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Smart401k Blog

Archive for August, 2008

A Week in the Rearview – week ending 8/29/08

Friday, August 29th, 2008
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In the headlines

A look at some of the market movers over the past week:

Commentary

The market did start out the week on a pessimistic note, and the S&P 500 lost 2% on Monday. Surprisingly enough, though, positive economic reports came to save the day and stronger than expected durable goods orders and a healthy upward revision to GDP estimates led the market to some solid gains through the middle of the week. The continued signs of weak consumer spending were outweighed by other positive factors, including rising consumer sentiment.

The market couldn’t hold onto the gains, though, as pessimism came back into the picture on Friday led by soft personal income data, rising oil prices, and a lousy earnings report from Dell. Fannie Mae and Freddie Mac continue to show their faces in the headlines almost daily, but this past week actually brought some moderately good news for the two — which is certainly a welcome change.

Looking ahead

As we head into next week, we’ve past the main rush of earnings. There will be some notable companies such as Guess (NYSE: GES), H&R Block (NYSE: HRB), and Toll Brothers (NYSE: TOL) that will still report, but it’s likely there will be anything substantial enough for the market to really sink its teeth into. The third calendar quarter ends on September 30th, so we can expect the true earnings coverage to be pretty quiet until after that. As we get closer to the end of the quarter, though, we will start to get early quarter reports — upward and downward guidance — that could certainly help set the market’s tone in the month to come.

Getting back to the imminent future, we’ve got a full slate of economic releases headed towards us next week, though it’s likely only a select few that will raise any eyebrows. The ISM index, the ADP employment report, factory orders, the Fed’s beige book, and the unemployment rate are all releases to keep an eye out for. And of course we’re likely to see some reaction to both the weekly initial claims report as well as the crude inventories.

When it comes to what you do with your money, there’s a very important distinction between investing and speculation. Imagine there was a goose that was laying golden eggs (creative, I know!). With almost Old Faithful like predictability this goose lays a new golden egg every week. The catch is that the size of the eggs are highly variable — sometimes they’re as large as three normal sized eggs, while at other times they can be as small as a pea. However, even with the varying egg sizes, on an annual basis the goose manages to almost always lay the same total amount of gold.

In our little fantasy scenario here, the investor is the person that likes the idea of a goose that they can count on laying a certain amount of gold for them so he buys the whole goose for a reasonable price. The speculator, on the other hand, wants to try and outsmart the goose and every other speculator out there and so on a week to week basis he tries to guess when the next extra large egg is going to come out and offers ahead of time to buy the egg when he thinks there is going to be a larger-than-normal egg.

Now I’m not here to say that one way is right or wrong — in fact, maybe the speculator did find some reliable way to figure out the next egg size. However, as you might guess, the speculator is constantly at work running numbers, studying geese of all types, and wheeling and dealing with the golden goose owner. In fact, goose egg speculation is his full time job. Our investor, on the other hand, owns the goose and gets every bit of the gold. He may not have the same stories of goose egg conquests to share at cocktail parties, but he never finds himself tossing and turning in bed wondering about egg sizes, nor does he end up paying big bucks for pea sized eggs.

The bottom line? As we continue to stress, the best way to approach saving for retirement is to avoid timing the market completely and simply save and invest consistently. Owning solid equity and bond funds may not be as whimsical as having a golden goose, but historically a good, diversified portfolio has played the same golden part for investors.

A Week in the Rearview – week ending 8/22/08

Sunday, August 24th, 2008
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In the headlines

A look at some of the market movers over the past week:

Commentary

An upswing in the second half of the week couldn’t make up for a rough start and the S&P 500 fell 0.5% on the week.

There’s really not a whole lot to say about the past week, as it progressed largely as expected. Though earnings were still coming out, the market has already largely looked past them and on to next quarter and second half earnings, along with the broader economic picture. So the market moved largely on speculation about where the economic downturn is in relation to the bottom, as well as how much further financial companies will have to write-off. As has been the case in recent weeks, Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) were at blame for a lot of the negative headlines during the week.

Meanwhile, oil continued to play a big part in investor sentiment. Global political concerns, specifically regarding Russia, sent oil up, though not by much. The size of the increase of producer price index did raise eyebrows, though inflation concerns continue to be damped at least to some extent by the moderating commodity prices.

Looking ahead

Expect the unexpected next week — again. There will be a few important economic reports out next week including a report on second quarter GDP, the minutes from the most recent Federal Reserve meeting, consumer confidence, consumer sentiment, and personal income. Any one of these releases has the ability to move the markets if the actual results are out of line with expectations. Keep in mind that there will be a lot of talk about the fact that GDP in the second quarter — which is expected to have grown at a 2.7% annual pace — got a big boost from the government’s tax rebate program.

The coming week is the last big week of earnings before reports start settling down again in anticipation of the end of the third quarter. The market will likely overlook most of the earnings reports next week as it continues to focus on the bigger picture issues.

Once again, look out for speculative reports about Fannie, Freddie, Lehman, and their ilk to be the primary factors in the market next week along with continued debate about the condition of the economy. If the market repeats its pattern of the past couple of weeks, pessimism will rule the roost early in the week before the outlook softens at midweek and finishes just slightly up or down.

While there are plenty of very smart people out there — economists, stock analysts, and the like — that are analyzing the economy and the markets, trying to base an investing strategy on them is likely to prove frustrating at the least and disastrous at the worst. The reason is that most of the time for every bright, accomplished analyst who holds a certain opinion, you will be able to find a similarly bright and similarly accomplished analyst who has an equally convincing and diametrically opposed viewpoint. At the same time, the speed at which markets move and the extent to which they try to anticipate turns means that by the time great numbers of smart folks start to agree, it’s already too late to act on those opinions.

So what’s the solution? You got it — stay out of the guessing game completely and maintain a well crafted, steady investment plan that you continue to contribute to through thick and thin.

Drafting your Investment Team

Wednesday, August 20th, 2008
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It’s almost that time of year again – the time where you begin to trade your Sundays on the lake for some time in front of your TV, eagerly hoping that your favorite football team finally has a successful season.  Being a Chiefs fan for as long as I can remember, I’m not expecting good things anytime soon.  Luckily though, I am also involved in our work-sponsored fantasy football league, ensuring that my Sundays will almost certainly be unproductive for the next few months.   

For those who have not played before, the basic setup is you first draft your team and then each week you compete against one person in your league.  Scores are calculated based on the real performance of those players you select, and the person with the highest score earns a win for that week. 

In preparation for our draft last night, I realized that the process I took to decide which players I would pick was very similar to that of the investment selection process:

·       Do your research.  In fantasy football, you look at each player’s track record of success, whether they are working with the same coach, health status and their outlook for the season based on any other factors you know.  You should also research your investment options as extensively as you can, by looking at the fund type, past return history, manager tenure, performance outlook, etc.

·       The future is uncertain.  Because you do not actually know whether your picks will be good or not, you manage your risk as much as possible by making informed decisions.  Remember that past performance does not guarantee future results in either situation; you shouldn’t pick a player based completely on last year’s performance and you shouldn’t just select a fund based only on recent returns.

·       Monitoring your selections is important.  Just as you need to make sure your players are healthy and performing in fantasy football, you need to also periodically evaluate how your investments are doing.  We recommend doing this once every quarter.

·       You will inevitably make mistakes and there will be some surprises.  What seemed like a fool-proof pick early in the season may turn disastrous later (e.g. your star player gets hurt); or maybe a relatively unknown player has a career year and unexpectedly gives one owner a huge boost.  Maybe you mistakingly drafted your quarterback too soon, which left you with lower quality picks later.  The same is true with picking investments; some things could have been prevented, and others are completely beyond your control. 

 

What looked like a solid investment when you picked it may suddenly take a big downturn, or an unproven investment takes off and becomes your portfolio’s biggest star.  Perhaps you became overly aggressive when the markets were doing well, and have now experienced huge losses during the downturn.  The important thing is that you learn from previous experiences and make changes that are appropriate for your situation.

And I could go on… but remember that this is an ongoing process.  Proper investing requires some attention periodically to make sure you stay on course with your current goals and objectives. 

The last connection I want to make is one major diffence between the two.  From past experiences, and all the message boards I’ve read leading up to our draft, my conclusion is that people make more informed decisions and are more prepared for fantasy football than they are about investing.  Of course, I don’t know this for sure, but people are certainly more enthusiastic about it anyway.   There are also more accessible resources for draft-day strategies; you can print off a cheat sheet five minutes before your draft and still be pretty well-prepared to make some decent decisions (cheat sheets are prepared by fantasy football ‘experts’).  The same is not true for investment strategies. 

Even though you may know that investment selection is probably more important than something like fantasy football (or any hobby for that matter), it’s easy to understand that it’s not terribly exciting.  For those that are interested in making better investment choices, many do not know where to turn or how to even begin getting the guidance they need. 

A couple of basic sites that I suggest to get started are:

http://morningstar.com/

http://finance.yahoo.com/

These sites will allow you to research any publicly-traded funds that you have available in your retirement plan.  Look for funds with good track records, and be sure that the managers have been with the fund long enough to take credit for the past performance.  Also, pay attention to the types of funds you are looking at; you shouldn’t have too much exposure in any one single asset category.  There is no set amount of time you should spend researching your options, but the goal is to at least have a gameplan set in place before you start picking your investment options.

For those that are getting stuck at this point, or just don’t have the time necessary for this process, do not give up – the quality of your retirement may depend on it. 

If you find yourself looking at the list of funds in your work-sponsored retirement plan, and wondering how to begin building your team of investments, please consider allowing us to assist you.  We will put together a strategy that makes sense for you so your investment ‘draft’ goes as successful as possible.

 Kevin Jaegers, Senior Investment Advisor

 

 

A Week in the Rearview – week ending 8/15/08

Saturday, August 16th, 2008
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In the headlines

A look at some of the market movers over the past week:

Commentary

Amidst a slew of earnings and economic data, the market stayed basically flat this week. The 1.2% drop on Tuesday was the largest move of the week and was balanced out by moderate up days on Monday, Thursday, and Friday.

Uncertainty is still the buzzword in the market. Financial companies are having a major pull on the indexes and investor sentiment in general, as it’s yet unclear whether they have already recognized the worst of their losses. At the same time, investors still aren’t sure what to make of the broader economy. Currently it is teetering on verge of recession, but there isn’t a consensus on which direction it is headed.

Meanwhile inflation continues to climb ever higher on screaming food and energy prices. The 5.6% year-over-year increase reported this week is far above the reported “comfort zone” of the Federal Reserve. Investors, however, have been feeling more sanguine about inflation lately due to the heavy drop in oil and other commodity prices.

Looking ahead

After such a busy week this week, next week will be somewhat lighter — at least when it comes to economic and earnings reports.

We still have a couple weeks of relatively heavy earnings reports left, but the atmosphere seems to be winding down as compared to the beginning of the reporting season. Next week will bring some big names like Home Depot (NYSE: HD) and Gap (NYSE: GPS), but we can probably count on the financial companies continuing to steal most of the spotlight.

On the economic front, reports will be much lighter and what we will see next week will be of lower consequence than what we’ve been getting the past couple weeks. Because of the moderating energy prices, investors will likely overlook the producer price index unless it is far above expectations or core PPI makes a big jump. The weekly initial claims and crude inventory reports could prove to be the highlights of the week.

My expectation is that media attention and market sentiment next week will more likely be set by one-off reports from Wall Street and media analysts. These will be of similar content to the reports we’ve been getting for the past year — someone either saying that financial stocks have bottomed or they haven’t or else saying that the US is either in a recession or it’s not. Trying to keep up with the myriad opinions out there on these topics is probably not worth your time since by the time you finish reading one opinion somebody else publishes another opinion that contradicts it in whole.

The best plan for your retirement money right now is to keep it invested according to a diversified allocation, and continue adding to it on a regular basis. The best plan for your psyche is to take the market’s crazy gyrations with a grain of salt — or else stop looking altogether.

Inflation and Your Retirement Account

Thursday, August 14th, 2008
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One of the goals I have for my blog articles is to help educate you on the basics of investing and managing your portfolio. In my opinion, education is the most effective way to gain the knowledge necessary to appropriately and successfully prepare for retirement.

Recently, we have been hearing the term inflation and I thought I would explain why inflation is so significant, and how it relates to your retirement portfolio.  

Inflation, simply put, is the rise in prices of goods and services and the loss of purchasing power of your money over time.  This means that your savings in today’s dollars will not be able to purchase as much tomorrow as you are able to purchase today.  For example $20 in 2008 has the same buying power as $7.53 in 1980 and $20 in 1915 has the same purchasing power as $433.30 in today’s dollars!  History shows that inflation has averaged approximately 3-4%a year.  For example, prices rose an average of 2.4% in the 1960’s, 6.7% in the 1970’s, and 5% in the 1980’s. (www.bls.gov)

Inflation represents the minimum return you must generate with your investments to maintain the “value” of a dollar you have today for when you spend it in the future.  Let’s say inflation is 3% a year.  In order to purchase what you can today next year (disregarding non-inflation related price increases) you need to generate a minimum of 3%.  Taking it a step farther and you’ll find that inflation also affects the “real” return generated by your investments.   If you have a mutual fund that generated 8% in a year with 3% inflation your real return is 5%.

We cannot predict what inflation is going to be in the future but when you choose your investments, you will always need to consider the long-term effects that inflation will have on your returns.   The impact of inflation on your portfolio depends on the type of securities you hold. Everyone, no matter if you hold all cash or all stocks, is affected by inflation.  Individuals living off a fixed income are typically the most affected by inflation (they receive the same amount per month which in turn purchases less and less as time goes by) while individuals with exposure to the stock market theoretically are the most likely to have investments that exceed the rate of inflation and as a result have the ability to purchase more with their invested dollars.

Inflationary risk is just one of the many risks associated with investing and unfortunately, it is often overlooked when assembling a retirement goal or plan.  I’ll try to continue to cover the areas I feel are important for individuals to be aware of, but if you guys have any that you’d like to know more about please let me know by posting a comment to this post of by sending an email to info@smart401k.com.  And as always, please feel free to contact us by phone or email if you have any questions that you’d like to address on a one-to-one basis with myself or another one of our advisors. 

Jessica Slaters, Investment Advisor

Lessons from a failed 401(k) plan

Tuesday, August 12th, 2008
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As many of you probably do, I read the Wall Street Journal as often as possible.  Last week, I read an article detailing how West Virginia had recently switched back to a pension plan from a 401(k).  I initially focused on the article because “401(k)” was in the title, but became more interested as I read about the issues that brought about the change of heart.  Upon finishing the article I was both concerned for those adversely affected and reinforced in my belief of the importance of impartial, unbiased advice for participants.

Let’s start with a quick recap.  The state of West Virginia switched to a 401(k) because like many employers they were facing continually increasing costs from their defined benefit (“db”) plan.  When they decided to switch to a 401(k) they instituted a generous employer contribution of 7.5% vs. the most common private sector match of 50% on the dollar up to 6% of an individual’s salary.  The plan offered stock and bond mutual funds, a money market fund, and an annuity.  Seems like a pretty good set-up… right? Well, besides the fixed annuity part, but that’s a personal opinion.

So what went wrong and forced the state to switch back to a defined benefit plan?

First, the state actually lowered the amount employees were required to contribute to the plan (6% in the db plan and only 4.5% in the dc, or defined contribution, plan).  A large employer match is great and certainly helps individuals prepare for retirement, but lowering the required contribution each individual had to make seems a bit odd to me.

Second, the plan had a fixed annuity option.  I imagine there are situations where a fixed annuity makes sense for an individual. However, I struggle to think of a reason why almost 2/3 of plan assets should be invested in one, which according to the article was reached at one point during the plans existence. (If you want to learn more about annuities, check out our Primer on Annuities

Now while I don’t understand why you would invest in a fixed annuity in a dc plan, I do understand how it happened.  The story mentions that Valic (the company that offered the fixed annuity) sent in salespeople to talk about the annuity.  In fact many of these salespeople were former educators and school employees.  While I’m all for knowledgeable advisors working with participants to build appropriate investment plans, I have a problem with individuals who are “not authorized or directed to give investment advice” but who are “… only authorized to sell a fixed-annuity contract.”  Inherently, this relationship is going to be rife with potential conflicts.  First, a salesperson is incented to sell a product.  Second, if you are a knowledge resource shouldn’t you be able to talk about other investments or the pension plan as a whole… especially in something as important as retirement investing?

So what does this mean?

I urge everyone who reads this post, no matter if you are a participant or employer, to do the research necessary to select appropriate investments.  Or if you aren’t interested (or don’t think you have the knowledge) please consider using an advice provider.  I’d love for it to be Smart401k, but would find it gratifying simply to know that you are taking control of your investments.

If you are an individual and want more information on Smart401k click here or contact one of our advisors who are authorized to provide advice.  If you’re an employer and want to know more about how we can strengthen your plan and educate your employees click here to request more information.

If you have any questions or comments, feel free to post of comment to this article or call us at 1-877-627-8401.

Till next time…

Scott H

Full Disclosure: My knowledge about the situation is entirely contained with the WSJ article “When 401(k) Investing Goes Bad” that was published on Monday, August 4, 2008.

A Week in the Rearview – week ending 8/8/08

Saturday, August 9th, 2008
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In the headlines

A look at some of the market movers over the past week:

Commentary

The bulls won a tough tug of war this week and the S&P 500 tacked on nearly three percentage points despite significant down days on Monday and Thursday.

If you’ve been following the market in recent weeks, the playbook hasn’t changed. Investors are still focused intently on the earnings results from financial and retail companies, changes in commodity prices, and everything that says anything about the direction of the economy.

We fared well this week for a number of reasons. Though results from the likes of Fannie Mae, Freddie Mac, and Wal-Mart weren’t particularly good, it’s arguable that they also weren’t as bad as they could have been. Meanwhile, oil and other commodity prices continue to decline. Though it’s unclear whether this is a short correction or the popping of a bubble, investors have been taking it as a good sign all the same.

And while the good news isn’t exactly pouring in on the economy, the economic reports coming out at least appear to be mixed. That doesn’t say that the threat of further economic contraction is behind us, but it at least confirms that we’re not hurtling downward into the abyss.

Looking ahead

I talked a little bit last week about why it’s not worth your time to lose sleep over short term market fluctuations. Building on that a bit, I thought I’d spend a moment talking about why it often makes sense to turn down the volume on the media.

In the end, the media does make information convenient. They (hopefully!) find primary sources that provide useful information and then they put it in front of us in a very readable format. Unfortunately though, the facts are often gelled together with writing that’s intended to not only make the article more interesting, but also to draw readers away from other news sources.

And how do media companies try to draw readers away from competitors? By trying to make the news as exciting as possible. The headlines are all too familiar — every down day on the market is a “plunge” and on every up day the market is “soaring.” A headline from FOXBusiness on Friday read “Olympic-Sized Rally: Dow Soars 225 Points.” Sounds good, but it was only a day earlier that Briefing.com thought things looked bad enough to run a headline “Barrage of Negative News Sinks Stocks.” Of course if you tuned in to Forbes on Tuesday, you might’ve seen “Street Heats Up After Fed Stands Pat.”

I’m all for excitement, but I prefer to get it from TV, movies, and outdoor sports — not my investments. So what’s the solution? You don’t have to throw out your newspapers and erase the news bookmarks on your browser. However, you’ll find it much easier on the stomach to read financial news if you remember that news sources are trying to excite you and get your emotions going while they are also conveying information.

On that note, there will be plenty of ammo for news outlets in the coming week. Earnings will continue pouring out, with many of the all-important retail companies reporting during the week. On the economic side, retail sales, consumer price index, and the consumer sentiment index will likely have the biggest impact on the markets. CPI in particular will be notable as it will have implications for how quickly the Federal Reserve will start raising interest rates from the current 2% level. Moderating energy prices should help stem the growth in total CPI.

As always, a steady, consistent investment plan is the best way to go. You won’t find many in the media espousing such an approach because without constant excitement around the stock market many of these outlets would be out of business. So feel free to continue following financial news, but leave the excitement to Jack Bauer and Chuck Norris.

Minor Adjustments can Lead to Major Improvements

Wednesday, August 6th, 2008
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I’m now about three months out from the marathon which means that I’m in the heart of my training schedule. 

So far, my longest run has been 14.1 miles.  I’m currently dealing with the humidity of a Midwest summer (I moved from the San Francisco area about a year ago which has a far milder climate) and as a result have made a number of adjustments to my training regimen. I’ve been told that the best way to train is to get up in the morning before the humidity and heat hit their peak.  Unfortunately, I have a bit of an issue with waking up in the morning. Despite the best of intentions, I always seem to start my run as the heat and humidity are peaking.  After this Sunday, I think I may have finally have the motivation to change my ways.  I ended up running outside for a little less than an hour and then finishing inside on the treadmill.  I realized that it was probably counterproductive for me to run outside if I was going to subject myself to the worst part of the day.  While I usually run indoors once a week (a quick thank you to whoever mounted a TV on workout equipment), I really don’t see myself having the patience to run for more than an hour on a treadmill.

The other changes that I’ve made so far are to buy another pair of shoes (unfortunately, I bought the wrong size the first time and only found out on my long runs), increased my caloric intake and have added a fourth day to my running schedule.   I switched back to my now trusted Mizuno’s after realizing that my other pair was a bit small when my feet swelled on the longer runs.  Other than the cost of buying another pair of shoes this was the easiest thing to fix so far.  I have learned that a proper pair of shoes is equivalent to having an investment allocation that fits your personal situation (i.e. one of the most important pieces of any training or investment plan).  I wish I wouldn’t have had to deal with the blisters to realize the mistake, but you live and learn (plus, now I know all about New-Skin).

After bonking on a couple long runs, I realized that I needed to increase my calorie intake to more properly fuel my body.  In addition, I added a fourth day of running to increase the mileage that I am putting in each week in an effort to strengthen my legs and get used to the pounding your body takes from distance running.

So how does all of this relate to investing? 

First, as I mentioned in my first blog article, without a plan and the tools to pursue that plan you the likelihood that you won’t reach your retirement goals on time. 

Second, although I don’t advocate making significant changes to your retirement investment plan on a regular basis, I do believe in monitoring your plan in relation to your goal and making small adjustments when you discover they are necessary.  Changes could be as simple as reviewing your account on a quarterly basis and updating your contribution elections to match our recommendations or they could be bigger like increasing your savings rate if you decide that you want to travel more than you initially thought.

And last but not least…. Educate yourself!  I feel like I could have avoided most of these mistakes if I invested more time upfront to learn about the common pitfalls of marathon training.  I’ve been working out for a long time, researched a number of different training schedules and examined several training related diets, but I could have easily taken it a bit further.  This is all to say that there is always more to learn no matter how knowledgeable you are on a subject.  You’ve taken the first step by reading this blog.  The next step could be checking out our Insight articles.  After that, you might want to check out some of the sites that we have recommended here.  And as always, our advisors are here to answer any questions you might have regarding our advice or investing in general. 

Thanks again for tuning in… I’ll make sure that the next post doesn’t take so long.

Scott H

 

P.S.  Ed, thanks for the tips.  I’m working on 3, 4, 5 and can’t wait for 6,7

 

A Week in the Rearview – week ending 8/1/08

Saturday, August 2nd, 2008
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In the headlines

A look at some of the market movers over the past week:

  • KKR announced plans to go public via the acquisition of its publicly held European fund
  • Unilever (NYSE: UL) announced the sale of its North American laundry business — which includes the Surf, Snuggle, Wisk, and Sunlight brands — to private equity firm Vestar Capital
  • Investors were highly disappointed in the outlook from European airline Ryanair
  • The FDIC found itself taking over two additional banks
  • Merrill Lynch (NYSE: MER) announced two moves to continue trying to bail water from its balance sheet
  • The White House lowered its economic growth forecast
  • The SEC decided to extend its ban on naked short selling
  • Wyeth (NYSE: WYE) and Elan (NYSE: ELN) took a hit as trial data from their Alzheimer’s drug candidate was not as conclusive as hoped for
  • Though consumer confidence was up slightly in July, it remains at notably low levels
  • Like many fellow large bank/brokerages Deutsche Bank (NYSE: DB) posted a steep drop in profits, but still managed to beat analysts’ estimates
  • The US isn’t the only place where inflation is rearing its ugly head
  • Jobless claims rose even more than economists had expected
  • Increased joblessness led to the unemployment rate climbing to 5.7%

Commentary

The S&P 500 managed to stay just above flat for the week despite three down days out of the five. Monday started the week on a sour note as investors — particularly those that were starting to get bullish on financials again — digested the failure of two more banks. Tuesday came to the rescue with a gain of more than 2% as consumer posted a modest increase against the expectation of a decline.

Wednesday tacked on a bit more as oil prices and the ADP employment report weighed in positively. However, the balance of the week was spent declining. Employment, as measured by both the weekly initial jobless claims report and the monthly unemployment reading, highlighted the cracks in the economy.

Meanwhile, initial GDP readings for the second quarter came in well below what was expected. Though the 1.9% growth may still seem like a good sign, this quarter was expected to be higher due to the government’s tax rebate program. In addition to releasing second quarter GDP, readings on first quarter and fourth quarter 2007 readings were also revised down. Economists now believe that the economy grew at a 0.9% pace in the first quarter — down from 1.0% — and that it shrank by 0.2% in the final quarter of last year.

Though earnings were coming fast and furious during the week, they seemed to have far less impact on the market than the economic releases.

Looking ahead

Volatility continues, and that’s not what we want to see. A market that’s unsure of itself is a market that will continue to have us tossing and turning at night — if we let it.

However, if we break down the week’s market movements, we can emphasize why fretting about the day-to-day movements isn’t worth your time. On Monday, the S&P dipped nearly 2% on worries over financial companies, inspiring the talking heads to take off on a bearish charge. Tuesday and Wednesday, though, the market charged back largely on the stronger than expected consumer confidence reading, and by Wednesday evening the market was up over 2% for the week.

Thursday and Friday came along with renewed pessimism, this time largely over the state of the job market and peeled off 1.9% from Wednesday’s close. So at market close today, after the violent swings during the week, we stand at just about where we started. Considering that when we talk about the S&P index we’re talking about a collection of companies worth over $11 trillion, do the movements of the week sound like sober analysis by investors or gut reactions to whatever is in front of them at the moment?

There’s no reason to expect that the volatility will simmer down next week either. Earning will continue to pour out next and though we will have some major releases such as Procter & Gamble (NYSE: PG) and Cisco (Nasdaq: CSCO), I expect that the market will be less concerned with earnings until the major retailers start coming to the podium. That will start the week of the 11th and continue through the following week and will include everyone from Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) to Nordstrom (NYSE: JWN) and Gap (NYSE: GPS).

What the market will be watching with eagle eyes next week is the Federal Reserve’s policy statement. The Fed meeting took on less significance the last time around because it was generally accepted that the Fed was done lowering rates and that it wasn’t ready to begin raising them yet. And when the market has a clear expectation of what will happen it tends to be much calmer.

This time around, though, there is somewhat less certainty. According to data from the Federal Reserve Bank of Cleveland, an overwhelming percentage of market participants believe that rates will be kept steady again. The probability of a 25 basis point rate hike is growing though and is looked at as an even greater probability in the September meeting, so the commentary, as well as the rate decision, will be watched closely.

It should be noted that rates are not the simple “down is good, up is bad” binary that they often seem to be interpreted as. Though lower rates are typically better for businesses and equity markets, the ability of higher rates to contain inflation is very desirable to keep the economy running smoothly. In addition, higher rates would almost certainly have a positive affect on the dollar and put downward pressure on the prices of oil and other commodities.

Since I’m not a clairvoyant and we aren’t a group that likes to make predictions — especially about short term events — we’ll have to wait and see what the Fed does. Regardless of the rate meeting outcome though, we still believe that retirement investors are best served by regarding the day-to-day market fluctuations as entertainment at most, and sticking to a steady, long-term oriented plan when it comes to investing their hard earned money.

Commission vs. Fee Based Advisors

Friday, August 1st, 2008
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I recently received an email inquiry from a client and wanted to share a little bit about our discussion with you.  The client had recently heard, from a friend, that it was better to use an advisor who worked on a commission basis rather than on a fee basis and wanted to know if we could refer him to someone.  I have to admit that I was surprised to hear the request, but then I realized there are probably a lot of people who don’t understand the differences between commission and fee based advisors.  I immediately called him to talk about the differences between a commission based advisor and fee based advisor.   

This biggest difference is that an advisor paid solely on commission is receiving a portion of the proceeds from selling you a product. This means they only make money if they make trades/investments on your behalf (unfortunately this means the more trades they make the more revenue they generate for themselves).  A fee based advisor on the other hand, is someone who gets paid on a flat hourly rate or other fixed rate schedule.  They don’t make money off what they sell you but rather by keeping you as a long term client (by keeping you happy). 

Another potential conflict of interest that exists for commission based advisors deals with the specific investments they recommend.  For example, if there are two funds with similar investment strategies and returns, but Fund A pays out at a higher rate than Fund B, the advisor faces the moral hazard of making money or recommending the fund that is likely better suited for their client. In the case of the fee based advisor this conflict doesn’t exist because they aren’t paid based on specific investments, but rather on whether they retain their clientele.

No matter what type of advisor you work with there are several things that, in my opinion, distinguish one advisor from another.  I have provided a few examples below to help you get started, but by no means is it an all encompassing list.

1) An advisor should take the time to learn about your personal situation, goals for the future and significant life changes as they occur.

2) They should have a way to evaluate whether you are a conservative or aggressive investor.

3) They should set expectations for how they will be paid, how oftenthey will communicate with you and how they will evaluate their performance.

Being a commission based or fee based advisor doesn’t automatically make you a good or bad advisor.  However, we do believe that the characteristics of a commission based relationship call for increased diligence on the part of the client.  In our opinion, fewer opportunities exist for a conflict of interest in a fee based arrangement.  After all, wouldn’t you prefer to be able to decide whether to continue to pay for a service based on your level of satisfaction rather than pay up-front and have no recourse if you aren’t satisfied?

At the end of the day, one of the most important aspects in an advisor/client relationship is trust (i.e. do you trust that they are looking out for your best interests).  Please enter any financial arrangement with caution and an informed perspective. Hope you guys find this helpful and as always, if you ever have any questions, please feel free to email us at, info@smart401k.com or call us at, 1-877-627-8401.

Jeff Studebaker, Investment Advisor


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