The Credit Crunch

As the credit crunch continues, the Fed keeps adding liquidity to the financial system. However, as quoted in The Wall Street Journal, Bob Eisenbeis, chief monetary economist for Cumberland Advisers, said it’s no longer an issue of liquidity that’s plaguing the markets, “Rather, there is uncertainty about the underlying quality of assets – which is a solvency issue, driven by a breakdown in highly leveraged positions.”

This “breakdown in highly leveraged positions” initially stemmed from rising defaults in subprime mortgages. That cascaded into other areas of the financial system and is now reaching into areas that, heretofore, were considered “safe.” The meltdown of Bear Stearns also suggests that we’re moving from a financial crisis to a crisis of confidence. When clients and lenders lose confidence in a firm’s abilities to meet its financial obligations, they can pull the plug quickly.

While that may sound rather dire, we need to keep in mind that for the prepared investor, fear may breed opportunity. As nervous investors throw in the towel, seasoned investors with a broad perspective and intestinal fortitude may profit from the tumult. Sir John Templeton, considered by many to be one of the greatest investors of the 20th century, said, “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell." That contrarian thinking enabled him to build a highly successful investment management company that he eventually sold in 1992 for nearly $1 billion.

Of course, nobody rings a bell and says, “Hear ye, hear ye, now is the time of maximum pessimism so back up the truck and start buying.” The chances of identifying the bottom of the market and jumping in at that exact moment are slim to none. However, being a successful investor does not require perfect timing. It requires a strategy of buying low and selling high.

Interestingly, when it comes to the financial markets, many investors do just the opposite. They want to sell their securities when prices are relatively low (e.g., 2002 and 2003) and then, buy securities when times are euphoric and prices are historically high (e.g., 1999 and early 2000). That’s a recipe for whiplash and poor returns.

The current “confidence breakdown” may eventually lead to a great buying opportunity. As your advisor, we continue to do what we think is best for our clients based on our experience and based on our clients’ goals, objectives, and risk tolerance.

Dateline March 10, 2000

Dateline March 10, 2000. Do you remember that day? It was a giddy time in the stock market as that was the day the NASDAQ Composite Index closed at an all-time record high of 5,048.62. To show you just how euphoric that time was, the NASDAQ Composite Index rose at a phenomenal average annualized rate of 44.5% for the preceding five years ending March 10, 2000. But, then the bubble burst and the NASDAQ Composite Index began a severe decline. Now let’s fast forward to last Friday, which is eight years later, and we see that the NASDAQ Composite Index is still 56% below its all-time high. Ouch!

Aren’t stocks supposed to go up in the long term? Isn’t eight years long enough to recover from a bear market? Those are two good questions and we’ll try to answer them.

Yes, historically, stocks have risen in the long term in the United States. The S&P 500 Index (generally considered a broad measure of the U.S. stock market) rose at an average annualized rate of 10.4% between 1926 and 2007. While that’s the average annual total return over a long period, the actual return in any given year could be much different. Stock market returns are generally quite “lumpy.” For example, the S&P 500 rose 37% in 1995 and declined 26% in 1974.

While the NASDAQ Composite Index is still down 56% from its March 10, 2000, close, the S&P 500 is actually down “only” 7% from its March 10, 2000, close (although the S&P 500 did hit a new all-time high back on October 9, 2007). Why the big gap? Part of the reason is diversification. Even though the NASDAQ Composite Index contains more than 3,000 securities, many of them are technology related, don’t pay dividends and, on average, they are smaller companies compared to the S&P 500 Index.

You see, diversification is not simply achieved by the number of stocks you own, it’s achieved by owning an array of securities with different risk and return profiles that respond differently to economic circumstances. So to answer the first question, yes, stocks have historically gone up, but we need to make sure that we own well diversified portfolios.

Concerning the second question, under “normal” circumstances, we would expect eight years to be long enough to get back to even from a bear market. For example, according to a March 7th article by Mark Hulbert at MarketWatch.com, it took about four years for the DJ Wilshire 5000 Index (the broadest index for the U.S. stock market) to reach an all-time high after touching its 2000-2002 bear market low set on October 9, 2002. Hulbert also pointed out that it took only 17 months for the DJ Wilshire 5000 Index to regain its all-time high after the October 1987 stock market crash. So, what’s the problem with the NASDAQ Composite Index? Why is it still so far off its all-time high? In a word – diversification (or more accurately – lack thereof).

Generally speaking, the NASDAQ Composite Index is not a well-diversified, broad-based index. It’s heavily weighted toward technology stocks and many of those stocks are still struggling to regain their former, late 1990s glory days.

The bottom line is diversification is critical to successful investing. But, not just any old diversification; it has to be intelligent diversification with a variety of asset classes that are carefully constructed. The good news about investing today is that we have a broader range of asset classes to choose. While no guarantee against loss, we try to build intelligent diversification into our clients’ portfolios to help minimize the pain when financial markets are in disarray…as they seem to be now.

Press Release

FOR IMMEDIATE RELEASE
PaladinRegistry.com research describes facts that financial advisors deliberately withhold from consumers

SACRAMENTO, Calif., April 9, 2007 – Recent Paladin Registry research has produced new data that describes several key facts that financial advisors deliberately withhold from consumers who rely on their knowledge and services to achieve their financial goals.

Having access to this information is critical for consumers because advisors influence or control financial decisions that impact their quality of life, especially during retirement years. Selecting a competent, ethical professional is tough enough, but it can be a near impossible task if consumers don’t have accurate, complete data they can use to make informed decisions.

For example, all advisors tell consumers they are financial experts who put consumers’ interests first. The problem is they aren’t telling the truth at least 85% of the time. What consumers are hearing is a refined sales pitch that’s designed to win their trust and assets. The information they really need to hear is deliberately left out because they might not buy what the advisors are selling. Following are a few examples of information that is frequently misrepresented, omitted, or hidden by financial advisors.

Sales Representatives
Advisors don’t want consumers to know their role is to sell them investment and insurance products. So their business cards say they are planners, advisors, and consultants, because sounding more professional makes it easier to their products. They know consumers would be very uncomfortable if their “financial advisors” or “financial planners” were really sales representatives who had no vested interest in helping them achieve their long-term financial goals.

Advisor Competence
Advisors who are new to the financial services industry don’t want consumers to know they have little or no investment experience. There are four reasons why inexperienced advisors can sell investment products and advice. First, the financial services industry has no education or experience requirements. Second, companies hire representatives who are older so they appear to have experience. Third, advisors use their personalities to get consumers to like them because they know people trust people they like so they don’t question advisor competence. And fourth, most consumers don’t know the right questions to ask to determine advisor competence. They would probably be very surprised to learn their nice, 40 year old advisors were selling pharmaceutical products three months ago.

Preferred Products
Advisors don’t want consumers to know they have quotas that require them to sell company or preferred products even if the investments are inferior to alternative product.
In the past, advisors received extra compensation for selling proprietary or preferred products, but that practice has been banned. Now, companies threaten them with the loss of their health and disability insurance benefits and even their pension benefits if they fail to sell the mix of products that maximize company profits.

Total Compensation
Advisors who work for commissions don’t want consumers to know how much money they make from their investment recommendations. Since the payments come from third parties such as broker/dealers and product companies, consumers don’t see this information unless they ask for it. And then the advisor may or may not tell them the truth. Why hide the amount of money they make? An advisor may spend two or three hours with a consumer and make thousands of dollars of commission compensation. Consumers would question the services they received to justify the payments of such large sums of money.

Verbal Sales Presentation
Advisors don’t want consumers to know how important written documentation is for protecting their financial interests. They want consumers to hire them based on flowery sales literature, their rapport-building personalities, and verbal presentations. The pitches tell consumers what they want to hear, for example high investment returns and low risk, and give reasons for buying whatever the advisors are selling. Verbal information benefits advisors because there is no written record of what is said to win consumer trust and assets. That makes sales pitches dangerous because they are easy to deny later when it’s the consumer’s word against the advisors.

Cross-Selling
Consumers’ banks, credit unions, and car insurance agents want to sell them investment products. Their goal is to leverage their relationship with consumers by selling additional products. The more revenue streams they generate, the more profitable their relationship is with them. What they don’t want consumers to know is they treat financial services like any another bank or insurance product. However, providing checking account services is not the same as recommending investments for consumer IRAs – assets they will depend on for 20 or 30 years of retirement.

About Paladin Registry Inc.
Founded in 2003, the Paladin Registry provides three public services that are free to consumers: Awareness & Education programs, Advisor Search Services, and Advisor Documentation Services. Paladin is an information services company, not a financial services company, and is 100% owned by key employees who are active in the company. For more information, visit Paladin Registry at http://www.paladinregistry.com.

Contact:
Jack Waymire Paladin Registry Inc. 916-253-3334
jack@paladinregistry.com

About Triton Wealth Management

Founded in 2002, Triton Wealth Management, LLC, is a Registered Investment Advisor providing "Fee-Only" financial planning and investment management services. Senior Partner Ted Toal is a CERTIFIED FINANCIAL PLANNER™ Professional and a member of the National Association of Personal Financial Advisors (NAPFA). Ted Toal has been admitted into the Paladin Registry (www.paladregistry.com). Admittance to the Registry is limited to the top 10% of U.S. financial advisors based on their competency, integrity, and various risk factors. For more information, visit Triton Wealth Management, LLC at www.tritonwm.com.

Contact:

Ted Toal, CFP®
Triton Wealth Management, LLC
410-224-0097
http://www.tritonwm.com/contact.html

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Disproving Gen-X’s Spendthrift Reputation

When it comes to financial matters, the adult children of baby boomers defy the traditional Gen-X “slacker” stereotype. According to the “Ameriprise Financial Money Across Generations” study, adult children of boomers are fixated on finances. In fact, 87% of the adult children of boomers said it is very important to them to assure a financially secure life. Other goals: Seventy-two percent of adult children of boomers said it is very important to them to substantially help their children or grandchildren pay for education (compared to 50% of boomers and 38% of boomers’ parents). Also, compared to their parents, twice as many adult children of boomers (60%) said that it is very important to them to preserve wealth to leave to their children.

In other insights, the study disproved Gen-X’s spendthrift reputation. For example, illustrating frugality in a difficult market, the adult children of boomers expressed the lowest level of confidence that now is a good time to make major purchases. More than one third (36%) said “now is a good time to wait” before buying, compared to 28% of both boomers and parents of boomers. What’s more, the adult children of boomers were the most likely to strongly agree with the statement, “I don't like to be in debt at any time” (80% compared to 68% of baby boomers).

However, the survey also found Gen-Xers were not confident in their own money management skills. When asked, “Do you think your generation, your parents’ generation, or your grandparents’ generation has the best money management skills?,” only 15% of the adult children of boomers said their own generation. Almost a third (31%) of Gen-Xers said their parents’ generation had the best money management skills, and 53% said the boomers’ parents’ generation is the best at handling money.

In spite of their perceived lack of money skills, the adult children of boomers are the most optimistic generation about their financial futures. Forty-six percent of the adult children of boomers said they are very optimistic about their personal financial future, compared to 39% of boomers and 28% of the boomers’ parents’ generation. Additionally, 48% of the adult children of boomers said they are very confident in their ability to reach all of their financial goals over time, while only 36% of boomers and 34% of boomers’ parents indicated they feel the same way.

This may be an interesting launching pad to talk to your adult children about money.