This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Sunday, February 22, 2009

Revisit your retirement plan

In today’s changing investment climate, it is well worth many investors’ time to learn about their retirement plans. Whether they contribute to an IRA or have an employer-sponsored plan (i.e.: 401(k)), investors ought to learn their respective rules and features. While IRA’s, being individually established and self-directed, are much less restrictive, many of these rules apply more for 401(k)’s, but are worthwhile for everyone to consider. First and foremost in any retirement plan, investors should learn about their investment options. Many company-sponsored plans have a limited list of investment options from which employees can choose, while others are more open-ended. And while some plans are quite restrictive in their investment options, they also have provisions allowing the employee to rollover their 401(k) into an IRA, which has many more options. All these rules are worth the little time it takes to study them.

Even more importantly in today’s economic environment, investors need to change the way they look at their retirement accounts. With social security under-funded and quickly falling out of favor, Americans need to look at their own savings as their primary retirement fund. As such, retirement accounts need attention, more than they used to. We are entering a period where there is good money to be made; but, unlike previous years, only in select investments. Here are a few steps readers can follow to prepare themselves:

  1. Adjust your investment horizon to fit your profile. If you’re 30 years old, recognize that you probably aren’t going to retire anytime soon (Mega Millions aside). Invest with this timeline in mind, recognizing that you have decades to recoup recent losses. This brings up an important note: This doesn’t mean that you can simply buy into an investment and forget about it, just adopt the right mindset.

  2. Develop an investment strategy and stick to it; don’t be discouraged by the day-to-day fluctuations of the market. Decide what level of contributions you are comfortable with and what investments allow you to sleep at night.

  3. Don’t stop contributing to your retirement plan unless cash flow is a serious issue. With deep discounts to be found in stocks and corporate debt, it is extremely expensive to let fear get the better of you. Look at investment opportunities objectively to judge what looks good fundamentally but may have been sold down with the rest of the market.

For those with employer-sponsored retirement plans, here is perhaps the most important piece of advice we can offer: Find out whether your plan provides you with an advisor you can talk to. They should be able to teach you a lot of the ins and outs of your retirement plan, as well as discuss investment options. If an advisor isn’t made available to you and you don’t feel comfortable researching these issues yourself, please seek one out. Find an advisor that doesn’t charge for time (ask their secretary if you’re not sure) and get professional opinions on what you can do to be best-prepared for your retirement.

Saturday, February 21, 2009

Saving your way out of recession

Dominating the headlines this past week, as well as the thoughts of many Americans, is the latest stimulus bill working its way through Congress. The Obama Administration, with all of its good intentions, still doesn’t seem to grasp the idea that we – and I say we meaning people, corporations, and our government – can’t spend our way back into prosperity. Having lived for the last decade with one of if not the lowest savings rates in the world, America’s times for free spending and living beyond our means are over. This doesn’t mean that we don’t need a plan; quite the contrary. Right now, more than anything, the market demands answers and transparency. As new Treasury Secretary Geithner found out yesterday, talk is cheap. While rhetoric works wonderfully in campaigns, the Obama Administration needs to learn, and quickly, that it won’t drive markets.

And even though the stimulus plan is not yet in effect – and we’re sure it will be soon, with or without Republican support - there are bright spots in this economy nevertheless. Auto dealers, of all people, have reported seeing improvement as of late. We’ve heard that this past January, usually a slow month in cars, was a good month over all and the best January in a long time, especially for used cars, both imported and domestic. In addition, the market for corporate debt appears to be loosening. In the past week Cisco issued $4 billion to use for buying out its competitors and Intel announced a $7 billion expansion in plants here in the US.

With these new developments in the credit markets, it is quite possible that what we are witnessing, in response to tight bank credit recently, is a return to 1980s-style alternative financing. In the ‘80s it became extremely popular for companies to issue bonds rather than using bank financing. It worked wonders for the spree of leveraged buyouts then, and it is providing a great option of financing today. And the stock market seems to be recognizing these developments, as it has stayed relatively stable since bottoming in November. However, precious metals have been shining especially bright as investors flock to gold and silver for safe-haven investments as well as hedges against the inflation this stimulus plan is likely to cause.

Sunday, February 8, 2009

Buying is golden

In recent days the Dow has proven remarkably indecisive. Bouncing around aimlessly, for the most part it has trended down slightly. We, like many advisors, are waiting to see if the Dow breaks through its November lows, which could signal a new downturn and massive bear market. However, like most people, we are still optimistic. We still believe that November's lows will hold, due in part to what is going on in Washington. We believe that the next week or two will see the passing of Obama's stimulus package, and with it the resumption of bank lending. We believe that these events have been timed by the new administration in order to magnify the perceived positive effects of the new stimulus bill.

Of course we maintain that the increase in bank lending will spark a massive wave of inflation, the likes of which haven't been seen in this country since the 1970s. It is a little known fact that in the past 6 months, the Federal Reserve has more than doubled the monetary base, which will cause the US money supply to skyrocket once this new money begins to circulate through the economy. This circulation, also called money’s velocity or turnover, will increase once banks begin lending money, which in addition to helping consumer spending and small businesses, also allows major corporations to finance continuing operations as well as new projects and acquisitions.

We, therefore, maintain our stance that in order to protect their financial well-being, investors need to own hard assets like natural resources and precious metals. Merrill Lynch, Goldman Sachs, and UBS have all issued buy recommendations for gold. However, investors should be extremely careful how they invest. Investors need to be mindful of the differences, especially the risks and dangers, associated with the trading of exchange-traded funds (ETFs) and derivatives. These are much more complex than traditional investment vehicles, and we strongly recommend conducting research or speaking with an investment advisor to decide if they're right for you.

Sunday, February 1, 2009

How to pick a financial adviser

In the wake of recent turmoil in financial markets, many investors are looking for professionals to help manage their finances. Many have never worked with a professional before, and many have decided to change because of the way their previous adviser handled this latest crisis, be it a lack of personal attention, lack of communication, poor returns, etc. We feel it is important that the public is aware of some particulars of the financial industry to aid in the process of choosing a financial adviser. After all, this choice will have a greater impact on a person’s long-term well-being than almost any other professional.

In the field of finance, many professionals refer to themselves as “financial advisers.” This is, in many cases, a misnomer. Many, in fact, are more salesmen than investment advisers. They look at the particulars of a potential client (age, income, number of dependents, etc.) and develop a portfolio that is meant to be in line with that individual’s risk tolerance. After a portfolio is established, the adviser will periodically (typically quarterly, semi-annually or annually) sit down with the client and see if there are any changes in the risk profile that need to be reflected in the portfolio. These advisers typically receive most of their income in the form of commissions made on a sale. They do not conduct extensive research to see where the economy and stock market are going in the future. Instead, they rely on investments that are sellable; those with good back stories, impressive numbers and glossy paper. And while history can be helpful in choosing an investment, remember that investments react to economic conditions. Since the conditions rarely repeat, neither will the returns.

There is another class of financial professional that consists of people (us included) who refer to themselves as “investment advisers” or, more simply, as “money managers.” These individuals have an entirely different, more hands-on approach. They spend considerable time researching current market conditions and thinking about how they will play out in the future. They then try to gauge what investments will have the best potential for returns in the environment they see going forward, and position client funds accordingly. They do not sell any particular investment, but instead they market their own experience, knowledge and expertise that should (hopefully) be beneficial to a client, who most likely doesn’t have the time or ability to spend such extensive time and effort managing their own money. While these professionals may also earn compensation from commissions, typically a greater degree of their income is derived from management or investment advisory fees. Because of their money management style, some can be criticized for a lack of diversification. In reality, however, their clients’ accounts typically receive more attention because they are relatively similar.

There are many questions that can be asked when interviewing a financial professional to determine how they manage money. And it is important to think of this as a process. When an investor begins their search for an adviser, we hope they don’t simply crack open the yellow pages, call the first number they find and walk in with a check. Think of it as a job interview, since that’s what it really is. Financial professionals are interviewing for the opportunity to work for you. And, as is the case with any job hiring, you as the interviewer should know what kinds of questions to ask so that you can decide with which manager you are most comfortable working. The following are some examples:

1. How much experience does the adviser have in the financial industry? Have they held any related positions, and if so for how long?

2. What is their money management system? Ask them to describe their approach to managing clients’ money. You might also want to ask if this is substantially different from how they handle their own money. While this subject would be taboo at a cocktail party, it shouldn’t be here.

3. How much personal attention can each client expect? How often is each portfolio monitored?

4. Ask about communication. If you call the office, are you going to talk directly with the person watching your money or with a call center in India? Do they send out newsletters? If so, do they write their own or subscribe to a newsletter service and just put their name on them?

5. How has their long-term performance been? While short-term results can throw off averages (especially this past year), advisors should still have a decent long-term track record.

6. How are their fees structured?

7. What safeguards do they have in place against fraud? With all the recent fraud cases, you want to feel secure, even if you have an investment that loses money. But what you don’t want is to find yourself in a situation where your advisor disappears with all your money.

If you’ve been losing sleep at night over your investments, we urge you to go out and look for a professional. Whether it’s your first time working with an adviser or you just need a change, it is important to find an arrangement you are comfortable with. Interview several potential advisors, and resist the urge to make a decision on the spot. Instead, go home and think it over before making your final selection.