Search results matching tag 'Halbert Wealth Management'

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

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

Institutionalized Deception

GaryHalbert — Tue, 28 Jul 2009 22:05:00 GMT

IN THIS ISSUE:

Figures Don't Lie but...
The Recovery Fallacy
Limiting Losses is the Key
The Potomac Guardian Example
Conclusions

Introduction

Some of you may remember the radio spots some years ago by Eddie Chiles, CEO of the Western Company. His brief commercials would often contain a phrase borrowed from the 1976 movie Network: "I'm mad as hell and I'm not going to take it any more." Right now, I feel somewhat the same way. While I'm not quite as angry as Mr. Chiles, I am concerned that investors continue to be subjected to misleading arguments that favor "buy-and-hold" investments over "actively managed" strategies, even though we've had two major bear markets in this decade alone.

This is especially true now that the market is again moving upward. Wall Street is making a big deal of the fact that the stock market has rebounded from its March low. What they don't tell you is that most of this rebound was needed to just erase the losses incurred in the early months of the year, not to mention losses incurred in 2008.

Even worse is that these misrepresentations continue to be made by many of the big brokerage and mutual fund firms that are intent only on keeping investors' money tied up in their products. Likewise, many in the financial press have also continued to pass on these faulty arguments in the name of prudent advice. It's time to realize that Wall Street's conventional wisdom is designed to have you do what's best for them, and not necessarily what's best for you!

What irritates me even more is that these same buy-and-hold outfits continually preach that it is "impossible to time the stock market." I beg to differ! In the pages that follow, I'm going to show you a professional money manager that has successfully timed the stock market for over a decade, with an average annualized return of 9.13% versus the S&P 500 return of 4.26% over the same period. So don't tell me it's impossible to time the stock market! As always, I must add that past performance is no guarantee of future results.

This week, I'm going to challenge one of the most prevalent buy-and-hold arguments that I consider to be most misleading. I have written about this in the past, but I think it is important to keep spreading the word about buy-and-hold studies and marketing materials that are repeatedly designed to tell only half of the story. The half they tell you is how it hurts you to be out of the market on the good days. The half they don't tell you is how difficult it is to recover from large bear market losses. What else is new?

Figures Don't Lie but...

Proponents of buy-and-hold present a variety of very misleading arguments when attempting to counter the advantages of active investment management strategies. While the statistics that they provide are usually accurate in and of themselves, they are spun together into a web of deception in an attempt to keep unwitting investors in the promoters' funds and/or brokerage accounts.

For example, those who offer buy-and-hold strategies have recently started referring to them as "diversification" rather than Modern Portfolio Theory, asset allocation, etc., etc. The obvious implication is that if you're not using one of these buy-and-hold methods, your portfolio is not diversified. Hogwash!

By adding active management strategies, you can actually increase diversification by adding different investment strategies and not just a variety of investment asset classes. Plus, if you look at the history of bear markets, it's in the buy-and-hold programs where diversification often breaks down as previously uncorrelated investments all start going down together in a declining market. I'll bet you haven't seen this disclosed in any traditional mutual fund advertising.

Another example of this type of deception goes something like this excerpt from an article I found on a prominent brokerage firm's website:

"...Bull market returns tend to be front-loaded, with the bulk of returns accruing to the earliest months of the rally. Being late to the party can mean the birthday cake is half eaten by the time you arrive. For example...The first 12 months of the average bull market has provided more than 40% of an entire bull market's price appreciation, yielding on average 45% for investors..."

While the statistical return figures quoted in this excerpt appear to be true, I have a number of problems with the implications of this statement. The first problem is that it doesn't explain that the 45% average gain after the end of a typical bear market may not even get you back to break-even after the bear market losses you've just incurred. Unfortunately, many investors mistakenly believe that a 45% gain will erase a 45% loss, but it won't.

For example, the 45% average gain mentioned above will cover a portfolio loss of only about 31%. In other words, if your investment portfolio lost 31% of its value, it would take a gain of 45% just to get you back to break-even. So what would it take to get back to break-even if you had a loss of 45%? Doing the math, we find that $10,000 incurring a 45% loss drops to $5,500. To gain the $4,500 back, the investor would need to earn a return of over 80%!! This is another tidbit of information you're not likely to find in Wall Street's glossy marketing materials.

Here is a table showing various levels of loss and the gain it would take just to get the portfolio back to where it started:

Amount of Loss Incurred	Return Required To Break Even

10%	11.1%
15%	17.7%
20%	25.0%
25%	33.3%
30%	42.9%
35%	53.9%
40%	66.7%
45%	81.8%
50%	100.0%

The moral of this story is that avoiding large losses can be just as important (actually more so, as I will discuss below) than holding investments so that you don't miss out on subsequent gains.

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 Recovery Fallacy

There's a flip side of this buy-and-hold fairy tale that I also need to address. As noted above, buy-and-hold adherents use the statistics showing that much of a bull market's gain is concentrated in the first 12 months to convince investors to stay invested at all times. Going to cash, they say, will prevent you from taking advantage of the outsized returns that often occur during the early months of a new bull market.

However, this argument is bogus unless you decided to move to cash at or near the very bottom of the market. Had you chosen to move to cash sometime before the bottom, you could actually miss some of the early bull market gains and still be better off than had you stayed in the market.

You see, to get the maximum benefit of the average 45% gain in the first year of a new bull market, you must be invested at the very bottom of the market. About the only way to do this is to have followed the buy-and-hold advice of staying invested at all times. So, to get the full value of the 45% average upside, you would likely have had to endure the pain of the entire bear market's downward ride. OUCH!!!

Common sense, however, tells you that if you exited the market sometime before the actual market bottom, you could afford to miss out on some of a new bull market's early gain and not be any worse off.

To provide an example, I documented six times when market analysts, journalists, talking heads, etc. incorrectly predicted an end to the current bear market over the past year or so. By comparing where the markets were when these "false bottom" calls were made to the actual lows at the market close set in March of 2009, we can see that timing the market isn't necessarily a bad thing if it allows you to avoid losses.

The most recent dip in the S&P 500 Index took it down to 676 at the close on March 9th and the Dow Jones Industrial Average (Dow) closed at 6,547 on the same date. Compare that to the stock market levels on the dates of these selected bottom callers:

In January of 2008 with the Dow at 13,265, well-known perma-bull Abby Joseph Cohen predicted a reversal in the Dow and that it would be at 14,750 by the end of the year.
On March 17, 2008 with the Dow at 11,972, some analysts declared a "Bear Stearns Bottom." CNBC guru Jim Cramer declared that the bear market had been tamed.
On July 31, 2008, Jim Cramer again predicted that the Dow's July 15, 2008 low of 10,962 would be the market bottom. As Cramer put it, "Bye, bye bear market."
On October 9, 2008 with the Dow at 8,579, professional stock trader Tony Oz declared that the market was near a significant bottom.
On November 20, 2008, the Dow posted a new low of 7,552, which prompted some analysts and investors to again declare that the bear market was dead. However, the Dow eventually broke through the 7,552 low on February 27, 2009.
Finally, many investors thought that the New Year (accompanied by a new president) would somehow bring about a "hope" rally in the stock markets. It didn't. At the end of 2008 the Dow stood at 8,776, yet it continued to fall even further until closing at 6,547 on March 9th, its lowest level yet during the current bear market.

If nothing else, the above list shows that some very smart analysts with extensive experience in the stock market can be very, very wrong when it comes to calling the market bottoms. However, it's likely that any of these market gurus would have told you that getting out of the market on these dates would be the worst time to do so, since they expected the market to reverse course and go higher.

Limiting Losses is the Key

My purpose in noting these predictions of "false bottoms" is to illustrate what would happen should an investor ignore buy-and-hold advice and get out at exactly where Wall Street might consider it to be the worst possible time – when the "experts" were saying a market bottom was in. You may think I'm being a contrarian, but this analysis will show you why Wall Street never mentions how much more you might lose if you're not, in fact, near the bottom of the market when you decide to cash out.

Take the first bottom call from the list when Ms. Cohen predicted a market bottom in January of 2008. The Dow ended up falling an additional 6,718 points after this inaccurate prediction. This drop represents a 50.6% reduction in the value of the Index and, using the mathematics of gains and losses discussed above, will require a gain of over 102% just to get back to break-even.

In other words, investors who moved to cash in January of 2008, despite an expert opinion that the market had hit bottom, could stand to miss out on the first 102% of a new bull market's gains before they would be worse off financially than had they not gone to cash at all. Do you think that this investor might recognize that a new bull market is under way sometime before the markets post gains of 102%? I think so, especially if he is using a professional active money manager as I will discuss later on.

The table below shows a similar analysis for all of the "false bottom" dates from the above list. The results reflect how much further the market fell after the experts' calls, and how much return you could have missed in the early stages of a market rally and still not have been harmed:

Date	Dow Position	Additional Loss to March '09 Low	Gain Required to Break Even
January 1, 2008	13,265	6,718 (50.6%)	102.6%
March 17, 2008	11,972	5,425 (45.3%)	82.9%
July 15, 2008	10,962	4,415 (40.3%)	67.4%
October 9, 2008	8,579	2,032 (23.7%)	31.0%
November 20, 2008	7,552	1,005 (13.3%)	15.4%
January 1, 2009	8,776	2,229 (25.4%)	34.0%

The most obvious lesson to be learned from this analysis is that going to cash during a bear market may not be as dangerous to your portfolio as the far from accurate buy-and-hold crowd promises. As the above table represents, the potential to lose more money before an actual market bottom effectively debunks the idea that missing out on early market gains in a renewed bull market is a reason to stay invested. Obviously, this doesn't work if you actually do get out at the actual bottom of the market, but that's a hard call to make.

The next most obvious realization is that it might be possible to maximize returns and minimize losses if you could move out of the market early in the bear market, and then move back into the market fairly soon after the bull market begins. That way, you'd not only benefit from avoiding losses, but also from participating in the outsized gains early in the bull market. Actually, this concept is the driving force behind the active management strategy known as "market timing."

However, attempting to time the market on your own can be dangerous, since making the wrong move at the wrong time could actually expose you to more losses than a buy-and-hold strategy. That's why we recommend that you depend upon professional money managers with time-tested systems with the potential to get out of bear markets as early as possible and avoid big losses, and then get back in when conditions suggest a renewed uptrend. These strategies can help you to control the emotions associated with investing on your own.

The Potomac Guardian Example

The best way for me to illustrate the value of professional active management is by way of example using one of our recommended actively managed investment programs. My company has been offering the Potomac Guardian managed account program since 1996, and it has shown to be a consistent performer over that time. While past performance can't guarantee future results, this investment has provided a much smoother growth line than the benchmark S&P 500 Index.

Potomac's Guardian Program essentially ignores Wall Street's admonitions to refrain from timing the market. Potomac has developed a proprietary strategy that moves gradually to cash or a hedged position when their system detects a greater level of market risk. This gradual pace helps Potomac keep from being "whipsawed" by quick up and down spikes in the market, while also maintaining a market exposure should a downward trend prove to be temporary.

Since Potomac's Guardian Program defies Wall Street's conventional wisdom, let's compare its performance to that of the unmanaged S&P 500 Index during the 2000 – 2002 bear market. We'll assume an investment of $1,000 at the beginning of the bear market and actual month-end performance data from April of 2000 through September of 2002. Note that our analysis is for comparison purposes only since you can't invest directly in the S&P 500 Index.

Over this time period, the amount of money deemed to have been invested in the S&P 500 Index dropped from $1,000 to $562.54, a loss of 43.75%. Over the same time period, the Potomac Guardian program grew from $1,000 to $1,004.80. Potomac actually made a modest profit in the 2000-2002 bear market when an S&P 500 buy-and-hold strategy incurred a devastating loss of almost 44%. You can clearly see from this analysis why I recommend proven active management strategies over Wall Street's buy-and-hold mantra.

However, Wall Street's argument isn't that large losses won't happen from time to time; rather that you need to stay in the market to participate in the gains that come about during the early months of a new bull market. Therefore, let's see how the S&P 500 Index performed as compared to the Potomac Guardian program in the 12 months following the market bottom in early October 2002.

From October 2002 through September 2003, the S&P 500 Index gained a whopping 24.4%. Since the Guardian Program moved back into the market gradually, it produced a gain of only 9.33% over the same 12 months. So, buy-and-hold wins, right?

Not so fast! As I mentioned above, we have to factor in the mathematics of gains and losses. To get a true comparison, we need to see what happened to the hypothetical values of our sample accounts in the 12 months following the bear market of 2000 – 2002.

As noted, the value of $1,000 invested in the S&P 500 Index in April 2000 would have shriveled down to only $562.54 by September 2002. However, this investment benefited from the 24.4% accumulated gain over the 12 months following the bear market. Doing the math, we see that the S&P 500 Index account grew from $562.54 to $699.80 over that one-year period. Not bad, but still far short of the original $1,000 investment.

The Potomac Guardian account, however, didn't lose money during the bear market, retaining a value of $1,004.80 and underscoring the importance of avoiding losses. During the subsequent 12 months, the Guardian account gained 9.33%, growing our example account balance to $1,098.55 at the end of September, 2003. Remember, the Potomac numbers are based on actual performance net of fees and expenses, while the S&P 500 Index numbers do not include any management fees.

Thus, the S&P 500 Index investment had a greater percentage gain after the end of the bear market, but Potomac retained a higher dollar value. Since most grocery stores don't accept percentages as payment, what really matters is your MIP (money in pocket) at the end of the day. So here's a tough question: Which account would you rather have?

Wait a minute! I can already hear the buy-and-hold devotees becoming defensive, saying that I am misrepresenting the case for active management by cherry picking a time period. I'm not sure how they could say that, since I used the 12-month example from a buy-and-hold article, but let's humor the buy-and-hold advocates for a while longer. After all, they've had a hard decade considering we've had two major bear markets in less than ten years.

The buy-and-hold groupies might protest that I didn't show what happened after September 2003. Since the S&P 500 Index produced a gain of two-and-a-half times that of the Guardian Program in the 12 months following the bottom of the 2000 – 2002 bear market, they might reason that future years would allow the S&P 500 Index to catch up to Guardian. That's a logical conclusion. Logical but wrong.

Below, I have listed the actual performance numbers for both the S&P 500 Index and the Potomac Guardian program picking up at October 2003 and going through September 2007, which marks the month-end closest to the market peak reached in early October 2007:

	S&P 500 Return	S&P 500 Accum Value	Guardian Return	Guardian Accum Return
Value at Sept 2003		$699.80		$1,098.55
Oct - Dec 2003 Return	12.18%	$785.04	12.39%	$1,234.66
2004 Annual Return	10.88%	$870.45	10.21%	$1,360.72
2005 Annual Return	4.91%	$913.19	5.27%	$1,432.43
2006 Annual Return	15.79%	$1,057.38	16.13%	$1,663.48
Jan - Sept 2007	9.13%	$1,153.92	4.76%	1,742.66

So, while the S&P 500 Index spent most of its time getting back to break-even, the Potomac Guardian Program was busy building wealth on a risk-managed basis. This also illustrates that, while Potomac moves back into the market gradually, once it is fully invested it can match or even beat market index returns. Obviously, there's no guarantee that they can always do so.

And just in case you're curious, the Potomac Guardian Program has significantly limited losses in the most recent bear market cycle. From the market peak in October of 2007 through June of 2009, Guardian had annualized return of -5.27% versus the S&P 500 Index's -23.32%. This again shows the value of having a program that can play defense as well as offense.

From its inception in June of 1996, Guardian has produced an annualized return of 9.13% through June of 2009, net of fees and expenses. Over the same period of time, the S&P 500 Index has an annualized gain (including dividends) of only 4.26%. If you accumulate these returns over the entire period, you will find that the S&P 500 Index would have grown a one-time investment of $100,000 into $172,558. Meanwhile, the Potomac Guardian Program would have produced a nest egg of $313,748 over that same period of time. That's a difference of $141,190 in favor of Potomac. Such is the value of successful active management strategies. Again, which account would you rather have? (Past results are not necessarily indicative of future results.)

As a moderate-risk investment, the Potomac Guardian program may be suitable to a wide variety of investors who seek asset growth with an eye on capital preservation. At my company, we consider Guardian to be a "core" holding, meaning one that may be suitable for a wide range of investment goals and risk tolerances.

It is also important to note that the results above are net of Potomac's 2.5% annual management fee and any expense loadings in the mutual funds they use. Yes, in my example an early Guardian investor would have paid higher fees with Potomac than in a low-cost index fund, but that investor would have had over $140,000 more MIP at the end of the day. Yet again, which would you prefer?

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

Are you mad yet? Well you should be! Major financial services firms have fed you a steady stream of misinformation about the benefits of active management as opposed to buy-and-hold strategies. And now that two consecutive bear markets have decimated investors' portfolios, Wall Street is still singing the same buy-and-hold song. Hopefully, this time it's a funeral dirge.

It seems clear to me that if buy-and-hold was actually superior to market timing or other active management strategies, Wall Street could make the case without using deceptive or misleading studies and analyses. But they don't – primarily because more and more studies are showing that successful active management strategies such as market timing CAN beat buy-and-hold portfolios.

At the end of the day, what really matters to most investors is the value of their accounts when they need their money. A double-digit historical return over a 75-year time horizon doesn't do you much good if the value of your investment dives 50% just at the time you need your money for retirement, a college education, etc. The siren song of buy-and-hold strategies is that you'll be OK if you just hold on. Many Baby Boomers who took that advice are now facing retirement with a smaller nest egg and not much time for buy-and-hold's empty promises to catch up.

If you would like to check out an actively managed program that can move in and out of the market, I suggest you take a look at the Potomac Guardian Program. While future performance can't be guaranteed, Guardian's actual results spanning the bursting of two asset bubbles and subsequent bear markets not only speaks well for that program, but also helps to disprove Wall Street's buy-and-hold mythology.

To get more information about the Guardian Program, including detailed performance information and a description of Potomac's trading methodology, give one of our Investment Consultants a call at 800-348-3601 to discuss this investment in more detail and ask any questions you may have. You can also click on the following link to access our online request form. This will allow you to request a packet of information to be sent to you via first-class mail. Or, visit our website at http://www.halbertwealth.com/advisorlink/potomac.php to access this information. Also be sure to read the Important Notes following my signature below before deciding to invest.

And remember, Potomac is only one of the actively managed investment strategies we recommend. We have several other professionally managed investment programs that also have very positive risk-adjusted returns as compared to Wall Street's buy-and-hold mantra. Maybe it's time you take a look and consider adding some of these programs to your portfolio.

Finally, we are sponsoring an online webinar featuring the Potomac Guardian Program on August 6th at 1:00 PM Eastern Time. You can learn more about this webinar and register to attend at the following Potomac Webinar Link. In this webinar, you'll hear directly from a member of Potomac's Investment Committee and be able to ask any questions you may have about Potomac's proprietary investment strategy.

We've had an incredible attendance rate at our first two online webinars. Maybe you should register and see why.

Wishing you profits in a difficult market,

Gary D. Halbert

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. 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 a benchmark for comparison, the Standard & Poor's 500 Stock Index (which includes dividends) represents an unmanaged, passive buy-and-hold approach. The volatility and investment characteristics of the S&P 500 may differ materially (more or less) from that of the Advisor, and this Index cannot be invested in directly. The performance of the S&P 500 Stock Index 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. 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. 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's trading program.

In addition, you should be aware that (i) the Potomac Guardian's trading program is speculative and involves a moderate degree of risk; (ii) the Potomac Guardian's 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's 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. The results shown are for limited time periods and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

More On Teaching Your Kids To Save & Invest Wisely

GaryHalbert — Tue, 07 Jul 2009 20:11:44 GMT

IN THIS ISSUE:

First, My Own Story About Saving
Teaching Your Kids The Importance Of Saving
Motivating Your Kids To Save
Finding Ways For Kids To Make Money
Get Your Kids Involved In Investing
"Gifting" Money Or Assets To Your Kids

Introduction

At my company, we often have the opportunity to speak with our clients' adult children. In some cases, the adult children are fairly knowledgeable about investing, but in most cases, they are not. It seems to us that talking to their children about how to invest their money must be uncomfortable for many parents. That's unfortunate because the learning curve in investing can be expensive, and years of compounding can be lost.

Given that this issue is so important, we will revisit some of the key points on teaching your kids how to save and invest, such as how to encourage your kids to save more, how to teach them to invest, how you can transfer assets to your kids and minimize estate taxes, and at what (children's) ages you should leave your inheritance to your kids and more.

Many of you will want to save this E-Letter on saving and investing and encourage your children or grandchildren to read it. I will write what follows in my usual easy-to-understand style that even a well-educated teenager can comprehend. So feel free to reprint this letter and share it with others you feel it may help.

First, My Own Story About Saving

I grew up in a lower middle class family in the country outside of Lubbock, Texas. Like many young kids, I dreamed of one day being rich. My parents encouraged me to do well in school so that I could grow up to be a doctor or lawyer or some other profession that would afford me a better lifestyle than their own. And they taught me to save.

I don't recall exactly how they did it, but they continually encouraged us to save. I do remember that my father always had a stash of "emergency money" whenever unexpected events popped up. Even though he didn't make that much money at his job, he always found a way to put away a few hundred bucks in his stash every month. That roll of hundreds looked like a fortune to me as a kid! I wanted one for myself, and this motivated me to save early on.

My parents always encouraged me to work and make money, even as a child. From the time I was about 10 years old, I worked at a neighborhood horse stable after school, on the weekends and in the summers. I did everything from cleaning stalls and shoveling horse manure to grooming horses to teaching other kids to ride horses. I loved the work – it made me feel more like an adult. But more than that, I loved having my own money.

By the time I was a teenager, I had saved enough money to buy a couple of young colts each summer. Over the fall and winter, I would saddle-break them and teach them to become barrel racing horses, and then I would sell them the next summer, usually to the city girls who boarded their horses at the stable where I worked. I made a handsome profit on each horse I sold.

One of the things my parents always told me is that I would have to pay for my own car, when that day came, and this was a big incentive for me. When I turned 17, I had my Dad drop me off at the local car dealership I had selected in Lubbock, Texas. I went in, looked around, and decided which new car I was going to buy. When I told the salesman I wanted to buy the car, he told me I would need to get my dad or mom to come in. I told him I didn't think so. I pulled out a roll of one-hundred dollar bills and told him what I was willing to pay. About an hour later, I drove out in my first new car.

In the summer of my senior year in high school, I got a job driving a bobtail truck back and forth between Lubbock and Amarillo. The pay was good for those days. I was able to keep that job even as I attended college at TexasTechUniversity, and it paid for most of my college education. The only time I didn't work, at least part-time, during college was the year I spent earning a Masters Degree in International Business. I took out a loan from a local bank to enable me not to work and get my Masters in one year.

Teaching Your Kids The Importance Of Saving

It is my opinion that, as parents, we have an obligation to teach our kids about saving and financial matters in general. I believe that teaching our kids about saving and financial matters is just as important as teaching them about honesty and integrity, and even sexual matters. Yet, as is the case with sex, many parents are uncomfortable teaching their kids about financial matters.

I believe this is a big reason why we have had a savings crisis in America. In 2005, the national savings rate fell to ZERO, down from a high of over 10% in the early 1980s. In more recent years, the national saving rate actually fell into negative territory before the trend began to reverse itself in 2008 in the wake of the credit crisis. The point is, if we are going to educate our kids about the importance of saving, we must not only teach them, but we must also practice what we preach. Kids whose parents don't save are not likely to be good savers either.

Motivating Your Kids To Save

My wife, Debi, and I have two kids, a son 19 and a daughter 17. There are many ways to motivate kids to save, especially young kids. For a variety of reasons, our kids are voracious savers as I will discuss below.

Probably the most common way parents encourage their kids to save is by paying them a weekly "allowance." Parents can encourage the kids to save some of their allowance each week or month, or they can require them to do so, and in what percentage.

Debi and I wanted to create a better incentive for our kids to work and save than an allowance (in fact, we never gave them an allowance). As soon as our kids were old enough to understand saving, we agreed to MATCH whatever they saved from the money they earned. If they bring us $20 to put in their savings account, we match it and deposit $40 in the account. You can set the "match" at any level you want, not necessarily 100% as we do.

We made it clear from the beginning that this was their money, in their own separate accounts, but once they put money into the savings account, they could not spend it without our approval. We do allow them to keep "spending money" outside the savings account for day-to-day expenses, etc. We told them from the beginning that their savings would one day be used to buy a car, pay for college expenses, etc.

As a result of this arrangement, both kids were eager to find work they could do to make money, both at our property and for neighbors. As noted above, they quickly became very serious savers. Best of all, they have never asked to make a withdrawal from their savings accounts to purchase anything, and they are very frugal even with their spending money.

Matching what your kids save may not be right for you. Also, not all kids can stay focused on a long-term financial goal like a car. If this is the case, you can use shorter-term incentives of many different types. There are many ways to encourage and motivate kids to work and save money. I will recommend a very good book later in this E-Letter that has many additional ways to encourage your kids or grandkids to be good savers.

Finding Ways For Kids To Make Money

In order to motivate young kids to save, you also have to find ways for them to make money. Early-on, Debi and I made it clear to our kids what types of chores around the house and the property were "unpaid" as a member of the family, and which chores we would pay them for. We live on several acres on Lake Travis (outside of Austin), and have a boat dock on the water, so there are always lots of chores, yardwork and maintenance the kids can do to earn money. They also do work for other people from time to time.

A few years ago, the senior vice-president at my company approached me and asked if the marketing group could hire my son to do some computer analysis for them during the summer. He is quite the math/computer whiz. I agreed but added that he must work for them, not me, and that he was to receive no special treatment or favors for being my son. He quickly proved that he could crunch numbers and analyze money managers' performance data faster than anyone on our staff. Best of all, he saved almost all of the money he made, and the staff asked him to return the next summer.

You might be thinking that our situation is unusual in that Debi and I own the business and therefore have the ability to "make" work for our kids. But the fact is that our company needed some part-time computer help, and we would have likely hired some other young person to do the work. And this leads me to the next point.

Lots of companies can use some part-time or full-time help in the summers. Most teenagers these days have good computer skills that could land them a better part-time job than working in most retail outlets, mowing lawns or other common summer jobs. Have your kids or grandkids consider mailing flyers and resumes to nearby businesses advising them of their skills and availability.

There are some inexpensive books on the subject of finding summer work for teenagers:

Better Than a Lemonade Stand by Bernstein & Huberg
Teen Dream Jobs by Nora Coon
Fast Cash For Kids by Bonnie & Drew Noel

Get Your Kids Involved In Investing

Once your kids have a handle on saving money, the next step is to teach them how to start investing their savings. Unfortunately, many of my kids' friends know absolutely nothing about investing. Many know very little about the stock markets, the bond markets, mutual funds, etc. In addition to motivating them to save, and providing ways for them to work and make money, it is also very important to teach them about investing. Here too, I believe it is an obligation of the parents to teach their children about investing.

There are various ways to get your kids involved with investing. By all means, you should share with them your philosophy on investing and explain why you hold the investments you do, and in what proportions. Teach them how to read account statements. Explain to them what brokers and Investment Advisors are and what they do. Teach them about stocks, bonds, mutual funds, etc., etc.

There are two really good books I would recommend to you as parents or grandparents. The first book – Kids & Money by Jayne Pearl - is simply outstanding as a guide for parents in teaching their kids about saving and investing. One of my all-time favorites is The Wealthy Barber by David Chilton, an excellent book you should have your teenage (or older) children read. Both are available on Amazon.com.

How & When Kids Should Begin Investing

There are differing opinions on when to have your kids actually start investing their own money. Kids are really smart these days, and my view is that you can let them begin investing in their mid-teens, if you have taught them adequately. While kids should keep most of their money in a risk-free savings account of some kind, don't be afraid to let them invest some of it in the stock market.

However you and your kids choose to get started in investing, you must teach them that any non-guaranteed investment carries some level of risk, and that losses will occur from time to time. It is important to discuss – in advance – what levels of losses are acceptable, and what levels are not. In fact, if large losses result, this can actually turn kids off to investing in anything that carries any level of risk. So, make sure they understand that they are investing for the long, long haul.

Some parents actually let their kids take a crack at picking individual stocks. However, since kids are not likely to have any more success picking individual stocks than most adults do, I generally do not recommend this approach. Rather than picking individual stocks, or following a broker's advice, I recommend having your kids invest in equity mutual funds, after having educated them about the value of professional management and diversification.

There are, of course, thousands of equity mutual funds out there, and it can be difficult to decide which funds your kids should invest in. Fortunately, there are services like Morningstar (www.morningstar.com) and others that can help you with fund selection. Of course, there are many companies like mine that will give you direction in selecting the mutual funds in which to invest.

"Gifting" Money Or Assets To Your Kids

Being in the investment management business, we get questions every year from clients who are trying to help their kids or grandkids learn to save and invest wisely. One of the most common observations along this line is: "I would really like to help my kids with investing, but they just don't have enough money to get started."

This is all too true. Most young families just make ends meet and don't have the savings to start an investment program when they really need to. Along that line, another very common comment we hear is: "I would love to give them the money to get started, but I worry they would just blow the money on wasteful things."

Yet there are ways to gift money to your kids or grandkids that are not only earmarked for certain financial expenditures (college, medical, etc.), but can be targeted for investments that will serve them well later in life. And there are ways you can increase the odds that money you gift to your kids or grandkids will be used for the purposes you desire.

I will talk more about that below, but first let's explore the basics of the gift tax exclusion. Current tax law allows that you can gift up to $13,000 per year to a child, grandchild, or anyone, with no tax consequences to either the donor or the recipient. As noted above, a husband and wife can give $13,000 each, or a total of $26,000 a year, with no tax consequences for the donor(s) or recipient(s).

The annual gift tax exclusion is one of the most popular ways that wealthy individuals transfer a portion of their estates to their heirs over the years prior to their deaths, thus reducing the significant estate taxes their heirs will have to pay. Gifting has the double benefit of helping those you love and reducing estate taxes that go to the government.

I'm surprised that more families don't take advantage of the gift tax exclusion. My wife, Debi, and I gift the maximum to our two kids – currently $13,000 per parent or $26,000 a year to each kid. We gift this money each year into trusts that we have set up for each of our kids.

Gifting: Control Is The Issue

One of the requirements of the gift tax exclusion is that the beneficiary must have ownership and control of the assets that are gifted. This is a big deal when considering gifting $13,000-$26,000 (perhaps annually) to a child, grandchild or other person(s). Generally speaking, if you gift it, the money becomes theirs, and it is possible that they can just blow the money on wasteful spending if they want.

This is one reason why many people do not elect to take advantage of the gift tax exclusion, as far as I can tell in talking to estate tax attorneys. But there are ways – directly and indirectly - to effect control of the assets gifted to a child or grandchild. If the child is a minor, the gifts can be made to a trust which can designate what the money may be spent for, such as college, medical expenses or whatever.

As noted above, Debi and I have established trusts for each of our children, and these trusts are where we make our annual contributions. Trust laws vary among the states, so I won't get into what type of trusts may be best in your particular situation, but this can be a very good way to transfer assets to minor children and maintain control over those assets, at least until they reach legal age, or whatever age you specify in the trust(s).

In some states, minors do not have the right to execute a contract, and thus cannot own stocks, bonds, mutual funds, annuities and life insurance policies in their own names. In such cases, parents cannot simply transfer assets directly to their minor children, but instead must transfer the assets to a trust. The trust(s) can be a private trust you establish for your kid(s) with the help of an attorney, or a custodial account such as a UGMA or UTMA account, both of which can hold securities.

The Uniform Gift to Minors Act (UGMA) established a simple way for a minor to own securities without requiring the services of an attorney to prepare trust documents or the court appointment of a trustee. The terms of UGMAs are established by state statute instead of a trust document. The Uniform Transfer to Minors Act (UTMA) is similar, but also allows minors to own other types of property, such as real estate, fine art, patents, etc., and for the transfers to occur through inheritance. Whether you use an UGMA or UTMA is determined by the state you live in (most states now use UTMAs).

To establish a custodial account, the donor must appoint a custodian (trustee) and provide the name and social security number of the minor. The donor irrevocably gifts the money to the trust. The money then belongs to the minor but is controlled by the custodian until the minor reaches the age of trust termination. The age of trust termination is 18 to 21, depending on the state and whether it is an UGMA or an UTMA. The custodian has the fiduciary responsibility to manage the money in a prudent fashion for the benefit of the minor. Custodial accounts are most often established at banks and brokerages.

The bottom line is that gifting is a great way to transfer assets to those you love without tax consequences. But there must be a high degree of trust involved. If you do elect to form trusts, be sure to consult with an attorney that is familiar with the laws of your state.

Gifting To Adult Children

As noted above, you can gift to minors by establishing trusts in which the donor(s) can maintain control of the assets. But there is also a way to gift to adult children which can also be effective, at least in my experience.

Consider gifting them an investment account. Here is one way it can work. Let's say you are the parents or grandparents of an adult child. The two of you agree to gift $26,000 (or some lesser amount) to your adult child or grandchild. But you only agree to gift the money if it goes into a specified investment account. And you may agree to gift another $26,000 in the following year (or years) if things go as planned.

This approach is only advised if you have a good relationship with the adult child (or whomever you wish to help). It should be laid out carefully at the onset that this investment account is indeed a long-term program, and that the money should be kept in the account and not withdrawn for expenses, spending, etc.

For donors who have the where-with-all to gift for more than one year, the main gamble is really the first year in regard to adult children. You make it clear that if they maintain the investment, rather than spending the money, you may (at your discretion and under certain specified conditions) continue to make gifts in future years. This provides a huge incentive for the beneficiary to keep the money in the investment account. If they don't, you simply stop the gifts beyond the first year. Sounds simple, but it can be very effective.

This method of gifting will also create a big incentive to the child or grandchild to become more knowledgeable about investing in general, which is what you want. If they get into investing, that means they'll likely get more serious about saving, cutting expenses, building wealth, etc.

As always, the best course of action depends upon your individual situation, so it's important to seek out the advice of a qualified tax professional or estate planning attorney before pursuing any gifting strategy.

Conclusions

I believe that as parents, we have an obligation to teach our children the importance of saving. Likewise, we need to find ways that our kids can work and make money to add to their savings. And in my view, we also have an obligation to teach them how to invest wisely, whether they are teenagers or adult children.

You may want to consider funding investment accounts for your children, whether they are minors or adults. You may want to consider "gifting" money to your kids or grandkids (or others), as discussed above. The IRS gifting limit was increased from $12,000 in 2008 to $13,000 in 2009. So a husband and wife could gift a total of $26,000 a year to a child, or anyone for that matter.

In the case of minor children or grandchildren, you may want to consider using an UGMA or UTMA depending on the state you live in. Like most investment firms, my company accepts UGMAs and UTMAs. This is a great way to transfer assets.

Finally, I generally I recommend only professionally managed investment programs, especially for minors. Minors (and for that matter, most adults) need help in selecting and monitoring their investments. If you would like more information on doing so, be sure to contact us. We have professionally managed programs that only require $25,000 to invest.

I hope this week's information helps. Feel free to share this information with anyone you feel will benefit from it.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Teach Children To Save Resources
http://www.aba.com/ABAEF/teachchildrentosave.htm

Is Obama planning a second stimulus package?
http://online.wsj.com/article/SB124692229711302683.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

Coming From Behind - Investment Lessons From Sports

GaryHalbert — Tue, 02 Jun 2009 19:06:29 GMT

IN THIS ISSUE:

Update on My "Coaching Career"
Investors Playing Catch-Up
Remember The Object Of The Game
Don't Forfeit The Game
Have A Good Offense And Defense
Player Selection

Introduction

Back in 2006, I wrote an E-Letter that applied sports analogies to the investment world in an attempt to create a better picture for how you should manage your investments. Because of the extent to which I have been involved as a coach in my son's and daughter's sporting activities over many years, I found that E-Letter to be both very interesting to write, and it was popular with my readers.

This week, I want to revisit the sports analogy because the investment world has changed substantially since 2006. After reaching a peak in October of 2007, stocks were hit by a bear market that continues even as this is written. Between October of 2007 and March of 2009, the S&P 500 Index lost over 50% of its value. Even worse, 2008 saw most bonds suffer losses right along with stocks, something that Investing 101 tells us shouldn't happen.

As a result, many investors have had their portfolios decimated. Putting it in terms of our sports analogy, they are losing the game and have no idea how they might stage a comeback. With that in mind, let's revisit some of the analogies I discussed in my previous E-Letter, as well as some new ideas that might apply to your more recent investing experience.

A Personal Coaching Update

Before launching into a comparison of sports and investing, I thought I'd update you on my personal coaching activities that served as the springboard to the original sports analogy E-Letter article. My long-time clients and readers will recall that I got involved in coaching youth sports over a decade ago, and it has been one of the greatest blessings I have ever had in my life.

It all started when I took my son to his first tee-ball practice many years ago, and I noticed that there was only one coach and about 15 kids, some of whom didn't even have their gloves on the correct hand. So I stuck around to help until the other coaches arrived. No one else ever showed up. Soon, I was given a cap and tee shirt and was designated as the assistant coach. Little did I know that I would go on to coach not only baseball but also football and basketball for years thereafter.

I was not a jock in college, so I was hardly a candidate to become a good or successful coach. As a result, I have stacks of videotapes on coaching youth sports in my closet, which I used to educate myself on how to coach the various sports. Thus, whenever I say that you should "do your homework" in relation to investments, this is the kind of thing I'm talking about.

I continued to coach my son's baseball team in high school at the private Christian school he attended and where my daughter still attends. I even helped out with the football team for several years, which went on to win a State Championship. However, when my son graduated high school last year, I thought that would be the end of my coaching career. To my surprise, the school asked me to help coach the baseball team again this year, and I happily agreed. See photo of "Coach Halbert" with some of the baseball players and coaches at the end-of-season party late last month. Needless to say, coaching sports has been a real joy in my life.

All of this background is to say that I am more than just a casual observer in regard to the nuts and bolts of coaching, and have found that my coaching activities are sometimes similar to my role as an Investment Advisor. In other words, the role I play in my clients' financial planning is that of an investment coach. For the last 30+ years, I have been helping clients with their investments, educating them and steering them toward professionally managed investment products.

In essence, I'm trying to do the same thing with investors that I try to do in sports practices and on the playing field: coach them to be more successful. This has never been more important than now, when many investors are finding themselves at the brink of defeat at the hands of the worst bear market since the Great Depression.

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.

Investors Now Playing Catch-Up

One of the most frustrating parts of coaching is getting way behind in a game. It not only takes scoring a lot of points just to catch up, but can also lead to emotional reactions by players who give up and simply want the game to end. It goes without saying that many investors now have a lot of lost ground to make up, and I am concerned that many of them seem to be giving up on meeting their investment goals.

As the recent bear market has led to significant losses, some investors have started to focus on their own emotional reactions and have taken their eyes off of the ultimate goal. Emotions can be the enemy of sound investing just as they can lead to defeat on the field. I'm sure all of us have witnessed overconfident teams that build a big lead only to eventually lose the game, or teams that get so far behind that they hang their heads and just wish for the game to be over.

In sports, attitude is a big part of a successful program, and it can be a big part of recovering from an economic setback in the investment game. No, having a positive attitude won't miraculously lead to market gains, but it can lead to taking proactive steps to continue toward your investment goals. Some defeated investors sit and mope about past losses and feel unable to take action, while the winners take steps to learn from their experience and seek out options.

Just as it's not easy to come from behind in a ball game, there's no quick way to make up investment losses. There are things you can do to help get back on track, but there are other actions you can take that may actually hamper your progress toward your investment goals. In the remainder of this E-Letter, I'm going to suggest ways for you to "get back into the game."

Don't Forget the Object of the Game

Whether in sports or while investing, it's vitally important that you remember the object of the game. Perhaps the funniest, yet most frustrating years of coaching were the early ones, where many of the kids did not realize what the game was all about. If you have ever attended a beginners' tee-ball game, you know what I mean. Whenever the ball is hit, it seems that every player on the field takes off after it. They completely forget about playing their positions.

As odd as this may sound, there are many adults who are doing exactly the same thing in relation to their investments. They do not take the time to sit down and determine their long-range goals, and they opt for chasing after the latest "hot" stocks or funds or investment fads, without a long-term game plan or a disciplined strategy.

Other investors think that they have a better understanding of the game, but their focus is misguided. Like the baseball player who ignores his coach's signals and "swings for the bleachers" every time he's up to bat, some investors concentrate on hitting investment home runs and take on way too much risk. A classic example was the "dot-com" boom in the 1990s, and we all know how that turned out.

The same can be true today, as many investors are trying to find investments that can help them "make it all back" quickly. In doing so, they sometimes take on more risk than they would otherwise be comfortable with. While aggressive strategies may be the key to higher future returns, they could also result in losing even more of an already smaller nest egg. I'll discuss more about how to use aggressive strategies later on, but they should never make up your entire portfolio, no matter how good their past performance may be.

Focus on the Fundamentals

I have heard many professional coaches with teams in a losing slump talk about how they are directing their team to focus on the fundamentals. While I realize that the term "fundamentals" already has a meaning in the investment industry, for purposes of this discussion the term "fundamentals" will refer to the basic skills that are required to play any given sport – or construct a diversified portfolio.

In baseball, fundamentals include pitching, fielding and hitting, among others. Football, soccer and all other sports have their own set of fundamental skills. Professional coaches know that it is improbable that any team will be successful unless all players have a grasp of the basic skills necessary to play the game. Sometimes, however, there are pressures and distractions that take players' minds off of the basics.

So, how does this relate to investments? First of all, it means that outside influences can sometimes divert an investor's attention from the basics of good investing. Accordingly, getting back to the fundamentals means to focus on how you got the money to invest in the first place. For most of us, that means working hard and saving money. Until recently, saving money was out of style in the US. As recently as 2005, the savings rate was actually in negative territory. Apparently, many Americans mistakenly decided they could spend their way into a comfortable retirement.

Fortunately, the savings rate is now rising, so the first fundamental that I would encourage you to work on is increasing your savings. Or, said another way, decrease your discretionary spending and live below your means. This also means reducing your debt load along the way. It doesn't do much good to save money while piling up credit card debt. The net effect is still low (or no) savings, since the creditors will always have to be paid off.

Others among us have amassed wealth by building a business. While it's not always possible to rebuild a business from scratch, or start a new business after one has been sold, some entrepreneurs are doing just that now that their nest eggs have been eroded by the bear market. It is rarely an easy path, but it is one that can prevent outliving your money in retirement.

The next fundamental skill of investing is to diversify. Here, unfortunately, many investors have had the misfortune of having some poor coaching in years past. That's because they were led to believe that "Modern Portfolio Theory" (MPT), asset allocation and various other buy-and-hold investment strategies somehow provided sufficient diversification.

Over the course of my coaching career, I have had the opportunity to coach with several very successful former professional athletes. I can tell you, it didn't take long for us non-professional, volunteer coaches to figure out that we had a lot to learn. To this day, I still see volunteer Dads teaching kids things that are either wrong or outdated.

Much the same is true, in my opinion, when it comes to most stockbrokers and financial planners who broadcast Wall Street's buy-and-hold mantra across the country. Accompanied by flashy proposals and sophisticated sounding reports like "correlation matrices" and "Monte Carlo simulations," these promoters sold an entire generation of investors on the idea that allocating assets among a group of stock and bond asset classes would protect them in a market downturn.

What they didn't count on was that many of these historical relationships often break down in a bear market, just when they're needed the most!

As we now know, this poor attempt at diversification didn't work in the 2000 – 2002 bear market nor has it worked in the one we're in right now. Yet, many of these buy-and-hold adherents continue to counsel their clients to "keep running that play until you run it right." In other words, stay invested and hope that you don't need your money until the market recovers.

Fortunately, many investors have now realized that true diversification means having a variety of investment strategies in a portfolio, not just a collection of securities that happen to fit in different sections of the Morningstar style box. Specifically, active management strategies that can move to cash or hedge in down markets are catching on like wildfire because they have historically offered true diversification, many with low correlation to the equity markets.

Monitor Performance Regularly &
Make Changes When Necessary

Professional sports franchises spend a huge amount of time, effort and money to monitor and evaluate the performance of their superstar athletes. They know that a weakness, if left unchecked, can mean the difference between winning or losing a game – or even a championship! Likewise, investors should make it a priority to monitor the progress of their investments, but I have found that this important step is often overlooked.

Over the years I have been surprised at how many investors don't monitor the performance of their various investments regularly. It is very important to continually monitor your investment performance to insure that you are on track to meet your investment goals. Monitoring has always been an important part of the investment process, but today it is even more critical. Unfortunately, many investors learned this lesson too late to help prevent past losses, especially in the case of the current bear market.

Too many just assume that their broker, advisor or planner will make or recommend changes if they are needed. Unfortunately, this is often not true. Ask yourself, what broker or advisor is going to tell you that you should close your account and move the money elsewhere? Answer: probably none.

Also, many brokers are restricted to selling only those products offered by their firm. In such cases, the broker is not likely to tell you about other investment opportunities that may be performing better, or that may offer much-needed diversification in your portfolio. As noted above, the last thing they want is for you to move your money elsewhere.

Whenever possible, you want your broker, advisor or planner to be independent, with the ability to analyze and recommend a variety of investments or funds from different sources. Typically, such independent advisors are "fee-based" rather than "commission-based." Put differently, you want someone who is on your side of the table, and will not hesitate to recommend a change, if needed.

Here's where my firm can help. We are truly independent. We not only recommend third-party money managers, but we also monitor the performance and trading of each manager on a daily basis. Since I have my own money with every single money manager and program that we recommend, it is easy for us to track their real performance daily.

We compare the performance of my accounts to the published "official" track record and evaluate trading patterns to see that they comply with our expectations for each strategy. We are also in frequent contact with each manager we recommend to make sure that they have not made material changes to their strategy or system.

And finally, because we are independent, we do not hesitate to recommend that you "fire" a manager if the performance does not live up to reasonable expectations, or if they do make material changes to the strategy or system that are untested.

ENDORSED ADVERTISEMENT

Add a Little "Razzle-Dazzle"

Almost every football team I have ever observed has at least one "razzle dazzle" play. Also called "trick plays," the term refers to plays that are out of the ordinary and totally unexpected by the defense. Examples have names like the Statue of Liberty play, guard-around play, halfback pass play and my favorite, the flea-flicker.

Plays like this are designed to catch the defense off-guard and, hopefully, lead to a score. In my experience, I have seen such plays shift the momentum in a game and lead to a victory for the underdog. However, just as often, I have seen these plays blow up and lead to a score for the opposing team. In other words, they are risky.

Earlier on, I mentioned that I would discuss how to use aggressive investment strategies to help diversify an investment portfolio. Shifting our focus to the investment world, a good analogy to the razzle-dazzle play would be aggressive investment strategies that employ sophisticated trading techniques. I originally wrote about this concept in my April 14 E-Letter, and I feel that such strategies can bring needed diversification to a portfolio in the right circumstances.

Just as a razzle-dazzle play in football contains something unexpected by the opposing team, aggressive investments often employ sophisticated trading strategies that used to be confined mostly to the secretive hedge fund industry where only the wealthy had access. Today, however, advances in mutual fund design make it possible for money managers and investors alike to access funds that employ leverage, that can "short" various stock indexes and even provide access to markets such as commodity futures and currencies.

These investment strategies are often based on a quantitative trading model developed by a professional Investment Advisor. Using a variety of indicators such as trend analysis, momentum, technical analysis and a host of others, these trading models seek to anticipate and capitalize on shorter-term market moves. To be honest, most of these aggressive programs provide lackluster results, and can have severe losing periods, but there are some such as Scotia Partners and Third Day Advisors who have produced favorable returns over a number of years. Of course, there's no guarantee that they will continue to do so.

When these programs are on a winning streak, they often win big. However, just like the razzle-dazzle play in football, they are risky and can also lead to significant losses. Thus, just as no sports team could get away with running trick plays all of the time, allocations to aggressive investment strategies should be limited, no matter how good their past performance may be.

Have A Good Offense And Defense

Another important analogy between sports and investments is the idea that you can't concentrate on just offense or defense, you have to play both. If you focus too much on one and not enough on the other, you're not likely to win many games. There's an old football saying: "Offense wins games, but defense wins championships."

Over my years of coaching, I have witnessed sports teams that have a fantastic offense, but their defense could not keep the other team out of the end zone. On the other hand, I have also seen teams with strong defenses that couldn't seem to put a score on the board. It just makes logical sense that being strong in one or the other does not necessarily mean you'll win the game.

While this is a common sports analogy, it may surprise you that a number of popular investment strategies used by millions of investors are all offense and no defense. I think most "buy-and-hold" investment strategies Wall Street offers could be described this way. Only if the market goes up do you make money, and when it goes down, you can lose big.

If you have read my E-Letters for long, you know that my main emphasis is on avoiding large losses in your investments. Likewise, you've probably already seen the table below (we publish it often), but it can't be repeated too often in my opinion. The breakeven table below illustrates just how devastating large losses are, and how difficult it is to recover from them.

Amount of Loss Incurred	Return Required To Break Even

10%	11.1%
15%	17.7%
20%	25.0%
25%	33.3%
30%	42.9%
35%	53.9%
40%	66.7%
45%	81.8%
50%	100.0%

This breakeven table is why I like to emphasize active management strategies that can play both offense and defense. Most active management strategies include the flexibility to exit the market (partially or fully) or "hedge" long positions if market trends turn ugly. This is one good way of playing defense in your investments. However, they also have ways to put the offensive unit back on the field through sophisticated strategies for getting back into the market.

Player Selection

Now that we have established that both offense and defense are necessary ingredients on your investment team, it's time to turn our attention to player selection. In baseball, you see teams that can hit the ball well, but lack a good defense in the field – and vice-versa. But it is generally agreed that to win championships, you need a balance of both. On the defensive side, you must be able to field the ball well and make good throws.

In many ways, investing is no different. You are usually best served by a diversified portfolio with multiple investment strategies. However, this is easy to say, and sometimes hard to do. After all, how and where should you invest? What investment strategies should you include or exclude from your portfolio? How do you evaluate the various players to select the best team?

The investment industry is truly one of the most confusing places to try to navigate, sometimes even for experienced investors. There is an overload of investment and market information out there, and much of it is conflicting or outright wrong. We are constantly bombarded with investment information from the mainstream media, cable networks and the Internet, not to mention our mailboxes.

So, how should you go about selecting the most appropriate players for your investment team? Where should you send your scouts? What analysis should you run on each? What performance statistics are the most meaningful, and what "intangibles" exist that might mean the difference between success and failure?

I think most people realize that they do not have the ability to evaluate an athlete's strengths and weaknesses to determine if they should be on a sports team. Yet, these same individuals often feel that they should be qualified to select investments for their portfolio. Why should this be? After all, very few people try to be their own banker, lawyer or doctor, but they seem to have no problem trying to be their own investment manager.

From my 30+ years in the investment business, I think the primary reason many people take on their own investments is that there is an expectation that they should be able to do it, even though there is no good reason why. Perhaps it's the flood of investment information in the broadcast and print media and the Internet that causes this. Or maybe it's a matter of thinking that we should have picked up investment knowledge somewhere during our education.

Unfortunately, this sense of self-direction has led many to adopt "canned" buy-and-hold approaches from the Internet or any of the hoards of "how-to" investment books. Don't get me wrong, some do-it-yourself investors have done quite well, often by applying some form of active management to their portfolios. However, many of the do-it-yourself investors who have contacted us have not fared well over the past decade.

Going back to our sports analogy, what do team owners or schools do when they need someone to evaluate players and put the best team on the field? That's right, they hire a coach!

Good Coaching Makes All The Difference

And now we're back to where I began, with the realization that much of my sports coaching experience relates, to a certain extent, to the investment management services my company offers. As an investment coach, an independent professional Investment Advisor can help investors by:

Scouting out and evaluating various investment managers representing a number of different approaches to the market;
Using detailed investor questionnaires and discussions to develop a playbook designed to work toward his or her individual investment goals;
Assembling a team of independent, professional money managers whose strategies have the potential to work together over time to help moderate the risks of being in the market; and
Monitoring the performance of each Advisor as the game progresses to know when it may be best to send in a substitution.

In sports, it is often true that the best-coached team wins the game, rather than the one with the most talent or ability. The same can be true in the investment world. Many of the funds and investment programs we recommend never hit the "Top 10 Investments" list. Yet, when used to create a diversified portfolio, they can work together in such a way as to provide meaningful risk-adjusted returns and limit losing periods.

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

Imagine the following scenario: You are attending a football game and the home team is struggling against a worthy opponent. Suddenly, a fan jumps out of the stands, walks onto the sidelines, fires the coach and takes over the team. Not long after, the self-appointed new coach becomes disappointed in his players, so he suits up himself and goes onto the field to play in the game.

Sounds ridiculous, doesn't it? Yet, this kind of thing happens every day in the investment game. Investors often take over the reigns of their investments for one reason or another. Sometimes, they do well, but in many instances, they do not. In my opinion, investors are usually best served when they focus on their jobs or businesses, doing what they like to do and allowing professionals to handle most or all of their investments.

To that end, it would be a pleasure for Halbert Wealth Management to serve as your investment coach. We have been evaluating professional money managers for over 30 years, and we have a team of quality managers just waiting to get on the field for you. And I have an excellent staff of Assistant Coaches (Investment Consultants) that are standing by to help you evaluate your goals and get started. Together, we can handle all or part of your investment portfolio.

If you'd like to learn more about the investment management services we offer, just give us a call at 800-348-3601 or e-mail us at info@halbertwealth.com. Or, you can request that we call you by clicking on our online contact request form.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES:

Obama considers a new "Value-Added Tax" to fund
out-of-control spending & Nationalized Health Care
http://foxforum.blogs.foxnews.com/2009/05/27/kerpen_vat_obama/

Health Reform's Saving Myths
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/29/AR2009052903235.html

Cap & Trade: All Cost, No Benefit
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/31/AR2009053102077.html?hpid=opinionsbox1

On The Economy, Bonds & Bear Market Rallies

GaryHalbert — Tue, 05 May 2009 21:15:55 GMT

IN THIS ISSUE:

First Quarter GDP Falls More Than Expected
Stocks Always Outperform Bonds, Right? Wrong!
Should You Put All Your Money in Bonds? No!
Is the Current Market Rally Too Big to Fail?
Conclusions – Not Out of the Woods Yet

Introduction

Last Wednesday the government reported that 1Q GDP declined at an annual rate of 6.1%, thus confirming that we are still in a deep recession. While the GDP report was worse than the pre-report consensus, it was very much in line with what I predicted in my April 21 E-Letter. I continue to believe that we will be in this recession all year.

Several recently released studies highlight the fact that long maturity Treasury bonds have outperformed stocks over the last 40+ years, and by a substantial margin over the last 28 years. I will examine these reports as we go along. Does this mean you should put all of your money in bonds now? I'll tell you why I believe that would be the wrong move to make at this time.

Finally, we get calls every day asking if the recent rally in the stock markets means that the bear market is over, or if this is just a bear market rally. While no one knows for sure, we will take a look at some past bear market rallies to keep things in perspective. I think you'll find this week's letter interesting.

GDP Falls More Than Expected (But Not to My Readers)

The Commerce Department reported last Wednesday that 1Q GDP fell at an annual rate of 6.1%. The pre-report consensus called for a drop of 4.7%, so the actual report came as a negative surprise to the markets (but not to those of you who read my April 21 E-Letter). The decrease in real GDP in the 1Q primarily reflected negative contributions from exports, inventory investment, equipment and software, and decreases in commercial and residential construction.

There were, however, a few bright spots in the latest GDP report, particularly in regard to consumer spending. The GDP report last Wednesday noted that personal consumption expenditures (consumer spending) increased at an annual rate of 2.2% in the 1Q in contrast to a decrease of 4.3% in the 4Q. That number seemed unusually high to me in light of the continued plunge in consumer confidence in the 1Q (more on this below).

Durable goods orders increased 9.4% in contrast to a decrease of 22.1% in the 4Q. Nondurable goods orders increased 1.3% in contrast to a decrease of 9.4% in the 4Q. These are encouraging signs but were overwhelmed by the bad news in the 1Q.

Commercial construction plunged 37.9% year-over-year in the 1Q, even worse than the 21.7% decline in the 4Q. Residential construction decreased 38.0% in the 1Q compared with a decrease of 22.8% in the 4Q. Equipment and software purchases decreased 33.8% compared with a decrease of 28.1% in the 4Q. Exports of goods and services decreased 30.0% in the 1Q compared with a decrease of 23.6% in the 4Q. Imports of goods and services decreased 34.1% compared with a decrease of 17.5% in the 4Q.

The bottom line is that if we had not seen the pickup in consumer spending and durable goods orders, the 1Q GDP number could well have been down 8-10%. The recession is still quite severe, and I continue to predict that it will be with us all year.

It remains to be seen if the next 1Q GDP update on May 29 will include a downward revision from the -6.1% number reported last week. If so, that may not be good news for the markets.

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.

Stocks Always Outperform Bonds, Right? Wrong!

The conventional wisdom going back over a century is that stocks outperform government bonds over time, right? Surely most everyone reading this has been taught that axiom over the years. It's your basic Investing 101 gospel. It's also the financial planning gospel. It goes like this: stocks are more volatile than bonds, but they deliver a fairly significant return premium over bonds in the long-term. Since government-backed bonds are considered safer, if held to maturity, then it only stands to reason that they would deliver somewhat lower returns than stocks over time.

So as a general rule, you should invest more heavily in stocks over bonds when you are younger and have lots of years to ride out the occasional bear market. Then, as you get closer to retirement age, you begin to scale back your equity allocation and invest more in government bonds. Many traditional asset allocation and financial planning models suggest something in the range of a 60/40 stocks/bonds split when you are younger and over time moving to a 40/60 stocks/bonds split – and then even more in bonds as you hit retirement.

Yet this conventional wisdom has come under increased scrutiny recently. Why? Since we've had two serious equity bear markets in the last decade, Treasury bonds have now outperformed equities over the last 30-40 years. Many financial academics and Investment Advisors are now seriously rethinking their long-held beliefs about bonds. (You might note that yours truly never believed you should have all of your money in stocks and bonds only, but that's another story for another time.)

Given the severity of the recent stock market debacle, with the benchmark S&P 500 Index plunging almost 45% since the peak in late 2007, the long-term performance numbers for stocks-versus-bonds have changed. Government bonds now have somewhat higher returns than stocks, especially over the last 30-40 years. Let's look at the numbers.

If we look back from 1801 (for some reason this is a popular historical date) to today, stocks did beat government bonds by apprx. 2.5% per year on average, which is huge considering the compounding effect over more than two centuries. This is the basis for claims that stocks beat bonds over the long-term. But these days, the “long-term” is hardly measured by multiple centuries. Today, a long-term investment horizon is more typically three to five years, or 10 at tops.

But even if we are to look back 200+ years, we see several long periods in which Treasury bonds beat stocks, including the last 30-40 years. Bonds outperformed stocks in the following time windows: 1803 to 1871 (68 years); 1929 to 1949 (20 years);and yes, 1968 to 2009 (41 years).

The implications of this are quite interesting. While Treasury bonds can be quite volatile at times, they always pay off in full if held to maturity. Stock investors have no such guarantee. As a result, stocks are supposed to provide a “risk premium” of a couple percentage points or more, at least historically, to pay for that chance their price could drop (potentially to zero).

Yet as noted above, stocks have not lived up to that historical expectation over the last 30-40 years, not to mention the current bear market. Based on the actual returns in stocks and bonds over that period, you could have chosen one of the safest investments in the world and performed better than those following Wall Street's buy-and-hold forever mantra (which I have never believed should be one's only strategy).

Bonds Really Outperformed Over the Last 28 Years

Economist and author A. Gary Shilling recently published an interesting study on the performance of stocks versus bonds over the period from 1981 to early 2009. For purposes of illustration, Shilling assumed that one bought a 25-year zero-coupon T-bond at the all-time low in October 1981 when long-bond yields were well above 14%. Each year thereafter, he rolled it into another 25-year bond to maintain the 25-year maturity and reinvested the income.

By comparison, Shilling assumed that one bought the S&P 500 Index at its low in July 1982 and reinvested the dividends each year. Then he tracked the performance of both investments through the end of March 2009. The results are quite surprising! Of course, keep in mind that we have seen one of the largest declines in interest rates and inflation in history over the last 28 years, along with two major bear markets in stocks in the last decade.

Shilling found that the 25-year zero-coupon bond delivered an average annual return of 20.4% over the 28 years, while the S&P 500 gained an average of only 10.7% annually over the period from 1981 through March 2009.

If you would like to review Shilling's study (that was printed in Forbes recently) in more detail, I have provided a link to it below in SPECIAL ARTICLES.

Actually, you can go all the way back to 1969 and long-bonds (Treasuries with 20-year or longer maturities) still beat the S&P 500, but only by a marginal amount.

So, Should You Put All Your Money in Bonds? No!

Given that bonds almost doubled the returns of the S&P 500 over the last 28 years, and given that the S&P 500 fell 37% last year and is still down in 2009, you might think it's time to put all or most of your money in Treasury bonds. I do not recommend doing so. First of all, interest rates today are the lowest in many years.

The 20-year and 30-year Treasury bond yields are currently well below 4%, which is extremely low. The 10-year T-bond is well below 3%. Sooner or later the inflation threat will sink in, and bond rates will rise, possibly significantly.

With trillion dollar budget deficits as far as the eye can see, and with other trillions being spent on bailouts, toxic asset purchases, etc., there is little doubt that the US will experience a significant increase in inflation in the years ahead. Some fear we will see hyperinflation given the unprecedented spending by President Obama. Therefore, now could be one of the worst times to load up on Treasury bonds.

Stocks, on the other hand, remain quite depressed. The S&P 500 Index is down apprx. 45% from the highs back in late 2007. While no one knows if the early March lows are “the bottom,” stocks are much cheaper in terms of value today than are bonds, which are in my opinion over-valued.

The question before us is not what happened over the last four decades, but what might happen in the future. One Internet blog entry that I read noted that a call to invest in bonds right now may be similar to John Bogle's (of Vanguard fame) advice in the late 1990s to buy a S&P 500 Index fund and hold it for the foreseeable future. Given that we have experienced two major bear markets since then, that advice was obviously wrong!

There are several bond studies coming out that basically reach the same findings as Gary Shilling's numbers quoted above. So bonds are getting a LOT of attention of late. While all this attention is almost sure to drive more investors to bonds, I would not follow the crowd by selling stocks and equity mutual funds to buy Treasury bonds, which will go down in value if interest rates rise.

ENDORSED ADVERTISEMENT

Is the Current Market Rally Too Big to Fail?

We have heard a lot since last year about institutions that were deemed “too big to fail” and were thus eligible for billions in government bailouts. While it's admittedly a bit different in the stock market, there are market analysts and investors who are claiming that the sheer size of the recent market rally means that the bear market is over and happy days are here again; in other words, this 25% rally is “too big to fail.” While all of us would like to believe that the bear market has run its course, I'm afraid that we can't make that judgment based on the size of the recent rally.

To illustrate this point, I'll reference an excellent example that I came across the other day. The illustration begins with a question: What would an investment of $100,000 be worth if it was invested over a three year period that benefited from the following stock market rallies.

+48.0%
+23.4%
+27.6%
+35.0%
+24.6%

The natural inclination is to assume that the $100,000 would be worth far more at the end of the three-year period. Compounding the original $100,000 investment by the returns above results in an ending value of almost $400,000. However, we know that markets don't go straight up, and there were also some down periods during this timeframe. So we have to reign in our guess to something less. So, what about $200,000 to $250,000? That sounds like a reasonable range, doesn't it?

Well, the correct answer is only $10,800! Yes, over this particular three-year period, $100,000 invested in the Dow Jones stocks would have lost almost 90% of its value.

Surprised? Shocked? I have to admit that this illustration is somewhat of a trick question because it conveniently leaves out the fact that these market rallies occurred over the three years between September 1929 and July of 1932, the darkest period ever for the US stock markets. During this time, the down periods were far worse than the market rallies, so a $100,000 investment in the stock market lost over 89% of its value.

While the above illustration is designed to generate a surprise reaction, it also makes a very important point in regard to bear market rallies. Very rarely do bear markets go straight down, just as no bull market goes straight up. There are almost always “corrections” in the short-term trends, and these reversals are frequently large enough to convince investors that the major trend has changed as well. This can be very costly, especially if they make a change, only to find that the correction was just that, and then the major trend continues.

After the Crash of '29, there were several powerful market rallies that followed. Just as now, I'm sure there were stock market pundits back then claiming that a new bull market had surely begun during some of these rallies, especially the one in late 1929 to early 1930 that gained 48% over the course of 22 weeks.

While the 1929–1932 period was the most prominent example, other notable bear markets have had strong rallies that proved to be false alarms. One Internet source I consulted noted that the 1973–1974 bear market had two bear market rallies of apprx. 10%, and the 2000–2002 bear market had three substantial rallies with the smallest being 19%.

Even the current bear market that began in October of 2007 has had four double-digit rallies, including the one we're in right now. Each of the preceding rallies has provided hope to market participants and drawn many of them back into the market, only to see their investments dwindle further.

As I have mentioned in these pages several times, I am not sure that we have seen the end of this bear market, especially if we learn in the coming weeks that some or many of the largest insurance companies are in trouble. While I am willing to consider the possibility that the March 9 low was the bottom of the market, I also believe that we are very likely to at least retest this low again in the future.

A good example of the market retesting its prior lows is the period of time from July of 2002 to March of 2003. The statistics on the 2000–2002 bear market indicate that the S&P 500 Index hit an intra-day low of 768.67 in October of 2002. However, when you look at a chart of the S&P 500 Index during that period of time, you see that we came very close to the October 2002 intra-day low in July of 2002 (775.96) and again in March of 2003 (788.94). Chartists call this a “triple bottom.” I would not be surprised to see a similar situation occur in 2009.

What Should You Be Doing?

There's an old saying that you should “hope for the best but plan for the worst.” I think that's where we are today in the stock markets. With the unprecedented government intervention in the credit markets and even corporate ownership, we are sailing in uncharted waters. Politicians, who are always happy to see a healthy stock market, now have an even greater incentive to make sure the economy pulls itself out of the ditch. No one wants to run for re-election with the stock market in a slump, especially when the government controls some of the nation's largest banks and corporations.

Therefore, while we all hope that the March 9 low set the bottom of the current bear market, we have to plan as though there's more pain to come. There are a number of ways you can do so, including:

If you are fully invested in the market, you have experienced a nice bump in the value of your portfolio recently. Not knowing what lies ahead, you may want to consider taking advantage of the rally and moving some of your investments to cash. This way, if the market continues to rally, you'll still participate in the gains but with less exposure. However, if we retest the March 9 lows, you'll have some money on the sidelines out of harm's way.
If you are totally on the sidelines in cash, then you have probably been spared some of the bear market's losses, depending upon when you cashed out of the market. However, you have also missed out on the recent market rally. Don't let this regret grow into an emotional need to jump into the market. You could be setting yourself up for losses if we retest the March lows.

If you feel you must get back into the market in some way now, I would suggest that you “dollar cost average” into the market. This is a strategy that calls for making partial investments over time rather than committing your whole portfolio at once. That way, if we retest the March lows, not all of your portfolio will be affected.
Finally, I suggest that you consider the actively managed strategies I recommend that have the flexibility to move to cash or hedge long positions during market downturns. This professionally managed approach takes away the worry and hassle of deciding whether to be in or out of the market. Since I have written about some of these managers in the past, I'll not go into detail here. Suffice it to say that professional active money managers seek to position your portfolio to participate in up markets but become defensive during market downturns.

In light of the current stock market situation, I am reminded of a conversation I had many years ago with a very successful active money manager. We were discussing the higher management fees charged by active managers, typically in the 2-2½% range annually. I made the comment that I believed such fees were justified in return for getting investors out of the market during serious downturns. The manager responded as follows (more or less verbatim):

You know, most people think they pay us our fees to get them out of the market to avoid the big declines and bear markets. But getting out of the market is the easy part. What people really pay us for is to get them back in the market – that's the hard part.

That conversation comes to mind because we hear from so many people who got out of the stock market late last year or early this year, and they have no idea when to get back in. That's when having a time-tested mechanical timing system directing a portion of your portfolio can be very valuable.

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 – Not Out of the Woods Yet

Following the release of the 1Q GDP report last Wednesday, the Dow Jones promptly rallied 200 points, and the S&P 500 gained 22 points – even though the overall GDP report (-6.1%) was worse than expected. People reacted to the increase in consumer spending in the 1Q as a sign that the recession may be ending.

Yet if we dissect the numbers within the GDP report, as I did above, we find that most sectors of the economy declined at an even faster pace in the 1Q. These facts suggest that this recession has not hit bottom and will be with us for some time to come.

It may be that the 1Q proves to be the worst part of the recession. Most economists expect the decline in GDP to be smaller in the 2Q and even smaller in the 3Q. While those estimates may prove to be correct, we saw no convincing evidence that the recession was starting to bottom in the 1Q. Given that, I think we can dismiss forecasts calling for a return to positive GDP in the second half of this year.

Also keep in mind that there may be more bad news for the credit crisis just ahead. As I discussed at length in my April 7 E-Letter, there is plenty of evidence that some of the largest insurers in the US are in financial trouble. Some are pleading for bailouts, and it is probably reasonable to expect they will get them. But this news is getting hardly any media attention thus far. So this could be the next shoe to drop in the credit crisis.

Obviously, it is very difficult to know what to do with your investments in times like these. Investors who are on the sidelines wonder if they should jump back in. People who rode the market all the way down are wondering if they should now get out. Based on the calls we get, most investors are still very nervous, even though the stock markets have recovered somewhat.

In my Investment Advisory business, we have found that investors mostly want to talk to someone they can trust and explore all of the options. They don't want to talk to someone who is automatically going to tell them to sell all of their investments and transfer their money to a new Advisor or program, nor do they want to be hounded on the phone or via constant e-mails. Fortunately, we don't do any of those things at my company.

I would like to offer you the ability to talk to any of our Investment Consultants about your investment needs with no cost or obligation to invest of any kind. My company is very different in that all my Investment Consultants are paid a salary, and do not receive commissions or incentive compensation of any kind. Thus, their marching orders are to make sure that our clients' investment needs are met, even if it means not participating in any of the investment programs we recommend.

If you would like to discuss your current investments and/or retirement planning with someone who is not going to pressure you to invest with them, then you are welcome to call one of my experienced Investment Consultants, at no charge to you. You can call us at 800-348-3601, or if you prefer, you can send an e-mail to info@halbertwealth.com and your questions will be immediately routed to one of our staff members.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES:

Gary Shilling Study: Stocks vs. Bonds
http://www.forbes.com/2009/04/22/treasury-deflation-stocks-personal-finance-guru-insight-gary-shilling.html

More on the Financial Stability Board
http://spectator.org/archives/2009/05/04/the-fed-fails-upward

Insurance Companies - The Next Shoe to Drop?

GaryHalbert — Tue, 07 Apr 2009 19:25:50 GMT

IN THIS ISSUE:

Are Insurance Companies The Next Shoe to Drop?
2008 Was a Bad Year All Around for Insurers
Credit Crisis Severely Impacts Some Insurers
Reinsurance Companies Facing Similar Problems
Insurance Companies Look to States For Help
Look Out For Hurricane Season This Year
What to Look For in the Financial Reports

Introduction

Some observers now feel that we’ve seen the worst of the recession and the credit crisis, and that things should slowly improve in the second half of this year. People in this camp believe that the massive bailouts of major banks and President Obama’s huge stimulus package should work to unfreeze the credit markets later this year. Others like myself are not so sure.

While most of the attention has focused on the major banks in recent months, there is another potentially huge problem that I will bring to your attention in this E-Letter. The major insurance companies, with a few exceptions, may be in financial trouble. The recession has meant a large drop in premium income for all but a select few large insurance companies.

Furthermore, the credit crisis has delivered a serious blow to the major insurers who are big players in derivative instruments such as Credit Default Swaps and Collateralized Debt Obligations and others. Expect to hear much more about this in the weeks and months ahead.

Another serious problem for the major insurance companies is the bear market in stocks. A.M. Best reported recently that stock portfolios for the top 25 insurance companies fell 28% on average in 2008. Even with the latest rebound in the market, these portfolios are almost certainly down more this year. For all these reasons, insurers are looking to their home states for relief, and some states are cooperating. But will it be enough?

Next on the list of concerns is the upcoming hurricane season. As I will discuss later, the Texas and Florida hurricane catastrophe funds are dangerously under-funded. Neither the Texas nor the Florida legislatures have taken action to recapitalize these emergency funds. If we have major hurricanes this summer or fall, the major insurance companies could be very hard hit.

The major insurance companies will be releasing their financial reports for the 1Q (10-Qs) and for all of 2008 (10-Ks) over the next few weeks. It is widely expected that most of these reports will be disappointing and may well raise some red flags. I will tell you what to look for in these reports as we go along, in case you want to check up on your own insurance companies. This may be one of the most important and timely E-Letters I have published.

Insurance Companies – The Next Shoe to Drop?

As the recession and the credit crisis unfolded over the last year, most of the media attention and Congressional hearings have focused largely on the big banks. But we also know that the nation’s large insurance companies (property/casualty/life/health) are not immune from the recession or the credit crisis or the bear market in stocks. We hear from sources close to the industry that 1Q financial reports, which will be released over the next few weeks, and revisions to 4Q numbers, are likely to raise concerns that some large insurance companies may be in trouble.

We don’t tend to hear a lot about these big companies because they are largely regulated by the states, not the federal government, although that may change before long, especially if these upcoming financial reports set off alarm bells at the Treasury Department. A recently released A.M. Best Statistical Study suggests the upcoming reports could be quite ugly. A.M. Best is a worldwide credit rating agency for insurance companies and banks.

In March, A.M. Best reported that total “admitted assets” for the top 25 US life/health writers declined 10.1% at the end of 2008 to $3.6 trillion and declined by 8.7% for the entire industry to $4.6 trillion. Admitted assets include both general account assets and separate account assets. The study also shows just two insurers out of the top 25 with year-over-year profits in 2008.

A.M. Best noted that the main reason total admitted assets declined by over 10% at year-end 2008 from 2007 for the top 25 insurers was the substantial decline in separate account assets, down 28% year-over-year, largely due to the significant downturn in the equity markets. The S&P 500 declined 37% for calendar year 2008.

The companies in the top 25 showing the greatest declines in admitted assets were: Nationwide Life Group, down 21.7%; Hartford Life Group, down 21%; Axa Financial Group, down 20.6%; Lincoln Financial Group, down 16.4% and Ameriprise Financial Group, down 15%. AIG Life Group and Principal Life Group tied for the next spot, with both showing 14.9% drops in admitted assets.

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.

2008 Was a Bad Year All Around for Insurers

Insurance company problems and losses in 2008 affected not only life/annuity insurers, but also property/casualty writers. Losses were not only attributable to the recession, the credit crisis and the bear market in stocks, but also natural disasters. A.M. Best notes the following in regard to life/annuity insurers:

“The year 2008 was among the worst in memory for life/annuity operating performance – the key drivers being substantial realized and unrealized losses on investment portfolios, higher costs of capital and a declining revenue base. These trends clearly are continuing and could deepen well into 2009. The severe decline and volatility in the equity markets are causing capital strain for many life companies, especially large variable [annuity] writers.

A.M. Best has taken a number of negative rating actions in the life insurance sector, triggered primarily by investment concerns and expects the pace of these negative rating actions to accelerate as it reviews life insurers’ year-end results. Increased sales of less creditworthy products, erosion of earnings power and reduced capital flexibility has led A.M Best to conclude that the life/annuity segment is of lower credit quality.

Individual Life [insurance] – The most direct impact of the recession, so far, has been the accelerating decline in annualized new business premium. Individual life sales were down 3% through the third quarter and, given the economy, this trend clearly will continue through at least the first half of 2009.

Individual Annuities – Many VA [variable annuity] writers are reviewing their product designs, leading to more restrictive choices and higher prices for guaranteed benefit riders –if offered, at all. Trends in VA net assets, sales and net flows are negative, but are being somewhat offset by increases in fixed annuity sales.

Life Reinsurance – Demand for reinsurance for variable products continues to outstrip supply, driven by larger net amounts at risk and higher hedging costs due to volatility in the equity markets.

Mergers and Acquisitions (M&A) – M&A activity is likely to accelerate in 2009 as the need to raise capital clearly is a concern. Investment losses also are motivating companies to find strategic partners.”

A.M. Best goes on to highlight concerns and challenges facing property/casualty insurers:

“Natural catastrophes and financial upheaval drove a sharp reversal in the property/casualty industry’s fortunes in 2008, and the effects spread to A.M. Best Co.’s rating activity… Several destructive tropical storm systems and continued turmoil on Wall Street marked the fourth quarter of 2008. These factors drove up combined ratios and put a dent in policyholder surplus for the U.S. property/casualty industry.

Net income was down and the combined ratio was up for 2008, as investment losses took a toll, a soft market [recession] cut premium income, and natural catastrophes drove up underwriting losses. Downgrades of property/casualty insurers totaled 57 in 2008, up from 43 in 2007… Downgrades may reflect adverse reserve development; shortfalls in profitability; imprudent growth; or capitalization dropping below that needed to maintain a company’s rating level.”

2008 was a higher than normal year for natural disasters such as hurricanes, but it was certainly not the worst we have seen. But combined with the recession and the bear market, most property/casualty insurers are really hurting financially.

Credit Crisis Severely Impacts Some Insurers

The recession and the bear market may have created the “perfect storm” for insurance companies, but the news gets even worse. As it turns out, many of the largest insurers have been heavily impacted by the credit crisis, since many have been and are sizable players with large portfolios of derivative instruments such as Credit Default Swaps (CDSs) and Collateralized Debt Obligations (CDOs) and others. As you know, it was some of these same derivative securities that got many of the big banks in trouble. Can the insurance companies be far behind?

The Wall Street Journal posted an online article on April 1 which focused on Hartford Financial Services Group, the fourth largest insurer in the US. A research report from Credit Suisse called on Hartford to post collateral on $400 million of its CDS portfolio, following Hartford’s latest senior debt rating decline by Moody’s to Baa3, just one level above junk bonds.

Reuters reported on March 31 that following Hartford’s debt rating decline by Moody’s, its cost for insuring its senior debt increased significantly:

“The cost of insuring the debt of Hartford Financial Services Group (HIG.N) jumped on Tuesday after Moody’s Investors Service cut the ratings on the insurer's debt to the cusp of junk territory. Moody’s late on Monday cut Hartford’s senior debt ratings two steps to Baa3, the lowest investment grade, and gave the company a negative outlook, indicating an additional downgrade may be more likely over the next 12 to 18 months.

A downgrade into junk territory can significantly increase a company’s borrowing costs. Credit default swaps insuring Hartford’s debt rose to 19.25 percent of the sum insured as an upfront payment, or $1.92 million to insure $10 million for five years, plus annual payments of $500,000, from 16.25 percent upfront at Monday’s close, according to Markit Intraday.

The downgrade ‘was driven primarily by the credit deterioration of the life insurance subsidiaries, as well as a reduction in financial flexibility,’ Moody’s said in a statement. The group’s financial leverage and earnings and cash coverage are expected to deteriorate further and be constrained over the medium term due to potential realized losses and reduced earnings capacity at the operating units, Moody’s said.

Hartford, the fourth largest U.S. insurer, in February posted a fourth-quarter loss and said it would slash its dividend by 84 percent in a bid to preserve capital.”

My sources close to the insurance industry tell me that other large US insurers are in similar financial straights as Hartford. Therefore, sophisticated investors will want to pay particular attention to the financial filings (10-Qs for the 1Q and 10-Ks for 2008) that will be released over the next few weeks by the publicly-traded insurance companies.

Reinsurance Companies Facing Similar Problems

Insurance companies traditionally offset some of their risk exposure by selling it to “reinsurers.” Reinsurance is a means by which an insurance company can protect itself with other insurance companies against the risk of losses. Individuals and corporations obtain insurance policies to provide protection for various risks (hurricanes, earthquakes, lawsuits, collisions, sickness, death, etc., etc.). Reinsurers, in turn, provide insurance to insurance companies.

The main purpose for reinsurance is to allow the company to assume greater individual risks than its size would otherwise permit, and to protect the company against losses. Reinsurance enables an insurance company to offer higher limits of protection to policyholders than its own assets would allow. For example, if the principal insurance company can write only $10 million in limits on any given policy, it can reinsure the amount of the limits in excess of $10 million.

Reinsurance companies have highly refined their policies in recent years to include applications where reinsurance was used as part of a carefully planned hedging strategy. Reinsurance can help to make an insurance company’s results more predictable by absorbing larger losses and reducing the amount of capital needed to provide coverage.

The largest reinsurers include Swiss Re, Munich Re, Berkshire Hathaway/General Re (Warren Buffet), Hannover Re (Germany) and Reinsurance Group of America. The problem is, due to the recession, the bear market and the credit crisis, more and more insurance companies are looking to reinsure more of their books to free up capital. Yet the reinsurance companies are facing all of the same problems, plus in some cases, adverse currency exchange rates.

Reuters reported on April 1 that reinsurance rates for property catastrophe insurance rose by an average 8% worldwide based on January renewal rates. Reuters also reported in the same news release that reinsurance costs for US catastrophe risks rose by as much as 40% in 2008. So, it is clear that insurers around the world, and especially in the US, are struggling to find ways to reduce their risks in this very bad economic and financial time.

Insurance Companies Look to States For Help

When former Treasury Secretary Hank Paulson made it clear last year that TARP and federal bailout monies would not be made available to insurance companies (with the notable exception of AIG), dozens of insurers have approached their state regulators for relief from “capital and surplus requirements.” The various states which regulate insurers have capital requirements that the companies must meet or exceed.

If insurers fail to meet these capital and surplus requirements, the states can put these companies under “supervision.” If the deficits continue, the states have the power to put such companies into receivership (bankruptcy). The last time this occurred with a life insurance company was in the case of Executive Life back in 1991. More recently, property and casualty giant Reliance Insurance Company was placed in receivership by the state of Pennsylvania in May 2001 and filed for bankruptcy a month later.

The worst news is that a number of large US insurers have fallen below their capital requirements and have lobbied state regulators for changes in the accounting rules for how they value their assets and liabilities. Surprisingly, several states are obliging. The Washington Post reported on March 10 that several well-known insurers have been granted financial relief:

“State regulators trying to help life insurance companies cope with the financial crisis have granted $6 billion of relief from requirements meant to ensure financial stability, according to data released yesterday.

The top recipients were Allstate Life Insurance Co. with $1.4 billion; Jackson National Life Insurance Co. with $825.6 million and Hartford Life Insurance Co. with $655.2 million, according to the National Association of Insurance Commissioners.

The relief typically came in the form of accounting changes that allowed companies to pad their financial cushions, in effect making them appear stronger than they otherwise would. Insurance companies are required to maintain such cushions, known as capital and surplus, to absorb losses and pay claims.

Much of the padding involves increased counting of potential tax benefits that could end up being worthless to the companies.

Like other investors and financial institutions, life insurance companies have seen the value of their investments reduced by the financial crisis. Unlike banks, though, insurers have yet to receive federal bailouts to replenish lost capital.

Industry leaders have argued that regulatory relief could help insurers weather the crisis. They have expressed hope that it will stave off downgrades to their credit ratings, which can be damaging to their business. They also want to avoid having to raise capital from investors, which could cost a lot of money and dilute the value of shareholders' stock.

Critics such as the Consumer Federation of America have argued that the relief could weaken insurance companies and leave policyholders at greater risk… Some state regulators said they wanted to make sure their home-state companies weren't left at a competitive disadvantage. The result is an accounting hodgepodge that makes it harder to compare insurers and gives some companies an edge over others.

Other big recipients included Pacific Life Insurance Co. with $529.8 million, Transamerica Life Insurance Co. with $505 million, Metlife Insurance Co. of Connecticut with $396.1 million, and Lincoln National Life Insurance Co. with $313.4 million, according to the NAIC data. Many of the companies listed are part of larger families, such as the MetLife group, that operate multiple insurers.”

We can certainly argue whether giving large insurance companies breaks on their capital and surplus requirements in order to keep them afloat is a good or a bad thing. But what we should be able to agree on is the fact that these accounting changes were granted because the companies are in trouble. Further, it is all but certain that many more insurers will seek the same sort of relief from their states, if for no other reason than to remain competitive with those who have already received such breaks.

Look Out For Hurricane Season This Year

The insurance industry, especially property and casualty, is bracing for this year’s hurricane and storm season. The hurricane and windstorm emergency funds in Texas and Florida are dangerously under-funded, and this could be particularly bad news for many large insurance companies if either state is hit by a serious hurricane(s) later this year.

In Texas, we have what is known as the Texas Windstorm Insurance Association (“TWIA”). TWIA was created by the Texas legislature in 1971 to provide windstorm and hail coverage to those who are unable to obtain insurance from the traditional insurance market. TWIA was created in response to market conditions along the coast after Corpus Christi was hit by Hurricane Celia in 1970.

The public policy reasons for creating TWIA included ensuring the availability and affordability of insurance along the TexasGulfCoast, thereby supporting general economic development of the coastal area. TWIA issues insurance policies like an insurance company; however, it also functions as a pooling mechanism that allocates losses back to the insurance industry.

All property and casualty insurers licensed in Texas are required to become TWIA members as a condition of doing business in the state. Should hurricane or storm-related losses exceed the amount in the TWIA fund, then excess losses are assessed back to the member insurers. The greater an insurer’s share of the Texas market, the greater its potential for loss assessments.

In 1993, the Texas legislature created the Catastrophe Reserve Trust Fund (“CRTF”) as part of the state’s plan to specifically address catastrophic losses associated with major windstorms (ie – hurricanes). The CRTF is funded by the TWIA, which deposits all of its excess funds on an annual basis into the CRTF.

Over the last four years, the TWIA and CRTF funds have been especially hard hit by Hurricanes Rita (2005), Humberto (2007) and Dolly and Ike (2008). Hurricane Ike, for example, resulted in losses to TWIA/CRTF estimated at $2.3 billion. Ike was the Category 2 hurricane that decimated Galveston last September.

Even though TWIA made excess loss assessments of over $630 million to those P&C insurers operating in the state over the last four years, it remains dangerously under-funded. In fact, the CRTF currently has no money whatsoever. There is not nearly enough money left in TWIA to recapitalize the CRFT, and the Texas legislature has thus far failed to address this matter by appropriating new monies to the CRFT.

The Florida Hurricane Catastrophe Fund (“FHCF”) was reportedly under-funded by at least $14 billion as of the end of last year. As in Texas, the Florida legislature has thus far failed to address this issue. Florida residents are likely facing a significant increase in homeowners insurance later this year.

The bottom line is that if Texas and/or Florida are hit by a major hurricane(s) this summer or fall, insurers that do business in these states are going to get hit very, very hard.

My sources close to the insurance industry believe that if a major hurricane(s) hits Texas and/or Florida this year, a number of large insurance companies could be wiped out.

Clearly, some major insurance companies are in financial trouble already, but things may well get considerably worse depending on this year’s hurricane season.

What to Look For in the Financial Reports

As noted earlier, most of the publicly-traded insurance companies will be reporting their 10-Q financial statements for the 1Q over the next several weeks, along with their 10-Ks covering all of 2008. I am told by my sources close to the industry that these numbers, generally speaking, are going to look very bad, including a lot of downward revisions for 2008 profits and upward revisions to losses, largely as a result of the significant decline in the stock markets and shrinking premium income.

One of the simplest ways to evaluate these particular financial reports is to go directly to the “operating income” number and compare that to the total income. If the operating income is a small percentage of total income, it may indicate that the company’s core insurance business is in decline, and that it is relying on other sources for income. Also, if the operating income fell off sharply late last year and in the 1Q of this year, it may be a very good indication that the company was making much of its money from the bull market in stocks. This could also be an indication that the company may be in financial trouble already, or soon will be.

LIMRA, a well-know insurance industry consulting firm, reported in March that individual life insurance sales saw a 14% drop in the 4Q of 2008, ending the year with an overall 7% decline, according to its quarterly sales survey. The 4Q marked the single sharpest decline in premium income since the 4Q of 1951, according to LIMRA. The overall decline for the year erased the strong 7% gain in 2007, and was the largest one-year decline in the organization’s records.

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 should be obvious from the information above, we need to keep a close eye on the insurance industry in the weeks and months ahead. Look for the upcoming financial reports to be quite negative overall, with disappointing 1Q results and downward revisions to their 2008 financials.

This could be the next shock in the credit markets and the stock markets as well. While this may not be the most interesting topic to think about, virtually all of us have exposure to the major insurance companies, directly or indirectly. Certainly, the fate of the major insurance companies will impact the economy and in turn, the recession.

While the latest recovery in the stock market is impressive, I continue to recommend that you take steps to reduce downside risks in your investment portfolio. If you would like to discuss ways to do so, give us a call at 800-348-3601 or e-mail us at info@halbertwealth.com.

Hoping we can help you in these tough times,

Gary D. Halbert

SPECIAL ARTICLES:

States Give Regulatory Relief to Insurers
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/09/AR2009030902964.html

Failure worries drag down life insurers
http://www.charleston.net/news/2009/mar/15/failure_worries_drag_down_life_insurers/

Aftermath of the Financial Crisis for Life Insurers
http://www.insurancenetworking.com/news/life_insurance_LIMRA_LOMA_financial_crisis-12098-1.html

More Buy-And-Hold Myths Debunked

GaryHalbert — Tue, 24 Mar 2009 20:39:27 GMT

IN THIS ISSUE:

Another Flawed Buy-And-Hold Theory
A More Realistic Analysis
Putting The NAAIM Study In Perspective
The Elusive Bear Bottom
The Recovery Fallacy

Introduction

For years, I have written about the frequent misleading arguments put forth to keep investors in buy-and-hold investments. I am pleased to say that such articles, such as my recent March 3 E-Letter highlighting a misleading Investors' Business Daily article, have been well received by readers and the feedback has been very positive.

The information I have provided over the years allows you to ask critical questions when confronted with these one-sided arguments. In fact, I have even heard from brokers and other financial professionals who now "see the light" in regard to actively managed programs and want to know how to access actively managed strategies for their clients.

Unfortunately, this has not slowed the flood of misinformation being distributed by the usual suspects in an effort to support buy-and-hold investment strategies. It seems that the more I write about skewed articles, studies, etc., the more examples I see of them being generated by Wall Street and the brokerage community to sway unsuspecting investors.

I recently received an e-mail from a major mutual fund family promoting the buy-and-hold concept. While I am not at all surprised that a mutual fund company would be trying to keep investors in their funds, I was disappointed to see that the argument used was a very old, and thoroughly discredited line of reasoning known as "don't miss the best days in the market."

I'm not going to disclose the company that published the e-mail I received, but it really doesn't matter. You can look in the archives of virtually any major brokerage firm or mutual fund family and likely see similar titles. As I pointed out in the March 3 E-letter, it's in their best interests for you to stay invested, even though doing so may not be in your best interest. Thus, you need to look out for your own best interest when you deal with them.

In this week's E-Letter, I'm going to (again!) debunk the flawed argument of missing just the best days in the market. After that, I'm going to take on those who are calling an end to the bear market. Since the new lows in early March, the stock market has rallied. Naturally, Wall Street's cheerleaders are saying that we've hit the bottom and are now on our way back up out of the hole we've dug. Perhaps we have, but they've been wrong before – lots of times – as I will point out.

After that, I'll debunk yet another Wall Street myth that is based on accurate historical data, but is really just another misleading way to convince investors to stay in the market at all times. In the end, I hope that you will feel empowered to resist and even counter the seemingly endless sales pitches, media interviews, articles and other sources of misinformation that seek to hang on to the buy-and-hold message despite the clear evidence that such programs simply don't always work.

If you've read this far, then read what follows very carefully. Traditional investment providers and mutual fund families are making my long-held case against buy-and-hold in spades, even though they don't know it!

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.

Another Flawed Buy-And-Hold Theory

As I have frequently mentioned in recent E-Letters, Wall Street's media and advertising machines are still trying to defend buy-and-hold and disprove the value of active management. I noted back in January that I had received an e-mail from a prominent mutual fund company that continues to perpetuate one of the worst examples of Wall Street's misguided conventional wisdom. Not only was the material significantly dated, but it also presents a buy-and-hold argument that I have thoroughly discredited a number of times.

The story goes like this: Historically, much of the stock market's upward moves are concentrated in a relatively small number of market days (which is true). Thus, they allege, if following a market timing strategy takes you out of the market on those days, then your returns will suffer dramatically. Therefore, they maintain that it is important that you stay in the market at all times so that you will not miss these good days.

The e-mail I received had an attached file that presented their bogus argument in full color. Pulling S&P 500 Index performance information (including dividends) from 1988 through 2007, the illustration showed that the S&P 500 Index had an annualized return of 11.82%. However, if you missed just the 10 best days of performance over that 20-year span, your return would drop to 9.20%, a reduction of over 22%.

Missing more of the best days means even lower returns. For example, if you missed the 40 best days in the market over that 20 year period, your annualized return would fall to only 3.77%, a reduction of over 68%. Thus, Wall Street's conventional wisdom reasons if you want to maximize your returns, you must stay in the market so that you don't miss the good days.

While the numbers quoted in the sales piece are accurate, this analysis is obviously skewed to fit the viewpoint of the buy-and-hold crowd, but they hope you won't notice. For example, the first major flaw is the time period covered. This e-mail hit my mailbox in early December of 2008, long after some of the worst stock market losses in history. Yet, the best-days analysis only goes through the end of 2007, just a little over two months after the market had hit new highs.

Being in the financial services business, I can understand having to use information that is provided as of a certain cut-off date, since the number crunching required to produce the piece is considerable. However, to send a marketing piece with information as of 12/31/07 when the market has subsequently melted down is, in my opinion, misleading to the extreme.

The National Association of Active Investment Managers (NAAIM), of which my firm is a member, is a trade association of money managers specializing in active management strategies, including market timing. Each year, NAAIM publishes its own study in regard to missing the best days in the market. However, NAAIM's version provides a much more balanced analysis, as I will discuss in more detail below.

Since the e-mail I received was so dated, I used NAAIM's study to get a better idea of the updated numbers. It is important to note that NAAIM's study measured performance over a longer time period – from January 1984 through December 2008 – and excluded S&P 500 Index dividends. However, the basic outcome is the same.

NAAIM's analysis found that a constant investment in the S&P 500 Index (excluding dividends) would have resulted in an annualized return of 7.06%, evidence of the effects of the 2008 market meltdown. However, if you missed just the 10 best days in the market over this period of time, your annualized return would drop to only 4.10%. This is a decrease of 42% – even worse than the analysis for the time period ending in 2007. As you increase the number of days missed, the differential becomes greater, to the point that if you missed the 40 best days in the market, your annualized return would actually be negative.

On its face, you might think NAAIM's study actually supports the buy-and-hold position, but you have to first consider another major weakness of the buy-and-hold argument. The next and most obvious flaw to an informed reader is that the analysis assumes that an active manager would be OUT of the market on all of the best days, but IN the market on all of the worst days. Unfortunately, many investors buy this argument hook-line-and-sinker without thinking to ask the question, "What happens if you miss the bad days in the market?"

This is a very critical point, so let's bring it out into the light!

Using numbers from the same NAAIM analysis discussed above, let's reverse the assumptions and see what happens. Instead of missing the good days in the market, let's say that a market timing Advisor allows you to miss only the worst days in the market. Over the 1984 through 2008 time period, NAAIM's analysis shows that if you missed just the 10 worst days in the market, your annualized return would have been 11.23% vs. the 7.06% Index return.

That's a 59% better return! Compared to the 42% reduction in return we get when missing the 10 best days, we find that missing the bad days in the market is actually more significant than missing the good days in regard to the effect on returns. Now that's impressive! I'll bet your buy-and-hold broker never told you that. As you increase the number of worst days missed, the numbers get even better, resulting in a return of 17.59% if you missed the worst 40 days in the market over this 25-year period of time.

Of course, this analysis is as flawed as the first one, since it assumes that the Advisor is smart enough to be out of the market on all the worst days, but in the market on all of the best days. We, at least, are willing to point out the fallacies in both arguments.

A More Realistic Analysis

Since both sets of performance numbers discussed above are skewed to fit one approach or the other, neither is useful to the knowledgeable investor. However, NAAIM's study also covers what would happen if an Advisor missed BOTH the best and worst days in the market over the 25-year period. The results are pretty amazing.

If you missed the 10 best and 10 worst days in the market, the resulting return would have been 8.15%, as compared to the 7.06% S&P 500 Index return.

As the number of best and worst days missed is increased, the percentage return stays essentially the same. For example, if the best and worst 40 days are all missed, the annualized return would have been 8.82%, still almost 2% better than the S&P 500 Index return over the same time period. The table below shows the effect of missing various combinations of best and worst days in the market over that 25-year period. Compare these numbers to the S&P 500 Index annualized return of 7.06% over the same period of time:

If you missed just the best:	Your return fell to:
10 days	4.10%
20 days	2.15%
30 days	0.54%
40 days	-0.93%
If you missed just the worst:	Your return rose to:
10 days	11.23%
20 days	13.80%
30 days	15.83%
40 days	17.59%
If you missed best and worst:	Your return was:
10 days	8.15%
20 days	8.58%
30 days	8.61%
40 days	8.82%

(Source: NAAIM, Inc., based on an analysis performed by Hepburn Capital Management, LLC, 805 Whipple St., Suite D, Prescott, AZ 86301. This data is for illustrative purposes only and is not indicative of the actual performance of any investment. S&P 500 Index returns do not reflect reinvested dividends.)

Thus, while the average annual return percentages showed the results of the recent bear market, the basic result stayed the same: missing bad days in the market can more than compensate for missing out on the good days. Even when the general direction of the market was downward, missing out on the worst declines still proved effective in enhancing performance.

Putting The NAAIM Study In Perspective

While it may be the goal of every active money manager to be in the market only on the good days and out of the market on all of the bad days, we all know that such a perfect system doesn't exist. Over the course of writing this E-Letter through the years, I have discussed that the ultimate goal of market timing, in my opinion, is not necessarily beating the market, but to attempt to control the downside risk of being in the market.

I base my opinion upon studies such as those done by the Dalbar organization that demonstrate the negative effect of emotional trading upon investors' long-term returns. We all know how it is when we lose money on an investment. Should we stay the course, bail out and go to cash, or move to something that seems to be performing better?

The above analysis by the NAAIM organization shows the value of being out of the market on the worst days, even if you miss some or all of the best days. That's because the worst days are often far worse (in terms of percentage loss) than the best days are good.

For my company, the practical application of this information is to seek out professional active money managers who are able to miss more bad days than good days and thus provide added value over and above the management fees they charge. Quite frankly, even most professional active managers can't accomplish this, but there are some who have done so and it's our job to find the ones who can.

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 Elusive Bear Bottom

As I noted in last week's E-Letter, it is interesting to me just how giddy Wall Street and the financial media have become at the prospect of a renewed bull market with the nice rally we've seen over the last week or so. While we are nowhere near out of the woods yet, in my opinion, you wouldn't know that from listening to the talking heads on the financial shows.

As you might imagine, those who promote buy-and-hold investment strategies are also experiencing a brief reprieve from the steady drop in their products and portfolios. With a string of market gains at least partially fueled by the Fed's announcement that it will be buying about a trillion dollars worth of debt, happy days are indeed here again. Or so it would seem.

I found myself wondering just how many analysts, journalists, talking heads, etc. have predicted an end to the current bear market over the past year or so, only to be treated to additional losses.

The steady stream of bottom calls reminds me of an old auto repair commercial. It told the story of an unfortunate driver who had to take his car back many times to get a simple repair done. The first time, the mechanic declared that the car was "better than new." The next time, he said it was "much better than new." After a third shot at the same repair, the mechanic declared it to be "much, much better than new." I think you can get the picture.

The same kind of situation seems to be going on in the stock market. Every time the stock market hits new lows, we hear that it is a much, much stronger bottom than before, and should mark the point at which stocks will now begin to rise again. Of course, it seems that, just like the driver in the ad, we are eventually met with disappointment (not to mention additional losses) as the market sets yet another new low.

To illustrate how a market bottom is much, much harder to call than you might think, I have listed below predictions by major analysts and commentators calling a market bottom. For reference, the most recent dip in the S&P 500 Index took it down to 676 on March 9th and the Dow Jones Industrial Average (Dow) hit 6547 on the same date. Compare that to the stock market levels on the dates of these selected bottom callers:

In January of 2008, well-known perma-bull Abby Joseph Cohen predicts that the Dow will reverse its recent downturn and be at 14,750 by the end of the year. At this point, the Dow was not yet in an "official" bear market, and Ms. Cohen evidently thought it wouldn't get there. The Dow started 2008 at 13,265, so Ms. Cohen's prediction was for a gain of over 11%.
On March 17, 2008, the demise of investment banking and brokerage giant, Bear Stearns, led some analysts to declare a "Bear Stearns Bottom." CNBC market maven Jim Cramer declared that the bear market had been tamed, and one-third of the respondents to a CNBC poll declared that they thought the worst was behind us. The Dow was then at 11,972.
On July 31, 2008, Jim Cramer, undaunted by his previous erroneous call, announced that the Dow's July 15, 2008 low of 10,962 would be the bottom of the bear market. His reason, among others, was that negativity was so high that he thought the market had reached "capitulation." As Cramer put it, "Bye, bye bear market."
On October 9, 2008, professional stock trader Tony Oz declared that the market was near a significant bottom. The title of his article was "If We Aren't Near A Bottom, Find A Cave & Buy Guns." The Dow closed at 8579 on October 9th.
On November 20, 2008, the Dow posted a new low of 7552, which prompted some analysts to again declare that the bear market was dead. This call became even louder as the low continued to hold on into 2009. However, the Dow eventually broke through the 7552 low on February 27, 2009.
Finally, many investors thought that the New Year (accompanied by a new presidential administration) would somehow bring about a "hope" rally in the stock markets. It didn't. At the end of 2008 the Dow stood at 8776, yet it continued to fall even further until hitting 6547 on March 9th, its lowest level yet during the current bear market.

And these are just a few of the many incorrect market calls that some refer to as "false bottoms." If nothing else, the above list shows that some very smart analysts with extensive experience in the stock market can be very, very wrong when it comes to calling the market bottom. Unfortunately, many people follow the sage advice of these individuals, resulting in significant losses in their buy-and-hold investment strategies.

Just think, anyone who thought Abby Joseph Cohen was right in early 2008 witnessed a further drop of 6718 points in the Dow from the first of January 2008 when the Dow was at 13,265 through the market's most recent bottom of 6547 on March 9, 2009. That's a percentage drop of over 50%. Unfortunately, many buy-and-hold investors also saw their own investments fall by that much or more during this period of time.

The Recovery Fallacy

The importance of the above market bottom discussion becomes apparent when you consider another bogus argument often used by the buy-and-hold crowd to sell the supposed superiority of that strategy. Specifically, proponents of buy-and-hold strategies claim that one reason that you should not try to "time the market" and move your assets to cash occasionally is that you'll miss out on the early phase of the new bull market.

They then provide statistical analyses to show that most gains are concentrated in the early phase of a bull market, so if you are on the sidelines, it is highly unlikely that you will get back in the market in time to capture any of these gains. Their solution? Stay invested at all times and you'll be sure to be in the market when it eventually turns around.

It might surprise you that I agree with the statistical analyses used in this argument. After all, historical market action is what it is, so the pace of historical gains following the end of bear markets is a matter of fact. Of course, bear market rallies (aka: sucker rallies) also often shoot up quickly, only to return to lower levels later on. However, let's assume that it is correct to assume that much of the rebound in stock prices is concentrated in the early part of a new bull market.

The problem is that this argument is valid only if you are contemplating cashing out when the bear market is at or near its actual bottom. And as we have discussed in this article, it's not always easy (read: impossible) to tell exactly when or where the bottom will occur. Even so, if you get out of the market at the very bottom, then it is very likely that you'd miss out on a significant part of any subsequent market rally.

However, buy-and-hold supporters never discuss how much more you might lose if you're not, in fact, near the bottom of the market when you decide to cash out. Take the above situation where the Dow fell an additional 6718 points after Ms. Cohen made her incorrect call for a market rebound in 2008. This drop represents a 50.6% reduction in the value of the Index, and many unfortunate investors took that same downward ride.

Thus, the fallacy of this buy-and-hold fairy tale is that they don't tell you how much additional loss you may have to incur before the real market bottom and a new bull market begins. And then, there's the matter of the "mathematics of recovering losses." As I have noted in past E-Letters, a loss of 20% requires a 25% return just to get back to break-even. A 50% loss requires a 100% return and so on. Read on and you'll find out how important this is to your investment well-being.

So, how much would investors have "suffered" had they gone to cash just when Ms. Cohen said that it was safe to be in the market? Let's say that an investor moved to cash despite Ms. Cohen's advice in January of 2008. The buy-and-hold crowd would say that he was unwise, since his cash position would likely miss out on the gains concentrated in the early part of the next bull market. Oh really?

Using the Dow as a proxy for an investment portfolio, our sample investor who moved to cash in January 2008 missed out on a further 50.6% drop in value. That doesn't sound unwise to me! Plus, the mathematics of losses of 50+% dictate that a buy-and-hold investor would need a gain of over 102% just to get back to the position he was in by going to cash in January of 2008.

In other words, this investor could stand to miss out on the first 102% of a new bull market's gains before he would be worse off financially than had he not gone to cash at all. Do you think that this investor might recognize that a new bull market is under way sometime before the markets post gains of 102%? I think so, especially if he is using a professional active money manager (no guarantees, of course).

Just for fun, I thought I'd compare where the market indexes were on the dates of the incorrect market bottom calls listed above, and see how much more the market dropped after that using the March 9, 2009 low of 6547. Then, I calculated the amount of return necessary to get back to that point. The result will be an analysis of just how much return you could have missed out on in the early stages of a market rally and still not been harmed.

Date	Dow Position	Additional Loss to March '09 Low	Gain Required to Break Even
January 1, 2008	13,265	6718 (50.6%)	102.6%
March 17, 2008	11,972	5425 (45.3%)	82.9%
July 15, 2008	10,962	4415 (40.3%)	67.4%
October 9, 2008	8579	2032 (23.7%)	31.0%
November 20, 2008	7552	1005 (13.3%)	15.4%
January 1, 2009	8776	2229 (25.4%)	34.0%

The most obvious lesson learned from this analysis is that going to cash during a bear market may not be as dangerous to your portfolio as the buy-and-hold crowd says. As the above table represents, the potential to lose more money before an actual market bottom occurs very effectively debunks the idea that missing out on early market gains in a renewed bull market is a reason to stay invested. While it's true that investors who went to cash on any of the above dates may also miss out on future gains, the figures show that they can well afford to miss out on at least part of the rebound.

The next, and most important, lesson is that using a professional active manager may actually improve your chances to maximize gains in a renewed bull market. The goal of active management is not just getting out of the market at the right time, but also knowing when to get back in. While no active management strategy is perfect, the goal is to move out of the market as it goes down, and then get back in during the early stages of a new bull market. If successful, the end result would be better portfolio performance than if you had stayed in buy-and-hold investments. Of course, no one can guarantee that this goal will always be met.

A recent publication by Fidelity Investments notes that the stock market has typically bottomed out approximately half-way through a recession. Since the stock market tends to anticipate economic recovery, it usually starts rising before the recession is over. According to Fidelity, over the course of the past 14 recessions, the median return between the stock market's lowest point and the end of recessions has been 25.2%, which supports the claim that gains are concentrated during the early months of a new bull market.

Of course, Fidelity concludes that this level of return during the early part of a renewed bull market should convince you to stay invested no matter what. However, considering that only one of the entries in the above table requires a return of less than 25% to break even, I think the Fidelity study shows that it may be worth the risk to jump out of the market from time to time, even if you miss the first "false bottom."

The result is clear – going to cash during a bear market is probably going to be more harmful to your broker or mutual fund company than it might be to your portfolio.

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 question now becomes whether the March 9th low was "THE" bottom, or just one of a series of recurring lows that may or may not mark the end of the bear market. I wish I knew the answer, but I'm one of the rare breed of analysts who will admit that I don't have a clue as to when the bear market may end. As this is written, the market is rising based on the hope that Treasury Secretary Geithner's recent disclosures will bring an end to the credit crunch. Maybe the buyers are right, but then again, maybe they're wrong.

As far as advice, if you are in a buy-and-hold portfolio and have been riding the market down since October of 2007, you might want to see if this rally has legs before jumping out of the market. While I still believe that active management is the way to go, I also don't see any reason to bail out during an upswing, even if it may be short-lived. However, I'd be ready to move to cash at the first signs of weakness.

On the other hand, if you have been on the sidelines in cash for a while and are wondering whether now is a good time to get back into the market, I recommend that you give our actively managed strategies a look before deciding what to do. All of our money managers use time-tested strategies to let them know when to get back into the market, and when to stay out. And some even have trading models that can even make money in down markets.

Whether we have or haven't hit the market bottom, I'm glad that I have most of my money being invested by professional active money managers. As a result, I don't worry about how my portfolio is positioned in the current economic and market environment. If you would like to learn more about these strategies, feel free to give one of our Investment Consultants a call at 800-348-3601, send us an e-mail at info@halbertwealth.com, or visit our website at www.halbertwealth.com.

Finally, I hope that you are enjoying these E-Letters in which I debunk some of the skewed and misleading studies produced by Wall Street firms to convince you to buy investments and hold them indefinitely. While some of the reasoning employed in these articles and marketing pieces are laughable, the losses incurred by investors swayed by these faulty arguments are not.

Hopefully, you have already taken my advice over the years as to the perils of buy-and-hold investing, and you have not incurred all of the historic losses over the past year or so. In any event, you may have friends or relatives who might benefit from this information. Therefore, feel free to forward this E-Letter to anyone you feel may benefit. It might open their eyes to some of the misleading arguments used to promote buy-and-hold strategies.

Hoping we can help you in these tough times,

Gary D. Halbert

SPECIAL ARTICLES:

The Deception Used by Fund Managers to Keep You Fully Invested in Their Funds
http://www.protectyournestegginretirement.com/investment-risk/deception-used-by-fund-managers

The Toxic Assets We Elected (excellent read)
http://www.realclearpolitics.com/articles/2009/03/political_malfeasance_and_the.html

Don't Forget About Inflation
http://www.forbes.com/2009/03/23/inflation-deflation-fed-opinions-columnists-ppi-cpi.html