Market Update

The above chart indicates the amount of cash investors have held as a percentage of the Wilshire 5000 at any point dating back to 1974. First, this chart confirms the belief that people invest money when they feel good, and pull money out of the market when they are fearful. Look at the 1990s. The percentage of cash not invested in the market steadily decreased throughout a decade where returns were constantly high. Consequently, in percentage terms, more money was invested in the stock market right before the crash of 2000 than during any other period studied. Additionally, you can see the amount of money pulled out of the market during the last six months or so, even though the majority of damage had already been done. Still, because of fear, people agreed to sell and lock in their losses.

Second, and perhaps more importantly, you can see the large amount of cash that is currently sitting on the sidelines. The first thing I think of after looking at this chart is the large amount of funds that will likely flood the market once investors start feeling better about the state of the economy. Logic would figure that once the market finally develops some momentum, this factor could lead to a healthy, extended rally.

One more chart...

This chart illustrates that historically, the market has performed better when the average price-to-earnings ratio of the S&P 500 was low. As of March 30th, the S&P 500 had a P/E ratio of 13.74. You can see that the ratio is moving further toward the cheap side of the continuum. This could be yet another indicator that the market is getting closer to a bottom.

The Fight Over Who is Going to Guard Your Nest Egg

Please check out the following article posted in the Wall Street Journal, written by Jason Zweig:

http://online.wsj.com/article/SB123819596242261401.html

Mr. Zweig does a great job of explaining in easy-to-understand terms the difference between a fiduciary and suitability standards. If you've ever wondered whether or not your financial advisor/broker has your best interest in mind, this is a great place to educate yourself about the debate that is evolving in the financial planning industry.

Surprise, Surprise...

Think fast! Are we in the middle of a bull or a bear market? As of the market close on Thursday, March 26, the market was up over 21 percent over its recent low. The technical definition of a bull market requires a 20 percent advance over the previous low. Thus, as of today, we have entered a bull market (stay tuned...) Also of note, the entire surge happened in just the last 13 days. That is the fastest bull market turnaround since 1938!

One last quick thought on the matter. If you follow Wall Street, it is likely you knew the market has had a productive two weeks. However, the news that we are up over 20% likely caught you by surprise. Funny how the media makes sure everyone knows when the market is down, but chooses to place their focus elsewhere when the news is good. I suppose it's all about the ratings, and evidence must suggest negative news draws more viewers than positive news.

Are Market Declines Bothering You More Than They Should?

Everyone has felt the sting of the faltering stock market. The decline in retirement account values causes people to react differently: some sell their stocks and move to cash, some hang on for dear life, and others haven't had a good night's rest for 17 months. The question I would briefly like to address is, "how concerned should I be about my nest egg?" Simply, the answer to this question depends on when you are going to need the money in your savings.

We all know the equities market has lost approximately 50 percent since its high in October of 2007. Most people are also aware that the housing market has also struggled lately. Given that both markets are down, ask yourself "am I more concerned about the value of my retirement accounts, or my home?" Let me guess, you answered that your nest egg is your biggest concern. Why? Is it because you feel your equity investments have declined more than your home's value? If so, sorry to inform you of this, but you may very well be wrong.



As you can see, median home prices have declined to levels not seen since 1979! The pullback in the housing market far exceeds the decline in the stock market, which is at levels last seen in 1996, on an inflation-adjusted basis. Thus, the severity of the pullback isn't the only factor to cause you to worry more about your stock investments than your home.

Let me suggest an alternative factor. If you aren't currently interested in selling your home, there is no reason for you to care about the market value of the home today. You only care about what you can sell your home for the day you want to sell it, which may be five, ten, or thirty years down the road. Not being concerned with the value of your home today allows you to sleep well at night, regardless of the massive fallout in the real estate market.

I suggest you take the same mental approach to your equity investments. If you aren't planning on retiring soon, and won't need to take withdrawals from these accounts within five or seven years, don't worry about what the stock market does now. We have one hundred years of history that suggest the stock market's value will increase over time. We recovered from the great depression, the crash of 73-74, and the bursting of the tech bubble. Sure, it won't be pretty in the near term, but if we can be confident that prices will recover by the time we need the funds, let's stop losing valuable sleep.

NAPFA's Response to the Madoff Scandal

Bernard Madoff ‘Made Off’ With Investor Money –

How Other Consumers Can Avoid a Similar Fate

Bernard Madoff’s alleged Ponzi Scheme stands as an example of how the financial services industry has failed to protect the best interests of consumers. It highlights the increased need for consumers to proceed cautiously when working with an advisor and the importance of asking pointed questions before hiring a professional.

As the post-Madoff era begins and the federal government and industry regulators decide the best course of action to protect consumers, people need to ask the right questions of an existing or potential advisor.

The National Association of Personal Financial Advisors (NAPFA), the country’s leading association of fee-only financial advisors, encourages consumers to take the time to get to know an advisor and gauge his or her commitment to placing clients’ interests first.

Find out how the advisor and his or her firm are compensated. Fee-Only compensation has the fewest conflicts of interest, but there are other acceptable methods as long as full disclosure takes place up front. It’s important to know if an advisor will make additional money if you follow certain recommendations.

You should always know where your money and securities are actually held. Most reputable advisors will use an unaffiliated custodian for the safe keeping of your assets. This simple check and balance could have saved the Madoff investors millions by bringing the problem to the forefront earlier.

Legally, all clients are entitled to a copy of the firm’s Form ADV Part II or brochure. It’s a compliance document that can be pretty dry, but it holds a lot of important information and ultimately shows that the firm is registered with the SEC or state.

Consumers can access a Financial Advisor Checklist and Financial Advisor Diagnostic on the NAPFA website by visiting www.NAPFA.org and clicking on the Tips and Tools button in the Consumer Information section. The Diagnostic tool includes an answer key to help consumers understand NAPFA’s recommendations for the most appropriate answers to the questions.

Mortgage Rates are Likely at the Bottom

By buying back hundreds of billions in mortgage securities and treasury bonds, the Federal Reserve is doing everything it can to lower long-term interest rates. Consequently, mortgage rates on 30-year fixed-rate mortgages have recently averaged around 4.75% according to Zillow.com. That is down from about 6% in mid-November.

The Fed began driving mortgage rates down last November when it announced plans to purchase a half trillion dollars of mortgage-backed securities within a year. That number has since expanded to $1.25 trillion dollars. The Fed is also buying back long-term Treasury bonds, whose pricing affects mortgage rates.

However, further declines are extremely unlikely because the mortgage-lending market has become less competitive lately, as hundreds of small banks and independent lenders have collapsed. As a result, less competition between lenders should reasonably lead to higher interest rates. Most market experts expect mortgage rates to hover between 4.75% and 5.5% for the rest of the year.

Many mortgage experts suggest now is the time to refinance. Until recently, 30-year fixed-rate mortgages hadn't been below 5% since the 1950s. Thus, if you have been waiting to refinance your home, now may be the time as large banks that are beginning to dominate the market will be looking for ways to boost their profit margins.

Speak to your financial professional to discuss whether a refinance is appropriate for your situation. As always, it is best to speak with an advisor who won't make a commission on your actions (a fee-only advisor) so can receive objective advice.

Returning to our Roots

Lately, many people have asked me if they should consider turning their equity positions into cash. I know it is hard to see the S&P 500 decline like it has, and there is no denying that we are in the midst of a terrible bear market. However, it is important to remember that we are in the MIDST of the decline, not the beginning. The time to sell was 17 months ago, not now.

Unless you're on the doorstep to retirement, you still have years to allow the market to work for you, not against you. A long-term investor should review and potentially adjust their strategy. Making investment decisions based on emotion, however, is behavior more representative of a speculator. Let's review the difference:

Investing is a long-term process of implementing a diversified portfolio with a consistent re-balancing strategy based on your personal financial factors and risk tolerance.

Speculating, however, is what most people are resorting to now - trying to time and beat the market. Thinking they can predict it’s direction and force. Pulling out of the market to buy back in later. The problem is you have to be right TWICE - once on when to get out (I would argue it’s a bit late for that, but nothing would surprise me in this market), and once on when to get back in.

If you truly classify yourself as an investor, I encourage you to develop a financial plan, implement the plan, and monitor the plan on a fixed schedule. This will prevent you from acting irrationally. Seek the advice of an fee only, independent CFP with a fiduciary responsibility to do what is best for their clients to get working on your financial plan.

Comprehending Government Bailouts - The Significance of $1 Trillion

Humans have no way to relate to the number one trillion. Yet, we hear the number an increasing amount of times, especially as it impacts the US economy. One way to illustrate the enormity of one trillion is to think of it as it relates to time. One million seconds is about 11.5 days. One billion seconds is 32 years, and one trillion seconds is 32,000 years. Starting to get the picture?

James Hamilton identified the following information to make the number more real as it relates to finance:

"A trillion dollars is about the total amount collected in income taxes by the U.S. federal government in fiscal year 2006. So if you want to know what an additional trillion dollars in government borrowing or spending means, just imagine what it would be like to pay twice as much in federal income taxes for one year."

Thus, the President’s proposed budget calling for deficits of $1.75 trillion for 2009 and an additional $1.17 trillion for 2010 would be the equivalent of doubling your tax bill three years in a row.

So what would be another way to spend, say, $1.2 trillion? Here is what the NY Times recommends:

For starters, $1.2 trillion would pay for an unprecedented public health campaign — a doubling of cancer research funding, treatment for every American whose diabetes or heart disease is now going unmanaged and a global immunization campaign to save millions of children’s lives.

Combined, the cost of running those programs for a decade wouldn’t use up even half our money pot. So we could then turn to poverty and education, starting with universal preschool for every 3- and 4-year-old child across the country. The city of New Orleans could also receive a huge increase in reconstruction funds.

The final big chunk of the money could go to national security. The recommendations of the 9/11 Commission that have not been put in place — better baggage and cargo screening, stronger measures against nuclear proliferation — could be enacted. Financing for the war in Afghanistan could be increased to beat back the Taliban’s recent gains, and a peacekeeping force could put a stop to the genocide in Darfur.

All that would be one way to spend $1.2 trillion.

Retirement Planing Seminar (3/18/2009)

Attend this free seminar to familiarize yourself with the 20 major decisions to successfully transition into retirement.

>> Do I have enough money to retire now?
>> How do I properly handle my 401(k)?
>> When should I start taking Social Security?
>> How should I diversify my investment portfolio?
>> How much money can I safely withdraw from my investment portfolio?

Attendees will receive a complimentary copy of The Retiring Boomer’s Financial Handbook as it will be used to guide the class discussion.

Hosted by Net Worth Advisory Group, a fee-only (no commission) financial planning firm specializing in helping clients prepare for retirement.

Wednesday, March 18th
7:00 - 8:30 PM

American Towers Community Room
44 West 300 South
Salt Lake City, UT 84101

To reserve your spot in the class please contact:
Lon Jefferies
Net Worth Advisory Group
lon@networthadvice.com