Free Markets!!

There have been many opinions on what to do with the automakers. Should we save them? Can we save them? No one really knows for sure. The business model utilized by the automakers is antiquated and inefficient. Would $25 billion save them? I have my doubts. The pain of allowing the automakers to fail would be hard, but attempting to save them might just delay the inevitable and cost the taxpayers more money for no return. Free markets demand that only well managed and efficient companies should survive. However the ripple effect would be deep and far reaching. The debate will continue. Should poorly managed companies be saved because they are BIG? Is the current management team capable and or willing to make the necessary changes? I do know that free markets work in the long run. The market rewards the companies with efficient processes and with the ability to remain flexible. We are investors not market timers or predictors. We have developed a scientific portfolio and investment policy statement. We must not allow these events to alter our ultimate goal. Stay invested...diversify...rebalance.

Fee Disclosure in your 401k Plan

Brokers and 401(k) providers often claim to sell inexpensive 401(k) plans, sometimes even promising to operate plans for free. Here’s how they do it: Providers offset up-front discounts by making employees select from investments with very expensive fees. While an investment with 1.4% fees might not sound like much, a mere 1% increase in fees can decrease the value of a $100,000 investment by $66,254 over 20 years, assuming an annual return of 7%. Unlike administrative fees, investment fees are not directly billed. Instead they are subtracted from individuals’ account balances each reporting period, reducing individual returns, often without knowledge of investors. These fees are not one-time charges, but are deducted from individuals’ accounts for as long as they participate in the plan. And since investment fees grow as individual accounts balances grow, those who save the most are penalized the harshest. Plan providers rarely discuss investment fees. In fact, by law they are only required to disclose investment fees during enrollment, after employers have purchased the plan, making it almost impossible for participants and employers to effectively comparison shop. This all will be changing very soon, as the regulators will require full fee disclosure. The best plan of action is to have an independent analysis done on your plan.

The System

There has been a great amount of discussion and opinions on the market conditions we are dealing with. I recently read an article that said Modern Portfolio Theory no longer works, market timing is the way to go. I will admit that no strategy always works, however going from one strategy to another and trying to out guess the market will inevitably lead to failure. The different opinions out there today are trying to work on the investors emotions, that someone else has the 'answer'! No one can consistently predict the future, by remaining disciplined to a proven strategy the investor will succeed in the long run. Financial institutions such as Merrill Lynch and Fidelity have hundreds of money managers, stock pickers, on staff because they know a few will get lucky and pick the right stocks or strategy, they then promote these lucky pickers or strategists. The result is the investor moving their money to the lucky pickers or strategists, which makes more money for the financial institutions. These institutions criticize strategies such as Modern Portfolio Theory because they make less money on trading. I encourage you not to fall victim to this hype stay disciplined to a proven strategy. In the long run you will succeed.

Finally

I just returned from doing my civic duty. No need to call me with a recorded message for a last minute plea to vote for your candidate. I've already voted. So please stop calling me. Well almost over and everyone is wondering how the outcome will affect the markets. No one really knows for sure. The Democrats say the market performs better while they are in office. The Republicans say Wall Street prefers a Republican in office, which isn't really a good argument this year. I do know we are going through some very anxious times. Many plans have been derailed over the last three months. No one said it was going to be easy. Although this crisis seems the worst ever right now, however this is not the first time nor will it be the last. We must remain diligent in maintaining our focus and follow our investment policy statement no matter who is elected. We have a mathematically and scientifically designed portfolio, with our own customized level of risk. Successful investing is not about guessing where the market will go or which asset classes will out perform, its about having a plan and following that plan. Soon, I hope, we will have new leaders in Washington. Only time will tell what will develop.

Stay Invested and Win.

As I write this the DJIA is up nearly 500 points. Where will it close? I have no idea. No one does. No one can predict the future, if they did why would they tell us. We are living through a historic time, Wall Street will be changed forever, General Motors is looking to merge with Chrysler, Consumer Confidence is at a low. The list goes on and on. Each time there is a crisis, this is not the first, there are different reasons for the crisis. As investors we must stay true to our plan. Stay globally diverisified, only 45% of the world's capitalization is in the U.S., rebalance and if possible keep buying/saving. These markets will recover, when I don't know. Will it be the U.S. market leading, intermnational markets or emerging markets? Is the bull market in commodities over? Who knows. When will the real estate market recover? Is the bear market in real estate over? All these questions are really unanswerable by any individual. However, there are those that will proclaim they saw it coming. If enough people are predicting someone will be right. The problem is we don't know who will be right and when until its all over. These markets will recover...stay invested...stay globally diversified...rebalance.

Oracle of Omaha

As you might have guessed I am a big fan of Warren Buffet. Although I do not believe anyone can predict the future, Mr. Buffet's advice is well worth following. In a recent interview he mentioned his number one investing rule, "be fearful when others are greedy and greedy when others are fearful". He went on to say in the interview that people who are congratulating themselves for moving all their money into "cash", ie, CD's treasurey bills, money markets, will learn to regret that decision. Mr. Buffet feels "cash" will become the worst performing asset class going forward. We are in very trying times, with numerous opinions on what to do. Someone will be right in the short run, however, there is little chance that the same person will be right more than once. The difference is Mr. Buffet's strategy has not changed, he does not market time by getting in the market at the right time and get out of the market at the right time. He has a defined strategy that he follows no matter what the market conditions. He is well diversified and disciplined in his approach. There are times when his portfolio is lagging the general market, he remains focused, diversified, disciplined and invested.

Congratulations!

Congratulations to all those that did not panic. Free markets work in the long run and you will be rewarded. It took courage to remain vigilant and stay invested. Courage is not the opposite of fear, courage is doing the right thing when it needs to be done. Remember Wall Street, whats left of it, benefits whenever investors buy and sell. When your portfolio is designed in a mathematical and scientific manner, using Modern Portfolio Theory you have a plan and you will reap the benefits if you follow that plan. No business became successful without a plan, unless it was plain lucky. Don't rely on luck with your investments. Adam Smith wrote "The Wealth of Nations" in 1776 and it remains the foundation of our free markets, just like the Constitution remains the foundation of our society. No one can predict the future. Stay diverisified...rebalance...stay invested in the free markets!!