Monday, July 6, 2009

Advice is Everywhere But How Useful is It?

You may have noticed that as the recession and credit crisis drag on, all manner of advice on how best to deal with falling stock prices, declining home values, rising unemployment, etc. has proliferated. It’s fair to say that there is a raging bull market in the advice business these days. Two reasons account for this. First, in the context of a crisis environment such as we face currently, the need for sound advice is more important than ever. Second, sensitized as we are by the hit(s) to our financial wellbeing, most of us are simply more receptive than usual to guidance from credible sources. We’re all seeking answers.

Unfortunately, the quality and, by extension, utility, of much of the advice currently flooding the airways is dubious at best. For example, a recent headline caught my attention by trumpeting “Here’s How to Save Your Retirement.” I thought ‘What’s not to like about that,’ as I flipped to the first page. It took only a few moments of reading to discover the secret formula for saving our collective retirements: “save more” and “spend less.” That’s it…simple as that. Save more—spend less. Under-whelming? I thought so too.

In a world where home foreclosures are skyrocketing, most people don’t have the income to save more, to state the obvious. Spend less? Most Americans, including even the super-rich, have already cut discretionary spending to the bone just to keep their heads above water, let alone boost their savings.

That bit of wisdom got me thinking about other insightful nuggets that I came across so I decided to share some of them with you here. The headlines that capture our attention in this way are invariably well written and promise clear, concise answers to vexing problems. It’s the material following the headlines that under-whelms and may even mislead.

1. Build a Stress-Free Financial Portfolio. What could be better? We could all do with a little less stress in our lives. Unfortunately, the article recommends a portfolio consisting entirely of certificates-of-deposit, money market mutual funds, and US treasury bonds all yielding between 1.00%-3.75%. This approach is indeed protected from capital loss and unsettling price volatility. Safety comes at a price, however. How many people can realize their retirement dreams or college saving objectives on such a low total return? Not many. Moreover, after adjusting for inflation and taxes, the real rate-of-return will be even less. That could really cause some stress!

2. 5 Ways to Stretch Your Savings. Make your savings go farther and last longer; excellent idea and another attention grabber. The first of the five secrets…don’t retire…keep working. Never mind those people that don’t want to work into their late 60’s or 70’s, whose health won’t allow them to work longer, or that get laid off, downsized, etc. and can’t find a suitable job or one that pays a comparable salary.

3. 4 Ways to Tame Your Fear of This Market. Taming fear is good. Lots of people today are just plain scared. The solution? Allocate a larger portion of your investment assets to fixed income securities like bonds. This makes sense in principle, but isn’t as easy as it seems. First, all investors with exposure to stocks have seen the value of these assets decline since the market peaked in late 2007. Many have incurred sizable unrealized losses even on quality, blue-chip holdings that are likely to perform well as the recession ends and the economy recovers. Selling stocks now in order to re-allocate to bonds realizes or locks-in those losses. While bonds pay steady interest, their total return is unlikely to match that of stocks as the economy starts to grow again. Taming your fear in this way could cost you a lot of money which is, in itself, frightening.

Further, if the crisis has shown us anything, it’s that even the safest investments are not as safe as we once thought. Prices of some mortgage-backed bonds and bonds of commercial & investment banks, auto makers, etc. once thought to be rock solid, have been as volatile as stock prices. Just ask General Motors bondholders.

4. Safe Moves in Today’s Market. Safety is definitely in vogue as investors have become more risk averse and less risk seeking. This source suggests that a good way to begin building a “safe” portfolio is to buy the S&P Dividend SPDR (SDY). This is an exchange-traded index fund that holds the shares of 52 blue-chip, dividend-paying common stocks. The only problem is that SDY has traded down by as much as 53% in just the last 12-months! Most investors would not consider a capital loss of that magnitude paramount to “safe.” This is not to say that SDY won’t prove to be a fine investment over time. It simply underscores what most investors already know in their hearts, which is that investment risk & reward go hand-in-hand. You cannot benefit from the latter without incurring the former.

5. Make Yourself Recession-Proof. Can we really do that? In a word…NO! The central piece of advice here is to hold on to your job. Yet, how many people lose their jobs by choice? None that I know of. Few people have any significant influence over personnel decisions in their workplace. Sure, we should each maximize our value to our employer and make ourselves as indispensable as possible but 1) it’s to our benefit to do that all the time, not just during recessions, and 2) corporate downsizing decisions are not generally made on an individual-by-individual basis. Doing that is called discrimination and it’s illegal.

Be careful as you read & listen to the advice swirling around today. If it sounds too good to be true...it is! As much as we would like there to be easy answers to the challenges we face, those are few & far between. That doesn’t mean that answers don’t exist. They do. Trust your instincts, first & foremost, and seek out competent professional help when you feel it necessary. Remember, the current recession will end as all the others before it ended. Stock prices are in the midst of a robust month-long rally and bond prices show signs of stabilizing. Recent economic data provide cause for optimism and attractive investment opportunities abound.


Timothy R. Meyer
President & Chief Investment Officer

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