A note on money market funds

A few people have asked me about money market funds and whether we should start worrying about their safety. Last week's news of the Prime Reserve fund "breaking the buck" added to the worries of the week's unfolding disasters. This fund in particular wrote down the market value of some Lehman securities it owned which resulted in a 3 penny loss in net assets value from $1 to $.97, or a 3% loss. An investor who held the fund for a year probably had earned about 4% in interest payments over the course of the year and so netted against the 3% loss is still up about 1% for one year. In the whole scheme of things, this isn't the worst thing that could happen. However, money market funds' $1 net asset value (NAV) is held sacred by investors and money market providers alike. In the past when a money market fund faced the predicament of losing value, usually the mutual fund provider injected capital to make up for any loss. Presently, this option may be difficult given the current liquidity crisis in the fixed income markets. However, I believe that mutual fund companies like Vanguard, Fidelity and TRowe Price in particular would be in a position to infuse capital to one of their money funds if necessary as they have escaped many of the problems that have plagued the banks and investment banking firms who have been writing off bad mortgage loans and bonds backed by bad mortgage loans. To safeguard any further issues with losses in money market funds, the government has made insurance available for purchase by any provider that wants it--up to 50 billion in insurance is available. All of the steps taken by both the Treasury and the Federal reserve have been done to restore confidence in the financial system. So be confident.

On another note, the SEC has banned short selling on 799 financial stocks until October 2, 2008. While some (especially short sellers) think this step draconian, I do think it is the right action at this time. Hopefully the SEC will reinstate the uptick rule which forces anyone who wants to sell any stock short to wait for an uptick in price before selling. This does mitigate downward spiral of stock price in a bear market as it just "slows down" trading and pessimism. The uptick rule was eliminated last year---I don't know why. The short sellers are I believe partly to blame for this fiasco because lower stock prices mean that companies, like AIG, cannot raise adequate capital in the equity markets: their stock price is too low.

I think we are headed in the right direction with the Treasury trying to get Congress to pass a bill that will ultimately buy all of these bonds that no one seems to want. What this will cost to US productivity and economic growth in the long term remains to be seen. It is kind of like trying to put out a 5 alarm fire and worrying about what the water damage will be--can't worry about that now, let's just put out the fire.

Better days are coming...may they get here soon.

AIG Annuity holders

In response to the worsening news on AIG today, I wanted to publish a link to the Life Insurance Company Guaranty Corp which provides insurance (similar to FDIC) for insurance policies, including annuities. The link is http://www.nolhga.com/policyholderinfo/main.cfm/location/questions#six
Each state has their own rules however most cover policies from $100,000 up to $300,000 and a few have higher limits. On this website is a link to your specific state's rules that you can review.

Market Turmoil

I just wanted to briefly comment on yesterday's news of Merrill being bought out by Bank of America, Lehman Brothers filing for bankruptcy protection and AIG seeking liquidity. I know the news is bad and lends to feeling anxious in a market that is already fragile, but this is not a time to panic. The truth is when we look at markets historically, it has always been plagued by one disaster or another and somehow the markets manage to march on. If anyone remembers the Savings and Loan crisis of the 90's, bad news was a daily experience, in some ways as bad if not worse than what we are living through now.

I also know that questions arise as to the protection of assets at an institution that has been purchased or has filed for bankruptcy. Generally speaking, brokerage accounts are held in custody for clients and are therefore protected from bankruptcy or sale. Anyone with a Merrill account will soon have a BofA account. In addition, the government insures brokerage accounts for up to $500,000 and most of the large brokerage firms have additional insurance to protect even larger amounts. However, this insurance does not protect against loss in account due to the market going down!!!

Bank deposits are insured for up to $100,000 per account per bank by FDIC insurance. This includes CDs ,checking accounts and savings accounts.

Misery loves Company?

A new bulletin out by Employee Benefit Research Institute is reporting the survey results of savings of Americans aged 19-39. 67% reported having savings, including employer retirement plans, of less than $20,000. Check out the link at http://www.ebri.org/publications/facts/index.cfm?fa=fastfacts.

Summer 2008

Well, July did not prove to be the month that the market makes it's turnaround. The S&P500 was down 1%, the DJIA up a paltry .3% and the Nasdaq impressed with a positive 1.5% Year to date numbers are all negative, double digit numbers and still down over 20% from the Fall 2007 high. The only bright spot is small cap stocks. Small-value posted a whopping 5% return for July (still down 5% YTD) beating large cap stocks which were negative in July. Many long time investors view this as a positive sign. Small and mid cap stocks tend to be leaders when the economy rebounds. In fact, the market, over several previous recessions usually begins to turn up about six months before the recession is officially ended. Ever the optimist, I do think the worst is over. For all of you sitting with cash or bonds--who didn't check with me first before selling stocks, it is time to get back to your long term asset allocation. My favorite saying is: no one rings a bell when the market has bottomed--which means, no one can time the market effectively. Buying and holding a well diversified portfolio is the only way to earn real wealth over long periods of time. Interesting fact, the average mutual fund has returned 8 or 9% on average over time but the average mutual fund investor has earned around 3% over time. Why? Because the average investor buys high and sells low. Seasoned investors watch the behavior of retail investors to gauge when the market has bottomed or hit a top--by whether Mom & Pop are buying record amounts or selling record amounts. Guess where we are now? That's right, the retail investor has much of his/her assets in bonds and money market funds and is pulling money out of equity funds. You'll never build wealth following the pack--you need to stick to your plan.

Market volatility does create opportunity. Right now, it appears that municipal bonds are quite the bargain. When you can buy bonds that in some maturities offer higher yields than treasury bonds, investors in the highest tax brackets should strongly consider it. While buying individual bonds can be treacherous for the retail investor, there are some notable bond funds worth looking into.

Moving on to another important subject: the CDC National center for health statistics announced that death rates are falling and that life expectancy at birth hit a new record high. Why is this important? As you know, longevity risk is one of the major risks facing retirees today--that is, the risk of outliving your assets. As advances in medicine progress, this risk will become more pronounced. Anyone just starting out on his/her career should try to save as much as is feasible. This money will compound over decades preparing you for retirement. For anyone who hasn't saved enough, keep in mind that the IRS allows for catch up contributions of an additional $5,000 over and above the $15,500 that is currently allowed to be contributed to a 401k/403b plan.

I hope you are enjoying your summer. Thanks for reading.

Second Quarter 2008

It was a pretty bad week last week. The DJIA was down 4.2% last week and down 19.9% from the October high. Here are some year to date returns for various market caps: large cap stocks down -10.84%, mid cap stocks -6.5% and small cap -6.36%. Large cap growth did better than value but the opposite is true for small and mid caps with value outpacing growth stocks. International stocks are down -11.3%--equity income funds are down -12.5% and even balanced funds, which are meant to hold up well in declining market environments are down -6.42% year to date. The only thing that has held up in here are commodities. For example, oil as measured by the ETF USO is up 46% year to date.

Here is the big problem facing the Fed with what to do with interest rates: CPI (a widely used measure of inflation) is up 4.2% year over year--core inflation (which excludes food and energy prices for those of us that don't eat or use fuel) is up 2.3% year over year. These numbers, particularly the total CPI, is much higher than it has been in years. Slowing economic growth coupled with rising inflation is a real dilemma for the Fed.

I have started reading a very interesting book called Simple Wealth, Inevitable Wealth by Nick Murray available only at www.nickmurray.com. Murray is a consultant to financial advisors but wrote this book for clients. He has been in the financial services industry for 41 years and has seen a lot. I really like to read and hear the wisdom of people who have been involved in the markets for a long time--they seem to make so much sense and they don't get pulled into the over zealous media's negativity. What Murray says is when the markets are down is the time to buy more shares of your favorite stocks or funds or just index funds as part of your long term investing plan--Warren Buffet once said that the only thing Americans won't buy on sale is stocks! Well, they are 20% off now!! As investors, we all must invest with rationality not emotions. History has shown that the stock market has always gone up over the long term--don't believe anyone who says it is different this time--the details may be different, but the cycles remain the same.
Thanks for reading.

Financial Education

I often come across really interesting information I like to share. There is an organization called the National Endowment for Financial Education that puts out some great research and has developed age appropriate financial education programs to be used at all grade levels within the school environment. The website is http://www.nefe.org/. One article particularly useful addresses the topic of raising a money smart child.

Read here :http://www.smartaboutmoney.org/nefe/pages/popups/1770.asp?resource=227



There are other tons of articles available at http://www.smartaboutmoney.org/ especially for those friends who do not work with a financial planner who maybe should be considering it.



Another great resource is the Mature Market Institute at http://www.metlife.com/ under the "brokers & consultants" tab which addresses issues of retirement, longevity, long term care insurance, social security and medicare.



There is so much information available on the internet--it's nice to have a guidepost. If anyone else has found helpful websites, please post so we can all take a look.

Thanks for reading.