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Buy-and-Hold t’s time to revisit investment strategy. If we’ve learned one thing over the past year and a half that we can use to move forward, it’s this… “Buy-and-Hold” as traditionally espoused, does not work. The buy-and-holders will tell you that had you sold and gone into cash, you would have missed the large gains over the past few months, but let’s put this into perspective. The Dow Jones has gone from 14,000+ down to 6,629 and has bounced back to roughly 8,500. So if you were a strict buy-and-holder over the past 5 years or so, you’d still have lost a boatload of money. The most often-cited buy-and-hold investor on the planet, Warren Buffet, publishes his portfolio changes quarterly, and guess what? He sells things and takes profits when he feels things are over-valued or have too much downside risk. The mere fact that Berkshire buys a stock could insure its eventual rise—or not—but Buffett can afford to make mistakes that most of us can’t. Understand, that when the “Oracle of Omaha” speaks of buyand-hold, he’s talking about buying a severely undervalued stock and riding it out. What he’s not suggesting (I don’t think) is that we lesser mortals hang out forever in underperforming investments hoping they’ll snap back. Managed mutual funds that use those mountain charts to advertise long-term gains, buy and sell individual stocks all day long. Even index funds and ETF’s buy and sell equities to keep themselves in balance and to match up with changes in the index.
Every once in awhile I’m asked, and rightly so, why I move equities around as frequently as I do. The answer is easier to show than tell. 1) You can read more about my philosophy. I’ve included a copy of an illustrated article I wrote for last Spring’s newsletter. A few of the statistics have changed and are noted, but the premise remains the same. 2) And you can know that, with the market down over 50%, with many mutual funds, stocks, and even some bonds down more, not one of my clients has experienced those types of catastrophic losses. So my advice for the future, whether you are my client or not, is to stay nimble, flexible, and don’t fall in love with any single investment. Realize that markets do get over-valued, undervalued, and are fairly valued. Learn what areas do better coming out of a recession, going into a recession and in the middle of a recession. If there is one promise I can make, and legally there are very few, it is that this won’t be the last recession our economy sees. It won’t be the last time our markets have a hiccup and lose value. But as long as you’re prepared, or have an advisor who is, you can come out ahead when recovery happens.
Mike Bosso Financial Advisor
FBR Wealth Management 8050 SW Pfaffle St., Ste. 100 Tigard, OR 97223
Mike Bosso #8
Celebrate Independence! My favorite movie clip of all time:
Change is Afoot ue to the rapid changes in the market, it has been a labor of frustration to put together a large, quality newsletter. So I am changing to a smaller, monthly update formula. I feel that this will be better for my clients as the information won’t be out of date before it even hits your mailbox.
http://www.youtube.com/ watch?v=oRGUqd_M6Mg
Office 503-595-1662 Toll Free 877-421-9991 Fax 503-595-1666 Cell 971-212-9464 mike@teamfbr.com
What Inning are We In? hose of you that know me, know how much I love baseball! Which is why I get a chuckle every time I hear a financial journalist asking the economist du jour, “What inning of the recovery are we in?” If I had to choose an inning, I would probably put us in the bottom of the fifth. I don’t know why, but it’s as good an answer as any. Let’s take a look at the box score without the hype of the news: Unemployment: 9.1% Housing: The price drops are slowing, but still going down Closed banks: 39 in 2009; several during the month of June Stock Market: Although it seems to be moving in the right direction, it’s still down almost 40% from its highs. My point is this: It doesn’t really matter which inning we’re in. The economy’s playing hardball and it’s definitely not a pitcher’s duel. The score changes hourly. Our best pitcher might have an off day, or our worst batter might hit a grand slam. We might make it to the bottom of the 9th with a tie game and go into extra innings. In the words of baseball legend Yogi Berra “It ain’t over ’til it’s over”. So what does this mean for your investments? It means volatility is going to be here for awhile longer. It means that “buy-andhold”, still doesn’t work. And it means that we need to remain careful with our stop-limits, but not be afraid to take advantage of some of this upward momentum. Someday, in the moderately near future, we will be through this and things will returns to some normalcy. But that day isn’t here yet. We haven’t gotten to the bottom of the ninth with a five run lead. So for now, let’s just say we are in the fifth, a few runs down, with some really excellent players coming up to bat.
Where the Money Will be Made e’ve had a nice little run over the last couple of months, but where will the money be made next? Believe it or not, the “real” recovery has not yet begun since unemployment is still going up, but when it does begin, certain sectors are likely to improve first. And due to the current administration’s policies, certain other areas are getting huge government cash infusions and should profit nicely. So here’s the heads-up on where to be when things start getting better: Shipping and Transportation Trains and boats are going to be moving all over the planet getting the goods to where they need to be. Copper Just about everything made or built on this planet has copper in it somewhere. Mining companies that specialize in copper production should do incredibly well. Homebuilders It’s going to be awhile, but these companies stock prices are so depressed that the survivors should grow rapidly. Green Investing With the amount of money being dumped into these companies by our government, solar, wind, water preservation, clean-air-based companies, and the ETF’s that follow them should thrive. Inflation-Linked Investments When things get better in the economy, the Federal Reserve is going to have to figure out what to do about the cash they’ve printed, borrowed, and put into circulation. All that cash floating around is almost a sure way to cause inflation like we’ve not seen since the 1980’s. Those items will represent the low-hanging fruit as we start to come out of this, probably later this year. Until then, just take profits where you can and patiently wait for these areas to start sustaining upward momentum.
Securities offered through Pacific West Securities, Inc., Member FINRA/SIPC Advisory Services offered through Pacific West Financial Advisors, Inc., a Registered Investment Advisor Clearing services offered through Pershing, LLC, a subsidiary of the Bank of New York Mellon Please note that the mention of stocks in this publication is a not recommendation to buy or sell those stocks. Indexes are unmanaged groupings of stocks used to approximate general stock market performance. You cannot invest directly into any of these indexes. Certificates of deposit offered subject to change and availability. FDIC insured up to $250,000 through Dec. 31, 2009 and $100,000 thereafter. Minimum deposit required. Periodic interest payments may not be reinvested in the certificate of deposit. Certificates of deposit sold prior to maturity may result in an uninsured capital loss. The comments contained herein are for general educational purposes only, do not address the entire topic, and should not be considered investment advice, a solicitation, or a recommendation. All investments involve risk, including the possible loss of invested principal. Past performance is NOT a guarantee of future results. Security transactions involve trade costs. For more specific information on investment risks, you should consult the offering’s prospectus. Prior to implementing any strategy, taxpayers are urged to seek the advice of their tax advisors.
This article was written last Spring. The changes in RED represent today’s reality.
Keeping it in Perspective
50/60/70%
The markets have corrected about 20%. Many individual stocks have lost 30%, 40%, 50%, or even more in an incredibly short period of time. Had you made changes early in the correction, you could now start to think about getting back in at a much lower price, but if you didn’t, how much do you have to worry?
40%
At face value, I’m not a buy-and-holder, and recent months in the markets graphically illustrate why that is. If, however, you’ve held onto your investments throughout this downturn, I’d like to help you keep it in perspective. To realize that this has happened before, it’s not the end of the world, and how a slight change in perspective can create a sea change of future possibilities.
I’ll use an example of a typical diversified portfolio which has lost around 15% in the last 12 weeks. So if you had $200,000 12 weeks ago, you now have $170,000. That’s today. But remember this: Over the long haul--say 10 or more years, that same typical portfolio would have had an average return of over 8% even with similar large drops in value happening over that same time frame. Eight percent isn’t bad; it’s not great, but it isn’t bad either. Because of the upward bias of the markets, the law of averages takes care of you. You’ll be fine. Now when I say “upward bias,” what I mean is that over long periods of time---years, say, instead of months---the overall line on the graph is
moving up and to the right. Yes, there are downturns, from which things recover to their historic average returns. It’s just the way markets work. So if over those same 12 weeks, your portfolio lost anything less than that approximate 15%--you’re ahead of where a lot of folks are. When the recovery begins, you’ll be starting from a higher spot—you’ll have more to work with. And those examples illustrate part of the conventional wisdom behind the buy-and-hold philosophy---you’ll be fine.
The goal is to beat the indices. To make money. To win. So why am I not a buy-and-holder if all of this is true? Because the goal is to beat the average indices. To make money. To be more than just OK. To win. I’ve been accused of being a wee bit competitive, to which I say, “Thank you.” Anyone can make money when the market is going up. Take bank stocks (please!), or traded Real Estate Investment Trusts, or mutual funds that invested heavily in them. If you’d invested in any of these when they were booming then you probably made a great deal of money. Which you would have promptly lost when they went bust—if you’d held onto them. A situation similar to the example above only on a grander scale, causing you to lose significantly more than the market averages. An example to me of: not OK.
What would’ve happened if ????.
Even though investments like those may eventually recover, consider the example of the tech bubble of 2000. Eight years later the NASDAQ index which tracks most of the technology stocks, is still more than 30% down from its high point. But, if a tech investor would’ve gotten out of the way (ie: sold) after they’d already lost 10 percent or so, let the stocks “do their drop”, then gotten back in, even after a 20% increase from the lows, they would have more than doubled their (see below) money. Some will tell you that’s called market timing which they believe to be dangerous. I believe true market timing is when an investor tries to pick absolute lows at which to buy and tip-top highs at which to sell, and that can be quite risky. My belief is that if you know what to look for, the writing is almost always on the wall. Are there really people surprised by the current crisis that knew how far leveraged banks, hedge funds, and financial institutions were? Who out there, that follows markets and the economy daily, couldn’t see that housing prices couldn’t go up at that rate forever? So why not utilize that information to your advantage? Use the information to gently and wisely move in and out of different types of investments (see Correlations article). Use it to generally, as best you can, avoid a habit of buying at highs and selling at lows. It’s simply moving out of the way and waiting for a better day.
A different perspective.
All examples based on the PowerShares QQQ Exchange Traded Fund which is tied to the NASDAQ 100 Index
Prices: QQQQ’s Share (at the close) 1/3/2000 3/20/2000
3/27/2000 7/5/2000
9/30/2002 10/21/2002 4/10/2008
88.20
115.21 115.40 89.73 20.31 23.80 45.54
Hypotheticals from Morningstar. Numbers are rounded. Scenarios based on historical data, which may not, (usually doesn’t) work out exactly the same way in the future. The purpose of this graphic is to illustrate the above article.
If I buy and hold 100 shares... 1/3/2000
$8,820
3/20/2000
11,521
7/5/2000
8,973
9/30/2002
2,031
10/21/2002
2,380
4/10/2008
4,554
Approx. comm.. Pd
Net loss:
<100>
$4336
net investment amt. $8,820
ALL FOUR COMMISSION CHARGES ABOVE ARE ESTIMATES based on what I might charge for trades today in similar scenarios. Commissions shown are NOT reflected in the account values; they are assumed to have been paid separately only for the simplicity of showing overall, net amounts. You know I get paid for what I do, but I wanted to show that for what I’m trying to say — it’s not about the commissions.
If I invest $10,000 on Jan 3 2000... 3/31/2008
4708
Approx. comm. Pd.
Net loss:
<150>
$5442
net investment amt.. $10,000
If I invest $100/mo. (Dollar Cost Average) from Jan 1 2000 through 3/31/08... 3/31/2008
$11,264
net investment amt.
10,000
Approx. comm.. pd.
<400>
Net gain:
$764
the top 100 stocks traded on the NA SDAQ Stock E xchang e
If I owned 100 shares on 1/3/2000... 1/3/2000 3/27/2000
7/5/2000
$8,820 11,540 8,973
Sell sh ares, buy 5% CD, hold 24 mo., +3 mo. in money mkt., buy 400 shar es back 10/21/02
04/10/2008
Approx. comm .. pd. Net investment amt.
Net gain:
9515 18,216 <350> 17,866 8,820
$9,046