Unemployment News

The U.S. Labor Department reported today that the unemployment rate has increased to 10.2% -- this is a 26-year high. To understand the significance of our current labor market the above chart illustrates the unemployment rate since 1948.

The chart shows that today's move above the 10% threshold is only the second time since World War II that the rate has exceeded 10%. It is also worth noting that the unemployment rate historically tends to peak shortly after a recession ends. However, following the previous two recessions, the unemployment rate continued rising for many months following the beginning of an economic "expansion."

Investment Odd Couple

Through the third quarter, an odd couple has emerged as big winners in the investment world. The Dow Jones Industrial Average, representing the broad U.S. stock market, is up 14 %, while gold futures are up 19%.

Usually, a rise in the stock market reflects a confidence in an economic recovery, while an increase in gold prices indicates investors fear an unstable economy. Therefore, these two investment markets usually move in opposite directions. However, low interest rates and government stimulus have poured cheap money into financial markets, helping stocks. Yet the creation of all that money, together with the Federal Reserve's maintenance of near-zero interest rates and the prospect of heavy government borrowing to fund deficits, threatens to weaken the dollar and fuel inflation and economic volatility. This, in turn, creates a growing interest in gold.

While many institutional investors have been placing large bets on gold, gold futures can be volatile and probably shouldn't compose more than 5 percent of an individual investor's portfolio. While it's true gold futures have soared from $250 in 1999 to $1,055 for a troy ounce, gold would still have to double to $2,291 to reach its 1980 high adjusting for inflation. This illustrates why gold has not been a solid long-term investment. If you are interested in gold, be sure to buy gold futures on a legitimate exchange, not those pretty gold coins you see on TV late at night.

Of course, these type of investment decisions and building a well-rounded portfolio can be complex, working with a financial advisor can help. It's best to speak with an independent fee-only financial planner to make sure your investment portfolio represents your risk tolerance, investment goals, and time horizon before taking any action.

Joseph Pisani of CNBC News reports that the cost to attend a four-year nonprofit private college increased 4.3% for the 2009-2010 academic year, bringing the average annual price to $35,636. Meanwhile, during the last 12 months, the Consumer Price Index (a measure of inflation) actually fell 1.3%.


Shockingly, the cost to attend a public college grew at an even greater rate. Public in-state college costs climbed 5.9%, with the average cost reaching $15,213. Out-of-state students watched their costs rise 6% to $26,741, according to the College Board, a non-profit association of schools, colleges and universities. (All costs include tuition, fees and room and board.)

Interestingly, poor investment performance may be one reason college costs continue to measurably outpace the rate of inflation. Many schools are suffering significant losses in their endowments as a result of the current financial crisis. Some of the largest endowments in the country including places like Harvard, Princeton and even the University of Michigan have experienced declines of over 20 percent during the fiscal year that ended June 30, 2009.

However, Benjamin Franklin's words still hold true: "an investment in education pays the best interest." As a matter of fact, over a lifetime a high school graduate earns an average of $1.2 million, while a college graduate earns $2.1 million (in current dollars). Therefore, it's more important than ever to adequately plan for college tuition expenses. Work with an independent fee-only financial advisor to ensure you are taking the right steps to ensure your investments are ready when your student is.

Financial Planning Tips

Good advice never goes out of style.

Things to do:

• Have a financial plan showing where you want to be and how you will get there.
• Develop an investment policy statement describing how you will make investment decisions to help prevent you from making emotionally-charged investment decisions.
• Whenever possible, invest often. Consider a systematic investment plan. This forces dollar-cost averaging.
• Work with a financial professional who is compensated to provide objective advice, not an advisor who's paid to sell products.
• Identify your risk tolerance before the next market drop, and have an asset allocation targeting that risk tolerance.
• Be truly diversified including large, mid, small, international, growth, and value stocks in you portfolio. Invest in corporate bonds, government bonds and international bonds.
• Make your asset allocation more conservative as you approach retirement.
• Rebalance your portfolio at least annually.
• Meet with your financial advisor at least every six months.
• Review and update your financial plan and estate documents at least annually.
• Have some liquidity in your portfolio. Having cash available will reduce your need to sell securities when their values are depleted.
• Take full advantage of the employer match on your 401k. Remember the match is part of your compensation.
  
• Understand the risk/return history and expectations for all your investments.
• Monitor how and how much your investment advisor is compensated.
• WORK WITH A FIDUCIARY - since they are obligated to act in your best interest.

Things not to do:

• Let emotion get the best of you.
• Necessarily trust your financial advisor. Make him or her earn that trust.
• Trust "financial advisors" that encourage you to leverage your home, or push annuity products without mentioning the costs of such products.
• Be enticed by new, short-term investment strategies.
• Work with a financial planner who isn't financially motivated to constantly serve you.
• Neglect estate planning.
• Invest in things you don't understand such as gold, commodities, and options.
• Pay high investment fees or commissions.
• Seek advice from "financial professionals" who work with a limited range of products, such as insurance or annuity salesmen.
• Seek advice from friends and family who are not financial professionals.
• Invest for the long-term without an established emergency fund (3-6 months of expenses).
• Use short-term investments for long-term goals, or vice versa.

Consumer Financial Landscape

In these tough economic times, consumers should be particularly watchful regarding their credit card spending. Many have seen their rates jump up to 25% or more, and their credit lines cut. The credit card firms are defending this practice since they have been hurt in the credit crunch over the last year. Help for consumers may be on the horizon though.

A bill to address these practices in the credit card business was on track for approval by the U.S. Senate with President Obama expected to sign it into law before the end of the month. Enactment of the legislation would mark the crest of a backlash rising for years against the card industry amid sudden interest rate increases, hidden fees and aggressive marketing programs that have angered consumers.

If enacted, it would be the first major financial regulation reform completed by Obama. The bill would limit, but not prohibit, card issuers' ability to raise interest rates on existing balances. It would require 45-day notice of most rate increases; limit rate increases for new accounts and prohibit certain kinds of fees.

In addition, the bill would require more disclosure of the terms of card agreements; require periodic review of a cardholders' interest rate and open the possibility of lowering it. Much of the bill would take effect 9 months after enactment. The bill does not include a cap on interest rates, nor does it bar lenders from issuing cards to college students.

These changes hopefully will lead Americans to be more aware of their spending and in particular more aware of their credit card rates and limits. If you are shopping for a new credit card, there are many great web resources. For example apply for credit card using this link.

"Sell in May, and go Away...?"

The oft-cited strategy for investors to "sell in May and go away" might be especially tempting this year. In spite of the market's spring rally, the outlook for the economy is still uncertain and stocks do traditionally lag from the Spring months on into mid-autumn. So why not sell stocks now and move into bonds? Simplistic as it sounds, the approach has actually produced reliable results with reduced risk for over 50 years! Since 1950, the Dow Jones average has an average gain of 7.3% from November through April compared to a mere 0.1% from May through October.

Of course, there is no guarantee that it will work in this year, especially coming off the roller-coaster ride that was 2008. However, for those investors who want fewer sleepless nights, and are willing to forgo some potential upside, this approach may make sense. Remember, though, to move back into stocks in October. Please contact our offices if you would like to discuss this approach and how it may make sense to your individual account.

2009 - 1st Quarter Market Review and Commentary

The stock market continued to falter in the first quarter of 2009. Slashed earnings estimates, rising unemployment, and confusing government policy all weighed heavily on stocks. The S&P 500 was down another 26% at its nadir before a late quarter rally trimmed the losses to 11.7% at quarter end. The activity was volatile and largely driven by government response to the on-going credit crisis.

The government announced the passage of a $789 billion stimulus bill and a plan to purchase $300 billion of longer-term treasury securities. Investors showed their frustration with the announcements by moving to cash and the safety of government bonds. The lone bright spot in the quarter were treasuries which showed a slight gain due to "flight to safety" and the government’s purchase announcement.

Economically, the news was as expected; which was bad. Unemployment continues to rise as firms cut payrolls and hours in response to weak consumer demand. The weak demand showed up in the GDP data for the fourth quarter which showed a sharp 6.3% decline. Despite the spate of poor economic and market news there are nascent signs of a recovery. There are very early signs that housing sales are starting to pick up materially. The broad decline in housing prices were bound to attract bargain hunters and we may not be at the level. Housing is a crucial component of an economic turn as it still represents the vast majority of an individuals net worth.

The current earnings yield of the S&P 500 is 7.7% and 10yr Treasuries are approximately 2.75%. This spread of 5 % is very large from a historical perspective and suggests equities may very well be undervalued. Historically, the spread is closer to 0%. Obviously this large spread suggests that earnings estimates are still too high and we tend to agree with that opinion. However, even with a material cut in estimates of 30% the spread is still very attractive. The time to sell may well be past and investors need to review their current holdings and strategies.

We find the most attractive segment of the market to be high quality muni-bonds, high quality corporate debt securities, and a diversified portfolio of high yield corporate debt. The muni market is currently yielding about 5% tax-free and presents a tremendous opportunity especially in light of tax increases in the Obama plan. High yield debt securities have many of the same characteristics of equities in the current environment. While there are sure to be an increase in defaults, a well diversified high yield portfolio will weather the storm as equities in general surely will. In the meantime an investor could reap 15%+ in annual income while capturing reasonable upside appreciation if the stock market rebounds. This portfolio, which we have been recommending to our individual accounts since the 2nd quarter 2008, was up slightly during the first quarter.

Selecting an Investment Advisor

It was about 15 years ago when I was a young, idealistic, new investment representative. Working for a well-known, national brokerage firm, I was eager to learn the best practices of successful advisors. I joined a networking group with the hope of gathering wisdom from the investment industry’s best. Each month we would meet to analyze client cases. I presented the case of a client who would be coming to see me that day. My client had recently sold a second home and had $125,000 he needed to invest. After presenting my case I waited to hear the advice of these veteran financial planners. The most successful of the group confidently announced that I should recommend the XYZ variable annuity. I had never sold this product before so I asked for an explanation. My mentor told me the reason to sell the variable annuity was “YTB”. All of the other representatives in the group nodded in agreement but I’d never heard of “YTB”. Thinking I was unfamiliar with a unique product feature, I asked for an explanation. The group laughed and said “YTB” meant “Yield to Broker”. The product they recommended gave the highest payout in the industry. As I listened to the other presentations, I realized that all they ever recommended to each other were the products that paid the most or offered the best “due diligence” trips. Soon after I stopped meeting with this group. My wide-eyed innocence was gone.
The lesson that I hope you take from this is to get to know your advisor and approach each recommendation with a critical eye.

401k Plans - Why Fees Matter

Just read a very interesting article about the structure of 401k fees and the "hidden" effect they can have on your ultimate investment performance. While this article is a bit academic in nature, there are many relevant takeaways that apply to nearly everyone who participates in, or sponsors a retirement plan:

• Over a 30-year career, paying an additional fee of .50% can reduce the purchasing
  power of savings at the time of retirement by one-eighth.
• Complete disclosure of fees help employers fulfill their fiduciary responsibility to ensure that the 401k plan they sponsor does not impose unreasonable costs for their employees.
• The Department of Labor is revising regulations to require sponsors to report the fees of their 401k plans more clearly to their employees.

As I have noted many times before, one of the keys to a successful 401k plan is the cost of the plan itself. These costs come in many forms, and it is important that you are able to identify as many of them as possible. At Symphony, all of the fees and costs are completely disclosed and transparent. Can your current provider make the same claim?

5 Things to Consider When Selecting an Investment Advisor

Our current market crisis has clarified the need for investors to work with trusted investment professionals. Obviously the Madoff Scandal has demonstrated how easily fortunes can be lost in illegal investment schemes. However, Ponzi Schemes are far less common than unscrupulous advisors who overcharge clients or recommend products that are inappropriate. I’ve run into many advisors over the years that cared little about their client’s best interests.

When selecting an advisor you should consider five things:

1. Experience - Select an advisor with who has been in the business for a while. The passage of time tends to eliminate many of the incompetents. As the industry undergoes its normal ebbs and flows, those financial professionals who don’t excel are separated out, either voluntarily or otherwise. When I was new I didn’t know what I didn’t know. New advisors often make mistakes with new clients. You are probably safe with anyone with at least seven years of verifiable experience as a financial advisor. Since a market cycle is typically five years, seven years is enough time for them to have experience both up and down markets.
2. Philosophy - Select an advisor with a compatible investment philosophy. Try to choose an advisor whose personal portfolio strategy mirrors your own. If you are a conservative investors who prefers low risk, don’t work with an investment manager who frequently recommends high flying stocks. Your advisors bias will always be reflected in the advice you are given.
3. Compensation – Get to know how your advisor is paid. The payment to your advisor must avoid conflict-of-interest. You don’t want an advisor who profits by putting you in or taking you out of an investment. The best situation is where advisor and client profit or lose together. Next best is an advisor, paid to provide advice, with no financial stake in the decision the client makes. Always ask how they are paid.
4. Expertise - Does the financial advisor handle the services you need? Consider whether you need individual financial planning, group planning, or portfolio management. Will you need help with securities, or simply need someone to give tax advice? Is the planner simply an insurance salesman? Find the consultant that provides the services that you need.
5. Team – Who is part of your advisors team? Is he a solo-practitioner, or does he work with other specialists that can strategize on the various issues? It’s rare you will find a single person with all of the answers, by working with a team you get the combined experience of the group.

There are many charming investment salespersons out there, ready and willing to sell their services to you. Do your homework. Approach every financial advisor with a critical eye. After you doctor, your investment advisor might be your most important relationship.

Are Your Assets Safe?

In light of several recent investment scandals, including Bernard Madoff and his $50 Billion “Ponzi” scheme, we want to assure you that we will NEVER place you or your assets in such a position. We hope the following questions and answers put your mind at ease. Additionally, you should confirm that ALL of your advisors could answer these questions in a similar manner.

Where Is My Money? As a client of Symphony Investment Group we have “limited trading authorization”. What this means is that your money stays in your name. Further, it is “custodied”, or actually held, at one of our trusted custodians (Fidelity, TD Ameritrade, Schwab). In addition, you never write a check to Symphony to deposit your funds. Instead, your check is written to the custodian.

What Is My Account Invested In? Symphony Investment Group believes in “full transparency”. You will know, up front, exactly what investments your account holds. We only invest in regulated, publicly traded securities such as common stock, ETFs and mutual funds. All of these are highly transparent and highly regulated.

What Is The Value of My Account? Since your account is actually held by a national custodian, such as Fidelity, you can simply access their website, or the link on our website, 24 hours a day, 7 days a week. Of course, you can always call our toll-free number for any account information.

Can I Get My Money Out? Investors in “hedge funds”, like those managed by Madoff, often are told they can only withdraw assets at specific times, and many have a “lockout” period of 1 year or more when first invested! As written in our contract, Symphony Investment Group will never charge you for withdrawing your money, nor hold you to any time commitment.

Be Prepared For Questions......

This past weekend I ran across a great article that all Retirement Plan sponsors should read. It is called: “Ten things DC plan sponsors need to do for '09”. Of course, all of these things should be done every year, but given the recent market fluctuations and economic uncertainty, 2009 will undoubtedly be a challenge for both Plan sponsors and participants. I would expect many more questions than usual from your employees, and they will probably focus on fees, and investment performance. So be prepared.....

No Place to Hide -- 2008

The S&P 500 has experienced its’ worst annual loss in history with a decline of 38.2% from the start of the year. Foreign markets, and especially emerging markets, fared even worse. (Note that most Hedge Funds also experienced double-digit losses in 2008). Investors have seen their retirement accounts decimated and are justifiably concerned. Even “balanced” accounts which are typically 60% equities and 40% bonds suffered their worst losses ever with declines in the range of 20% to 30%.

In a bear market for equities, normally bonds and bond-like securities tend to do quite well. Not just longer-term treasury securities, but investment grade corporate, munis, and even REITS (real estate investment trusts). The reason is that interest rates are usually being reduced to combat economic weakness and investment flows to those securities that are paying a higher rate of interest and have a greater perceived safety. Investors with a balanced portfolio then, in theory, can moderate the volatility and losses in their portfolio over any economic cycle. In 2008 this was not the case.

Looking forward the environment will most likely improve but at an uncertain pace. The vast majority of the price declines in stocks, bonds, and real estate are behind us, but a rapid rebound in many of these asset classes is doubtful. However, this does not mean there are not any outstanding opportunities in the current market. Corporate bonds, junk bonds, and municipal bonds all look very attractive at current levels. Stocks also have a wonderful longer-term outlook. The yield on stocks now exceeds the yield in government bonds. Stock earnings, however, could be a bit slow to recover dampening the short-term return on equities. While the year has been difficult and disappointing to many investors it is important to stay with a disciplined approach that recognizes the longer-term time horizons of investing. Let us all wish for a happier 2009.