Week's News That moves the Markets

1. Monday April 27, 2009, The top story has to be the Swine Flu and it over shadowed the very poor restructure program laid out by General Motor's CEO Fritz Henderson. I was Twittering with a reporter who was checking out what will probably be the first case of Swine Flu for Michigan Monday night.
2. Tuesday April 28, 2009, The restructuring of the UAW contract with Chrysler may put off the fall of Chrysler for a few years, but it can't save it alone. Thursday's Government deadline will become crucial to the markets this week! The Government says Bank of America and Citi need to up their bank's capital after the acid tests. Commercial Bank of China and Honda post profits.
3. Wednesday April 29, 2009, Swine Flu is still part of what is moving the markets but, during the first two days of the week, it was the fear of the unknown that wreaked havoc on the markets. Now that we have become more knowledgeable, the markets are having a better day.
4. Wednesday April 29, 2009, More companies appear to be showing profits for the quarter and this is helping the investment markets. CEOs worth their salt should have been able to, and/or should now be able to shed problems caused by last year's economic meltdown and get their quarterly profits in order during this quarter or next.
5. Thursday, April 30, 2009, I will be coordinating the Your Money Bus (www.yourmoneybus.com) stop at the Detroit Public Library, 5201 Woodward Avenue, Detroit, Michigan. The nonprofit group is giving out TOTALLY FREE personal financial planning information to anyone who stops. We will be there from 10:00 a.m. to 3:00 p.m.
6. Friday Morning, May 1, 2009, I will be coordinating the Lansing stop of the Your Money Bus (www.yourmoneybus.com). We will be right in front of the State of Michigan's Capitol Building, 100 North Capitol, Lansing, Michigan from 9:00 a.m. to 1:00 p.m. We will be giving out TOTALLY FREE personal financial planning information to anyone who stops by.
7. Friday afternoon, May 1, 2009, I will be coordinating the Grand Rapids stop of the Your Money Bus (www.yourmoneybus.com). We will be at the President Ford Museum, Rosa Park Circle, Market Street and Monroe Avenue, in Grand Rapids from 2:30 p.m. to 6:00 p.m. We will be giving out TOTALLY FREE personal financial planning information to anyone who stops by.
   

Notable News of the Week

1. Monday April 20, 2009: 67% of all companies reporting in the 1st 2 weeks of this quarter reported positive earnings. A far change from that of the last few quarters.
   
2. Tuesday April 21, 2009: Bank losses have not hit bottom yet! As banks post quarterly reports Bank of New York posts a -51% loss, Comerica posts a -92% loss and Huntington Bank went from a $ .35 gain to a $6.79 loss for the quarter.
3. Wednesday April 22, 2009: McDonald's profit rises on breakfast and drinks, Wells Fargo profit climb 53%, Morgan Stanley wider than expected loss. Stock's earnings are mixed but better than a few months ago.
4. Wednesday April 22, 2009: Advertising has changed drastically, over the past few years local and national newspapers, magazines, radio, television and cable stations have had a hard time making enough money from advertising to be profitable and many have had to file chapter 11 bankruptcy. Now Yahoo and other internet advertising firms, who took the business away from the others, are also having earnings problems with their advertising.
   

Notable News of the Week

1. Monday April 13, 2009: Governor Jennifer Granholm would support a graduated income tax. Now you all know I have supported Governor Granholm many times when others have not, but this is insane. Ted's comment: According to an article in Forbes magazine within the last 30 days, Michigan is the #5 most taxed state in the country. Now the Governor wants to raise the taxes even higher? Does she want to be able to say we are #1, the highest taxed state in the country? I would not want that title. Last year we had 2.5 million people leave Michigan and that number is not slowing down. Isn't it time our governmental bodies realize that we cannot support the State's current services. That, rather than raise taxes to cover the costs, it is time to start cutting back services, combining governmental bodies including state, county and city to reduce taxes, not increase them. Governor Granholm, if you keep raising taxes, anyone with money will simply leave the state.
2. Tuesday April 14, 2009 Bloomberg: The U.S. government is considering swapping some of the $13.4 billion General Motors Corp. owes it for an equity stake in a stripped-down version of the car maker. Then 2 hours later Reuters UK: GM bankruptcy fears drag down auto stocks. Ted's Comments: Well, what do you expect after last year's Fannie Mae and Freddie Mac fiasco, where the government asked (told) them to make loans and provide liquidity to the markets and then took them over; causing the stocks to lose 80% of their value? Now they are about to do the same thing to an almost nonexistent GM stock value. If that is not enough, has anyone looked at how many jobs GM going into chapter 11 is going to cost this country? According to Fortune in 2006 GM had 335,000 employees, in 2007 GM had 266,000 employees and the 2008 estimates were 243,000 employees. Under the chapter 11 program GM will end up with less than 133,000 employees and it will probably affect another 500,000 employees of suppliers. That is a loss of over 702,0000 jobs in the last three years and that is probably low. No wonder the country is in a funk! Best not have all our money invested before the June 2009 GM chapter 11 deadline. We are going to want to see how this plays out.
3. Wednesday April 15, 2009 Bloomberg: Analysts estimate that profits at S&P 500 companies decreased for the seventh straight quarter in the January to March Period, the longest stretch of declines since at least the Great Depression. Ted's comments: This either means that we will start out of the mess we are currently in or we are out to set a 100 year record. For now we are slowly getting back into investments. However, we are very worried about the June 1, 2009 deadline for GM and will wait to put all our eggs back into investments until we see how that plays out.
   

Mid-Week News to Watch

I download articles into my computer and have the computer read them to me as I get ready for work in the morning. I am going to start posting the articles I feel are noteworthy at least once a week.

1. Richard Fisher, President of the Dallas Federal Reserve Bank, said Wednesday that the first "green shoots" of recovery can be seen in the U.S. economy, Dow Jones Newswires reported. (Mr. Fisher has been a person I have listened to and agreed with, for the 11 years I have watched him.)
2. U.S Wholesale inventories in February fell by the most ever even as sales rose modestly, according to a report that suggested businesses were getting control of their stocks of goods. (This is important because wholesale inventories have to dry up before factories will be forced to gear up.)
3. The commission is expected to unveil the proposal to reinstate the "uptick" rule, that was repealed in the summer of 2007. The rule had been in effect since the early 1930s and was long considered a "circuit-breaker" and/or "tap on the brake" when markets started falling too fast, like last fall. It had kept hedge funds from piling on and causing excessive market sell offs. The SEC will vote Wednesday on which type of rule they intend to propose. (We really need this back, write your Congressperson and Senators.)
   
4. Discounter Family Dollar Stores shares jumped 4.8%, after it said Wednesday that its second-quarter profits rose 33%. (We are starting to get some good quarterly reports, but the majority are still very bad. This is, usually, the sign that we are trying to bottom.)
5. Preliminary figures showed auto sales in China reached about 1.03 million in exceeding U.S. auto sales for the third month in a row, accounting for 90% of all auto sales. (Now you know why we want to invest in China first when we go back into our investments.)

Note: Past returns are no guarantee of future returns. These are simply the things I found most interesting while starting my day from 6 a.m. to 8 a.m., that my computer read to me.

Redesigned Web Site and Earth Day

Friday, April 03, 2009 Blog

For those of you who have been following my blog who are not clients I apologize, but the March newsletter will not appear in this blog. Some things are only for paying clients.

We do have two new announcements:

First, we have opened a new office in Portage, Michigan. Many of you know we have been approached to open offices in Las Vegas and Phoenix, but we decided that would take too much time away from our current clients.

Second, our completely redesigned web site is now up and running. It took six months and a lot of time and money, but the new web site has a lot more to offer.

1. For the Gen-X type, we have a free financial planning software program available on the left side of the home page. I believe you will find it very user friendly, life orientated, thorough and, as I mentioned, free.
2. There are a lot of flash videos, MP3 player audios and Power Point presentations.
3. The In The News area shows most of the WLNS television news clips we have been in over the last 12 months and articles we have been in from Business Week, The Wall Street Journal, Los Angeles Times to the Peruvia news (Peru, South America) and more.
4. There are areas showing frequently asked questions, our privacy policy, contract, fees, disclosure and more.
5. Under What Clients Can Expect is our new Planning Tenets. This should be interesting to even our long-time clients.
6. Finally, there is a new password-protected Client Links area.
   
   • That helps clients access their Charles Schwab accounts.
   • There is an access to MoneyGuidePro, a very thorough Life, Financial and Wealth Planning program that is only for client use.
   • There are links to the Internal Revenue Service, Social Security, Student Aid information, the Special Needs Alliance and other client oriented areas.
   • We are hoping that, by next year, clients will be able to store their valuable paperwork like tax returns, wills, trusts, medical directives, and powers of attorney. They will be able to access their investment reports, 1099 forms and average cost basis forms whenever they wish, via their own computer.
     

$ Ways to Go Green and Save Green $

With Earth Day just around the corner, you might want to think about ways you can help Mother Earth while helping yourself save some money. Here are just a few small ways you can modify your own hapits to help the environment and your wallet:

1. Recycle. Everything from cell phones to computers can now be recycled or reused. Most computer manufacturers now have recycling programs, and cell phones can be donated to a number of charities.
2. When you need a new monitor, get an LCD. Flat-screen LCDs use less energy than plasma monitors, and they're now Energy Star rated.
3. Reduce "vampire power" with a smart power strip. Many of the devices you use every day pull a fair amount of current even when they're not turned on. A smart power strip can detect when devices are shut off and prevent the flow of current to those devices. Some can also be set to automatically power down peripheral devices, such as printers, whenever the main device (like your computer) shuts off.
4. Buy electronics that use rechargeable batteries. You'll have to buy fewer disposable batteries, and fewer disposable batteries will end up in landfills.
5. Don't buy it if you don't need it. A lot of people replace their cell phones, MP3 players, and other gadgets as soon as the newest version comes out. If you stick with the old version through a new product release or two, it saves you money and reduces landfill waste.
   

February 2009 Newsletter Text

It has been beyond frustrating to watch what we believe to be the raping and pillaging of America by a privileged few who rotate between the executive suite of the largest investment firms and the top tiers of regulatory agencies and the administration. You, our clients, came to Creative Financial Design with dollars, hopes, dreams and fears in hand, asking for help; and we put our lives, experience, and training on the line to help you do well and help you make good decisions about your present and future. Then we get to watch while a select group of (words my mother taught me not to say) destroy institutions and wreak havoc on stocks, options, and the trust and confidence of the American people. On top of that, we watch while politicians use this opportunity to maximize their personal benefit under the guise of a proposed bailout, promising security that is purchased at the price of our grandchildren's future.

I suspect this bailout will benefit those executives. I suspect it may even end up making money for taxpayers. But current sentiment is certainly justifiable, and there is a clear danger that these same executives may do more lasting damage than just the financial crisis they brought down upon us.

But, in the meantime, I think it's fair and natural that all of us look back at the global meltdown, at the lockup of capitalism itself, at a mess that will take perhaps a trillion taxpayer dollars to fix, and recognize that the people who engineered the mess received millions in individual bonuses that will never have to be paid back, and were favored by tax regulatory oversight even as they were arguing that fiduciary planners, like myself, are under-regulated.

I think it's appropriate to vent some of this anger and frustration to you, the press and our elected representatives. It may be time to start making sure we never have to go through something like this again.

This next issue is very interesting and complicated. I greatly regret all the damage that has been caused to the American people by the corporate meltdown; however, some good may come out of it in the end. For the first time I see millions of Americans are waking up to the idea that:

• It is important to live within your means.
• Taking on debt makes you vulnerable.
• Consumer purchases may be less valuable than contributions to savings.
• Just maybe some of this new found thrift might find its way to the government policymakers as well.

The point is that the trauma of the past year may have shaken the complacency of people who seldom thought about the consequences of their spending habits, who have lived more for the moment and saved less for the future. If the market fully recovers its equilibrium and value, than this new level of financial self-care will be a bonus that may be felt across the financial landscape.

The fact that millions of people have reformed their spending habits is part of what has created this economic downturn. Our economy, after all, is heavily dependent on consumer spending, and every ec9onomic stimulus package is passed in hopes that taxpayers will spend every dime of it rather than pay down their debt.

I don't know what the answer is here, but it seems to me that our economy has to find a solution to this dilemma:

• The behavior that is good for the consumer is bad for the corporate world.
• The behavior that is good for the corporate world is bad for the consumer.

This conflict of interest, which is currently built into the fabric of our economy, will need to be resolved.

I want to thank the many clients who have expressed their concern about my mental and physical state during this period of time. I want to especially thank you for the praise for the work that we have done. Many of you have said things like, "Thank you for caring about me," "Thank you for worrying," "I trust you to do the right thing," "I know you have an overall plan for me," "I'm so worried about you and your staff," etc. Absolutely amazing! My very favorite comment from clients (and it has been said by many) is, "Thank you for not letting us lose as much as we might have!"

The thing that strikes me the most throughout this mess is the absolutely essential value of the "financial plan". This is our road map that we have developed with clients, that is supposed to reflect their values, that should take into account emergencies or disasters along the way (whether it is a worldwide financial meltdown, a sudden illness, a catastrophic weather related incident, a job loss, the collapse of a company or industry). So far our financial plan has worked. Our stops on our investments have reduced our losses and worked as advertised.

I will admit that I am tired. It is hard to sleep through the night sometimes with all that is running around in my mind. However, now is going to be the most critical time for us to be sharp. For now we are approaching the time to take action.

How to Survive a Bear Market

It is hard to watch 500 and 1,000 point drops in the Dow; these last few months have been brutal on all of us. It was even harder to watch our portfolios fall with it. The Dow was off 46.36% from its October 11, 2007 high, and the more diversified S&P 500 was off 51.84%. Invested alongside you in the very same investments, we certainly felt your pain. And we feel it even more professionally that we do for our personal portfolios. We did not have a crystal ball to tell us how bad it was going to get, but our sell signals did warn us and help us avoid the majority of the meltdown. The ironical part of all this is that one of our biggest clients fired us last March, because they no longer believed in our signals. I have wondered how much money they lost, but it is more important now that I worry about taking care of all of you.

Other planners are telling their clients, "Going to cash would have been guessing and you did not hire us to 'guess' with your investment portfolio." "You need to ride out the market's ups and downs."

Well, we called this market and got you out of it long before the real meltdown. Now, unfortunately, these same advisors may be right if we are not careful. They are also telling their clients that, "These 'experts', who get you out of the market during bad times, usually remain too fearful to get back into the market, at their clients' expense."

As I have always said, the time to get back into investments is at the point of maximum fear, when there is blood in the streets, and that time is coming.

Waiting out a bear market in cash sounds like a great idea but, without a crystal ball, it is among the worst possible investment advice. Investment gains are made in just a few days out of the year. Yet another study (this one by consulting firm SEI in 2002) showed that investors who cashed-out during a bear market and waited until the market "recovered" before getting back in, jumped in too late and lost out on double digit gains. Investors who held on through the last 12 bear markets gained an average of 32.5% in the first year following the market's recovery. Investors, who jumped back into the market just 3 months late, gave up over 17% of the market's gains and it took them an additional 1 1/2 years to recoup their losses.

Investors Who Gain----------------------------After 1 Year-----------Broke Even
Rode the Markets Down & Back Up------------32.50%---------------1.5 Years
Jumped back in 1 week too late-----------------24.30%---------------2.5 Years
Jumped back in 3 months too late-------------14.80%---------------3.0 Years

This bear market will end, and it will do so when we least expect it. Remember, recoveries are only labeled thus in hindsight. By the time the headlines scream 'recovery,' it's too late -- investors who do not reinvest will have missed out. Worse yet, they will have made the classic investing mistake of "sell low and buy high." Well not so low, but almost all of us have to make up some ground.

You hired us to develop a thoughtful investment strategy and keep you out of the FOG. We did that and got you out of the markets for the majority of the 2008 economic meltdown. We did this by looking at our buy sell signals. Our clients who took our advice in 2007 and 2008, who had accounts containing only ETFs, were down between -3.42% to -17.38%.

Today's market is the same market, but the flip side of the coin. We are now getting buy signals. Oil has been giving us a buy signal since the market bottomed in November. We have waited for a confirming signal and expect to get it soon. Fear has gripped most of us and it is going to take courage, but it is about time to buy back into the markets before we lose out on the gains.

You're In or Out!

There are really only two ways to invest in the market...position yourself for when it goes up, or for when it goes down. The market goes down roughly 30-40% of the time (depending on the time periods). Why bet against it? Remember: For investment portfolio growth, it is more important to be IN the market when it rises and OUT of the market when it falls. Keep in mind that the huge markets' swings during 2008 were due to leverage. If an investment bank had to unwind a position that was leveraged 30 or 50 to 1, it had to sell an awful low of securities to do so, resulting in the point tumbles. Now that leverage appears to be about out of the markets and the government appears to have done all the damage it can do. So now the markets should get back to what they do best.

What Should You Do?

There is no question that we are in a recession. Even after the credit markets start to recover, we still have several quarters of negative growth ahead of us. Recovery from this bear market will likely take years, not months, and we have to retest our bottoms. Common sense needs to replace fear. This is a time to spend less and save more. It is a time to focus on family and friends and less on material things. Make sure your cash reserve is adequate. Reduce debt if you have any. Turn off the 'fear mongers' on television and remember that you are in this for the long haul.

"Markets are capable only of creating temporary declines. Only people can create permanent losses."

Now it is time for us, Creative Financial Design, to do our thing for you. There are no guarantees; but it is time to rely on the buy and sell signals that took care of us in 2008 and got us out of the markets to tell us when to get back in. That time is not today, but I think it is getting closer. For now we sit in cash and bonds, but soon it will be time to get back into the markets.

Finally, for those of you who had accounts under $50,000, with annuities, variable life insurance, 401(k) accounts or chose not to take our advice, I am sorry you did not do better. You lost between -15.78% to -40.17% in 2008. In August of 2006 when our first sell signal showed up, I suggested, in many cases, you cash in your annuities or combine accounts you had with other advisors to raise the value of your accounts with us, so they were large enough that you could use our ETF and stop formula. If you had done this, your losses would have been much less. I do not say this now to make you mad at me. I bring it up because I believe the recovery that is coming will work much better within our system than with your current investments. Plus, market meltdowns seem to be happening more often than in the past and, because of the increasing speed of computers, these meltdowns appear to be going much deeper than in the past. The markets are going to recover. They always do but, they are also going to have another meltdown and, I want you to fare better in future meltdowns than you did in this one.

Thank you for your courage and patience during these difficult times. We take nothing for granted, and are honored by your trust in us. When you are done with this newsletter, please pass it on to someone you think would benefit from it. If you know of someone who might benefit from our counsel, please give them a copy of this newsletter and have them contact us; for, as all businesses during this time, we are looking for new business.

God bless!

Ted Feight

January 2009 Newsletter Text

I think it is about time you get a little good news. No, I cannot guarantee that the 2008 markets meltdown is over. I can't even tell you when it will be over. No one can tell you that. In fact, I am not sure if we have seen the worst of it yet. That is why we need to look at a few things before we get to the good news.

The Ugly

Last week the Wall Street Journal ran an article titled "Banks Die Too Fast for the Regulators." It said, "Banking regulators across the country are struggling with a new phenomenon: Banks are failing with accelerating speed, exposing holes in the regulatory infrastructure designed to catch collapsing institutions. The two small banks that failed a week ago, National Bank of Commerce in Berkeley, Ill., and Bank of Clark County, in Vancouver, Wash., both fell before regulators hit either one with public enforcement actions that would have alerted the public to their condition and allowed regulators to demand changes. National Bank of Commerce, for one, was reeling from losses related to its investments in mortgage giants Fannie Mae and Freddie Mac. Of the 25 banks that failed in 2008, nine toppled before regulators publicly cracked down." Later in the article it said, "Meantime, federal regulators are bracing for more than 20 bank failures in the first quarter of this year. Regulators typically crack down on weak institutions following periodic exams. But banks are falling into trouble faster than in previous downturns. By the time problems are discovered, many of those banks are beyond repair, regulators have found. For the most part, I think it was a tidal wave," says Rob Braswell, the top bank regulator in Georgia, where five banks failed last year. Only one was under a public enforcement action at the time. "We've seen banks die within a matter of days and weeks. You go from having a cold to buried."

That was just to give you a taste of what is coming.

• This week over 52,000 people were laid off. By March of this year, 2 of my 4 sons will be unemployed. If that is what is happening to big business, think about what is happening to small business.
• They say the Lansing Mall will have to file bankruptcy and the Meridian Mall, in Okemos, Michigan, has 13% of its stores empty.
• Small businesses that have been paying all of their bills and have no problems have had their credit lines cut off.
• Auto dealers have been forced to pay extra money to the banks that floor plan their cars and/or forced to order new cars even though they cannot sell the ones they have.
• Many stores have gone from having 25% off sales to 75% off sales, just to raise money to pay their bills.
  

Didn't I say something about good news?

Well, the good news is that it has to get worse before it gets better. There has to be blood in the streets so we can fix the problems that got us here. We can't expect the government to be the only ones who do the fixing. Some of the fixing has to come from us, each and every American, but that is for another newsletter.

The Good

So where is the good news? Well, every 20 or 30 years some of us humans get greedy and screw things up. What we are going through right now is Mother Nature's way of straightening us out. Oh, yes, this is usually about as bad as it gets. We just don't know how long it will take for some of the people to have had enough.

My guess, and that is all it is, is sometime around April or May will be a very good time to start investing again. We won't realize it was until November or December. The markets should end the year with single digit losses, but investments made during that period of time should work like magic for some time to come.

This is where I have to say past returns do not guarantee future returns and there are no guarantees.

During 2008:

• Clients with accounts we managed that were under $50,000 or contained 401(k)s, variable annuities, variable life insurance, untouchable stocks and mutual funds were down between -15.78% to -40.17%.
• Clients who took our advice and had accounts only containing ETFs were down between -3.42% to -17.38%.
  

During 2008 the markets were:

DJIA -33.80%
Nasdaq -40.50%
S&P 500 -38.50%
EAFE -45.10%

The good news is that when the markets start to come back (and they always have come back -- we just do not know how long it will take) they will have to make the following just to get back where they were on January 1, 2008:

DJIA +51.06%
Nasdaq +68.07%
S&P 500 +62.60%
EAFE +82.15%

We do not even have to get in at the bottom to get extraordinary returns. We are about to live through possibly the best period of time to make money in your lifetime. There are no guarantees, but out of a grass fire comes a fertile field and out of the ashes of the Phoenix comes new life. We just have to be patient, not spend our money foolishly, not be in a hurry and have faith.

Thank you in advance for your courage and patience during one of the most difficult bear markets of our lifetime. We take nothing for granted, and are honored by your decision to retain us as your tgrusted financial counsel. When you are done with this newsletter, please pass it on to someone you tnink would benefit from it. If you know of someone who might benefit from our counsel, please give them a copy of this newsletter and have them contact us; for, as all small business during this time, we are looking for new business.

Ted Feight

December 2008 Newsletter

Avoid the Bernie Madoffs in the world![i]

[1] Thanks to Tom Posey, of Posey Capital Management for help with this portion.

The buzz on Wall Street is still the Bernard Madoff Ponzi scheme, which appears to have vaporized $50 billion.

What did he do? He allegedly collected money to invest from clients, made up false statements to show that they were doing well, and used new clients' money to pay interest and withdrawals to existing clients.

The majorities of his clients were thought to be very sophisticated, but didn't see this coming. Could they have? Let's look at three key safety tips that would have prevented this from happening.

1. Stick to stocks, bonds, ETFs, and mutual funds that are publicly traded and listed on major exchanges like the New York Stock Exchange. They are valued independently at least daily, if not minute-by-minute, while the exchange is open. You can check their reported returns against your own portfolio. If you can't look up the prices and performance in the newspaper or on the Internet - that's a red flag - ask a lot more questions.

2. Be sure your advisor uses an independent account custodian. Madoff held his client assets, managed them, and priced them, too. See the conflicts of interest? Investment performance can look better if the prices reported to clients are manipulated, which is allegedly how Madoff showed winning year after winning year despite market turmoil. At Creative Financial Design, our client assets are held by an independent third party, Charles Schwab. We have no input on investment pricing and that separation is a very good thing. The only power we have over those accounts is to make trades and deduct fees. Clients also get an independent statement directly from Charles Schwab each month.

3. Check on insurance. Our clients benefit from fraud insurance. The first part is the Securities Investor Protection Corporation (SIPC) coverage for $500,000 per account. Then Charles Schwab buys additional coverage from Lloyd’s of London that provides protection of securities and cash up to an aggregate of $600 million, and is limited to a combined return to any customer from a Trustee, SIPC and Lloyd’s of $150 million, including cash of up to $1 million. Fraud insurance does not protect against market declines, but it does protect against theft of securities and/or related fraudulent transactions.

If an investment sounds too good to be true, it probably is. Reportedly, Madoff claimed consistent monthly returns of 0% to 2% (annual returns of 10-12%) with little volatility and no annual losses. This claim of making money in up-markets while not participating in declines is impossible.

My final Madoff thought is this: I have seen this same type of Ponzi scheme pulled off in Lansing and Flint three times. The first time I was in competition with the gentleman who pulled it off. He got the business and the customer got the shaft.

Which type of planning advice do you want in 2009?[i]

The following is my overview of a white paper by Dave Loeper, CEO of Wealth Capital Management in Richmond, VA. Dave was one of the very early adopters of the Monte Carlo modeling technology in building portfolios and communicating volatility more meaningfully to clients.

Dave is attempting to calculate the benefit of a financial planner who tends your investment portfolio, and constantly rebalancing back, not just to the original tolerances, but to the equity exposure you would need in order to achieve your goals. This exposure is a moving target; in times like these, when the markets have put many of you behind your retirement goals, there would need to be a higher allocation to equities. Other times, when you are ahead of the game, the planner would give you a reasonable chance of success with fewer equities. The net effect is to broaden clients’ exposure during down markets, when there is an expected recovery, and reduce clients’ exposure as they achieve their goals and effectively take them out of the way of whatever bear market might set them back.

The paper runs to 40 pages, so I'll offer a quick summary of the high points. If you would like to see the total paper, let me know and I will send it to you.

Dave's central thesis is that advisors should manage client wealth instead of client returns, and that they should make their asset allocation decisions on an ongoing basis based on their evaluation of where a client is relative to his/her funding goals. In many cases, he says, clients are already overfunded, and should not be heavily weighted in equities; the advisor should lock in their achievement of the goal. Clients who are underfunded should be encouraged to save and invest more money in the markets, to freeze spending and/or raise the allocation to equities. The asset allocation decisions are based on each client's funded status, with the full recognition that we don't know what the markets will do in any given year or decade.

The test Dave chose is a woman who happened to be widowed in 1926. She needs to generate $5,000 a year in real (inflation-adjusted) income (about $50,000 in today's dollars), from the proceeds of a $100,000 life insurance policy left to her by her deceased husband. As it happens, she will live to the year 2006; as Dave puts it, her blood pressure runs out when she turns age 100.

At the moment the life insurance settlement is paid out, the universe splits into five different branches, and in each branch the woman works with a different money manager.

1. The first checks out the widow's risk tolerance and creates an asset allocation which will run more or less constantly throughout her life.
2. The second adopts a target-date equity allocation which Dave sets as 100 minus the widow's age--starting at 80% and dropping from there.
3. A third manager decides to put the entire portfolio into stocks.
4. The fourth sets a long-term asset allocation and then manages to beat it by 1.5% a year.
5. The fifth runs a Monte Carlo analysis with historical inputs, and decides to set the portfolio at an allocation which produces an 82% confidence rate of reaching the widow's stated long-term goal. Each year, this manager will re-run the analysis, and over the next 100 years, he will be required to make nine changes to the allocations--all in the first 20 years of her life. A table in the white paper shows these changes, but basically the percentages shift from 80% equities in the first two years to 45% in 1928, to 30% in 1929, to 80% in 1930 (we're now in catchup mode), to 100% in 1931, back to 30% in 1938, back to 45% in 1942, to 60% in 1943, and then back down to 30% in 1945, when the portfolio appears highly likely to meet the widow's funding goals.
   
   

Overall, advisor 1 maintains a stock allocation of 38%, and achieves a compound return of 8.29% each year.

Advisor 2 is gradually lowering exposure, but over 80 years, he/she has an average stock allocation of 41% and a slightly higher compounded return of 8.42%.

The third manager, who owns nothing but stocks (I won't calculate the average annual stock exposure for you) generates an impressive 10.36% rate of return.

The fourth manager has the same average allocation as the first one, but because he can beat this index each year, he manages to achieve a 9.8% compounded yearly return.

The wealth manager has an average annual allocation of 38% and a very low 30% allocation for all of the Post-WWII years, and manages to generate 8.58%, compounded, a year.

You might think that the terminal wealth of the portfolios can be sorted neatly according to the compounded annual return, but that wouldn't take into account the sequence issue; the sequence of returns matters greatly to overall wealth.

Now here's the punch line: If the widow continues to take her inflation-adjusted income out of the portfolios:

1. In the universe of the first manager she will be broke at age 51.

2. She spends her last dime at age 50 in the universe of manager two.

3. She runs out of money at age 55 with manager three.

4. The fourth manager, who can consistently beat the market, fares much better; the widow dies leaving an inheritance of $1,072,678.

5. The fifth manager? With him watching over the portfolio, adjusting the stock allocations up a bit when the market is down, down a bit when the market has taken her closer to her funding goals, she dies with $4,878,522 in her portfolio.

His allocations never produced superior returns in any one year, never beat the indices, but it did manage to capture a bit more of the upside, a bit less of the downside, and basically iced down the portfolio when the widow had essentially achieved her funding goal. Of course, the other managers contributed to their own defeat, by continuing to invest aggressively when they could have taken the widow's risk off the table, and by refusing to become more aggressive themselves when the funding goal was slipping out of their reach.

I think the results would have been much more dramatic if Dave had assumed that the widow had earned some income during this 80-year time period and managed to save a bit more and increase funding during times when the portfolio returns had threatened her funding goals. This, of course, is the kind of flexibility that pre-retired clients have and, in fact, the opportunity that clients have at this very moment, when more money could be deployed when virtually every asset class is on sale, often at screaming bargains.

Do you know the difference between an Elderly Lady and an Old Woman? Money!

Goodbye 2008![1]

[1] Thanks to Bob Veres, The National Association of Personal Financial Advisors (NAPFA) and Bob’s readers for helping us all communicated better with our clients during these troubled times.

We certainly live in interesting times. We did foresee, in the fall of 2006, the financial and economic turmoil that has resulted from difficulties in the real estate, credit and derivative markets. That is why the majority of our clients are now holding cash and short term bonds. However, we did not foresee the extent to which things would fall apart. Since October 2007, the world seems to have been turned on its head. The pessimistic outlook so commonly held today will not be reversed until there are reasons to be optimistic. Capitalism depends on confidence. Without it, transactions cannot take place. And confidence is in very short supply today.

It is our belief that the current decline in the stock market is being driven by two other types of sellers as well: Those who are forced to sell to meet cash needs or liquidation requests, and those investors who are driven to sell out of fear or a sense of panic. Forced or panicked sellers are not selling with economic justification. Therefore, they push prices down to such an extent that they actually set the stage for a significant price recovery. The majority of investors buy high and sell low! Yes, you read that correctly.

Although there are no guarantees, those of you who took our advice are now ready to buy really low and participate in what could be the greatest worldwide investment recovery in 78 years. No one is sure when this recovery will start or long it will last. We just need to be patient. Financially, we know you can do it. Emotionally, we know you can too; you just may need our help.

For now, we want you to lead your lives in as normal a fashion as possible. None of us knows how long our stay on this earth will be. We encourage you to continue to spend money on things or services that increase the quality of your life or the lives of loved ones within reasonable spending limits. However, if we have cautioned you about your spending level being higher than what would be prudent given your portfolio size, recent investment declines will only magnify the importance of a spending reduction.

It is very important for all of us to be mentally prepared for additional bad economic news as the nation and the world work through this. There will be no quick solutions. As dark as it is, it could, and probably will, get worse. If the markets decline from here, they will only increase the potential of your future profits. That is if you don’t spend your money before it gets a chance to once again work for you.

Many of you grew up in small towns or cities, and you may remember that some of the most beautiful springs followed some of the harshest winters. I can tell you with certainty, after having watched the market for 35 years, that spring is coming. We have been given one day at a time, so I cannot predict with accuracy when spring will bloom, but I can tell you that it will arrive. At that point, this harsh winter will become a memory.

Finally, with all that is going on today when you are done with this newsletter, pass it on to someone you think would benefit from it, be they family, friends or business associates.

Thank you in advance for your courage and patience during these difficult times. We take nothing for granted, and are honored by your decision to retain us as your trusted financial counsel.

Ted Feight

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Focus on Fiduciary

Do you know that only certain financial professionals are subject to a “Fiduciary Standard”. A Fiduciary Standard means an advisor is putting their client’s interests first. In no way do they urge their clients to invest in vehicles that are in the advisor’s best interests.

fi•du•ci•ar•y – A financial advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a Fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated and any corresponding conflicts of interest.

Theodore J. Feight, CFP® firmly believes this is the strongest definition of Fiduciary available because of the basic requirements of Trust, Loyalty, and Disclosure.

Trust – Someone who does not completely trust their financial advisor can never be fully confident that they are receiving the best possible advice from the best possible advisor. Without trust, can confidence really be achieved?

Loyalty – An advisor who is loyal to only their clients will not be swayed by outside forces to recommend investments with higher commissions or payouts. Without loyalty, can people ever be sure their own interests are being looked after?

Disclosure – People must know, and understand, how their financial advisor is being compensated for the advice they are providing and whether or not any conflicts exist that may cause a problem with that advisor’s ability to provide truly independent advice. Without disclosure, can prudent advice be provided?

It’s hard to find the perfect financial professional who will meet your needs. You deserve an advisor who is competent, qualified, knowledgeable, and is compensated in a manner that minimizes conflicts of interest. But, more importantly, the advisor must be held to a Fiduciary Standard, meaning they will always put your interests first. You want to always be sure the advisor is working for you – not for themselves.

Registered Investment Advisors (RIAs) are held to a Fiduciary Standard. By law, a Fiduciary will act solely in the best interest of the client. They must fully disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Fiduciaries will also adopt a Code of Ethics and will fully disclose how they are compensated.

You must be careful to read and understand the disclaimers on marketing and advertising materials offered by a professional. Recent regulations put forth by the Securities and Exchange Commission (SEC) now require brokers and other professionals who are not considered fiduciaries to add the following disclosure:

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”

If this disclaimer appears, you should ask questions, obtain complete disclosure, and determine if the relationship with the financial professional is in your best interests.

Do you know what physicians, lawyers and CPAs have in common? They all hold to a Fiduciary Standard to put your interest first. Look to a Financial Planner who will put your interest first.

The complexity of retirement distributions:

It won't be long before a lot of people are taking distributions from a myriad complexity of retirement plans, taxable accounts, Traditional IRAs and Roth IRAs, and they should be looking for guidance on where the money should come from first. There is little research and even less agreement on how this should be done.

We are developing a decision matrix which takes a lot of things into account before you can decide where to take your initial distributions. For example: Stocks or funds with a high tax basis might be more attractive to liquidate than IRA assets, but stocks or funds with a low tax basis might be profitably held until the first spouse dies, giving the second spouse a step-up in basis that can really enhance tax-efficiency going forward.

Tax-inefficient investments like taxable bonds are most profitably stashed in the IRA. But as you liquidate the IRA, you are also reducing your capacity to deploy those tax-inefficient investments where they belong. So you have to keep an eye on your IRA "capacity" in relation to the percentage of taxable bonds in the portfolio.

How you leave any leftover assets to heirs at death is another consideration. If the next generation of beneficiaries is quite young, then leaving a stretch-out IRA might be more efficient than leaving assets from the taxable account. However, we are not optimistic, given our current budget deficit, that Congress will maintain our current tax rates, and that money inside a retirement plan is more subject than outside money to the government's taxing whims. This would argue for taking money out of the IRA first, while the getting is good.

If there are estate tax liquidity issues, then it might be beneficial to avoid depleting the taxable accounts, since those assets would receive a step-up in basis, and no income taxes would have to be paid by the heirs to get this money. Withdrawing money from a traditional IRA to pay estate taxes would trigger additional income tax payments.

We look at distributing (rather than reinvesting) dividends and capital gains distributions from the taxable accounts, and considers whether clients have capital loss carry-forwards and/or realized capital losses for the current year (which would suggest taking capital gains from the taxable account sufficient to offset the losses). Beyond that, how important is creditor protection? (IRA assets are less vulnerable.) And are the heirs capable of managing a stretch IRA? Is there a high possibility that they would liquidate it in a few years, rather than stretching out the distributions and taking full advantage of the deferral?

There are two points here: First, that the source and sequence of retirement income distributions is a seriously complex planning issue, with too many variables to yield a pat, simple, one-sentence rule-of-thumb answer. Second: we may not have yet defined all the variables or outlined how they interact with each other.

Ted Feight, CFP®

April 2006

The media is touting the first quarter of 2006 as the great quarter in this decade. It was a good quarter with the DJIA up 5.77%, S&P 500 up 9.68% and the NASDAQ up 17.03%. But what makes it seem so good is that there has not been a first quarter in any year since 1998 that all three of these stock market indexes were positive.

So should you get excited and run out and put all your money into the stock market. Probably not, according to the following:

1. Have you ever heard the saying buy low and sell high? Well the stock market indexes are currently at all time highs.
2. If you look you can find a chart called the Average Presidential Cycle. The one I have takes each week of the DJIA, for each week in every United States President’s four-year term since 1897 and averages them together in a four year chart. That chart clearly shows that during the second year in a presidential cycle the DJIA starts out up, then goes flat to down until the last part of the year. Then the DJIA goes up for some time. This chart does not give guarantees, so don’t take it as one.
3. The two year and ten year interest rates have been inverted for 34 days this year. “So what?” you say. An inverted yield curve is when short-term interest rates are higher than long-term interest rates. This is usually measured by using the 2-year treasury rates in comparison with the 10-year treasury rates and/or the 3-month treasury rates in comparison to the 10-year treasury rates. When the short-term rates are higher than the long-term rates, it is called an inverted yield curve. This usually means that the country will go into a recession within the next two to four quarters. The yield curve has predicted essentially every U.S. recession since 1950 (1969, 1973 - 1974, 1980, 1981 - 1982, 1990, 2001 - 2002) with only one false signal, which preceded the credit crunch and slowdown in production in 1967. To be a credible signal, the curve must stay inverted for 30 days and the 3-month and 10-year treasury rates do the best job of predicting this.

So what do you do? Find your self a good Certified Financial Planner™ to help you answer that question. Ad lives are for aminitures and your monitory future is too important to play around with.

Nov 7th 2005

It was my fault. I took some time off to go hunting, even though I knew that there was a good chance the world would fall apart. And this is what happened: A horrible mudslide in Central America, parts of India and Pakistan devastated by one of the deadliest earthquakes in history, a new tropical storm swirled up ominously in the Gulf, Mount Everest inexplicably lost 12 feet in height and a tornado in the Midwest . For those of you who are hiding under your beds, you can safely come out again; I'm back in my office.

While hunting, I did have a saw fall out of a tree and try to cut my nose off, another saw cut through a branch and attack my left hand (3 stitches) and a small tree I was pruning jumped up and it tried to take my head off. Hunting is dangerous.

This is the time of year that we start planning what we want to do during the next year. We try to pre-set client appointments, find a financial planning theme for the coming year and improvements our systems to better help our clients. No matter how much planning we do, nature will usually throw a monkey wrench into things along the way. Yet having a plan often helps us to get better results.

Very often the financial planning theme will be different for each client, as almost each client is in a different stage of his or her financial planning life. Often, the times we pick for appointments will not fit into the client’s schedule. That is OK. We can and will work around these small setbacks. The real joy will come next year at this time, when we see the results of the planning we do now.

June 24th 2005

From time to time I sit back and look at where we have been and how I see it relating to where we are. Although not a complete match, I see us now in a period of time like 1974, 1984 and 1994. In 1974 the oil problems were hitting their second crisis period in 3 years and the markets looked bleak. In 1984 we were in the middle of the S&L crisis, high interest rates and the markets looked bleak. In 1994 we had just had a war in the Middle East , oil prices were up, interest rates were being raised and the markets looked bleak. Today, we have a war in the Middle East , oil prices are hitting their second crisis period in 3 years and the markets look bleak.

During each period you heard people say, “In the future the stock markets will not be able to give us the returns we had in the past.” In the 1970s oil drove the stock markets up during the last half of the decade. In the 1980s computers and lower interest rates drove the stock markets up during the last half of the decade. In the 1990s the internet and lower interest rates drove the stock markets up during the last half of the decade. All of these decades started the boom in the latter half of the decade. They were driven by things we did not even know existed before the decade began.

Well, guess where we are today. I see the markets ready for another new driver that many people do not see coming. Do you see what it is?

June 05. 2005

Retirement in the 21st Century is't like it use to be.

There are several stages in retirement.

1. The early stage (the go-go years).
2. A stage where people can no longer do all the tasks of daily living (the slow go years).
3. Finally the nursing home stage (the no-go years).

During the early retirement, individuals have the most flexibility and can enjoy life the most: they can continue to work full time or part time, they do some things themselves rather than hire someone More importantly, during this time the amount of assets at that time has the biggest effect on sustainable withdrawal and life expectancy is the most difficult to determine. You should tend to be conservative in withdrawal rates during that period. During early retirement the client can enjoy his spending the most, but the trick is to not have the spending be too high or there won't be enough left for the no-go years.

With depression era people, the problem usually is not spending enough of their money. Many planners seem to have the issue of urging these clients to spend more, because depression era people believe they will never have enough. The baby boomer generation is another story. They have not ever had to go without or wonder where their next dollar would come from. They all spend too much, to early in retirement and on many things they really do not need.

I want my clients to understand the trade-off.

June 05, 2005

Currently the economy is growing faster than it is creating jobs. Put another way, companies are accomplishing more and more with technology rather than people. There is a disconnect between job creation and GNP growth which begs the questions:

How will we provide a living to additional people with an economy that creates jobless growth?

How will you protect your assets in an economy that is doing this?

June 05, 2005

It appears that the stock markets liked the information coming out of the Federal Reserve today. There are no guarantees with investments, but it appears the markets want to rally.

May 05, 2005

We need to help people gain insight into the future and how it will impact on them. We need to help people to work on their own personal strategic planning processes so they can move forward and realize their goals whether they be short- or long- term. We need to do this without getting caught up in the short-term smoke screen thrown up by the media. Live and work for the future, not the past or the present.