The following article from Investor's News is an eye opener. It is so easy to think investing is easy - think again. And, enjoy reading this article and take heed.

Like so many investors in the spring of 2009, Gordon Wolf needed to dig out of a hole.

A 68-year-old psychologist in Napa, California, Wolf was a buy-and-hold sort of guy, yet the nest egg he had entrusted to his broker at Merrill Lynch was suddenly down by more than 50 percent.

The broker had invested much of it in a range of exchange- traded funds, or ETFs, a relatively new financial innovation that was replacing mutual funds in the hearts and portfolios of many investors. An ETF, which can be bought or sold like a stock, attempts to track the price of a particular basket of assets--tech stocks, for instance, or high-yield bonds, or commodities ranging from wheat to gold to oil to natural gas.

The commodity ETFs were supposed to offer a hedge against equity losses, but in the crash of 2008 everything fell in tandem. Now it was early 2009, and Wolf was watching oil fall to $34 a barrel. That had to be an opportunity, he figured, so he called his Merrill broker and asked about the U.S. Oil Fund, an ETF designed to track the price of light, sweet crude. “This seems to be something good,” Wolf told the broker, and had him buy about $10,000 of USO.

What happened next didn't make sense. Wolf watched oil go up as predicted, yet USO kept going down. In February 2009, for example, crude rose 7.4 percent while USO fell 7.4 percent. What was going on?

A definition of perspective is as follows: 

“The appearance of things relative to one another as determined by their distance from the viewer.” 

Volatility in the market has more than doubled since mid-April as measured by the VIX index (measures the volatility of the S&P 500).  I’m sure that was something most investors knew without looking at VIX.  

According to the Bureau of Economic Analysis, real gross domestic product the output of goods and services  increased at an annual rate of 2.7 percent in the first quarter of 2010. In the fourth quarter of 2009, real GDP increased 5.6 percent.  There was a deceleration in real GDP in the first quarter primarily reflected decelerations in private inventory investment and in exports, a downturn in residential fixed investment, a deceleration in nonresidential fixed investment, and a larger decrease in state and local government spending that were partly offset by an acceleration in personal consumption expenditures.

Recent market declines followed reports that showed the U.S. pending-home sales plunged 30% in May right after the homebuyer tax credit expired, and that the Institute for Supply Management’s June manufacturing index dropped more than expected.  There have been further concerns about recent increase in jobs claims, European and U.S. debt concerns, and a very strong “June Gloom” in San Diego.  

On the flip side, value or contrarian investors will see these price declines as an opportunity to purchase lower priced stocks following the principle of buying low and selling high. And, there are countering signals in different sectors indicating stabilization and potential growth.

So the market is reflecting the concern that we may be in for a long haul recovery and potentially a double dip recession.  As an investor, these are no small matters as we continue to evaluate what to do with our hard earned money.  

What is the best thing to do today? Every day we are overwhelmed with ‘great’ ideas.  Gold, currencies, options, bonds, China, Brazil, plastics; you get the picture.  Also, friends usually have some ‘smart’ person they know who has the secret to beating the market consistently; their personal version of Bernie Madoff.  (continued)

One thing to remember is that the market is generally a leading indicator of the future state of the economy, and, sometimes it moves very quickly.  If investors plan on timing entry and exit of the market or any particular investment over the next thirty years, they will most likely replicate history and get much worse returns than the market is providing. Sometimes the ‘market’ reflects real issues that are cause for pessimism or optimism, sometimes they reflect quickly changing sentiment based on emotions.  And, it is very easy to hallucinate a pattern.  

Notice I said that the market is an indicator and not a crystal ball.  Research tells us that it is impossible to consistently read the tea leaves and take actionable investment decisions based on daily market movements.  Some of the best ways we can help create a winning strategy is to ensure that a sound investment game plan is in place for each investor situation.  This includes having options to access cash when needed if the stock market is down (bonds, cash), liquidity of investments (readily available), and the opportunity to grow your investments above inflation while only taking risk you will be compensated for (diversified equity portfolios with exposure to small and value stocks).

Let’s take a look at recent index performance numbers:

Table 1 (sources below)

Looking at Table 1, we can see that it has not been a very good quarter or year-to-date (YTD) period for stock indexes.  Interestingly, US REIT’s have done rather well, something most people might not have expected.

Medium maturity global markets have done the best in the bond space listed in Table 1 YTD, while medium maturity government bonds have performed the best for the 2nd quarter.  

Still, for the past year (‘One Year’ column), those investors holding equities have faired significantly better in all categories relative to bonds with the exception of the EAFE.  The obvious star performing asset class was REIT’s with this particular index returning 54.39% for the year.  Commodities have not faired so well over the last year.

If you think that today is feeling like a year ago (can you remember that far back?) when things seemed much worse than today, how many investors a year ago would have said that stocks would have been the safest place for their money for the next year? Not many.  But, many investors getting the right advice with a game plan in place understand that some of the principles I have touched on here allowed them to clarify their perspective and make intelligent decisions as opposed to throwing money at hope and chance.  Thus they have benefited during this time period.  And remember, all of my clients have cash and bond positions to varying degrees in a well diversified portfolio, and thus can benefit through market cycles.

So, am I predicting that this year will look the same? No. But, what I do know is that there have been many market cycles in the past with the common theme that there are investors that come out ahead and those that are losers.

Beware of chasing the consensus sentiment.  A recent example making a monkey out of investors was the consensus this spring that Europe was in worse shape than the U.S., and right on cue, European stocks outperformed U.S. stocks sharply. Legions of analysts doomed U.S. treasuries earlier this year, which of course went on to perform quite nicely.  Of note, my clients held both European stocks and U.S. Treasuries.

We may be in for another volatile and quite frankly confusing year for investors without good advice but if history is any indicator, when the stock market recovers, it will do so relatively quickly without a clear indication of why.  Since these recovery periods are critical to long term wealth creation, it is imperative that investors participate in recovery cycles which cannot be done if they are sitting on the sidelines with cash under their pillow.

Top Five Principles For Money You Cannot Afford To Lose

1. Hold only well diversified portfolios.

2. Only take risks that you will be compensated for.

3. Do not be forced into a position where you have to sell investments that have fallen in price.

4. Help ensure you have those top companies in your stock portfolio that will provide positive returns.  The strategy in doing so is critical to a positive or negative return.

5. Remember, no matter how much success someone has had in that past, how well educated they are, or how bright their smile, no one can predict the future. Plan for it.

The important thing to remember is that these principles are of no practical use unless implemented.  Losing money is easy, holding on to it and earning positive returns is the tough part. 

Report Entry Wednesday July 7th, 2010: A new day and one that yet again validates the research we base our investment strategies upon.  Strategies that not only draw on math and statistics from academia but on the nuances of behavioral science and the tendencies of investors to let emotion get in the way of intelligent decision making. The headline today from the Wall Street Journal (I did not see anyone predict this. OK, maybe I suggested it would happen.)

The Wall Street Journal, Wednesday July 7th, 2010

Dow Roars Past 10000 Again

Stocks surged as optimism grew for the approaching corporate-earnings season, pushing the Dow up 2.82% and through the 10000 mark for the first time since June 28.

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From a business perspective, our firm continues to add new clients.  Prior to coming to our firm, some of them had lost significant amounts wealth in risky investments that they could not afford to lose and now understand the need to do things differently.  Some of them have been confused by the marketing of sales people selling investment products and feel much more comfortable with an advisor held to a fiduciary standard making decisions based on research from some of the best minds in finance and economics. 

I believe that our experience and attention to detail go a long way in helping people become better investors and for those clients that are reading this, I know you do as well. Thank you for allowing me the opportunity to help you with your lives.

Lastly, as you may know, I accept clients on a referral only basis, and appreciate those friends, colleagues, and clients that have referred individuals, families, and business owners, that are important to them, to me.

Best and continued Success

This morning I woke up thinking about some emails I needed to get out, then scanned the Wall Street Journal. Oil spills, market volatility, political scandals, iPads, and military maneuverings hovered on the computer screen daring me to crawl into my hole.  I remembered how all this news can be daunting especially for clients who have put their trust in all of us here at Trovena, to help them with their lives.  My next thought was that I was sure everyone could use a break from all this and should have a nice three day weekend to enjoy.  What to do?  Beach, barbecue, time with family, I’m looking forward to it. 

So I will do all that, and enjoy it.  I will also spend a moment honoring my dear friend, roommate in flight school for two years, hero, thinker, leader, and jokester, Lt. Patrick K. Connor.  I cannot even scrape the surface of the unique bond we had as friends and fellow Naval Flight Officers.  But I can tell you we worked hard, played hard, and we were once young and invincible.  On February 2nd, 1991, Pat was shot down along with his pilot LCDR Barry T. Cook in their A6 Intruder in the Persian Gulf during a strike mission against Iraqi warships.  One of the highest honors I’ve had was the privilege of speaking about him at his memorial service.  The best figure I could paint of Patrick at that time was that of Marcus Aurelius.

Last year I had breakfast with his father, mother and brother.  It was a fine reunion, warm and stoic.  It brought home a couple of lessons that I have lived through.  You never know what will happen today, and whatever does happen, life will go on.  On that note, it’s best to be prepared for yourself and those you love.  It’s tempting to look at the news and get paralyzed with an overwhelming perception of doom and gloom but life will go on and we all can help create a positive outcome. So, I will enjoy this Memorial Day weekend, recharge the batteries, and get back to the business at hand on Tuesday; helping people create a positive outcome. I hope you do the same as well. 

If you own a business and employ 25 or fewer full time employees and pay an average salary of $50,000 or less, you may qualify for the Health Care Tax Credit under the recently passed Health Care Reform legislation.

The credit is available for this year, tax year 2010. To get more details and see if your business may qualify for this credit, go to the IRS information release dated yesterday, May 17, 2010.

What is Reasonable Compensation for S Corporation Shareholder-Employees?

Some Practical Guidance

The issue of what reasonable compensation for shareholder-employees of S corporations should be has been around for some time. Every time the IRS accepts a Form 2553, "Election by a Small Business Corporation," it sends a CP261, "Notice of Acceptance as an S Corporation." This acceptance letter specifically emphasized the requirement for shareholder-employees to be paid reasonable compensation for the service that they provide to the corporation. The IRS has increased its interest in this area over the past few years, and it is now more likely than ever that the adequacy of a shareholder-employee's salary could become the subject of an IRS audit.

For the rest of this story, go to "What is Reasonable Compensation for S Corporation Shareholder-Employees?"

Posted by Charles L Stanley CFP® who is a Wealth Manager with Trovena, LLC and the founder and editor of Capital Markets U.com Magazine

The Details:

I.    The €60 billion European Stabilization Mechanism is immediately available and can be drawn upon by the European Commission to lend to any of the 27 European member states facing financial difficulties. It has been called the Brussels-based IMF for Europe.

II.     The €440 billion pledged by euro-zone governments is not immediately available cash. Instead, a specially created off-balance-sheet entity will borrow the money as needed and then lend it out to the country or countries in trouble.

a.    The special entity’s borrowings will be guaranteed by euro-zone countries excluding the country asking for aid. This helps avoid the Maastricht prohibition on one state’s assuming the debt of another.

b.   The guarantees are to be arranged in a pro rata manner. In other words, Germany as the largest economy in the European Union would have the largest share of guarantees.

III. The IMF has said it will make €250 billion of loans available to Euro Zone countries. If tapped, these loans will come with the usual strings in terms of fiscal deficit reduction and economic restructuring.

IV. The ECB has agreed to buy up public and private debt, something it vehemently opposed as recently as last week. The ECB says it will sterilize these transactions meaning for every bond it purchases there will be an offsetting transaction that takes an equal amount of cash out of the financial system.

a.    These offsetting transactions may take one of two forms:

  i.   The ECB may sell higher quality, shorter duration assets (e.g., German Bundesbank bills) to be replace with longer duration lower quality assets (Greek 5-year bonds).

    ii.   The ECB, unlike the US Fed, may issue debt certificates to take cash out of the financial system.  

V.     The US Fed has reopened currency swap lines with the European Central Bank, the Bank of England, the Bank of Canada, the Bank of Japan, and the Swiss National Bank.

a.    The Fed had nearly $600 billion in currency swap lines open at the height of the global financial crisis in December 2008. These were closed down in February 2010 due to lack of demand.

b.   The Fed has reopened these lines but not said how much will be made available. The Fed earns interest on any open swap lines with foreign central banks. 

The Impact:

The €750 billion bailout package was well received by investors. Global equity markets rallied and bond yields fell in Greece, Portugal, Italy, and Spain. However, the bailout is thin on details and risks still remain in terms of authorization as much of the package is still dependent on individual parliamentary approvals. Moreover, the bailout is just one side of the equation. The Europe must get its fiscal house in order if the situation is to show sustained improvement.

By:

Tom Higgins, Chief Economist at Payden and Rygel

So, I peeked at the markets and scanned online for an explanation; here's what I found:

According to multiple sources, a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble [PG  60.75    -1.41  (-2.27%)   ], a component in the Dow. (CNBC's Jim Cramer noted suspicious price movement in P&G stock on air during the height of the market selloff.

(Full story here: Stocks Plunge As Investor Fears... )

Lesson learned: Make sure you have someone review important decisions before you push that mutton.   (editors note: he meant button)

For the rest of this story please go to Health care law's massive, hidden tax change.

This story was posted by Charles L Stanley CFP®. In addition to being one of Trovena's Wealth Managers, he is founder and editor of Capital Markets U.com Magazine.

The Senate Budget Committee-approved budget resolution does not make room for dividends tax rates to continue to be tied to capital gains rates after 2010, raising questions among some lawmakers about whether Democrats intend to allow the top effective tax rate on dividends to soar to more than 40 percent.

Since the Jobs and Growth Tax Relief Reconciliation Act of 2003 (Pub. L. No. 108-27), the maximum dividend and capital gains tax rates have been linked together at 15 percent. Unless Congress acts in the coming months, the capital gains tax rate will return to its pre-2003 level of 20 percent in 2011 and dividends will again be taxed at ordinary income tax rates of up to 39.6 percent.

When combined with the 3.8 percent surtax created in the Health Care and Education Reconciliation Act of 2010 (Pub. L. No. 111-152), the effective top tax rate on dividends would rise to 43.4 percent in 2013.

For the rest of this article, go to Senate Budget Raises Questions if Dividends Rates Will Top 40 Percent

- Christopher

Deaths Highlight Estate Tax Question (Dow Jones)

Estate-tax questions are mounting along with the ranks of very wealthy people who have died in 2010 during the one-year gap in the federal tax.
The recent death of Texas billionaire Dan Duncan puts a point on some of the issues, including the central one: whether Congress is growing more or less likely to impose a retroactive tax as huge estates come into play in the meantime.

Duncan, who died last month at age 77, is perhaps the first billionaire to die this year. Reported by Forbes to be the 74th-richest person in the world and the wealthiest man in Houston, the pipeline mogul had a $9 billion estate. He headed three publicly traded companies, Enterprise Products Partners LP, Enterprise GP Holdings LP and Duncan Energy Partners LP.