyers take the fruits of years of hard work, persistence and prudent living?
If your answer – as I suspect – is a resounding “no,” check out The Insured Portfolio. It’s available at bookstores nationwide. Or you can pick it up today for less than $20 on Amazon.
Good investing,
Alexander Green
13
Are You Ready for The Evergreen Portfolio?
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Are You Ready for The Evergreen Portfolio?
by Alexander Green, Investment U’s Chief Investment Strategist
Monday, September 13, 2010: Issue #1343
Bill Gross, the top-performing manager of the Pimco Total Return Fund, the world’s largest actively managed mutual fund, says it’s time for investors to accept and start adjusting to “the new normal.”
What’s that?
High unemployment, excess housing capacity, difficult-to-obtain credit and, not least of all, much-lower-than-historic returns from stocks, bonds, real estate and cash.
Sounds depressing. However, some investment advisors aren’t content telling their clients to simply lower their expectations. Two of them are seasoned investors Martin Truax and Ron Miller, Managing Directors at Atlanta-based Morgan Keegan & Company.
Adjusting to the “New Normal” With The Evergreen Portfolio
Truax and Miller point out that “buy and hold” investing and simple diversification haven’t worked over the last 10 years – and it’s hard to disagree. The S&P 500, for example, is no higher than it was in 1999.
Looking forward, they argue that these failed approaches won’t work over the next 10 years either.
Yet there are proven strategies that are likely to produce high returns with an acceptable level of risk. In their new book, The Evergreen Portfolio, out this week from John Wiley & Sons, Truax and Miller invite more than a dozen of the nation’s leading analysts to talk about “the new normal” and make specific recommendations about what investors should do with their money today. (They also reveal their own particular solution: The Evergreen Portfolio itself.)
The book is chock full of interesting and unconventional investment angles. That’s not too surprising when you consider who was involved in this project.
The Evergreen Portfolio: A “Who’s Who” of the Investment World
Contributors to The Evergreen Portfolio include such well-known names as…
- Rick Rule, CEO of Global Resource Investments.
- Dr. Mark Skousen, free-market economist, former Investment U Chairman and current contributing editor, and editor of Forecasts & Strategies.
- Elliott Gue, editor of The Energy Strategist.
- Frank Trotter, currency specialist and president of EverBank.
- Mining specialist Bob Bishop, the longtime editor of Gold Mining Stock Report.
- Bob Prechter, editor of The Elliott Wave Theorist.
- Richard Maybury, publisher of U.S. and World Early Warning Report.
There are many others, including yours truly. (In the interest of full disclosure, I have not received – and will not receive – any compensation from the sale of this book.)
There is a lot of pessimism out there right now about what lies ahead for the economy and stock market. Yet, unlike most investment advisors, Truax and Miller don’t try to convince the reader otherwise. They are convinced that excess consumer debt, weakness in housing, and rampant government spending are creating a very tough environment for investors.
Their advice – and the investment advice of their contributors – is to face up to this new reality and start managing your portfolio effectively to deal with it.
Why You Need to Read The Evergreen Portfolio
The Evergreen Portfolio is written for:
- Investors who want a thorough understanding of “the new normal” and hard-hitting advice about how to protect your assets even in inflationary or deflationary times.
- Businesspeople and other professionals who have been successful in their careers but need a solid foundation for investment success.
- Investors who are unhappy with the performance of their brokers and money managers and want “untainted” investment advice.
- Investors who are overwhelmed with too many investment choices and want an uncomplicated approach to the market.
I’m a contributor to The Evergreen Portfolio, so perhaps I have a positive bias. But the book is the distilled wisdom of more than 15 seasoned investment pros and a thoroughly enjoyable read, full of unconventional ideas and unusual insights.
There will be fortunes made and lost in the months ahead – and, like most readers, I intend to be on the winning side. The Evergreen Portfolio is a survival guide for those who want to protect and build their wealth in the tumultuous years that almost certainly lie ahead.
Good investing,
Alexander Green
P.S. The Evergreen Portfolio is available at bookstores nationwide and is currently discounted 28% on Amazon. For further information on the book, click here.
21
Treasury Funds: Get These Time Bombs Out of Your Portfolio
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Treasury Funds: Get These Time Bombs Out of Your Portfolio
by Alexander Green, Chief Investment Strategist
Monday, June 21, 2010: Issue #1285
Tens of millions of investors have a ticking time bomb in their fixed-income portfolios.
Are you one of them? If so, there’s still time to defuse it.
A few weeks ago, I wrote an Investment U column entitled, “Why the Safest Investment is Now One of the Riskiest.”
I noted that investors – frustrated by the microscopic yields on money market funds and certificates of deposit (CDs) – have poured money into longer-term Treasury funds.
Their thinking is simple. Too simple: “These funds yield over 5%, not bad in this environment, and the bonds they hold are guaranteed by the full faith and credit of Uncle Sam. What’s to worry about?”
Plenty…
Aren’t Treasury Funds Free of Risk?
Unlike individuals, corporations, and municipalities, the federal government can simply create money to meet any obligations. U.S. Treasuries are thus free of credit risk. But they aren’t free of interest-rate risk.
When interest rates go up, Treasury bond prices go down. Yet investors are comforting themselves that inflation isn’t currently a problem and that long-term rates remain near historic lows.
Don’t be fooled. There is a monster on the horizon – and he makes Beowulf’s Grindel look like Barney.
- Over the past 18 months, the federal debt has surged from $5.5 trillion to more than $8.6 trillion.
- Two years ago, it was 38% of GDP. Today, it’s 59% of GDP. And by the Congressional Budget Office’s own estimates, it’s going much higher still.
This is dangerous. Yet inflation has remained remarkably subdued so far. But understand that if the government opts to stimulate the economy further – especially if some emergency action is needed – short-term rates are already at zero.
Having already thrown the kitchen sink at the slowdown from a monetary standpoint, the federal government will almost certainly opt to spend even more dramatically.
The bond markets will not take this news well. Long-term rates are likely to spike. And when they do, it will get real ugly, real quick.
Investors always think they have time to move out of longer obligations before that happens. But that is not likely to be true…
The Triple Threat to Treasury Funds
Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points, driving a stake through most people’s bond portfolios.
Making matters worse, millions of Mom-and-Pop investors have unwittingly plunged into leveraged bond funds in recent years, often on their brokers’ recommendation.
Leveraged bond funds borrow money in the short-term to buy more longer-dated issues and enhance the funds’ yields. This is all well and good when rates are flat to lower. But when rates spike higher, look out below. The same thing will happen to these funds as to a margined stock portfolio in a correction. |
In fact, leveraged closed-end bond fund investors could get hit with a triple-whammy…
- The bonds in the fund will drop when interest rates rise.
- The drop will be compounded by the fact that the portfolio is leveraged.
- The fund could plunge to a deep discount to its net asset value, too.
Become a Bomb Disposal Expert… On Your Portfolio
Not pretty. So what to do?
- First, check to see what percentage of your portfolio is in long-term bonds. It shouldn’t be more than 10% as a maximum (as protection against a deflationary scenario).
- Second, visit www.etfconnect.com and type in the symbols for your fixed-income ETFs or closed-end funds.
Then look at the number beside the fund’s “effective leverage.” Zero means the fund is unleveraged. But some may be leveraged up to 40% or more. (That’s how these funds are able to yield more than the bonds they invest in, even after expenses.)
In sum, this is a time to pare back your long-term bond holdings and eliminate most of your leveraged holdings.
Don’t take these words lightly. There is danger on the horizon. But if you act now, there’s still time to get that ticking time bomb out of your portfolio.
Good investing,
Alexander Green
26
Timing the Market: If Only You Knew What Mark Hulbert Knows…
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Timing the Market: If Only You Knew What Mark Hulbert Knows…
by Alexander Green, Chief Investment Strategist
Monday, April 26, 2010: Issue #1246
For over a decade, I’ve been telling readers that timing the market isn’t just unhelpful… it actually hurts performance.
Now the evidence is even more definitive…
Sure, it’s easy to look back and see exactly when you could have been in or out of the market for maximum performance. That’s the beauty of hindsight.
But when you look ahead, things get a whole lot cloudier. So if you’re even thinking about jumping in or out based on some guru’s system or “market outlook,” listen up…
Trying to Time the Market? Don’t Do It!
The Journal of Financial Economics, an academic journal, recently published a new study – “Measuring Investor Sentiment With Mutual Fund Flows.”
Using easily available public information published by the Investment Company Institute, a mutual fund trade organization, the researchers focused on investor exchanges out of stock funds into bond funds and vice-versa.
This led to an interesting discovery…
- The research shows that market timers, as a group, have god-awful instincts. In fact, you could hardly find a better investment system than to do EXACTLY THE OPPOSITE of what they’re doing.
- The researchers built a hypothetical portfolio going all the way back to 1984 and switched back-and-forth between the S&P 500 and 90-day T-bills. They did the mirror opposite of what mutual fund flow figures showed switchers were doing.
- Over the next 25 years, the portfolio produced an annual return of 12% – 1.6% a year better than merely buying and holding the S&P 500.
To put this in concrete terms, buy-and-holders turned a $10,000 initial investment (with dividends reinvested) into $118,639 over the period.
Those who did the opposite of mutual fund timers, however, turned the same $10,000 into more than $170,000. (Most fund switchers, on the other hand, did about as well as someone betting on black or red at the roulette wheel.)
That’s not the best part, however…
An Impressive Performance… For Serious Contrarians Only
What makes these numbers even more impressive is that the contrarian portfolio took on far less risk than being fully invested in stocks. After all, it was invested in riskless T-bills nearly half the time.
I’m not actually recommending that you follow this strategy, incidentally. For one thing, past performance – as every investment prospectus reminds you – does not guarantee future results.
Plus, 25 years as a portfolio manager and investment writer have proved to me that the overwhelming majority of investors lack the emotional discipline to invest contrary to the crowd. (So when the chips are down, you may still be out.)
As Mark Hulbert, editor of the independent Hulbert Financial Digest, concludes, the average investor “would be far better off if he never engaged in market timing.”
The Oxford Club doesn’t. And it shows in our results…
A Top Five Ranking for 10 Years Running
Of course, every newsletter editor brags that his investment letter gives superior returns. The industry bears an uncanny resemblance to Lake Wobegone, where “all the women are strong, all the men are good-looking and all the children are above average.”
It’s worth noting, however, that Hulbert ranks The Oxford Club Communiqué among the top five letters in the nation for risk-adjusted performance over the past 10 years.
That allows us to give entirely honest answers to the two most commonly asked questions:
- “How has your investment advice worked out?” – Beautifully.
- “What do you think the market will do next?” – We haven’t the foggiest notion.
Good investing,
Alexander Green
Editor’s Note: Are you trying to time the stock market? Don’t! There’s a better way to tackle the investing process: let some of the best, most successful analysts in the business do the work for you.
The Oxford Club’s pragmatic, “market neutral” approach has generated consistent, impressive results for many years, based on real facts, information and numbers that matter, not arbitrary stock market indicators or timing.
For more details on how you can profit from the stocks in The Oxford Club’s Communiqué portfolio, please visit this link. You’ll see why the Hulbert Financial Digest has ranked the Communiqué in the top five investment newsletters over the past 10 years and get the latest investing ideas, insights and recommendations that can make you money for the next year and beyond.
