The news media has been full of stories lately how the bull market in bonds is coming to an end. Interest rates have been at record lows for the last couple of years, and there is really only one way for them to go...and that would be higher. Since the price of bonds move in the opposite direction of interest rates, we would expect to see bonds lose value. The media has run story after story about the "experts" ...

Sometimes we get so wrapped up in our daily activities and plans that we can easily miss the really important things. I almost missed something really important this weekend. Lucky for me, I didn’t.

For some crazy reason, my 18-year old daughter came up with the idea that she wanted to jump out of a perfectly good airplane. Now, I did ...

Sometimes an investment idea just doesn’t feel right. This article discusses one of those ideas. An investment that has been becoming more popular, and a bit more mainstream, over the last couple of years is known as Stranger-Owned Life Insurance (SOLI). In a nutshell, SOLI is when an investor, or a group of investors, offers upfront cash to a person in poor health. The investors cash in when the insured dies, collecting the death benefit from the insurance company. ...

In my last post, I took a look back at the year that was 2010 and the major news and investment headlines that made it such an interesting year. It was a l-o-n-g post. In this post, I will take a look forward into 2011. At our firm, we manage our clients’ (and our own) portfolios using a passive investment strategy. By definition, that means that we don’t try to forecast the future of the economy, markets, or individual securities. We ...

As we close out 2010 and look forward to a healthy, happy and prosperous 2011, it’s a good time to do a checkup on your investment strategy.  Is your asset allocation mix still appropriate?  How should you position your portfolio for the New Year?  Will it be a good year for stocks?  What about bonds?  Should you own some international equities, real estate, and/or commodities?

Based upon some of the headlines I’ve seen lately, it looks like 2011 will be the year for stocks.  But are you willing to risk your portfolio based on headlines?

In today’s Wall Street Journal, there’s this…”Stock Investors Look on the Bright Side.”  It discusses that despite the deteriorating debt situation in Europe and the U.S., and the threat that inflation may derail emerging market economies, the stock market is hitting two-year highs and investors are more bullish than they have been in years.  We’ve had a rally underway since August that has basically been a steady move higher.  Volatility is low and investor complacency is high.  At least one of the strategists mentioned in the article seems to offer some good advice.  “With everyone so bullish, you have to be damn careful here,” said Peter Boockvar, a strategist with Miller Taback & Co.

Last week, there was this article, also from the Wall Street Journal…”Stock Markets Are Poised to Steal the Show Next Year.”  This article says that investor resilience to the euro crisis (although I read that as complacency) and good economic and corporate news have helped drive international and domestic stock markets higher in the fourth quarter of 2010.  “Those same forces should drive performance next year too,” the author, Richard Barley, concludes.  At least he adds that volatility is likely.  Political and policy issues could unsettle markets, particularly in Europe, as their debt crisis continues to unfold.  He also cites Chinese monetary policy and emerging market inflation (hmmm…twice we’ve heard about that one) as potential risks to the upward path of equities.

But what about bonds?  There are numerous stories out there about the “bond bubble.”  And as we keep reading the headlines, it looks like bonds are definitely out of favor.  On December 16^th, another Wall Street Journal article reported that “Investors Pull Cash Out of Bond Funds.”  The article reported that for the week ended December 8^th, investors moved $1.66 billion out of bond funds.  It was even worse the following week.  On December 22^nd, Investment News Daily noted that in the week ending December 15^th, $8.62 billion flowed out of bond funds.  The article said that investors are fleeing the bond funds after signs of an economic recovery and a stock market rally fueled thoughts that interest rates may rise. 

So, what should we do?  Sell our bonds and load up on stocks?  Actually, you might want to consider doing just the opposite.  The track record of the “average” investor is dismal.  Individual investors have a terrible habit of letting the emotions of the moment drive their buy and sell decisions.  And most often it means they are buying when they should be selling, and selling when they should be buying.  We don’t have to look too hard for recent evidence.  In July of this year, we read about how investors were pulling big money out of stock funds…just before the rally started in August.

Ok, so we should take a contrarian approach and buy bonds while selling our stocks?  That’s probably a better strategy, but it’s still not one that I would recommend.

Instead, try not to listen to the noise of the market and the people who try to predict where it’s going.  Make sure your portfolio is properly allocated to reflect your personal situation…your goals, time horizon, risk tolerance, cash needs, etc.  Make sure it is diversified across all the different asset classes.  That means owning large company stocks and small company stocks.  It means owning both U.S. and international stocks.  It also means owning bonds of different quality and maturity.  And it means you should have some exposure to emerging markets, real estate and commodities.  Tune out the noise and take a look at your portfolio every now and then to rebalance when the markets change your mix.  It will make 2011 less stressful, and most likely, a more profitable year for you and your investments.

When my wife, Gina, and I travel to marathons, we usually go with a group.  But every so often it’s just the two of us.  Our trip to Louisiana for the Baton Rouge Beach Marathon was one of those occasions.  It would be state #18 on my quest towards completing one in every state (Wow! That still means I’ll have 32 to go!).  It would be state #11 for Gina.

We arrived in Baton Rouge late in the morning on Friday, December 3^rd.  We were able to check into our hotel early, so we dropped off our luggage and went for a walk to find a local lunch spot.  The host hotel, the Marriott, was about 3 miles from downtown Baton Rouge.  We didn’t have a car, and there wasn’t much to do around us, so we just relaxed, did some reading and even caught a short nap in the afternoon. 

Baton Rouge is a very small marathon.  Having participated in several of the larger ones, we both agree that we like the smaller ones.  The Expo was held in the hotel where we were staying, but this was different than most we have been to.  It didn’t start until Friday evening at 6pm and it was held in two of the hotel meeting rooms.  One room was for packet pickup and late registration.  The other room was set up with some tables and chairs and FOOD.  Free beer, water, soda, gumbo, salad and pizza were an unexpected, and nice, touch.  We sat with some 50-State club members and shared stories about other races.  There were only a couple of vendors and they were set up outside the two meeting rooms. 

Our race bag included a nice technical shirt that was the most neon-green color  you’ve ever seen.  We also received a pair of the ugliest running socks ever.  The race is presented by “The Running Chicken Track Club” (we never did find out the origin of the name) and the socks were the same neon green as the shirts, but also had some running chickens in yellow on the anklet.  They’re so ugly that we figured we would only be able to wear them on our pre-dawn runs.  We were also given a pair of throwaway gloves, which was another nice touch because the forecast for race morning called for a cool start to the race. 

After spending a little time at the expo, we caught a taxi to the Downtown Festival of Lights.  It is a holiday tradition in Baton Rouge and included a 35-foot Christmas tree, live entertainment, a small ice skating rink, “real” snow and several roaming performers.  We walked around for a while, enjoying the holiday decorations.  We ended the evening by ducking into The Wine Loft for a glass of wine.

Race morning, as forecast, was a bit cool, about 45 degrees at the start of the race.  School buses served as shuttles to get us from the hotel to the starting line, which was at the “Beach” on University Lake, adjacent to the LSU campus.  This was a “loop” course through the campus area and the residential neighborhoods around the lake.  Half-marathoners did one loop, full marathoners did it twice.   If you’ve done a loop race before, you know that it’s hard to watch the half-marathoners cross the finish line and celebrate while you know that you have to do it again.

The race started at 7am. As we normally do, Gina and I kissed each other at the start, wished each other a good race, then went on our way separately.  We ran through the beautiful LSU campus, by Tiger Stadium (AKA “Death Valley”), and the Memorial Tower.  The neighborhoods were also very pretty and the shaded streets provided some cover from what had become a hot sun on that second loop. 

With the half-marathoners outnumbering the full-marathoners almost 4 to 1, it got a bit lonely at times on the second loop.  I’m not one to chat much while running, but I did talk with a couple of people on that second time around.  One was a young lady from Utah who was running her second marathon ever and chose Baton Rouge because it fell on her 26.2 birthday.  Cool.  I also spoke with an army soldier from New Orleans running his first marathon.

I felt strong through the first 18 miles and was able to maintain my goal pace of 9:09/mile.  If I could maintain that pace for the entire run, I would finally be able to break the four hour mark.  Unfortunately, that wouldn’t happen.  I ran into the infamous “wall” at mile 19 and struggled for the last 7 miles.  I had been fueling with PowerBar Double Latte gels, as I did through training.  When I started struggling, I broke one of the rules of running a marathon…don’t try anything new!  I carried a nut bar and ate about half of it around mile 20.  Not a good idea.  As my stomach rebelled, I remembered my awful experience with peanut butter at the Ragnar Relay last year.  I wished I would have remembered that lesson before I ate that bar.

I walked a bit and watched my average pace climb first to 10:00/mile, then to 11:00.  I still had a shot at breaking my PR of 4:09, but my body wasn’t cooperating.  Nothing hurt too badly...I was just tired.  I came around the final turn on the lake and had about ¼ mile to go.  I reached deep and picked up my pace to the finish.  About 75 yards away from the finish line, I felt my right hamstring pop.  It felt like I had been shot and it stopped me dead in my tracks.  A race official came running up to see if I was ok as I limped over to a tree and tried to stretch it out.  It loosened up and I was able to run across the line.  4:15:29. Not my best.  Not my worst.  It was a lot closer to my best than my worst.

I grabbed a couple bottles of water and went back to the finish line to watch for Gina.  She had a goal to break her PR of 4:36 and really wanted to break 4:30 so she could say she beat Oprah.  I watched the clock tick closer and closer to 4:30 and sent encouraging thoughts her way.  She came into view just after 4:29 and she was running hard!  She realized she had a chance to break her 4:30 goal and was giving it her best.  She gave me a high five as she went by and crossed the finish line in 4:29:35!  She beat Oprah!!

The post-race spread was the best we’ve seen at a marathon.  We were in Cajun Country and they served it up!  Gumbo, alligator, hot chicken wings, fried catfish, chicken nuggets, pulled pork sandwiches and more.  And ice cold beer!  I don’t normally drink a lot of beer, but have recently discovered how good one can taste after 26.2 miles on the road.  And two or three taste even better!

There were 889 finishers in the half-marathon and 234 made it through the full.  It was a beautiful day, a beautiful course, and a well-run event.  As you might expect for a small race, there wasn’t a lot of crowd support, but that’s ok.  Other than the abandoned water stop at mile 20, the volunteers were great.  Baton Rouge seemed like a very friendly town and we enjoyed our short visit.  If you are looking for a race to cross Louisiana off your list, we would both strongly recommend the Baton Rouge Beach Marathon. 

I have written before about how dangerous it can be to base your investment decisions on what you believe is the direction of the markets.  And I’ve talked about how even the best and the brightest minds in the investment world can’t seem to agree on what that direction will be.  At the risk of repeating myself, I couldn’t let my observations of the last week go by without an updated comment. 

In the last three days, four very well-known investment gurus have made their predictions on what’s coming for the US equity markets.  If you are trying to decide how to position your portfolio for the upcoming year, these are some names you might want to pay attention to.  But then again, you might not.

On Monday of this week, Bloomberg News released a story with the headline “Bill Miller sees coming spike in stock prices.”  Miller, the Chief Investment Officer of Legg Mason Capital Management, won fame when the mutual fund he manages, the Legg Mason Value Trust, beat the S&P 500 for a record 15 straight years through 2005.  He’s a very smart and experienced money manager.  He said that US stocks may rise 15 percent in the next 12 months as the Federal Reserve continues their efforts to inflate asset prices and boost the economy.  I don’t know anybody who wouldn’t be happy with a 15 percent gain in their portfolio over the next 12 months.

But hold on.  On that very same day, the very same news service, Bloomberg News, released a story with the headline “Shilling: ‘Significant’ stock selloff dead ahead.”  Gary Shilling runs a company that forecasts and analyzes economic and financial developments.  He was one of the few analysts who predicted the US housing collapse.  He is another very smart and experienced money manager.  He says that the stock market is overvalued and he foresees a “significant” selloff within a year as the Federal Reserve fails to stimulate economic growth.

So, which one do you believe?  Are you willing to bet your portfolio on it?  If it helps, there were a couple of other predictions made this week.  Jeremy Siegel, Professor of Finance at the Wharton School of the University of Pennsylvania, and a senior advisor to the Wisdom Tree family of mutual funds, sides with Bill Miller.  He is yet another very smart and experienced money manager.  In a story released on Tuesday, he said that he sees the market growing 10-20% in 2011, and even sees a nice gain through the end of 2010. 

And finally, last but not least, on Wednesday we heard from Jim O’Neill, Chairman of Goldman Sachs Asset Management, and another very smart and experienced money manager.  He sides with Miller and Siegel and predicts that the S&P 500 may rise as much as 20 percent in the next 12 months as the Federal Reserve will be relentless in stimulating our economy.

With 3 out of 4 gurus predicting nice gains in the market next year, should we go “all-in?”  Are you willing to take that chance?  These stories are just the most recent examples of why a passive strategy to managing your money is probably the best approach for most of us.  If the smartest investment minds in the world can disagree by so much, how are the rest of us supposed to predict what will happen?

A passive strategy lets you tune-out the media “noise” surrounding the markets.  You develop an asset allocation mix that is appropriate for your situation, and only make adjustments when the movement in the markets alters that mix.  It’s a lower risk and less expensive approach to managing your portfolio. 

But if you insist on actively managing your portfolio and following the words of wisdom available from the “experts,” the predictions this week will have you feeling fairly confident.  But don’t forget…there’s always next week.

“How to Get Back Into Stocks Without Getting Burned” was the name of the article that landed in my email inbox.  It was from the Director of Personal Finance for a financial information website.  But, like a lot of advice that we see in our inbox, on television and other forms of media…you usually get what you pay for.

The article starts out harmlessly enough.  It discusses a problem that a lot of investors are facing right now, the decision on when to get back into the market.  When the market got dicey a couple of years ago (dicey might be the understatement of the year), a lot of investors sought relief by pulling out of stocks.  But after a big year last year, and a pretty good year so far in 2010, a lot of those same people are trying to decide if it’s safe to get back in.  And, as the article points out, those who do jump out when things get shaky often wish they had originally made no change at all.  They are reacting emotionally.  Fear drove them out.  Now greed is calling them back in. 

The equity markets started misbehaving in the fall of 2008.  They hit bottom on March 9, 2009.  A lot of people moved to the sidelines as the viability of our financial system was in question.  Let’s say that an investor was unlucky enough to have made the decision to get out on March 9^th when the SP500 closed at 676.   After a selloff last week, the index closed at 1199.   That’s a gain of 77% our unlucky investor missed.  So now what to do?

The author’s first piece of advice is good… you shouldn’t try to time the market.  Instead, you should find the stock/bond mix that suits your situation and only make modest changes to rebalance when the market changes that mix.  She should have stopped there.  She goes on to suggest a plan to dollar cost average your way back into the market.  This allows you to tiptoe back in over a period of time by moving a small percentage back into the markets every month.  Dollar-cost averaging is how most people build an account such as their 401k over the years and it helps to smooth out your purchase prices over time and reduce the risk that you go “all in” near a market high.  She suggests spreading your purchases out over 6 months to a year or so, depending upon how much of your portfolio you moved out in the first place.    She even suggests setting up an automatic investment plan so that you don’t “chicken out” with future purchases if the market gets rocky again.  So, for an investor that moved out of the markets, I would agree with the author…up to now.

But then the advice takes a dangerous turn.  Citing her company’s equity analysts, she suggests that stocks are currently trading close to the analysts’ opinion of their fair value.  She then moves away from her earlier “don’t time the market” advice and suggests that the investor use her firm’s “Premium Stock Screener” to find the market segments that are still undervalued.  She even states that by narrowing the universe to this group of stocks that “it’s an ideal time to upgrade the quality of your stock holdings and to do so at an advantageous price.  Isn’t that timing the market?

So what is the lesson here?  I would suggest that you follow the initial piece of advice and stop there.  Build a portfolio that is appropriate for your situation in life and stop playing the guessing games.  If identifying the stocks that are currently undervalued is as easy as using their stock screener, would they still be undervalued?  And don’t forget to get fully diversified.  Your mix should include many different asset classes, not just US stocks and bonds.  You should have some exposure to international and emerging markets, real estate, commodities and a variety of fixed-income assets.  And then, as tough as it can be at times, and it can be very tough, don’t give in to the emotions of the moment by changing  your allocation.  If you do, then at some time in the future you will be struggling with the question on when, and how, to change it back.

When you cast your ballot on Tuesday (and hopefully you ARE casting your ballot), should you be thinking about your investment portfolio?   Everyone that has issued a prediction on the results of Tuesday’s election has said that it will be a strong day for the Republicans.  They only differ on how many House seats will change hands and on whether it will be enough of a tidal wave for the Republicans to take back control of the Senate.

So, what about your investment portfolio?  Republicans are generally thought to be the more pro-business party.  Does that mean that if the Democrats lose their majority it will be good for business, and therefore stocks?  At least one major prognosticator thinks so.  Birinyi Associates, Inc. says that if Barack Obama’s party should lose control of the Senate, US stocks would probably rally through February. 

This is another case of trying to find patterns in historical data and then applying those patterns to today’s markets.  They found some interesting, though not particularly helpful, patterns of stock performance around elections.  For example, the six times that the Senate changed hands during elections in the middle of a president’s terms, stocks posted an average three-month gain of 5.2%, and only fell once, when the Democrats lost the Senate in 2002.  This is data mining gone wild! 

The analysts who created the report for Birinyi are pretty smart guys.  But, I think they wasted their time.  Instead of using current economic data and trying to predict how a Republican victory might affect industries, revenues, earnings, etc. (which I also think is folly), they spent their time looking at historical data when making their conclusion that “Democrats Losing Senate Would Probably Give Boost to S&P 500.”   

The authors even commented that they took a “special interest in 1946 and 1994 midterm elections, when first-term Presidents Truman and Clinton lost control of the Senate and House.”  In both of those cases, the market was down in the two months prior to the election, and moved higher over the three months following the election.  To their credit, they probably couldn’t have found a better example…two first term presidents losing control of Congress.  But how useful is the information?  Leading up to Tuesday’s election the S&P 500 is coming off a very nice two-month rally.  September saw a 5.6% gain for the S&P 500, while October followed with a 3.6% gain.  So, should we assume since it’s the opposite of the example the analysts used, we should expect a selloff if Obama loses both the House and Senate?

Or, maybe this is simply another case of “buy the rumor, sell the news?”  We see this all the time with earnings announcements and other big events in the markets.  Maybe “those in the know” are fairly certain of the election outcome and stocks have been bid up in advance of the actual event.  If that’s the case, then we’ll probably see a selloff. 

In either case, are you willing to bet your portfolio on the election outcome?  Once again, it’s just noise.  You shouldn’t listen to any of it.  Two similar events over the last 100+ years do not a pattern make.  Neither do six.  They are only a pattern because someone is looking for one.  The proper thing to do with your investment portfolio is to tune out market prognosticators.  The election will come and go and, in the short term, the markets may go up, or they may go down.  Stay focused on the long-term, make sure you are properly diversified, and rebalance your holdings when market movements create an imbalance.

Now, please go cast your ballot.