Some Christmas Cheer - Believe it or not, the economy is in a recovery

by Robert B. Garey, Ph.D.

Here’s some great news that you may not be hearing on TV: The U.S. economy is no longer on life support. It’s growing. Growth definitely sagged over the summer, but it’s picking up now. Here are a few signs:

• New jobless claims are trending downward. Initial claims for unemployment insurance, reported weekly, are at less than two-thirds of the peak two years ago.¹


• The private sector has been adding jobs every month this year. We need to add a lot more, of course. Despite fewer than expected being added in November, we are headed in the right direction.²


• Corporate profits are at or near a record high, and rising. Profits of nonfinancial companies are the highest since the end of 2006. As economist Ed Yardeni says, “Repeat after me: Profitable companies hire workers”.³


• The manufacturing sector is strengthening. The November Purchasing Managers Index of manufacturing showed strong growth – including strength in manufacturing employment, new orders, and exports. Economist Scott Grannis says this suggests the economy may be growing at a 4% rate in the 4th quarter, compared with 2.5% growth in the 3rd quarter and 1.7% in the 2nd quarter.⁴


• Consumer spending is also up. Economist Brian Wesbury says that consumer spending surged in October and has been very strong after Thanksgiving—especially in online purchases. He says consumers are spending more because they’re earning more—private sector incomes are up 4% and small business incomes are up 5.8% in the past year.⁵

This is good news. It means the economy is repairing itself. Of course, we still have a lot of problems that need fixing. Unemployment is too high, as so is government spending and the debt that it’s caused. The stock market is still well below its peak in 2007, and so are most baby boomers’ retirement assets. But America is on the mend. As Scott Grannis put it,

“The ‘forces of recovery’ have been slowly building for the last 18 months, and in my opinion, will not be easily derailed. Left to its own devices, the U.S. economy has a strong propensity to grow, and has been growing despite the fierce headwinds of fiscal and monetary policy.”⁶

What does this mean for you, as an investor? With company profits high and growing, and stocks at low valuations based on next year’s expected earnings⁷, there’s a lot of room for stocks to rise over the next year or two. And yet—many people are still too heavy in cash and bonds. The memory of the 2008 market crash is still fresh, and much of what they’ve been hearing on the news has been doom and gloom. Unfortunately many of them won’t start investing in stocks again until the Dow Jones Average is much higher. By then the potential for gains may be much less than it is now.

Are you underinvested in stocks for your investment goals? Tampa Asset Management can help you figure it out.

Contact us for a free consultation.
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¹Doug Short, Weekly Unemployment Claims: Lowest Since July 2008 , Seeking Alpha, 11-24-10
²WashingtonMonthly.com, “Private-Sector Job Growth,” 11-5-10.
³Ed Yardeni, quoted in Hays Advisory’s “Market Comment”, 11-29-10
⁴Scott Grannis blog, Manufacturing Sector Continues to Improve , 12-1-10; Institute of Supply Management, “November 2010 Manufacturing ISM Report on Business, 12-1-10.
⁵Brian S. Wesbury and Robert Stein, It's a Self-Sustaining Recovery, Forbes.com, 11-29-10.
⁶Grannis, op cit.
⁷Robert Huebscher, interview, Jeremy Siegel on the Upside for Equities and the Virtues of QE2 , Advisor Perspectives, 11-16-10.

What Women Investors Want, and Don't Want

by Robert B. Garey, Ph.D.

Women control 33% of the investment assets in America, but when it comes to getting good financial advice, many feel like second class citizens. Women investors often feel that financial advisors and planners pay more attention to men, value and respect men more, and give men better advice and more investment options.¹

Many advisors seem to relate to their male clients on an almost primal level, where investing “is conveyed as an aggressive, even belligerent sport, with terms such as ‘winning,’ ‘losing,’ ‘beating the market,’ ‘running of the bulls,’ ‘swimming with the sharks.’” While these images may appeal to the competitive nature of men, they turn most women off.²

Women tend to approach investing differently. They’re more likely than men to set long term goals, often because of (or in preparation for) “major life changes, such as marriage or divorce, the birth of a child, or death of a spouse”³ or eventual retirement. They want their investment decisions to be in pursuit of those goals and their overall financial security, rather than chase short term performance objectives like beating the S&P 500 in the current quarter.

Women investors want their advisors to understand and be empathetic to what’s going on in their lives, and what they’re trying to achieve by investing. They want clear and meaningful explanations and advice, and sometimes want to be educated, but not talked down to. Most important of all, they want to be able to trust their advisors. Of course, trust has to be built—on respect, empathy, and a true effort to by the advisor to understand them, and of course, honesty.

Unfortunately, far too many financial advisors see women investors through the lens of their own gender biases and stereotypes. Worth.com describes a few⁴:

• Advisors “may be uncomfortable talking to women about personal matters”;


• Advisors “may believe that women have limited financial knowledge, so they provide fewer investment options and reduced reporting”;


• And the most annoying of all: “assuming husbands are the decision makers, they ignore wives.”

So, what should women investors look for when selecting an advisor? Don’t place too much value on establishing immediate rapport with an advisor. Some of the worst are great salesmen with winning personalities. I think the following qualities are very important, although this isn’t a comprehensive list:

• First, make sure that the advisor has a fiduciary responsibility to act in your best interest. Registered investment advisors (and their representatives) have that obligation. Brokers and insurance agents do not.


• The advisor should strive to gain an understanding of your life and financial goals, and what’s important to you. This includes learning about your family dynamics and the important people in your life, your worries and concerns about money, the objective financial needs and risks in your life, and anything else that’s relevant.


• The advisor’s recommendations should all be related to your investment goals. Be wary of investments that are touted because they “beat the market” over some recent period. This is a sales tactic designed to impress you so you’ll buy the product. As you’ve heard many times, past performance is no guarantee of future success.


• The advisor should put all of his or her recommendations to you in a written investment plan that ties everything to your goals. The plan shouldn’t be boilerplate. It should be tailored for your needs, logical, and written in English without unexplained jargon.


• The advisor should be able to explain everything he or she is recommending in a way that you, as an intelligent person (but not a financial expert), can understand.


• Before you hire an advisor, find out who you are going to be working with after you initially invest. Will you have access to the advisor for reviews and to answer important questions, or will you be assigned to a staff member or junior advisor?


• How much will it cost you? Investment advice isn’t free, but costs should be low. Avoid advisors who charge or receive commissions. When you think about it, commissions give the advisor financial rewards for selling products to you, and create a direct conflict of interest with giving you objective advice that’s designed for your best interest. A fee-only investment advisor who charges by the hour or as a percentage of your investment assets avoids the conflict of interest of commissions.

My experience has been that women make great investors. In general, they know very well the importance of money and becoming financially secure, and are usually very serious about investment decisions. No woman (or man) should hire or keep a financial advisor (or a CPA, attorney, or doctor, for that matter) who doesn’t take her seriously or work for her best interest. Demand excellence from the people who work for you.
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¹ The Boston Consulting Group, "Leveling the Playing Field: Upgrading the Wealth Management Experience for Women", July, 2010.
² Eleanor Blayney, "Empowering, Educating, and Engaging Women Clients", Journal of Financial Planning, October 2010.
³ The Boston Consulting Group, op cit.
⁴ Worth.com, "What Women Want", http://www.worth.com/index.php/component/content/article/3-grow/1566-what-womenwant

Six Positives We See for the Stock Market

The 11% drop in the stock market in May has a lot of investors worried. Everyone remembers 2008, and nobody wants to relive it. Throw in the high unemployment rate, the breathtaking speed of the growth of our national debt, and the possibility of default in the government bonds of Greece, Portugal and Spain, and many investors wonder why they should ever invest in the market. Even though 2009 turned out to be a good year, people are still skittish. But is the outlook for stocks really that bleak?

While the risks are real, I believe there are six reasons to be positive about the outlook for stocks over the next 6 – 12 months, even if the market decides to go somewhat lower first:

1. Valuations are low. Based on the consensus earnings estimate for the S&P 500 for 2010¹, the PE (price to earnings) ratio of the index is about 13, well below the average over the last 20 years. And prices are still 10% lower than just one month ago.

2. Corporate profits are continuing to grow. Earnings for the S&P 500 companies were up substantially in the last two quarters. Consensus estimates are that they will continue to increase at a good clip at least through the end of 2011.

3. Although still weak, hiring has resumed. The monthly trend in non-farm payroll employment stopped getting worse a year ago. Monthly job losses started to diminish in the fall. Since the beginning of 2010 the economy has actually been adding jobs, with an increasing amount each month. It’s not enough yet to start to absorb the millions of jobs that have been lost, but it’s a beginning. If the positive trend continues, as I believe it will, it will help discretionary spending as well as the housing market.

4. The Fed (Federal Reserve Board) will, in my opinion, keep targeted interest rates low for an extended time. The problems in Greece, along with high unemployment in the U.S., low inflation, and the strengthening dollar should keep the Fed from raising interest rates until at least late this year, if not longer.

5. Investor psychology has turned pessimistic since the end of April—which is actually good. There are many ways to take a reading of this—statistics about market trading behavior (put-call ratios, Arms index, etc.), surveys, listening to guests on the business programs, and so on. Put it all together (or just ask your friends), and we find that pessimism is close to an extreme—which has been a very good contrary indicator for the stock market in the past. (Investors tend to feel the most negative near market lows, and the happiest near peaks.)

6. Political changes are in the wind. Many people are very concerned about the expansion of government power, entitlement programs, and spending over the last 15 months, and feel that Congress is out of control. The $13 trillion debt and the annual $1 trillion+ deficit are scaring people. If the trend in recent elections and primaries continues, many incumbents are likely to be voted out of office in November, and the next Congress will be decidedly more conservative. If so, the ability of the current majority party to pass new spending programs will be reigned in somewhat, which could be the start (but no more than a start) of returning to fiscal prudence. If it happens, I believe it will be beneficial for the stock market.

Of course, no matter what the outlook, you should never have more invested in stocks, or take more risk, than what is appropriate for your needs, as spelled out in your investment plan. Your investments in stocks should be widely diversified to avoid taking unexpected big losses in individual stocks. Buying and holding forever, as is often promoted by the big brokerages and mutual funds, is not the right approach—but neither is active short term trading that plays into your emotions (also often promoted by stockbrokers who need commissions). You should have a good plan, based on your future needs for a secure retirement, and you should be able to go to sleep at night.



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¹ Garzarelli Capital, Inc., Sector Analysis Monthly Monitor, 5-14-2010

You Owe It to Yourself to Get Out of Debt

Wouldn’t you like to get out of debt? Just think of how good you’d feel, and how much money you’d be able to save, if you didn’t have to make payments each month for things you bought in the past. Maybe you’re reading this and thinking about your grown daughter or son with a young family. Wouldn’t their lives be better if they could get free of the heavy weight of debt? The good news is that for almost everybody, it’s not only possible—you owe it to yourself to do it.

Carrying debt is very stressful, yet Americans have a lot of it. Many middle and upper income families never get free of consumer debt, student loans, and car payments. They just keep paying and paying (very profitable for the banks and finance companies), and then adding on new debt. Reminds me of that old coal mining song: “St. Peter don’t you call me, ‘cause I can’t go—I owe my soul to the company store.” Even investors can have unnecessary debt. They get caught up in the trap of thinking that if they can make more in risky stock market returns than the interest they are paying on their loans and cards, they’re beating the system.

In my experience in counseling families over the years, I’ve found that there are four important reasons for reducing and eliminating debt:

1. You’ll be more likely to survive financially if something bad happens in your life—loss of a job or a forced early retirement, a serious illness of a family member, or something else.

2. Most interest charges are not tax deductible. Suppose you are in a 25% tax bracket. In order to pay $100 in interest charges, you have to earn $133.33 and then pay $33.33 of it in taxes to get the $100 to send to the credit card company.

3. You’ll have more money to invest, and you’ll be able to retire earlier (if you want to). In my opinion, you’ll be wealthier when you retire, too.

4. You’ll be happier, and you won’t worry about money nearly as much—maybe not at all.

So, how do you go about it? Here are some guidelines that I recommend:

• Start by buying a copy of Dave Ramsey’s book, The Total Money Makeover. It has some very good advice, and many inspiring examples of people who have gotten free of heavy debt loads.

• Make a written monthly budget, and include everything in it. Don’t forget to divide quarterly or annual bills (such as insurance payments, birthday and Christmas gifts, vacations, etc.) into monthly portions that you will set aside. Dave Ramsey’s budget worksheet is a good place to start.

• Use the budget to uncover things you can spend less on. (Don’t be scared. You can do it.)

• Don’t buy anything new on credit.

• Save up a small emergency fund first, if you don’t already have one. Better yet, have at least three to six months of expenses in a cash savings account if you aren’t in crisis mode in trying to pay all your bills. Don’t use this money except for an emergency.

• Next, start paying extra money each month on the principal of your debt with the smallest balance. When you get that paid off something great will happen to you—you’ll feel so good that you’ll be anxious to get the next one paid off. So, get started paying extra on the next bill with the smallest balance. One by one, get them all paid off—including your student loans and cars.

• Then you can start saving and investing for your children’s college educations, as well as in your 401(k) and Roth IRAs, and to build your wealth.

• Make your cars go as long as they can, save up as much as you can (hopefully the whole price) to put on each car purchase, and buy “pre-owned” instead of new cars.

• After all of your other debt is paid off, and you are saving adequately for college and retirement, begin paying a moderate amount extra on the principal of your home mortgage each month.

Of course, these guidelines can’t cover everyone’s situation. Some people have very complex problems or severe amounts of debt and will need professional legal advice on how to address it. If you believe you are in this predicament, don’t put off getting that advice. Face it head on. Do it for yourself and your family.

For most people, the great news is that you can have freedom from the burden of debt. You can be working for yourself instead of the bank. If you commit to it, you’ll probably be surprised at how quickly you can do it. You’ll be happier, feel lighter and less burdened.

Getting out of debt should be an important part of your investment plan. You owe it to yourself.

Investing in Bonds – What Do You Need to Know?

Rebuild Your Wealth on Solid Ground (Part 4 of 4):

Investing in bonds and CDs. People buy bonds and CDs primarily for safety and income. If you own high quality bonds and FDIC insured CDs, and hold them to maturity (or to when they are redeemed or “called” early), you should get your money back and steady interest income along the way. These are valuable qualities when the stock market is in a swoon like it was in 2008 and early 2009, as well as when you are retired and need steady income.

In fact, if you buy them right, bonds and CDs can be an effective counterbalance to the part of your portfolio that’s invested in stocks. That’s because many of the conditions that make the stock market go down can cause bond prices to be stable or even go up. Most of the time, the higher the percentage of your portfolio that you have in bonds, CDs, and cash, the lower the up and down volatility you experience, which means you’ll have less risk of loss in a given year than investors with a heavy weighting in stocks. Of course, over long periods of time stocks tend to give higher returns than bonds, so investors with a greater need for growth often have to have more invested in stocks and less in bonds.

So, how should you buy bonds and CDs for your portfolio? Is there a good strategy for buying them? Are there any risks? What about the growing amount of government debt, inflation, and the economy—don’t those things have an effect on bonds? Are bond funds better than individual bonds? Let’s address these questions one by one.

Strategy for buying bonds and CDs. Most of the time, the best practice is to “ladder” (or spread out) the maturities of the bonds and CDs you are buying. The reason for owning some short and intermediate maturities is so that every year or two you’ll have a CD or bond maturing. Every time one matures, you can reinvest in a new long term bond. That way, you’ll constantly be walking your bond portfolio forward, and be somewhat insulated from the effects of changing interest rates.

The reason for having some bonds with longer maturities is that they generally pay higher interest rates than bonds and CDs with shorter maturities. Also, if interest rates go down for a few years (as has been the case recently), the longer maturity bonds you bought earlier will continue paying the higher interest rates they had when you purchased them.

Risks of buying bonds. There are two main risks to consider. The first is that you buy a bond from a corporation, municipality, or state that goes bankrupt. This is called credit risk, which is really the risk of defaulting (not paying interest and principal) at some point in the future. Lower credit quality bonds (also called “junk bonds” or “high yield bonds”) usually pay higher interest rates, but the risk to the safety of your principal is rarely worth it (unless you have a small amount in a junk bond mutual fund). It’s much better to get a lower interest rate from a high quality company or municipality than a higher interest rate from a questionable or struggling company. If you invest in quality, and diversify among various issuers, your portfolio’s overall risk of losing money from a default should be very low.

The second risk is that interest rates will rise in the future, causing the resale value of the bonds you’ve already bought to go down. This can be caused by a pickup in inflation or by a massive increase in government debt, among other things. If you’ve laddered the maturities in the bonds you’ve already bought, you’ve done most of what you can do to protect your portfolio. However, during periods of extraordinarily low interest rates, like now, it’s best to invest new money in very short maturity (up to two years) bonds and CDs. At some point the current appetite of the world for more and more bonds (particularly the large supply of new U.S. treasury bonds being issued each year to fund the deficit) will probably diminish, and interest rates will likely have to move higher to continue attracting buyers. This will, in my opinion, push yields up (and prices down) in all types of bonds, with the biggest effect on the longest maturity bonds. So, for now, I recommend keeping your maturities short for new bond and CD purchases.

Which to buy: bond mutual funds or individual bonds? Each one has its benefits and drawbacks. A bond fund is invested in many different bonds, so if one bond goes bad (defaults) it shouldn’t have a major impact on the fund. Also, it’s the responsibility of the fund’s manager to monitor the bonds in the fund and sell any whose risk of default is increasing. This diversification and professional management is valuable when you are investing in complicated bonds (like convertibles), or in riskier bonds (such as junk bonds or bonds from emerging markets), or in your 401(k) where CDs and individual bonds aren’t available. It’s not as valuable, and may not be worth the cost, when you are investing in high quality bonds like treasuries, or investment grade corporate or municipal bonds, where the risk of default is very low.

Bond funds have one major disadvantage, in my opinion. Unlike individual bonds, funds do not have a maturity date with a promise that you’ll get your principal back at that time. If interest rates rise after you invest in a bond fund, the price of the fund’s shares will go down and may or may not come back up to the full value of your original investment when you eventually sell the fund. Individual bonds, on the other hand, do mature at full face value on a certain date (or on a predetermined “call” date). If you’ve bought high quality bonds with a low risk of default, you can be confident of getting the full face value of your bonds if you hold them to the call or maturity date. Therefore, in general, I recommend owning individual CDs and high quality bonds with laddered maturities. Of course, each investor’s situation is unique, and for some people bond funds are more comfortable and appropriate.

As you work hard and invest to rebuild your wealth, make sure you are on solid ground. In the last four blogs, we’ve outlined the most important steps:

• Part 1. Start with a good investment plan based on your personal needs.
• Part 2. Have the right mix of stocks vs. bonds and cash – for you.
• Part 3. When you invest for growth in stocks – diversify and keep your costs low.
• Part 4. When you invest in bonds and CDs – ladder maturities (but stay short term for now) and buy quality.

Coming soon: How to reduce and eliminate your debt.

When You Invest For Growth In Stocks – Diversify and Keep Your Costs Low.

Rebuild Your Wealth on Solid Ground. (Part 3 of 4):

Can you find the next hot technology stock before other people do? Are you sure? Or better yet, can a stockbroker working at a big bank or brokerage find it for you, and then tell you to buy it before all the hedge funds and money managers and the rest of the world does? You should know the answer to that.

Let’s step back for a minute. What's the real reason that you invest in stocks? To lose sleep? To help replenish the profits of the bailed-out banks and brokerages by paying lots of hefty commissions when they sell you mutual funds and stocks? Of course not. Your purpose for owning stocks is to build wealth over a long period of time by the compounding of your returns, and to offset the wealth-destroying effect of inflation.

So why does it seem so hard to invest in stocks and achieve long term success? Do stockbrokers have some mysterious inside knowledge of which stocks to buy (and when to sell them) that they only share with their best customers? They’d like you to think that, but no, they don’t. Neither do the experts on TV. (Even if they occasionally did, after they announced their picks on TV, everyone who was going to use that information would already have acted on it.) The truth is, there's a lot of research that demonstrates that very few professional money managers (including managers of mutual funds) can consistently beat the stock market. They do in some years, and then fail to in other years. If those full time professionals can’t, how can your stockbroker, the cable TV screamers, your best friend, or even you—do it consistently?

The better way, in my opinion, is that you should quit trying to beat the stock market and join it. Over very long periods of time, the stock market itself (all stocks combined) has given good returns. Of course, over the last ten years, that hasn’t been the case. 2000 – 2009 has been called the “lost decade” because the stock market actually ended lower than it started, and the decade ended with a deep recession. But previous decades with very low or slightly negative returns for stocks, even when accompanied by a rough economy (such as the 1930s), have been followed by better times for both (stocks and the economy) in the next decade ^[1]. I think that’s likely to happen again in the next few years, although, of course, there's no guarantee.

What does it mean to “join the market” when you invest? It means to diversify your investments in stocks so well that your portfolio holdings are very close to the stocks that make up the whole market. One of the most efficient ways to achieve good diversification is to use index funds—which you can invest in as ETFs or traditional mutual funds. For example, the most widely known index funds are those that invest in the S&P 500. These funds own the stocks of 500 of the largest companies in America. Other index funds invest in mid cap and small cap stocks, as well as in other groups of large cap stocks in the U.S. By investing in a group of broad-based index funds (meaning those that don’t concentrate on certain industries), the returns of the U.S. portion of your portfolio can be very close to that of the stock market itself. You should also have a part of your portfolio invested internationally, and you can achieve great diversification there with index funds.

Index mutual funds also help keep your costs low, compared to actively managed mutual funds. “On the whole, expense ratios [ongoing annual fees charged by the fund] range from as low as 0.2% (usually for index funds) to as high as 2%. The average equity mutual fund [in U.S. stocks] charges around 1.3%-1.5%. You'll generally pay more for specialty or international funds...” ^[2] Since the SEC says that "Higher expense funds do not, on average, perform better than lower expense funds,” ^[3] there is rarely a good reason to buy higher expense mutual funds.

Another expense you can avoid with index mutual funds is the commission, or “load” that you pay brokers and agents to buy mutual funds. If you pay a broker a front end commission of up to 5% to buy a mutual fund, you often also pay annual 12b-1 fees of 0.25%. If the broker or agent sells you a fund with a “contingent deferred sales charge” instead of a front end commission, your annual 12b-1 expenses and shareholder service fees can add up to as much as 1%. In this case, your annual bill (embedded in your mutual fund) can be 2% or even higher. Ouch. Much better to invest in index mutual funds with no broker “load”, redemption fee, or 12b-1 charges, and a very low management fee.

Buying ETF index funds is a little different. ETFs have very low expense ratios, but you buy and sell them just like stocks. So, you have to pay a commission each time to a broker unless you are buying them in a fee-based account where commissions are waived. Many stockbrokers and insurance agents have caught on to the popularity of ETFs, and are using them as trading vehicles to generate commissions from their clients—just like they used to do with individual stocks. This can be bad for two reasons: short term trading isn’t investing, and when a broker receives a commission every time you buy or sell, he has a big incentive to get you to trade—which is a distinct conflict of interest.

Keeping your total investment costs low is very important to your long term success as an investor. To control your costs, understand what they are, and think about whether you benefit from the incentives they create for the person you’ve hired to help you.

^[1] Tom Lauricella, “Investors Hope the ‘10s beat the ‘00s,” WSJ, 12-21-2009, p. C1.
^[2] Quote [with information in brackets added by me] is from Investopedia at http://www.investopedia.com/university/mutualfunds/mutualfunds2.asp See also: William J. Bernstein, The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between (New York: John Wiley & Sons, 2010), p.140. The SEC web site that explains types of mutual fund fees is http://www.sec.gov/answers/mffees.htm#distribution
^[3] Investopedia, http://www.investopedia.com/university/mutualfunds/mutualfunds2.asp

Stocks vs. Bonds and Cash: How Much Should You Have?

Rebuild Your Wealth on Solid Ground (Part 2 of 4):

Deciding on the amount you should have in stocks vs. bonds and cash (known as “asset allocation”) is one of the most important decisions an investor can make. The goal of “asset allocation” is to earn high enough returns to achieve your goals, while limiting the amount of risk that you’re taking.

Over long periods of time (say, ten years or more), stocks almost always return more than bonds. Because stocks are shares of ownership in businesses, they reflect the long term trends of growth in the economy. People invest in stocks because they want their assets to grow. If you are younger and are investing for the distant future (such as retirement that’s at least 15 or 20 years away), and won’t need to withdraw money until then, you can afford to have a fairly high percentage allocated to stocks—even though you will probably go through some major stock market downturns along the way.

If you are closer to the time when you’ll need to start using the money you’ve invested, such as within 15 years of retirement, you should have a lower weighting in stocks than you did when you were younger. This is because in the short run, the stock market has a lot of risk. We don’t have to look any further back than the last couple years to see how much stocks can decline at times. As you approach retirement, you should gradually reduce your weighting in stocks. The best times to do this are during periods when the market has been rising for a while rather than after a big selloff in the market. After you retire, you will probably still need to have a modest allocation to stocks to be able to keep up with inflation.

Bonds and cash are a counterbalance to stocks in your portfolio. These are your preservation and income assets. The biggest long term risk to bonds, assuming you’ve invested in high credit quality bonds, is inflation. It would be very appealing to retire with, say, a $1 million bond portfolio that gives you $50,000 in annual interest income—just the amount you need—and just avoid the stock market altogether. The problem is that inflation will reduce the buying power of that $50,000 each year. In five to ten years, you’ll be drawing down on the principal or looking for a job because the interest income from your bond portfolio can’t pay your bills.

So—what should your personal asset allocation be? What’s the formula to figure it out? For people over 45, the general rule of thumb says that the percentage you have in stocks should be 100 minus your age. However, the best allocation for you may not be quite that simple. For example, if you are behind on the amount you have saved and invested, you may need to have a somewhat higher percentage in stocks at age 50 in order to increase your potential for having enough money when you retire. On the other hand, if you are 55 and worry a lot about losing money during market downturns, you may only be able to handle a small percentage in stocks—and perhaps lower your lifestyle expectations for retirement.

There is nothing wrong with tactically, or temporarily, deviating modestly from your asset allocation target to try to avoid temporary losses or to take advantage of selloffs in the market. However, the temptation we all have is to follow our emotions (and the emotions of the “experts” on the business programs) and sell stocks after the market is already down, and get too optimistic when the market has been rising for an extended period. Try hard to avoid acting on these “knee-jerk” emotions.

A much better approach is to rebalance periodically. This means selling a little of the asset class that has increased its weighting in your portfolio recently, and buying a little of the one that has declined—to get back to your target allocation. If you do that at least annually, you will usually be “buying low and selling high.”

At Tampa Asset Management, we will recommend an asset allocation that we’ve designed specifically for your needs. We’ll pay a lot of attention to how you feel about investing and your personal “go to sleep at night” factor. Over time, we’ll help you change your asset allocation as you get closer to retirement, and as you enter it. It’s part of the solid ground that you should build your wealth on.

Next in the “Rebuild your Wealth on Solid Ground” series (Part 3 of 4):
Guidelines for investing in stocks, bonds, CDs, and cash - while keeping costs low.

Have A Good Investment Plan. Follow The Plan.

Rebuild Your Wealth on Solid Ground (Part 1 of 4):

Feeling shell shocked? You aren’t alone. After the great collapse of the stock market in 2008 and early 2009, most investors are looking for a way to rebuild their assets. Unfortunately, many people are so shaken by the losses they’ve incurred that they don’t know how to invest now without taking more risk than they can stomach. Some have sworn off investing entirely, vowing to stay in cash and CDs. Others feel like they have missed the rebound in stocks, so now they are just…waiting. More than a few are questioning the whole concept of investing, after the “lost decade” that they have just been through.

Don’t feel bad if any or all of these describe you. This has been a treacherous period for almost all investors. Retirement savings, including 401(k)s and IRA rollovers were cut nearly in half for many investors across the country, although they have rebounded somewhat since March.

A good investment plan is as important to your financial success as a good map is when you’re traveling in an unfamiliar part of the world. You wouldn’t fly to Sydney, Australia, rent a car, and then set out driving across the continent to Perth without a roadmap—would you? You might end up chasing kangaroos in a rainforest.

Just like a roadmap, a good investment plan identifies your destination (your investment goal), where you are now, and the best road to take to get from here to there. Of course, a roadmap can’t forecast all the problems you might encounter along the way—heavy rain storms, a section of the highway that’s closed, or a flat tire. But it can help you adjust, deal with those problems when they come, and then continue along in the right direction to reach your intended destination.

Simple, right? But what does a good investment plan have in it? The answer is that it has everything that is important and relevant to reaching your goal. The essential elements include:

• A clear statement of your investment objectives. These are the tangible reasons you are investing—the amount of inflation-adjusted income you’ll need when you retire, paying for your children to go to college, or buying a vacation home in North Carolina.


• An evaluation of your current assets—individual stocks, mutual funds, CDs, municipal bonds, 401(k), IRAs, and any other assets, as well as your debts. This is the starting point.


• An assessment of how much you’ll be able to save and invest, as well as any other sources of income or lump sum payments you expect.


• A realistic assessment of risk—including identifying current weaknesses in your portfolio, the risk of loss from investing, future inflation, debt risk, and the risk of running out of money when you retire. They can’t all be neatly quantified or eliminated, but you can work to prepare for them.


• A target for asset allocation (% to invest in stocks vs. bonds, CDs, and cash). This depends on a lot of things—your age, when you want to retire, how far short of your goals you are now, your “go to sleep at night” factor, and some consideration of where the markets are now.


• A diversification plan for your growth assets (across large cap, mid cap, and small cap U.S. stocks, as well international and emerging markets stocks).


• A preservation plan for your bonds and CDs, which takes into account potential changes in inflation and interest rates, credit risk, and your tax bracket, and includes a policy of laddering bond maturities from short to long.


• Investment guidelines for what to do in good and bad market conditions—such as when stocks go up substantially, or enter a sustained downturn, or when interest rate changes affect bond prices.


• A specific plan to reduce or eliminate debt.

It should be clearly written (yes, written down on paper), designed specifically for your needs, and should not be built on somebody’s forecasts of future market performance.

Do you have a good investment plan that is designed just for your needs? Your future is too important to you to avoid this first step. If you need to rebuild after the market decline of 2008, do so on solid ground—starting with a good plan.

Next in the “Rebuild your Wealth on Solid Ground” series (Part 2 of 4):
Stocks vs. Bonds and Cash: How Much Should You Have?

NEWS RELEASE: Tampa Asset Management Celebrates Successful First Year Anniversary

For immediate release:

INVESTING IN CLIENTS, NOT WALL STREET
Local Tampa investment advisor celebrates firm’s successful one year anniversary with over $95 million dollars of assets under management, and total freedom from commissions and corporate hidden agendas.

South Tampa, FL—Bob Garey, CEO of Tampa Asset Management, LLC, has twenty-five years of experience providing investment advice to families and individuals, most of it spent under the auspices of big name firms like Shearson/American Express, Smith Barney and Wachovia Securities. In December 2008, after the near collapse of several of the biggest banks and brokerages fueled increasing turmoil in the minds of investors, Bob took the financial bull by the horns and went independent, founding the fee-only registered investment advisor firm of Tampa Asset Management, LLC.

“Founding a new registered investment advisor (RIA) firm at a time when trust in the market was at an all time low was a big leap,” says Bob, “but if I had no confidence in the current system, how could I expect my clients to? It made sense to go independent, and take my clients with me. They weren’t just faceless, numbered accounts—they were people, many of whom have become personal friends.”

A January 2009 article in The Wall Street Journal¹ supports Bob’s strategy, citing how financial turmoil and tarnished reputations have resulted in a major shift in the financial industry as assets are transferred away from big name brokerages and into low cost custodial accounts at neutral firms like Charles Schwab and TD Ameritrade, to be managed by registered investment advisors like Tampa Asset Management.

Most of Bob’s original clients opted to follow his lead, transferring their accounts from his former brokerage firm into low cost custodial accounts, which he manages on a fee-only basis. One year later, he’s certain everyone involved made the right decision.

“What people may not realize is that RIAs like Tampa Asset Management have a fiduciary responsibility to act in each client’s best interest,” Bob says. “Brokers and insurance agents, who charge commissions for the products they sell, do not. Simply put, our registration with the SEC holds us to a higher standard, and our clients are the ones who benefit. My clients receive all the benefits of the personalized financial guidance and management I was giving them before, with lower costs, no hidden fees, commissions or corporate agendas,” Bob states. “It’s a win-win scenario for everyone involved, except the big banks and brokerages.”

⁽¹⁾E.S. Browning, “More Brokers Flee Big Firms, Taking Investors With Them”, Wall Street Journal, 1/4/2009

Bob Garey has a B.S. in mathematics and an M.A. and Ph.D. in political science from the University of South Carolina. Prior to his graduate studies, Bob was a pilot and captain in the U.S. Marine Corps. After receiving his doctorate, he was a research associate at Oak Ridge Associated Universities in Tennessee. He and his wife, Terri, have three children, are active in the South Tampa community, and are members of Logos Dei Community Church.

Visit Tampa Asset Management on the web at http://www.tampaasset.com/.

Contact info:
Bob Garey at Tampa Asset Management, LLC
4221 W. El Prado Blvd.
Tampa, FL 33629
813-675-8011 (office)
813-390-2577 (cell)
bob.garey@tampaasset.com