Search results matching tag 'AdvisorLink'

Dalbar Update: Investors Still Lagging The Market

GaryHalbert — Tue, 03 Nov 2009 23:04:00 GMT

IN THIS ISSUE:

Third Quarter GDP Surprises on the Upside
Why Investor Returns Can Trail the Market
The 2009 Dalbar QAIB Study Update
Investor Panic Leads to Poor Decisions
A Chink in Passive Investing’s Armor?
Same Study – Different Conclusions

Introduction

Since late 1994, studies have shown that many investors do not realize the same returns as the mutual funds in which they were investing. The first such study I saw back in the 1990s was one that Martin Zweig commissioned Morningstar to produce. This study analyzed cash flows in and out of stock mutual funds to see how the average investor did. I remember being surprised when I learned that over the period from 1989 through 1994, the average growth mutual fund returned 12.5% but the average investor in those funds actually lost 2.2%.

Soon, the Zweig/Morningstar study was joined by others, the most notable of which was the Quantitative Analysis of Investor Behavior (QAIB) Study conducted by Dalbar, Inc. in 1994. Dalbar confirmed that many investors were not participating in long-term mutual fund returns because of frequent switching among funds.

Until these studies were published, no one worried too much about what kind of returns investors were actually realizing. Everyone just assumed that whatever the large mutual fund firms reported as returns were what investors got. These studies, however, showed that many investors were chasing hot returns in order to get better returns. In other words, they’d jump from one hot fund to the other in hopes of increasing their return. But just the opposite occurred.

To say that these studies had a huge impact on my firm is an understatement, since they were the catalyst for the introduction of our AdvisorLink® Program back in 1995. Fortunately, Dalbar has continued to update its original study each year, and the general trend has remained the same – investors overall are not getting the kind of returns they should because of frequent switching among funds.

This week, I’m going to update you on the latest update of the Dalbar QAIB Study. It’s possible that you might see yourself in these statistics. After that, I’m going to discuss the original conclusion reached in the QAIB Study, and why we chose a different track when developing our AdvisorLink® Program.

First, however, I’m going to briefly discuss the 3Q GDP report that came out last week after my weekly E-Letter had been published. To say the least, the number surprised most analysts by coming in on the high side of economists’ forecasts. I think you’ll find both subjects to be very interesting reading, so let’s get started.

Third Quarter GDP Surprises on the Upside

Last Thursday, the Commerce Department reported that 3Q GDP rose 3.5% (annual rate). This was above pre-report estimates which averaged around 3%. The government noted that the rebound in the 3Q was led by increased consumer spending (think "cash for clunkers"), higher exports and a continued increase in federal spending.

Most analysts concluded that the better than expected 3Q GDP report confirms that the US economy came out of the recession in the July-September quarter. However, the Consumer Confidence Index unexpectedly fell sharply in October, partly due to the continued rise in unemployment, which raises questions about economic growth in the 4Q.

Finally, keep in mind that the 3Q GDP report will be revised two more times in the coming weeks, and it will not surprise me if it is revised downward, what with the unemployment rate on track to top 10% by the end of the year. And for most of us, this economy does not feel like it's growing at the rate of 3.5%.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Why Do Investors’ Returns Trail the Market?

Before going into the most recent update of the Dalbar QAIB study, it is probably worthwhile to provide some background on exactly how investor returns and fund returns can differ. I would bet that many readers just assume that investors always earn returns in line with those of the equity and bond mutual funds they hold, but this is definitely not always the case.

In a nutshell, fund returns represent what someone buying and holding a particular mutual fund would have earned over a specific time period. Returns for the “average investor,” on the other hand, factor in behavioral measures that can (and do) affect the actual returns earned by investors in these funds. Dalbar explains it this way:

“…the [QAIB] study utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. These behaviors are then used to simulate the ‘average investor.’ Based on this behavior, the analysis calculates ‘average investor return’ …”

In other words, switching among investments has an effect on the eventual return received, both on a long-term and short-term basis. Dalbar and others have found that investors who tend to hop from one hot mutual fund to another not only fail to enhance their performance over industry benchmarks, but have been shown to actually end up earning a far smaller return because of their periodic switching among funds.

Why do investors hop from fund to fund so much? The reasons vary, but my experience has been that some investors panic when losses occur and get out of the market. Others frequently change their investments to chase the hottest returns. Unfortunately, this hot performance mindset is aided by financial publications that routinely list the top five or 10 or 20 best funds for the previous year. Investors often look at their own return during the year compared with the “hot” funds, and decide to switch and get in on some of that high-powered performance.

Unfortunately, the mass migration of investors to funds with the best previous performance often guarantees that those funds will not repeat as a top performer the next year. The end result is that funds with hot performance one year often lag behind other funds in subsequent years. Thus, those investors who flocked into these funds after their best performance often find that they would have been better off had they stayed in their old funds.

So, do investors learn their lesson and look for funds with consistent long-term performance? The answer for many of them is “no,” and they continue hopping to the next hot fund and hoping for a repeat performance that seldom happens. This is what we like to call becoming a “Dalbar statistic.”

The 2009 QAIB Study Update

The 2009 update of the original QAIB Study measures performance over the 20-year period extending from January 1, 1989 through December 31, 2008. Considering that this period includes both the 2000 – 2002 and 2007 – 2008 bear markets, one might conclude that investors who frequently switch among mutual funds on their own might have had better results than those of the actual mutual funds, but you’d be wrong.

Here’s what the most recent update to the Dalbar QAIB Study found:

Over the 20 years ending December 31, 2008, equity mutual fund investors had average annual returns of only +1.87% while the S&P 500 Index averaged +8. 35% over the same time period.
Fixed income fund investors had average annual returns of +0.77% over the same 20-year period, while the benchmark Barclays Aggregate Bond Index averaged +7.43%.
Note that both the equity and fixed income fund investors’ average returns were less than inflation, which clocked in at 2.89% over this 20-year period of time.
Confirming the “lost decade” concept, Dalbar’s study showed that the S&P 500 Index had negative returns over 10, 5, 3 and 1-year time windows. Fixed income investors, however, fared better with the Barclay’s Aggregate Bond Index averaging positive returns ranging from +4.65% to +5.63% over this period of time. However, neither the average equity fund investor nor average bond fund investor beat the benchmark returns over any of the 1 to 10-year time windows.

Thus, the QAIB Study again shows that investors’ own behavior is detrimental to their long-term investment goals. Following are graphic representations of the study’s findings. The first graph shows the performance of the various benchmarks used in the QAIB Study during various time windows:

The next graph shows the performance of the average equity, fixed income and asset allocation mutual fund investor over the same time windows:

To sum it all up, many mutual fund investors have been their own worst enemies over the last 20 years. The only bright spot, if you can call it that, was a statistic showing that the average asset allocation fund investor fared better than both the S&P 500 Index benchmark and average equity fund investors in 2008, losing “only” 30%. In fact, the average asset allocation investor lost less than the average equity fund investor in most time periods. Obviously, this is a function of having both equity and fixed income mutual funds in the typical asset allocation portfolio.

However, something even more interesting is that asset allocation did not enhance performance over the long haul. Note that the average asset allocation investor had an average annual gain of only 1.67% over 20 years, versus 1.87% for the average equity mutual fund investor.

News Flash – Investors Panic in Down Markets!

Another, rather obvious finding in this year’s QAIB Study update was the fact that “When the going gets tough, investors panic.” In all previous updates of the QAIB Study, Dalbar has pointed out that investors’ emotional behavior can significantly affect their returns. However, their advice has been to simply suppress this emotional behavior and stay in the market.

This advice tends to ring hollow in bear markets like we had in 2000 – 2002 and 2007 – 2009. It’s like being on the Titanic and Dalbar saying “please remain calm and proceed in an orderly fashion to the lifeboats.” Some may heed the call, but the average passenger, like the average investor, is likely going to panic.

Thus, Dalbar has finally realized that investors engage in irrational behavior despite scholarly advice to the contrary. To illustrate this behavior, Dalbar has developed a “Guess Right Ratio” that measures how often the average equity fund investor makes an accurate investment decision based on the market environment. In other words, this ratio measures how often the average investor buys low and sells high. Over the 20-year period covered in the study, Dalbar found that “Market declines caused panic and panic led to bad decisions. And bad decisions combined with declining markets resulted in exacerbated losses.”

What I find disappointing in all of this is why it took Dalbar so long to figure out that investors won’t necessarily heed a call to ignore losses and stay invested during bear markets and major corrections. When I read the first QAIB Study back in 1995, my initial reaction was that investors need professional management because they were not likely to have the discipline to remain invested in losing markets, no matter how many times their broker tells them to “stay the course.” After only 15 years, Dalbar finally sees the light.

A Chink in Passive Investing’s Armor?

Perhaps the most surprising revelation in the 2009 QAIB update compared to all previous years is that traditional passive buy-and-hold strategies are not seen as a solution to the problem. Not only did Dalbar decide against endorsing traditional asset allocation as a solution, they actually came to the realization that such strategies don’t work. Here’s how Dalbar put it in this year’s update:

“This year’s report … also demonstrates that simply adopting a one-size-fits-all asset allocation strategy will not suffice in the new investment paradigm.” [Dalbar QAIB, Page 2] “Portfolio performance during the market meltdown of 2008 is clear evidence that the current methods are ineffective, even independent of investor behavior. Current asset allocation and diversifi-cation strategies are based on uncorrelated asset classes that in 2008 became highly correlated, thus rendering all such strategies moot.” [Dalbar QAIB, Page 11, Emphasis added]

For a while, I thought that Dalbar may have been reading my E-Letters. After all, I have been making similar observations about buy-and-hold strategies for a very long time. However, I soon learned that they are not running plays from my playbook when I began reading their new recommendations to help investors keep from being their own worst enemies.

While space does not permit me to go into detail about each of Dalbar’s recommended solutions to inferior investment returns, I’ll discuss each of them briefly below:

1. Dalbar’s first suggestion to help investors get better returns was to consider using Dollar Cost Averaging (DCA) to ease back into the market. I have written about DCA in the past in the E-Letter, and it is essentially a method of investing where you gradually invest your portfolio in increments over time. This means that you buy into the market at different price levels and are somewhat less susceptible to a major market downturn. In fact, investing during these market downturns can result in buying at bargain prices, which should be good for your portfolio in the long run.

Of course, this only works if you have moved your money to the sidelines or are making periodic contributions to a retirement plan. I think that DCA can be a good idea if you are in a 401(k) or other type of plan where you have only mutual fund options and cannot access actively managed investment strategies. Obviously, this technique is not available for anyone who is already fully invested in the market. For those investors, Dalbar had other alternatives as discussed below.

2. The second strategy that Dalbar suggested was to consider a portfolio management technique known as Purpose-Based Asset Management, or PBAM. This strategy has the benefit of being available to both investors on the sidelines and those already fully invested. That’s the good news. The bad news is that this approach is little more than buy-and-hold “lite.”

According to Dalbar, traditional asset allocation strategies often assume only one level of risk tolerance for the entire portfolio. The main premise behind PBAM is that investors actually have multiple risk tolerances depending upon the particular investment goal. Investors may be more comfortable with higher risk on investments held for longer periods, such as for retirement, than they are for investments held for shorter-term goals.

Thus, investors are encouraged to allocate assets into separate strategic “compartments” based on the ultimate goal for that part of the portfolio, and then design an asset allocation strategy based on the appropriate risk level for each compartment. The hope is that money allocated more conservatively will lose less in down markets than the more aggressive compartments, resulting in less panic on the part of the investor.

In reality, this simply means that instead of having one big asset allocation portfolio, they will have multiple small buy-and-hold portfolios that will be subject to the same limitations as any other passive asset allocation strategy. My personal opinion is that PBAM is simply a marketing gimmick that will result in little difference in overall performance or emotional decision making.

3. A final recommendation from the Dalbar report is to explore the use of leverage within portfolio holdings, both at the portfolio and individual holding level. In essence, Dalbar is acknowledging that leverage, especially in the credit markets, played a big part in the subprime meltdown and resulting credit crisis.

Since this leverage can occur in the private sector, government and international markets, Dalbar suggests that investment experts begin requiring issuers of securities to compute and disclose their true leverage. Once disclosed, Dalbar suggests that leverage should be incorporated into computer models that screen investments as well as asset allocation models.

Same Study, Very Different Conclusions

While the conclusion reached by this most recent update of the QAIB Study pretends to offer a new approach to investing, it’s really just a tweak of traditional buy-and-hold. This really isn’t all that different than the findings in prior years when Dalbar recommended investors follow buy-and-hold strategies and suppress the emotional desire to exit mutual fund investments when (not if) they begin to lose money.

I noted above that the Dalbar and Zweig studies were the catalyst for the development of my firm’s AdvisorLink® Program. Yet, AdvisorLink® is anything but a buy-and-hold investment program, so how did we get from Dalbar’s recommendation to an innovative collection of active management strategies?

It happened this way: I reported the findings of these studies in my monthly client newsletter (remember when publications were actually printed on paper?), but pretty much dismissed its applicability to my audience since most were experienced investors in my managed futures funds. Anyone sophisticated enough to invest in futures funds must be able to handle their own mutual fund investments, right?

Wrong! Imagine my surprise when a very large percentage of my futures funds’ investors responded to my newsletter saying that the Dalbar QAIB Study described their own behavior. They resoundingly supported our research into a way to keep from becoming a “Dalbar statistic.”

We then had to develop a strategy to try to get investors to avoid emotional decisions in down markets. While Dalbar suggested just saying “no” to switching among funds, we knew that investor psychology would dictate moving away from equities when the pain became too great. As a result, we took a different track in addressing investor psychology.

First, we reasoned that investors who are doing everything on their own were becoming confused with all of the conflicting information in the marketplace. We called this “information overload,” and this was just the early days of the Internet. Thus, our first principle was that investors should seek out the help of professional money managers rather than trying to do everything themselves. This helps take some of the emotion out of the equation, since a third party is responsible for investment decisions. This first principle was the genesis of our AdvisorLink® name, since we were linking investors to qualified Investment Advisors.

The next principle we adopted was that all of the strategies in our AdvisorLink® Program had to be actively managed. We saw no benefit in strategies that would stay fully invested in the face of a bear market or major correction. It just makes sense to move to cash or hedge long positions when the markets are going against you. This, too, helped to reduce the emotional impulse to sell during bad markets. We even included more aggressive programs that were able to “short” the market with the potential to actually make money during down markets.

A final principle in the establishment of our AdvisorLink® Program was that it needed to be mutual fund based. While we were aware of active money managers using individual stocks and bonds, many had minimum investments in the hundreds of thousands of dollars, and some required over a million. By concentrating on Advisors who used mutual funds, we were able to bring the advantage of professional money management to our clients at reasonable minimum investment levels.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

The Dalbar QAIB Study has been a valuable tool in educating both investors and Advisors about the dangers of emotional trading. While QAIB is instructive in showing weaknesses of the average investor’s actions, it falls short on solutions. I predict that you’ll be hearing more about Purpose-Based Asset Management in the future as this marketing gimmick catches on with brokers who want their asset allocation programs to sound like something other than what they are. Just remember that PBAM is nothing more than buy-and-hold lite.

The purpose of my short history lesson about our AdvisorLink® Program is to give you some insight as to why it is structured the way it is and why we feel it’s important to have active management represented in your portfolio. These strategies not only address the issue of investor panic and emotional trading, but also offer additional strategic diversification over buy-and-hold.

If you would like more information about AdvisorLink® or the various strategies offered within that program, you can learn more by going to our website at www.halbertwealth.com. Or, feel free to give one of our Investment Consultants a call at 800-348-3601. I think you’ll be glad you did.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

How the Economic Crisis Changed Us
http://www.parade.com/news/2009/11/01-how-the-economic-crisis-changed-us.html

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Republicans to announce alternative healthcare reform
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The Stock Market Conundrum

GaryHalbert — Tue, 06 Oct 2009 19:14:00 GMT

IN THIS ISSUE:

Ball of Confusion
The Gloom-and-Doom Argument
Damn the Torpedoes, Full Speed Ahead!
Is the Market Defying Gravity?
What You Should be Doing

Introduction

The cover of the October 5, 2009 issue of Business Week magazine summed up the current dilemma for stock market investors perfectly. It had a staircase running diagonally across the page, with one figure climbing up the stairs, and the other going down the stairs. The "upstairs" view had the caption, "Why the Market Will Keep Going Up," while the downstairs view was labeled, "Why the Market is Going Nowhere."

The fact that both cases can be made in a single magazine article shows that there are good reasons for the market to go up, and equally good reasons for it to go sideways, or even down. The fact that the S&P 500 Index has risen over 50% since the March lows has both bulls and bears scratching their heads. And nobody knows what lies ahead.

There's little wonder why $3-$4 trillion of investor assets are reportedly still sitting on the sidelines in cash, even though the market's rally since the March 9th lows has been nothing short of spectacular. You would think that even hesitant investors would now be piling into the market. Some have, but much of this sideline money is staying put where it won't be subject to another round of losses, should the market rally suddenly reverse.

This week, I'm going to discuss both the upside and downside potential in the stock markets. In doing so, I'm going to lean upon the opinions of various market forecasters as well as my best economic resources. I warn you, however, that there is no single oracle of truth and light that has all the answers. George Bernard Shaw reportedly said if all the economists were laid end to end, they'd never reach a conclusion, and I'm beginning to get the same feeling about today's stock market analysts.

Ball of Confusion

The term "uncharted waters" as it relates to the stock and bond markets has probably never been as apt as in today's environment. Unprecedented federal government intervention in the markets has created a playing field that is, at best, significantly different than past market environments. The Fed and Treasury have primed the pump, and we seem to be coming out of the worst recession since the Great Depression. But no one knows whether the economy will continue on a path of sustained growth once these trillions of dollars are no longer flowing.

As we all know, however, the stock market and the economy are two different things and they sometimes move independently. As a result, some feel that the stock market is giving the "all clear" signal for investors with its 50%+ run-up since the March lows. Others, however, point to the fact that stocks haven't risen this far this fast since 1933, and we all know what happened after that. Plus, while this rally is impressive, it's important to realize that the S&P 500 Index is still over 32% below its October 2007 peak value as of the end of September, so many buy-and-hold investors are still under water.

Some analysts point to the fact that the market hasn't experienced even a 10% downward correction since March as a reason for caution, thinking that such a correction could be in the cards in the near future. Others, however, actually think that the market's lack of a significant correction is a sign of the superior strength of this run-up in prices.

There is also a wide range of interpretations of the stock market's current pricing. Some say that the market is pricing in continued economic growth and, if such growth doesn't happen, the market will fall again, possibly even re-testing the March lows. Others, however, claim that the stock market is priced fairly at this point in time and investors need not be concerned.

A number of analysts pin responsibility for the market rally on corporate profits, especially as they continue to beat expectations. Others, however, claim that expectations were so low that they were almost impossible not to beat. Since we don't track or recommend individual stocks, I can't offer an opinion on this earnings discussion. However, I do know that if you lower your expectations enough, earnings are bound to beat them sooner or later.

The end result is that investors are now justifiably confused and there is no single authoritative source for market action going forward. For every positive argument, there's a negative opinion. For every cheerleader, there's a gloom-and-doomer and most are backed up with sophisticated statistical analyses supporting their predictions. As always, the future is unknowable, but in this case it doesn't even seem to be giving us the slightest hint of what might happen.

The Gloom-and-Doom Argument

I am always a little hard on the gloom-and-doom crowd, possibly because I have been exposed to them for so long that I know how wrong they have been over the years. Many in this negative camp missed out on the greatest bull market in history in the 1980s and ‘90s because of their deep-seated fears that the sky was always falling. At best, the old adage about even a stopped clock being right twice a day seems to be appropriate for this group.

However, it's not just the usual suspects who are sounding warnings about the current state of the stock market. Bill Gross and Mohamed A. El-Erian, both with the PIMCO family of mutual funds, are touting a "new normal" where stock market returns will be less than the long-term averages as economic growth is likely to be below-trend (3% or less in GDP) for at least the next couple of years. El-Erian expresses his skepticism of the stock market's recent rally, saying "Interest rates are at zero, there's $2 trillion plus on the Federal Reserve's balance sheet, and yet the economy is still losing jobs. What exactly is the stock market romancing?"

Of course, El-Erian and Bill Gross are well-known bond guys, so it is not unusual for them to be a bit biased against stocks. However, many of my best sources over the years share the view that stocks are likely to under-perform their historical averages over the next several years.

Ned Davis Research recently issued a report noting that all previous rallies of the magnitude we've seen over the past six months or so took place in the 1930s and the 1970s. Davis notes that none of those rallies were sustained over the long haul. In essence, Davis points out that anyone who missed out on the first six months of such powerful rallies, and then jumped back in the market, would have been subjected to losses as the bull market ran out of steam and started falling. This data suggests that the current rally will run out of steam later on this year, but that remains to be seen.

A recent Wall Street Journal article noted that Tim Hayes, chief strategist for Ned Davis Research, believes that there is a good chance that the stock market could have another big decline in 2010. Mr. Hayes is known for having forecast the current market rally, so his opinion does carry some weight. Likewise, Jordan Kotick with Barclays Capital in New York expects a repeat of the 1970s, where the rally fizzles and we end up with an extended range-bound market.

A separate article in the October 5 Business Week noted that high unemployment and low inflation might lead to a decline in pay, which could slow consumer spending in the next year and, in turn, the economic recovery. Mainstream economists downplay the probability of this happening, but it is a possibility, and stock prices could suffer if it comes to pass.

As for consumer spending, a recent Careerbuilder.com survey indicated that 61% of Americans say they are living paycheck to paycheck, up from 49% a year ago. Even among those making over $100,000 per year, 30% say they are just scraping by, compared to 21% a year ago. With a growing number of families strapped for cash and unemployment expected to peak at over 10%, please tell me how consumer spending is going to rebound sharply.

A final cautionary word comes from those analysts who are tracking the massive spending by the federal government. As I have mentioned a number of times, this short-term spending could lead to long-term catastrophe, especially if the Treasury has to raise interest rates paid on its debt to attract foreign buyers. Higher interest rates could stifle an economic recovery already facing headwinds from curtailed consumer spending and high unemployment.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Damn the Torpedoes, Full Speed Ahead!

While there are many reasons to be cautious about the market's recent strong rally, the number of analysts and professional money managers who are cheerleaders for the new bull market is growing. A recent Financial Advisor Magazine article noted that such luminaries as Byron Wien (Chief Investment Strategist for Pequot Capital Management), Barton Biggs (Manager of the Traxis Partners hedge fund), Steve Leuthold (Leuthold mutual funds manager) and Michael Price (billionaire value investor and fund manager) are all now firmly in the bull market camp. Despite the 50+% spike since March, these well-known stock market mavens believe the bull market should continue.

The primary supporters of a continued market rally are those who believe that the market will revert back to its previous long-term mean return. These analysts admit that the last 10 years have been anything but normal, but they believe that long-term stock market fundamentals should regain control as the economy continues to get better.

Of course, when these "normalists" speak of a return to the mean, they are talking about a 12.9% annualized gain like the stock market produced from 1900 to 1999. But some ask how we can return to "normal" when consumer spending is expected to remain suppressed as the rate of savings continues to increase.

Liz Ann Sonders, chief market strategist for Charles Schwab, says that many investors have underestimated the "bounce-back effect," referring to the tendency of the market to rebound from artificially low points such as the March 2009 lows, which were spawned by panic about the ongoing credit crisis. She also predicts that US exports will rise sharply over the next year, which in her view will help to offset slower consumer spending. She, too, is bullish.

Likewise, Neil Hennessy, chief investment officer of Hennessey Funds, not only thinks that the current market rally will continue, but also believes that we are at the start of a 10-year bull market that will see the Dow Jones Industrial Average doubling by the time it's done. He cites low interest rates that make stocks far more attractive than government bonds, and large amounts of cash waiting on the sidelines as the main reasons for his optimism.

Trillions of Dollars Sitting in Cash

The amount of money on the sidelines in cash and money market accounts is a recurring theme when researching stock market analysts with bullish views. As noted earlier, there is reportedly anywhere from $3-$4 trillion sitting on the sidelines, much of it waiting for a signal to jump back into the market. Like Hennessy, many analysts believe that investors will tire of earning little or no return on this money, and then move back into the market, thus leading to higher stock prices.

I have to agree that so much money on the sidelines is a potentially good bullish argument. In fact, some of this money is already flowing back into mutual funds, but industry data show that most is flowing into bond mutual funds, not stock funds. Therefore, it may be a little early to pin too much hope on the herd instinct driving the market up.

Plus, much of this money belongs to Baby Boomers whose retirement funds have already endured two major bear markets in the span of a decade. Many of these individuals may feel that the bulk of the bull market has passed them by, and fear that getting back into the market may expose them to even further losses.

As for government spending and deficits, there is no doubt that much of the economy's growth since the 9-11 terrorist attacks has been fueled by government spending of one kind or another, aided along the way by the housing bubble. As the Fed continues to hold interest rates to near-zero, it is essentially making cash and money market funds unattractive to investors in hopes of driving them to other investments. The question then becomes what happens after the government stops priming the pump?

Fed chairman Bernanke has indicated that interest rates will stay low for a long time. In the past, this liquidity has gone to fuel bubbles – first the tech bubble and then the housing bubble. This time, the bulls believe it will take the form of a stock market bubble, which could send the market much higher in the weeks and months to come. That remains to be seen.

Looking at the Big Picture

As discussed above, there are compelling arguments for both the bullish and bearish cases at this time. However, there is little disagreement that the major stock market averages are "overbought" at this time. As noted earlier, there has not been even a 10% downward correction since the March lows.

The Dow Jones Industrial Average peaked in October 2007 at just over 14,000. It then experienced the largest numerical decline in history over the next 18 months to the low on March 9, 2009. The percentage decline from peak-to-valley was apprx. 54%. From the March low, the Dow spiked up to above 9,800 briefly in late September, marking a recovery of just over 50% without so much as a 10% downward correction along the way.

This is why most market forecasters agree that the stock markets are overbought. From the highs in late September, the Dow retreated to just under 9,500 in early October, but is again rallying so far this week.

One point is clear from the chart, however. Buy-and-hold investors who rode the market all the way down have not recovered even half of their investment losses, despite the latest 50% rebound. And there is no guarantee that the market will continue higher.

Investors that bailed out of the market late last year or early this year, and have not gotten back in, are between a rock and a hard place, as the saying goes. They are understandably reluctant to jump back in the market after a 50% spike up. Yet they are earning next to nothing in cash. I've had plenty of people voice this concern to me: Well, if I get back in now, that means the market is sure to go down again. Those on the sidelines are in a really tough spot right now.

Is the Market Defying Gravity?

As I have mentioned many times, my firm recommends a number of actively managed investment programs that have the flexibility to move to cash or hedge long positions. To provide the most value for our clients, we are also constantly tracking other active money managers to see if their strategies might have a place in our AdvisorLink® Program.

This tracking of current and prospective investment programs allows us to see a lot of daily trading activity generated by a wide variety of systematic approaches, which I believe supports the idea that there are a lot of contradictory signals being given by the market. From our experience, it's not uncommon for the various systems to disagree about the market's direction. After all, they use a variety of technical and statistical data to generate their trading signals, but not all systems use the same data.

However, when we see most of the various programs we track line up on the same side of the market, it usually means there is a good chance the market will move in that direction. Yet as noted above, the current market has been giving numerous contradictory signals, and thus some of the managers we track (and even some we recommend) have been on both sides of the market recently.

This makes it even more difficult to have a strong view of the market's overall direction going forward, other than the consensus that it is currently overbought and overdue for a downward correction. Whether or not we are in such a correction as this is written is uncertain.

The last time something like this happened was back in the late 1990s when the tech bubble was being inflated. Most everyone agreed that the markets were overbought, but stocks, especially tech stocks, continued to soar. New-age market gurus claimed that we were in a "new paradigm" and that the old rules no longer applied. Eventually, the market did collapse under its own weight, but only after an extended period of impressive gains.

We may, again, be dealing with an irrational market that neglects proven technical indicators and, instead, believes that we have entered a new era of government funded gains in the stocks of companies deemed "too big to fail." However, I think there is still a lot of risk for those considering traditional buy-and-hold investment strategies.

It may be that the recent uptrend in stocks continues for a while as it does appear that we are coming out of the recession, and corporate earnings have been surprising on the upside, generally speaking. Consensus opinion has turned significantly higher and, as noted above, there are trillions of dollars looking to get back in that could limit downturns and drive prices even higher.

But with the Obama administration on track to double the national debt in the next 10 years, I don't see things ending pretty at some point, probably soon after all those sidelined trillions jump back in the market.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

As I researched material for this article, I found it interesting that the current opinions about the strength of the current market rally somewhat parallel what was going on back in the late 1990s. Back then, all of the fundamental analysis was showing that the market shouldn't be going up like it was, while the "new paradigm" crowd was saying it's different this time.

Now, we have many of the same arguments. The fundamental analysis camp is saying that the market is fairly priced and should continue to go up based on profit expectations. All the while, those promoting the "new normal" are claiming that even if the market continues higher, it will struggle and will under-perform its historical averages. It seems that the more things change, the more they stay the same.

Of course, there is a third possibility that could prove both camps wrong. There is a distinct possibility that the stock market could get caught up in a broad trading range in which it moves generally sideways for an extended period of time. Maybe we're already in it: the Dow's close at 9,487.67 on Friday, October 2nd was actually lower than the index's closing value of 9,505.96 back on August 21st.

Such a market environment does not mean that stock prices do not change, but rather that short-term upward trends could be followed by similar periods of downward price movement, and vice versa. Over the long haul, the market could grind slowly higher or lower, but any such move could be gradual, at best.

Of course, these arguments don't help investors who are trying to figure out what to do with their money. Have they missed out on most of the market's gain, or is there plenty more to go around? Unfortunately, no one knows for sure, and anyone who tells you they do is either dishonest or delusional or both.

As always, I suggest that you have most of your stock and bond portfolio professionally managed by Advisors that have a proven system, complete with the ability to move to cash or hedge long positions during major market downturns and bear markets. More sophisticated investors may also want to consider a small allocation to investment programs that can go "short" if market conditions warrant.

Two of the programs I have mentioned most often are Niemann Equity Plus and Potomac Guardian. These are managed accounts that invest in a wide variety of mutual funds in up markets, but also have the ability to move to cash or hedge positions during major corrections or bear markets. We recently presented a webinar on the Potomac Guardian Program that featured a member of its Investment Committee explaining their approach to the market. If you would like to learn more about this program, I would strongly suggest that you listen to the recorded version of this seminar at the Potomac Webinar link.

For anyone interested in the Niemann Equity Plus Program, we're having a live webinar tomorrow, October 7th, at 12:00 PM Central Time. In this webinar, Travis Silberman, one of Niemann's co-founders, will discuss the strategy Niemann employs in managing money. If you would like to sit in on this webinar, click on the following link to access the Niemann Webinar Invitation.

And don't forget about the Columbus High-Yield Bond Program that I wrote about in my September 15 E-Letter. This actively managed high-yield bond fund strategy offers a fixed income exposure for your portfolio along with the ability to move to cash in down markets. For a more aggressive fixed income program, you may want to check out the Hg Capital Long/Short Government Bond Program that trades the 30-year Treasury bond both long and short.

These are in addition to our other AdvisorLink® recommended programs like Third Day Advisors and Scotia Partners that I have also written about in the past. If you'd like to find out how these programs could bring additional diversification to your portfolio, check out our website at www.halbertwealth.com. Better yet, give one of our Investment Consultants a call at 800-348-3601 and let them explain our various investment options and how they might fit within a diversified portfolio.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

The New Economic Landscape Will be Grim Unless Policymakers Act to Foster Growth
http://www.economist.com/opinion/displayStory.cfm?story_id=14548881&source=hptextfeature

Democrats Brace for the Hardest Part of Health-Care Reform
http://www.time.com/time/politics/article/0,8599,1927787,00.html

Obama Caves on Iran
http://online.wsj.com/article/SB10001424052748703628304574452933624279114.html

The Case for High-Yield Bonds

GaryHalbert — Tue, 15 Sep 2009 21:34:00 GMT

IN THIS ISSUE:

"Junk Bond" Basics
High-Yield Bond Whitepaper
by Steven D. Landis, CFP
Is the Party Over for 2009?
Introducing the Columbus High-Yield Bond Program
Performance Evaluation
Conclusions

Introduction

High-yield bonds, or "junk bonds" as they are widely known, have become the subject of quite a bit of attention in recent months. That's because, as of August 31st, the Barclays and Merrill Lynch high-yield bond indexes have jumped over 40% in value so far in 2009. This makes the S&P 500 Index's year-to-date return of only 14.97% as of August 31st paltry in comparison.

Returns of that magnitude have not escaped the notice of investors. Inflows into high-yield bond mutual funds have been at or near record levels since March, based on information from AMG Data Services, a mutual fund tracking firm. However, the question is whether the good times in high-yield bonds will last.

I certainly don't pretend to be an expert on high-yield bonds, but I have found that the cyclical trends in the high-yield market often do lend themselves to being traded by an active money manager. Though "junk bonds" carry with them the reputation for being risky (and they are), we have found a professional money manager who has produced an enviable track record with low historical drawdowns.

This week, I'm going to feature Sojourn Financial Strategies, LLC and its co-founder, Steven D. Landis, CFP. I'll begin by reprinting excerpts from a whitepaper on high-yield bonds that Steve has authored. This paper does an excellent job of explaining the opportunities available in high-yield bonds, and whether or not it's too late to participate in the junk bond rally that began earlier this year.

I'll then finish up by presenting Steve's Columbus High-Yield Bond (CHYB) Program. Just to whet your appetite, this actively managed strategy has produced an annualized return of over 10% since its inception in 2002, with a maximum drawdown of only -6.14%. Year-to-date, the CHYB Program is up over 24% as of the end of August. Past performance, however, is not necessarily indicative of future results.

Junk Bonds 101

Most of us realize that high-yield bonds are called "junk bonds" because they carry a much higher risk of default than government or high-grade corporate bonds. As a result, these bonds tend to carry a higher rate of interest in order to compensate investors for taking on a greater risk of default. Like all bonds, high-yield issues tend to be affected by the interest rate climate. However, what you may not know is that the value of a high-yield bond can also be affected by the health of the economy and stock market.

It just makes sense that a better economic environment sometimes reduces a junk bond's default risk, since the issuing corporation may be less likely to default in a good economy. As a result, the spread between the effective junk bond yield and a risk-free (Treasury) rate closes, and the underlying bond becomes more valuable.

Of course, the skill in managing high-yield bonds or junk bond mutual funds comes in knowing when to be in the market and when to move to cash. Since 2002, Steve has shown us that he has the methodology in place to make these decisions with a high degree of accuracy. However, before getting into the details of his program, I want to reprint excerpts from his recent whitepaper on high-yield bond investing.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

QUOTE:

Investors Ready for a New Way to Invest in High Yield Bonds
By Steven D. Landis, CFP®

High yield bonds have been around for longer than most of us can remember. Anybody who was born earlier than 1960 can recall the days of Ivan Boesky and Michael Milken, the highly creative and somewhat dubious creators of "junk bonds" (the more-to-the-point term for high yield bonds). Eventually, their actions, not the junk bonds, landed the boys in jail for a short time. It should be noted that never was there (then or now) anything illegal about the use of the junk bonds, but their criminal activity, in part, contributed to the bad reputation sometimes attributed to high yield bonds.

In this paper, the terms high yield bonds, junk bonds, and "junks" will be used interchangeably and will have the same meaning and reference. These terms apply to loans that are made to higher risk, corporate borrowers of money. High yield bonds had been in existence long before Boesky's and Milken's involvement in the early 1980s. During the early part of the 20th century General Motors, U.S. Steel, and other well-known corporations borrowed money that, at that time, was considered higher-risk debt. If that debt were issued today, it would be considered to be a junk bond.

Fast forward to today and we find that more than $500 billion (a half-trillion dollars) defines the magnitude of the high yield bond market. Its explosive growth is the result of two factors: 1) more companies needing capital; and 2) the availability of investors who are willing to take more risk in return for a higher yield on their investment.

Bond Ratings

Bonds are rated based on the probability of the borrower defaulting on the bond, that is eventually failing to meet the terms of the bond covenant. The highest quality bonds, those with the greatest probability of paying back the loan principle and interest, are rated AAA. As the chances of a bond default increases, the lower the rating on the bond, as illustrated in Table 1 below.

Table 1.
Bond Rating vs. Default Risk

Standard & Poor's Rating	Grade	Default Risk
AAA	Investment	Lowest Risk
AA	Investment	Low Risk
A	Investment	Low Risk
BBB	Investment	Medium Risk
BB, B	Junk	High Risk
CCC, CC, C	Junk	Highest Risk
D	Junk	In Default

So we can see that the two terms used to describe these bonds, high-yield and junk, come from two features of the bonds: 1) High-yield refers to the increased interest rate that accompanies the bonds; and 2) Junk refers to the low quality of the bond.

Risks of investing in high yield bonds

In 2007, investors and the public became intimately familiar with the sub-prime consumer mortgages and their risk to lenders (and ultimately the economy, in general). The results of consumers overextending themselves by borrowing more debt than they could repay, under terms that were unfavorable, eventually resulted in a near-collapse of the consumer mortgage market. Investors in those sub-prime mortgages soon found their investments suffering tremendous losses. Meanwhile, the ability to sell out of those investments became more and more difficult due to a lack of buyers. A similar scenario also played out in the high yield bond market in which holders of low-quality debt saw their investments lose a substantial percentage of its original value.

A fact of life is that consumers with low credit scores must pay high interest rates when they borrow money. This higher interest rate compensates the lender for the increased chance of the borrower defaulting on the loan. Likewise, corporate borrowers with a lower credit rating have an increased probability of defaulting on their loans and pay lenders accordingly. Those who loan money to these corporate borrowers demand to be compensated for the extra risk they take in making these loans. Should a default occur, the bondholders stand in line with all the other creditors of the company, hoping to get back some portion of their money. The lower the quality the bond, the less chance there will be assets that can be used to pay back creditors. The increased interest rate compensates the lender, at least in part, for this additional risk.

The result is that those entities that lend money to higher risk borrowers, via junk bond offerings, receive a higher interest rate than if they had been lending money to higher quality (lower risk) borrowers. To illustrate this difference, consider that over the past twenty or so years, high yield bonds have paid an interest rate of 3-9% (with an average of 6%) per year more than that of U.S. Treasury bonds. This difference is known as the "spread." In early 2008 the average default rate on junk bonds was about 1.1%. However, as the economy continued to sour the default was expected to increase to around 5.2%. Compare this with an average, long-term default rate of about 4.9% (according to John Lonski, chief economist of Moody's.)

An additional risk of junk bonds is their lack of liquidity. Liquidity refers to the ease of trading the instrument in the marketplace. The author of this paper also refers to liquidity as "how quickly one can sell an investment and convert it to cash". Junk bonds are not traded as freely as, say, government bonds. Thus, the liquidity of high yields is significantly lower than that of high quality debt, which leads to higher costs of trading and selling at one's desired price. All of these factors combined result in the higher interest rate that is attached to junks.

Why Invest in High-Yield Bonds?

Unlike normal bonds, that are greatly influenced by fluctuations in interest rates, junk bonds are less affected by interest rate movement. This is because junks generally have higher interest rates and have, generally, shorter maturities. In fact, junk bonds are affected more by overall economic changes (expansion or contraction) than changes (increase or decrease) in prevailing interest rates. This is because the quality of a junk bond is most affected by the strength of the company issuing the bond.

If the company's profitability increases (since the issuance date of the bond), the quality of their bonds increases. For an investor in a junk bond, this is an almost-perfect scenario: One in which a junk bond with a high interest rate becomes a quality bond with a high interest rate (this being the result of the formerly high risk borrower becoming a low risk borrower).

For example, ABC Corp. had a debt rating of "B" and issued a bond at 12%. Meanwhile, AAA-rated debt was paying 4%. Sometime following issuance of this debt, ABC Corp. enjoys a return to profitability and its debt rating is upgraded to "A". The result is that holders of those old ABC Corp. bonds now hold A-rated debt that is paying 12%! This, in turn, makes the underlying bond more valuable since investors are willing to accept a lower rate of interest on debt issued by a stable company.

How to Invest in High-Yields

In my opinion, investing directly in individual junk bonds should be left to the wealthy and institutional investors. In fact, the majority of investors in junk debt are institutional…mutual funds, pension funds, hedge funds, and others. This, however, does not suggest that investing in junks is only for the wealthy. Most all investors can get involved with junk bond investing by investing in mutual funds that specialize in them.

By investing in a mutual fund that specializes in junk bonds, an investor can take advantage of a professional fund manager. Additionally, the investor will be able to reduce risk via the diversification that mutual funds offer. (A typical mutual fund will hold as many as 200-400 bonds, all of which are owned, on a pro rata basis, by investors in the fund.)

Keep in mind, though, that investing in a mutual fund does not mean that the investor has no risk. Like the bonds held by the fund, a mutual fund can gain or lose value. Plus, in the event of a slowing economy, high yield bond mutual funds can lose significant value. So, for anybody considering an investment in high yield bond funds (or for that matter, any mutual fund) consider your tolerance for and ability to withstand potential losses.

An Improvement on Buy-and-Hold Bond Investing

As much as we really like investing in high-yield bond funds, they have one major flaw. That flaw is that there are times in which high yield bonds (and mutual funds investing in them) will get absolutely annihilated in a bear market. The years 2007 and 2008 are the most recent examples of this. In 2008, the majority of high yield bond mutual funds lost more than 20% of their value. Worse still were those funds that lost more than 50% of their value!

Risk-averse investors may find themselves asking: "Is there a way to invest in high yield bond funds without the risk of losing money in a down market?" Fortunately, the answer is, "Yes, there is." There are any number of advisers whose role is to actively manage money for their clients. (The author of this paper is among those who manage money for investors who want to invest in high yield bond funds.) The goal for most of these advisers/managers is to be invested in a security/market when it's gaining in price and to sell that security/market before its price goes down too much.

If the adviser is able to do this buying and selling successfully (and we emphasize "IF"), then that adviser's clients/investors would be able to make more profit while taking less risk. By reducing the losses during time periods in which high yield bonds are losing money (1998-2002 and 2007-2008) one can dramatically improve the potential for long-term profits.

Is the Party Over for 2009?

At this point, readers of this paper are either eager to invest in high-yield bond funds or skeptical and not interested in the increased risk. For those who are tempted to invest in the high-yield bond market, a question arises: "How much profit is left after the big run junks have had this year?"

It goes without saying that we have no idea how much more high yields can offer. But we can offer a look at three possible scenarios:

Scenario 1. The Economy Improves. If the economy continues to improve, profits of most corporations will rise. At the same time, we would expect profits of many issuers of high yield debt to improve. If this scenario does, in fact, occur then we would expect high yield bonds to continue increasing in price. (Additionally, bondholders would continue to receive interest payments from those bonds.)

Scenario 2. The Economy Sours. If the economy begins to worsen, then corporate profits will likely be depressed. At the same time, profits of issuers of high yield debt would probably suffer. In this scenario, the prices of high-yield debt would probably begin to fall. The buy-and-hold investor would suffer losses to his/her investment. Investors who use skilled, successful active managers have a great probability that their adviser/manager would sell their junk bond fund and invest their money in the safety of a money market fund. This move to safety would preserve the value of investors money.

Scenario 3. The Economy Muddles Along. If the economy becomes listless and neither grows nor contracts, there is the possibility that high-yield bond prices could stagnate. That is, prices would neither rise nor fall. It would be extremely rare for this to continue for an extended period of time, but let's assume it does. In such a situation, the investor neither gains nor loses money on his/her investment principle. However, he/she could continue to reap profits in the form of high interest income being generated by the bonds.

So, looking at the three possible scenarios, the only one that we would expect to pose a threat of significant loss is Scenario #2, specifically for the buy-and-hold investor. The investor who uses a skilled, active adviser/manager has a significantly greater chance of avoiding losses during a "down market". [There are no guarantees, of course. GDH]

In summary, we contend that high yield bond mutual funds can be an extremely attractive way to invest, though subject to substantial losses during falling markets. Furthermore, we believe that investing in high yield bond mutual funds can be an even more attractive method of investing, if managed under the guidance, direction, and oversight of an experienced and skilled adviser.

Steven D. Landis, CFP®
Sojourn Financial Strategies, LLC

References:

Glenn Yago. "Junk Bonds." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved December 20, 2008 from the World Wide Web: http://www.econlib.org/Library/Enc/JunkBonds.html
John Waggoner. USA Today. February 7, 2008.
"Junk Bonds: Everything You Need to Know". Investopedia®

END QUOTE

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The Columbus High-Yield Bond Program (CHYB)

As Steve made clear in his whitepaper, active management of high-yield bond mutual funds can potentially allow investors to participate in both capital gains and coupon returns, while also moving to the sidelines during times of downward price pressure. This ability to move to cash in downward trending markets is very important, especially considering the aggressive nature of high-yield bond investments.

It might come as a disappointment that the CHYB Program is up "only" 25.01% so far in 2009 as of August 31, considering that the Barclay's High-Yield Credit Bond Index is up over 40% over the same period of time. However, this analysis is very short-sighted given that historical drawdowns in the Barclay's Index have exceeded -33%, while the CHYB's worst-ever drawdown has been limited to just over -6%.

The value of minimizing losses becomes even more apparent when looking at the rolling 5-year returns as of August 31. The CHYB Program has a 5-year annualized return of 8.94% while the unmanaged Barclays Index has managed an annualized return of only 5.27%. Again, the ability to move to cash in downward trending markets can make a significant difference in long-term returns, though there are no guarantees. And remember that the CHYB returns are net of all fees and expenses.

The Columbus High-Yield Bond Trading Strategy

Steve's proprietary trading model uses technical indicators to determine the high-yield bond market's potential future movements. However, Steve goes one step further by analyzing the technical indicators unique to each of the high-yield bond mutual funds he uses. Like many other active money managers, Steve will sometimes use specialized high-yield bond index funds. However, he also uses traditional high-yield bond funds when his system tells him they have the best potential for future gain.

Doing this allows him to combine his market timing expertise with the bond selection expertise of the mutual fund manager. Plus, traditional high-yield bond funds typically pay a higher "coupon" rate of return than specialized index funds.

As a general rule, the CHYB Program invests in only one mutual fund at a time, though future growth may require him to use two or more funds. Client accounts will either be 100% in a high-yield mutual fund or 100% in cash (money market); there are no graded investments or partial positions taken.

The CHYB trading model does not use leveraged funds nor does it use specialized inverse funds that provide a net "short" exposure to the high-yield bond market. However, Steve may use such inverse funds as a hedge under certain conditions. Best of all, Steve's strategy employs the use of trailing stop orders that close out trades should losses exceed a pre-determined percentage. In winning trades, these stop-loss orders ratchet up with gains, providing the potential to lock in any positive returns over and above the stop-loss trigger percentage.

If I had to describe our observations of Steve's trading model, I'd have to use the term "patience." Steve does not employ any discretion in his trading, so he will allow the system to stay in cash as long as necessary until the high-yield bond market environment improves. For example, the CHYB Program was in cash for much of 2008, which is why it ended the year with only a 2.9% loss rather than a drop of over 26% as was the case in the Barclays High-Yield Credit Bond Index.

Performance Evaluation

The goal of the CHYB Program is not necessarily to "beat the market" over the short run, but rather to participate in market gains while also managing risks. From the historical performance statistics provided below, it is evident that Steve has attained this goal in the past, though past performance cannot guarantee favorable future results:

Performance Statistics
(Net of all fees and expenses)

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
(Please see Important Disclosures below.)

The CHYB Program is available through the Purcell Advisory Services platform. Accounts are held at Trust Company of America (TCA), an independent trust company located in Denver, Colorado. Clients have online access to their accounts via the TCA website. Both TCA and Purcell issue quarterly statements and TCA produces year-end tax reports. TCA charges a custodial fee of 1/10th of one percent (ten basis points) of the account balance.

The minimum account size for the CHYB Program is $50,000 per account. Management fees are billed quarterly in advance based on the following annual percentages for various sized accounts:

First $500,000	2.50%
$500,000 to $1 million	2.25% (entire account)
$Over $1 million	2.00% (entire account)

It is important to remember that all performance information provided above is net of both the management fee and custodial fee charged on the accounts.

Conclusions

We have been offering the Columbus High-Yield Bond Program for over three years now, and I continue to be impressed with the way it can participate in market gains and then move to the safety of the money market fund when the risk of loss becomes too great. I also like the fact that it is a non-discretionary system, which is an important factor when the model has been in cash for an extended period of time.

Over the years, I have seen money managers disregard their trading systems when they signal to be in cash for weeks or months. Overriding a trading system can also result from clients calling to ask why they are paying a fee to sit in a money market fund. Steve stuck to his guns during the extended cash position in 2008, and we haven't heard many clients complaining about having lost only 2.9% for the year when the stock and high-yield bond markets were in free-fall.

While you may have missed much of the move in high-yield bonds so far in 2009, I think Steve makes a good case for investing in this program now. Since we recommend this program for investors with at least a three-to-five-year time horizon, we feel that the CHYB Program's combination of market participation and risk management is a fit for the less aggressive portion of your portfolio. As always, be sure to read all offering materials and Important Disclosures before making a decision to invest.

If you would like to learn more about the Columbus High-Yield Bond Program or any of our other risk-managed AdvisorLink® investment programs, please feel free to give one of our Investment Consultants a call at 800-348-3601 or click on the following link to complete one of our online request forms. If more convenient, drop us an e-mail at info@halbertwealth.com or visit our website at www.halbertwealth.com to learn more about this and our other actively managed investment strategies.

Special Reminder about the "All They'll Need to Know" Booklets

As I mentioned a couple of weeks ago, we have now exhausted our supply of the end-of-life planning resource entitled "All They'll Need to Know." You can, however, still obtain a copy of the "All They'll Need to Know" booklet directly from Emerson Publications. I have negotiated a discounted price on both the printed and electronic versions of the booklet which you can access by clicking on the Emerson Publications website link below:

http://emersonpublications.com/index.php?pr=ATNTK-Halbert&nosessionkill=1

I am making this valuable resource available as a service to my readers and I do not share in any part of the purchase price of either version of the booklet. This discount is available for a limited time only, so I suggest that you take advantage of this offer as soon as possible.

Wishing you profits,

Gary D. Halbert

IMPORTANT DISCLOSURES: Halbert Wealth Management, Inc. (HWM), Sojourn Financial Strategies, LLC (Sojourn), and Purcell Advisory Services, LLC (Purcell) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from the Advisors in exchange for introducing client accounts. For more information on HWM or any other Advisor mentioned, please consult their respective Form ADV II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor's 500 Stock Index and the Barclays High Yield Credit Bond Index (which both include dividends) were used. Both represent unmanaged, passive buy-and-hold approaches, and are designed to represent their specific market. The volatility and investment characteristics of these indexes may differ materially (more or less) from that of this program, and these Indexes cannot be invested in directly. The performance of the S & P 500 Stock Index and the Barclays High Yield Credit Bond Index is not meant to imply that investors should consider an investment in the Columbus High-Yield trading program as comparable to an investment in the "blue chip" stocks that comprise the S & P 500 Stock Index or the high yield investments that comprise the Barclays High Yield Credit Bond Index. Historical performance data from inception through December 2005 represents a tracking account managed by Steven D. Landis and audited by MoniResearch, an independent corporation, Steve Shellans, President. Performance from January 2006 forward is from an actual account in Purcell Advisory Services Columbus High-Yield Bond Program. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in the Columbus High-Yield Bond Program.

Purcell utilizes research signals purchased from Sojourn, an unaffiliated investment advisor. The signals are generated by the use of a proprietary model developed by Sojourn, with the objective of providing superior risk-adjusted returns using high-yield bond investments. Assets in the program are allocated 100% to the appropriate high-yield mutual funds or 100% to the money market according to the purchased research signals. Statistics for "Worst Drawdown" are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

In addition, you should be aware that (i) the Columbus High-Yield trading program is speculative and involves risk; (ii) the Columbus High-Yield trading program's performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Purcell will have trading authority over an investor's account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Columbus High-Yield trading program's fees and expenses (if any) will reduce an investor's trading profits, or increase any trading losses.

Any investment in a mutual fund or money market fund carries the risk of loss. Mutual funds and money market funds have their own expenses which are outlined in the fund's prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency. Returns illustrated are net of the maximum annual management fee of 2.5%, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. Dividends and capital gains have been reinvested. Management Fees are deducted quarterly, and are not accrued on a month-by-month basis. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. Individual account results may vary based on each investor's unique situation. No adjustment has been made for income tax liability. Performance for individual accounts may differ materially (more or less) from the results illustrated. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

A Case of Mistaken Identity - The "Other" Gary Halbert

GaryHalbert — Tue, 01 Sep 2009 19:59:00 GMT

IN THIS ISSUE:

An Alter-Ego on the Internet
The Late Gary C. Halbert
My Background and Qualifications
Halbert Wealth Management, Inc.
The Forecasts & Trends E-Letter
Conclusions - Don't Forget the "D"

Introduction

Since hundreds of thousands of new subscribers come onboard my Forecasts & Trends E-Letter each year, it is important to advise readers from time to time that there is another Gary Halbert that is prominent on the Internet. His name is Gary C. Halbert. I am Gary D. Halbert. We are not related, and I have never even met Gary C. Halbert.

In fact, Gary C. Halbert is now deceased, but he continues to have a huge presence on the Internet even after his death. If you do a Google search for "Gary Halbert" without my middle initial, you do not find a direct link to me until somewhere around the second page of links. The entire first page of links, including the sponsored links, refer to the deceased Gary C. Halbert, not me - even though he passed away in April of 2007.

Perhaps it wouldn't be so bad if it were just a case of mistaken identity. However, the checkered past of Gary C. Halbert makes many of the subject lines of the search results appear to be very negative, especially to someone like me in the Investment Advisory business. Here's an example of what you might see when you Google "Gary Halbert" without my middle initial:

Gary Halbert has passed away (never good for business);
Gary Halbert Reviews - Is Gary Halbert a Scam?
Gary Halbert - Even though he apparently did something very wrong, he's still one heck of a good writer!
Gary Halbert shut down? He's not who you might think. Read the summary of facts we turned up.

If you happened to have done an online search for my name and came upon these links, let me assure you that they are NOT talking about me, but rather Gary C. Halbert (deceased).

Today, it has become second nature to go on the Internet and Google someone's name after hearing about them or seeing an advertisement. Thus, there's no telling how many people have received my E-Letter and then unsubscribed after doing a quick Internet search for my name and reading one of the horrible links above (or others) about the other Gary Halbert. While I do not want to speak ill of the dead, I do hope you can understand my desire to distance myself from Gary C. Halbert, even though he is no longer with us.

This week, I'm going to help clear up any confusion that my readers may have regarding the two Gary Halberts on the Internet. I'll spend a little time relating what I know of Gary C. Halbert, but most of the time discussing my background so that you will be more comfortable that I'm neither shut down nor dead, nor have I ever been imprisoned for fraud.

Gary C. Halbert

As I noted above, I have never met Gary C. Halbert and have never talked to him on the phone. The closest we came to communicating happened when he wrote me a terse e-mail as a result of a previous e-letter discussing how he and I were not the same person.

I do not know for sure exactly what Gary C. Halbert did, other than what is available on the Internet. While he wrote a newsletter and had a website (which is still operating - why, I don't know), his main claim to fame seemed to be as a marketing/direct-mail consultant. In fact, some of the links generated by Internet search engines are offering his old copywriting materials. Sometimes, you can even find his marketing materials on E-bay.

If that were the entire story, it might not be so bad since being confused with a formerly well-known direct-mail copywriter is not the worst thing in the world. However, Gary C. Halbert evidently had a few skeletons in his closet. According to information on www.gary-halbert.net, Gary C. Halbert spent "…several years in the Boron Federal Prison Camp for fraud in the 1980s." That's certainly not something I'd want my readers to think happened to me.

Then, back in 2003, the Securities & Exchange Commission initiated litigation against Gary C. Halbert and his son, Bond Halbert, for "possible violations of the federal securities laws" related to a stock trading system they had been promoting. According to the SEC press release, Halbert was being investigated for "…possible material false statements concerning a stock trading system made by or on behalf of Gary C. Halbert…"

I'm not sure how this SEC investigation came out in the end, but the important thing to know is that I was not the target of it. I have always tried to keep my 30-year regulatory record clean, which is no small feat when you consider that my various companies are regulated by the SEC, Financial Regulatory Authority (FINRA), Commodities Futures Trading Association (CFTC), National Futures Association (NFA) and even the Texas Department of Insurance.

Thus, you can see how someone doing an Internet search on my first and last name might give up before learning that there are actually two Gary Halberts on the Internet. Given the recent Madoff, Stanford and other investment frauds uncovered by the recent bear market, even a whiff of impropriety is enough to send investors elsewhere. Thus, having someone with the same name apparently being imprisoned for fraud and formerly under SEC investigation has likely sent more than a few of my readers to the unsubscribe link.

Again, I hold no animosity for Gary C. Halbert, and I find it sad that he passed away at the relatively young age of 68. The above discussion is simply a presentation of the facts and they are what they are. The important thing is, when you read any of these Internet postings about Gary C. Halbert, that you realize it's not me, Gary D. Halbert.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

And Now for My Story

Friends, family and co-workers will tell you that self-promotion is not one of my strong suits. In that way, I guess I'm the polar opposite of the other Gary Halbert whose self-promotion has taken on a life of its own on the Internet. Thus, discussing my background in the financial services business does not come natural to me, but at times I feel it's important so that you can feel that you know the person who writes to you each week. So here goes…

After obtaining my MBA in International Management, I began my career with a nationwide commodities brokerage firm in 1976. I specialized as a "hedging" broker and worked with agri-businesses and large farmers who wanted to use the futures markets to hedge the price of physical commodities that they dealt in or produced. In 1982, I moved to another nationwide brokerage firm that catered more to investors who wanted to trade commodities futures on a speculative basis.

It was during this time that I noticed how many brokers and brokerage firms were more interested in generating fees and commissions for themselves than providing good advice to their clients. After hearing an industry big-wig claim that over 90% of individual commodities account holders lost money, I realized that investors needed someone on their side of the table to help them evaluate the many investment opportunities available.

In 1984, I decided to leave the ranks of the big brokerage firms and, along with my wife Debi, founded ProFutures, Inc. While I knew that many investors needed professional help, I also found that the large minimum investments required by many successful money managers were a barrier to entry for most people. So, in 1987, we organized the ProFutures Diversified Fund, a managed futures fund featuring multiple Advisors, deeply discounted fees and commissions and a minimum investment of only $10,000.

In the years that followed, ProFutures expanded its services within its original mission of matching client needs with suitable professional money managers. In addition to other futures funds, ProFutures organized a series of private equity hedge funds and an offshore currency fund.

Halbert Wealth Management, Inc.

In 1994, my clients began asking for help with their more traditional investments, including mutual funds. Realizing that the principles that apply to selecting traditional money managers are similar to those required when selecting a commodities trader, we formed ProFutures Capital Management, Inc., later to become Halbert Wealth Management, Inc. (HWM). HWM's flagship service is ADVISORLINK®, an innovative program offering HWM's clients access to active management strategies from third-party money managers with the goal of participating in market gains with an eye on limiting investment losses.

Over the years, we have developed other programs to meet investors' needs, but they all have the common denominator of using professionals to manage money in an effort to produce better results than you can get on your own. While the initial selection of programs to be recommended to our clients is important, I think one of the greatest values we provide is the ongoing monitoring of our money managers.

As I have noted many times, I invest in every program we recommend alongside my clients. Not only does this mean that my money is at risk along with yours, but also that my accounts are available to us for monitoring purposes. Each day, my staff reviews the performance and trading of each investment program we recommend and sends a summary around to everyone in our office. This way, we not only know where each program is in terms of performance, but we are also able to spot any deviations from expected trading patterns.

If we see something unusual, we can determine if a mistake was made or if a money manager has significantly modified their trading model. Either way, we're on the phone or sending an e-mail immediately to determine what's going on. Several of our money managers have commented over the years about how quickly my staff can spot a small trading deviation and be on the phone asking for an explanation.

While it's something we don't like to think about, there are also times that it becomes necessary to fire a money manager. It's just a fact of life that sometimes a money manager ceases to perform according to expectations and has to be replaced. However, in all of my experience, I have never had a money manager tell me that I needed to fire him or her, and I'll bet you've never had it happen to you, either. Money managers always have a new "fix" to try or other excuse, but the sad truth is that sometimes they need to be fired.

Since my company sits on your side of the table, we are concerned about doing what's in your best interest, not ours or the best interests of a money manager. Thus, we become your advocate when it comes time to let a money manager go and search for new strategies for your investment dollars. Equally important, we constantly search the universe of US money managers to find new talent to recommend to our clients. We attend conferences where money managers gather, and we have several databases that track professional money managers.

The Forecasts & Trends Weekly E-Letter

Since most of you know me through my Forecasts & Trends weekly e-letter, it might be a good idea to revisit how this Internet publication came to be. I have been writing my paper F&Ts for over 30 years. In the weeks just after the September 11, 2001 terrorist disaster, I started writing more frequent updates in the form of expanded e-mails. Eventually, the Forecasts & Trends E-Letter became a weekly publication.

In 2002, I was approached by the owner and president of InvestorsInsights.com, an Internet- based investment publishing company with over 1 million potential readers all across the nation. They asked permission to re-publish my weekly Forecasts & Trends E-Letters, and as you might expect, I immediately accepted.

Generally speaking, I write about the economy, the markets, investments, financial matters, what's happening in the world, geopolitics, etc. But I also write about political issues from time to time because they can and do often affect the economy, the markets and even our investments. If you have read me for long, you know that I am a political conservative on most issues, and my views often don't sit well with our more liberal readers; nonetheless, I tell it like I see it.

Fixing the "Gary Halbert" Problem

Call me naïve, but I thought that the untimely death of Gary C. Halbert might actually result in lower Internet visibility on his part, but such has not been the case. Aside from the many links to notices about the other Gary Halbert's death, there are now a flood of websites offering his direct-marketing and copywriting materials for sale. As I noted above, you can sometimes even find them on the E-bay online auction website.

The result is that Gary C. Halbert is at least as visible on the Internet after his death as he was before, and possibly more so. Perhaps this is a testament to the quality of his marketing and copywriting materials. Otherwise, he would have evaporated into oblivion following his death. However, because many of the links have very negative subject lines, I am now going on the offense to try to even the odds of my name appearing at the top of the search engine lists.

We are in the process of spending a considerable amount of time and money in an effort to place sponsored ads that will at least tell the story of there being two Gary Halberts on the Internet. Hopefully, this will help to avoid any confusion on the part of investors and potential E-Letter subscribers.

Writing To Strangers, Sort Of

Some of you may be wondering why having a namesake on the Internet is such a big deal, especially since he is deceased. The reason is that, especially in today's post-Madoff investment environment, reputation is everything. It's very frustrating to spend over 30 years building a business known for honesty and integrity, only to be confused with another Gary Halbert whose reputation on the Internet is questionable, to say the least.

I have over a thousand investment clients who live all across America. I have never met most of them. Most have come to me by way of third-party referrals, as noted above. I also don't know very many of you who are among InvestorsInsight's 1+ million E-Letter recipients. It's an interesting challenge to write to over a million people you don't know, but it's vitally important that I be able to earn my readers' trust.

I have a lot of questions I wish I knew the answers to. Like, most of all, I wish I could know exactly what most of you are looking for in terms of information and advice. We assume that we have readers from all financial strata - from the very wealthy to middle class folks, from those who are very sophisticated investors to those who are just starting out, from those who are retired to those who are just starting to save for their retirement, etc., etc.

My goal is to provide a variety of topics, most of which are at least somewhat investment related, that will hopefully be helpful to a majority of this broad cross-section of readers, but also knowing that not everything I write will be useful to all of you week in and week out.

We Are Avid Readers

My editorial staff and I are avid readers. We have to be. We subscribe to dozens of financial periodicals (including some very expensive ones) and investment-related magazines and newsletters. In addition, we are voracious surfers of the Internet.

Each morning, for example, one person on my editorial staff spends over an hour cruising our list of Internet sites, looking for interesting news and information that may not have been covered (or was mis-reported) by the mainstream media. By mid-morning each day, he sends me an e-mail with a list of links to the stories he thinks I will want to read. Some of those stories end-up in my SPECIAL ARTICLES section below.

On Monday of each week, or even earlier, we sit down and think about all the topics and reports we've read and decide what will be the focus of the weekly E-Letter. Some weeks, there's just so much to write about, I don't know where to start. On other weeks, the topic seems obvious. And then on some weeks, I'm still scratching my head on Monday.

The Common Thread - Spotting Mis-Information

There is a ton of mis-information out there. If you have been reading me very long, you know that I believe the mainstream media is very slanted. For years now, I have directed you to a great website for tracking the bias in the mainstream media - the Media Research Center CyberAlert at www.mediaresearch.org. If you haven't done so, check it out.

I also believe that many in the financial media are also very slanted, in one way or the other. Some analysts and publications spin the news and reports so as to only reflect their views on the markets and investing. This includes the "perma bulls" on Wall Street.

And then there is the "gloom-and-doom" crowd for which the sky is always falling. I call them "perma-bears" since they always expect the worst. They missed the greatest bull market in stocks in history during the 1980s and ‘90s. For them, the next depression is always right around the corner.

The common thread in my writing is that I try to bring you the real story, whatever that may be, whether it's about the economy, the investment markets, world events or politics. This is not to suggest that I am right all the time. I'm not. What I do is read a variety of respected publications and writers, in addition to the mainstream media, and I try to maintain a flexible attitude. I try to give you my very best thinking every week. And I don't mind admitting when I'm wrong.

Along this same line, I very much appreciate your comments and suggestions for topics that I can write about. Remember, this E-Letter is for you, and I will try to address your comments and suggestions - if you send them to me.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions - Don't Forget the "D"

To recap, if you do an Internet search for "Gary Halbert," you will see a LOT of links about the "other" Gary C. Halbert, and nothing about me, Gary D. Halbert until you get a couple of pages deep in most search engines. Just keep that in mind.

However, if you search for "Gary D. Halbert" on Google, you will find me at the top followed by pages and pages of links to things I have written in the past. Thus, it is always important that you add the "D" to your search, if you are looking for a past article that I have written.

As should be obvious, I do not endorse or recommend any of the products or services offered by those who continue to promote the late Gary C. Halbert. I could not in any event because I don't know what those products or services are.

I could not even begin to speculate how many prospective clients we have lost over the last 10 to 15 years of the Internet explosion because of the confusion that Gary C. Halbert has generated with me. Obviously, there is no way to know, and unfortunately that is water under the bridge.

We have known about this problem for over a decade. But as noted above, we plan to take some bold new steps to get my name above his on most Internet search engines. Time (and money) will determine how successful our upcoming efforts will be. I will keep you posted.

Finally, I would like to ask a favor of you. For many years, the majority of new clients that come to us do so because one of our existing clients referred them to us. I am extremely grateful for that! So, if you should tell someone that they might want to check out our services, please emphasize that they use "Gary D. Halbert" should they do a search on the Internet.

Next week, we return to economic, financial, market and investment topics as the summer is winding down, kids are off to school, and we return our focus to how to make some money in this very challenging market environment.

And be sure to send me your comments and suggestions for making this weekly E-Letter better for you. What you like; what you don't like; and ideas for making it better. Thanks in advance!

I hope you had a great 2009 summer - I sure did, despite the Texas drought.

Very best regards,

Gary D. Halbert

P.S. - Last week, I mentioned that we had come across an important resource for end-of-life planning entitled "All They'll Need to Know." This booklet helps you think through a multitude of issues that arise after an untimely death, but are often overlooked by other estate planning materials.

In my E-letter, I offered readers a discount on the price of the electronic version of this booklet, or a free paper copy of the booklet as long as our existing supply held out. After receiving an overwhelming response, our existing supply of booklets is now depleted and we are unable to honor any more requests for a free booklet.

You can, however, still obtain a copy of the "All They'll Need to Know" booklet directly from Emerson Publications. To help defray the cost, I have negotiated a discounted price on both the printed and electronic versions of the booklet which you can access by clicking on the Emerson Publications website link below. This discount is available for a limited time only, so I suggest that you take advantage of this offer as soon as possible. Just click on the following link to access the Emerson Publications website:

http://emersonpublications.com/index.php?pr=ATNTK-Halbert&nosessionkill=1

This booklet is an important resource for loved ones in case of an untimely death, so I urge you to order either a printed or electronic version while the special discounted price is still available.

GDH

SPECIAL ARTICLES:

Witch Hunt at the CIA Hurts America
http://www.nypost.com/seven/09012009/postopinion/opedcolumnists/punishing_patriots_187490.htm

The Obama Slide
http://www.nytimes.com/2009/09/01/opinion/01brooks.html?_r=2&ref=opinion

Democrats' Strange Bedfellows on Health Care Reform
http://www.forbes.com/2009/08/31/health-care-reform-lobbying-biologics-opinions-contributors-phrma.html

Millionaires' Club - Record Plunge In 2008

GaryHalbert — Tue, 30 Jun 2009 20:53:58 GMT

IN THIS ISSUE:

Millionaires' Club Shrank at Record Rate in 2008
Global Millionaire Population Still Concentrated, but...
Household Net Worth Continues to Fall
Conclusions

Introduction

With the double-whammy of falling home prices and a major bear market in stocks, and a global credit crisis on top of that, it is not surprising that the number of millionaires in the US and around the world plunged last year.

An interesting new report out last week from Capgemini (a global consulting firm) and Merrill Lynch found that the ranks of the world's millionaires shrank at the fastest rate ever in 2008, with North America suffering the biggest wealth loss worldwide.

The Capgemini/Merrill Lynch annual "World Wealth Report" notes that the global slump in property and equity markets last year cut the number of millionaires by 15% to 8.6 million, wiping out two years of increases. The value of the world's millionaires' assets fell 20% to $32.8 trillion, after a 9.4% increase in 2007, according to the latest report.

Since this weekly E-Letter is primarily sent to high net worth investors, I thought it might be interesting to summarize the 13th annual World Wealth Report for you in the pages that follow. Even if you are not a millionaire, the results of this new study should be both interesting and instructive. The reduction in the number of millionaires may ultimately affect all of us in one way or another as I will discuss later.

Following that summary, we will look at some statistics on household wealth here in the US, which will shed light on consumer spending, the engine of the US economy.

Millionaires' Club Shrank at Record Rate in 2008

The Capgemini/Merrill Lynch World Wealth Report for 2008, which was released last Wednesday, defines a millionaire as someone with a net worth of $1,000,000 excluding the value of their primary residence, collectibles, consumables, and consumer durables (ie – liquid assets). The survey is conducted globally each year. The authors use the acronym "HNWI" to represent High Net Worth Individuals who are millionaires, as defined above.

The Report concludes that at the end of 2008, the world's population of HNWIs was down 14.9% from the year before to 8.6 million, and their wealth had dropped 19.5% to $32.8 trillion. The declines were unprecedented, and wiped out two robust years of growth in 2006 and 2007. As a result, the world's population of millionaires and their wealth ended 2008 below levels seen at the close of 2005.

The global population of millionaires had seen robust annual growth of 7.2% on average from 2005 to 2007, before reversing in 2008. The same trend was evident in HNWI financial wealth, which grew 10.4% per year in 2005-07, before the steep contraction.

The most significant declines in the HNWI population in 2008 occurred in the three largest regions: North America (-19.0%), Europe (-14.4%) and Asia-Pacific (-14.2%). But behind the aggregate numbers lie some interesting developments in the HNWI populations of those regions. The authors summarize as follows:

The number of HNWIs in the U.S. fell 18.5% in 2008, but the U.S. remains the single largest home to HNWIs, with its 2.5 million HNWIs accounting for 28.7% of the global HNWI population.
In Europe, the 14.4% decline in the millionaire population varied widely by country. For example, the number of HNWIs shrank 26.3% in the U.K., but just 12.6% in France and only 2.7% in Germany, which avoided a steep contraction in part because HNWIs there were more heavily invested in conservative asset classes than those in other countries.
Japan, which accounts for more than 50% of the HNWIs in the Asia-Pacific region, suffered a relatively mild HNWI decline of 9.9%, but others in the region suffered greater losses, including Hong Kong (-61.3%) and India (-31.6%).

The apparent resilience of Japan, however, stemmed largely from the fact that the expansion of the HNWI population there had already been capped by the 2007 slowdown in macroeconomic growth and a weakening stock market (market capitalization was down 11.1% in 2007).

The Capgemini/Merrill World Wealth Report also surveys the globe for the super-rich, those with at least $30 million in liquid assets, which they refer to as the "Ultra-HNWIs." The contraction in the overall HNWI population was exacerbated by the steeper-than-average decline (globally and regionally) in the number of Ultra-HNWIs.

A decline in Ultra-HNWI numbers has a disproportionate effect on overall HNWI wealth, because so much world wealth is concentrated in their hands. The Report notes that at the end of 2008, Ultra-HNWIs accounted for 34.7% of global HNWI wealth, but only 0.9% of the total HNWI population.

Recall as noted above that the entire world population of HNWIs was down 14.9% in 2008, and their wealth had dropped 19.5% to $32.8 trillion. Yet the world population of Ultra-HNWIs shrank and lost even more. The number of Ultra-HNWIs plunged 24.6% in 2008, and their wealth was down 23.9%. This is very interesting!

The Ultra-HNWIs (those with at least $30 million in liquid assets) should have access to the very best in money management, and they should be highly diversified. Yet they lost more numbers and more wealth than the mere millionaires.

The authors suggest that the sharp decline in the number of Ultra-HNWIs globally largely resulted from that group's "partiality for more aggressive products, which tend to deliver greater-than-average returns in good times, but delivered hefty losses in 2008." While this may have been true in some cases, I strongly suspect that the losses occurred primarily because many millionaires (along with average investors) bought into Wall Street's buy-and-hold mantra, and when the stock markets plunged, so did their assets.

It is also true that some of the most highly sought after, high profile professional money managers lost 40% or more last year. And who knows, they may have had money with Bernie Madoff! I would also suggest that the plunge in oil prices last year played a role in the losses among Ultra-HNWIs, many of whom are Middle East oil sheiks.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Global Millionaire Population is Still
Concentrated, but the Ranks are Shifting

The Report noted that the U.S., Japan and Germany together accounted for 54.0% of the world's HNWI population in 2008, up very slightly from 53.3% in 2007, despite the substantial loss of wealth by HNWIs in those countries, particularly the United States. The authors noted:

China's HNWI population surpassed that of the U.K. to become the fourth largest in the world in 2008 (364k HNWIs), after having exceeded France in 2007. In 2008, despite steep market capitalization losses, the closed nature of China's markets combined with robust macroeconomic growth to help China avoid some of the steep losses felt elsewhere.
Brazil surpassed Australia and Spain to reach 10th place among HNWI populations globally (131k HNWIs). It is also striking to note how the financial crisis impacted HNWIs differently in different types of economies. For example:
Hong Kong's HNWI population took by far the largest hit in percentage terms, with a 61.3% drop to 37k. Hong Kong is unique in that it is a developing economy with an extremely high market-capitalization-to-nominal-GDP ratio (5.76). That ratio indicates Hong Kong is particularly vulnerable to large market capitalization declines like the one experienced in 2008 (-49.9%). By contrast, the ratio is 1.49 in Singapore, and just 0.83 in the U.S. Furthermore, Hong Kong has a very large proportion of its HNWIs in the $1m-$5m wealth band, and many of these HNWIs dropped below the $1m threshold in 2008 due to market losses.
India's HNWI population shrank 31.6% to 84k, the second largest decline in the world, after posting the fastest rate of growth (up 22.7%) in 2007. India, still an emerging economy, suffered declining global demand for its goods and services and a hefty drop in market capitalization (64.1%) in 2008.
Russia's HNWI population declined 28.5% to 97k, the seventh largest per-country drop in 2008, after growing at the tenth fastest rate (14.4%) in 2007. Russia's economy decelerated rapidly, in line with the steep decline in global demand for oil and gas. Compounding the problem was the sharp fall in equity markets—down 71.7%, and the largest drop globally.
The U.K. experienced a 26.3% drop in its HNWI population in 2008, to 362k. A mature economy, heavily reliant on financial services, the U.K. was particularly hard-hit by falling equity and real estate values.

HNWI Wealth is Forecast to Resume
Growth as Global Economy Recovers

The authors of the Capgemini/Merrill World Wealth Report are considerably more optimistic than I am about global economic growth over the next several years. (But then what do you expect from Merrill Lynch?) They expect that the US will lead the recovery, along with Asia. I have my doubts, of course, but here are their forecasts:

"We forecast HNWI financial wealth will grow to $48.5 trillion by 2013 [up from $32.8 trillion at the end of 2008], advancing at an annualized rate of 8.1%. This growth will be driven by the recovery in asset prices as the global economy and financial system right themselves.

Also, the 2008 flight-to-safety imperative is expected to ease, encouraging HNWIs to return to higher-risk/higher-return assets, and away from capital-preservation instruments, as conditions improve.

We expect North America and Asia-Pacific to lead the growth in HNWI financial wealth, and predict Asia-Pacific will actually surpass North America by 2013. Growth in these regions will be driven by increased U.S. consumer expenditure as well as newfound autonomy for the Chinese economy, which is already experiencing increased consumer demand.

Latin America is poised to grow again when the U.S. and Asian economies start to pick up, as it has the commodities and manufacturing capability that will be needed during the return to growth. Europe's economic recovery is likely to lag, as several major countries there continue to face difficulties.

In the Middle East, oil is expected to be a less dependable driver of wealth in the future, so growth there is likely to be slower than it has been in the past.

Our global forecasts assume continued difficulties for the global economy in 2009. We expect some initial signs of growth in selected countries, which could pick up steam from 2010, but protracted weakness in the global economic and/or financial systems could force a downward revision in our forecast numbers. [Emphasis added, GDH.]

Notably, HNWI wealth grew at a strong annualized rate of close to 9% in 2002-07—the recovery years following the bursting of the technology bubble. While the tech downturn and the most recent financial crisis are not identical forms of disruption, we nevertheless expect the recovery in HNWI wealth to be similarly robust this time around, as the business cycle starts to trend back up."

While I am not nearly as optimistic as the folks at Capgemini and Merrill Lynch, I certainly hope they are correct. In any event, their annual World Wealth Report is very interesting and appreciated, at least by me.

Finally, I am sure there will be readers who will respond and ask, Why should I care if a lot of millionaires and super-millionaire fat cats took a beating over the last 18 months; after all, I lost a lot of money in the market as well. To that question, I would simply remind everyone that the wealthy create lots of jobs and pay a lot of taxes (top 5% of taxpayers pay over 60% of all income taxes). To that end, their large loss of wealth will have a negative effect on economic growth and the federal budget deficits.

But at the end of the day, what this demonstrates for all investors is that Wall Street's buy-and-hold mantra was a recipe for huge losses over the last 18 months, just as it was during the last bear market in 2000-2002. Perhaps that is why we are seeing a wave of investors seeking actively managed alternative investment strategies such as those I recommend.

Household Net Worth Continues To Fall

The Capgemini/Merrill Lynch report on the plunge in millionaires globally wasn't the only recent source of bad news about last year's drop in personal net worth. According to a Federal Reserve report earlier this month, 2008 was the worst year on record for US household net worth (assets minus liabilities).

Household net worth in the United States declined by $11.2 trillion (-18%) last year and Americans curbed their spending as they watched the value of their assets fall. It was the worst yearly decline in household net worth on record.

In the 4Q of last year alone, household net worth plunged by $5.1 trillion (-9%), the largest quarterly drop in dollar terms on record, going back to 1951, when the government began keeping quarterly records.

On June 11, the Federal Reserve reported that US household net worth plunged $1.7 trillion (-2.6%) in the first three months of this year. That followed the record large drop in 2008 when household net worth plunged (18%). The 1Q of this year marked the seventh consecutive quarterly drop in household net worth.

The continued swift decline in household net worth was caused, once again, primarily by the continued decline in home values and the stock markets in the 1Q, plus the significant rise in the unemployment rate.

The Fed reported that the value of household real-estate holdings, mostly home residences, fell 2.4% in the 1Q to $50.4 trillion overall, down from $51.7 trillion at the end of 2008. Collectively across the US, homeowners had 41.4% equity in their homes in the 1Q, another record low. That was down from 42.9% in the 4Q of last year.

Making matters even worse, the damage to US household wealth in the 1Q also came from the sinking stock market. The Fed reported that the value of Americans' stock holdings dropped 5.8% from the final quarter of last year.

While the equity markets have rebounded nicely since the early March lows, home values have continued to fall, so household net worth on average is almost certainly lower today than it was at the end of March (latest data available). And, of course, we know that many Americans, and foreigners as well, bailed out of the stock markets late last year and early this year and have yet to get back in, so they have not benefitted from the recent rebound in equities and related mutual funds.

This Does Not Bode Well For Stocks

Consumer spending accounts for 66%-72% of GDP (depending on whose stats you use). Almost every forecaster that is predicting an end to the recession in the second half of this year is counting on a revival in consumer spending. I find that wishful thinking in light of the continued fall in household net worth.

It is true that there have been some bright spots over the past few weeks. Consumer confidence has picked up over the last few months from very low levels, although it declined slightly in June as reported this morning. Personal income saw a healthy 1.4% jump in June, thanks in part to the government's stimulus checks. Personal spending and retails sales ticked up slightly in May (latest data available), also from very low levels.

Yet most Americans are increasing their savings significantly, which is more money that will not find its way into cash registers. The Commerce Department reported last Friday that the personal savings rate spiked to 6.9% of disposable income in May, up from 5.6% in April and 4.3% in March. The May savings rate of 6.9% was the highest since December 1993. Most analysts believe the personal savings rate is on its way to 10% by year-end.

So, in addition to the continued decline in household net worth, which is likely to continue all year as home prices fall further, the rapidly rising savings rate does not bode well for a lasting surge in consumer spending just ahead. This is a key reason why I believe we will not emerge from this recession until next year.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

The bear market in stocks, which saw the S&P 500 Index fall by more than 50% from the peak in late 2007, has certainly inflicted a lot of casualties on the world's millionaires and super-millionaires.

The White House National Economic Council estimates that on a global basis, $50 trillion dollars in wealth has been erased over the last 18 months. This includes $7 trillion dollars in US stock market wealth which has vanished, and $6 trillion dollars in US housing wealth that has been destroyed over that period. These declines were unprecedented, and wiped out two robust years of growth in 2006 and 2007.

In 2008, the world's population of millionaires was down 14.9% from the year before to 8.6 million, and their wealth had dropped 19.5% to $32.8 trillion. The super-millionaires ($30 million or more) fared even worse. The number of super-millionaires plunged 24.6% in 2008, and their wealth was down 23.9%.

I found this surprising since you would think that those with fortunes of $30 million or more would avail their portfolios (or at least part of them) to professional money managers and programs that employ defensive strategies that can go to cash or hedge long positions in a bear market.

As most readers know by now, Halbert Wealth Management specializes in finding such professional money managers, doing due diligence on their programs, verifying their past performance records and then recommending them to our many clients across the US.

All of the equity managers we recommend in our AdvisorLink® program performed much better than the stock market in 2008. Some of the equity managers that I have featured in these pages in recent years actually made money in 2008 and thus far in 2009. Of course, past performance is no guarantee of future results.

If you would like to see detailed information on these professional money managers, including their actual performance records (net of all fees), simply CLICK HERE. Remember that all of these programs have the ability to move to cash and/or hedge long positions in case of a bear market. Obviously, that has been a very good option to have in the last year and a half!

As always, if you would like to learn more about the benefits of active money managers, feel free to give one of my professional Investment Consultants a call at 800-348-3601 or visit our website at www.halbertwealth.com. If you prefer, you can also contact us via e-mail at info@halbertwealth.com.

Wishing you a great summer,

Gary D. Halbert

SPECIAL ARTICLES

P.S. Now that the House of Representatives has narrowly passed President Obama's "cap and trade" bill, otherwise known as "cap and tax," you might want to look at the following articles on the subject. Most Americans have no idea what this bill really holds for the future.

The Cap and Tax Fiction
http://online.wsj.com/article/SB124588837560750781.html

Cap and trade being cancelled in other countries
http://online.wsj.com/article/SB124597505076157449.html

Cap and trade bill flunks the math
http://blogs.forbes.com/digitalrules/2009/06/waxmanmarkey-flunks-math.html

No Recovery in Sight
http://www.nytimes.com/2009/06/27/opinion/27herbert.html?ref=opinion

When Will The Bull Market Return?

GaryHalbert — Tue, 17 Mar 2009 20:48:30 GMT

IN THIS ISSUE:

David Henry On A New Bull Market
Why Wall Street Needs A New Bull
Make Half A Decision

Introduction

This week, I am off spending some time with my son, who is home from college for Spring Break. Since we live on the lake, I’m putting in a lot of time driving the boat while he and his friends ski and wakeboard on Lake Travis. It’s a tough job but somebody’s got to do it.

Since I’m out most of the week, I have chosen to reprint below a very informative analysis on the history of bear markets in stocks, and what it might take to turn the one we’re in around. This article originally appeared in Yahoo! News and I thought the author, David Henry, had some good insights into how stock market cycles work.

Last week, many market analysts were pleased to see a consecutive string of positive days in the stock market. Of course, this immediately sent some in the financial media into a frenzy about how we have now seen the bottom of the bear market and we can only go up from here. It seems that there is no shortage of cheerleaders for a renewed bull market. If wishing could make it so, we’d definitely have an up market from here on out. But for now, I remain unconvinced.

That being the case, I follow David Henry’s reprint with a discussion about why we often see so much attention being given to a return of the bull market. Obviously, everyone from investors to the government wants the market to go up since it’s supposedly a sign of a healthy economy. But as we all know, our economy and financial system are far from healthy at this point, so it remains to be seen if the bear market is over.

The last two bear markets in US stocks have underscored the weaknesses of the widespread “buy-and-hold” investment strategies that have been Wall Street’s mantra for decades. The bottom line, in my opinion, is that when you offer buy-and-hold investment products that only work in up markets, you root for a bull whenever you can.

I’ll end up the E-Letter by discussing a way for you to include active management investment strategies that may be more comfortable for you. Sometimes, making “half a decision” can help you to test the waters of active management, while still having a foothold in other investment strategies that may be more familiar to you. Let’s get started.

Stock Markets: When Will the Bull Return?
By David Henry, Yahoo! News, Fri Mar 6, 2009

QUOTE:

The stock market is crashing -- slowly, and in plain view of the people who count on it most. The 53% plunge in the Dow Jones industrials since October 2007 [measured as of March 6th – GDH] has wrecked the college- and retirement-savings plans of millions of investors. It has permanently lowered the long-term investment projections of private endowments and pension funds. It has sent corporate compensation experts scrambling to figure out how to reward top employees. All told, more than $10 trillion of stock market wealth has vanished, and with it the confidence that springs from financial security.

While 17 months may feel like an eternity, it could turn out merely to be a prequel. The questions on the minds of investors, money managers, and corporate executives are threefold: How much longer will the bear market last? How low will the averages go? And when might investors get their money back?

As Warren E. Buffett has said: "Beware of geeks bearing formulas." It's especially difficult to predict the direction of the markets these days because the most popular gauges, from price-earnings ratios to measures of investor "capitulation," have stopped working. The peculiar nature of this bear market limits the kit of useful tools to just a handful of bond market and business confidence indicators.

Those signals, along with interviews with financial historians, market strategists, and economists, point mostly to painful scenarios. Stocks don't seem likely to fall much more from here -- but market turmoil could continue for months or even years. Worse, by the time the market revisits its highs, so many years are likely to have passed that many older people will have gotten out of stocks, missing out on the rebound. The flip side is that new money put into the stock market now will likely do comparatively well over the long term. That's welcome news for twentysomethings and executive compensation consultants, but perhaps not for soon-to-be retirees.

Searching For Precedents

History can't provide as many clues to the market's direction as usual. That's because while most bear markets more or less track the business cycle, this one began with a broken financial system. That makes the current bear more like the one that snarled from 1929-32 than others of the past 100 years. But that analogy doesn't fit perfectly, either. "We have no good precedents to help us," says Peter L. Bernstein, a 90-year-old market essayist and financial historian who was a teenager during the Great Depression. "What's breathtaking is the rapidity of the decline and its breadth."

The market anxiety is especially high now because of the raging fire in the economy. "The next six to nine months are going to be awful," says Desmond Lachman of the American Enterprise Institute. Waves of corporate defaults, home foreclosures, bank failures, and job losses are still to come.

Of course, the stock market already knows that for the rest of 2009 the economy will be a "shambles," to use Buffett's recent description. Today's low share prices may well reflect that. The Dow Jones industrial average has already fallen through the 7,000 level predicted earlier this year by Nouriel Roubini, the New York University economist nicknamed “Dr. Doom” for daring in 2006 to foretell the credit calamity. That's right, even Dr. Doom was too optimistic.

If recent history were a reliable guide, it would be just about time for the bear to retreat to his den, which nowadays might include a flat-panel TV and leather chair bought at a foreclosure sale. The market's average decline during bear markets since the 1929 market crash is just 30%. What's more, those past bears lasted an average of 13 months, making this one look not just mean but old.

But this is no ordinary slump. Even the most basic market gauge, the price-earnings ratio, which measures a company's share price relative to the earnings it generates, is unreliable. Historically, the overall market has traded at prices that average 15 times earnings, ranging from roughly 8 during the worst bear markets to 25 or greater during bull runs. At the start of the year, the market's p-e ratio was about 11, suggesting that stocks were already cheap and wouldn't drop much more. Instead, the Standard & Poor's 500-stock index fell 19% in January and February, the worst opening months on record.

Why did the p-e ratio get it so wrong? The "e" is plunging -- by 18% in January and February alone, according to Thomson Reuters. As a result, even though the stock market has dropped, it hasn't gotten any cheaper relative to earnings. Sure, a lot of earnings vanished amid a fog of one-time charges that may say nothing about companies' future profit power. But analysts still aren't seeing through that fog; their earnings projections are more scattered than they've been in two decades. "You don't know what the 'e' is because the economy is in free fall," says Charles Biderman, CEO of TrimTabs Investment Research.

The credit bust has rendered other trusted market indicators useless -- most notably monetary policy, or the Federal Reserve's raising or lowering of its benchmark interest rate. Before the current slump, the federal funds rate was a reliable indicator in all but one bear market since World War II, says James B. Stack, president of InvesTech Research and Stack Financial Management. When the economy slowed, the Fed began cutting rates to turn the business cycle back up. After the second cut came, investors stepped in to buy, anticipating higher corporate earnings. But the Fed has cut rates 10 times since August 2007, to essentially zero, and yet the economy and stock market keep sliding. "The Depression is the only parallel for the lack of effectiveness in monetary policy," says Stack. It is failing because too many borrowers don't want to borrow and too many lenders don't have the capital or courage to lend.

Measures of capitulation, Wall Street's term for the final moment of a sell-off when the last weak investors give up on stocks, aren't working, either. The idea is that once the wobbly players are out, the ones left are strong enough to bid up stocks. Bull runs begin during those moments. Market mavens try to track capitulation by parsing statistics from days of heavy selling and comparing the intensity of past routs. Many thought they saw capitulation last September, says Eric C. Bjorgen, senior analyst with the Leuthold Group in Minneapolis. "But then the market kept going down," says Bjorgen. "Extreme fear was not a good indicator." The gauges became even more bullish with the selling in November, after which the market rallied 24%. Then it fell again. Biderman of TrimTabs says that's because much of the selling was by hedge funds that had been using borrowed money, not a major factor in previous bear markets.

Another signal that's turned out to be misleading is "cash on the sidelines," or the funds in money market and bank savings accounts. In normal times, strategists could look with some confidence to money in these accounts as buying power that investors were holding back from the stock market. The greater the cash compared with the value of the overall market, the more impact it could make on stocks. In January the reading reached its highest levels since 1984, says Bjorgen. Even so, he's dubious. As long as investors are worried about their own incomes, he says, the money seems most likely to stay right where it is. TrimTabs' Biderman, who tracks how investors move their money among asset classes, says he doesn't see much chance of this cash flowing into stocks with the job and housing markets so weak. He figures investors have been taking more money out of stocks than they've been putting into their cash accounts. "Some people are being forced to sell stocks to eat," Biderman says. "They are certainly not going to buy Google here."

With the ordinary historical measures failing, experts are looking further back for clues. During the Great Depression, the Dow plunged 89% from the 1929 crash to July 1932. Then it went through some big swings before losing 49% in 1937-38 as the economy tanked again. World War II, which grew in part out of financial stress around the globe, followed. The Dow didn't get back to its 1929 high until 1954.

Much, of course, has changed in the U.S. since the Great Crash. Back then Washington made major policy mistakes, such as erecting trade barriers and letting too many banks fail without protecting depositors. This time, with a couple of exceptions, the government hasn't blundered so, even though it hasn't yet solved the economy's many problems.

So this bear market likely won't rival that of the Great Depression. But the bear markets during other banking crises have been brutal in their own right. In a recent study of 21 such episodes from around the world, including ones from Spain in 1977, Sweden in 1991, and Thailand in 1997, professors Carmen M. Reinhart of the University of Maryland and Kenneth S. Rogoff of Harvard University found that stocks fell an average of 56% -- the same loss the S&P 500 had suffered through Mar. 3. Those bear markets also tended to be agonizingly slow, taking an average of 3.4 years to reach bottom. "Everything is protracted," says Reinhart. "In the best-case scenario, you are looking at six years or longer" to return to past highs. Bad as that sounds, it would compare favorably with Japan, whose Nikkei index reached 38,900 in 1989 and now trades at around 7,200.

Of course, just because investors have lost money in stocks doesn't mean equities are a bad choice from this point onward. "Stocks can't make up for the past 10 years, but they can do extremely well from our current position," says Jeremy J. Siegel, author of Stocks for the Long Run and professor at the Wharton School of the University of Pennsylvania. Siegel says that while stock returns have fallen behind government bond returns over the past 20 years, history says that's almost certain to reverse. He's found only one 30-year period when stocks returned less than bonds, and that one ended in 1861. "That tells us that once you are down 50%, those who are in stock markets for 10 to 15 years will get much better returns," he says. Lately, government bond prices have run up, boosting the odds that stocks will be the better play in the future.

So where to look for signs of an incipient upturn? One logical place is the corporate debt market, which understands the economy's core problem firsthand. Eventually, the pace of new defaults on corporate bonds will slow, and bad debts will be reduced or erased in financial reorganizations and bankruptcies. When those things happen, the economy and stock market should breathe easier…

Another critical factor is the health of the banking system. One measure to watch is banks' so-called net worth, or the difference between how much they owe and the value of their assets. Rebuilding the banking system's net worth will be monumentally difficult. "On average, this process takes about six years," says Joseph Mason, a banking professor at Louisiana State University who has studied past banking crises. So far, little has been accomplished -- a big reason the stock market hasn't gotten up from its knees.

Keep An Eye On CEOs

Government policy decisions could speed or slow the pace of rehabilitation for the banks and, in turn, the stock market. David A. Hendler, a New York-based bank analyst at CreditSights, says his job has shifted from financial analysis toward Washington analysis. Essentially, his task is to figure out how quickly the government will permit weak banks to consolidate. When investors believe they know which banks will survive, they'll buy their stocks. The process is so critical to the stock market that Richard Bernstein, chief investment strategist at Merrill Lynch, is tracking six signposts for financial industry consolidation. Among them: the extent to which the government carves up and sells bad banks rather than buying into them to prop them up.

Other strategists are keeping a close eye on the people who really know what's happening in the economy: business leaders. Biderman says he'll know corporations are getting confident once they start buying back their own shares and acquiring other companies. Right now they show no such bravado. Announcements of share buybacks are down 90% from a year ago, leaving that market thermometer so cold the mercury is off the scale.

In the end, the timing of the bear's retreat will likely hinge on that great market imponderable: psychology. How investors feel has a lot to do with whether they start seeing mixed signals as proof of a glass half-full. "The (market) stress causes the analytical part of our brains to shut down, and that makes us hyperreactive to bad news," says Michael A. Ervolini, CEO of Cabot Research, a consultancy catering to institutional investors. People become convinced conditions are worse than rock-bottom bad, he says. Only after they see that they've overreacted can things improve: "We look for the market to start (saying) tomorrow will be brighter."

For now, pessimism is winning the day. In the worst-case scenario, bad debts will continue to weigh on borrowers and lenders, causing the economy to slow even more, which will erode incomes and push more borrowers over the edge. Economies and corporations around the globe will weaken and rattle investors and business executives even more. Such fears have prompted Ben McCoy, a 30-year-old software engineer, to swear off new stock investments. Instead, he's putting money into his own business ventures, such as writing software for real estate appraisers and a blog about personal finance called moneysmartlife.com. "With these investments, I feel like I have more control," he says.

More Ben McCoys could signal the stirrings of an upturn. A market bottom, says Merrill's Bernstein, "generally occurs when everyone thinks it will never happen. You want to hear people giving up on the stocks-for-the-long-run theme."

But something positive must draw investors back. George A. Akerlof, a Nobel prize-winning economist at the University of California at Berkeley and co-author of a new book, with Yale professor Robert J. Shiller, on the importance of sentiment in moving markets, says investors will have to be offered a new story they can believe to get them to buy again.

That new story likely involves corporate and consumer debts being reduced to what borrowers can pay, freeing them of past mistakes so that new money can be put to productive use. Banks resume lending, and the stock market bottoms, signaling that the recession will be over soon. Budding optimism reverses the vicious cycle of losses. A bull is born.

A more probable outcome is the one drawn from the narrow history of bear markets that grew out of financial crises. In it, the bear scenario continues to play out until the bull takes over, with more debt busts and government trial and error until things get set right again. That could mean two more years of bouncing around and then another six or so before the Dow is back above 14,000. Not long ago, such an outcome would have seemed unimaginably bleak. Given the other possibilities, it doesn't seem so bad now.

END QUOTE

Why Wall Street Desperately Needs A New Bull Market

As this is written, the stock market has just staged a comeback of sorts. Yesterday (March 16th) marked an end to four consecutive days of positive returns, something not seen since November of last year. The Dow closed up just over 9% for the week, even after falling to its lowest level in 12 years on March 9th. Is the bear market over? Have we seen the bottom of the market? Can you again trust your buy-and-hold advisors who counsel you to “stay the course?” Maybe, but don’t count on it.

As the above article indicates, a new bull market may not be just around the corner, and David Henry isn’t the only one saying so. Peter Schiff, an analyst and fund manager also nicknamed “Dr. Doom” for his early warnings about the subprime crisis, says the worst is not yet over. A January 23rd Fortune magazine article highlights Schiff’s evaluation of the current situation:

“I'm as negative as I've ever been because everything the government is doing now is going to make the situation much, much worse. They're trying to reflate this bubble. All along I knew that what would potentially be fatal wasn't the recession itself but the government’s response. But what they've already done exceeds even my worst-case imagination.”

More recently, Schiff has provided a counter-argument to the idea that the market’s recent rally marks the end of the current bear market. In a March 11 entry on his Internet blog (http://peterschiffblog.blogspot.com), he again states his opinion that the bear market is not yet over. Though he concedes that we could see a bear market rally (read: sucker rally) that lasts for a period of weeks or months, he notes that such rallies were common in the 1930s and do not necessarily point to an end of the current bear market.

I think one of the reasons the analysts that are calling the market bottom get so much attention is because Wall Street and the financial media so desperately need a new bull market to appear. Quite frankly, it’s the only kind of market environment where their buy-and-hold investments are likely to work, so it’s really sort of a matter of survival. If our experience is any indication, investors are leaving buy-and-hold investments in droves, no longer heeding the tired old “stay the course” message.

Yet, these purveyors of the failed buy-and-hold strategy continue to advise clients to stay invested. If you exit the market, they say, you’ll miss out on the big market moves that usually occur early in a new bull market cycle. Of course, what they don’t say is that if you get out, they’ll miss out on their fees and possibly commissions too, but they don’t like to dwell on that.

In reality, many financial firms simply have too much invested in software, marketing materials, broker training, etc., etc. to toss their buy-and-hold strategies in the garbage can where they belong. Almost every day, we get calls from investors who are tired of listening to advice that puts a financial firm’s best interest above their own. Good for them!

The stories we hear from new investors calling us now are all different, but really they are largely the same. They had a comfortable retirement nest egg going in the late 1990s. The multi-decade bull market, and their buy-and-hold strategies, had served them very, very well for two decades. But then came the tech bubble bursting in 2000 and the bear market of 2000-2002. Unfortunately, I don’t think that bear market really got the attention of investors, especially with the market rally in 2003.

Next, we experienced the subprime crisis, and next the freeze in the credit markets, and an unprecedented bear market in stocks in such a short time. Stocks have plunged well over 50%, and buy-and-hold strategies have collapsed commensurately over the last year. Now, investors who have believed in buy-and-hold for years are abandoning such strategies in droves.

Two gut-wrenching bear markets since 2000 have shown investors and brokers alike that the “stocks are best for the long haul” mantra may not be the best alternative. After all, what is the “long haul?” Unfortunately, buy-and-hold strategies may require a time period far beyond the realistic time horizons of many investors.

These bear markets have also illustrated that the asset values can vanish into thin air at the very time they are needed the most, even though “proven” diversification and asset allocation (buy-and-hold) techniques have been employed. The most recent bear market is a good case-in-point, where once non-correlated asset classes all plunged in value at the same time.

I have argued for years that the buy-and-hold strategies advanced by Wall Street and “Modern Portfolio Theory” were fatally flawed, and it would be nice to conclude that I told you so. But that misses the point. The only question now is how to go forward without incurring 50+% losses in the future. If my argument for avoiding huge buy-and-hold losses has not gotten your attention by now, I guess it never will.

But if it has, I offer the following advice as to how to get started. I have offered this line of reasoning for over two decades, and it has worked consistently for many investors.

Make Half A Decision

“You don’t want to abandon the investment strategy (buy-and-hold) that worked so well for you during the bull markets of the 1980s and 1990s,” or so you have been told by your broker or financial advisor. But now your portfolio is down over 50% and your retirement plans are in shambles. Now, finally, you are open to other ideas. Good. What follows is an easy way to get started comfortably.

Frankly, we realize that the type of investment strategies we recommend are very different from what most investors, and even many investment professionals, have been educated to believe. Since the onset of the bear market back in October of 2007, my staff has told me of many calls from investors who are interested in the actively managed programs we recommend, but who are reluctant to make the change.

In those cases, we suggest that investors consider making “half a decision.” In other words, place only half as much as you might otherwise commit to active management strategies, as long as applicable minimum investments are met. We have many investors who will test the waters with smaller accounts before making a full commitment to active management strategies.

I am so confident that active management strategies will prove their merit versus buy-and-hold strategies that I welcome you to make half a decision in regard to your investment portfolio. If you prefer, open a minimum account in one of the actively managed programs we offer in our AdvisorLink® Program. Once you see the difference between the performance of your actively managed investments and your buy-and-hold strategy, I believe you’ll begin to see the light. Of course, there are no guarantees in regard to the future performance of any investment.

This is a very good way to get started, in my opinion. Based on how the buy-and-hold mantra has served you over the last several years, maybe now is the time to try something different with at least part of your portfolio. Think about it.

For more information on the programs I recommend, and have most of my own money invested in, feel free to give one of my Investment Consultants a call at 800-348-3601 or, if you prefer, send us an e-mail at info@halbertwealth.com. You can also obtain more information on our website at www.halbertwealth.com. Whatever you do, don’t let buy-and-hold’s empty promises continue to decimate your portfolio.

Hoping we can help you in these tough times,

Gary D. Halbert

SPECIAL ARTICLES:

The Market’s Rally is Misguided Optimism
http://articles.moneycentral.msn.com/Investing/SuperModels/market-rally-just-misguided-optimism.aspx

Obama’s Incompetent Socialism
http://www.newsmax.com/morris/obama_bailout/2009/03/16/192401.html

Will China Dump the Dollar?
http://www.fundmasteryblog.com/2009/03/16/will-china-dump-the-dollar/

Beware: Bear Market Brings Out Tall Tales!

GaryHalbert — Tue, 03 Mar 2009 22:39:52 GMT

IN THIS ISSUE:

Two Valuable Investment Articles To Share
Stocks Hit 50% Drawdown In February
Investors Naturally Seeking Guidance
Some Buy-And-Hold Advice Is Misleading
Another Active Money Manager Doing It Right
Conclusions – Don't Be Misled

Introduction

As I have noted many times in past E-Letters, my staff and I read a ton of material every week. This week, I want to bring two recent articles to your attention. Each of these articles is on the subject of investing, with one from the Wall Street Journal and the other from Investor's Business Daily. While they have very different subject matters, they are related in a way that I'll make clearer as we progress through the E-Letter.

The first article from the Journal provides a snapshot of just how badly the stock markets have performed in 2009. While many believed that stocks would stage a rally in early 2009 based on a variety of factors, the equity markets have plunged instead. With that being the case, investors are asking what they should do in light of the market's drop.

That's where the second article comes in. It's an article from Investor's Business Daily that is little more than a shill on behalf of large mutual fund firms. It purports to illustrate why timing the market is a bad thing, but it is so skewed in its analysis that one of our fellow Investment Advisors called it “…so bad it's funny.”

Unfortunately, it's not funny for those who are locked into investments that have continued to plummet in value, yet the only advice they get is to “stay the course.” That's why I'll end up this week's E-Letter with an analysis of one of the actively managed investment programs that I have written about in the past.

Stocks Dropping Like A Rock

The first article I'd like to bring to your attention is from the February 24 edition of the Wall Street Journal. The headline says it all: “Stocks Drop to 50% of Peak.” The day before the article was featured, the Dow closed at 7114.78, down by about half from the October 7, 2007 high close of 14,164.53.

Clearly, the stock market has not been impressed with the efforts so far to address the credit crunch and reverse the economic recession in which we now find ourselves. Since the article was written, the Dow rallied a bit, but then continued its downward slide, closing out the month of February even lower at 7062.93. As of the end of February, the Dow was down over 19% year-to-date in 2009 and stood at a loss of just over 50% from its October 2007 peak, and things have gotten worse since then.

The S&P 500 Index, one of the most widely followed of all stock market benchmarks, is actually worse off than the Dow. From its peak value of 1565.15 on October 9, 2007, the S&P 500 hit a 50% drawdown in November of 2008, and then hit another new low for this bear market of 743.33 on February 23, a drop of over 52%. As of the end of February, the S&P 500 Index stood at 735.09, down over 18% for 2009 and down over 53% from its peak in late 2007.

I have provided a link to the full WSJ article under the Special Articles heading below my signature. I encourage you to read it over to glean additional details about how various sectors of the market have performed. Obviously, it remains to be seen when the markets will hit bottom and begin to recover.

Looking back, much has been said of a “lost decade” in the stock market. Unfortunately, we're now pushing even further back to find comparable values for the major market indexes. The Journal article notes that the major market indexes are revisiting values not seen in more than 11 years. That's a zero net gain for a period of over a decade, which is not what they tell you to expect in the buy-and-hold propaganda.

More recent market action has now taken the S&P 500 Index down to October 1996 levels, dropping the Index value to just over the 700 mark. The S&P 500 Index now stands at 55% below its October 2007 peak, which means that index investors will have to make returns of over 122% just to get back to break-even. The Dow is in similar shape, needing returns of apprx. 110% to get back to where it was in October of 2007.

Investors Are Seeking Guidance

Needless to say, investors who still have money in the markets have continued to see their account balances fall in 2009. With all the talk of a rally in early 2009, there is widespread concern and disappointment. Now that the major market averages have fallen to new lows, many investors are wondering if they should bail out now or hang on and hope the market finds its footing soon.

At the same time, investors who have already moved to cash are asking if now might be the time to get back in. As noted above, as of the end of February the S&P 500 Index is down over 18% year to date, and the Dow is in even worse shape with a year-to-date loss of over 19%. Thus, investors who are on the sidelines are wondering if we're now at a point where they should jump back into the market. I suspect a large percentage of them are paralyzed with fear, not knowing how much further the market may have to fall.

Fortunately, the message I have been giving ever since I started writing this E-Letter has hit home with many of my readers. I have always suggested using active money managers who have the ability to move to cash or hedge long positions as opposed to buy-and-hold strategies that just tell you to take losses in stride. We are as busy as we have ever been – handling phone calls, e-mails and website contacts from investors who are now anxious to learn more about our active management strategies.

You see, with active management strategies you don't have to worry about when to get in or out of the market. Our professional active money managers handle those details for you. Thus, no matter whether the market starts back up or continues its decline, you know that you have an experienced professional on your side. In addition, you also know that you have my firm monitoring the managers on your behalf.

Bad Advice From A Good Source

Unfortunately, however, not everyone has jumped on the actively managed bandwagon. As I noted in my January 27 E-Letter, buy-and-hold is not going down without a fight. Many investors are getting poor advice, sometimes based on misleading “studies” that are little more than blatant attempts to keep investors in the market as long as possible, despite the negative consequences. And sometimes this ill-fated advice comes from well-respected sources.

A case in point is the Investor's Business Daily article that I mentioned above. On February 18, the IBD ran an article in their Investment Trends section that provided a very one-sided view of buy-and-hold versus market timing. The article summarized a study done by a large mutual fund company that showed the superiority of “dollar-cost-averaging,” which is a buy-and-hold strategy, to their interpretation of market timing. It was entitled “When Buy-And-Hold Beats Bad Timing,” and it was little more than a hit piece on active management from the beginning.

The study is fatally flawed, in my opinion, as I will discuss in more detail below. Such flawed studies are nothing new for the mutual fund industry, since after all, it's in their best interests for clients to stay invested (even though it may or may not be in the clients' best interests).

What bothers me the most, however, is that a well-respected publication like Investor's Business Daily chose to serve as the marketing arm of a giant mutual fund family by publishing a study that they had to know included dubious assumptions. Whatever happened to objective financial journalism where assumptions were analyzed rather than just accepted at face value? I will dissect the study and show you why it is faulty below.

Here's the scenario depicted in the fund company study. An investor has $10,000 of accumulated value in the stock market on January 1, 2000 and then decides to make $500 monthly contributions under a dollar-cost-averaging plan going forward. The study assumes that all investments will be made into the S&P 500 Index (which is not possible in reality, but is OK for the purposes of an illustration). The study tracked the ongoing performance from January 1, 2000 through the end of January 2004.

Using various assumptions that I will critique in more detail below, the study concluded that investors would have been better off had they stayed invested in the market during the entire 2000 – 2002 bear market than if they had followed any of three different market timing strategies. Keep in mind that these are not real market timing strategies, but rather just completely hypothetical scenarios dreamed up by the mutual fund company.

Anyway, according to the article, by the end of January 2004, the buy-and-hold investor would have had $33,502 of value as opposed to $33,357 for what the study called the “Bear Market Dodger,” $31,799 for the “Bear Market Refugee” and only $31,616 for the “Doomsday Capitulator.” Cute names, don't you think?

In my analysis, I concentrated on just the first market timer category, the “Bear Market Dodger,” since doing so will allow me to simplify the calculations and stay within the space I have to discuss this issue. Under this scenario, the investor becomes nervous about the market in early 2000 and elects to make all ongoing monthly contributions of $500 to cash instead of into the market. Then, in January of 2004, the Dodger jumps back into the market with both ongoing contributions and accumulated cash.

I had my staff run the numbers again from scratch using the study's basic assumptions. Unfortunately, we were unable to duplicate the exact numbers published in the study, but we got close. We were using month-end S&P 500 Index total return numbers while the study's authors may have used daily returns, so this could account for the slight difference. We then ran scenarios that corrected the flaws we identified in the assumptions. I will discuss the results of our alternative calculations in more detail below.

Many investors and even financial professionals would just take the study's numbers at face value without further critical thought. However, I believe the mutual fund study has a number of flaws that make its conclusions of little value (read: misleading!). They are as follows:

The study assumed the market timing investor would be sophisticated enough to initially invest in mutual funds, but at the same time be so unsophisticated that he or she would not put cash contributions into an interest-bearing money market account. Frankly, anyone who is that unsophisticated is probably hiding money in their mattress or burying it in jars in their back yard, not investing in buy-and-hold mutual fund programs.

So, what would adding interest do to the market timing total? To find out, I consulted the Morningstar mutual fund database and obtained the average returns for the taxable money market category for the time period in question. If we assume that only the ongoing contributions were diverted to cash and the accumulated balance stayed in the stock market, the interest on the $500 monthly contributions would increase the total value to $34,074, beating the buy-and-hold ending value of $33,502 by $572.
The next flawed assumption is even more important. The fund company study assumed that only the ongoing $500 per month contributions would be “timed,” or put in a cash account, while the entire accumulated balance would continue to be subject to the whims of the market. In all my years of advising clients and evaluating active money managers, I have never seen anyone time the market like that.

The reality of the situation is someone nervous about investment losses would most likely move their largest balance to the safety of cash, and not just the ongoing monthly contributions. Thus, it is ridiculous to assume that only the ongoing contributions would be made to cash.

If we adjust the calculations to assume both the ongoing contributions and the accumulated balance are taken to cash in April of 2000, we get a much different picture. Assuming the Bear Market Dodger moved the entire account out of the market in April of 2000 and then back in again in January of 2004, he ended up with a value of $37,373 at the end of January 2004, as opposed to the study's buy-and-hold calculation of $33,502. That's a difference of over $3,800 in favor of the market timer.
The original study also assumed that a market timer would have missed out on all of the market gains in 2003. That assumption is questionable, at best. However, I'm not going to try to illustrate moving back into the market earlier than assumed in the study, since doing so would simply be a guess based on 20/20 hindsight. However, I can say that our experience with the professional active managers we recommend is that most participated in at least part of the market rally in 2003.

For example, the Potomac Guardian program that I will highlight below was fully invested in the market as early as November of 2002, just as the market was showing renewed signs of life. As a result, Potomac participated in the entire 2003 market rally and gained over 21% that year, net of all fees and expenses. While there's no guarantee that Potomac can always make such timely calls, this underscores what I always say about knowing when to get back in the market is more important than knowing when to get out. Plus, it blows another hole in the buy-and-hold study.
Another problem is that the study projected values 30 years into the future, starting in 2004, to show the long-term effect of “bad timing.” While I'm tempted to run our revised Bear Market Dodger numbers out that far using their assumptions, doing so would be irresponsible, especially using the 10.2% long-term average total return of the S&P 500 from 1927 to August of 2008 quoted in the study.

I hate to tell the folks who produced this study, but they are already way behind. The annualized return of the S&P 500 Index for the five years from 2004 through 2008 is a negative 2.19%. That means the market will have to do substantially better than 10.2% over the remaining 25 years of their projection period to keep up with their study's conclusions. It's possible, but it's not probable.
And speaking of being behind, the study was published in September of 2008, well after the official declaration of a new bear market in stocks that began in October of 2007. Even worse, the IBD article came out in February of 2009, long after the bear market accelerated its losses in the fourth quarter of 2008. Why was performance after January of 2004 disregarded in the study? I think we all know the answer to that question.

Unfortunately, I'm sure that many investors who read the IBD article or reviewed the fund study didn't pick up on the flawed assumptions designed to favor buy-and-hold, especially when it was published by a trusted name in the financial media. The moral to this story is that you should read any comparison of investment strategies with great care, even if they come from what most consider to be reliable sources.

And one final point on the study. As noted above, the market timing strategies in the study were not real market timing strategies, but rather just completely hypothetical scenarios dreamed up by the mutual fund company. In each strategy, the decision to get out of the market was based on fear and emotion. The successful market timers I recommend do not operate out of fear; instead, they have very sophisticated systems that generate trading signals.

Another Active Manager Doing It Right

In light of the blatantly skewed materials being produced by huge mutual fund firms and lovingly embraced by the financial media, I want to provide some straight talk about a money manager I have mentioned many times over the years in these pages, and have been recommending for over a decade. Specifically, I'm going to bring you up to date on the Potomac Fund Management Guardian Program.

We got a lot of good feedback from readers in regard to my January 27 E-Letter in which I highlighted Niemann Capital Management and Scotia Partners, so I'm going to follow the same format in the discussion below. As I did with Niemann, the Potomac Guardian Program will be evaluated over a 10-year period ending as of 12/31/2008. As always, I'll also provide a link to the complete strategy description and detailed track record of this program.

Also note that the Potomac Guardian managed account makes up just a part of the professionally managed investments we recommend as part of our AdvisorLink® Program. More information about these strategies and their performance can be found on our website, along with detailed descriptions of each strategy. Just click on the following link to see performance information on all of the various actively managed investments we recommend within our AdvisorLink® Program.

Potomac Guardian – Slow And Steady

The objective of the Potomac Guardian program is to participate in stock market growth while also limiting portfolio volatility and risk of extensive loss. Note that Guardian is a long or neutral (cash or hedged) only program, and does not seek to take net short positions in order to gain during down markets.

Guardian seeks to achieve this objective by allocating portfolios across many sectors and/or asset classes, over-weighting those identified by its model as having the best risk-to-reward ratio. Investments are primarily limited to low-volatility mutual funds in an overall effort to reduce downside exposure. In down markets, Guardian will shift to cash or hedged positions to gain a neutral exposure to the markets.

Looking at the turbulent markets in 2008, it appears that Potomac met its objective of limiting losses in down markets. In a year when the S&P 500 Index and Dow Jones Industrial Average both lost over 30% of their value, the Potomac Guardian program limited portfolio losses to only 11.68% in 2008, net of all fees and expenses. Of course, past performance is not necessarily indicative of future results.

However, the real value of the Potomac Guardian program becomes more apparent when you compare its performance to that of the alternatives in the marketplace over a 10-year period. Therefore, as I did with the Niemann Equity Plus program in my January 27 E-Letter, this week we'll see how the Potomac Guardian program did when compared to the entire universe of stock and bond mutual funds.

The Analysis

I had my staff run some mutual fund searches on our Morningstar Principia software using performance data as of the end of December of 2008 with the Potomac Guardian program as a baseline. I eliminated mutual funds with super-high minimum investments available only to institutional investors. I also restricted the search to Morningstar's “Distinct Portfolios,” which eliminates multiple share classes for the same fund.

We then searched for mutual funds with 10-year average annualized returns greater than Guardian's 6.00%, net of all fees and expenses. According to Morningstar, there were over 300 such funds in existence out of a total universe of more than 7,700 mutual fund “Distinct Portfolios.” Already, Guardian is better than 95% of mutual fund alternatives.

However, return alone is not all we're looking for. Risk management is a big part of what Potomac offers, since it will move to cash or hedged positions during down markets. As you know, we use “peak-to-valley drawdown” as one way to determine an investment's overall risk. However, Morningstar does not provide drawdown information on mutual funds. Therefore, I used Guardian's 2008 performance of -11.68% as a proxy for drawdown in our Principia search.

Using the additional 2008 performance criterion, we found that there were a total of 27 mutual funds that could boast a 10-year annualized return greater than Guardian's 6.00%, while also keeping losses to less than -11.68% in 2008. Past results do not guarantee future performance.

However, we weren't done yet. Recall that we use drawdown as a risk-analysis measure in all of our programs. Now that we had narrowed down the universe of mutual funds to a just a few candidates, we used another of our mutual fund analysis tools to obtain the maximum drawdown of the 27 mutual funds with a higher 10-year annualized return than Guardian. We found that only 12 funds beat Potomac Guardian's 10-year performance AND limited their drawdowns to under Potomac's -15.79% worst peak-to-valley performance.

However, none of the funds that beat Potomac's 10-year returns were equity mutual funds. In other words, Potomac's 6.00% annualized return beat every equity “distinct portfolio” in the Morningstar database. Of the mutual funds that did perform better than the Guardian program over the last decade, most were government bond funds.

With the current credit crunch and uncertain bond markets, many analysts are doubting whether even government bonds can repeat this type of performance, especially in light of the Treasury's having to print money to cover trillion-dollar bailouts. Thus, when considering 10-year annualized returns, 2008 calendar-year performance and maximum drawdowns, the Potomac Guardian Program beat all equity mutual funds in the Morningstar database. Now that's impressive long-term performance. Past performance, however, is not a guarantee of future results.

While other time periods will likely render different results, I believe the 10-year time window is important, especially for actively managed investment programs, because it encompasses two different cyclical bear markets. While no one knows what the future holds, the ability to deliver a consistent gain over 10 years, coupled with holding drawdowns to -15.79% or less is just the kind of performance we have come to expect from Potomac Fund Management.

Potomac has the distinction of having the longest tenure on our list of recommended professional money managers. The Potomac Guardian Program has been a mainstay of our AdvisorLink® Program since its inception in June of 1996. Over that time, it has produced an annualized return of 8.96% as of the end of January, 2009. As always, there are no guarantees for the future.

As noted above, Potomac has been able to produce these returns by utilizing its ability to move to cash or hedge long positions in downward markets. Yet the critics, armed with flawed studies like the one recently highlighted by IBD, still say that “market timing” doesn't work. Well, yes it does if you can find a successful manager like Potomac, Niemann or our other AdvisorLink® money managers.

For more information on the Potomac Guardian Program and performance, please click on the following link to access our Potomac Guardian Advisor Profile. If you would like for us to send you an Investor Kit on this program that contains the Advisor Profile plus documents necessary to establish an account, just click on the link for our Potomac online request form, or give one of our Investment Consultants a call at 800-348-3601.

Be sure to read all of the Important Notes and disclosures that follow my signature at the end of this E-Letter in regard to the above performance statistics. Also, keep in mind that the universe of mutual funds on the Morningstar database consists of a wide variety of different types of funds and strategies, many of which are different from those utilized by Potomac.

Conclusions

I know that this week's E-Letter covers a lot of ground. To summarize, I'd like you to take a few key points away with you now that you've read it. First, the markets are in bad shape and have resisted every attempt to prop them up. While many analysts have indicated that we have hit “the bottom” since the end of 2008, the market continues to perform as if it had a mind of its own, indifferent to the experts' opinions. As this is being written, the Dow has dipped below 6800 for the first time since April of 1997. Will this be the bottom? It might, but it also might not.

Next, no matter how poorly the market performs, those with vested interests in you keeping your money in the market will produce “studies” and other authoritative sounding materials to keep you invested in their products. Some, as the one discussed above, will be based on flawed assumptions, and worst of all, they will sometimes be embraced by trusted members of the financial media. If you learn nothing else from this article, please take away with you that you should always approach any such financial industry study with a critical eye, asking yourself whether the assumptions used make sense in today's world.

Last but not least, no matter how many studies try to disprove the benefit of active management, there are professional money managers who have successfully employed these strategies for well over a decade. To ignore the actual historical track records of these managers is to rob your portfolio of an additional source of diversification.

In closing, one of my staff members recently gave me an article authored by Steve H. Hanke, a professor of applied economics at the Johns Hopkins University and a senior fellow at the Cato Institute. He notes that “Following conventional wisdom has led an entire generation of investors down the road to ruin.” I agree, yet we still see official-looking studies like the one discussed above that continue to spout conventional wisdom as the way out of the abyss.

Truth be known, it might be that had many investors not followed conventional wisdom, they wouldn't be in the abyss in the first place. I think it's time that you consider being a little unconventional in your approach to investing. I and my staff stand ready to help you shed the confines of conventional wisdom and experience active management for yourself. Just give us a call at 800-348-3601 or send us an e-mail at info@halbertwealth.com.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES:

Stocks Drop to 50% of Peak (subscription may be required)
http://online.wsj.com/article/SB123543520857454281.html?mod=todays_us_nonsub_page_one

When Buy-And-Hold Beats Bad Timing (subscription may be required)
http://www.investors.com/editorial/IBDArticles.asp?artsec=19&issue=20090217

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM) and Potomac Fund management (PFM) are Investment Advisors registered with the SEC and/or their respective states. Some Advisors are not available in all states, and this report does not constitute a solicitation to residents of such states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. HWM receives compensation from PFM in exchange for introducing client accounts. For more information on HWM or PFM, please consult the appropriate Form ADV Part II, or the PFM Annual GIPS Disclosure Presentation 2007, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor's 500 Stock Index (which includes dividends) and the NASDAQ Composite Index represent unmanaged, passive buy-and-hold approaches. The volatility and investment characteristics of the S&P 500 or the NASDAQ Composite may differ materially (more or less) from that of the Advisor, and these Indexes cannot be invested in directly. The performance of the S & P 500 Stock Index and the NASDAQ Composite is not meant to imply that investors should consider an investment in the Potomac Guardian trading program as comparable to an investment in the “blue chip” stocks that comprise the S&P 500 Stock Index or the stocks listed on The NASDAQ Stock Market that comprise the NASDAQ Composite.

Potomac's performance results are based on the Model Portfolio. The Model Portfolio is an actual account that is considered representative of the majority of client accounts with similar investment objectives. Returns for the Model Portfolio are time-weighted, total returns that reflect the reinvestment of dividends and capital gain distributions. The Guardian strategy is actively allocated across many sectors and/or asset classes, overweighting those exhibiting the best risk-to-reward ratio. Statistics for “Worst Drawdown” are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any investment in a mutual fund carries the risk of loss. Mutual funds carry their own expenses which are outlined in the fund's prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Potomac Guardian trading program. Comparisons to the universe of mutual funds in Morningstar is not meant to imply that an investment in Potomac Guardian is comparable to each or any of these different mutual funds, most of which have different strategies and investments than those used by Potomac's Guardian program. The comparison is made for informational purposes only.

In addition, you should be aware that (i) the Potomac Guardian trading program is speculative and involves a moderate degree of risk; (ii) the Potomac Guardian trading program's performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) PFM will have trading authority over an investor's account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Potomac Guardian trading program's fees and expenses (if any) will reduce an investor's trading profits, or increase any trading losses. Returns illustrated are net of the maximum management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

A Eulogy For Buy-And-Hold Investing

GaryHalbert — Tue, 27 Jan 2009 21:33:53 GMT

IN THIS ISSUE:

News Flash - Buy-And-Hold Is Dead
Or Is It?
The Bottom Line
Actively Managed Programs That Work
Niemann Equity Plus - Master Of The Universe
Scotia Partners - The Best Defense Is A Good Offense

Introduction

In my November 11, 2008 E-Letter, I claimed that buy-and-hold investing might soon be a thing of the past following the catastrophic stock market losses late last year. In light of a second bear market within eight years that has (again!) decimated the retirement savings of the Baby Boom generation, it's not much of a stretch to think the investment strategy that allowed the whims of the market to lay waste to investors' portfolios would be cast aside.

However, buy-and-hold investment strategies are not going gently into that good night. While the financial media has been buzzing with stories of how buy-and-hold is dead, other stories are, like Mark Twain, claiming that the news of its death is greatly exaggerated.

Proponents of asset allocation have even trotted out 81-year-old Harry Markowitz, the creator of Modern Portfolio Theory (MPT), to defend the faith. You may recall that Markowitz won the Nobel Prize in Economic Sciences in 1990 based on his MPT work. However, you may also recall that in my May 24, 2005 E-Letter I documented that Mr. Markowitz did not utilize MPT when investing his own portfolio.

Since 1995, I have been advising my clients to include active management strategies, and especially those that can move to cash or hedged positions when the market drops like a rock. Whether you call it buy-and-hold, asset allocation, passive or index investing, MPT or whatever, the end result is that your investment strategy requires you to ride out bear markets and the potentially huge swings in the market such as we've seen recently.

Let me state this as candidly as possible: If you are trusting Modern Portfolio Theory to help you reach your investment goals, I think you will continue to be disappointed. Whether you are constructing your own portfolios on the Internet or using one of the many brokers or advisors who have no other alternatives to show you, MPT has major flaws that have long been identified, but generally dismissed by Wall Street due to factors I'll discuss later on.

I also believe that there are powerful vested interests in the financial services industry that are seeking to keep asset allocation on life support. This week, I'm going to discuss these forces and tell you why you need to reject their tired old theories. In addition, I'm going to tell you what some brokers who were previously under buy-and-hold's spell are doing, and why you should take notice.

Finally, I'm going to highlight two of the programs that I wrote about last year and let you know how they did. While past performance cannot predict future results, I'm pleased to report that the Scotia Growth S&P Plus Strategy turned in a 77%+ return in 2008. Most impressive, however, is the Niemann Equity Plus Program that has beaten every mutual fund in the universe of funds available to individual investors, based on our risk and return analysis. The details on these programs should astound you, but first, let's give buy-and-hold the burial it deserves.

Buy-And-Hold Is Dead

According to the Investment News publication, a recent survey of 750 millionaires by the Chicago-based Spectrem Group indicated that two-thirds said their advisors did a poor job of managing their investments, and are looking for alternatives. While buy-and-hold is offered under a variety of names, the idea of leaving your investment portfolio to the whims of the market is going the way of the dodo.

This death has not been swift nor has it been merciful, but it has been long expected. Experts have questioned MPT's buy-and-hold strategy almost since it was first promoted, claiming that it was lulling investors into a false sense of security based on historical relationships among asset classes that may or may not continue into the future. However, a strong bull market generally kept these shortcomings from coming to light, at least until the last eight years or so.

The poor performance of buy-and-hold portfolios during the last two bear markets has been a major factor in calling the strategy into question. However, another important factor is that the advantage of low correlation among certain asset classes so highly touted by proponents of asset allocation can be significantly reduced in severe bear markets.

Correlation is a term used to describe the relationship among various types of investments. If different classes of stocks go up in unison, they are considered to be positively correlated. If one goes up when the other goes down, they are negatively correlated. The goal of MPT and asset allocation is to diversify a portfolio among asset classes that have low or no correlation. In theory, this would give an investor a measure of risk management, since not all investments should go up and down together.

However, recent bear markets have shown that correlation tends to increase during declining markets. Thus, the end result has been that correlation is low during bull markets when investors don't need it, but begins to disappear in bear markets when it would be useful.

If MPT buy-and-hold programs had such obvious faults, why did it take so long to die? I think there are a number of reasons for this, including the following:

The financial services industry has invested millions of dollars in research, software, websites, training and marketing pieces that depend upon MPT and asset allocation. To give up on asset allocation would mean scrapping all of this expensive effort, and I don't think that's going to happen.
Sadly, MPT asset allocation programs are all that some investment professionals know how to sell. The concept makes sense to them, has won a Nobel Prize, provides diversification and the software noted above makes it relatively easy to hand a professional looking proposal to a prospective client. What's not to like (other than the performance, of course)?
Some brokers may be open to active strategies, but may be restricted by their broker/dealer organizations from selling such programs unless they are in the form of an approved mutual fund. Since many broker/dealers have been convinced that market timing doesn't work, active managers sometimes can't even get in the door.
This may come as a surprise, but the move to actively managed strategies has also been hampered by the fact that most actively managed programs don't work. We have reviewed literally hundreds of actively managed investment programs over the years, and only a select few have ever been recommended to our clients. I believe that with effective due diligence, appropriate active managers can be found, but those who fail reinforce the idea that market timing and other active management strategies don't work.

Finally, advisors touting MPT strategies are trying to keep clients by claiming that the market is now set up for another bull phase, and that pulling out (or staying out) of the market will make you miss the gains. Actually, this may be true, but it is important to remember that major market indexes had just risen back to their April 2000 levels when WHAM, they were hit again by the subprime bear market. How many rides on that roller coaster do you want to take?

I dare say that many of those investors holding fancy MPT proposals with Monte Carlo simulations showing they have a high percentage chance of meeting their investment goals are now wondering, "How do I get there from here?" How indeed.

Face it, MPT in whatever shape or form has failed many of the Baby Boom generation who needed it to work for them the most. Many are now approaching retirement with decimated portfolios, and are tired of hearing Wall Street's same old buy-and-hold mantra. If buy-and-hold isn't dead, it should be.

Or Is It?

As I noted above, I have read a number of articles recently claiming that buy-and-hold is not dead. Some of these articles use what can best be called "Clintonian" definitions of buy-and-hold. Some have tried to redefine buy-and-hold by calling it "diversification." Others claim that MPT and asset allocation are not really buy-and-hold strategies, since portfolios are periodically rebalanced. Another article even said that one critic of buy-and-hold was really referring to market timing. Now that's a long shot!

I find it very interesting that those who defend MPT are now trying to recharacterize it as the ultimate in diversification. Perhaps that's because diversification is a cornerstone of investing, and everyone pretty much agrees that it's important (even me.) So, if they can equate MPT and diversification, criticizing MPT would be like speaking against baseball, Mom and apple pie.

However, MPT is not the only way to achieve diversification. In fact, putting all of your money into an asset allocation program only provides diversification among asset classes; it does not diversify your portfolio among different investment strategies. Plus, some of the benefits of asset allocation, such as non-correlation, break down in bear markets.

And then there are the tired old arguments about how most of the market's upside is concentrated into just a few days, and that missing those days would negatively affect your return. I just recently received an e-mail from a mutual fund using this old argument as a reason for shareholders to keep their money in their fund. Sorry, but as I have pointed out numerous times in this E-Letter, this is a bogus argument because it assumes you are out of the market all of the best days, but still in the market on the worst days.

An article written in October of 2008 took on those who said buy-and-hold was dead. It quoted Wharton professor and author, Jeremy Siegel, who said "That's about the craziest thing I've ever heard!" He comes to this conclusion, no doubt, from his analysis of 200 years' worth of US stock market returns that shows staying invested in the stock market over a long period is the most effective strategy for creation of wealth.

The problem is that, from an academic standpoint, the long-haul is entirely feasible. In the real world, however, the long-haul may be far too long for investors to wait for their retirement goals to be met. The article gives additional reasons that buy-and-hold is not dead, including:

You can't time the market. Actually, I'll agree with this one in that most investors cannot time the market on their own. That's why I only recommend investment programs where professionals call the shots, and even they aren't perfect.
Warren Buffett is buying. Wow, what an investment recommendation. You should buy an MPT strategy because Mr. Buffett is now buying. Note the date on the article, and then look at what happened in November of 2008. Mr. Buffett lost money. Plus, Mr. Buffett does not buy MPT programs, but rather individual companies that he feels may have value in the long run. Thus, this argument is meaningless to the average investor.
Bargains abound. In the business world, something is a bargain only if you know its true value. Unfortunately, some market analysts equate low price to equity or some other measure as being a bargain. However, just because a stock's or mutual fund's value is lower than it was in the past does not alone mean that it's a bargain. Again, note that the article was written in late October of 2008 and remember what happened in November. I guess those bargains got even better.

The Bottom Line

The bottom line is that it's not likely that buy-and-hold strategies will cease to exist. There are just too many Wall Street entities that have a vested interest in seeing them continue. At the same time, however, I think that the siren song of buy-and-hold is going to be less and less attractive to investors who have seen two bear markets decimate their portfolios over just the last eight years.

The proof is that investors are increasingly moving away from simplistic buy-and-hold strategies modeled on Modern Portfolio Theory. Those 78 million Baby Boomers we always talk about have now experienced two major bear markets just as they are entering the time they can start thinking about retirement. Just like the famous quote, they are now more concerned with the return of their money than the return on their money.

In addition, there are now many stock brokers and broker/dealers who are seeking out alternatives to buy-and-hold strategies in order to better serve their clients. In talking with the active money managers we recommend, they state that the single largest source of new interest in their programs is coming from the brokerage community that once shunned their services.

Actively Managed Strategies That Work

If buy-and-hold strategies do meet their demise, the past decade will likely be credited with being a nail in their coffin. Despite high returns during the tech bubble, and during the 2003 - 2007 market rally, major stock market indexes (and many buy-and-hold investors) are roughly where they were ten years ago. Financial journalists call it a "lost decade," and the reality of the situation is that many investors have not been able to meet their investment goals.

In the remainder of this E-Letter, I'm going to focus on two money managers we recommend, and how they have performed over time. One investment, the Niemann Capital Management Equity Plus Program, will be evaluated over the past 10 years. Another, the Scotia Partners Growth S&P Plus Strategy will be evaluated over a shorter period of time, since it does not yet have a 10-year track record.

I wrote about both of these programs in 2008, so I feel an update is in order. Plus, these two programs offer different perspectives of actively managed programs - one moves slowly in and out of the market, while the other trades frequently using 2X leverage. Together, they allow you to have a glimpse into the world of active investment management and evaluate these strategies for your own portfolio.

From an editorial standpoint, I am sometimes asked why I limit my comments to just one or two programs in the E-Letter. The answer lies not in relative performance, but in the amount of disclosures required for each program. Regulatory rules require that we provide certain important disclosures for each program we feature in the E-Letter. I agree that these disclosures are necessary and important, so to keep the E-Letter to a manageable size, we limit the number of programs we feature in any given issue.

However, we are more than happy to provide performance information for every program we currently recommend. The information can be found on our website, along with detailed descriptions of each strategy. Just click on the following link to see performance information on all of the various actively managed investments we recommend within our AdvisorLink® Program.

Niemann's Equity Plus Program - Master of the Universe

When reading articles in financial publications about a "lost decade," I thought it would be interesting to evaluate some of our programs with long-term track records and compare them to the universe of mutual funds. I have seen some comparisons of investments to the top 100 mutual funds by size, but I thought it would be interesting to see how our Advisors fared compared to ALL mutual funds.

I had my staff run some mutual fund searches on our Morningstar Principia software using performance data as of 12/31/2008 with the Niemann Equity Plus Program as baseline. First, however, I eliminated mutual funds with super-high minimum investments available only to institutional investors. I also restricted the search to Morningstar's "Distinct Portfolios," which eliminates multiple share classes for the same fund. We then searched for mutual funds with 10-year average annualized returns greater than Equity Plus' 10.56%, net of all fees and expenses. According to Morningstar, there were 92 such funds in existence out of a total universe of more than 7,700 mutual fund "Distinct Portfolios."

However, return alone is not all we're looking for. Risk management is a big part of what Niemann offers, since it will move to cash or hedged positions during down markets. As you know, we use "peak-to-valley drawdown" as one way to determine an investment's overall risk. However, Morningstar does not provide drawdown information on mutual funds. Therefore, I used the Equity Plus 2008 performance of -11.4% as a proxy for drawdown in our Principia search.

Using the additional 2008 performance criterion, we found that there was only one non-institutional fund of the 92 noted above that could boast a 10-year annualized return greater than Equity Plus' 10.56%, while also keeping losses to less than -11.4% in 2008. The one fund that beat Niemann's Equity Plus program using the Morningstar filter was the MFS Emerging Market Debt Fund (a bond fund). Thus, Niemann's Equity Plus Program showed that it beat all equity mutual funds in the Morningstar database for the last 10 years, using our search criteria and restrictions. Past results do not guarantee future performance.

However, we weren't done yet. Recall that we use drawdown as a risk-analysis measure in all of our programs. Now that we had narrowed down the universe of mutual funds to a single candidate, we used another of our mutual fund analysis tools to obtain the maximum drawdown of the MFS Emerging Market Debt Fund. We found that this fund has a maximum drawdown of over 33%, while the Niemann Equity Plus Program has limited its worst drawdown to -18.06%.

Thus, when considering 10-year annualized return, 2008 calendar-year performance and maximum drawdown, the Niemann Equity Plus Program beat the entire universe of mutual funds in the Morningstar database. Now that's impressive long-term performance. Past performance, however, is not a guarantee of future results.

While other time periods will likely render different results, I believe the 10-year time window is important for the Niemann program since it encompasses two different cyclical bear markets. While no one knows what the future holds, the ability to deliver a double-digit annualized return over 10 years, coupled with holding drawdowns to -18.06% or less is just the kind of performance we have come to expect from money manager Don Niemann. As always, there are no guarantees for the future.

As noted above, Niemann has been able to produce these returns by utilizing its ability to move to cash or hedge long positions in downward markets, yet the critics still say that "market timing" doesn't work. Well, yes it does if you can find a successful manager like Niemann.

Now it's your turn. Compare Niemann's 10-year annualized return of 10.56% and 2008 performance of -11.4% to your current mutual funds or investment portfolio. To help you with your mutual fund investments, click on the following link to access the Business Week Mutual Fund Scoreboard website. Just enter your fund name or ticker symbol in the box and hit enter. You will then be shown detailed performance information on your fund, including a 10-year return number. Then, compare it to the Niemann Equity Plus performance. You really should do this! Here's the link:

http://bwnt.businessweek.com/mutual_fund

For more information on the Niemann Equity Plus Program and performance, please click on the following link to access our Niemann Equity Plus Advisor Profile. If you would like for us to send you an Investor Kit on this program that contains the Advisor Profile plus documents necessary to establish an account, just click on the link for our Niemann online request form, or give one of our Investment Consultants a call at 800-348-3601.

Scotia Growth S&P Plus - The Best Defense Is A Good Offense

As I mentioned earlier, Niemann's approach to the market is more of a slow and steady strategy, which I feel has been a big key to its success over time. However, this type of investment strategy is also subject to losses during the early part of a bear market, since it gradually moves to cash or hedged positions rather than moving to neutral all at once.

In contrast, there are actively managed mutual fund programs that seek to make money in both up and down markets using specialized funds that "short" the market. In addition, some investors like to up the ante by seeking out programs that not only go long and short, but do so on a leveraged basis. I characterize this type of program as being one where the best defense is a good offense.

One of the best leveraged, long/short mutual fund programs we have ever come across is the Scotia Growth S&P Plus Strategy. We first introduced this program to our E-Letter audience in June of 2008, and it has received a great deal of attention. However, when you look at Scotia's performance over the entire year, it's nothing short of amazing. Past performance is not necessarily indicative of future results.

Scotia's owner and portfolio manager, Cliff Montgomery, has developed a proprietary strategy that was able to navigate the difficult market we experienced in 2008. While the S&P 500 Index lost 37% during 2008 and the Nasdaq Composite dropped over 40%, the Growth S&P Plus Strategy gained over 77%, net of all fees and expenses. While Scotia's past accomplishments cannot guarantee favorable future results, I do think the way Cliff approaches the market merits your consideration.

And that's not all. Though we are early in the year, our Growth S&P Plus test account has already posted a gain of over 13% as of the close of business on January 23rd, while the S&P 500 Index has lost 7.89% (excluding dividends) and the Nasdaq Composite has fallen over 6% during the month. Of course, there's no guarantee that Scotia will end the month with a double-digit gain, but it does show that the Growth S&P Plus Strategy has continued to exhibit the potential to navigate these volatile markets.

As noted above, Scotia trades in and out of the market frequently, and typically is only in the market for a few days at time. And again, the critics say market timing doesn't work. My clients and I know it works, especially if you can find a money manager like Scotia.

It is also important to note that the extreme market volatility in late 2008 caused Scotia to post a worst drawdown of -29.37%. While this was in line with our expectations for the program, it further emphasizes that this program should only represent a small percentage of your overall portfolio, and is generally best suited for aggressive investors.

You can access additional performance information and a full description of Scotia's investment strategy by clicking on the following link to the Scotia S&P Plus Advisor Profile. Or, you can learn more about Scotia's money management strategies by viewing a recording of our recent hour-long online webinar found at the following Internet address:

http://www.halbertwealth.com/webinar/sco20090114/scotiawebinar.php

And again, be sure to read all of the Important Notes and disclosures that follow my signature at the end of this E-Letter. If you would like to obtain an Investor Kit complete with the documents necessary to make an investment in the Scotia Growth S&P Plus Strategy, please click on this link to access the Scotia Online Request Form, or call one of our Investment Consultants at 800-348-3601.

Conclusions

The weaknesses of asset allocation have long been known by those of us who have studied it closely and followed the markets. Today, it is encouraging to see that more and more investors and financial professionals are picking up on buy-and-hold's weaknesses. However, I believe the financial services industry has far too much invested in software, sales material and training to allow MPT, asset allocation and other versions of buy-and-hold to slip into the obscurity they so richly deserve.

Even so, many in the brokerage community are reaching out to active money managers in order to have an alternative that won't likely follow the market indexes on their roller coaster ride. This is not conjecture, but the results of conversations with our recommended money managers who are seeing a huge increase in demand for their services from former bastions of buy-and-hold strategies.

In a recent E-Letter, I touched upon this issue and asked what some brokers know that you may not know. The answer to that question is that they know asset allocation doesn't always work. As a result, many brokerage firms are now seeking out alternatives, often led by their brokers whose clients are demanding a new approach to the market.

The fact that some brokers are now looking into actively managed programs might be an indication that it's time for you to consider these strategies for your own portfolio. We can help. We have a 10-year head start on the due diligence and analysis required to select active money managers for our clients. If you are interested in these strategies, I encourage you to give us a call at 800-348-3601, send us an e-mail at info@halbertwealth.com, or visit our website at www.halbertwealth.com.

Wishing you profits,

Gary D. Halbert

P.S. - We often receive questions from prospective clients about how Halbert Wealth Management fits into the equation. Quite simply, we are responsible for the search, evaluation and marketing of third party money managers on behalf of our clients. In the above article, I said that most active managers are not successful in their efforts, so it is our job to separate the wheat from the chaff and offer our clients only those Advisors who we believe have the highest probability of continued success. In addition, I have my own money with every Advisor we recommend, so we can monitor the daily performance and trading activity to determine if they continue to meet our expectations.

Professional active managers typically charge annual management fees of 2-2½%, usually billed quarterly. Rather than charging an investment management fee over and above the Advisor's fee structure for the services we provide as some do, HWM negotiates directly with the Advisor and is paid a percentage of its money management fee. So, by using HWM, clients generally pay no more in management fees than if they were to contact the Advisor directly, plus they get the benefit of our ongoing services.

Note that we always present performance information net of all fees and expenses, so you are better able to evaluate whether an Advisor is adding value over and above the fees charged. For answers to more questions about our AdvisorLink® Program, please click on the following link to review our Frequently Asked Questions publication. GDH

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM), Niemann Capital Management, (NCM) Scotia Partners, Ltd. (SPL) and Purcell Advisory Services (PAS) are Investment Advisors registered with the SEC and/or their respective states. Some Advisors are not available in all states, and this report does not constitute a solicitation to residents of such states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from NCM and PAS in exchange for introducing client accounts. For more information on HWM, NCM, SPL or PAS please consult their respective Form ADV Part II and Niemann's Annual Disclosure Presentation, 2007, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor's 500 Stock Index (which includes dividends) and the NASDAQ Composite Index represent unmanaged, passive buy-and-hold approaches. The volatility and investment characteristics of the S&P 500 and the NASDAQ Composite Index may differ materially (more or less) from that of the Advisors, and these Indexes cannot be invested in directly. The performance of the S&P 500 Stock Index and the NASDAQ Composite is not meant to imply that investors should consider an investment in these trading programs as comparable to an investment in the "blue chip" stocks that comprise the S&P 500 Stock Index or the stocks listed on The NASDAQ Stock Market that comprise the NASDAQ Composite.

Comparisons to the universe of mutual funds in Morningstar is not meant to imply that an investment in Niemann is comparable to each or any of these different mutual funds, most of which have different strategies and investments than those used by Niemann's Equity Plus program. The comparison is made for informational purposes only.

Historical performance data for Niemann is provided by the Advisor in compliance with the Global Investment Performance Standards (GIPS). Performance figures presented include all actual, fee-paying fully discretionary accounts in a composite. See the Annual Disclosure Presentation, 2007 for more details. Historical performance for Scotia represents actual accounts in a program named Scotia Partners Growth S&P Plus custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in these programs. The signals are generated by the use of a proprietary model developed by Scotia Partners, which is then traded by Purcell Advisory Services. Statistics for "Worst Drawdown" are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any investment in a mutual fund carries the risk of loss. Mutual funds carry their own expenses which are outlined in the fund's prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

In addition, you should be aware that (i) the trading programs are speculative and involve risk; (ii) the trading programs' performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the programs; (iv) the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the trading programs' fees and expenses (if any) will reduce an investor's trading profits, or increase any trading losses.

Returns illustrated are net of actual management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. Returns for Scotia are deducted in full quarterly, and not accrued month-by-month. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. All dividends and capital gains have been reinvested. Some Funds also charge short-term redemption fees and excess transaction fees (Special Fees), which are billed to shareholders at the time of the event causing the fee. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

In selecting Funds in which to invest using various analytical tools, Niemann considers the nature and size of the fees charged by the Funds. Niemann's objective is to select a Fund only if Niemann believes the Fund's performance, after all fees, will meet Niemann's performance standards. Consequently, Niemann may select Funds, which have higher or lower fees than other similar Funds, and which charge Special Fees. When deciding whether to liquidate a Fund position, Niemann will take into consideration any Special fees which may be charged. Niemann may decide to sell a Fund position even though it will result in the client being required to pay Special Fees.

"Buy-And-Hold" Bites The Dust - Now What?

GaryHalbert — Tue, 11 Nov 2008 20:54:52 GMT

IN THIS ISSUE:

Economic Overview
The Conventional Wisdom Was Wrong
The Shortcomings Of Index Investing
Are Low Fees The Key To Investment Success?
Risk Management Is Crucial

Introduction

In the newsletter business, it's rewarding to see market action reinforce the advice you have been giving in your publication. Ever since I started writing this E-Letter, I have warned of the perils of passive "buy-and-hold" investing in general, and "index investing" in particular. While adherents to these strategies like to trot out long-term charts and graphs supporting their case, I have always warned that passive investing can result in major losses at just the wrong time from the investor's perspective.

However, I have to admit that being right rings hollow in the aftermath of the carnage we have seen in the US stock market since its peak in October of 2007, and especially over the last month or so. It is estimated that over $8 trillion of investor value has been lost in the US equity markets since then, and no one knows how long the bear market may continue. Many Baby Boomers are now realizing that their passive investments have incurred huge losses at a time when capital preservation is far more important to them.

How did we ever get to the point where buy-and-hold became investment gospel? It's as if investors were convinced that it's OK to stay on the track and get hit by an oncoming bear-market train, since a bull-market train going the other direction would soon bring them back to where they were before, and eventually higher over the long term. Yet it has always made sense to me to step off the tracks (go to cash or hedge) to avoid oncoming trains altogether.

Many investors are now feeling as if their portfolios have been hit by a train and it's uncertain if and when one going the other direction (bull market) may come along. Since many of the highest investment balances were held by Baby Boomers nearing retirement, it's an even worse train wreck because they lack the lengthy time horizon that may be necessary for the market to regain recent large losses.

This week, I'm going to revisit the issue of passive investing, and especially index investing. I'll discuss why I think they became so popular, and why I continue to recommend actively managed programs that have the potential to reduce risk during market meltdowns. First, however, I'm going to give you an overview of the latest economic forecasts I am seeing. Let me warn you, the news is not good.

Economic Picture Getting Darker

Every economic forecasting group that I read has downgraded its predictions over the last few weeks in light of the plunge in the global equity markets in October. As noted last week, 3Q GDP was estimated at -0.3% (annual rate), and that estimate is likely to be downgraded later this month. Most forecasters are now predicting that 4Q GDP will be down at least 1-2%.

While forecasts earlier in the year suggested that the economy would rebound to positive growth in the second half of next year, such forecasts have all but disappeared. Now, there is a general consensus that the US economy will be negative for at least several more quarters to come. Specifically, that this will be the worst recession since the Great Depression. All of the sources I trust believe that it will take several years to work out of this financial crisis.

It remains to be seen if the stock markets have seen the bottom. In any event, most forecasters I respect believe that once the stock markets have bottomed, they will move into a broad, multi-year trading range. No one I respect is predicting a "V" bottom or a quick return to a bull market.

This is precisely why we need to revisit the problems associated with passive, buy-and-hold investment strategies. These strategies got killed over the last year, especially the last month or so, and are not designed to do well in a broad trading range, which could persist for the next several years. Fortunately, there are alternatives.

The Conventional Wisdom Was Wrong

The basics of passive investing are relatively simple. You put your money into a diversified portfolio, usually based on "asset allocation" strategies, and leave it there during good and bad market cycles. Armed with reams of historical data, the conventional wisdom was that including multiple asset classes in a portfolio would protect investors during all types of market conditions. While changes are made periodically to rebalance allocations or adjust for advancing age, the portfolio is largely a "set it and forget it" instrument, so the theory goes.

The historical data also suggested that most hands-on mutual fund managers were not adding value above and beyond what the broad market indexes could provide, so mutual funds tied to various market indexes were developed to offer a low-cost alternative to actively managed mutual funds. However, back in December 2005, I wrote an E-Letter about the potential drawbacks of passive index investing:

"'Index investing' is growing like wildfire among investors today…And it's no wonder why. The allure of a simple, low-cost investment strategy tied to market indices that have been shown to grow over long periods of time sounds irresistible…The main problem is that Wall Street's ad machine is only telling half of the story. They often use historical time periods that are far longer than what most people have to invest, and they also fail to disclose how much an investor might lose in a bear market or major correction."

To illustrate, during the 2000 - 2002 bear market, the S&P 500 Index lost over 44% of its value, and the Nasdaq Composite fared even worse, losing over 75%! Unfortunately, however, neither investors nor Wall Street learned a lesson about how fickle the market can be, and at the worst possible times.

Thus, even with those huge 2000 - 2002 market losses fresh on their minds, investors still flocked to index investing as if there would never be another bear market or correction. I think there were several reasons for this, including:

Having just been through a major bear market caused some of them to think that the worst was over, and that the market would now over-perform in order to get back to historical long-term averages. Unfortunately, they failed to study history, which shows that, since 1952, bear markets have occurred an average of once every five or so years, so we were actually due for a bear market.

The market's action during 2003 through 2006 seemed to confirm index investors' convictions that happy days were, indeed, here again. The S&P 500 Index gained 28.68%, 10.88%, 4.91% and 15.79% in 2003 through 2006, respectively. This annualized return of 14.74% over those four years compared favorably to the 10% to 12% touted as the long-term average stock market return, so "reversion to the mean" became the watchword of the day.
Though 2007 saw the first warnings of the subprime crisis, the Dow and S&P 500 market indexes still managed to hit all-time record highs in October of 2007. Investors were convinced that this, too, shall pass and stayed invested.
The bear market of 2000 - 2002 also claimed another victim, and that was the average mutual fund manager. Unfortunately, all active management strategies seemed to be lumped into the same category by the financial media and Wall Street firms. No difference was made between an active mutual fund manager and specialized strategies such as market timing, sector rotation, long/short or a variety of other active management techniques. Wall Street even promoted flawed statistics to support their point, as I noted in my June 21, 2005 E-Letter.
Investors were subjected to so many different investment opinions and theories that many of them just didn't know which way to turn. They were paralyzed by all of the conflicting information out there. I call it "information overload." Thus, they chose the option that seemed to be the simplest, plus it was supported by Nobel Prize Winning theories. How could they possibly go wrong?
Since most index investing used asset allocation strategies based on the work of Nobel Laureate Dr. Harry Markowitz, many investors felt that using multiple asset classes including bonds and international investments would protect them in a bear market. Another big plus was that the financial services industry found Markowitz's theories relatively easy to incorporate into computerized portfolio modeling programs, resulting in highly effective proposal presentations.

Unfortunately, we have learned that the subprime crisis spared no asset class as it ravaged global stock and bond markets. The traditional correlation among asset classes broke down, which is often the case in severe bear markets.
Finally, fees became one of the major selling points of passive index investing, especially among the financial media (more about this later on). I now find it interesting that some members of this same financial media are now declaring that "buy-and-hold is dead." How convenient to be able to change your story to fit the times.

Over the course of my 30-plus-year career in the investment business, I have found that most investors' goals are very simple. They want to put their money into investments that are: 1) reasonably safe; 2) have the potential to earn a reasonable rate of return; and 3) will not suffer large losses along the way. While these goals are relatively simple, how you invest to achieve them is not a simple process.

However, the investment industry is always willing to create products to fill investor demands, some of which are based on the conventional wisdom of the day. For those wanting a simple solution, the financial services industry created a number of different "one-size-fits-all" investment products, with index investing being one of the most popular.

They even created "target-retirement" and "lifestyle" funds that incorporated asset allocation so that investors need only know the year they wanted to retire in order to select the "right" investment. I guess you could call this the ultimate in conventional wisdom portfolios.

Chinks In The Index Investing Armor

Before I discuss some of the arguments against index investing, let me say that I am a big fan of both index mutual funds and ETFs. I feel that the ability to "buy the index" has changed the investing landscape in a number of positive ways, though I don't always agree with proponents of buying and holding index funds. Several of the Advisors whose programs I recommend use index mutual funds to facilitate their active management strategies, so I am a big fan.

That being said, I have often advised against combining index funds and asset allocation programs as the sole investment strategy in an investor's portfolio. The reason for this is within the passively managed nature of the index fund. Index funds, by their very nature, will not exit positions and move to cash during bear markets or downward corrections. An index fund will follow its underlying index, even if it dives right into the dirt (or gets hit by a train).

Index fund proponents say that this is no problem - just diversify among a variety of index funds covering various stock and bond asset classes, and everything will be OK in the long run. I can best illustrate this strategy using an investment offer I once received from a financial Advisor back in 2005. While the information is somewhat dated, the shortcomings are the same today as they were then.

The Advisor recommended only "index" funds allocated among a variety of selected funds based on traditional asset allocation principles. The Advisor went on to illustrate the performance of a set of index funds over a 25-year period of time from 1979 through 2004. The performance was excellent, especially as compared to fixed rate investments like CDs and fixed annuities.

The Advisor's implication was clear: the market indexes will do well over long periods of time, so all you need to do is invest in his special blend of index funds and you'll be just fine. Since the time period included returns during the bear market of 2000 - 2002, it would seem that his argument would have been fair, right?

Sorry, but I'm still not convinced. Here are just a few of the fallacies of this Advisor's argument, in my opinion:

It assumed the next 25 years will be the same as the last 25 years. Let's see, did 78 million Baby Boomers retire in the last 25 years? Were we afraid of terrorist attacks on our major financial centers prior to 2001? Will Medicare and Social Security costs be the same percentage of government spending in the next 25 years as they were in the last 25 years? And, of course, had we experienced a housing and subprime mortgage crisis resulting in a global credit crunch, massive Wall Street bailouts and a stock market meltdown? (Hint: "NO" is the appropriate answer to all of these questions.)
The 25-year time period cited as an example doesn't necessarily correspond to any individual investor's actual time frame. What if an investor's time frame had them needing their money for retirement in September of 2002 at the bottom of the bear market? I doubt index investing would have met with much praise at that point in time. Fast forwarding to the present, what if a retiree needs money NOW?
It doesn't hurt your argument when you choose a 25-year period that just happens to include the longest bull market in history, along with a stock market bubble in the go-go 90s. Let's roll the clock on back a bit. What if we chose a period of time from 1966 through 1982? Over this 16-year span of time, the stock market went nowhere.

Even Vanguard's John Bogle, the father of index investing, has pointed out that "each and every comparison we see is period-dependent." This means that the time period you choose can greatly affect the outcome of your analysis. I have written about this before, but it is especially important in regard to index investing.
Finally, historical analysis of stock market returns does show that stocks increase in value over long periods of time. Yet, there are many shorter periods in which stocks do poorly, or even lose money. Investors are often confronted with glossy charts and graphs illustrating stock market performance data over 25 years, 50 years and even 75 years. Yet, few people trying to make investment decisions today have a 50 or 75-year time horizon!

Let's look at the timelines. The youngest of the Baby Boomers are now nearing age 45, at which time they will have 20 years until retirement at 65. A 50-year-old has only 15 years, and at 55, you're looking at only a decade to accumulate wealth. Are there lots of 10-year periods during which the major market indexes did poorly? You bet there are, and we're in one of them right now!

So, you have to ask yourself, what historical 10-year period will the next 10 years be like? Don't know? Neither do I, and neither do economists, financial planners, mutual fund managers, or anyone else.

Because of these shortcomings, I continue to believe active management strategies with a historical track record of having provided reasonable returns with reduced risks are more appropriate for many investors than buy-and-hold index investing. Some of the financial media are now agreeing with me, but where were they in 1995 when I first began to recommend these active management strategies to my clients?

Do Low Fees = Good Investments?

One facet of investing where the index proponents have been successful is that of fees. Many investors will automatically reject any investment with expenses greater than those of an index fund. They have bought into the idea that active management doesn't pay, so they are not willing to pay higher fees for the expertise of an active manager. They use fees as a simple way to eliminate alternatives from their investment radar screen.

Unfortunately, this simple criterion can eliminate many qualified alternatives. After all, do you drive the least expensive car? Why not? Don't all cars offer you a mode of transportation? Do you shop for the least expensive doctor, lawyer or dentist? Those who do many times find out exactly why they charge fees below the going rates.

The important thing is not always what fees are being charged, but how the investment program has performed net of all fees and expenses. Many people will pay more for a product or service if they can see, hear, or feel added value, and investments should be no different.

Now, however, the focus on low fees is coming back to haunt many investors. For example, the Vanguard S&P 500 mutual fund has one of the lowest fees around, at only 0.15%, but according to the Vanguard website, this fund had a year-to-date loss of 32.87% as of the end of October.

At the same time, the Niemann Equity Plus Program that I have featured in this E-Letter had a year-to-date loss of only 10.85%, net of Niemann's 2.3% annual fee. Would you pay an additional 2.15% fee to shave over 22 percentage points off of your losses right now? I'll bet you would! (Past performance is not necessarily indicative of future results. Niemann's October 2008 performance is an estimate and may vary. Be sure to see Important Notes at the end of this E-Letter.)

It gets even better - since the inception of the Niemann Equity Plus program in November of 1996, it has produced an annualized return of 12.25%, again net of all fees. Over the same period of time, the Vanguard S&P 500 Index mutual fund has produced an annualized gain of only 4.32%, also net of fees. Again, the lower fee alternative produced an inferior return to the higher-fee actively managed program. Of course, there are no guarantees it will always do so.

Obviously, we have other programs that have higher and lower returns than the Equity Plus Program, but this comparison does show that relying on fees alone can be detrimental to your investment returns, even in comparisons spanning over a decade. Of course, there are no guarantees.

Finally, there are some financial services companies that extol the virtues of low fees to "retail" investors, while at the same time offering hedge funds to their wealthy clients. As you probably already know, hedge funds carry some of the highest fees of any investment vehicle.

So, if high fees are such a bane on the investment industry, then why have wealthy individuals flocked to hedge funds as never before? The answer is that there are some (albeit few) money managers who are able to provide value over and above their fees in the form of consistent risk-managed returns. This is the type of money manager we look for to recommend in our AdvisorLink® Program.

What About Risk Management?

As I noted above, many investors seek investments that are: 1) reasonably safe; 2) have the potential to earn a reasonable rate of growth; and 3) will not suffer large losses along the way. My biggest problem with index investing is that it can fail all three of these tests, and the recent market meltdown is a good case in point.

On the first issue of safety, you could say that index investing passes this test in one sense because there is little likelihood of losing money through embezzlement or fraud. However, safety can mean more than protection from fraud. One example is in regard to a type of mutual fund that has been getting a lot of attention lately. There are some new index funds that allow investors to "short" the market, or participate in a fund that generates double the movement of the underlying market through 2-to-1 leverage.

As the stock market has been hit by loss after loss, these funds are looking very attractive. Investors who have moved to these funds brag of outsized performance, and will continue to do so as the markets continue to go down. However, when the markets do turn around, the leverage and short position will begin to work against the investor. And since much of the gain is concentrated in the early days of a new bull market, losses could be big and quick.

Thus, while the ability to short the market and use leverage offer a lot of flexibility, they can also offer a lot of additional risk. Unless managed by a competent professional using a disciplined strategy, I consider participation in leveraged and short funds little more than gambling. You might win big, but you can lose just as big, and may never be able to recover your losses.

As for the second test of the potential to earn a reasonable rate of growth, index investing proponents would say that index funds pass this test with flying colors, considering the historical long-term return of the stock market. However, as I have shown in this article, stock market returns are very period-dependent. The shorter your investment time horizon, the better the chance that index funds will provide results below their long-term average. In fact, there have been examples in the past where the stock market has gone virtually nowhere for 10, 15 or even 20 years.

On the final qualification that the investment program not suffer large losses along the way, index investing fails miserably. Since there is no active management of the underlying portfolio, the investor is destined to rise and fall with the markets. During the past bear market of 2000 - 2002, the major market indices had some tremendous drawdowns in value, with the S&P 500 losing over 44% of its value, and the Nasdaq Composite Index losing over 75%!

In the current bear market, drawdowns have not yet accumulated to the low points experienced during 2000 - 2002, but they are very close. As this is written, the S&P 500 Index is approximately 40% below its October 2007 peak. The last bear market drawdown bottomed out in September of 2002, so that's two 40% drawdowns in six years. No wonder many retirees are saying they're "done" with the stock market.

My staff and I have personally talked to a number of investors who needed their money for retirement during this time, only to find that a large part of their investments' values had vanished into thin air. Even if I were sold on the value of index investing over the long haul, I would still not recommend it to my clients simply because of this last shortcoming.

Conclusions

I would like to believe that the latest market mayhem will spell the end of one-size-fits-all index investing, but I know better. Wall Street has sunk far too much money into literature and software to let the concept die a peaceful death. Just as we saw index investing take off after the 2000 - 2002 bear market, I expect to see it marketed heavily once the market starts to come back from the current low point.

Oh yes, some of the marketing material will be changed to reflect the subprime debacle, but I will bet that the industry will attempt to explain the current market malaise away by saying it's a "market aberration" that won't happen again because of improved regulatory scrutiny that is almost certain to come. Thus, Wall Street will attempt to skip over this bump in the road and do what they do best - marketing.

One of the primary reasons I agreed to write this weekly E-Letter in the first place was the hope that I might be able to make a difference by countering some of the expensive marketing efforts launched by the major Wall Street firms and large mutual fund families. In this way, I can share some of the insights I have been able to gain from my 30+ years in the investment industry. To that end, I hope that I have provided some information this week that will help you resist the siren song of index investing in the future.

Through the years, many of my readers have sought out some of the investment programs my company offers, but many have not. While I'm the first to admit that some of our programs did a better job of limiting risk than others, almost all have been successful in holding risks to less than those of the S&P 500 Index, which is what they are designed to do. Plus, we have a couple of programs that have actually made money during the down market. Past performance, however, cannot guarantee future results.

If you are among those who have put off checking out our risk-managed investment programs, perhaps the current market meltdown will convince you it's time to take a look. Just give one of our Investment Consultants a call at 800-348-3601 or complete our online information request form. You can also find out more about these programs and the strategies they employ on our website at www.halbertwealth.com.

Wishing you a market bottom,

Gary D. Halbert

SPECIAL ARTICLES:

The Death of Buy and Hold
http://www.cnbc.com/id/27651174

The Specter of Deflation
http://www.realclearpolitics.com/articles/2008/11/the_specter_of_deflation.html

What lower oil prices mean for the world
http://www.ft.com/cms/s/0/5c238848-af5d-11dd-a4bf-000077b07658.html?nclick_check=1

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM) and Niemann Capital Management, (NCM) are Investment Advisors registered with the SEC and/or their respective states. Some Advisors are not available in all states, and this report does not constitute a solicitation to residents of such states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. There is no foolproof way of selecting an Investment Advisor. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from NCM in exchange for introducing client accounts to the Advisors. For more information on HWM or NCM, please consult HWM Form ADV Part II, NCM Form ADV Part II and Niemann's Annual Disclosure Presentation, 2007, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor's 500 Stock Index, the Vanguard S&P 500 Index and the NASDAQ Composite Index (which include dividends) represent an unmanaged, passive buy-and-hold approach. The volatility and investment characteristics of the S&P 500, the Vanguard S&P 500 Index and the NASDAQ Composite Index may differ materially (more or less) from that of the Advisor. The performance of the S & P 500 Stock Index, the Vanguard S&P 500 Index and the NASDAQ Composite is not meant to imply that investors should consider an investment in the Niemann trading program as comparable to an investment in the "blue chip" stocks that comprise the S & P 500 Stock Index and the Vanguard S&P 500 Index, or the stocks that comprise the NASDAQ Composite. Historical performance data is provided by the Advisor in compliance with the Global Investment Performance Standards (GIPS), except for the month of October 2008, which is an estimate which has not been verified for GIPS compliance. The actual final performance number for October 2008 could change significantly from the estimate. See the Annual Disclosure Presentation, 2007 for more details on GIPS performance. Statistics for "Worst Drawdown" are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any investment in a mutual fund carries the risk of loss. Mutual funds carry their own expenses which are outlined in the fund's prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

In addition, you should be aware that (i) the Niemann Equity Plus trading program is speculative and involves risk; (ii) the Niemann Equity Plus trading program's performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Niemann will have trading authority over an investor's account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Niemann Equity Plus trading program's fees and expenses (if any) will reduce an investor's trading profits, or increase any trading losses.

Returns illustrated are net of actual management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. All dividends and capital gains have been reinvested. Performance is based on actual fee-paying, fully discretionary accounts in a composite. Individual account performance may differ from the composite. No adjustment has been made for income tax liability. Some Funds also charge short-term redemption fees and excess transaction fees (Special Fees), which are billed to shareholders at the time of the event causing the fee. All of these fees are in addition to Niemann's advisory fees. In selecting Funds in which to invest, Niemann considers the nature and size of the fees charged by the Funds. Niemann will select a Fund only if Niemann believes the Fund's performance, after all fees, will meet Niemann's performance standards. Consequently, Niemann may select Funds, which have higher or lower fees than other similar Funds, and which charge Special Fees. When deciding whether to liquidate a Fund position, Niemann will take into consideration any Special fees which may be charged. Niemann may decide to sell a Fund position even though it will result in the client being required to pay Special Fees. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

Retirement Focus - What Now???

GaryHalbert — Wed, 29 Oct 2008 00:16:44 GMT

by Mike Posey

IN THIS ISSUE:

Avoiding Costly Bear Market Mistakes
Active Management Revisited
Other Post-Retirement Investment Alternatives
Combining Strategies

Introduction

To say that the world has changed since I last wrote to you on August 26th would be a vast understatement. Long-time cornerstones of the financial services industry have either been forced into mergers or have ceased to exist. The credit markets have seized up, choking off vital sources of borrowing for corporations and consumers alike. And the US government has embarked upon what might best be called a domestic "sovereign wealth fund."

Trillions of dollars of investor assets (including retirement funds) have literally vaporized in front of our eyes. For those accumulating assets prior to retirement, the recent market activity could mean working longer and/or saving more of each paycheck. For those already in retirement, however, the situation could be much worse. It could mean going back to work, learning to live on a lot less money, or a combination of the two.

This week, I'm going to follow my original plan to complete the series of E-Letters dedicated to investing after retirement. My next category to discuss was that of actively managed investments. Since Gary did such a good job of discussing those investment strategies last week, I'll only add a few observations to what he already wrote. Then, I'll move on to a discussion of investment alternatives that don't neatly fit in other categories.

Before that, however, I'm going to address some very timely issues in relation to post-retirement investing during the market turmoil we are now experiencing. All investors are nervous about the market, but those in retirement are understandably more fearful of how the stock market meltdown has affected their retirement assets. Since we know that fear is a major emotional trigger for investment decisions, I want to inject some calm reason to help you avoid making costly investment mistakes in this market environment.

As always, I need to point out that any investment information provided in this E-Letter is general in nature, and should not be construed as specific investment or insurance advice. You should always evaluate insurance and investment options in light of your personal financial situation, retirement goals and any special circumstances you may have.

Avoiding Costly Bear Market Mistakes

As I noted above, many retirees now fear that their nest eggs may not carry them through retirement after having been devastated by the recent stock market decline. For those who had not saved all that much to begin with, this fear is now close to panic as the prospects of a longer life span are now on a collision course with a smaller (much smaller in some cases) retirement fund.

Fear and panic often blind investors as to the best actions to take in regard to their retirement assets. Combine that with the constantly changing advice from the financial media and the empty promises of scam artists and it becomes hard to know exactly what to do. To help any readers who may be in that situation, I offer the following advice on ways to avoid making costly investment mistakes in retirement:

Keep retirement distributions realistic. Actually, long before the recent market decline, I had read of studies documenting how recent retirees were withdrawing far too much from their retirement assets to be sustainable. One article I saw was entitled "Delusional Distribution Strategies," alluding to the idea that many Baby Boomers assume they could take annual distributions of 10% and still have sufficient income throughout retirement.

As I have mentioned in my Retirement Focus E-Letters, many experts suggest a more reasonable withdrawal rate of 4% to 6% per year is most appropriate. If that was true before the recent market meltdown, it may be necessary to withdraw even less that 4-6%, especially for retirement portfolios that may have suffered significant losses. Increasing the withdrawal rate on a portfolio of assets that has declined in value only makes the problem worse, and hastens the day when the portfolio can no longer provide a sufficient income stream.

Thus, if you are retired and the value of your investments has been hit hard by the market's bailout blues, seek out other ways to supplement income rather than by increasing your withdrawal rate to a level that may be unsustainable. For details about these other options, see my February 19, 2008 Retirement Focus issue.
Be careful when liquidating assets. It's been said that cash is king when markets take a dive, and who wouldn't want to have been in cash or fixed-rate investments over the past year or so? However, if you have an equity portfolio that has suffered major losses, you may want to resist the temptation to cash out now.

The reason? While no one knows how much further this bear market has to run, it's certain that if you cash out now, you realize all of the losses that are now just on paper. Remembering back to the 1987 market dive, we saw that those who held onto their investments were eventually rewarded by having their value restored. Those who sold out at the bottom and stayed in cash over the next couple of years didn't get this rebound.

While it may sound strange coming from a firm that promotes actively managed accounts and moving to cash in bad markets, there are some times when holding onto losing investments may be the best alternative. This is especially true when the markets are hit with selling pressures that are not based on fundamentals, but rather on news reports, selling by hedge funds, mutual funds and other panicked investors, and a generous helping of global uncertainty.

As these selling pressures diminish over time, it's possible that equity prices will eventually rebound. And while they may not get back to their original October 2007 values, they may pare losses enough to make it worthwhile to have waited to liquidate. Of course, there's no guarantee that market prices will rebound within any given time period, and losses could get a lot worse before the market gets better.

A final caution is in regard to income producing property. If you have bonds, dividend-paying stocks or other income-producing assets, it is often best to concentrate on the sufficiency and stability of ongoing income payments rather than the market price of the underlying asset. If the ongoing income stream appears to be stable and is sufficient for your needs, then selling out may be a big mistake.
Don't try to "make it all back" in risky investments. Retirees need to resist the temptation to seek out investments that will let them "make it all back." I recall after the end of the 2000 – 2002 bear market, we had several investors in or near retirement contact us wanting to find an investment that would quickly restore all of the money they had lost during the bear market.

While investments do exist that have the potential for oversized gains, it's important to remember that they generally have oversized risks that goes along with them. The bottom line is that retirees who push the risk envelope to make up lost ground could end up losing even more of their nest eggs.

Thus, when investing during retirement it's usually best to seek out investments that are suitable to your goals and risk tolerance and not buy the latest hot performance. It's also preferable to invest in programs with actual track records that span different market cycles rather than putting money with short-term performers who may only be a "flash in the pan."
Be aware of scam artists. Both Gary and I have previously written about investment scams, and especially those aimed at retirees. Be aware that the huge losses in the stock market are going to be fertile ground for scam artists who will promise the world, but deliver only misery. Just remember, if it sounds too good to be true, it probably is.

Active Management Strategies Revisited

As I mentioned in the introduction, Gary has already written extensively about actively managed investment strategies in last week's E-Letter. That being the case, I'll only add a few comments of my own to highlight how these strategies can be effective during retirement. First, however, let me summarize the other post-retirement investment options that I have already discussed.

In my initial discussion of post-retirement investing alternatives in the May 27 Retirement Focus, I mentioned the following ways to invest during retirement, each with its own set of advantages and disadvantages:

Immediate Annuities;
Fixed Income Alternatives;
Variable Annuities;
Asset Allocation Alternatives;
Actively Managed Strategies; and
Other Alternatives.

I covered the first two of these alternatives in the May 27 E-Letter, and discussed variable annuities in the July 15 issue. Asset allocation strategies were covered in my August 26 E-Letter, and as noted above, Gary discussed actively managed investment strategies in the October 21 Forecasts & Trends E-Letter.

As Gary discussed last week, active management strategies are those that involve actively moving from one investment to another in an effort to provide superior risk-managed returns. While the active management category encompasses a number of different money management strategies, Gary spent most of last week's E-Letter talking about a specific active strategy known as "market timing." This strategy seeks to move out of the market or into hedged positions during bear markets and major corrections, and then back into the market as conditions improve.

Through the years, the idea of market timing has not always been easy to sell. During the late 1990s, the tech bubble was buoying the entire stock market, with 20%-plus annual returns commonplace in the major market indexes. Needless to say, investors didn't think they needed a strategy that would take them out of the market.

Savvy investors, however, knew that the market couldn't continue to provide double-digit returns forever. Sure enough, the bear market of 2000 – 2002 once again underscored the need for an investment strategy that has the ability to go to cash or hedge long positions during extended declining markets.

Beginning in 2003, the stock market experienced a new bull market phase that continued through the third quarter of 2007. Guess what! Investors again forgot the lesson learned about having a money management strategy that would move out of the market. "Index investing" once again became the fad, with an emphasis on low fees rather than risk management. Account balances once again soared, with both the Dow and S&P 500 Indexes entering new record territory.

As is often the case, those who do not learn from history are destined to repeat it, and repeat it they did. Beginning in November of 2007, the market started digesting the steady stream of bad news about the subprime mortgage crisis and resulting credit crunch. I probably don't need to tell you what has happened since then, but suffice it to say that, as this is written, the S&P 500 Index stands not too far from its 2002 low. The subprime debacle has served as a big eraser of sorts, obliterating most of the equity gains experienced since the last bear market.

Will the lesson be learned this time around? I suspect that it will, especially by those who are seeking to nurse a wounded nest egg during retirement. A second major bear market within the first decade of the 21st Century should be reason enough for all investors to look more toward risk management, and not just focus on short-term performance or the lowest fees.

While Gary covered the topic of actively managed investment strategies very well, I do want to point out the following issues that are particular to someone who is investing for post-retirement income rather than pre-retirement accumulation:

Be prepared for more frequent trading activity. Most experienced investors are wary of frequent trading in their accounts. Fear of having their accounts "churned" to generate new commissions is a real threat in many brokerage accounts. Thus, when active management strategies generate numerous trades over the course of a year, some investors become concerned about the level of activity.

Generally speaking, the trading in an active management strategy is done to manage risk, and not to generate additional commission income. In fact, most actively managed portfolios that I'm familiar with do not generate commissions. Instead, they usually involve the trading of mutual funds on a no-load basis, or individual stocks and bonds within a "wrap" account that charges a flat asset-based fee.

In some cases, frequent trading activity can result in added costs to the investor over and above the management fee paid. Therefore, it's important to determine whether an active money manager has the potential to provide a level of return that justifies any additional fees from active trading. This determination is one of the many "due diligence" services we perform for our clients in the AdvisorLink® Program that Gary discussed last week.
Consider the tax aspects of active management. Due to the potential for frequent trading as noted above, many actively managed investment programs are not "tax efficient." Essentially, this means that most, if not all, gains will be treated as short-term capital gains and taxed as ordinary income rather than under the more favorable long-term capital gains rates for assets held for a year or more.

As a result, many investors place actively managed strategies in their IRA, annuity or other tax-qualified plan, and use taxable accounts for other types of investments that have the potential for gains that would qualify for special long-term capital gain tax treatment. That's why it's always a good idea to consult a tax professional or qualified Investment Advisor to determine which assets may be best inside or outside of an IRA or annuity.
Consider total returns when taking income. Within an actively managed portfolio, the goal is primarily risk management and producing "total returns," which include interest, dividends and capital gains. Thus, few of the actively managed programs we run across specifically try to manage solely for income. While some income is usually produced from interest-bearing accounts and dividends from mutual funds, most of any increase in value generally comes from gains from trading activity.

That being the case, it is usually best to withdraw income by taking whatever interest and dividend income the investments have produced, and then liquidating assets in order to get to the appropriate withdrawal percentage you seek. Most mutual fund and brokerage companies have a way to automatically withdraw a certain percentage of assets on a periodic basis, which makes it easy.

However, don't let an automatic withdrawal election lull you into complacency. It's sometimes easy to get used to regular withdrawals and forget about the underlying performance of your portfolio. Thus, it's important to continue to closely monitor the performance of your account and adjust the withdrawal percentage over time as may be appropriate.

The current stock market environment underscores the need for active management strategies that seek to manage portfolio risk. In fact, as Gary pointed out last week, these strategies can be a valuable addition to virtually any suitable investment portfolio. For retirees, it's imperative to seek out the counsel of an Investment Advisor or other qualified professional in order to help insure that active management strategies are properly integrated into an overall portfolio.

Conclusion – Consider A Combination Of Strategies

This marks the end of my series of E-Letters on investing after retirement. While the stock market meltdown has placed an exclamation mark behind the need to manage risk during your retirement years, it may have also underlined the need to have at least part of your nest egg in guaranteed retirement assets such as an immediate annuity that pays a constant amount of monthly income.

Thus, many Advisors recommend a mixture of the various investment and payout techniques I have mentioned in this series. Some recommend anywhere from 50% to 80% of the portfolio should go to a guaranteed immediate annuity payout. This will provide a stable level of income that can then be supplemented with the remainder of assets invested using other techniques I have discussed. However, other Advisors shun immediate annuities as they do not provide for increased income over a potentially long retirement.

While I tend to agree with the combination approach, the best solution should be one based on a retiree's individual wants, needs and financial situation. Someone with a predictable monthly income from a defined benefit pension plan will have a different planning need than someone whose only retirement assets are in the form of personal savings. Between these two extremes lie a myriad of combinations of asset types and tax consequences that must be evaluated for the best fit during retirement.

As the Baby Boom generation continues to enter into retirement, we're sure to see even more innovative solutions from the financial services industry over time. Hopefully, this series of E-Letters has provided you with a road map to follow and armed you with the kind of questions you need to ask about any financial instrument designed to produce income. After all, scam artists will be after your money as well.

As always, I welcome your questions and comments regarding this article as well as any other retirement topic. Just send an e-mail with your input or questions to info@halbertwealth.com. Also feel free to forward this article to anyone you feel may benefit from the information.

Best regards,

Mike Posey

P.S. from Gary:

I would strongly urge all of you to read the following article from Accuracy In Media. While it starts out being critical of President Bush, it goes on to point how a President Obama would be in a unique position to advance a socialist-leaning agenda. With the government now owning equity stakes in major banks and insurance companies, the US is ripe for a move toward socialism. This is an article I wish all voters had the chance to see.

http://www.aim.org/aim-column/bush-embraces-obamas-socialism/

Search results matching tag 'AdvisorLink'

Dalbar Update: Investors Still Lagging The Market

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The Case for High-Yield Bonds

A Case of Mistaken Identity - The "Other" Gary Halbert

Millionaires' Club - Record Plunge In 2008

When Will The Bull Market Return?

Beware: Bear Market Brings Out Tall Tales!

A Eulogy For Buy-And-Hold Investing

Introduction

Buy-And-Hold Is Dead

Or Is It?

The Bottom Line

Actively Managed Strategies That Work

Niemann's Equity Plus Program - Master of the Universe

Scotia Growth S&P Plus - The Best Defense Is A Good Offense

Conclusions

"Buy-And-Hold" Bites The Dust - Now What?

Introduction

Economic Picture Getting Darker

The Conventional Wisdom Was Wrong

Chinks In The Index Investing Armor

Do Low Fees = Good Investments?

What About Risk Management?

Conclusions

Retirement Focus - What Now???

Introduction

Avoiding Costly Bear Market Mistakes

Active Management Strategies Revisited

Other Post-Retirement Investment Alternatives

Conclusion – Consider A Combination Of Strategies