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Archive for January, 2011


Do you know the value of your Money Market Fund? What you think

Some money market funds maintained a $1 price during the financial crisis by subsidizing the funds.  Some money market funds were closed.   
There are some that have speculated whether the remaining funds would increase their expenses to recapture the amounts they subsidized.  Starting in February funds will be required to disclose the actual market value of the funds holdings.  If the difference between the market value and the $1 are more than a minimal amount, some may question whether money market funds are meet their needs.
Savings account insured by the Federal Deposit Insurance Corporation (FDIC) or similar insurance for credit unions and brokerage firms may be more appropriate for short term liquidity needs.  There is a wide range of interest rates and services available among financial institutions. 
With a little more effort higher interest rates may be realized with certificates of deposits (CD).  CDs insured by organizations such as the FDIC provide the same safety as  savings accounts and generally will provide higher interest rates than savings accounts.  CD’s usually have a penalty or interest charge if they redeemed before their maturity.  By spreading the funds over different maturities and in combination with savings accounts an individual may have adequate liquidity and earn higher interest rates.
Since the amount of an early withdrawal is known (redemption value less penalty or interest charge) the value can be  calculated without regard to fluctuations in interest rates.  This makes it possible to determine if the CD fits your situation at any time.
Financial institutions change their rates on CD’s from time to time.  To get the best rate, you will need to shop around.  Recently online financial institutions have had higher interest rates.  The institution with the best rate at any point in time will not have the best rate the next time you are ready to buy a CD.

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The January 26th article in the Wall Street Journal, (Read “Why you Can’t Trust the Inflation Numbers“), raises more questions than it answers.  That is the point of the article.  Today you can find someone advancing one view and at least one person advancing a different view on the same topic.  How do you know which one is right?  How do you know if there are other views you are not aware of?  Combine that with the accuracy of forecasts and you realize how difficult it is to determine what actions to take.  Some would argue that the answer is diversification.  That is not all there is.  You have to know where you are heading (what are your goals?), you have to know when you want to achieve your goals (what is your time horizon?), how important it is to you that you achieve your goals (risk tolerance) and more.  Yes, I am advocating planning, monitoring your progress and reviewing periodically. 
There is much more that could be said, but I have committed to keeping these shorts.  I will try to cover more in the future.

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“Making Sense of Market Forecasts”

Jason Zweig’s article in the Weekend Investor January 8–9, 2011 highlights the inaccuracies of forecasts.  As many of you know this is one of my soapbox topics.  The heart of the matter is that no one can know the future or how the market will react to future events.  He notes that there have been some individuals that in a few instances did “call” future markets actions.  Subsequent “calls”have not been consistently accurate.  Since we do not know the future, we do not know how accurate their future predictions will be. 
The article notes that short-term forecasts seem to be more accurate than long-term forecasts.  He suggests that we should expect surprises.  He observes that long-term investors should not try to adjust their portfolios for short-term events or forecasts.  He suggests analyzing many forecast may give in investor a range that may be reasonable to expect. 

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Active or Passive Investing?

Brent Hunsberger of “The Oregonian” published an interview with Burton G. Malkiel December 25th.  Mr Malkiel, a Princeton University economist, wrote “A Random Walk Down Wall Street” 37 years ago.  He believes that some active funds do outperform other funds.  His concern is that you never know ahead of time which ones will outperform.  Although he believes in indexing (passive investment)  he does not think the entire portfolio has to be indexed.  A portfolio that is partially active will have much lower risk if the core portfolio is indexed.
This should sound familiar to anyone who has discussed portfolio construction with me.  By following this approach costs are also reduced.  Finding active funds with lower expenses is important in picking funds that out perform other funds in the same investment category.  Indexing and picking funds with relatively lower costs are essential in constructing a portfolio to meet the unique goals of an investor.    

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January 1, 2011

Welcome to the first day of 2011 and the rest of your life.  Learn from the past and apply it to the present and have a great future!

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