Your Credit Score

This is from out latest MoneyMinute. Let me know if you would like future MoneyMinutes emailed to you automatically (about monthly).

October 2009 MoneyMinute – Your Credit Score

By Julie Schatz, CFP(R)

Credit scores. We hear about them all the time, and if you’ve recently applied for a loan then you have felt their importance firsthand.

If you are curious to know more about what seems to be a ‘black box,’ then I recommend this excellent article by Karen Blumenthal at the Wall Street Journal, “Credit Scores: What You Need to Know Now.” This link will take you to the full article:
http://tinyurl.com/yczpcby The link works only for a few days. If you can't access the article, let me know and I will try to gain access for another short period. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address before using it to email to me.

Here’s the 30-second summary on what you can do to enhance your scores:

• Make all payments on time.
• Open as few new accounts as possible.
• Keep old accounts with good payment history open.
• Maintain balances that are less than 50% of credit limits.
  

Today, a good credit score matters more than ever. Lenders are requiring higher scores for their best interest rates, and they’re less likely to lend to borrowers with flawed credit histories. Because of that, treat your credit score like any valuable asset that needs to be monitored and maintained.

A great source for information on credit scores and to obtain yours, go directly to the Fair Isaac Corp. (FICO) website: http://www.myfico.com/.

Lastly, if you are planning to buy or refinance a property in the next six months, then contact us for a referral to mortgage brokers we trust. They can guide you on making your score as good as it can be before the lender checks your credit.

Bear Market History

“The further we look back, the further we may see ahead.”
-Winston Churchill

“The only thing new in the world is the history you do not know.”
-Harry Truman

Let's review the bear markets in the post-WWII era. A bear market is defined as about a 20% drop in the stock market and we’ll use the S&P 500 index as a measure of the markets.


for a better view, click on the table

A few things to note from the data:

• The market has gone down an average of 30%, 13 times in 63 years. That’s one bear market about every five years.
• Even though economic events in some of the bear markets seemed to portend the end of life as we know it, every time the market has recovered and gone on to new highs.
• Because this chart is based on the price of the S&P 500 index and excludes reinvesting dividends, it makes both bear and bull markets look worse than they really were. Our media does not understand this detail and so they report a worse-than-reality scenario in the news.
• The S&P 500 is not very diversified so better portfolios should have better results.
  

When you use stock market investments, bear markets come and go with regularity. We all must be prepared for them and live through them.

Thanks to Nick Murray in his book, Behavioral Investment Counseling for the inspiration for this topic.

Quote - time the market?

"Don't try to time the market. It's very, very difficult to do. There may be a couple of people in the world who can do it, but if there are they're not telling you."
- Ben Bernanke

Quote - Socialism

"The problem with socialism is that eventually you run out of other people's money"
- Margaret Thatcher

Is Buy and Hold Dead? Part III

Part I - May 13, 2009
Part II - July 6, 2009

Can you name the 10 most successful market-timers? No, how about the top 5? One?

I can't and it's not for lack of searching. Market timing is a very attractive idea that has seen quite a resurgence due to this dreadful bear market. It's attractive and impossible.

As proof, I offer Joseph Granville who was considered to be the market guru of the 1980s. He made some very impressive market timing calls and at one point could actually move the market in one direction or another based on what he said that day. Joe sold his market timing advice via a newsletter.

Mark Hulbert publishes the well researched, Hulbert Financial Digest where he monitors the performance of 100s of investment newsletters. I've used the Digest to get an independent assessment of a newsletter's quality and I respect the data Mark provides.

Go read what Wikipedia has to say about Joseph Granville. Hulbert Digest data is mentioned there.
http://en.wikipedia.org/wiki/Joseph_Granville

Well -20% per year is so awful that it is not to be believed. So I looked it up in the Digest for myself and Granville's Traders Portfolio achieved -0.2% per year since mid 1980 (still awful). If you invested in the Wilshire 5000 (all domestic stocks) you earned +10.3% per year.

Starting with $1,000,000 29 years ago and compounding it at -0.2% annually, you end up with $943,595. In contrast, the Wilshire 5000 investment is worth $17,166,820.

You would think at least the Granville portfolio was less risky than the Wilshire 5000, but no, Hulbert says the Trader's Portfolio was 5% more risky.

Conclusions:
1) Market timing doesn't work and never will.
2) The only people who made money on the Trader's Portfolio were the people selling the newsletter!

P. S. if you compound $1M at -20% for 20 years you have all of $1,547 left.

Thanks to Harold Evensky and Financial Advisor Magazine for the idea for this article.

Why oh Why Do I Invest in Stocks?

Cick the chart for a better view.

This is why we invest in stocks. If government bonds seem "safe", then using "unsafe" large-cap stocks more than tripled the return after inflation. Using small-cap stocks caused the return to more than quadruple.

This makes a lot of sense. The returns from bonds are much more stable (reliable) than the returns from stocks. The market assigns returns based on an estimate of reliability. Bonds are more "reliable" therefore they must return less than the "unreliable" stocks.

To achieve their financial planning goals, most of my clients need returns that are greater than what can be provided by bonds or cash or CDs, etc. By mixing in an appropriate amount of stocks with the bonds, we hope to achieve the required return.

The disadvantage to using stocks is volatility and this can be very painful at times.

Right now we are in an extreme bear market that illustrated quite well that the pain of owning stocks is watching them go down, down, down. However, for most of my clients, cheaper stock prices are a good thing because they can buy more stocks at lower prices. For those nearer retirement, an adjustment to more bonds and less stocks may be an answer although the planning is complicated by spending patterns, Social Security, other sources of income, and perhaps the need to leave a bequest for the next generation.

Data Source: Morningstar 2008. Thanks to Nick Murray in his book Behavior Investment Counseling for the idea for this article.

The Economy Has Hit Bottom

I like this article because it concentrates on fundamental truths -- economies do recover, sometimes with surprising gusto.

From the Wall Street Journal, 7-23-09 by Alan S. Blinder

"How’s the economy, you ask? I have the proverbial good news and bad news, but in this case, they’re exactly the same: The U.S. economy appears to be hitting bottom.
First, the good news. Right now, it looks like second-quarter GDP growth will come in only slightly negative, and third-quarter growth will finally turn positive. Compared to the catastrophic decline we recently experienced—with GDP dropping at roughly a 6% annual rate in the fourth quarter of last year and the first quarter of this year—that would be a gigantic improvement.

Furthermore, there is a reasonable chance—not a certainty, mind you, but a reasonable chance—that the second half of 2009 will surprise us on the upside. (Can anyone remember what an upside surprise feels like?) Three-percent growth is eminently doable. Four percent is even possible. Surprised? How, with all our economic travails, could we possibly mount such a boom? The answer is that this seemingly high growth scenario isn’t a boom at all. Rather, it follows directly from the arithmetic of hitting bottom."

For the entire article: http://tinyurl.com/msbhcj The link works only for a few days. If you can't access the article, let me know and I will try to gain access for another short period. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address.