Performance Is Everything

400-Yard Dash in 53.3 seconds!

I debated whether or not I should divulge a little known fact at this stage in my life, but yes, I ran the quarter mile dash in 53.3 seconds in high school. Fifty years later, there are thousands of humans running the same distance in less than 44 seconds; so, who cares about my athletic history?

The point is that my ability to run holes in the wind at one point in my past is in NO WAY a guarantee of future performance. It takes me nearly the same length of time to get down the stairs to my garage as it did to run 1320 feet in my youth. You may wonder, “why is that?” Maybe not.

Let’s talk about all the impressive ads we see on our TV screens spouting impressive returns from mutual funds for the last five, ten and twenty years. The longer span on performance history is generally a more conventional attempt to reassure us of future financial security. Immediately, the mind projects out to the next long haul and accepts the potential gain as a fact of life. Meanwhile, I could not find any recently advertised performance figures on mutual funds for the two or three years preceding 2004 . If they existed, you needed a hound dog to find them. Marketing strategies use numbers to the promoter’s advantage.

But, if you ask the thousands of people who put their money into the hottest index funds in January of 2001 how they feel about past performance [the Standard & Poors 500 index tanked nearly 30% for a continuous period of 24 months.], many of them will tell you they wish they had been giveen more information. Two and a half years is a long time, considering the time value of money.

The start for year 2008, market-wise, is shaky. The reason for the volatility is most unsettling, which is why I will reiterate my previous warnings about so-called conventional wisdom. While I was channel surfing this past week-end, I caught a prominent female financial guru in the middle of one of the most over-used and inappropriate advisory statements of our times. She used the term - long haul - a little too often while implying that the market will go back up. That kind of advice is very bad news, especially for workers who wish to retire inside the next three to five years.

To be brief, we have a dilemma in the credit markets that is bulging. There has never been a larger glut in the sub-prime lending sector than what we have today. The billions of dollars in bad loans around the world weigh heavily on several major economies, especially ours. Refinancing of low-quality mortgages began more than a decade ago and has escalated at a run-away pace to the extent that equity markets are reacting to the situation. If credit quality does not improve, what kind of performance should we expect from the stock market?

Here's something to ponder: define long haul.

If you want an investment strategy that will help to secure your retirement in the next three to five years, it is time to get more involved with your finances. Start by monitoring your investments more frequently to check their performance. If you have been lulled into believing what goes down must go up, snap out of it! Look for sensible advice. It's not the hardest job you ever had.

Hawk

We All Know Who Freddie And Fannie Are, Right?

More than a decade has passed since I last touted these two financial giants as the safest investment vehicles second only to U.S. Treasuries. For those who might still be a little fuzzy as to who Freddie and Fannie are, I am referring to Freddie Mac (FHMAC) and Fannie Mae (FNMA), the mortgage industry's largest guarantors of home loans.

Back in my "hay day", between 1995 and 2000, I helped investors understand that getting 1 to 2 points over 10-year T-Bills was a sweet deal. Beside being more lucrative, mortgage securites were often much more liquid in a strong market. Those were the days---when rates were at or above 8.0% on paper "equivalent" to 10-year bonds.

The more things change, the more things change.

The recent ripple through the credit markets has caught up with Freddie and Fannie, providing confirmation to a critical underlying dilemma in our economy. Both of these giants need more money to build reserves after suffering from some bad mortgages in recent years. Refinancing has caught up with investors and institutions seeking to extend the defunct bullish trend in real estate. Now the same financial monoliths that were, at one time, my absolute favorite sources for fixed income are under the gun with the startling potential of losing their status as safer investments, at least from an equity standpoint.

Both of these mortgage buyers need to raise a few billion dollars. You might already know that Fannie Mae recently drummed up a pittance of $500 million in preferred stock; but the stock does not have the value it would normally have because the shares are "non-cumulative". Although an annual percentage rate of 7.25% can be seen as attractive in this environment, the dividend is not guaranteed. One missed dividend payout - there goes your annual rate!

It will be interesting to see what the magicians of Wall Street come up with in the way of alternative financing. I suspect a slick packaged derivative of some kind, to buy time, might be in the offing. How would you like a high-yield, short-term, zero coupon EFT? Don't laugh!

Hawk

Retirement Bully

Are we seeing more reports about American workers who cannot afford to retire, or is it my imagination?

Just the other day, I saw a news report indicating that nearly 40 percent of baby boomers will have to work for the rest of their lives. My first reaction to that information was: "so what else is new?" When I decided to backtrack with my thinking, I immediately began to question such a broad prediction.

One of the reasons I think the media gets it wrong is that sifting through and analyzing data is not required to publish a sensational story. In other words, I don’t take mass media seriously when I want to know what’s happening financial markets. That’s not where you get information for future planning. No sir (ma'am).

Just from studying the statement above for a minute, one starts to wonder, why?

My best guess (a mighty good one, too) is that there is an abundance of surveys taken from suspects who are given the universal treatment of measuring current income, savings, investments and real assets in what might be loosely called 'realistic' or standard investment models. This is where the projections fall short of being functional and investors start to frown.

When I first became an investment broker, I took the position that mutual funds are to financial planning as aspirin is to bodybuilding. Sure, you can try each one, but you’d better have a deeper, well-designed personalized program if you want to reach your objective. I was right in 1988 about my views on financial planning, and I am assured of being more correct today.

In up and down markets, I have seen dozens of individuals, with three, five and ten year goals, meet their marks on or close to schedule. The key was in the right counseling that helped them make critical decisions about their money. Mutual funds were not at the center of their success. As time permits, I will continue this series on the dilemma and the solution for most workers who would like to retire in fifteen or twenty years.

It's time some of us broke away from public inertia. We'll be back with some really good news!

Hudster

Stock Power Soon To Be Released!

We have had our share of delays in the past six months; but, Stock Power (The Novel) is on its way to the presses!

The story within a story is that this new epic novel has finally reached the point of no return - a date with Trafford Publishing of British Columbia, Canada. Thanks to several individuals who have shown their faith, moral and financial support, my dream will come true at the book stores in about six weeks from now. It won't be a minute too soon.

We are hoping for a decent return on our labors within the next six months. During the next six weeks, there will be plenty of publicity about the story, its author and locations where the book-signings are likely to take place.

To all of my supporters, many thanks for your interest and patience with this long awaited book. I am hopeful that your patience will be compensated by an enjoyable adventure with Bill Haydon.

Money Wins Over Grass!

I was invited to speak at an investment club inauguration. The group represented several distinct age groups. Toward the end of my presentation, I asked for a show of hands from people who would prefer to watch money grow rather grass.

Fortunately, the consensus was that, as a spectacle, grass was less attractive.

Although, I knew what to expect from my compliant audience, I was also not surprised to find out that less than half of the attendees knew whether or not CitiGroup would be considered a growth stock. Worse than that, only four people had reviewed their investment accounts within the past thirty days. Yet, these same investors were excited about the new investment club they had just organized. There were nearly fifty members present.

“Why do you want to start an investment club?” I asked.

The spokesperson reiterated what she told me during our first conversation. Most of the members did have an ambition to learn more about investing in stocks. Their premise was correct. The few that approached me at the end of the meeting confirmed that they were happy about the knowledge they received in forty minutes.

In my opinion, this story reflects the disposition of thousands of Americans who, either because of busy schedules or social distractions, domestic or otherwise, are not in touch with their investments. A quick “drive by” at any lay financial forum on the Internet confirms this view. If index funds were band-aids, Johnson & Johnson should shut down all of its non-band-aid operations and go vertical.

I use the plastic strip analogy to build an image of how thousands of people relate to index funds and diversification. You might want a better metaphor. Nonetheless, facts show that billions of dollars have been transferred away from other investment vehicles, in favor of market tracking funds. This behavior has created a dilemma for investors who plan to retire soon or rich or both.

Just like drivers who don't look in the rear view mirror, investors use diversifaction (same as index funds) as the wherewithall to their monetary goals, and it is a mistake.

I measured the 5-year performance of the popular Vanguard 500 Index Fund from January 2, 2001 to January 3, 2006. The total gain in the net asset value (NAV) of the fund was a paltry 8.84%! And that's for the enitre 260 weeks. (Of course, in retrospect it was a good time to buy the shares.) But, stop and think what numbers can do for a mutual fund sales brochure, depending on which numbers you choose. It is true, that [eliminating the months immediately prior] this portfolio has averaged a little over 6% per annum during the most recent five-year term. Dozens of intermediate bond funds funds have done better.

Of personal concern is whether or not the share price will get back to, or exceed its February high and for how long.

I rest my case.

Hudster

The name of the game is money. Hel-l-o-o-o-o!

We got into a discussion the other day (over at the Helium website) about the differences between money market funds and CDs. While we're at it, the discussion contained the key phrase money market funds - not money markets, a wide-spread misnomer.

Meanwhile, money market funds are actually mutual funds that are managed, and they invest in commercial paper and other short-term cash equivalents, typlically called "obligations". The only change that takes place in a money fund [of importance to investors] is its dividend yield, generally expressed in annualized terms but calculated over periods of 7 and 10 days (mutual funds, including money funds, don't pay interest). The yield will fluctuate, but not the principal.

The share price has always been one dollar. The shorter the term of certificate, which is most often between 90 and 180 days, the safer it is. That characteristic alone helps to make the decision a lot simpler when the choice might be based on the annualized yield.

To go a step further, the most compelling reason to "invest" in a money market fund is to have liquidity - which is to say, write checks, make frequent withdrawals and invest in other vehicles - and getting a better dividend rate (not interest rate) than a short-term CD.

Certificates of Deposit pay more interest when the date to maturity is further away. Their main attraction to knowledgeable customers is that they are guaranteed by way of insurance. Money market funds can never be insured.

Obviously, there is a wide-spread misconception about the nature of money market funds for a large population of investors. (I thought this platform was too good an opportunity to pass up.)

Over the years, including our recent interaction with Helium, we have identified a class of people that believes money market funds invest in the stock market. This is a gross misconception. For the sake of making the connection, go no further than the name of the fund(s). M-o-n-e-y. Money. For further clarification, please take a quick glance at the SEC's definition of the security.

In addition, they are not considered viable investments for long periods of time. Sure, they're as safe as can be. So is a Hummer! Why don't we all go out and buy one! There are thousands of people who put half their savings into these investments. It's wrong, with a capital 'R'. It's like driving from L.A. to San Diego with your foot on the break pedal. Don't do it.!

Whew! That felt good.

Hudster