Invest With Awareness

September 23, 2008

Unbridled Greed forces America to accept socialism?

Filed under: 2008 Credit Crisis, Education and Timely Discussion — Peyton @ 10:19 am

In the short term, it was absolutely necessary for the US Government to bail out the banking system. It allowed business to continue functioning. No question about it. But do we realize what it means when we promise, on the backs of taxpayers, to amortize $700 billion dollars? First of all, Its a lot of money. It’s like paying for a couple of Iraq Wars (without a  war), to put it in perspective.

Individuals bought homes, faced bad news, and walked away. Wall Street “Rating Agencies” with conflicts of interest rained capital on the venture and sold it as “AA” Safe.  There was no money at stake, really. Just notes hidden in complex financial instruments.Banks proudly displayed the “assets” as real, until the illusion vaporized, along with their balance sheets. And now much of the hyper-inflated real estate value is gone. Wealth evaporated before our eyes, as it does in financial bubbles.

The worse thing is that the public will pay the bill. Private risk takers will be subsidized by public taxpayers. We have all made a promise to labor and pay taxes, in order to pay this bill. The slate is wiped clean, the notes will be serviced, and it will be as expensive as a war.

So now the federal government will struggle to make good on it’s obligations in the name of “all of us”, Maybe it’s time to look at the way things really are, and abandon our romantic notions of living in pure capitalism.

We are more socialistic this week then we were last week.The bailout is a further hybridization of Capitalism and Socialism.  Hard to hear, I know…more socialist. Should I capitalize Socialist? socialist? Socialist? Is the Capital S more Un-American than the little s?

We have watched while a greater and greater divide came between rich and poor in this country. We have seen Pain Avoidance as a personal and governmental fiscal policy. Primitive emotional control and predatory lending crippling household budgets. A short-sighted financial services industry plagued with too many conflicts of interest. A regulatory environment ill-conceived and way too unsophisticated ro protect us from the sword of greed. And to top it off, an energy policy so woefully under-visited that we now witness the greatest transfer of wealth in history, mostly to our sworn enemies.

Let me suggest something positive might come from this. These financial obligations will not prove to be a complete loss. For one thing, many mortgage obligations will be paid in full, on time. Also, there is real estate value to be recouped in the event of repossession and auction. So, this crisis may be overstated when calculating the cost to taxpayers.

In “long time” I believe we are destined to evolve a balance…a bringing-together… of the best of both Capitalism and Socialism.

This may be a natural evolution, one we should recognize and be grown up about accepting. We have huge problems to solve as a collective, and lots of hard work and innovation to be done individually. Rejecting any and all “socialist” aspects to our regulatory and governmental structure may be unrealistic.

Our tax structure already facilitates wealth re-distribution, so we are in fact, already something other than pure capitalists. Get over it, and get on with designing something that works better, and acknowledge that it may be necessary and healthy for the whole economy.

Once we accept this, the Conservatives can admit we need government to provide the structure to grow sustainably, and the Liberals can accept that competition solves problems and creates jobs, not government. This could be a valuable lesson, even if it smacks of the “S” word.

September 19, 2008

The Financial Crisis and Recommendations to Clients

Filed under: 2008 Credit Crisis, Education and Timely Discussion, General Advice — Peyton @ 5:34 pm

(An open letter to our clients during the September 2008 credit crisis)

The credit crisis of 2008 is one of the most acute financial problems the world has ever faced. Essentially, borrowers signed mortgage notes without adequate pre-qualifying, and the terms of these notes provided “resets” which dramatically increased the required payment, leaving many borrowers unable to make the payments. To make matters worse, housing values dropped dramatically, causing many borrowers to simply walk away from their obligation.

These mortgage notes were packaged into complicated income vehicles, and the rating agencies failed to accurately disclose the risks inherent in these notes, which was really a product of the conflicts of interest these rating agencies had when providing the disclosure to investors. Most of the investors in these notes were financial firms, who included in their financial statements the assumed full value of the notes. Oh, and this not just a domestic problem…these notes were purchased world-wide. It is astounding the number of CEO’s and CFO’s who failed to recognize (chose to ignore?) the true risk of these notes. Now that the notes are failing, the revision of financial statements has caused a dramatic revaluation, causing stock prices of these financial firms to plummet, and affecting other companies and industries stock issues at the same time.

So what does the future hold for our credit and monetary systems? It is not an easy question to answer. Because these complex mortgage notes are the root of the problem, it is very difficult to assess the risks that still remain. One thing is for sure, this crisis will leave fewer financial companies in it’s wake, as mergers are completed. We are concerned that the liquidity and credit crisis may very well become a more widespread economic crisis. Cross your fingers this does not happen.

The Russell Hawkes Fee Only Portfolios are faring quite well. Diversification and our disciplined portfolio-building techniques are producing less volatility than a more focused (or “tactical”) strategy.

Also, our mutual fund managers are paired with one another because of their differing investment styles, adding another layer of diversification. Our decision to add the Amana Growth Fund in early 2007 has been a real success story. Amana invests according to the principles of Islamic Law, which prohibits profiting from lending. We chose this in order to limit our exposure to the financial sector, and this has obviously been a big advantage to the portfolios and for our clients.

The PIMCO Total Return and Emerging Markets bond funds, along with the Loomis Sayles Bond Fund, have been a bright spot compared to equities. Our bond fund managers have shown discipline. Seeing little value in the bond markets, they have been unafraid to take heavy cash positions. This has been a smart play. Signs of inflation are detrimental to bond holdings, so we anticipate that bonds and their inherent interest rate sensitivity could be less of a safe haven than usual in this phase of a receding economy.

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To give you an idea of how the Sept 15th, 500+ point drop in the Dow affected our portfolios, let’s look at exactly what happened. In one day, the DJIA dropped more than 4.5% in value. Our most aggressive Equity portfolio dropped only 3.81%, our Equity-Tilted dropped 3.04%, our Balanced dropped 2.46%, and our Conservative portfolio dropped only 1.52%.

So what would we recommend you do for the future? It is our feeling that the current financial crisis may have very serious implications for the next 12 months or more. We believe it will be resolved, but that there is no easy fix for this deep rooted problem.

Our portfolios contain mutual funds which have been screened for both bull and bear market superiority. Their investing style attracted us because they tend to be as conscious of avoiding losses as achieving gains. That’s why they are in our portfolios…risk and return characteristics which outpace their peers. In these turbulent times, it’s important to let them do their work….they are busy plucking good value from these ugly markets. It is during these low points that great companies are cheap to buy.

Even still, there may be those of you who, psychologically, cannot weather this financial storm. If you are feeling this way, you may want to consider our Conservative Balanced Portfolio.

The Conservative Balanced Portfolio is structured to be basically 60% Bonds and 40% diversified stocks, most of which are dividend-paying. We do not expect the stock portion to contribute much growth to the portfolio in the near term. We expect it’s price will bounce around, it will pay it’s dividends, but not add real octane to the portfolio until the current crisis has been resolved. The bond portion of the portfolio, whose managers are quite cash-laden at the moment, will also produce an income stream for investors. The bottom line is a portfolio strategy that is cash-heavy (currently over 44% cash!), and produces annual dividends of about 3.46%.This portfolio strategy provides prudent exposure to stocks for long term growth, but with enough bonds, cash, and dividend-producing stocks to generate an immediate income stream. Over time, the stock market will recover. In the meantime, our top-quality stock and bond fund managers are searching for the opportunities this crisis presents, and making wise purchase decisions for the future. Patient investors will be rewarded for their grit during these difficult times.

As always, Russell Hawkes Associates values your business, and takes seriously our role as your trusted advisor through good and bad markets.

Yours Truly

Peyton R. Hawkes

Russell Hawkes Associates Inc

Historical Recessions and the Stock Market

Filed under: General Advice, July 2008 Newsletter — Peyton @ 4:43 pm

The stock market does not reflect current economic conditions, but rather forecasts conditions, typically 6 months or more, into the future.   So the stock market’s poor performance is indicative of what?

According to the National Bureau of Economic Research, a recession can be defined as

“a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches it’s trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”

Looking back on the last 9 recessions (since 1953) provides valuable clues as to how this current one may play out.

  • On average, recessions last 11 months. Stocks begin their descent 6 months earlier,  and it lasts about 12 months, or into the middle of the recession.  During this period the average return on stocks was a negative 21%.
  • Then, as the markets discounts economic recovery, the returns turn positive, and the upward slope for stock prices averages a +36% return.
  • Through the entire “recession cycle”, investors have averaged +8%.

The worst return, pre-recession to post-recession, since 1953, began in 2000, when the dot-com bubble burst,  the 9/11 attacks occurred, and corporate accounting scandals were headlines.
Investors suffered a loss of 30% pre-to-post-recession, then in 2003 the they enjoyed a gain of 28.5% .

The next worst was Nov ’73 to March’75, a loss of 22%,during OPEC price-quadrupling, Watergate scandals, and Vietnam War spending.

From June 2007 through June of 2008, the S&P 500 has lost  18.25%.  So we may have more time and further stock price reductions.

….Or not. The problem is that these things are not predictable. The economy is a model of complex pulleys, wheels, and levers. There are many possible outcomes.

But we do know that patient investors average 8% from pre to post-recession, on average, if they simply weather the full market cycle.
Well-allocated investors can reduce the peak-to-trough impact and “smooth the ride” by owning a sensible bond fund or ladder, which typically perform well when interest rates decline. Interest rate declines are common when stock prices are falling.

-Sources include: Jennison Dryden

July 25, 2008

Electronic is the way to go!

Filed under: General Advice — Rhonda @ 8:28 am

Need some money from your account? If you provide us with bank information it can happen in HOURS! Electronic links are the way to go; it saves time and gas (no need for the mailman!) and is the easiest way to TRACK it. So please consider providing us with bank information in the form of a voided check or deposit slip; if you need money regulary (monthly or quarterly) OR just occasionally!

July 24, 2008

Not Your Father’s Retirement

Filed under: General Advice — Tags: , , — Peyton @ 11:51 am


Great Grandpa didn’t concern himself much with retirement. Odds are he wouldn’t live long past his employment years, and large, nearby extended family would insure his care if he did enjoy a long life.

Grandpa, on the other hand, was privy to the Social Security benefit, along with a strong American economy growing at a fast clip. Lots of opportunity came his way. A good work ethic, savings habits, and less temptation by the consumer credit trap, and he had himself a nest egg.

Now, Father’s generation had not only opportunity for the entrepreneurial among them, but also a paternal manufacturing industry that is almost quaint when pondered today. George F. Johnson’s plants and homes, the days when IBM had never laid off ANYONE , EVER. And these were the days of the Defined Benefit Pension Plan; if you worked for 30 years, a retirement income was guaranteed for life. The investing that was required to make this happen was the sole responsibility of The Company. Dad’s generation needed no investment savvy to make retirement happen.

Oh, how the landscape has changed. Today’s worker has changed jobs many times. He has re-tooled his skills several times to remain valuable. IBM has not only outsourced many jobs to India, but has cancelled that wonderful Defined Benefit Pension Plan his father enjoyed. EJ making shoes in America? Not in a long time, I’m afraid. For today’s worker, there are no guarantees ANYTHING will be there after 30 years in the workplace.

And what happened to that extended family Great Grandpa had? They have moved several times, and are all over the country, that’s what.

The onus falls on every Young Person to make the best use of the payroll-deducted savings opportunities that are available to them. That means never living on more than 85% of their income from the first day they begin working. That also means getting good investment returns. Making money in REAL terms: more than inflation and taxes will eat up. It isn’t the Fixed Option. They must get investment help, and it isn’t available at the water cooler either.

Young Person must also understand that the Credit World is poised to steal their prosperity, not provide it.

If you are a young person reading this article, or the Parent or Grandparent or Great Grandparent of a young worker, this means taking action NOW. Call a financial planner NOW and have him/her look at the 401(k) investment options and put together a portfolio that makes sense given your age. Find a planner who will do this for a fee, because there are no commissions available to do this. That’s why brokers aren’t calling you to do this. YOU must take action.

If you are within 10 years of wanting to retire, don’t forget that you are the Investment Manager of your Retirement Funds. Are you qualified? Paying attention? Reading? Nothing will be more important in your financial life once you stop working. Are you ready? I didn’t think so.

You need to pay a professional planner because IBM isn’t doing that for you anymore. You need to get good advice because you literally cannot afford to get this wrong.

Whether your 25, 45, 65, 0r 85, mapping out a strategy for your financial future is the task at hand. Consulting a fee-only financial consultant will bring to your circumstances the years of experience and perspective to do the job right. You need a professional in your corner who will respond appropriately as the world turns. Grandpa would be proud!

Peyton R. Hawkes

Russell Hawkes Associates, Inc

How to Make Money in the Stock Market

Filed under: General Advice — Peyton @ 11:48 am

How Can YOU make Money in the Stock Market ?

What does it take to make money in stocks? Research? Luck? Brilliance? Connections? Inside Information?

An academic study was done a few years ago, where 10 of the largest pools of money in the world were studied. Accounts such as the California and New York teachers retirements, the GM pension plan, and other very large pools of money were monitored for 10 years. The goal of this study was to determine the exact cause for varying performance. Some funds made money, while others lagged behind. Why? Better stock picking? Better market timing ? The results were quite interesting!
About 6% of the variance was due to stock selection. Buying Lowes instead of Home Depot, Microsoft instead of IBM, Toyota instead of GM, etc. Another 2% was attributed to timing. WHEN did they buy, and when did they sell? Over 90% of the performance variation was due to asset allocation policy differences. Buy stock or bonds? Buy domestic or international? Buy growth stocks or value stocks? Large or small companies? Manufacturing or Service sector? These decisions made the biggest difference in performance when all was said and done.
What can we learn from this? Being that over 90% of the variance was due to asset allocation policy, doesn’t it make sense that our own asset allocation policy receive our greatest attention as investors? Too often I hear “hot tips” from the watercooler portrayed as an important strategy for financial success, which is simply an inaccurate place to put your energies.

What might an Asset Allocation Policy look like for your family? Well, it might state that 60% be invested in stocks, and 40% in Fixed Income investments. That the stocks be 35% in Growth, 25% in Value. That 80% be domestic, and 20% be foreign. That the Service sector outweigh Manufacturing. That the bonds be laddered for stable pricing, and also contain some foreign government bonds.
If this were your family’s policy, it would be the most important part of your success. So instead of buying hot stocks, or trying to time the next market upturn, most of your attention should be in your policy development and refinement. Over the long run, this will determine your success or failure!
Of course having an asset allocation policy is important, but there is more to do. With roughly 13 different asset classes to manage, you must also find good managers to fill each one. Searching among over 14,000 mutual funds available, good research will yield superior managers. Once these managers are in place, they must be monitored. If they fall behind their peers, they should be replaced. If a manager leaves one fund and goes to another, you should know this. If the approach to investing that you bought originally changes, that fund might need replacing.
My suggestion is that if you don’t have the experience or ambition to develop and maintain an asset allocation policy, and select and monitor managers, you should hire a professional to do it for you.
If you retain a FEE ONLY firm to do this, their selections will be made without the bias of commissions, and selected from the entire universe, not just ones that pay commissions.. Also, a FEE ONLY firm will not hesitate to replace underperformers, because there are no commissions involved to make a trade.

So remember that, over the long term, good stock picks are offset by bad ones, and market timing has not worked consistently for anyone. Focus on what’s important; your long term asset allocation policy, patience, and attention to the performance of your managers. This is where the really savvy investor cashes in! Peyton Hawkes

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