Making Money Alert
Three Reasons to Batten Down the Hatches
08/13/2008
There's an old term used among sailing enthusiasts, and it goes like this: "Batten down the hatches." You see, sailors understand that this is what you do when you are way out at sea and you know a storm is on its way.
If you want to survive the storm, you have to make sure you prepare your vessel appropriately. That means you need to tie down everything on deck; drop the sails to a bear minimum; throw out the anchor to slow the boat down, and close every hatch and porthole as tightly as possible. Then, you had better go below deck and hang on until the storm passes.
It's the same way with the stock market. When you have money at risk, you have to be prepared to batten down the hatches at any time. I know many of the talking heads on CNBC and Fox Business News think the worst is over for this bear market, but I have a different opinion.
I actually think there's a market storm headed our way, and that means we all have to get ready to batten down our financial hatches. Before I continue, I'd just like to say that I know my prognostication for more pain ahead could be wrong. And if the uptrend we've witnessed during the past couple of weeks continues, I will revise my opinion. But let me tell you why I think we may be in store for another market storm -- and how we can batten down the hatches and make it through.
Reason #1 -- Falling Financials
Financials once again are on the decline, after making a nice run higher midway through July. The following chart of the Financials Select Sector SPDR (XLF) shows the trend. I don't think we can have a recovery in the stock market or the economy without this sector's participation. If we continue to see banks and other financial institutions struggle, it is going to have a very pernicious effect on this market's ability to bounce back.
Reason #2 -- Tis the Season
We are entering the "season of pain" for stocks. This is the period between August and November when stocks tend to be weak. There's been very little good news coming out that can actually help the market (with the possible exception of lower oil prices). Today's weak data on retail sales is just one sign of the kind of sullen economic news we are likely to face in the coming weeks and months. Unfortunately, I think the upside catalysts in this season of pain will be few and far between.
Reason #3 -- Election Uncertainty
The upcoming presidential election is a wild card, and the way I see it, there is no good outcome. An Obama win means change, a concept that Wall Street hates. Higher income taxes on the wealthy, more regulation, and the specter of an increase in the capital gains tax rate may cause a lot of selling if Obama takes the prize.
If McCain wins, I still think the market will be in trouble. McCain's economic bona fides aren't very substantive, and his economic plan really isn't much better than Obama's plan. Neither candidate is talking about cutting government spending, which is really what needs to happen if we want to extricate ourselves from the current economic lull.
For these three reasons, along with many others, I think we're likely to see more downside in stocks at least until after the November election. Moreover, I think the rising U.S. dollar is causing equities overseas to decline. Paradoxically, the dollar's strength is contributing to what now is a confirmed global economic slowdown, complete with declining equity values in Europe and Asia.
Perhaps the most interesting aspect of why I think we still are in for more downside in stocks is that we have yet to see that "panic low" that characterizes a true market bottom. The fear isn't baked out of this market cake just yet, and until we see everyone on Wall Street throw up their collective hands and run and hide, we are likely in for more selling.
So, how can you batten down your own financial hatches given what I think will be another big market storm? Simple -- get more defensive with your portfolio. This means rotating out of your risky long positions, reducing your exposure to equities, and entering into positions designed to produce income when stocks are in decline.
Right now, subscribers to my Successful Investing and High Monthly Income advisory services are positioned defensively to protect assets while generating income.
Want to find out how to batten down your financial hatches? Simply click below.
Click here to learn more about Successful Investing.
Click here to learn more about High Monthly Income.
ETF Talk -- Terminology 101
During the past several months, I have provided my ETF Talk readers with features aimed at identifying new funds, key sectors and important trends. I also like to go back to the basics once in awhile with something that I call ETF 101. The name comes from the 101 number often given to an introductory course at a college or university for virtually any subject.
The idea is to provide a bit of instruction about ETF terminology and investing. I know that ETFs are new to many of you and I want to make investing in them as simple as possible. ETFs offer diversification and cost-effectiveness that is unmatched by most other investments, including mutual funds. For that reason, I want to explain key terms this week that will help ETF investors of all experience levels.
As regular readers of this feature know, one of my top goals as an ETF enthusiast is to simplify what may seem like complex investment terms to produce confident and well-informed ETF investors. For that very reason, I chose to define eight ETF terms this week that every ETF investor should know. Among the eight key terms are ultra, short, volume, and sector -- common investment vocabulary that you may have heard about but not understand fully. Remember that I encourage my readers to send me their ETF questions. If you have one that you want me to answer in an upcoming issue, please click here.
The following is a list of eight useful ETF terms, along with their definitions:
Leverage -- This term is used to describe when an investor borrows capital to increase his or her potential returns. The use of leverage also raises the risk, so these kinds of funds require caution. In ETF speak, leverage usually refers to a fund designed to move twice as fast as its underlying index. Leverage can be used either on the long side, or the short side.
Ultra -- This class of ETFs uses leverage to double the exposure to a particular benchmark index. For that reason, these kinds of funds also double the risk and the potential reward.
Short -- In normal stock investing, this is the practice of an investor selling a borrowed security for the short term in hopes that it will fall in value before it is repurchased later for a reduced price. In ETF speak, short refers to a fund designed to move higher when its underlying index moves lower.
Commodity -- An asset class featuring natural resources or agricultural goods that can be bought or sold through specially designed ETFs. For example, a commodity ETF may focus on a single kind of good and hold it in physical storage. A commodity ETF also may invest in futures contracts. One example of a commodity ETF is PowerShares DB Agriculture (DBA), which tracks the performance of the Deutsche Bank Liquid Commodity Index. That index consists of futures contracts on agricultural commodities, such as corn, wheat and sugar.
Index -- A statistical measure of change in a market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Two major market indexes are the Dow Jones Wilshire 5000 and the iShares MSCI EAFE Index (EFA).
Volume -- The number of shares or contracts traded in a security or an entire market during a given period of time. I tend not to recommend ETFs that do not have a daily trading volume of at least 100,000 shares.
Sector -- A group of securities that are in the same industry or market.
Expense Ratio -- A measure of what it costs an investment company to operate a given fund. The expense ratio is determined by an annual calculation that divides a fund's operating expenses by the average dollar value of its assets under management.
I hope you agree that none of these terms are overly complicated. You now should have an improved grasp of key ETF asset classes and terms. Once you understand the kinds of ETFs that are available, you can better determine how best to use them to your advantage.
'Paid-Up' Life Insurance -- Is It Really A Good Deal? 3
By Kevin Yurkus -- President, Fairway Capital
You think you have a great deal with your "paid-up" life insurance? Well, guess again. What you don't realize is that you've created a "dead asset" (no pun intended) that will not likely grow to keep pace with inflation or your changing estate planning needs. What you might not also realize is that you can leverage the cash within your paid-up life insurance policy to generate additional wealth, protection or liquidity for your estate.
Why make the big mistake in paid-up life insurance? Because most paid-up policies have high amounts of cash built up within the policy, particularly in whole-life policies. Sure, the cash grows and, depending on the policy, it might even pay a dividend, but it does not increase the amount of insurance. When you die, only the death benefit passes on to your heirs and the insurance company keeps the cash in the policy.
Let's illustrate a typical case. John is a 71-year-old who has a "paid-up," whole life insurance policy with a death benefit of $300,000 and a cash value of $160,000. Upon his death, his heirs will receive only the $300,000 death benefit. They will forego $160,000 of cash value in the policy.
As a 71-year-old, John can make his $160,000 of cash work better for him than by just having it sit in a life insurance policy. He has a number of ways to do this. Let's discuss a few of them.
John can cash out of his policy and reinvest the cash into other investments, such as stocks, bonds, real estate, etc. Assuming a conservative 6% rate of return, his $160,000 will grow to approximately $380,000 at John's life expectancy, thus providing $80,000 more to his heirs.
If John is healthy enough to qualify for a new life insurance, he can transfer the cash value into a new life insurance policy with an increased death benefit, thus adding additional wealth for his heirs. At 71, John's $160,000 can purchase a new policy to increase the death benefit from $300,000 to $400,000, thus adding an additional $100,000 for his heirs with no further premium payments required.
John can use his cash value to purchase a large life insurance policy and monetize his insurance through a life settlement. For example, John's $160,000 can cover three years of premiums on a new $3,000,000 policy. Once the policy has been in force for two years, John has the option of selling it in the secondary market. Based on his age and assuming no change in health, John could sell his policy for approximately $400,000, thus providing John's estate with $400,000 well before he is expected to die, which is much better than the $300,000 in his current "paid-up" policy. The secondary market (Life Settlements) is comprised of Wall Street institutions paying cash settlements to acquire in-force, life insurance policies from seniors 65 and older.
Be careful with option #3, as insurance companies are becoming less enthused about consumers buying policies with the intent of selling. There is a right way to pursue this option.
First, using John's example, he has to be wealthy enough to justify purchasing the new $3,000,000 policy. Second, if John does not sell the policy, he needs to be solvent enough to continue the premium payments, especially since the premiums will be considerably higher than his original $300,000 policy. Third, and perhaps most importantly, there can be no formal or informal agreement for John to sell his policy. Although John likely may sell his policy, there can be no mandate from a third party forcing John's hand to relinquish his policy.
Does John's case sound familiar? Do you have a similar situation? If so, don't waste away the cash in your policy. Look to upgrade your "paid-up" life insurance.
If you have any questions about how to maximize your paid-up life insurance, or if you are looking for creative ways to enhance your estate planning, please contact us for an initial consultation. We can be reached by calling 1.800.338.1035, or visit us here.
It's your money, and you should take responsibility to maximize the opportunities for your estate.
San Francisco Money Show Musings -- See them for Yourself 3
This past weekend, I made my annual pilgrimage to one of the world's greatest cities -- gorgeous San Francisco, Calif., for the Money Show.
If you didn't get a chance to make it into town, don't worry. Now you can catch several of my presentations right from your own computer. Simply click here to view all of my Money Show musings for yourself.
Here's just some of what you'll see when you watch these special Money Show video broadcasts.
ETF Strategies in a Difficult Market
Some pundits are saying that we are in a recession; others call it a mere economic slowdown. The answer, in my opinion, is what difference does this technical distinction make to you? The one thing everyone agrees on, bull or bear, is that we're living in uncertain times. As a result, it is of the utmost importance for us to take a cautious approach. "ETF Strategies in a Difficult Market" will teach you the importance of managing risk, having a sell discipline, and how to benefit from new opportunities.
Structuring a Portfolio for Income and Safety
How do you generate high income without risking your principal? Are you tired of putting your money in poorly paying CDs or money market accounts? I reveal my favorite income-producing tools in this presentation to boost the yield in your portfolio without taking on excessive risk. Learn how to use exchange-traded funds, unit investment trusts, and closed-end funds to properly manage your income assets.
Seven Secrets of Success for ETF Investors
In this presentation, I reveal the seven secrets for successfully managing your portfolio using my favorite investment vehicles, exchange-traded funds. ETFs are simple to understand, easy to use, inexpensive and offer tremendous diversification. Learn how to manage any size portfolio using these proven methods to maximize returns.
To view my video presentations today, click here.
Guaranteed Monthly Income For Life? You Betcha! 7
On Saturday, July 12, I held the latest installment of my retirement income conference call. Big thanks to all of you who called in with your great questions, and big apologies to those who couldn't listen live because the event had reached capacity.
Now, if you are one of those who couldn't get through, or if you weren't available to attend the call that day, don't fret. You can hear a FREE replay of the call right now, by clicking here.
In this call, I discuss the many tools and vehicles you can use to produce a monthly income stream, and I show you how some products can offer you a 5% to 6% GUARANTEED return without losing control of your investments. These products are outstanding for taking a portion of your IRA or 401(k) and creating an income stream of $1,000, $2,000 or even $3,000 per month.
If you have an existing annuity and want to generate guaranteed income WITHOUT annuitizing your assets, then please listen to the replay of this informative discussion.
Remember, your assets will need to last you 20-30 years. You will need to create an income plan that will last as long as you do. We can help.
The Wisdom of Carroll
"Would you tell me, please, which way I ought to go from here?"
"That depends a good deal on where you want to get to," said the Cat.
"I don't much care where..." said Alice.
"Then it doesn't matter which way you go," said the Cat.
—Lewis Carroll, Alice in Wonderland
There's nothing like a brilliant literary illustration to bring a common sense point into full focus. When it comes to investing, you simply must know where you want to go. If you don't, then any path will do. To put it another way, you have to have a plan in place designed to help you achieve your specific goals. Of course, if you don't know where you want to go, then you'll never need a plan.