Investment Articles

Remember the thrill when you made your first trade and the excitement with which you followed it UP? Or, hopefully not, the disappointment as you followed it DOWN? And then, how, through the first few years of ups and downs, which, by the way, have happened to even the best of investors, you slowly learned to rein-in your emotions and dissociate them from the market. It’s what I call seasoning; think of it as experiencing all of the seasons of the stock market, directly in your own portfolio, over a span on time, and it wizens you to the market over time. Well, that’s what I broadly plan to touch on today; that success in investing is more than looking at prices jumping around on your computer monitor, more than a sexy story or puff piece, but a skill that is developed over time and by avoiding folly.

I’ll touch on three topics.

Even the experts miss corrections and crashes

Consider the anticipation of a market crash, that great destroyer of portfolios. Well, I recently watched an interview of Yale economist Robert Shiller where he said that experts have always missed big events like market crashes. Think about it, in hindsight, the housing bubble and the crash in 2008 seem so obvious, yet most experts missed it despite loudly flashing warning signs easy-to-get loans, zero down financing, blatant overbuilding and unbelievable gains in home prices.

Shiller, for one, did predict both, the dot-com and the housing crashes, where he was influenced by behavioral economics, a topic I have covered many times on past shows. Shiller believes that nowadays, there is too much focus on analysis and statistics but the problem is that world changes can’t always be easily quantified or accurately built into a model.

But let’s face it, no one wants to listen to the guys who talk about the risks of getting overly drunk when the party is raging and no one likes the guy who tells us to stay away from the punch bowl, so for every naysayer, the financial media typically trot out ten who encourage us to party on. And, surprisingly for me, this was not too long after the dot-com crash in 2001. So I have always wondered why even the experts don’t get it; these guys who’ve been steeped in the market for decades and have seen bubbles come and burst not once but several times. So I’d urge you to heed the signs of an overheated market and prepare yourself to anticipate down cycles and, more specifically, those crashes that we seem to get with increasing frequency and magnitude nowadays.

To give this a geological analogy, the frequency and magnitude of portfolio-destroying stock market quakes appears to be growing, perhaps because of derivatives, high use of leverage, computer-based trading or whatever: so you’ve got to prepare yourself even more to survive them.

Don’t throw good money after bad

Now, another trap that investors fall into is throwing good money after bad. Here’s how it happens: say you bought a stock at $30 and it’s now down to $10. You’re probably chagrined by your loss and eager to at least break even, so the thought that naturally comes to most folks is a degree of over-confidence in their own abilities where they believe that they’d done their research really well and that the stock’s likely a bargain at $10. But remember, your natural logic only holds true if the underlying business continues to be healthy and a drop in shares is merely the empathetic result of a broader market collapse, where even solid stocks get hammered. And, in fact, I personally know of many who continued to buy Lehman Brothers shares as it was collapsing… and, of course, lost lots of money in the process when Lehman quickly went bankrupt and its shares became worthless – simply because the underlying fundamentals of Lehman had collapsed. So when the market presents an obvious buying opportunity on even shares that you think you know like the back of your hand, be truly smart and have the discipline to re-do your research in an unbiased manner: dig even deeper when shares fall and only buy if those shares are a bargain. And make sure you understand the financial of the company you are going to own. In the case of Lehman, it was practically impossible to see what they were doing under the hood.

Additionally, investors commonly do two things when shares drop significantly from where they bought them. They either abandon that stock all together (which is such a waste) or they double-down and buy more without doing their research. And my advice to you is, do your research and then make an informed decision.

Be cautious of narcissistic CEOs

Another thing you learn with time is how to sieve good management from bad. It’s always a good idea to thoroughly examine the man at the helm: the company’s CEO. There happens to be research by two professors from Penn State which shows that narcissistic CEOs are value destroyers.

The research looked at subtle tell-tale signs like the size of the CEO’s picture in the annual report, (I’m not kidding about this) the number of times a CEO was mentioned in a press release, how often the CEO uses the first-person singular “I” in public comments, the gap between the CEO’s pay and the second highest paid employee, the lack of a succession plan,

They found that narcissistic CEOs spent more money than average on questionable pet projects and made acquisitions at significant premiums, and that such companies displayed a high degree of volatility in quarterly financial results with gravity defying performance inevitably followed by gravity embracing collapses.

For example, if you look at Microsoft’s acquisitions under its current CEO, Steve Ballmer, you may gain a few insights into why its stock has essentially gone nowhere

Its 2007 acquisition of aQuantive for $6.6 billion where, sometime later, a big chunk of the acquired company was later sold for just $530 million

The 2008 acquisition of Greenfield Online, only to later sell the main asset for under $100 million

Its $1.2 billion acquisition of FAST Search & Transfer at a 42% premium only to have FAST’s offices raided for fraud investigations 10 months later, or

Its 2011 acquisition of Skype for $8.5 billion.. we’ll see how that goes but the track record isn’t so great.

On the flip side, if you look at Steve Jobs and Apple, Jobs was rarely on conference calls, did not insist on being in press releases, had a successor in place and, very importantly, surrounded himself with smart people.

My hope is the thoughts I just shared with you will encourage you to now look at CEO quality as you evaluate stocks to buy.
So be cautious with your investments: be very cautious, and heed the three points I just spoke about to better weather potential quakes in your portfolio.

So you see it’s a lot more than trying to chase numbers jumping around your screen. You have to know the fundamentals. There is no substitute for knowing what you own.

Visit http://onthemoneyradio.org for weekly commentary and money advice that covers the entire financial spectrum which also airs on my weekly radio show, “On The Money!”

Steven L. Pomeranz, CFP is a 29 year investment management veteran and host of “On The Money!” which airs on NPR station, WXEL in South Florida. He concentrates on serving high net-worth individuals and has been named one of the Top 100 Wealth Advisors 2007, by Worth magazine (October 2007 Issue), honoring America’s premier financial and wealth strategists.

Should you hold Alternative Investments in your portfolio?

So you’ve decided to reduce your exposure to equities in order to avoid the price volatility that seems to be driven by the latest piece of political rhetoric about national debt or economic growth. You’re no longer seeing the value of your investments rise and fall by considerable margins on a daily basis, and you’re sitting on a nice pile of ’safe’ cash. But you probably also need to find a home for your capital where it will grow at least in line with inflation, hopefully generate some income, whilst sharing little correlation with the performance of equities, bonds and other traded financial instruments.

So now is the time you start to consider alternative investments. but where do you start? Do you buy fine wine, rare stamps, farmland, timber or any other of the plethora of emerging alternative investment asset classes currently being touted as the ‘perfect’ investment?

I suggest that the first place one should look should be to their requirements, really establish the end goals you wish to achieve, and the limits you have in terms of liquidity, asset allocation for your alternative investments (as a % your total portfolio) and risk. From there you can, with enough research, discover which asset class might be the right alternative investment for you.

Let’s look at a case study, and see if we can match the Investor to an alternative investment asset class that offer the performance e and characteristics he or she is searching for.

John has a total pension portfolio of £250,000, held in a flexible Self Invested pension Plan wrapper (SIPP). John chose to move his assets into a SIPP some time ago in order to take more control over decisions affecting his investments, rather than be reliant on a Financial Advisor who can only advise on a couple of asset classes – equities and bonds.

John pulled 50% of his portfolio into cash 12 months ago, with the remainder held in defensive stocks and bonds. He has decided to allocate 10% of his overall pension to non-financial, real-asset alternative investments. He does not need income, and he is prepared to hold an asset for up to 10 years, aiming to capture capital growth. John has self-certified as a Sophisticated Investor, but does not wants to invest in funds, he wants tangible assets.

Taking into account John’s position and requirements, it might be suggested that the following alternatives may be a good starting point for Johns research process:

Fine Wine
Land – Particularly productive agricultural land
Timber Properties
Collectibles

All of these assets display certain characteristics that John might find particularly appealing. Fine wine – when selected and managed by an expert – has been shown to deliver returns of up to 20 per cent per annum. The forward looking story looks good too, as increasing demand from Asia, particularly a growing wealthy class in China is demanding more fine wines that the world can currently produce, and they are prepared to pay increasingly large sums of money as wines get older and rarer as more of a particular year is consumed. This increase in demand for a finite asset is what drives capital growth, and a good wine investment manager might help John to pick and choose a suitable portfolio, or cellar’ of wine and also advise, perhaps on a discretionary basis, when to buy and sell to maximise profit and minimise risk. Also, the performance equities has absolutely no bearing on the investment performance of fine wines, allowing John to collect long-term capital appreciation.

Much the same thing can be said for collectible such as rare stamps, where again demand is driven by increasing rarity and increasing demand from wealthy overseas and domestic collectors and investors.

Agricultural land also benefits from increasing demand, as populations in developing economies grow and incomes rise, they demand more protein (meat), which requires many more resources to produce than their traditional grain-based diets. It takes about 3kg of grain to produce 1 kg of beef, so this adds considerable pressure to current agricultural productivity. At the same time we lose millions of hectares of arable land every year to urbanisation, degradation and climate change, so it is likely that farmland will continue to become more valuable over time, again giving John the long-term capital appreciation, as well as separation from financial markets that he requires. This would also generate income from farm rents, or perhaps even through a joint venture farming agreement that would allow John to share in the profits from harvesting.

Forestry investment may also offer John a potentials alternative. Essentially, purchasing a timber-producing property, through leasehold or freehold, and simply sitting back and watching the trees grow bigger and more valuable each year, a biological process that cannot be interrupted by an economic crisis. The actual price of timber also moves every year, having risen by an annual average of 6% for the past 100 years. This means John capture true growth in its truest sense. A huge number of institutional investors are investing in forestry, including pension funds, university endowments (Harvard and Yale to name but two) and hedge funds, all of which are investing in forestry for long-term capital growth. Again, the same principles of supply and demand hold true for forestry. We require more timber as the enormous populations of China and India enter into their most aggressive and resource-intensive phase of growth, requiring more timber for paper, biomass and construction, whilst at the same time natural forests are now protected, creating huge demand for sustainable sourced plantation timber.

In summary, there are a range of alternative investments for John to consider, and really the best thing for him to do would be to conduct his own research in to each subject, and speak to a range of Advisors with specific experience of each individual asset class and choose to work with a professional that can substitute a good track record of investment selection/management for the options he chooses. So, speak to a few fine wine brokers and measure their pitch against the knowledge gained from researching the asset class. Speak to a forestry investment advisor and agriculture investment advisor, and choose to work with someone that knows their sector, and has delivered success for Clients previously. Heck, why not ask to speak to any potential investment partner’s previous clients; I’m sure that any Advisor worth his salt would be proud to have a Client sing their praises.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

Even though stock markets are generally having a bad time of it at the moment, as an investor there is no need to panic unduly. There are several strategies you can adopt to ease the pain and to protect your portfolio in the current environment. Let’s start with a little perspective on the situation.

At the start of 2012, it’s worth looking back at 2011. There was the major natural catastrophe in Japan for starters. Then there were problems in Greece and other sovereign European states, culminating in threats to the Eurozone as well as the Euro itself – plus of course the downgrading of the US credit rating. There was no doubt that the media seemed to revel in the bad news and as bad news sells, this is sure to continue.

Certainly investors voted with their feet, as they staged the biggest retreat from the stock market in 20 years. According to the latest figures from the Investment Management Association, private investors pulled a record £864m from investment funds in November, bigger than the retreat from the crisis of 2008.

But what effect did all these problems actually have on the markets? Well, in Europe, unsurprisingly most markets ended down for the year. The FTSE 100 lost 5.6 percent, whilst Germany’s DAX lost 14.7 percent. Interestingly, Far East and Emerging Markets also suffered, roughly along the lines of Europe. Overall Emerging Markets were down 14.5%, Japan was down 14.1% and Pacific ex Japan lost 10.9% – so simply avoiding European equities was not a solution.

However, as reported in the Guardian, in the US, the Standard & Poor’s 500 index closed 2011 just a fraction of a point below where it started the year. The S&P closed at 1,257.60, compared to 1,257.64 at the end of 2010. So its loss for the year was just 0.04 point. The Dow was up 5.5 percent for the year, whilst the Nasdaq composite index lost 1.8 percent.

So the US is not looking in too bad a shape and there are encouraging trends there as well, with some improvements on the unemployment and housing market fronts. Obviously there is an election later this year so the issues of debt and deficit are likely to be put on hold until 2013, but there are at least glimmers of hope.

Away from equities, bonds did well in 2011 which is somewhat surprising as they usually do badly in times of rising inflation. Long term gilts (over 15 years) returned 24.3%, index-linked gilts returned 15.4% and all gilts on average returned 14.2%. Corporate bonds which are normally riskier than gilts returned 7.1%. Elsewhere, gold returned 25.3%.

Because of this, well diversified investors will have been cushioned from the fall in equities via their holdings of gilts, bonds and other asset classes.

So how do you keep your portfolio ticking over in these difficult times?

Well, firstly, by playing a long-game. As investors in equities know, the whole process is a long-term game, and losses are only crystallised once the funds are eventually sold. So don’t panic – and hold onto your equities.

Secondly, you should ensure your portfolio is diversified. If you have a well-diversified spread across a range of asset classes, it is more than likely that if one area goes down, other asset classes should help provide protection.

Thirdly, you should look to rebalance your portfolio. As 2011 was a fairly volatile time for markets, it is likely that the portfolios of most investors are somewhat skewed, and will need rebalancing to get back in line with their model asset allocation. This might mean selling some gilts or bonds that performed well last year, to get their portfolios back in line.

Fourthly, you should consider a focus on income. Higher yielding stocks tend to outperform low yielding stocks over the long term and can contribute towards total returns if the dividends are reinvested. In fact 2011 was a not a bad year if you invested in good quality, long-term, dividend-paying companies. According to Capita Registrars, 2011 was a record year for dividend pay-outs, with investors in UK companies getting a £67.8bn bonanza – up 19.4% on 2010. Record dividends therefore provided a real bright spot for investors in an otherwise gloomy world.

Finally, if you are still looking to invest but are a little nervous, you should consider “pound cost averaging” – the process where you invest amounts on a regular ongoing basis rather than as a lump sum. This process helps to smooth out your investment returns, as when share prices are low you end up buying more shares – but obviously fewer when the price is high. So when the market is depressed, you benefit by buying more shares, which will be good news when the stock markets rise again.

So the picture for 2012 may still look gloomy but it should be borne in mind that the markets have priced in a good deal of the problems already. Whilst the short-term could remain tough, particularly if something dramatic happens, like Greece defaulting for example, it should be remembered that on a historical price/earnings (P/E) basis, equities are now undervalued. So as mentioned above, holding on for the medium to long term would seem to be the sensible option.

A review of your portfolio also makes sense at a time like this, so if you haven’t done so already, contact your local independent financial adviser, who will be able to help you with an appraisal of your overall financial objectives and strategy.

Chris Flood, MA (Oxon), MBA, is a marketing and management consultant based in Bristol UK. He writes articles on investments and financial planning as well as other subjects. For a review of your investment portfolio, please go to http://www.kelland-gloucester.com/investment-management.asp

Further information about Kellands Gloucester and its services can be found at http://www.kelland-gloucester.com

I’m sure many of you have heard of the Consumer Price Index, or CPI as it’s commonly called. And you’d probably heard about it because CPI data is published every month by the U.S. government’s Bureau of Labor Statistics and is reported on heavily by financial and general interest news channels. Why? Simply because CPI measures monthly changes in the prices of goods and services most commonly consumed by U.S. households, and is a measure of supply versus demand, which in turn is a measure of the health of consumer spending, one of the key pillars that holds up the U.S. economy. Governments and businesses also use CPI data to adjust wages, social security, retirement benefits, food stamp programs, budgets for school lunches across the nation, adjust rents and for a host of other reasons.

The Bureau of Labor Statistics has classified expenses into 200 categories, arranged into eight major groups. Government statisticians compile CPI data from about 23,000 retail and service establishments and 50,000 landlords and tenants. The increase in CPI over twelve months is what’s commonly called annual inflation and our government watches this closely to set economic policies. And inflation, for those of you who remember my piece from a few months ago, directly impacts the value of our dollar relative to foreign currencies, primarily of our trading partners, and so impacts imports and exports; key drivers of our economic growth.

So now that you have some background on CPI, here are its eight major groups:

1. Food and Beverages: Food prices, broken down into food at home and away from home. This includes breakfast foods, full meals, beverages and snacks:fruits, vegetables, dairy, meat, fish, poultry, eggs, cereal, bakery products, beverages, oils, sugars, sweets; items most Americans typically pick up at grocery stores, and prices of food typically consumed outside such as burgers, pizza, sandwiches, shakes, steak and so on.

2. Housing: Price increases tied to housing: mortgages, rents, hotel room costs; owner’s and renter’s insurance; household energy and utility bills, water, sewer, trash collection; home furnishings; and general household expenses such as for cleaning supplies, repairs, maintenance, etc.

3. Apparel: Price changes on clothes, jackets, suits, sweaters, footwear, jewelry, accessories and so on, worn by typical American families.

4. Transportation: Costs associated with private and public transportation: new and used vehicles; insurance expenses; gasoline, diesel costs; parts, maintenance and repairs; on the public transportation front, price changes for flight, bus, train, subway tickets and so on.

5. Medical Care: Expense changes related to home medication, prescription drugs, medical supplies, physician services, hospital stays, routine dental and eye care, prescription eye glasses and so on: for all age groups; infants, children, adults and seniors.

6. Recreation: Prices on items like movie tickets, amusement parks, video games, DVDs, books, television, cable or satellite, toys, sports equipment, sporting events and so on.

7. Education and Communication: School and college tuition increases, prices for books and supplies, childcare and everything related to education; then for communication expenses tied to phones, Internet, computers, laptops, printers, postage supplies and the like.

8. Other Goods and Services: Prices on items like tobacco, smoking, haircuts, personal care, funeral expenses and so on.

When tracking CPI, the BLS also includes government fees such as water and sewerage charges, auto registration fees, vehicle tolls and sales and excise taxes: because these are real expenses borne by American households.

However, income and social security taxes and investment items (stocks, bonds, real estate and life insurance) are excluded because taxes can never be applied to purchasing consumer goods and services, and investments relate to savings, not to consumption.

Food and energy prices are typically very volatile because of supply disruptions: for food due to storms, severe weather, cold or heat waves and other such factors that disrupt costs; for energy due to global supply fluctuations related to fires, political instability, disruptive moves by cartels and so on. And remember too, that a major cost of food is the cost of hauling it to your table, which directly depends on gasoline and diesel prices, so food and energy are often clubbed together when talking about CPI data.

I’m speaking about the CPI this week because it is a key measure of your wallet’s ability to keep pace with rising prices, of the drop in the dollar’s purchasing power each year, and of a minimum hurdle that your investments should surpass, on average, year after year. So the next time someone talks about CPI, they likely will tell you where prices have risen the most, and give you some insights on where to cut back spending and stay within budget. Your earnings, investments and assets must ideally at least keep up with inflation so you can afford to maintain your standard of living. But ideally, you must grow your investments at an even greater pace. So that, in a nutshell, is a bit about CPI. And for the record, CPI or inflation stood at 3.4% for the 12 months ended November 2011.

Visit http://onthemoneyradio.org for weekly commentary and money advice that covers the entire financial spectrum which also airs on my weekly radio show, “On The Money!”

Steven L. Pomeranz, CFP is a 29 year investment management veteran and host of “On The Money!” which airs on NPR station, WXEL in South Florida. He concentrates on serving high net-worth individuals and has been named one of the Top 100 Wealth Advisors 2007, by Worth magazine (October 2007 Issue), honoring America’s premier financial and wealth strategists.

The most popular type of investments that people make are in collective investment schemes. This makes a lot of sense as it reduces risk for the investor.

Collective investments are funds where the monies of a large number of investors are pooled together under professional investment management. The investment manager then acts collectively on their behalf.

The most popular collectives are unit trusts, investment trusts and Open Ended Investment Companies (OEICs). Then there are offshore funds, with-profit funds, commercial property funds, corporate bond funds, exchange traded funds (ETF’s) et alia.

Of course, some people prefer to invest direct. This obviously takes a lot more time for them to do all the research – ideally beyond just reading the financial press. The problem is that, as several independent research studies show, people who invest direct tend to do worse than institutional investors for various reasons, mostly due to their own actions. These include lack of diversification, compulsive trading, buying high, selling low, going by hunches and simply by responding to media and market noise.

The latter often means that such investors end up investing on the basis of past performance. They read about good past performance for a 12 month period and then invest, when there is no certainty that this will lead to better returns the following year.

Financial markets are cyclical and the key to successful investment (as opposed to day trading) is not timing but patience. A buy and hold strategy may not be as sexy and exciting but it seems to work most of the time. On the other hand, becoming addicted to trading does not help in most cases.

A lot of the above behavioural traits that end up causing investor problems stem from over-confidence. In reality, what is required for most individual investors is to get their egos and emotions out of the investment process. One answer is to distance themselves from the daily noise by talking to an independent financial adviser, to help stop them doing things against their own long-term interests. It is quite likely that the financial adviser will recommend collective investments.

The major benefit of collective investments is that they can reduce the risk of investing, by spreading the risk of their investment. The fund manager is able to purchase a far greater number of investments than the individual investor possibly could. Because of this, the possible impact on the collective investment fund caused by one particular investment performing badly is low, as it forms only one small part of a much larger investment portfolio.

Collective funds also provide a higher degree of diversification. For example, if you were looking to invest in UK smaller companies, it would be impractical (in terms of costs and research time) to invest in more than a couple of companies. A fund manager, however, can buy shares in many companies and spread the investment further. The fund managers will also have the in-depth knowledge plus a team of researchers behind them to monitor the sector for new opportunities as well as potential problems.

A further benefit is that fund managers have access to markets and instruments where individual investors don’t have the knowledge, capital or perhaps even the legal right to invest. This includes hedge funds, emerging markets, private equity situations and complex derivatives.

With thousands of collective funds to choose from, the question is how to pick the best funds for you? It is not an easy process, even for professionals. But getting quality financial advice from an independent financial adviser should certainly help you with your overall investment planning process.

Chris Flood, MA (Oxon), MBA, is a marketing and management consultant based in Bristol UK. He writes articles on investments and financial planning as well as other subjects. To discover more about income investing, please go to http://www.kelland-hale.com/collective-investments.asp

Further information about Kellands Hale and its services can be found at http://www.kelland-hale.com/

The primary measure of farmland investment performance in the United States is the National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Returns Index. The index provides investors with a measure of the investment performance of a large pool of individual agricultural properties acquired in the private market for investment purposes. According to the index, US farmland returned 8.6% in 2010, and 5.85% to quarter 3 in 2011.

Regional U.S. farmland growth figures vary from state to state. A new report by the Federal Reserve Bank of Kansas City showed a 12.6% increase in mountain states farmland values over 2011.

The Minneapolis Federal Reserve Bank District reported farmland values as of second quarter 2011 up 17% from the same period a year ago, while the Kansas City District reports farmland prices up 20%.

Nebraska has seen one of the largest increases, with non-irrigated land up 30%. Oklahoma ranchland, suffering from a prolonged drought, saw values up just 6.4%, with what increase there was driven by oil and gas exploration.

There has been some concern amongst the agricultural community in the United States that land values have spiralled out of control, with demand for assets fuelled almost entirely by Investors seeking to diversify out of the stock market and into tangible assets. Don McCabe, an accredited farm manager with Soy Capital Ag Services said recently at an investment forum that, about 60% of all farmland is being purchased by active operators, with 15% purchased by nonlocal investors, 13% by local area investors, 7% by institutions and investment groups and 5% by other entities.

In Canada, Farm Credit Canada (FCC) monitors the value of a basket of 245 benchmark farm properties every six months. On average, Canadian farmland increased 7.4% in the first six months of 2011, and 9.5% for the year ending June 2011. Saskatchewan farmland led the nation in farmland price increases, up 11.6% in the six months ending in June, and up 14.3% year on year.

New York-based TIAA-CREF, the largest U.S. pension manager for teachers and academic researchers with $469 billion of assets said in October 2011 that farmland investments may return 8% to 12% per year as global food demand increases. The company has $2.5 billion in farmland investment assets and owns about 600,000 hectares.

Investors considering farmland investment should consult with an experienced Advisor in order to plan the most relevant and effective farmland investment strategy, identify suitable opportunities and identify and mitigate risk.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

The investment performance of the agriculture sector can be monitored via a number of devices and measures that track the performance of traditional investment assets such as quoted equities, as well as a range of measures that reflect price movements in alternative investment assets within the agriculture space such as farmland.

In reality, the agriculture sector as a whole relies on a combination of demand for its products, weighed against agricultural productivity. When demand for food, livestock feed and biofuels is high then soft-commodity prices rise, as is also the case when poor productivity creates the same widening of the gap between supply and demand. On the other hand, if demand falls back, or bumper harvests create an oversupply of produce, prices fall.

If one is able to gain an understanding of current productivity and demand dynamics, then one is best able to predict the true performance of the sector as a whole.

The performance of agricultural equities alone – as measured by agricultural indices – does not truly reflect the state of fundamentals that support the sector. In many cases, individual issues that affect specific companies can either boost or lessen demand for the stock resulting in movement in the stock price regardless of the performance of the sector as a whole.

Indeed, many consider that the most efficient method of capturing financial gains resultant of the boom in demand for commodities from a population that is growing exponentially is to acquire farmland as an investment. The value of farmland is driven at the most fundamental level by the net revenue earning capability of the individual asset in question. As an example; a one hectare lot capable of generating a net annual income after costs of £1,000, will be worth more to a Farmer than a similar plot capable of earning only £500.

Farmland values are recorded by different indices in different regions. In the U.S. the National Council of Real Estate Investment Fiduciaries (NCREIF) records the quarterly investment performance of farmland. In the UK the Land Registry offers the most accurate picture, although anecdotal evidence from estate agents such as Knight Frank offer some insight, although on a very broad, national basis.

Agricultural equity indices include Standard and Poors GSCI Agriculture Index; S-Network ITG Agriculture Index; Dow Jones-UBS Commodity Index and Société Générale Index Global Agriculture, all of which provide a different viewpoint as they measure a different set of equities or commodities and use different weightings.

Overall, agriculture investments can best be assessed individually, and conclusions drawn as to the potential for each project as a standalone entity, be it an equity investments or acquisition of tangible assets. Investing in any business should not be simply because it operates in a particular sector, farmland should not just be bought simply for its agricultural status, and alternative investments are not going to be profitable just because they are alternative.

DGC Asset Management are an alternative investment consultancy providing Investors with research, due diligence and select opportunities to participate in the acquisition and development of productive, income producing agricultural property and renewable energy assets.

Most of you have likely never heard of Claude Rosenberg but he certainly left his philosophical imprint on the investing world. Rosenberg founded money management firm Rosenberg Capital Management, grew assets under management to $40 billion, and made a fortune. Now, Mr. Rosenberg made a lot of money because he was a very disciplined investor and closely adhered to his investing philosophy through thick and thin.

So with that introduction, let me give you Mr. Rosenberg’s eight commandments on how to successfully invest.

#1 Do not be concerned with where a stock has already been – instead, be concerned with where it is going. The important thing is what lies ahead, not what has already transpired…

Focus on a company’s future – its earning, growth potential. Then make a well-researched judgment on whether you’re paying the right price today for its future earnings stream. If a stock is pricier than its future growth potential, do not buy it.

#2 Do not concern yourself as much with the market in general as with the outlook for your individual stocks—and this is key for today’s market.

Most investors base their buying and selling on overall market sentiment. Mr. Rosenberg believes this is a fallacy. He believed in buying good value as it appears and do not let the general market sentiment alter your decision.

#3 Remember… the public is generally wrong. He said: The masses are not well informed about investments and the stock market. They have not disciplined themselves correctly to make the right choices in the right industries at the right prices. They are moved mainly by their emotions, and history has proved them to be wrong consistently.

#4 Do not make hasty, emotional decisions about buying and selling stocks.

In fact, if you’ve heard my commentaries on this show, you’ll know that I keep insisting that you have peace of mind through all sorts of market gyrations, and always sleep well at night. It is very easy to get caught in the trap of emotions amidst media noise and peer pressure… build your discipline so you are emotionally detached from the market, and stay focused and attached to your long-term investment strategy, and you will do well.

#5 Stocks always look worst at the bottom of a bear market when everything is the most gloomy and always look best at the top of a bull market (when everybody is optimistic).

Again, as many of my listeners know, I recently said Bad Markets Make Good Friends, and this is exactly Mr. Rosenberg’s point – the best time to buy is when markets are beaten up and no one else is buying. In the man’s own words: Have strength and buy when things do look bleak and sell when they look too good to be true.

#6 Remember too, that you’ll seldom-if ever-buy stocks right at the bottom or sell them right at the top.
Not words you want to hear, for sure, but there is a lot of experience, truth and wisdom in them. As I’ve said in the past, never try and overly finesse the market’s every turn. Buy when stocks generally appear underpriced without looking for new bottoms, and sell when stocks reach or exceed your expectation of fair value.

#7 Beware of following stock market “fads.” (biotech, internet, emerging markets)

As he says…”the stock market occasionally develops fads for certain industries. In almost all cases a sudden rush to buy the fad stocks pushes them to price levels which are totally unwarranted. When you buy at the height of popularity you almost always pay prices which have little relationship to value…” Most recently, Real Estate fit this description. Is it Gold the new fad of the day?

#8 Concentrate on quality.

Three simple words with a lot of depth. You’ve heard me say this too, many times; so this time, let’s hear it from the master himself:

“While big profits are often made through buying and selling poor quality common stocks, your success in the stock market is far, far more assured if you emphasize quality in your stock selections. Too many investors shy away from the top-notch companies in search of rags-to-riches performers. These low-grade issues are certainly no foundation for a good portfolio; instead, the fine, well-managed companies should form the backbone…. fabulous fortunes have been made over the years in such high quality, non-speculative stocks as Carnation, Procter and Gamble, and others. ”

In fact, as many of you know, I have a similar philosophy and, notwithstanding the risk of getting repetitive and boring – I will keep telling you to stay on the road through highs and lows, to ignore the noise, to not abandon stocks when they are down, and so on. I wanted to share Mr. Rosenberg’s investing guidelines with you today, partly as a reminder on sound investing principals in confusing times such as these, and partly as a validation of everything we have been discussing over the years on my show and now my blog.

Visit http://onthemoneyradio.org for weekly commentary and money advice that covers the entire financial spectrum which also airs on my weekly radio show, “On The Money!”

Steven L. Pomeranz, CFP is a 29 year investment management veteran and host of “On The Money!” which airs on NPR station, WXEL in South Florida. He concentrates on serving high net-worth individuals and has been named one of the Top 100 Wealth Advisors 2007, by Worth magazine (October 2007 Issue), honoring America’s premier financial and wealth strategists.

If you are like most people, your initial reaction to the question posed by the title to this white paper is “no.” However, for many investors, the answer is “yes.” With all of the investment options available today, many investors are intimidated, confused and frustrated by the investment process. Recent studies also support the suggestion that many investors are perfect targets for investment fraud or already are victims of investment fraud. For instance,

A recent study by Schwab Institutional found that 75% of investor portfolios were unsuitable for investors given their financial situation and goals;

A recent study by CEG Worldwide concluded that over 94% of those holding themselves out as wealth managers were more product salesman than wealth manager;

The 2010 IPT Elder Investor Fraud Survey reported that investment fraud is the number crime against the elderly, affecting an estimated 7.3 million older Americans, or one out of every five senior citizens. Since that number only counts the instances of fraud actually reported, the number of victims is undoubtedly higher.

One of the problems with avoiding investment fraud is the difficulty in detecting some types of fraud due to the subtleness or complexity of the fraud itself. Another problem with detecting fraud is the personal biases and beliefs that each investor has regarding investing. The purpose of this article is to alert investors to some of the more common elements of investment fraud so that investors can prevent unnecessary investment risk and financial loss due to investment fraud.

Fraud and Cognitive Biases

The common response to investment fraud is to call for greater investor education programs. However, a recent law review article in The Elder Law Journal suggests that investor education programs may be largely ineffective due to cognitive issues such as cognitive biases and/or cognitive deficits of investors. Cognitive biases are personal beliefs that impact our decisions. Cognitive deficits are impairments in mental ability, including impairments due to aging.

In the article, “Deception, Decisions and Investor Education,” the author, suggests a model of fraud victimization, which she refers to as the “deception/decision cycle.”1 As investors are provided with investment information, they filter the information through their personal beliefs, beliefs based upon a combination of actual experience, education and first impressions. An Investor’s beliefs, or biases, may or may not be accurate, but they can become so ingrained, or “anchored,” within a person that the person resists any conflicting information.

These biases may be strengthened even further by what are known as “truth” and “authority” biases, a person’s tendency to accept a statement as true, especially when the statement comes from someone with actual or perceived authority or expertise. The individual investor, whether because of issues such as cognitive biases/deficits, the complexity of the investment information of the sheer volume of such information, may fail to recognize the deception involved in the fraud.

Asset Allocation and Cognitive Biases

A perfect example of how cognitive biases can negatively impact investment decisions is a common misperception involving asset allocation. When you mention asset allocation or diversification to most investors, they think in terms of quantity rather than quality. Consequently, a large percentage of investors have portfolios that are diversified in terms of types and numbers of holdings within the portfolio, but the portfolios are not “effectively” diversified due to the high correlation of returns, or overlap, between the investments.

Portfolios that are not “effectively” diversified are sometimes referred to as being “pseudo” diversified since they appear to be diversified, but they do not actually provide an investor with the benefits of a truly diversified portfolio. The high correlation between the investments results in an investor having less downside protection than they would have with a truly diversified portfolio.

As an example, most people would consider a portfolio consisting of a large cap fund (IWB – iShares Russell 100 Index), a small cap fund (IWM – i Shares Russell 2000 Index), an international equity fund (EFA – iShares MSCI EAFE Index) and a bond fund (AGG – iShares Barclay Aggregate Bond Index), to be diversified since it consists of four different types of funds. A review of a correlation of returns matrix for a portfolio of the four exchange traded funds (ETFs) representing the four categories over the time period 8/31/2003 to 8/31/2011 tells a different story.

IWB/IWM – 0.93 IWB/EFA – 0.91 IWB/AGG – 0.05

IWM/EFA – 0.81 IWM/EFA – (0.03) EFA/AGG – 0.11

Analyzing rolling periods of returns often provides a better picture of trends and the persistence of trends. An analysis of rolling five year periods of returns for the referenced ETFs provides the following information:

2010-06

IWB/IWM – 0.966 IWB/EFA – 0.970 IWB/AGG – (0.308)

IWM/EFA – 0.896 IWM/AGG – (0.325) EFA/AGG – (0.432)

2009-05

IWB/IWM – 0.985 IWB/EFA – 0.991 IWB/AGG – (0.282)

IWM/EFA – 0.977 IWM/AGG – (0.338) EFA/AGG – (0.340)

2008-04

IWB/IWM – 0.967 IWB/EFA – 0.999 IWB/AGG – (0.445)

IWM/EFA – 0.973 IWM/AGG – (0.518) EFA/AGG – (0.4650

The higher the matrix number, the higher the correlation of returns and performance. A negative matrix number indicates a negative correlation of returns, which means that the two investments behave differently during various market conditions.

The matrix clearly shows a high correlation of returns between the large cap and the small cap ETF, and a high, albeit varying, correlation of returns between the international ETF and the large and small cap ETFs. The matrix clearly shows a low correlation of returns between the bond ETF and the other three ETFs. An argument can be made that a portfolio consisting only of the large cap ETF (IWB) and the bond ETF (AGG) would produce similar results.

Since fees and expenses are relatively low for most ETFs, cost is not that much an issue with a portfolio of ETFs. Since many financial advisers do not use index funds or ETFs in making recommendations, the negative impact of “pseudo” diversification can be seen in a portfolio of load-based mutual funds, again representing the four asset categories used in the ETF portfolio. The mutual funds represented are American Funds Growth Fund of America (large cap equity), Oppenheimer Discovery (small cap equity), Fidelity Worldwide (international) and PIMCO Total Return (bond).

2010-06

Am/Opp – 0.922 Am/Fid – 0.981 Am/PIMCO – 0.705

Opp/Fid – 0.948 Opp/PIMCO – 0.688 Fid/PIMCO – 0.597

2009-05

Am/Opp – 0.922 Am/Fid – 0.981 Am/PIMCO – 0.519

Opp/Fid – 0.948 Opp/PIMCO – 0.636 Fid/PIMCO – 0.451

2008-04

Am/Opp – 0.893 Am/Fid – 0.989 Am/PIMCO – 0.052

Opp/Fid – 0.935 Opp/PIMCO – 0.482 Fid/PIMCO – 0.148

The data shows the correlation of returns over rolling five-year periods in order to show not only the correlation of returns, but also the trend in correlation of returns. Once again, we see the same high correlation of returns between the equity-based mutual funds, with a lower correlation of returns between the bond fund and the equity-based funds that we saw with the ETF portfolio. The results are consistent with studies that have shown an increase in correlation of returns between equity-based investments over the past decade, especially during periods of increased volatility in the markets.

The correlation of returns matrix exposes the false illusion of diversification created by the bias of assessing diversification on the quantity of funds or types of funds alone. This bias is sometimes difficult to remove, as diversification based on quantity and type seems to make sense. Unfortunately, that is exactly what unscrupulous financial advisers are relying on, as they try to exploit the “truth” and “authority ” biases.

Portfolio Optimization and Cognitive Biases

If you have had an asset allocation plan or portfolio optimization plan prepared by your financial adviser, look at the plan and see if there is anything in the plan that gives you the projected risk, return or correlation of return data on the actual investment portfolio the financial adviser recommended to you. Investors rarely see such an analysis using the investor’s actual investments, primarily because the commercial asset allocation/ portfolio optimization programs used by most financial advisers are not designed to produce such a “real world” analysis. And yet, the calculations can be done using Microsoft Excel.

In many cases this failure to provide a “real world” portfolio analysis results in recommendation-implementation gaps, often leaving investors with portfolios significantly different from the asset allocation/portfolio optimization plan provided to them by their financial adviser, especially with regard to exposure to unnecessary investment risk.

The calculations required to calculate the projected risk, return and correlation of returns statistics for an investor’s actual investment portfolio are complex. Consequently, most investors are unable to calculate the actual portfolio’s statistics themselves or to otherwise detect an investment adviser’s fraudulent behavior.

Too often an investor falls prey to the “trust” bias or the “authority” bias and just accepts the plan given to them without questioning the accuracy of the plan or the failure to provide a “real world” analysis of the actual investment portfolio that their financial adviser recommended. But you should question your financial adviser and ignore any “trust” or “authority” biases, especially since the portfolio optimizers often produce recommendations that are counterintuitive and/or contrary to existing legal standards.

Some examples may help to prove my point. Two of the most important factors in constructing a suitable investment portfolio are the investor’s risk tolerance level and the investor’s investment time horizon. With that in mind, an experiment with two popular online asset allocation calculators provides some interesting results.

The first asset allocation calculator asked about risk tolerance, but did not even ask about investment time horizon. The regulators take the basic position that anyone with an investment time horizon less than five years should generally avoid equity-based investments since they might not have enough time to recover any losses suffered in the market. With the first calculator, we ran the same set of personal investment parameters, with the only exception being that we varied the risk tolerance level in each scenario. The results are shown in Appendix A.

Two clear issues emerge regarding investor protection. First, regardless of the investor’s risk tolerance level, the calculator recommends a portfolio consisting of approximately 60% equities and 40% bonds/cash. Second, the calculator completely ignores the “low” risk tolerance entry, exposing the risk averse investor to an undesired level of investment risk due to recommended equity allocations.

With the second asset allocation calculator, information was requested on both the investor’s risk tolerance level and the investor’s investment time horizon. Once again, the same set of personal investment parameters are used in each analysis, changing only the risk tolerance level and/or the investment time horizon. The results are shown in Appendix B.

If you accept the regulators’ position regarding a minimum five-year investment time horizon for equity investments, then the second calculator’s equity allocation for the 3-5 year time horizon is questionable, as it recommends a 30% allocation to equities for the low risk investor and a 45% allocation to equities for a moderate risk investor.

Expanding the time horizon out to 5-10 years, the low risk investor get the same portfolio recommendations that the 3-5 year time horizon/moderate risk investor got, which obviously raises questions. Strangely, the moderate risk investor with the 5-10 year time horizon receives a recommendation that increases the bond allocation to 65% and lowers the equity allocation to only 45%.

Increasing the investment time horizon to 10-20 years produces basically the same recommendation for both the low risk and moderate risk investor, with the recommended equity allocation only varying by 5 percentage points. The calculator appears to overweight the investment time horizon and basically ignore the low risk investor’s preference to avoid investment risk.

The last example is just further evidence that most asset allocation/portfolio optimization software programs are highly unstable and susceptible to mistakes, so much so that they have been criticized as “estimation-error maximizers” by industry expert Richard Michaud. Investors who wish to protect their financial security would do well to replace any “truth” and/or “authority” biases with a healthy dose of skepticism and a willingness to question their financial advisers.

Investment Fees and Expenses and Cognitive Biases

Investors look to their financial advisers for advice and generally defer to any recommendations provided by their adviser. Again, this is often the results of both the “truth” and the “authority” biases. Many financial advisers limit their investment recommendations to actively managed, commission-based products, which may not be in an investor’s best interests.

The negative impact of biases grows even deeper once the impact of fees and expenses is considered. Fees and expenses on index funds and ETFs are usually low since there is little or no active management of such investments. Fees and expenses on actively managed mutual funds can vary, with some even assessing annual fees and expenses in excess of 1.0% per year. Fees and expenses are important to investors since they reduce an investor’s return.

Assume that we have two funds, Fund A and Fund B, both with relatively similar performance returns. Fund A is an index fund/ETF. Fund B is an actively managed fund that has an R-squared rating of 93, which means that approximately 93% of Fund B’s return can be attributed to the performance of a benchmark index, in this case the index represented by Fund A. However, Fund B’s annual fees and expenses are 1.0% per year, while those of Fund A are 0.25% per year.

Since most of the return of Fund B can be attributed to an index rather than the contributions of active management, why would an investor pay three times more in annual fees and expenses for Fund B? Before investing in Fund B, it is useful to see just how beneficial the active management has been and exactly what the active management is effectively costing the investor.

One commonly used method for making such assessments is known as the active expense ratio. The active expense ratio was introduced by Professor Ross Miller, a finance professor at the State University of New York at Albany. Professor Miller basically compares a fund’s R-squared rating with the excess annual fees charged by the fund to determine a fund’s “effective” annual fees and expenses.

In our example, the active expense ratio calculates to an effective annual active expense ratio fee of 3.02% for the active management of the fund, a little over 200% higher than the stated fees and expenses. For the four mutual funds in our sample portfolio, the active expense ratios were as follows.

American Funds Growth

R-Squared – 98.34

Stated Expense Ratio – 0.69%

Active Expense Ratio – 4.44%

Oppenheimer Discovery

R-Squared – 93.43

Stated Expense Ratio – 1.34%

Active Expense Ratio – 4.63%

Fidelity Worldwide

R-Squared – 97.58

Stated Expense Ratio – 0.71%

Active Expense Ratio – 3.06%

PIMCO Total Return

R-Squared – 68.43

Stated Expense Ratio – 0.56%

Active Expense Ratio – 0.53%

There are those who may argue that the active expense ratio is misleading. However, when an actively managed fund derives most of its performance from an index and an investor can obtain that same index’s performance at a much lower cost, one has to question the wisdom of reducing one’s investment returns by paying “money for nothing” and reducing one’s investment returns. Why pay three times more for essentially the same results?

And yet investors do it every day, impacted by “truth” and “authority” biases they may not even be aware of. Some investors have no choice, as their company’s retirement plan may only offer actively managed, commissioned-based investment options as a result of their plan’s fiduciary being influenced by their own “truth” and “authority” biases. Armed with the knowledge of both these biases and active expense ratios, it would not be surprising to see both plan participants and plan fiduciaries act to provide more meaningful investment options within retirement plans.

Wealth Management and Cognitive Biases

“Anchoring” is one of the strongest cognitive biases and, with regard to investing and wealth management, one of the most potentially destructive influences on wealth preservation. Anchoring can be defined as a reluctance to retreat from existing beliefs and decisions and a resistance to even consider new or opposing information.

The difficulty with addressing anchoring bias can summed up with the observation from noted economist John Maynard Keynes that “the difficulty lies not so much in developing new ideas as in escaping from the old ones” and that “worldly wisdom teaches us that it is better for reputation to fail conventionally than to succeed unconventionally.” Beliefs often become truths, regardless of whether such beliefs are valid, often resulting in unnecessary risk and financial loss.

A perfect example of the potential negative impact of anchoring can be seen in investors that adopt a buy-and-hold approach to wealth management, or, as buy-and-hold critics often refer to the strategy, the “buy, forget and regret” approach. It is interesting to note that the buy-and hold approach to wealth management is apparently derived from an ongoing misinterpretation of a famous financial study.

A 1986 study, commonly known as the Brinson-Hood-Beebower (BHB) study, concluded that approximately 94% of the variability of a portfolio’s returns was attributable to the portfolio’s asset allocation mix. The study made no representations whatsoever regarding the impact of asset allocation on a portfolio’s actual returns, only on the variability of a portfolio’s returns.

Nevertheless, financial advisers and investment companies misrepresent the study’s findings to support their buy-and-hold argument, claiming that all an investor has to do for investment success is to set up an appropriate initial asset allocation and maintain that allocation since the BHB study proved that asset allocation determines 94% of an investor’s returns. The problem is that many investors have read or heard this mantra so often that they have fallen prey to the “truth” and “authority” biases and the misrepresentations are now firmly anchored into their personal beliefs.

It is interesting to note that the buy-and-hold approach is not derived from the works of the early pioneers of wealth management, Nobel laureates Dr. Harry Markowitz, the father of Modern Portfolio Theory, and Dr. William Sharpe. In fact, Dr, Sharpe has recently stated that investors should change their asset allocation in response to changes in market values. A recent study by asset allocation expert Roger Ibbotson has rebuffed the buy-and-hold strategy, stating that active management and asset allocation have about the same impact on a portfolio’s performance.

There are many investment professionals who would argue that the buy-and-hold approach is fundamentally sound and does not constitute investment fraud. These professionals usually claim that anything other than a buy-and-hold approach, with an occasional rebalancing to restore the original asset allocation parameters, constitutes market timing, which is both costly and ineffective.

From a legal perspective, what buy-and-hold advocates fail to realize is that the buy-and-hold approach completely ignores the proven cyclical nature of the market and t the Prudent Investor Act, whose guidelines which are often used by regulatory bodies and the courts in determining questions of fraud and prudent fiduciary conduct. The Prudent Investor Act clearly states that a fiduciary should make changes in an investment portfolio when changes in the market or economy dictate such changes are necessary in order to protect the portfolio against unnecessary risk and losses.

The classic definition of market timing involves having all of one’s assets either in the market or out of the market. The potential tax implications and the difficulty in perfectly timing the stock make such a strategy practically impossible. Reallocating some of one’s resources to reduce risk exposure is not market timing, but smart, defensive investing.

Smart investors would do well to heed the advice of noted investor Ben Graham, who warned that “the essence of investment management is the management of risks, not the management of returns. Well managed portfolios start with this precept.” Various studies support Graham’s postion, with such studies documenting the fact that avoiding losses has a much greater impact than missing potential returns.

Many investors suffered unnecessary investment losses during the recent 2000-2002 and 2008 bear markets due to their cognitive biases regarding the buy-and-hold approach to investing and their refusal to objectively consider other investment approaches. Unfortunately, these same investors will likely continue to suffer unnecessary investment losses unless and until they recognize their cognitive biases and objectively examine their investment strategy. As George Santayana pointed out, those who cannot remember the past are condemned to repeat it.”

Conclusion

Investment fraud is a pervasive problem. While various statistics are often cited as evidence of the problem, the truth is that such numbers are only a small percentage of the actual cases of investment fraud, as many cases go unreported and many victims of investment fraud are unaware that they are victims due to the subtlety or complexity of the fraud itself.

An emerging theory of investment fraud is that investors are susceptible to investment fraud due to cognitive biases and/or cognitive deficits that impair their ability to properly analyze investment situations and the recommendations of their financial advisers. It is imperative that investors become aware of and overcome potentially harmful personal biases, such as “truth” bias, “authority” bias and anchoring, in order to properly analyze investment options and better protect their financial security.

© Copyright 2011, InvestSense, LLC. All rights reserved.

This article is for informational purposes only, and is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional adviser should be sought.

Notes

1. Jayne W. Barnard, “Deceptions, Decisions and Investor Education,” Elder Law Journal, Vol. 17, No. 2 (2010), 201.

APPENDIX A

Low Risk Portfolio

Investment Parameters > Age: 50 > Assets: $250,000 > Risk Tolerance: Low > Tax Bracket: 25% > Economic Outlook: Moderate > Income Needs: 4%

Recommended Allocation > Large Cap Equity – 23%, Midcap Equity – 13%, Small Cap Equity – 9%, Foreign Equity – 14%, Bonds – 23%, Municipal Bonds – 18%, Cash – 13%

Moderate Risk Portfolio

Investment Parameters > Age: 50 > Assets: $250,000 > Risk Tolerance: Moderate > Tax Bracket: 25% > Economic Outlook: Moderate > Income Needs: 4%

Recommended Allocation > Large Cap Equity – 21%, Midcap Equity – 14%, Small Cap Equity – 10%, Foreign Equity – 16%, Bonds – 26%, Municipal Bonds – 18%, Cash – 0%

High Risk Portfolio

Investment Parameters > Age: 50 > Assets: $250,000 > Risk Tolerance: High > Tax Bracket: 25% > Economic Outlook: Moderate > Income Needs: 4%

Recommended Allocation>Large Cap Equity – 20%, Midcap Equity – 16%, Small Cap Equity – 13%, Foreign Equity – 17%, Bonds – 24%, Municipal Bonds – 0%, Cash – 10%

APPENDIX B

3-5 Year Investment Time Horizon

Low Risk Tolerance: Bonds – 70%, Large Cap Equity – 15%, Small Cap Equity – 5%, Foreign Equity – 10%

Moderate Risk Tolerance: Bonds – 50%, Large Cap Equity – 25%, Small Cap Equity – 10%, Foreign Equity – 15%

High Risk Tolerance: Bonds – 60%, Large Cap Equity – 20%, Small Cap Equity – 10%, Foreign Equity – 10%

5-10 Year Investment Time Horizon

Low Risk Tolerance: Bonds – 50%, Large Cap Equity – 25%, Small Cap Equity – 10%, Foreign Equity – 15%

Moderate Risk Tolerance: Bonds – 65%, Large Cap Equity – 20%, Small Cap Equity – 5%, Foreign Equity – 10%

High Risk Tolerance: Bonds – 40%, Large Cap Equity – 30%, Small Cap Equity – ]15%, Foreign Equity – 15%

10-20 Year Investment Time Horizon

Low Risk Tolerance: Bonds – 30%, Large Cap Equity – 30%, Small Cap Equity – 20%, Foreign Equity – 20%

Moderate Risk Tolerance:Bonds – 25%, Large Cap Equity – 35%, Small Cap Equity – 20%, Foreign Equity – 20%

High Risk Tolerance: Bonds – 20%, Large Cap Equity – 40%, Small Cap Equity -20%, Foreign Equity – 20%

James W, Watkins, III is an attorney, a CFP® professional and an Accredited Wealth Management Adviser®. His areas of expertise include wealth preservation, asset protection, investment fraud and fiduciary law. He is CEO of InvestSense, LLC, a registered investment adviser firm located in Atlanta, Georgia. For additional articles and information, visit the company’s website, http://www.investsense.com. Mr. Watkins can be contacted at tawj3@yahoo.com, and followed on LinkedIn and on Twitter @InvestSense.

Well… so as most of you who’ve been following the stock market already know – the bulls and bears continue to slug it out, on a daily basis. Whenever the action gets so frenetic, with no clear winner and daily jostling back and forth… the outcome is always uncertain. Think of this as a match between two very well matched competitors – Arnold Palmer and Jack Nicklaus, Red Sox vs. the Yankees… And as for us fans- this can be exciting, emotional and excruciating. We can wildly cheer our favorite team -but we also know that winning and losing-when it comes to money-has an added dimension, directly affecting our future in real terms.

Additionally, in this case, I’d rather we get a winner quickly so we can get this over and done with and adjust our portfolios to the new reality. And because you and I are so deeply vested in the outcome of this match, it’s very important that we not sit idly by on the sidelines, watching this play out. So let’s take a close look at both teams-the bulls and the bears-and see how the stats stack up.

Let’s start with the bears.

• A woeful job market – 428,000 Americans filed for first-time unemployment benefits last week – the highest level since last July. And this is on top of the 3.7 million that already collect unemployment checks. And then there’s the announcement that Bank of America said it plans to slash 30,000 jobs. A cut large enough, some say, that it may have an effect on economic optimism among consumers, and impact GDP in a big way.

• Next… over 22.5% of U.S. homes are currently underwater, meaning they are valued at less than what they were bought for. Falling prices may have a negative effect eliciting more caution, more fear and tighter spending. This could have a negative ripple effect on corporate profits and stock prices. Moreover, adding to the gloom, economists at banks like JPMorgan Chase are predicting another 5% drop in housing prices over the next few months – so that can’t be good either.

• In addition, many more Americans are falling behind on their mortgage payments. Mortgage defaults rose 33% in August over July – which will result in foreclosures and more homes on the market, which will cause downward pressure on home prices.

• The rest of the world is not faring so well either. Europe is struggling dramatically with its various sovereign credit crises. The recent downgrade of Italy and a fear of a Greek default have already affected European stocks and American stocks alike.

• Russia – a major oil exporter – sees its economy stalling because they “fear” oil may drop to $60 a barrel, almost half of current levels. Now, on this one, Russia’s drop could well be our gain – I for one am all for paying half per gallon of gas as I am sure you are too – and herein lies some good news – and a perfect segue into

The Bulls’ Point of view.

• A poor economy worldwide will naturally decrease demand for raw materials which would reduce the cost to make and deliver goods and services. This in turn may lead to a gradual restoration of the economy into a state of long-term balance.

• The trade gap, between what we import and what we export, shrank in July quite sizably – down 13.1% to be precise, from the June number, the biggest monthly drop in recent years. This was due to a surge in U.S. exports to South America and a drop in imports because of a drop in the price of oil.

• Federal Reserve Bank chairman Ben Bernanke said he’s committed to stimulating the economy. A small stimulus package could mean lower interest rates, which could boost corporate profits and drive stocks higher.

Now, back to the match… I have laid it out as I see it and frankly – we are not in pretty economic times. From my vantage point, I do not see the bulls winning this outright but I do expect some positive surprises – such as a sharp rise in the markets if the European Central Bank comes out with a solid bailout plan for debt-ridden nations, or if Federal Reserve holds interest rates flat and promises more stimulus.

At times like this, I always continue to recommend a sound asset allocation strategy – which is always a good defense against wild swings in the market. In addition, bad markets always present opportunities. As the tide goes out, many treasures are exposed. We will be there to pick them up.

And last but not the least, should the bears prevail… rejoice, because as I said in my previous commentaries, a bad market could well be your best friend over the long run.

Visit http://onthemoneyradio.org for weekly commentary and money advice that covers the entire financial spectrum which also airs on my weekly radio show, “On The Money!”

Steven L. Pomeranz, CFP is a 29 year investment management veteran and host of “On The Money!” which airs on NPR station, WXEL in South Florida. He concentrates on serving high net-worth individuals and has been named one of the Top 100 Wealth Advisors 2007, by Worth magazine (October 2007 Issue), honoring America’s premier financial and wealth strategists.