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Archive for March, 2012


Measuring our economy is not easy.

Many different statistics are available to measure the health of our economy. 
Stock indexes are often used to measure the health of the economy.  How do you decide which index to watch?  The Dow Jones Industrial index is frequently quoted in the media.  Many of the indexes are based on the price of the underlining securities.  Most of the indexes do not factor in dividends.  The results would be different if the dividends were reinvested and included in the calculation for subsequent periods.  The comparison to prior periods does not factor in inflation.

Since the introduction of the indexed mutual funds in 1976, the number of individuals investing in stocks has increased.  Could that impact the ability to compare the value of indexes to periods prior to 1976?

Indexes factor in the value of each company.  The weighting within the index varies among indexes.  Most give more weight to the larger companies.  Some indexes include an equal weighting of the underlying securities.  Other indexes give different weight to other factors.
GDP (gross domestic product) is another factor that people look at to see how the economy is doing.  GDP is the value of all the goods and services produced in the economy.
GDI (gross domestic income) is to total of all income received in the economy, Income includes: wages, interest, profits, etc. 

Some of the other factors considered to measure the health of the economy included: employment, residential housing, gas prices, etc.

Adding to the confusion is how the statistics are determined and the time it takes to release them.  Then there are also seasonal and other adjustments as more of the information becomes available. 

The more reports one reads, the more apparent it is that the best and brightest looking at the economy do not agree on where it is and where it is going.  Most investors should treat this information as static and not as information to react to.  Investing is a long-term process. 
Each investor must determine for themselves what they need to do to achieve their personal financial goals.  They must identify when the funds are needed, how comfortable they are with fluctuation in values, if they can tolerate a loss of value, and many other factors.  An approach should be developed that reflects the various factors.  The monitoring and adjusting for changing goals, etc. should be performed consistently over the long-term.      

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Annuity Case Chills Insurance Agents

The article in today’s The Wall Street Journal , “Annuity Case Chills Insurance Agents” raises many questions.  My comments are based solely on the article.  An insurance agent was convicted of a felony-conviction “for selling a complex annuity to an 83 year-old` woman who prosecutors alleged had shown signs of dementia.”  The criminal case, brought under a state  law specifically protecting elderly people.”
“The case underlines authorities continuing discomfort with ‘indexed annuities.”
“Indexed annuities are attractive to agents because of the high commissions they receive from insurers, which can be 12% or more.”
“In the mid-2000s, private plaintiffs and state attorneys general sued numerous insurers for alleged unsuitable sales of products to elderly people who lost money because of the  withdrawal penalties.  To resolve the suits, insurers agreed to better screen buyers for financial suitability, among other changes.”   
Congress is currently is considering what standard should apply to individuals that provide financial saervices relating to to securities.  Currently registered investment advisors are held to a fiduciary standard.  That is, they must do what is best for their clients.  Others, brokers, are held to a lower standard, suitability standard.  There currently is disagreement whether indexed annuities are a security or an insurance product.  If they are insurance products, the provider of the annuity will generally be held to the standard of the applicable state.  For those who believe in regulations, why should there be more than one standard.  If indexed annuities are an insurance product, they are subject to 50 different standards.  Other questions apply to people who move to other states, or who live in one state and purchase the indexed annuity in another state from an agent in yet another state.  How will the consumer know what standard applies?  If they are securities, who will the consumer know what standard applies?
If a separate standard applies to the elderly, how should “elderly” be defined?  Are there others that should have a separate standard.  There seems to be unanimous agreemnt that these products are complex.  Should the level of education be a factor? 
This is only a few of the questions that this case raises.   If you are considering an indexed annuity, be sure to prepare yourself to make the decision.  A professional with the applicable experience, education and integrity is a good way to start.

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A “balanced” view of the economy.

In my view, David Wessel’s column in the March 15th edition of the The Wall Street Journal provides a realistic and balanced view of the economy.  The second paragraph starts: “Watching incoming economic data these days is like flying an airplane with two airspeed indicators.  One says you’re picking up speed : the other says you’re not.” 
The last paragraph states: “The U.S. economy feels better than it did a few months ago.  Signs of strength are proliferating.  That’s undeniable, and encouraging.  but there are too many warning lights blinking in the cockpit…”
Looking back to the fluctuation in the stock market in 2000 and 2007-2008, few “knowledgeable” people saw the drop coming.
Among the lesson learned is that an investment portfolio should consider you financial goals, the timing of the needs and many other factors unique to your situation.  In addition to assessing the holdings in the portfolio you must assess the changes in the other factors.  Portfolios should be constructed for the long term.  Portfolios should be monitored and evaluated periodically.  The make-up of the portfolio, allocation, should be based on the above factors.  It should also recognize that know one knows the future.  The allocation should not be kept the same.  It needs to be adjusted to reflect the changes in all the factors that can be identified.  This includes recognizing that you will never be able to identify every factor or every consequence of the factors you can identify.  
For most people, the monitoring and changes should be reviewed annually.  That is, in addition to life events and other significant and material changes. 

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Can you summarize your investment belief in 10 words or less?

Jason Zweig asked this question in his January 27, 2012 column in “The Wall Street Journal”.
He asked some leading investors and financial thinkers for their own contributions.  It appears that they believe in the KISS principle.
Following are some of the responses: 
Anything is possible, and the unexpected is inevitable. 
Determine value.  Then buy low, sell high.  ;-)
If everybody wants it, I don’t.  Avoid crowds.
Other people are smarter than you think they are.  Index.
Risk means more things can happen than will happen.
Invest for the long term and ignore interim aggravation.
100% of business value depends on the future.
Plan for the worst.  Hope for the best.
Control what you can: your savings rate, costs, and taxes.
The less portfolio management costs, the more you earn.
Do the math.  Expect catastrophes.  Whatever happens, stay the course.
Fallible, emotional people determine price; cold, hard cash determines value.
Save.  Invest long-term.  Compounding returns builds.  Compounding costs destroys.  Courage!
Spend less.  Diversify globally.  Own whatever’s feared, shun whatever’s beloved.

The themes in the above quotes are very consistent.
To find out who said what, read the article.  READ MORE

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