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Weekly Update

January 14, 2013 By Leave a Comment

There are some things I’ll never understand. Here’s one:

Why would my lovely wife, Marea, purchase two new pairs of sneakers and throw my old ones out without asking me first?

“You need to replace sneakers regularly and alternate them between your daily power walks,” she informed me.

I do? Who knew?

I walk for 3.5 to 4 miles for almost an hour practically every day. Apparently, according to my wife, this qualifies me as a highly tuned athlete who needs cutting edge footwear to maintain peak performance for my upcoming heat in the Senior Slow-Walk Olympics.

I wonder if Bill Russell and Bob Cousy alternated specifically designed point guard and center sneakers between games.

“Oh, and they should be replaced every 300 miles,” she added.

So I have to throw my sneakers away after every 75 walks? How do I keep count? Maybe sneaker companies can embed a hidden odometer in the soles of sneakers. Or, the foot engineers could inject a color fading dye in heels indicating when a new pair is needed. I believe toothbrush manufactures have the color of bristles fade away when it is time to buy a new brush. Why not sneakers?

Reflecting upon last week’s Update, I may have been wrong when I stated that women and women alone drive the global economy. The power of advertising is truly incredible! Not only is it innovative enough to sell designer sneakers for different purposes, it supports an infinitely sustainable business model by making consumers believe that they need multiple pairs of footwear for the same activity.

We consumers love advertising terms such as introducing, new, improved, best, original, customized, exclusive, doctor recommended, proven, free and finally, as Pandora states in its tag line, unforgettable.

And there is no reason for the creative marketing minds to stop there. I was looking through the December issue of SHAPE magazine and learned that New Balance markets training footwear just for the winter; skechers makes GOwalk footwear available so women can “GO like never before;” and best of all, Amy Schlinger, a writer for SHAPE highlighted the need for “Socks That Rock.” That’s right, activity specific socks for hiking, running, crossfit (whatever that means), yoga, and skiing.

How about this one? Gap markets pants that have a “perfect performance fit!” I should get a pair of performance fit pantaloons to wear under my suit at business meetings and, of course, while making my investment decisions. That should exponentially increase the annual performance of Marea’s portfolio.

Switching gears as we enter the New Year, I reviewed investment guidelines first published last year and concluded that it made sense to once again share them with Update readers.

Investment Guidelines:
• Stay diversified and don’t place all of your assets in one stock, bond, or fund.
• Invest globally with a concentration in the USA. (The portfolios publish in the Update do have global exposure through an international fund and large U.S. firms that sell products and services throughout the world.)
• When buying individual securities, concentrate on industry leaders offering dividends, which ultimately provide a cushion during corrections and remember, dividends generate approximately 40% of market performance.
• When increasing equity exposure, execute trades on down market days.
• Hold a cash position between 5% and 20% of a portfolio’s value.
• Fixed-income concentration should be in short to intermediate bond funds.
• Populate portfolio with both equity and bond funds charging low expenses and a better than average three and/or five-year track records.
• Know a security’s investment philosophy, objective, and style prior to purchase.
• A position/portfolio must meet personal suitability standards based on objectives, volatility, and investment time horizon.
• In a taxable account, be aware of the potential tax exposure.
• When considering bond funds, a low expense ratio is extremely important to overall annual performance.
• Index product performance should basically track its long-term category average.
• Monitor investments weekly. (For example, Yahoo finance allows you to compare the performance of your funds to its peer group over multiple periods of time.)
• Analyze a product’s performance over time (year-to-date, one year, three years, five years).
• Monitor sector investments closely.
• Performance must be assessed on a risk/return basis. (For example, Investor “A” generates a 5% return; Investor “B” generates a 10% return; which portfolio was the better performer? It completely depends on the level of risk inherent in each portfolio.)
• Note that raw performance benchmarks including the Dow, S&P 500, NASDAQ, and the Russell 2000 do not incorporate trading costs, fund expenses, and advisory fees.
• Let’s assume equity markets are up 10% and fixed income and cash are both flat at 0%. You have 50% invested in equity, 50% in fixed income and cash, and total expenses of 0.5%; a reasonable return for your portfolio would be approximately 4.5%.
• Be aware that markets tend to overreact to news, good or bad.
• Realize that absolutely no one knows how markets will perform next week, next month, or next year.
• So, my guess is that the market will generate an 8% return in 2013. (By the way, 10% is about the average stock market annual rate of return.)
• Be aware of a portfolio’s potential worst 1, 3, 5, and 10 year case scenario based on historical data.
• Unless you are willing to do your homework weekly, consider hiring a financial advisor.
• Dialing your equity allocation up (increased volatility) or down (less volatility) will ultimately increase the probability of capturing more or less of both the upside and downside of market performance.
• Wear performance fit pants when analyzing your investments.

• Do not
o Purchase any investment product you do not understand.
o Sell a fund because of poor performance over a limited period of time. (If a fund under performs for a couple of months, place the fund on a watch list for at least 30 days prior to making a decision to hold or sell out of the position.)
o Buy bond funds with higher than average expense ratios.
o Select a stock simply because of a potential high-dividend payout. (Make sure the company has the cash flow necessary to pay the dividend.)
o Allocate more than 5% to 7% per individual sector.
o Try to time the market.
o Overreact to the news of the day.
o Chase performance. (Performance is relative based on asset allocation, risk inherent in the portfolio, and expenses including trading costs, a fund’s expense ratio and advisory fees.)

Have a productive Week.
The Update is written by Chris Leone and Ron Mastrogiovanni

Filed Under: Healthcare, Market Commentary

Growing Fiscal Cliff Worries Zero in on Medicare

December 19, 2012 By Leave a Comment

In Washington D.C. growing worries about the fiscal cliff has led to debates on raising Medicare’s eligibility age to reduce the government’s huge deficits.

For years numerous ideas about controlling the exploding cost of entitlement programs, such as Medicare, have passed between party members but growing concerns about Fiscal Cliff have brought them in to perspective. Medicare, a $590 billion annual program is one of the most expensive and popular federal programs, that has long been untouchable and rarely trimmed. A change in age eligibility would not alter traditional benefits, but would not be available to all senior citizens 65 and older. Medicare’s popularity makes proposed changes a much harder sell amongst voters.

The most frequently discussed proposals that would affect Medicare’s 52 million beneficiaries are more means-testing, meaning higher costs for wealthier retirees, and raising the Medicare eligibility age by two years to 67 years old.

Regardless, of increasing age eligibility both the White House’s deficit reduction proposal and the Republican counter offer, submitted on Monday, propose trimming Medicare.

Republicans and Democrats disagree on what, where, and how to cut the program. Many Republicans, notably, House Speaker John Boehner, R-Ohio, openly support hiking the eligibility age to 67. It is estimated that increasing the age would reduce Medicare’s spending up to 5 percent annually, which would save hundreds of billions of dollars over time. These proposed cuts, in addition to others to additional healthcare programs including the Medicaid, could result in $400 billion to $600 billion in savings over a decade as part of a deficit-cutting agreement Congress and the White House must reach to avoid the so-called fiscal cliff.

Not everyone supports the proposed changes, people like Senator Dick Durbin, D-Ill., says that increasing the age would create numerous oversights and could make the program too expensive for some seniors.

A recent study by the AARP identified more negative windfalls if Medicare’s age eligibility is upped to age 67. There is a possibility that this could lead to higher monthly premiums for those on Medicare. Not allowing younger and healthier 65 and 66-year olds would raise the others’ costs, but the increase would only be around 3 percent. This would also lead to more expensive premiums for private coverage as well. This is because older adults would have to remain using private insurance for an additional two years before using Medicare. This older age group, compared to younger adults, is also more costly to insure. In total, this would lead to higher healthcare costs for two out of three adults whose entry into the Medicare program would be delayed. Medicare age eligibility wouldn’t just affect people, but also businesses. This would lead to an increase in employer costs as senior workers would stay on company insurance plans.

The Congressional Budget Office estimates that raising the eligibility age could save $148 billion in Medicare spending over the next decade, but there are drawbacks. It has also been estimated that the number of uninsured citizens would also increase. Highly populated states like Texas that won’t accept Obama’s Medicaid expansion in his health overhaul would create millions of uninsured citizens. Critics claim that these cutbacks would hurt business by placing the burden of these costs onto employers. This would lead to an increase in employer costs as senior workers would stay on company insurance plans.

The threat of this country toppling over the fiscal cliff has enabled Republican’s campaign to cut Medicare to perhaps have its first success. But, it remains to be seen if these changes will take affect and if the positive outcomes will outweigh the negative ones.

-Suzanne Bernard

Filed Under: Gillian's Corner, Healthcare, Investing, Medicare

Baby Boomer Confusions About Medicare Soars as Enrollment Date Looms

December 19, 2012 By Leave a Comment

As the days on the calendar grow closer to the start of the Medicare enrollment period on October 15, the newest wave of Baby Boomers turning 65 say that they are unprepared.

A recent study conducted by the National Council on Aging (NCOA) and United Healthcare reveals that a large numbers of seniors don’t understand Medicare and are unaware of recent changes. The findings highlight the need for more education regarding Medicare. This becomes all the more pertinent as over 10,000 people are turning 65 and becoming eligible daily. In the next twenty years tens of millions will sign up for Medicare, whether or not they not what they are doing.
“There’s just so many options,” says Laura Mckenzie a native of Rockville, Md. “B, C, or D I have no idea what plan I would even need or who to call about my questions.”

Mckenzie is not alone, more than half of the survey’s respondents didn’t understand Medicare’s structure. More worrisome is the fact that only a third correctly identified Part A as covering hospital care and less than 25 percent understood that Part B covers doctor visits. But, the confusion isn’t relegated to just Medicare’s structure as 19 percent reported they don’t even know what coverage they have.

“Without a solid grasp of the basics of Medicare, older adults are not well-positioned to understand their options and find the coverage that best meets their needs,” said Jim Firman, president and CEO of the National Council on Aging. The surveys findings reveal that Medicare beneficiaries are not receiving the necessary information, or if they are it is simply not sticking.

“I called the government’s phone number to have some questions answered and they put me on hold for 15 minutes,” says Mckenzie. “The person didn’t understand my question and I’m just as confused as I was when I started.”

More than a year after President Obama signed the Patient Protection and Affordable Care Act, many older adults still remain unaware of the most significant changes. The change in the Annual Enrollment Period (AEP) affects all beneficiaries. Previously, the AEP began on November 15, but now it’s a month earlier. It now begins October 15 and ends December 7. During the AEP beneficiaries are able to choose or change their supplemental insurance, including Medigap plans that cover hospitalization deductibles, and Part D plans that cover prescription drugs. Less than 10 percent of the survey respondents identified the correct date and the majority still believe they have until December 31 to file.

What is more concerning is that many Medicare confusion is costing seniors, who are worried about their ability to pay out of pocket, many opportunities to save money. Many of the survey’s respondents claimed that they didn’t shop around for the best coverage because they didn’t think that it would help them save money. Some even claim that they are indifferent to the whole process.

“As a Baby Boomer I feel that we approached every stage of our life differently and how we deal with Medicare will also be the same,” says Mckenizie. Regardless, the date is fast approaching and seniors will need to access information to make more informed choices about their future.

-Suzanne Bernard

Filed Under: Gillian's Corner, Medicare

Obama and Federal Government Combat Coming Doctor Shortage

December 19, 2012 By Leave a Comment

By 2025 the United States is going to have a doctor shortage, specifically primary care physicians, a development that could have serious consequences for the growing number of retiring baby boomers

The projected doctor deficit will continue to grow as roughly 79 million baby boomers request more medical care, except if the U.S. begins turning out more doctors. A number of recent studies claim this shortage could make it more difficult to get expedient and quality healthcare.

One of these studies was conducted by the Association of American Medical Colleges, which estimated that by 2015 the U.S. will have 62,900 fewer doctors than needed. In a decade this number will double, as the expansion of insurance coverage and the aging of retirees increases the demand for healthcare. Even excluding the Affordable Healthcare Act, the scarcity of physicians in 2025 would still exceed citizens’ requirements for doctors who are active in patient care. This report expects a shortfall of over 130,600 patient-care doctors, of 50 percent are primary-care physicians.

The doctor shortage is not a new development and has been the subject of heated debate inside Congressional meetings, especially when attempting to discount Obamacare. Opponents of the new health care law believe that this new study demonstrates that the well insured, shouldn’t have to share an increasing scarcity of doctors with the millions of uninsured.

Those who are against the Affordable Healthcare Act point to the fact that Health experts admit that there is little that the government or the medical profession will be able to do to combat the shortage by 2014. It seems that this issue will compound itself when one considers that it takes a decade to educate a physician. The drought of doctors entering into the field is even more startling when one examines that suggested government incentives and provisions will increase the number of primary care doctors by only 3,000 in the next decade, unless serious changes are made. But, that estimate will still fall drastically short of the 45,000 doctors needed in communities around the U.S.

The Obama administration has taken note of and is concerned over the future lack of physicians. They have started to delve into ways of expanding the doctor pool to meet the needs of the expanding senior and uninsured population. To lessen the far reaching impact of this shortage Obama and his cabinet are exploring several alternatives. One of the first provisions will occur 2013 and 2014 when the health care law increases Medicaid’s primary care payment in order to counteract the argument that primary care physicians are underpaid. To combat this the the Medicare Payment Advisory Commission, an independent federal panel, has suggested increasing the payment for primary care services to 10 percent in the payment for many primary care services, including office visits. Another inducement will give money to educate primary care doctors entering the field and provide incentive like rewards when they work underserved communities and build-up community health resources.  

States are also attempting to confront the doctor deficit by considering several key proposals that would lessen the blow in the coming years. Several of these proposals focus on education and the way that patients receive care. They have explored incentive based programs that are designed to up the enrollment in medical schools and residency training programs. Instead of relying on just doctors many believe relying on nurse practitioners and physician assistants could fill the gap. Lastly, they are looking to enlarge the National Health Service Corp to send doctors and nurses into underserved rural areas and poor neighborhoods.

It appears that the coming doctor shortage is inevitable. But, the provided incentives from Obama’s administration and federal proposals seek to overturn the coming tide. Primary care physicians are and will be in shorter supply until medical schools start churning out more physicians who are willing to forego into specialty fields.

-Suzanne Bernard

Filed Under: Gillian's Corner, Healthcare, Investing

Market Commentary – Long-term Care

December 17, 2012 By Leave a Comment

I recently served as a panelist, along with Dr. Katy Votava, President of Goodcare.com, and Thomas West, ChFC, of Signature Estate & Investment Advisors, for a webcast sponsored by Investment News entitled, “Women in Retirement: Managing Longevity.”  With over 1,200 financial advisors registering to be in attendance, moderators Frederick Gabriel and Mary Beth Franklin attempted to shed light on a growing financial problem among Baby Boomers: most women retiring today are projected to outlive their savings.

As the founder of HVS Financial, I have been proselytizing for years about the financial dangers related to long-term care costs in retirement. Women are especially vulnerable financially because they have longer life expectancies than men and are often left without enough savings after their spouses pass on. Here are some important facts:

  • According to a Women and Long-Term Care Fact Sheet published by AARP,
    • Over 70% of nursing home residents are women
    • 70% of women 75 or older are widowed, divorced, or never married
    • 48% of Americans living alone are women compared to 22% of men
  • A healthy 58-year-old woman living in Boston will have a life expectancy of 90 years and close to a 50% chance of needing long-term care by age 88.
  • Average length of stay in a nursing home for a woman will be over 2 years
  • Average annual cost of nursing home care in the Boston area today is $123,000
  • Estimated annual cost 30 years from now will be $613,000

The aforementioned statistics are not the total story. Let’s say this 58-year-old woman is happily married to her husband of the same age. More than likely, she will live approximately five years longer.  Here are some other projections:

  • His life expectancy will be approximately 85 years
  • Average length of stay in a nursing home for a healthy 58 year old male will be 1.5 years
  • Estimated annual cost 25 years from now will be $495,000
  • Based on his potential 1.5-year stay, the couple may be responsible for $770,000 in nursing home expenses
  • Additionally, beginning at age 80, they will also be responsible for approximately $40,000 in health insurance premiums and other out of pocket healthcare expenses, such as co-pays
  • Note that the $40,000 mentioned above is the equivalent of around $22,000 in today’s dollars, not much more than the $16,000 cost of medical insurance premiums your current employer is paying for your family plan

According to Medicare, by 2020, between 12 and 14 million people are going to need some form of long-term care.  That means roughly 1 in 6 Boomers—or more importantly, one third of all couples—will require some level of LTC—enough to cripple a family’s life savings.

A common reaction is to assume that Medicaid is the solution. Think twice before depending on Medicaid, as benefits will likely be cut to help address the country’s deficit problems, and for the most part, current Medicaid benefits do not cover facilities with any real amenities. The key is to have assets available to cover the cost of at least a one-year stay.

On a personal note, since I am considerably older than my lovely wife Marea, I should probably keep these statistics and all sharp objects away from her (only kidding).  I am sure that she would not look forward to the possibility that keeping me alive in a nursing home might one day put her in the poorhouse.  Let’s face facts: LTC almost exclusively occurs during the final years of life, when loved ones are hooked up to a myriad of tubes and bags and often cannot perform the most basic daily functions.  I am sure that my wife cares about me very much and would do anything for me. But, writing a check for $500,000 a year just to keep me propped on some pillows is difficult for me to swallow.  What if it goes on for two years?  Three?

Fortunately, financial industry professionals are prepared to address this issue, and the time to act is now. Potential solutions to catastrophic long-term care costs include purchasing LTC insurance, looking into annuity products that offer long-term care riders, carving a portion of savings that can be allocated to LTC costs, and/or purchasing a universal life policy that offers LTC or catastrophic care riders (an additional benefit is related to the favorable tax status built into life policies).  Since the average Baby Boomer is looking at an investment period of 20 to 30 years, it is worth talking to an advisor about considering a more aggressive portfolio dedicated to LTC savings. If investors do not require LTC services, the accrued assets can be left to heirs.

Think about it: tackling this problem today could be the ultimate holiday gift for your spouse and children.

Happy Holidays!

The next Update will be posted on January 7, 2013.

The Update is written by Chris Leone and Ron Mastrogiovanni.

Filed Under: Investing, Market Commentary, Medicare, Retirement

Weekly Update – Adventures in Holiday Shopping

December 10, 2012 By Leave a Comment

This is a tough time of year for the married male holiday shopper. Newlyweds have it easy, but holiday shopping becomes increasingly more difficult as the anniversaries pile up. After a decade or two of jewelry, trips to exotic locations, weekend jaunts to see Broadway shows, clothing, cookware (joking) and day-of-beauty gift certificates, there’s not much left to the imagination.  Even though retailer Bed Bath and Beyond (BBBY) appears to be a good stock to buy right now, I don’t think a stainless steel cheese grater will put me in my wife’s good graces.

One advantage today’s shoppers have over the dark days of mall excursions is the Internet.  I remember meandering around shops with titles like “Things Remembered” and wondering would Marea like a personalized clock?  Worse was entering the chaos of Macy’s in December; it was like being the proverbial deer caught in headlights of oncoming traffic.

“Coco by Chanel,” one saleswoman pounced as I entered the human reconstruction arena where attractive women attempted to capture my attention with new fragrances and makeup techniques that “Marea could not live without.” I always wondered what Marea’s reaction would be to a stocking stuffer consisting of a beautifully-wrapped aging, hyper-pigmentation, or skin-repairing serum designed to takes years off a gal’s appearance.

Anyway, my last holiday gift-buying disaster took place at a costume jewelry operation called Pandora, a retailer not on my radar.  I was strolling through the mall one afternoon close to Christmas when I noticed several guys in line at the Pandora store. This had to be the “in” thing! I looked at a display in the window and decided I would pick up a bracelet the following morning when the line disappeared.

So, the next day, with my mission clear, I drove to the mall early and went directly to Pandora. I was surprised when I walked in because there wasn’t much of a selection of bracelets on display.

A patient salesperson explained, “Customers actually designed bracelets with an array of meaningful charms.  How many would you like?”

I thought that was a rather unusual question. Of course, I needed the finished bracelet for our gift exchange that evening, so I replied, “Filler up!”

Two young salespeople helped me go though racks of charms representing first dates, children, divorces, and who knows what else. This was no ordinary jewelry buying experience; designing a charm bracelet is a tedious time consuming process requiring numerous relevant decisions. Choose an inappropriate charm and who knows what kind of trouble a guy can get himself into.

Once my bracelet was constructed, the lead salesperson took out her calculator to add up the damage. She discretely showed me the total, which was more expensive than I expected to pay for costume jewelry: $475.00. At that point, I was into the bracelet construction process for at least an hour and had to get to work, so I told her to wrap it up. Task complete.

Later that night, I proudly handed Marea the perfectly wrapped gift box, waiting for a warm embrace.

“I’m not into Pandora,” she said.

Surprised once again, I immediately responded by asking her to at least look at the bracelet before sending me through my traditional gift-giving repudiation process.

She did. “You filled up the entire bracelet with charms?”

I laughed and said, “Why would I give you a bracelet that is still under construction!”

She looked somewhat confused and asked me what my little Pandora gift cost. I eventually told her and she didn’t believe me, demanding to see the receipt. She looked at it and asked, “You paid $4,750.00 for this?”

Was she crazy?  I looked down and sure enough, there was an extra zero at the end of the total.  I was stunned! (Pretending to not need reading glasses can definitely be costly.) No wonder why the two sales girls laughed at all my jokes! Luckily, Marea was not into charms and agreed to return the bracelet, since I was too embarrassed to bring it back myself.

Thankfully, those days are gone, and now I virtually roam around retailers such as Gorsuch, Patagonia, Tiffany’s, Nordstrom’s and Macy’s on the Internet. I can sit at home in the comfort of my pajamas and make similar miscalculations in less time without dealing with the overwhelming mall traffic.

Which reminds me, the Internet will only make up around 12% of holiday purchases this year, telling me that Amazon (AMZN) is positioned to experience significant future growth opportunities. Traders and investors, including investment manager George Bernard, have been disappointed in Amazon’s recent results, however, I believe Amazon may make a great gift to yourself, your spouse, kids, and grandkids. Also, given the upswing in our economy, consider adding FedEx (FDX) or UPS (UPS) to your holiday portfolio.

Probably more importantly, here is a potentially critical investment holiday warning. During this hectic time constrained period of the year, be careful when performing reconstruction work to position your portfolio for 2013. Do not purchase mutual funds in December unless you are aware of the fund’s 2012 tax consequences.

Let’s say, for example, you purchased a fund on December 6, and you lose 1.5% of your investment by the end of 2012, you will still pay taxes on gains generated by the fund for the entire year despite the fact that you lost 1.5%! If you acquire shares of a fund in a taxable account prior to the fund’s distribution (X) date, you may be liable for the tax consequence related to its 2012 capital gains and dividend distributions. Hence, just as I shouldn’t have bowed to the pressures of buying a last minute gift, make sure you are not exposed to an unnecessary tax bill when rushing to purchase shares of a mutual fund in December.

Have a productive week.

The Update is written by Chris Leone and Ron Mastrogiovanni.

 

Filed Under: Investing, Market Commentary, News

Weekly Update – Interview with George Bernard, Part 2

December 4, 2012 By Leave a Comment

RM: Mr. Bernard, other than the U.S., where in the world are currently investing assets?

GB: There has been tremendous turmoil and volatility in economies around the world over the past six years.  This has created potential opportunities in large-cap, dividend-paying European corporations with solid balance sheets.  Also, some emerging market companies, especially in China (even though growth has slowed) have corrected (price-wise) and may represent real value.  We believe it makes sense to build positions in these types of firms because pricing seems reasonable and their upside potential is too attractive to ignore.

RM: What is your current allocation for growth portfolios?

GB: Normally, we divide the portfolio by 80% equity, 17% fixed income, and 2-3% cash.  Today, we are much more defensive due to current market volatility. We are roughly 60% equity, 28% fixed income, and 12% cash.  The bulk of the equity weightings are focused in the U.S., with 10% dedicated to both Europe and emerging markets respectively.

RM: Does gold have a place in your portfolio?

GB: Normally we would say no, but as a hedge against currency volatility, we have dedicated 3% to gold but we may increase exposure to as high as 5%.

RM: How will the fiscal cliff affect 2013 earnings?

GB: We have two points of view.  First of all, it is already impacting the economy.  Because of uncertainty, companies have started to cut their investments and spending.  Looking forward, the 3.8% tax to fund the Affordable Care Act will hit high net-worth individuals on January 1st.  We also know that companies will have to spend more money to meet the new regulatory requirements.  So in the very short term, we think individual and corporate incomes are going to suffer because of higher taxes and higher expenses.  However, we feel toward the second half of 2013, things will stabilize and our long-term outlook is reasonably positive.

RM: How difficult is it to invest today as compared to 20-30 years ago?

GB: Because our philosophy focuses on fundamentally solid companies to safeguard a portfolio for long-term investing, things haven’t changed much from our perspective.  Actually, since technology and the Internet have reduced expenses and increased the amount of information we have access to, we think it’s a good time to invest. However, because of heightened competition in institutional markets, traders looking for quick hits are unfortunately at the mercy of large conflicting forces which can create high short-term volatility.

RM: Over the next couple of years, what do you consider to be a reasonable rate of return on equities?

GB: If history is any prelude, not a guarantee, to the future, over the last 50 years, the average return on all capital, fixed income and equity, has been around 7%.  For someone who is willing to assume a bit more risk with a growth portfolio, we believe—with the caveat that potential volatility will always be present—that a reasonable rate of return for someone who can stay the course could be around 8-10% over the long haul.

RM: Lastly, if you were to write a next-generation book on investing, what is the most important piece of advice you would impart to your readers?

GB: We all pay attention to the local (meaning U.S.) markets, but our true corporate champions compete in the global economy.  So once again, let’s refer back to fundamentals and pose the question: does the company have the capability to manufacture and deliver products that address real global needs?  I like to use the old Dow anchor, General Electric, as an example.  Sure, they make jet engines and appliances, but they also have created a water filtration system that is in great demand in many emerging market countries, where tens of thousands of people die every year due to lack of clean water.  So, to answer the question, we focus on strong global companies with solid balance sheets, innovative products for the future, and a clear vision for long-term growth as the key to constructing a well-balanced portfolio.

Have a productive week.

The Update is written by Chris Leone and Ron Mastrogiovanni.

Filed Under: Investing, Market Commentary, News

Weekly Update – Interview with George Bernard, Part 1

November 26, 2012 By Leave a Comment

For the next two weeks, we will be joined by George Bernard, President of Bennington Asset Management, Registered Investment Advisory specializing in income optimization strategies and expense management for investors preparing to enter retirement. Mr. Bernard has held senior management positions for a number of well-known financial service companies, and his market insights are well worth considering as we look forward to the holiday season and the looming fiscal cliff.

Ron Mastrogiovanni: Should we expect a Santa rally this year?

George Bernard: I believe we should.  This was a tough political season.  After the election, half the country was disappointed with the results, but that sentiment cannot continue indefinitely. It actually appears that the market should have a solid finish through 2012.

RM: On the fixed-income side, do you expect some sort of bubble given that bonds have performed well for a significant period of time?

GB: That’s a topic I speak to clients about almost every day.  Rates have fallen to the point where they simply can’t go much lower.  A two-year Treasury yields 0.24%! My fear is that if prices turn around because of inflation fears or other variables, the result could be serious harm to client portfolios, so we have pretty much stayed away from the fixed-income area.

RM: Is there anything in fixed income that you are buying right now?

GB: Yes. We do like floating-rate mutual funds.

RM: What equity sectors are you investing in this quarter?

GB: We like equities attached to the housing sector, but not necessarily building.  We also like banking.  Banking has obviously experienced a pretty rough stretch, but we still believe that it is undervalued.  Lastly, we like technology.

RM: Are there specific housing stocks that you recommend?

GB: In Gold Rush days, they referred to them as “picks and shovels.” That is, some of the biggest winners weren’t necessarily the “forty-niners,” but those who provided the equipment; so in keeping with this theme, we like vendors who will benefit from the expansion of housing activities.  One interesting play is Plum Creek Timber (PCL). It is a vertically integrated timber company, which means they own the land, cut the trees, and create needed products.  It is master limited partnership (MLP), traded on the exchanges, and produces a nice dividend. We also like Home Depot (HD) and Lowe’s (LOW), both of which generate solid dividends and seem to have room to run on the upside.

RM: Here are a number of stocks that I get asked about quite often.  I would like your take on them. Give me a buy, hold or sell.  Salesforce.com.?

GB: Sell.

RM: Chipotle.

GB: Highly priced.  Big P/E.  Sell.

RM: RIMM.

GB: Highly speculative but RIMM does have significant upside potential.  Leaning to buy if you can stand the risk.

RM: Here’s one for you: Facebook.

GB: We believe that the power of social networking is in its infancy. It was overpriced in its debut, but there is room to grow over the long term.  Buy.

RM: Apple.

GB: A great company with a refreshed product line makes it an attractive buy during the holiday season; however, significant future competition from other companies, including a revitalized Microsoft, prevents it from being a long-term play.

RM: Amazon.

GB: Sell. Very high P/E.  Lots of revenue growth, but not profit growth.

RM: Google.

GB: Outstanding versatility.  The company literally offers something for everyone.  We think it’s a buy.

This interview will conclude next week.

Have a productive week.

The Weekly Update is written by Chris Leone and Ron Mastrogiovanni

Filed Under: Investing, Market Commentary, News

Weekly Update – Interview with Geoffrey Chalmers

November 8, 2012 By Leave a Comment

On a weekly basis, I attempt to integrate a rather unique mix of entertainment with my professional industry experience to reveal how investment pros manage assets.  This week, however, I would like to take a more serious look at the economy and the markets through the eyes of a very successful securities lawyer.

Geoffrey Chalmers has served as legal counsel to brokerage firms, investment companies, hedge funds, venture capital firms, and investment advisors in the areas of securities law and compliance issues. He is also an expert on the legal aspects of public and private securities offerings. Geoffrey is a graduate of Harvard College and Columbia Law School and has an MBA in finance from New York University.

The following is a transcript of our recent conversation.

Ron Mastrogiovanni: From your lengthy industry experience, what would you regard to be important red flags for investors to consider prior to investing?

Geoff Chalmers: First, investors need to gain as much information as possible about the vehicles in which they are going to place their money.  Second: exercise patience; the notion of “gotta buy now” is a certain recipe for disaster. Third, make sure that your advisor is dependable, provides reliable, up-to-date information, and does not evade hard questions.

 RM: From your perspective, what industry trends do you find to be the most troubling today?

GC: Excessive reliance on detailed rules by both the industry and regulators has replaced common sense and honesty.

 

RM: Do you think that the industry requires more regulation and disclosure, or do we need to revisit how we regulate?

 GC: Certainly the latter.  There’s already too much regulation.

 

RM: How difficult is it to invest today as compared to 25-30 years ago?

GC: It’s a paradox. There’s an enormous amount of information available; however, the sheer volume makes it difficult for the average investor to decipher which messages are truly important in order to make the best investment decision.

 

RM: Do you recommend that the average investor employ a financial advisor rather than manage their portfolio?

GC: Yes. Anybody who has a fair amount of liquid assets and an objective to protect and increase their worth over time should seek professional help—unless, of course, they are employed in the industry themselves.

 

RM: Are you bullish today?

GC: Yes.

 

RM: Even though you are bullish, what would you say are your greatest macroeconomic concerns?

 GC: The evident lack of coordination among the world economies and those who govern those economies is troubling.  There is such a tremendous presence of discontinuity across global financial markets. Also, the piling up of unfathomable amounts of government debt is certainly a major concern. Governments are simply unable to control their spending and allocate their resources in a responsible manner.

 

RM: Looking forward over the next few years, what can investors realistically expect for an annual return in equity markets?

 GC: I think 5% is realistic; 7% is aggressive.

 

RM:  What is the likelihood that an investor can beat equity market performance?

GC: It depends on the kind of advice they are getting.  A reasonable approach by a well-educated advisor has a better-than average chance of beating the markets.

 

RM: What is the likelihood of beating market performance without the help of an advisor?

GC: It’s risky today.  The odds on being able to consistently beat the markets—over a period of years—are less than 50/50.

 

RM: What sectors of the market do you think are undervalued today?

GC: That’s difficult to define.  There’s market value and then there is intrinsic value. Also, sector cycles are always changing. What is undervalued now may be overvalued in 6 months. I think that if I were to project out long-term, I would chart the sectors, do my research, and seek advice from a professional.  At this time, it would be difficult for me to point out one particular sector that is undervalued.

 

RM: Given the high correlation between domestic and international investments, do you recommend investing globally, despite higher costs, higher levels of volatility, and potential currency issues?

 GC:  I think that global markets must be considered along with all other investment opportunities at any given time.  To rule them out because of their current status is unwise.

 

RM: What is your personal investment vehicle of choice right now?

 GC: I am inclined to ETFs. The business has exploded over the past decade. It used to be like early mutual funds in which there were only a few to choose from.  However, their sheer proliferation and diversity across sectors makes them attractive for a portfolio. But, your readers should consider a well diversified portfolio that may also include individual securities, mutual funds and insurance products.

 

RM:  What are your expectations for the remainder of 2012 and looking ahead into 2013?

 GC: Flat for the rest of the year with incremental increases and pretty heavy volatility through the early part of next year.

 

RM: You aren’t worried about the “financial cliff” at the end of the year?

GC: I am optimistic that given the fragile state of our economy and recovery, Congress and whoever wins the presidency will probably find a way to work together to push this problem off again.

 

RM: Let’s assume that you are writing the next generation book on personal investing.  What would be the most important piece of advice offered in the text?

 GC: Focusing on loss of capital is much more important than worrying about loss of opportunity.

 

The next update will be published on 11/19/12.

 

Have a productive week.

 

This update is written by Chris Leone and Ron Mastrogiovanni.

Filed Under: Investing, Market Commentary

Weekly Investing Update – An Interview with Folio

October 29, 2012 By Leave a Comment

The following is a transcript of a conversation I recently had with my very sensitive and from time to time emotionally unstable investment portfolio named Folio.

“Hey, how’s is everything going today, Folio?”

“Not well,” it responds.

“What’s the problem now?” I ask, knowing the question would initiate a long diatribe.

“You are the problem.”

Here we go again. “Why am I the problem again today? You’re the one who lost value over the past month. You’re the one who never appears to be satisfied.”

“How about this for starters,” Folio squeals angrily. “You’re on that iPad, reading who-knows-what for hours while completely ignoring me. We need to spend at least a couple of hours per week together.”

“Hey Folio, do you think that every moment with you is sunshine and roses?” I retort. “At times I think you are just plain psychotic. Up one moment, down the next for no reason at all. Make up your mind!  And, do you ever hear me complain? No!”

“Weren’t you going to sell Apple (AAPL) at $700?” Folio asked accusingly.  If you worked with me for just a few hours, we could have saved over $100 per share.”

I hate when Folio is right.

“You just can’t let anything go, can you? After analyzing Apple, I revised my target-sell price up to $750,” I say confidently.

“Seven fifty?  Ha!  You were probably golfing when we should have been selling?  What’s more important, me or your stupid handicap? You weren’t analyzing, you were procrastinating! Do you know that Apple is now selling below $600 after the stock exceeded our target-sell price? If you spent as much time with me as you do with your golfing buddies, Apple profits would be in the bank today.”

“Hey, I had to consider the tax consequences of selling Apple in 2012, the introduction of a new iPhone, an upgraded iPad 3, and the new iPad Mini all in time for the holiday season.”

“It doesn’t matter. We decided to sell at $700. You preach how important portfolios are; how we are the key to long-term financial stability for families. I make up all of your life’s savings. If I’m so important, our relationship should be treated like a marriage! We need to spend more quality time together. Period!”

Wow. Do I really need this? Didn’t I have a similar conversation with someone else over breakfast?

“You certainly act like we’re married,” I strike back. “Maybe if you weren’t always on my case, I’d spend more time with you.  And by the way, Apple is trading at 9 times earnings, which makes it an attractive long-term investment.”

“Since you intend to retire within 10 years, have you projected a realistic retirement income that will cover housing, food, transportation, and healthcare? Healthcare alone will cost you and Marea between $500,000 and $1,300,000. Since Medicare is means tested, your adjusted gross income (AGI) will determine actual healthcare expenses. So, how will healthcare expenses of a $1,000,000 impact your expected standard of living, hmmm?”

Folio is on fire today.

“At this rate, living through retirement won’t be a problem because you’ll give me a heart attack in no time. As a matter of fact, you’ve already succeeded in giving me a pounding headache.”

“This isn’t funny. You simply don’t understand me. I’m actually trying to help you.  Are you truly prepared to cover basic retirement expenses for a period of 20 to 25 years?” Folio attacks again.

“I will as long as you do your part. Try not dropping like a lead balloon whenever you hear a little bad news,” I assert.

“I can’t do it alone and you are not giving me the time I need to succeed. We really should consider professional help,” Folio snaps back.

Here we go again: a financial advisor.

“I don’t want any help!”

“Really?” Folio continues undaunted. “I’ve asked you over and over again to consider converting your IRA to a Roth and investing in a universal life policy, but you have simply ignored me even though gains generated from a Roth or universal life policy are not considered income by Medicare.  You can literally save hundreds of thousands of dollars in healthcare costs alone.”

“I’ve already told you that I’m looking into it,” I turn back to my IPad.

“You need to take action sooner rather than later. Time is hardly on your side.”

Ouch.  That last shot was pretty harsh.

I hate to admit it, but Folio makes a number of excellent points for all investors to consider. Developing a retirement income plan is a critical step, especially for Baby Boomers retiring at an average of 10,000 per day. Initially, it would be wise to put aside discretionary spending, such as extended vacations, and focus on the basics: housing, food, transportation, healthcare and golf. Look into products such as a Roth conversion and/or a universal life policy; both have important features like potentially lowering healthcare expenses in retirement.

Do your homework every week. Manage a risk-appropriate mix of stocks, bonds and cash that will not keep you up at night. Understand the impact of expenses, including trading costs, fund-expense ratios and tax consequences.

Finally, if you do not have the time or inclination to spend quality time with your portfolio, strongly consider seeking a marr…er, financial advisor.

Have a productive week.

This Update is written by Chris Leone and Ron Mastrogiovanni

Filed Under: Investing, Market Commentary
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