To Euro or Not to Euro

noreply@fostergrp.com (Ross Polking) — Wed, 01 Feb 2012 15:54:00 CDT

The Euro, at its inception in 1999, was looked upon favorably by most. This shared currency among the countries belonging to the European Union was thought to be a fast-track to a stronger economy for the continent, improved collaboration throughout the region, porous trade borders and increased efficiency in tourist spending. Now, a decade later, we find several countries teetering on the brink of bankruptcy, another few in troubled waters, the world watching and markets whipsawing.

Where did this seemingly "great" idea go so wrong? Simple; shared monetary policy but no corresponding shared fiscal policy. They agreed on what to use, but not how to do so responsibly. The Euro was an invitation to mis-manage spending rather than drive economic development; doomed to fail from the start. The little guys (Greece, Portugal, Ireland, etc.) obviously saw this as an opportunity to play with the big boys. Keep in mind the biggest of those boys – Britain – declined at the inception to participate in the Euro game. Recently, they again declined to participate in a treaty to more closely align fiscal measures. They are taking a bad rap from socialist societies with historical unemployment rates averaging over 8%, in order to protect their sovereignty and not be brought down by other countries’ irresponsibility. Hard to blame them, but it certainly puts a crimp on resolving the problem in the short-term.

While the world watches, and to some degree offers their helping hand, Europe may continue to dictate market volatility over the coming weeks and months. Many investors find this reason enough to exclude international equity exposure from their portfolio. Many of those same investors found the economic downturn in 2008 to be reason to detach from stock exposure, effectively locking in losses and missing a historic rally in prices that began in early 2009. Volatility is a fact of life as an equity investor. Markets are forward-looking; they have already priced into equities an assumed outcome of the European mess with all public information currently available.

America has learned some lessons over the past few years. Hopefully, we’ll stay attuned to those and maintain our changed behaviors. Ideally, Europe will do the same as they sort out their collective mess. As investors, we need to conduct our own introspection and ensure that we’re learning as well . . . not to over-react to the perceived incompetence of governments world-wide. Equity markets will go up, and down, and repeat. That's my bold prediction for the year. Just remember - when they go down, those of us who choose to maintain our exposure are being offered more in future expected returns for putting our capital at risk. Stay diversified.

Tax---One of Life's Guarantees

noreply@fostergrp.com (Ross Polking) — Thu, 05 Jan 2012 12:41:00 CDT

Tax mitigation, and thus wealth enhancement, is a primary concern of the affluent. The infinite uncertainty of pending tax law does nothing to ease this strife. Two particular pieces of legislation being hotly debated center on the payroll tax deduction and so-called "millionaires' tax." As 2011 came to a close, Congress implemented a temporary extension (through February) of the reduction in employee contributions to Social Security, maintaining a 4.2% rate vs. the original 6.2%. One of the many proposals floating around to fund this cut beyond February is a surcharge on incomes above $1 million, championed by several Democratic senators. While this idea faces an uphill battle from Republicans, the temporary extension is being justified on Uncle Sam's balance sheet via an increase in mortgage lending fees. Moral of the story: Tax policy will remain an enigma as usual, and our lawmakers will most certainly begin throwing punches once back in Washington later this month.

Political maneuvering will drive the ultimate fate of both items, especially in light of this being an election year. While these pieces of tax legislation serve only as a snippet of the Congressionally-supported and IRS-enforced complexities we are faced with as investors, it serves as a good reminder to worry about what you can control . . . saving as much as possible, remaining diversified, avoiding debt, and using your American right to speak with your vote in next November’s elections.

Power of the Elf

noreply@fostergrp.com (Ross Polking) — Fri, 16 Dec 2011 15:24:00 CDT

Motivation comes from many sources, elves notwithstanding. This time of year, children have a particular interest in the potential treasures awaiting them under the Christmas tree. To ensure their wish list objectives are met in full, kids put on their West Point-finest behavior and march in line like never before.

The latest phenomenon to ensure this order-following continues throughout the month of December is the arrival of the Elf on the Shelf. If you’re unfamiliar, check it out here: www.elfontheshelf.com. With this Elf comes an element of mystery, fear, respect, and an almost guaranteed "yes-sir, yes ma'am" household. So, the billion-dollar industry of books coaching parents on how to garner obedience from their children has now been rendered useless...apparently. All you need is the Elf. Yep.

Just like kids, we adults know certain behaviors are required when it comes to planning for the future. The idea of a successful retirement serves as our Elf on the Shelf, driving certain elements of fear, motivation and discipline into our planning and strategizing. The key with the Elf, though, is that it must be visible. You have to know that Santa's helper is ever-present, always watching; otherwise, you assume you can get away with anything. If your plan isn’t written down, reviewed often and revised as needed, the likelihood of realizing your long-term goals decreases dramatically. If you aim at nothing, you will hit it every time. As the Elf purportedly says (or insinuates, because I've never heard him talk) . . . "Behave, or I'll tell Santa."

College Savings Iowa

noreply@fostergrp.com (Martha Gribble) — Fri, 16 Dec 2011 14:24:00 CDT

College Savings Iowa – What’s the Maximum Deductible Limit? Also, Some Changes are Coming!

For 2011, you may deduct from your Adjusted Gross Income a maximum contribution to College Savings Iowa of $2,865 per beneficiary on your State of Iowa income tax return. If you’re married, your spouse may contribute that amount as well. There’s still time left to contribute. Make sure your check is postmarked or your automatic deposit is posted no later than December 31, 2011.

If you’re planning for 2012, the maximum allowable deduction will be $2,975 per beneficiary. That’s right; 2 parents, 2 kids, 4 accounts - a total of $11,900 of allowable deductions! Not to mention a great way to accumulate tax-deferred growth for college. Remember, this is for contributions made January 1, 2012 or later.

Oh, and you might be interested to know that College Savings Iowa is making some changes to available investment options which may affect your existing accounts. If your accounts are invested in the age-based tracks, their objective will now be included in their name to give you a better idea of the investment style of each track.

More significant to note: the age-based tracks will increase their international stock exposure from 20% to 30% of the stock portion of each portfolio. While some of the underlying holdings will change as well, they’ll continue to have well-diversified domestic and international stock and bond holdings, all managed by Vanguard Funds. Fund expenses are not expected to increase. If you have existing accounts invested in an age-based track, you won’t need to take any action; the changes will happen automatically. If you’ve created a custom portfolio from the individual funds, you might consider the new international fund option, Total International Stock Index Portfolio, to see if it’s suitable as part of your allocation.

Complete details can be found at:

https://a248.e.akamai.net/f/248/21630/7d/im.uprinv.com/rc/sr2/ia/newsletter_supplement.pdf

Below is a summary of name and allocation changes for the track options:

Needs vs Wants

noreply@fostergrp.com (Ross Polking) — Wed, 30 Nov 2011 07:12:00 CDT

In our ever-evolving and never-ending personal battle of needs vs. wants, author Carl Richards frames up the issue in a style much better than I can. Enjoy and relate...

http://bucks.blogs.nytimes.com/2011/10/17/the-struggle-to-define-what-we-truly-need/

So What's in an Allocation ?

noreply@fostergrp.com (Martha Gribble) — Tue, 29 Nov 2011 15:48:00 CDT

An agenda topic in many client meetings is portfolio allocation. Generally, when we talk about allocation, we’re referring to the percentage of equities (stocks or stock-owning mutual funds) and the percentage of fixed income (bonds or bond-owning mutual funds) held in your portfolio. We’re asking if the mix you currently hold remains appropriate or if it should be changed for some reason. Perhaps you plan to retire sooner than you had thought or you’re receiving an unexpected inheritance.

Why is allocation important? Because it’s the largest single factor determining the risk of your portfolio. We want you to participate in equity markets for long term-growth and, ideally, have enough fixed income in your portfolio so that any necessary distributions will not require you to sell equities in a down market cycle. Planned selling of equities to rebalance your portfolio or to intentionally realize a gain makes sense when managing a portfolio, but being forced to sell equities when their values are depressed is not a good thing. Having adequate funds available in short-term, high-quality fixed income funds, allows needed distributions to be taken from that portion of your portfolio, giving equity positions time to recover.

Sometimes (i.e., late 2008 into early 2009) equities markets experience negative cycles lasting several months or as long as several years. When this happens, it’s pretty uncomfortable for most investors. Having been through this multiple times in my career (that’s right, I’m old!) I can tell you that a significant percentage of folks who are comfortable with high equity exposure most of the time (i.e. when equity markets are positive) feel much less confident in these down market cycles. No one likes watching their portfolio value decline.

A well-thought-out allocation devoting plenty of funds to short term, high quality fixed income positions that will plug away and hold their value, ready to come to your aid should you need cash, allows you to more easily stomach the lurches of a negative equity market period. How much should you devote to these types of positions? That differs for each investor and depends on a number of factors including your age, how long you plan to work, other financial resources you may have in addition to your portfolio and what we refer to as your "sleep well factor."

As a rule of thumb, here is a broad generalization: If you are within five years of retirement, work toward moving your allocation so that at retirement you have about 8 years of planned distributions held in fixed income. Don’t assume more risk than necessary. In other words, if you have a sizeable portfolio - more than you’ll reasonably need for lifestyle expenses during your lifetime - you may not need to take much risk, so why would you want to do so?

If you’re just beginning your investing career and have a long time until you plan to need distributions, say 15 to 20 years or more, a higher level of equity exposure may be appropriate. You might be comfortable investing 70, 80 or even as much as 90% of your portfolio in equities. This might be appropriate for you, assuming you sleep well with your portfolio invested heavily in equities, even when the stock market is declining for months on end. Cautionary Note: you won’t accurately understand your "sleep well factor" until you’ve been through a down market cycle or two. It’s a factor based on emotion, not intellect or reason and - trust me on this - you are not immune.

If you haven’t had an allocation discussion with your advisor recently, think about adding it to the agenda of your next meeting to make certain the allocation you have is appropriate for your future. If not, together you can decide what needs to change.

Generosity with Intention

noreply@fostergrp.com (Martha Gribble) — Tue, 29 Nov 2011 14:58:00 CDT

It’s that time of year again! Your mail box is filling with requests for donations. Maybe your phone is ringing or your neighbor is at the door asking for a donation for his favorite organization. How does that make you feel?

Do you have an intentional giving strategy for your family or, like so many, do you respond to requests for contributions based on who approaches you or what comes in your mailbox, and then find that you have little left to give to causes you’d really like to support? Planned giving can provide some structure to your gifts and allow you to feel more intentional about your choices. It’s really not so difficult and step one is to identify an annual giving amount - an estimate is ok - and it becomes a starting point allowing you to use your dollars in a manner that provides the benefit where you hope to have impact.

Step two is the fun part; deciding who or which organizations will receive contributions, how much and when. Including your family in this process makes charitable giving a family affair. Whether your children are youngsters or adults with children of their own, it’s never too early or too late to start intentional family giving conversations and to reap the rewards of shared strategies. Allowing everyone a voice in the use of the funds can establish a pattern of giving for your family members for the future and allow you to use your charitable dollars in a way that aligns with your personal beliefs and the causes that are dear to your heart and those of your family members. It can also lead to some pretty neat conversations on why you support each organization or individual you choose and the impact you would like to have. It can also be a way to connect the past to the present … and to the future, if you are honoring a loved one by contributing to a cause that was influential in their life.

You might consider a family activity giving of your time together to benefit an organization that your family would like to support.

So, how do you respond to that request that doesn’t fit your giving strategy for this year? Communicating that you have a family giving plan and that the funds for this year are already committed is a pretty strong reply and, in my experience, is usually respected and seen as a positive response. If it’s a cause of interest to you, you might say you will consider a gift next year.

We all tend to be a little more focused on gratitude around Thanksgiving and that makes this a perfect time to think about our year-end giving as well as planning for the year ahead. If you have thoughts to share on this subject, I would love to hear from you!

Canary in the Coal Mine

noreply@fostergrp.com (Brad Rempe) — Fri, 11 Nov 2011 10:09:00 CDT

Is Greece the world’s “Canary in the coal mine?”

There was a time when caged canaries were used in coal mining as sacrificial warning signs of the presence of toxic gases. When the canaries stopped singing, the miners knew it was time to get out.

While Greece has been receiving much of the attention, the size of Greece and magnitude of their potential default doesn’t seem to be in line with the markets’ response of late. In his blog, linked below, Scott Grannis discusses this issue and suggests the magnitude of recent market reactions to the back-and-forth of a potential Greek default may be a realization that many other governments around the world are traveling down the same road.

Regardless of your political leaning, there is a significant silver lining to this issue. It’s the broad realization that we have a problem and something needs to change. There have been issues in the past which America has solved and dark periods from which we’ve emerged, and I am a firm believer it can happen again. Admittedly, the road to fiscal recovery may be long and winding, but as the saying goes, “The first step is admitting you have a problem.”

http://scottgrannis.blogspot.com/2011/11/why-is-greek-tail-wagging-global-dog.html

Policy Update

noreply@fostergrp.com (Jonathan Evans) — Thu, 10 Nov 2011 12:38:00 CDT

Policy Update

Last week, you should have received a letter or e-mail from us, letting you know about modifications to a couple of our internal procedures. The purpose of these changes was first to continue protecting the financial interest of our clients and, second, to comply with regulatory mandates by the Securities and Exchange Commission (SEC). At the risk of over- communicating, we thought it might be helpful to summarize these changes on our blog as well.

Client Verification

This change applies to releasing any type of account information, or making any changes to an existing account. Prior to taking any action, we will be asking you to verify your identify. Any of the following pieces of information will satisfy this requirement:

The Schwab account number and account registration (the way the account is
titled)
The last four digits of your Social Security number
Your date of birth
The address of record for the account

This is a way for us to ensure that the person making the request is actually the account holder. While this is a common procedure among most financial service providers today, we understand it may be a bit of a hassle. Remember that it’s designed to protect you against someone fraudulently gaining access to your account.

Distribution Requests

The second change involves requesting distributions or moving assets from an account. Legally, these requests can only be made by the account holder himself or herself. We will, therefore, require that the account holder be on the phone to make the request. A spouse or other family member will not be able make a request on behalf of another account holder.

In order for a non-account holder to make changes or initiate asset movement from an account where they’re not listed as an account holder, a full Power of Attorney for that account will be required. It’s important to note that this document must be drafted by the client’s attorney.

Again, we do realize these changes may be an inconvenience for some clients, and we apologize in advance for that. We are committed to doing all we can to make the implementation and application of these new procedures as seamless, and painless, as possible.

If you’d like more information, please give us a call and we’ll be glad to talk through this

Emotional Roller Coaster

noreply@fostergrp.com (Ross Polking) — Mon, 31 Oct 2011 09:00:00 CDT

We have a children’s book in our house titled, “The Way I Feel” that encompasses the range of emotions kids seemingly go through on a routine basis; happy, sad, excited, angry, fearful. Ironically, I think we adults experience these same emotions in our daily lives, perhaps even more than our kids.

The current renewed volatility in financial markets is reviving unwelcome feelings among many investors – ultimately creating a sense of powerlessness. The sovereign debt strains in the US and Europe, renewed worries over financial institutions and fears of another recession are leading market participants to apply a greater discount to risky assets. It’s reminiscent of the fall of 2008 and early 2009, when the collapse of Lehman Brothers and the sub-prime mortgage crisis triggered a global market correction. This time, however, the focus of concern has turned from the private sector to public-sector balance sheets. The personified markets are expressing their uncertainty and anxiety!

As for what happens next, no one knows for sure; that is the nature of risk. But there are a few points investors can keep in mind to make living with this volatility more bearable:

Markets are unpredictable and do not always react the way “experts” predict they will. The recent downgrade by Standard & Poor's of the US government's credit rating actually led to a strengthening in US Treasury bonds.

Quitting equity markets at a time like this is like running away from a sale. Prices have been discounted to reflect higher risk, which is another way of saying future expected returns are higher. And while the media headlines proclaim, "Investors are dumping stocks," remember someone is buying them; there is no such thing as “orphan shares.”

Market recoveries can happen as abruptly as did the prior correction. Recall that in March 2009 - when market sentiment was last this bad - the S&P 500 reversed course and put up seven consecutive months of gains totaling almost 80%. This is not to predict that a similarly shaped recovery is imminent now. Rather, it’s a reminder of the danger, for long-term investors, of turning paper losses into real ones and paying for the risk without waiting around for the recovery.

Markets and economies are different things. The world economy is forever changing, and new forces are replacing old ones. The IMF noted in its April 2011 World Economic Outlook that while advanced economies seek to repair public and private balance sheets, emerging market economies are thriving. A globally-diversified portfolio takes account of these shifts.

Nothing lasts forever. Just as smart investors temper their enthusiasm during booms, they maintain a degree of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes.

Market volatility is worrisome. The feelings generated are completely understandable. But through discipline, diversification, and understanding how markets work, the ride can be bearable. At some point, value will re-emerge, appetite for risk will re-awaken and, for those who acknowledged their emotions without acting on them, relief will replace anxiety.

Here's a Thought-Disconnect and Power Up

noreply@fostergrp.com (Martha Gribble) — Tue, 25 Oct 2011 08:41:00 CDT

We‘re all barraged by TV, the internet, e-mail, texts and tweets. New vehicles for interacting are constantly being introduced; we’re assaulted from all directions. Especially disconcerting are the messages bombarding us with the information that the stock market is going down or up, and suggesting we should take action - now.

For that matter, it’s not just messages about the stock market, it’s concern about political action or inaction, social issues, sports teams and celebrities. You name it, if it’s of public interest, our attention is constantly being demanded to keep us “informed.”

But what if you were to disconnect from the sources demanding your attention on matters where you likely have no influence and chose, instead, to intentionally connect where you do have influence? How about giving a fraction of your attention and time to the things that matter to you personally? Let’s face it, today’s newsworthy political candidate who says or does something ridiculous, the Housewives of Wherever and someone’s favorite sports player will continue to have every action publicized as long as it causes sensationalism. You can always catch up on any of that “news” if you really care to, but take a bit of time away from it and you might find you really don’t care.

I hate to break the news to you, but most of us really don’t have influence over much, if any, of the above. I know that hurts, but it’s true. The good news is that you can be informed AND have a life of your own as well.

Are you the person who is in constant contact by phone or internet; checking messages during conversations with family, even during meals and subtly under the table, at meetings and gatherings? Guess what? You’re not fooling anyone. Everyone sees and knows your behavior, even your kids, or should I say, especially your kids. What behavior are you modeling? What’s really important and what or who really has your attention?

Try disconnecting. Try it for 60 minutes a day if you’re strong, 30 if you’re not and just 15 if you’re a real wimp. Be intentional and do it every day for, say . . . . a week. The idea is to connect where you do have influence, like your spouse, your kids, your employees or coworkers - maybe most importantly, yourself. That’s right, how are you doing? What do you want to accomplish? How’s that going for you? How do you make a difference? Are you burning out or supercharged? Take some time to find your real power.

Debt

noreply@fostergrp.com (Joe Bantz) — Wed, 19 Oct 2011 10:00:00 CDT

Good news!!

I was 14 when I fell in love for the first time - with a sweet, 20-year old riding lawn mower! With keen business sense, I approached my dad with an offer: "I'll mow our lawn all summer AND pay you back if you'll ‘front me the money' for the mower." I had visions of riches as we closed the deal, and a week later I was proudly rolling down our street to my first lawn-cutting job. But as I mowed lawn after lawn (including ours) through the summer, I got weary of handing over all my profits to my dad. After two months, I celebrated my last payment ... and graduated with my "Debt Stinks" diploma from the School of the Real World.

I've thought of that summer often, particularly over the last few years. While there are often excellent, practical reasons for borrowing money, it's nearly always true that a person OUT of debt is in a financially stronger position than someone who still owes others money. We see this playing out in significant ways as our nation's leaders debate our national debt.

Of course, for those with old-fashioned, Midwest values, this may be nothing new. Research recently released ranked average indebtedness (excluding student debt) by state, and Iowa and Nebraska were both in the top ten least-indebted states. You can read the article, and see the rankings here.

What does this mean for you? Work with your advisor to develop a strategy to eliminate the liabilities from your balance sheet, then be sure to implement the strategy with automated payments.
And if you fall in love with a sweet-looking antique lawn mower ... pay with cash!

NOTE: [[[Link address: http://moneywatch.bnet.com/saving-money/blog/devil-details/debt-in-america-most-least-indebted-states/4899/]]]

What Cancer Has Taught Me

noreply@fostergrp.com (Jerry Foster) — Tue, 18 Oct 2011 10:46:00 CDT

We have all had one of those experiences or defining moments that changed the way we look at life. Fifteen months ago, my world was rocked and changed forever when I was diagnosed with a rare form of cancer. While navigating through many decisions about my health, I also found myself thinking about, and confirming, the things I believe in and value the most. While not exhaustive, here are a few things I have confirmed:

People matter most. There are so many things in life that occupy my mind and become the object of my pursuits. Most are good things and deserve my attention. But when push comes to shove, it’s my family and friends who show up, stand beside me and support me through the tough times. During these past few months, there were many people who inspired me to keep fighting. While I need to be responsible for investing in my career, retirement and financial well-being, all of these should take a back seat to investing in people.

Having a plan is critical. In a matter of hours, or even minutes, I was thrust into a circumstance of urgency. There wasn't panic, because I knew I had my "house in order." I had completed my planning, but found myself thinking about issues that I had not considered. Things like; did my wife know the passwords to key account information? Did she know where to find the key to the safety deposit box? Would my files be easy for my executor to go through? It pushed me to take my planning to another level and to consider all the "what ifs," and minimize as many uncertainties as possible.

My most trusted advisors have my ear and most influence my decision-making. When the news of cancer hit, I found myself in an autopilot mode of operation. There was so much to think about; so many things to consider. I could only really hear the advice of the people who had already earned my trust; my wife and family, of course, my accountability partners of thirty years and my financial advisors who knew my circumstances and understood my wishes (even if they were a bit cloudy for me while dealing with the shock of this news). It confirmed for me the importance of having trusted advisors in place before being faced with uncertainty.

I will leave a legacy in this world. The question I need to ask myself is, “Will it be the one I want?” Facing the certainty of my mortality caused me to think about the people I care about the most. Each of these relationships deserved the very best from me. Were they getting my best? Were there other things in life that had edged above them on my priority list? It doesn't happen intentionally; life just has a way of squeezing us and misappropriating our attentions. I heard it said once, “When death is certain, life becomes rich.” I wasn't necessarily facing death at that moment, but it revealed to me what I obviously knew; that I would die someday. Being told you have cancer causes you to look at mortality differently. I have learned over this past year to live each day as if it were my last. It has forced me to pay attention to things that are most important. It has helped me to be much more strategic and intentional in investing in my legacy. What I have come to realize is that the legacy I leave will be dependent on the life I am living now.

I am not in control. Though I live my life with intentionality, there are some things I just can't control. This is the hardest lesson of all, because my human nature wants to control every aspect of my life and the circumstances in which I live. When the doctor gave me the diagnosis of cancer and an uncertain prognosis, it was truly the first time in my life that I felt totally out of control. This is inevitable for each of us, so it makes sense that we mentally and emotionally prepare ourselves for those times when all we can do is embrace the moment and learn the valuable lessons of difficult circumstances. Coming to grips with this reality that I am not in control has helped me to start living with a new level of abandonment and joy.

My education about living life with cancer is far from over, but I can honestly say that this past year has been rich beyond measure. I am looking forward to new lessons about living life with passion in the days, months and years to come.

An Excuse to Relax

noreply@fostergrp.com (Ross Polking) — Wed, 21 Sep 2011 12:10:00 CDT

There’s a thought in the world of exercise science that it’s good for the body, once in a while, to actually get "out of shape." In order to continually improve and not plateau your level of fitness, it’s thought that the body needs to “reset” itself. Think of a computer . . . every so often your computer starts running slow, acts in odd ways, makes you want to punch it, and the list goes on. Often, the fix is just a matter of rebooting. Same goes with our bodies - a little extended rest and then back to sweating can be a useful strategy to continue increasing your level of fitness.

The investment world tends to work this way as well. Financial markets actually need bad days. Yep, go back and read that part again. Actually - let's all say it together and then hug. Financial markets actually need bad days. If there were no bad days, weeks, months, or years, long-term returns would be drastically lower. Without those down periods, investors would have no reason to demand higher return potential for supplying their capital and putting it at risk.

Moral of the story? Accept the bad days gladly. Resolve to stick it out. Avoid the timing game. Most who succumb to their fight-or-flight response ultimately experience frustration and regret, incur unnecessary costs and face lost opportunities. History shows that those who do endure, and hang on as things reset, will benefit in the long run.

Expected Return in a Bad Economy

noreply@fostergrp.com (Kent Kramer) — Thu, 15 Sep 2011 07:45:00 CDT

Unemployment in the United States is still over 9%. Growth of the global economy is slowing, according to various international GDP measures. European banks are mired in what looks like a liquidity crisis due to bad sovereign debt and . . . well, you're familiar with the list. In response, stock markets seem to be zigging and zagging lower rather than higher. So, what kind of return should investors "expect" from their stock portfolios in the face of such bad economic news?

Professors Eugene Fama (University of Chicago Booth School of Business) and Kenneth French (Tuck School of Business at Dartmouth College) answered this question in a short blog post dated March 11, 2009, which, in hindsight, was within days of "the" market low point following the 2007-2008 financial crisis. At the time, they wrote this:

"The market has declined sharply in response to rough times and forecasts of future rough times. The decline in market prices combines two effects: (i) lower current and expected future profits, and (ii) higher discount rates for the expected future profits. The discount rate, in turn, has increased because uncertainty about future profits (in other words, risk) has increased and, apparently, because investors have become more risk averse. Higher discount rates for expected profits translate into higher expected stock returns.

In short, the two of us believe that the expected return on stocks is currently high. But beware: the high expected return is compensation for the risks associated with different possible outcomes. If the quite pessimistic assessments of future economic performance built into current market prices turn out to be right (which is our best single guess), realized returns will be high. In other words, we will get the currently high expected return if the market's pessimistic expectations of future economic performance are realized. On the positive side, there is a substantial chance that the current assessments of future economic performance built into market prices turn out to be too pessimistic. If so, realized returns will be even higher than expected. But there is also a substantial chance that the current quite pessimistic assessments of economic performance built into market prices turn out to be too optimistic. In that case realized returns will be low, perhaps quite low. This is always the general nature of the risks in stock market investing. The story is more poignant at the moment because risk is so high."*

Professors Fama and French make three critical observations worth re-reading and considering in today's economic environment. The first is that investors have responded to bad economic news by demanding a higher return for stock investments. This demand for higher return (what Fama and French refer to as the "discount rate") results in lower prices being paid for a company's expected future earnings. Investors, as a group, currently think those earnings are at greater risk of declining. Interestingly, in 2011 so far, actual corporate earnings have been relatively strong.

The second key point is captured in the statement, "In short, the two of us believe that the expected return on stocks is currently high." Why? Neither professor believed then (or now) in market timing or in making predictions. They have written extensively about why these practices should not be trusted. What they were saying is that the decline in prices reflects a de facto increase in the risk premium demanded by investors. Any positive return from these lower prices, mathematically, must be greater than if the stock price rose from a previously higher price. For example an investor's percentage return on a stock rising from $10 to $20 is higher than it is on an increase from $15 to $20. In both cases, the stock rises to $20, but the investor who bought (or held) at $10 will get a 100% return while the investor who bought (or buys) at $15 will "only" receive a 33% return on investment.

Finally, their perspective on risk is extremely important. Risk does not guarantee higher return, but as risk increases, investors require the possibility of a higher return. Fama and French envisioned three possible outcomes in 2009; the expected outcome, the better-than-expected outcome, and the worse-than-expected outcome. None could then, or now, be guaranteed. Current market prices factor in the pessimistic economic news that is known by the universe of investors. So, when the professors say that the higher rate of return is their "single best guess", they are not suggesting they know more than the market. They are, rather, observing that this is now what the market expects. As a result, the market of all buyers and sellers was requiring lower prices for equities in March of 2009 than in late 2007. This same observation holds today in September 2011 relative to stock prices in June 2011.

In retrospect, 2009 and 2010 were years of very high returns for stocks around the world. This growth reversed direction in July 2011 as the European banking crisis became a larger issue and world economic growth slowed. Both of these circumstances increased the perceived risk of investing in stocks, driving prices lower. At today's lower price, expected returns have again risen. The risks are real, but patient investors have been rewarded in the past for participating in stock markets and it is our expectation that they will be rewarded in the future as well.

*http://www.dimensional.com/famafrench/2009/03/qa-expected-return-in-a-bad-economy.html

When 0 + 0 = 4.3% - How You Can Be An Investment Alchemist

noreply@fostergrp.com (Kent Kramer) — Tue, 06 Sep 2011 13:56:00 CDT

Alchemists, according to legend, were both scientists and magicians, able to turn desert sand into gold. They took something plentiful, and of little or no value, and transformed it into the most valuable commodity of the age.

A July/August 2011 Financial Analysts Journal article* by University of Illinois Professor Scott Willenbrock references a thought-provoking example of what seems like modern-day alchemy; what he calls the "Diversification Return" that can be realized through the practice of portfolio rebalancing. He cites the result of a simulation by researchers Erb and Harvey who created 40 hypothetical uncorrelated assets, each with an average annual return of 0%, but a standard deviation of 30%. You could say that these 40 investment assets were "sand," in that they had no positive long-term return. Willenbrock summarizes their findings this way:

"Running 10,000 simulations over 45 years, they found an equally-weighted, rebalanced portfolio had an average return of 4.3%. They dubbed this result, "turning water into wine." *

It was portfolio alchemy! Each portfolio asset had a total return of 0% (e.g., worthless sand) for the period. But the portfolio of all 40 assets combined produced a positive return of 4.3% (e.g., gold). How is this possible? Regular rebalancing is the answer.

Foster Group has consistently advised clients to allow for the regular rebalancing of their investment portfolios regardless of the near-term investment environment. The basic premise of rebalancing is that investors have increased success when they "buy low" and "sell high," adopting a consistently dispassionate, almost contrarian viewpoint.

Here's an example of how it worked in the very volatile two-year period ended December 31, 2010. If the investor had simply owned the S&P 500 for the period, they would have experienced an average annual return of -2.86%. Had the investor invested only in US small companies, represented by the Russell 2000 index, they would have experienced a 2.22% annual return. If a third investor had only held US real estate investment trusts, as represented by the Dow Jones US REIT index, their return would have netted an annualized 0.01%. A fourth investor, very cautiously invested in only short-term US Treasury bills, would have been rewarded with a 0.63% annual return.

But a fifth investor - the "portfolio alchemist"- who utilized regular rebalancing, could have seen their return for the period, using these same more or less "sandy" assets, grow by 2.68%. How? If the fifth investor had simply held these assets in equal weights (25 cents of each dollar to each asset class), and every six months "rebalanced" back to the 25% target, selling the assets that grew and buying the assets that declined, the rebalancing "alchemy" could take place. This "alchemy" provided a better result than any of the individual investments over the 24-month period.

Additionally, the rebalanced portfolio exceeded a simple buy-and-hold approach where an investor took a 25% position in each of the assets in 2008, making no further buys or sells over the two-year period. The buy-and-hold portfolio would have produced a 0.04% annualized return vs. the 2.68% return of the rebalanced portfolio.

Admittedly, testing portfolios in differing time periods with different rebalancing intervals yields a variety of results. But the principle confirming the potential value of rebalancing has been shown to hold in most all investment environments and time periods where the outcome of what will turn out to be the “best” investment can only be known in retrospect. In today's uncertain financial markets, investors can be tempted to hold onto every last penny of bonds and cash in the face of very volatile, often declining, equity markets. However, long-term portfolio success can be enhanced by the regular practice of rebalancing to the Investment Policy allocation suitable to the individual investor’s circumstances and goals. Yale University Endowment portfolio director David Swensen calls it, “the rebalancing bonus." Willenbrock describes it as the "free dessert" of portfolio management. Either way, it works a bit like the legendary alchemy of old.

*Willenbrock, Scott. 2011. “Diversification Return, Portfolio Rebalancing, and the Commodity Return Puzzle.” Financial Analysts Journal, vol. 67, no. 4 (July/August): 42-49

Look Who's Buying

noreply@fostergrp.com (Ross Polking) — Tue, 23 Aug 2011 14:51:00 CDT

Yearning for any bit of positive news within the madness that is Wall Street these days? Ed Green and Kent Kramer have been providing excellent perspective on the recent volatility, so if you have yet to read their contributions, check them out (link).

Here's a not-so-well-publicized anecdote that may help you avoid further bouts of hyperventilation…

Seems many corporate executives are recognizing opportunity amid the recent market freefall. As of mid-August, these higher-ups have individually purchased, or increased corporate buybacks of, their own company’s stock to the tune of $900 million. That is the most for a single month since insiders bought $1 billion in stock in March 2009, "ironically” coinciding with the bottom of the last bear market. Thirty-five insiders thus far have each purchased in excess of $1 million of their company’s stock, and U.S. companies have already bought back more in share value this year (over $300 billion) than they did for all of 2010.

If you were an owner or executive of a company and lacked complete confidence that its share price would return to previous levels, would you have any reason to buy back shares now held by the public? Since you would theoretically be as knowledgeable as anyone concerning the strength and viability of your organization both short- and long-term, this would be a rather informed buying decision reflecting some positive intuition.

Keep this tidbit in mind to add some balance among the 359 other "newsworthy" headlines you're sure to see and hear this week, suggesting that doom and gloom is here to stay.

Markets under the Magnifying Glass

noreply@fostergrp.com (Kent Kramer) — Thu, 18 Aug 2011 12:37:00 CDT

Terror in the Markets! The latest "B" Movie?

The 1954 "B" movie, "Them" is based on the premise that irradiated ants in New Mexico grow to an enormous size and then threaten to end civilization. While I have not seen the movie (and who really needs to?), the basis for many "B" horror movies is to take relatively small threats in ordinary life and put them under the magnifying glass so that they look truly terrifying on the big screen.

The US and European stock markets opened to an immediate sell-off this morning, down over 4% in the first 60 minutes of trading on US exchanges. Why was there so much volatility? It's usually hard to say if there was any one thing caused the initial drop, but fear usually magnifies whatever actual problems there may be. The Labor department released data showing initial jobless claims rising by 9,000 to 408,000, though the four-week moving average dropped to 402,500; both relatively small changes. Inflation numbers were mixed, slightly higher when including gasoline, but lower than expected when excluding food and energy.

Of course, European banks and sovereign debt are still looming issues, but S&P did reiterate France's AAA rating, still higher than the US. However, 10-year US Treasury yields dropped below 2% briefly this morning, showing that investors, if not S&P, still view US government debt to be of the highest quality. What will actually happen in the Euro-zone is still uncertain; nothing new there, either.

So, today's economic numbers are not improving, but neither did they fall off the cliff overnight. The circumstances are still as uncertain economically and politically today as they were yesterday.

Markets Under the Magnifying Glass

I think most people recognized long ago that we are facing a host of difficult circumstances globally; problems that will not be resolved quickly. Most of these issues have been known for many months, if not years. The day-to-day and monthly numbers describing these problems are not dramatically changing. So, the ongoing problems remain large and real, but these dramatic market reactions to short-term readings are like putting on magnifying glasses while looking at ants and then acting as though dramatically newer and larger threats exist, that didn't the day before. This magnifying glass point of view causes some participants in equity markets to make and re-make what should be five- and ten-year decisions on each day's new data.

While running the risk of sounding like a broken record, a well-diversified portfolio with an adequate allocation to bonds and cash (e.g., 5-10 years of expenses for those contemplating retirement in the next few years) is built to weather the short- (1-year) and even intermediate-term (3-5 year) volatility of stock markets. For investors with long-term goals, long-term strategies still make the most sense. Yes, it's unnerving and discouraging to watch the reported daily values of our investments gyrate the way they have recently. However, short-term reserves in high-quality bonds have held their values and continue to pay interest. Stock dividend yields are actually rising above Treasury yields as prices fall, and long-term portfolios for those contemplating retirement still have the same amount of liquidity they had 30 days ago. Maybe a trip to the movies for a romantic comedy is in order instead of another night of MSNBC, Fox News and CNBC with "Them"?

Don't Panic About the Markets

noreply@fostergrp.com (Kent Kramer) — Mon, 08 Aug 2011 15:30:00 CDT

That was the headline of this morning's (Monday, August 8, 2011) Wall Street Journal op-ed by celebrated Princeton economics professor emeritus, Burton Malkiel.

As Professor Malkiel forecast, stock markets around the world have experienced eye-popping losses today, the first day of trading since S&P indicated that it would downgrade US Government debt. In the article, he catalogued the negatives facing the US economy and markets including stalling GDP growth, stubborn unemployment, sluggish housing, and dysfunctional government policy making. Then he writes this:

"Is it time to sell all your stocks, which are still well above their lows of 2009? I think not. No one can predict what the stock market will do in this and the coming weeks. Stocks may continue their decline, but I believe it would be a serious mistake for investors to panic and sell out. There are several reasons for optimism that in the long-run we will see higher, not lower, market valuations."

For the remainder of the article, he then highlights the relatively low price-earnings ratios for stocks, decent dividend yields (2.5%) and unusually healthy corporate balance sheets. All of these items, and a few more, indicate to him that the longer-term picture for stock investors should be better, not worse.

In closing, he writes:

"A strong dose of modesty is clearly in order. We all need to be aware of the limits of our ability to forecast future stock prices. No one can tell you when the stock market will end its decline, but there are some things that we do know. Investors who have sold out their stocks at times when there have been very large declines in the market have invariably been wrong. We have abundant evidence that the average investor tends to put money into the market at or near the top and tends to sell out during periods of extreme decline and volatility..."

"My advice for investors is to stay the course. No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world. Indeed, it is in times like this that investors should consider rebalancing their portfolios. If increases in bond prices and declines in equities have produced an asset allocation that is heavier in fixed income than is appropriate, given your time horizon and tolerance for risk, then sell some bonds and buy stocks. Years from now you will be glad you did."

At Foster Group, we are inclined to agree wholeheartedly with Professor Malkiel. Experiencing the kind of downward volatility of the past few weeks is very disconcerting, however we are reminded that stocks are for the long-term portion of our portfolios and that patient discipline applied to a balanced, globally diversified portfolio has been rewarded time after time.

For a limited time, you can find the entire article here:

http://online.wsj.com/article_email/SB10001424053111903366504576492512709525754-lMyQjAxMTAxMDAwODEwNDgyWj.html?mod=wsj_share_email

Volatility ? - Exceptional but Normal!

noreply@fostergrp.com (Ed Green) — Thu, 04 Aug 2011 16:16:00 CDT

After a difficult preceding week, equity markets sold off sharply on August 4, posting their largest daily decline (as measured by the S&P 500) since late January 2009, during the midst of the financial crisis. There appears to be no single piece of news or data driving the current sell-off; it is more likely the convergence of numerous separate influences. It does not appear to be related to fundamental factors, but to selling creating more selling; investors went into panic mode today.

You can count on all manner of dire predictions in the wake of this sell-off. Market forecasts will be altered, there will be predictions of shifts in volatility and risk premiums and it will almost certainly be said that this is the beginning of the next recession or depression. While the economy and the stock market certainly interact with one another, which is cause and which is effect is far from clear.

What is clear is that declines of this magnitude, while happening infrequently, are not uncommon. Statistically, one would be expected less than once in every 1000 trading days. In reality, they occur much more frequently than that; statisticians refer to this as a "fat-tailed distribution." Unfortunately, most investors would like to believe markets are even less volatile than statistics would predict, let alone the way they behave in reality. For that reason, a day like August 4 is particularly unsettling.

Such declines occur in both good and bad markets, as well as good and bad economic times. The mere fact that such a drop occurred doesn't tell us much of anything about markets' next move, but there's a tendency to read an awful lot into a market decline. There's far more randomness than we'd like to believe and nothing is the inevitable consequence of what happens in the stock market.

None of this, however, means the current sell-off will end soon. But corrections - all corrections - ultimately end. While it's attractive to think about altering your portfolio to avoid the present risk, we don't believe that's the smart play. We can't time markets, nor have we seen anyone else who can do it reliably. We continue to believe investors are better served sticking with their present allocation, as uncomfortable as that may be.

Social Security Options

noreply@fostergrp.com (Joe Bantz) — Mon, 01 Aug 2011 12:00:00 CDT

Why aren't the politicians solving our Social Security Problem?

Remember Mr. Holland's Opus? Mr. Holland, played by Richard Dreyfuss, is an aging high school music teacher who's taught most of the community leaders, including current members of the school board, which is looking to shut down the music program because of budget cuts (whew - that's a one-sentence summary of a two hour movie!). There's a great line in the dialogue when a board member explains to Mr. Holland that they've looked for other solutions, but just can't find any. With a delivery drawn from years of teaching music, Mr. Holland commands the board member, "Look harder - just like I taught you in high school!"

Sometimes, I think our representatives in Washington need to go back to their roots and just "work harder" at finding a solution to the problems confronting our country. Then I stumbled across the website below and realize an awful lot of work is actually going on!

http://ssa.gov/OACT/solvency/provisions/index.html

The site contains a summary of the impact of numerous proposals to "tweak" the Social Security system to make it solvent. It's not for everyone, but if you are a "datahead" like me you just may enjoy perusing the various proposals. It's surprising which ones have a substantial impact ... and which are nearly insignificant!

It may even seem like you're going back to school!

Do The Math

noreply@fostergrp.com (Ed Green) — Mon, 25 Jul 2011 09:00:00 CDT

A couple interesting “factoids” with respect to debt ceiling debate:

· If ALL taxpayer income currently taxed in the 35% bracket were taxed at a 100% rate instead, it would generate additional annual revenue of about $365 billion.

· If we took the entire Forbes 400 list (the 400 wealthiest US citizens) and confiscated ALL their assets, it would amount to just under $1.4 trillion.

Based on the current annual federal budget of nearly $4 trillion, the additional revenue from option #1 would fund government operations for about five weeks. The additional revenue from option #2 would fund operations for about four months. Both assume that none of these taxpayers change their current behavior as a result of their assets being taken from them at these rates. Unlikely, at best. When taxpayers begin losing large percentages of assets because of tax policy, they modify their behavior to keep their income below that level, or they simply aren’t willing to work as hard and don’t produce as much income. There’s an argument being made that the wealthy don’t pay their fair share in taxes. That sounds plausible on the surface, but when you look at the magnitude of the spending, we can’t tax the wealthy at a high enough rate to bridge the gap between revenue and spending for the long-term. It’s not a tax problem; it’s a spending problem

Moms, Mt. Dew, Patience

noreply@fostergrp.com (Ross Polking) — Tue, 19 Jul 2011 12:28:00 CDT

He was taking forever. Probably 8 years old, he stared at the fountain drink options while his mother patiently reminded him that someone else was waiting to fill their cup - me. His eyes scanned the spectrum of choices while considering mom's only directive: "No Mountain Dew." Granted, it was only 9 AM, but the dilemma seemed to be drawn out due to this one roadblock. Early in the selection process, I told him to take his time. But now after a good 30 seconds, I was getting impatient. At that point, I made my move, excusing myself and then leaning in to grab some water. As I did, I let him know again there was no need to rush. At that moment, coming between mom and son, the rascal made his daring move. The obstruction I provided allowed him a window of opportunity to start filling up with the sacred Dew juice and my presence probably lessened the chance that mom would make a scene or get upset. This dude was smart! Returning to my seat, I had to laugh as mom sighed, watching her little man tank up on pure energy.

Patience - what a virtue! It's invaluable, when we know what we want amid choices and limitations, and are willing to wait for it. Creating a plan is one thing - sticking to it is another. Securing a solid financial future is something we all seek, yet many do so by taking uninformed and, sometimes, unnecessary risks. Financial misfortune results from costly mistakes more often than from missed opportunities. There will always be "opportunities" to achieve this desired comfort, but all opportunities come with some form of risk, many not worth taking and "too good to be true."

You need to check your map, your direction, and your location with some regularity. That's what we do for our clients - act as a sounding board, solution provider, complexity reducer, and accountability creator. Remember, if you know what you want - Mountain Dew included - have a plan and be patient!

*Disclaimer and reminder to all readers that mothers are still always right and should be listened to and obeyed without fail.

Sequence Risk Part II - Ignorance Can Be Blissful, But It's Not Nearly As Helpful As Knowledge

noreply@fostergrp.com (Brad Rempe) — Wed, 06 Jul 2011 12:38:00 CDT

Following the lead of my friend and co-worker Ross Polking, I'm calling on Looney Tunes to help me illustrate an important point regarding your personal finances. While the Road Runner always somehow found success in sticking his (or her?) head in the sand to evade the persistent Wile E. Coyote, this practice will most likely not serve you or me too well in pursuit of our own financial success.

In my last entry, I wrote about Sequence Risk (the risk of experiencing lower or negative returns early in the withdrawal period from an investment portfolio) and the impact that exposure to this risk can have on its long-term sustainability. For a refresher on sequence risk, click here http://www.fostergrp.com/wise-wealth-resource-center/blog/sequence-risk.

Intentionality is almost always a good thing, and one of the best ways to be intentional with your finances is to track your cash flow. This understanding will enable you to reduce withdrawals from your portfolio, which is difficult if you don't know where your money is going. Slowing down your spending in a negative-return time period is one of the best ways to mitigate your exposure to sequence risk.
Summarizing, it's a lot easier (and much more effective) to make decisions from a position of understanding. And sticking your head in the sand won't save you from this wolf.

Independence Day

noreply@fostergrp.com (Joe Bantz) — Wed, 22 Jun 2011 12:43:00 CDT

It'll soon be the Fourth of July - Independence Day - and we'll celebrate our nation breaking free from the bonds of King George and the British Empire. As I reflected on the upcoming holiday and the parades (and the thousands of calories of candy!), picnics, yard games, relaxing time with family and friends, and, of course, lots of fireworks, I thought about what financial freedom looks like.
One of the first things that came to mind with financial freedom is being free of all debt - including the mortgage. But is this even possible? Over the last three years, more Americans have become aggressive about paying down or eliminating their mortgage. We're even seeing articles and commentary on the benefits of eliminating debt. I recently came across the following article, which addresses debt in a pretty even fashion. If you have a minute, it's worth a quick read.

http://money.cnn.com/2011/06/17/pf/expert/debt_free.moneymag/index.htm?eref=mrss_igoogle_business

How about you - what would being debt-free be like for you? Might be worth celebrating with a parade and fireworks!

Avoiding Jail Time

noreply@fostergrp.com (Ross Polking) — Thu, 16 Jun 2011 15:25:00 CDT

Ever play Monopoly? You know that space you land on, or that card you pick that directs you to, "Go Directly to Jail, Do Not Pass Go, Do Not Collect $200"? Not fun, nor did the chuckle from your competition add to your enjoyment. If you don't have a will in place, or haven't reviewed yours in years, please follow those same instructions - just replace "jail" with, "your preferred estate planning attorney."

I recently met with a middle-aged couple who have several children and no estate planning documents whatsoever. Upon that discovery, I contemplated stopping the meeting and driving them to a trusted estate planning attorney . . . and I'm only half kidding. When it comes to having a well- balanced and secure financial plan, having a proper will is a critical part of the foundation.

Think there's no need based upon your circumstances? No problem, so long as you fall into the following, narrowly-defined camp: you have no family and you'd love for the government to have everything you own after your passing. If that's not you, get a will in place.

Don't know of a good attorney? Ask a trusted friend, professional advisor, or us for a referral. The process is fairly straightforward and painless, but absolutely essential in protecting what's most important to you. Once done, you are "out of jail" and best wishes on not landing on anyone's properties, especially if they have hotels!

Embracing China's Growth ?

noreply@fostergrp.com (Ross Polking) — Mon, 23 May 2011 12:38:00 CDT

Remember those Looney Toon cartoons when a character would dig straight down into the ground and eventually pop out in China? The typical scene would highlight a bewildered look on the face of the portrayed rice farmer as Bugs Bunny does a quick u-turn back to the states. China has for the bulk of history been an unknown and mysterious entity...undeveloped, overcrowded, and ripe with political and religious suppression. While the latter components remain intact, recent history is evidencing a change in our global landscape. Reality has emerged that China has and will further become an ever-present fixture on our world's economic platform. So much so that to some, their growing prowess is creating relative discomfort. You can argue both sides, but most tend to take the stance of this not necessarily being a good thing. China owns so much of our debt...China is absorbing many jobs...China is driving our trade deficit...they have served notice of their arrival.

The linked article by Larry Swedroe is a very interesting yet practical view from the other end of the spectrum, however. China's emergence can be seen as a good thing (considering the alternative), so rather than me trying to sum it up, have a quick read...

http://moneywatch.bnet.com/investing/blog/wise-investing/why-chinas-economy-surpassing-the-uss-is-a-good-thing/2336/?utm_medium=twitter&utm_source=twitterfeed

Wanted: Cash for Economy

noreply@fostergrp.com (Ross Polking) — Wed, 27 Apr 2011 13:50:00 CDT

I've gone from writing to not writing this blog, give or take, 40 times over the past 6 months, so enough already. The moment I think a post on economic recovery is past its prime, some pundit or new survey surfaces suggesting that things are still incredibly dire and we are headed for doomsday part deux. Now, I'm not here to advocate for this position, nor say it isn't possible, but simply to offer some perspective on "reality" (which of course is a relative term these days) and let you continue to form or modify your own opinion. Since our economy operates and is fueled by free market capitalism, I'll come at this topic accordingly.

With the looming inflation bug starting to sink its teeth in, uncertainty surrounding the implications of healthcare reform, unrest in the Middle East, and devastation in Japan, businesses may not seem to be hurrying to deploy record-level cash holdings. Cash you say? Companies are stock-piling cash? These cash reserves, estimated to be in excess of $2 trillion, if unleashed, would certainly provide added momentum to the global economy. Unfortunately, the elephant – make that a herd of elephants - in the room is our spiraling governmental debt. As the formula goes, every dollar taken via taxation is one less dollar available for investment by private enterprise. While the latter is the more resourceful and efficient of the two, the ever-increasing national debt offers indirect warning that corporate tax bills may be headed north.

Companies today are reluctant to reinvest earnings from foreign operations domestically. Those entities represented by the Standard & Poor's 500 Index have approximately $1 trillion in profits that have been kept overseas to avoid U.S. taxation. The hard reality these organizations face is that if they bring home these revenues, a 35% marginal tax rate awaits those dollars. They get a credit for any taxes paid to foreign governments - but since the corporate tax rate in the U.S. is one of the world's highest, most companies are in no rush to bring the money home. By keeping those earnings abroad, U.S. companies indefinitely defer their day of reckoning with the IRS.

While employment figures seem to have bottomed and, in fact, have begun inching upward, corporate growth is being closely watched by all. Behavioral finance suggests we’re much more attuned to the pain of loss than the pleasure of gain. This, combined with the recency effect, (suggesting we’re more influenced by recent events than distant past), may mean a slow pace of reinvestment at the corporate level. However, those entities willing to take what could be perceived as a more aggressive - yet calculated - approach to growing their business may very well emerge as front-runners in the long term. Over half of today’s S&P 500 companies were born during past recessionary periods, suggesting that sound strategy and boldness are married to create successful organizations during times of unrest. Labor, technology, real estate and liquidity are cheap right now. Buy low and sell high is a mantra we all understand. Whether corporations have the will to get ahead of the curve with their excess cash resources, and whether Uncle Sam can avoid over-indulging, could determine how quickly the corporate landscape re-emerges as a sign of American strength.

Sequence Risk is Nothing to Play With

noreply@fostergrp.com (Brad Rempe) — Thu, 31 Mar 2011 12:00:00 CDT

Markets have recovered significantly from the “bottom” of March 9, 2009, and there’s a tendency to feel the worst is behind us and better days lie ahead. While that may be true, we’ll undoubtedly experience declining markets again. Understanding your exposure to these negative time periods is important and often misunderstood. The term given to this is “Sequence Risk,” which Investopedia.com defines as:

“The risk of receiving lower or negative returns early in a period when withdrawals are made from the underlying investments.”

There has been a marked increase in the amount of attention given to the idea of “Sequence Risk” since the markets of late Q4 2007 through Q1 2009. This idea focuses on the mathematical reality that in retirement, the sustainability of your portfolio can be dramatically affected by the order in which investment returns are experienced. To help explain this, consider the following:

Scenario #1 : You enter retirement at the beginning of 1973 with an investment portfolio of $1,000,000 (for those of you old enough to remember, this was a frightening time to be an investor - equity returns over the next two years were down over 40%.) Your living expenses require a monthly withdrawal of $4,000 from your portfolio, an annual withdrawal rate of 4.8% based on your total portfolio value. This withdrawal will increase at the rate of inflation and continue for the next ten years.

Scenario #2 : Identical to Scenario #1, except the sequence, or order, of your monthly investment returns over the ten-year period are reversed from Scenario #1.

The end result of each scenario is as follows:

Scenario #1 leaves you with $1,850,094 at the end of the ten years. That doesn’t sound too bad, but because of inflation you are now withdrawing over $9,000 a month which has actually increased your annual withdrawal rate to 5.9%. Said another way, while your assets have increased in absolute dollar terms, your purchasing power has declined by almost 20%, as compared to 1973 dollars.

In Scenario #2, you ended 1982 with $2,468,517. Your annual withdrawal rate decreased to 4.4%. In this scenario, your purchasing power actually increased by almost 8%.

The only difference in these scenarios is the experienced sequence of returns. In Scenario #1, investment return for the first two years was -18.72% and -25.19%, respectively; your withdrawals depleted principal right out of the gate. Conversely, scenario 2 returns were much more favorable; 32.52% and 17.72% in the first two years, more than covering the withdrawals and adding to the value of the portfolio.

To be clear, sequence risk only matters if cash flows occur in the portfolio. If there are no cash flows to or from the portfolio, the sequence of returns will not change the ending value. To illustrate this point, consider the following:

Scenario #3 : You have accumulated $1,000,000 at the beginning of 1973. No contributions or withdrawals will be made for the next ten years.

Scenario #4 : Identical to scenario 3, except that the sequence of your monthly investment returns over the ten-year period are reversed from Scenario #3.

The following chart illustrates the value of your portfolio over this ten year period. While the portfolio values vary greatly along the way, they end at exactly the same point.

As markets have recovered nicely and investors are becoming more confident, now may be a perfect time to consider what you can do to protect against sequence risk. Stay tuned . . . this will be the topic of my next piece.

Diversification and What Others Are Saying

noreply@fostergrp.com (Ross Polking) — Thu, 31 Mar 2011 09:00:00 CDT

Lost count of the number of times we’ve stressed the importance of diversification? Does consistent reiteration of a balanced portfolio start to sound like Charlie Brown's mom on the phone? Well, good news . . . we’re not the only ones promoting the crucial benefits of avoiding the "all-your-eggs-in-one-basket" approach. T. Rowe Price, one of the top mutual fund families in the world based on the value of assets under their management, conducted a recent study (described in the linked article below) demonstrating the benefits and high probabilities of success by maintaining a long-term, disciplined, diversified portfolio. While we all know past performance is no guarantee of future results, this study adds yet again to the growing mountain of academic evidence strongly suggesting that avoidance of security selection and market timing may produce better outcomes for investors.

For the full text or the article referenced, click here:

T.Rowe Price Study Shows Benefits of Diversification

Thoughts on the Disaster in Japan

noreply@fostergrp.com (Ed Green) — Tue, 22 Mar 2011 14:39:00 CDT

The devastation that's taken place in Japan recently as a result of the natural disaster is almost beyond human comprehension. Nature has a way of reminding us from time to time how truly vulnerable we are.

The added specter of a possible nuclear disaster only heightens the concern. The outcome of that situation could reverberate, not only in Japan, but in policy decisions around the world, for many years, as did the accidents at Three Mile Island in 1979 and Chernobyl in 1986.

At times of human tragedy, making observations about impact on markets and economies can seem insensitive, even inappropriate. We mean no disrespect, nor do we seek to minimize the human element; we fully realize thousands of lives have been lost and literally hundreds of thousands of others impacted; economic and market considerations are secondary. We know, however, that our clients look to us for perspective in times like we're witnessing today.

As with any disaster, there is an economic component to the Japanese tsunami. Early estimates of cost range near the $100 billion mark. This is similar to the $80 billion-plus impact Hurricane Katrina had on the US. The good news is that the heaviest damage in Japan is in areas that represent a small part of Japanese economic output.

Japan's economy is the third-largest in the world, having just recently been surpassed by China. It is a major player in finance, industry and technology. Japan has spent the last twenty years struggling to recover from its real estate and stock market collapses of the early 1990's. This added burden will make that task more difficult, but not impossible. It may have a near-term effect on Japan's GDP; perhaps an increased risk of a Japanese recession. This is far from a certainty, however. Many foresaw recession in the US as a result of Hurricane Katrina, which never materialized.

History clearly shows the resilience and determination of the Japanese people. They have recovered and rebuilt from many disastrous situations, both natural and man-made, over the past several decades. It is highly likely they will do so again, hopefully with the assistance of the world community.

From a market perspective, it's safe to assume the level of near-term volatility is likely to be higher than normal. Events of significant emotional impact typically create anxiety in investors, causing many to seek what they perceive as "safety" and avoid risk. This is likely to cause prices to fall in the short run. We do not believe these losses will be permanent, and we encourage our clients to maintain their present allocation, unless there's been a substantive change in their personal financial situation that might of itself dictate a change.

In this tragedy, we can see again the wisdom of broad diversification. Any market can suffer an unexpected crisis, whether economic or financial. Any country can suffer a disaster, natural or man-made. The best defense against all of these is to diversify broadly across countries, across segments of the market and across asset classes. This preparation was made in our client portfolios long before the current disaster occurred.

We are firm believers in the long-term resilience of markets and the human spirit. We believe Japan, the world and the markets will overcome.

Earthquakes, Oil, and Markets

noreply@fostergrp.com (Kent Kramer) — Tue, 22 Mar 2011 14:00:00 CDT

I don’t know how many of you have DirecTV, but over the past two weeks I have become somewhat addicted to the DirecTV News Mix channel. One channel with eight windows, simultaneously showing CNN, CNBC, Fox News, Fox Business, Bloomberg, MSNBC, Headline News and The Weather Channel. It is wall-to-wall, 24/7, non-stop “news.”
The opportunity for my “news” addiction came as a result of some back surgery that has kept me at home for a few weeks of recovery, allowing me to experience the nature and impact of this constant news barrage. During my home-bound recovery, Japan has had an historic earthquake and tsunami resulting in a nuclear emergency, Libya continues in civil war, and other parts of the Mideast are uneasy, at best. Of course, investment markets declined abruptly as a result of these news items and the uncertainty surrounding the timing of their resolution.
While these market swings would be disquieting under normal circumstances, I have found first-hand that they are even more so when one is exposed to the non-stop info-tainment “analysis” that now passes for news. On Wednesday, March 16th, I watched the Dow Jones Industrials first move down over 150 points on prepared remarks from a European energy commissioner (whose comments were later shown to be 24 hours old and without specific facts) and then up 100 points on a story that the Tokyo utility company was “close” to restoring some power to the overheating reactors (this didn’t happen for three more days). Both movements show how over-reactive markets can be to even a whiff of “news,” in this case, news that amounted to nothing!
Here are a couple observations that may be worth considering if this recent round of natural disaster and political unrest has you wondering if you should “do something” about how you are invested:
First, the natural disaster in northern Japan is tragic, especially for the people in the epicenter. “Fukutsu no sieshin” is the Japanese phrase for “never give up.” The brave and purposeful Japanese people are once again proving their ability to persevere in the face of heavy adversity. I spent some months in Japan during the late 1980’s and, as a nation, they are extremely disciplined and hard working; truly incredible people.
But this disaster will ultimately come to a conclusion and be absorbed in the much larger Japanese and world economy (remember our own experience with Hurricane Katrina and the Deepwater Horizon Oil Spill in the Gulf). Diligent, enterprising and creative people will rise to the task of rebuilding. People will find ways to recover and businesses and markets will recover as well.
Turning to the Middle East and the yo-yo of oil prices, one thing to remember is that oil-producing countries need oil-consuming economies to buy their oil. When prices get too high, consumers use less and the oil producers are left with lower revenue. If foreign oil prices rise even more dramatically, alternative fuels, including bio-fuels, natural gas, solar, wind, and even domestic oil production become relatively more cost-effective and threaten foreign oil producers’ long-term economic health. The bottom line here is that Libya represents only 2% of world oil production and they need oil money in a worse way than the world needs their oil. It seems that even Colonel Gadhafi may understand this as he has quickly announced today that he would not fight the UN “No-Fly Zone” resolution. What the Colonel actually does on the ground is anybody’s guess, as history has shown him to be a very unreliable leader.
Successful investing is still a long-term proposition regardless how much “news” is dispensed by the media every minute of every day. As Foster Group Portfolio Director Ed Green has written in his recent blog post on portfolio strategy in light of the Japan situation, “In this tragedy, we can see again the wisdom of broad diversification. Any market can suffer an unexpected crisis, whether economic or financial. Any country can suffer a disaster, natural or man-made. The best defense against all of these is to diversify broadly across countries, across segments of the market and across asset classes.”

Tax Agreement of 2010 Provides Wealth Preservation Opportunities in 2011 & 2012

noreply@fostergrp.com (Kent Kramer) — Wed, 09 Mar 2011 15:36:00 CDT

Finally! That was the response of many individuals and both legal and financial professionals as the long awaited tax agreement was passed by Congress and then signed by President Obama in December of 2010. The agreement presents a number of opportunities for individuals and families as they consider their financial and estate planning goals. Here is an example of one important opportunity for investors to consider.
The tax on long-term capital gains will now remain at 15% for another two years. Throughout 2010, it seemed likely this key tax rate would rise to at least 20% and potentially be tied to even higher ordinary income tax rates. For investors holding appreciated securities, the tax agreement means that you now have another two years to carefully, and relatively inexpensively, reposition portfolios that
1. May hold too much of one company's stock (a concentrated position), or
2. Need to be rebalanced due to significant gains in particular asset classes (e.g. emerging markets)
Investors would be wise to consider repositioning in either of these situations for at least two reasons. First, all indications continue point toward higher tax rates sometime in the future. The US fiscal situation will require both budget and tax reforms to resolve, but for at least the next two tax years, we have access to this historically low rate. Beyond that point, especially if the economy continues to recover, higher tax rates are likely.
The second reason to take action involves managing risk exposure in your portfolio. When you're not required to do so, realizing gain and paying taxes now may seem counterintuitive. Investors should remember, though, that if an asset is ever to be sold and the proceeds used, taxes will be incurred. Additionally, there is no guarantee that any specific investment won't decline in value by more than the current 15% tax bill. As an advisor to many families, we've seen investors hold on to investments because "the tax cost of selling would be too high", only to see the market value of the stock subsequently decline by significantly more than the tax rate, in some cases, all the way zero. In retrospect, paying the 15% tax on the gain to diversify the portfolio risk would have been very inexpensive indeed.

Foster Group in Nebraska!

noreply@fostergrp.com (Ross Polking) — Thu, 17 Feb 2011 11:59:00 CDT

Now that we’ve landed in Omaha, I'm struck by the level of connectivity within the community. Not unlike Iowa, everyone seems to know everyone. Folks here find strength in camaraderie, and success in hard work and handshakes. The welcome mat laid out for us has appeared endless as clients, strategic alliances, friends and neighbors have ignored our Iowa State Cyclone license plates and made our transition rather seamless.

We’re excited about what lies ahead for our firm, our clients and the expansion of our services to those west of the Missouri river. While the business environment here, similar to the rest of the country, is still recovering from the economic downturn, people are looking more than ever to better prepare themselves, their families and their organizations for the future. Foster Group is, and always will be, in the business of reducing complexity for our clients and seeking to deliver financial solutions that deliver high probabilities of success. We strongly believe in the world-class experience and value we bring to our clients. We have spent much time building, implementing and refining our processes and deliverables. We certainly side with Warren Buffet, arguably the most famous and successful Omaha resident, when he stated:

"Your premium brand had better be delivering something special, or it's not going to get the business."

Foster Group is a special place with people of amazing talent and processes to deliver that “something special.” Our firm is prepared for, and delighted with, the opportunity to expand our reach in significantly impacting lives and communities for the better. Please give us a call or email with any questions, if you would like to hear more about our Omaha office, or if you have contacts in the area we might engage in an introduction!

Beware "Chronological Snobbery"!

noreply@fostergrp.com (Kent Kramer) — Tue, 04 Jan 2011 14:57:00 CDT

“…"chronological snobbery," the uncritical acceptance of the intellectual climate common to our own age and the assumption that whatever has gone out of date is on that account discredited. You must find why it went out of date. Was it ever refuted (and if so by whom, where, and how conclusively) or did it merely die away as fashions do? If the latter, this tells us nothing about its truth or falsehood.” C.S. Lewis.

One of my favorite thinkers is the great 20th century British professor and author, C.S. Lewis. Lewis coined the phrase “chronological snobbery” referring to the logical fallacy that accepts an idea as better or “truer” simply because it’s “newer” than the alternatives. This error has the tendency to generate a bias against things of historical and long-term value in favor of the novel or contemporary. These “new and improved” ideas may prove to have value, but it is not their “new-ness” that should recommend them, but their actual usefulness as evidenced through research, performance and practical results over meaningful time periods.

In our marketing and consumer-driven economy, newer is virtually always positioned as better, not only because we are infatuated with our own inventions, but because it creates a transaction, a purchase of some kind; out with the old in with the new! The financial industry is particularly adept at this. I was reminded of this inventiveness in a recent conversation with a client who had been approached about purchasing a “new, market returning, no-downside, completely liquid” investment. He was rightfully skeptical!

Whether it was an investment strategy emphasizing “tech stocks” with no earnings (late 1990s), mortgages that were “interest only” with adjustable rates (early 2000s), or so-called “AAA rated” collateralized debt obligation pools (2003-2008) individuals have been victimized by the “new” and “novel” as though those qualities alone made the ideas better than the practices of the past. Certainly some financial innovations have proven valuable (e.g. low-cost index mutual funds), however, great new ideas have proven to be few and far between relative to the amount of marketing noise generated by Wall Street’s advertising hired guns and the “investor-tainment” programs of cable television.

Disciplined saving, diversification of investments, maintaining a prudent, long-term strategy, managing costs, elimination of debt and insuring against catastrophic loss continue to be examples of financial strategies that are proven to lead to success. They are not new and novel, but they remain incredibly rewarding. Entering 2011 we’ll all be better off if we take a moment to remember the lessons of the past before we naively discard them for the next “new, sure thing”.

Who's Really Working for You?

noreply@fostergrp.com (Ross Polking) — Fri, 22 Oct 2010 10:10:00 CDT

Who's really working for you . . . and only you? Most investors give the wrong answer when considering this question. Lots of discussion has been taking place in Congress and the Securities Exchange Commission with regard to the application of a true fiduciary standard. When, and to whom, should it apply? Should anyone calling themselves an "adviser" have the freedom to act in anything other than your best interests?

Foster Group is a Registered Investment Adviser, working independently of any other entities or conflicts of interests to ensure that our guidance is most appropriate for your financial success. We are a fiduciary.

Unfortunately, many investors do not enjoy this type of transparent relationship. Recent industry studies (see linked article) show most investors are not aware their adviser may not be legally obligated to provide the best direction, but may offer recommendations that are merely suitable. This misunderstanding is not the fault of investors; the current standards governing financial service providers allow this line to be blurred.

Here are two questions you should ask anyone you work with, now or in the future: "How do you get paid?" and "How are your dollars invested?" Any hesitation or hedging in the answer should suggest taking caution and slowly backing away!

http://www.businessweek.com/news/2010-09-15/-clueless-investors-think-brokers-are-fiduciaries-survey-says.html

How Healthcare Quality and Investment Success are Related

noreply@fostergrp.com (Kent Kramer) — Fri, 01 Oct 2010 15:17:00 CDT

"...18%, plus or minus 2% of our treatment approaches and prescriptions are based on solid, peer reviewed, statistically sound, evidence-based science...the remainder is based to a greater or lesser degree on a three letter word starting with "A"; that word is art."

Dr. David B. Nash, MD, MBA, Dean of the Jefferson School of Population Health at Thomas Jefferson University and Medical School in Philadelphia cited this finding during his recent keynote presentation at the Iowa Health Collaborative's annual meeting on quality initiatives in health care. I had the opportunity to hear Dr. Nash make two presentations during this meeting and could not help but see the similarities between "the ideal" and "reality" in health care as well as in investing.

Here's what I mean . . .

Dr. Nash said one of the most effective ways to improve care and reduce costs in the system (the holy grail of healthcare reform) would be to expand the 18% of what we know works and apply that knowledge rigorously. The higher the percentage of treatments available that we KNOW work (or that we know don't work) the less wasteful we'll be in the treatment of disease and injury and the better the outcomes we'll see as a percentage of cases. We'll spend less across the entire system and restore more people to good health.

That sounds like progress we can all believe in!

Investors face a very similar circumstance. What we KNOW about how economies and markets work, based on statistically-sound, evidence-based science that is always correct in a predictive sense is far less than 50%. We want to know how to create immediate and lasting economic growth. We want to know when the stock market has "bottomed." However, the actual evidence-based science for how to do these things consistently is lacking.

How can we observe this lack of knowledge? One example is a recent study of professional money managers versus their benchmark market indices. This study found that over the 10-year period ending December 31, 2009, between 60% and 90% of these professional managers underperformed their benchmark.* That indicates a "success rate" of between 10% and 40%. Those are not the odds that patients or investors are looking for.

What's an investor (or patient) to do?

First, when given the opportunity, we should apply any and all solutions that we KNOW (as a result of rigorous academic research, applied trials and practice) work. Where we have good science, it seems foolish to ignore it. For example, current evidence seems to support the idea that investors will likely have better long-term results investing in markets as opposed to placing their money with managers who are attempting to beat markets.

Second, we need to recognize that there are very few "SURE THINGS" (True 100% of the time). So, we need to move forward with prudence and caution and listen to those who have had a number of consistently good outcomes. When the facts aren't conclusive, we may want a second opinion.

In healthcare, informed patients seek out individual physicians and institutions that seem to have a good grasp of the science as well as the art of care. Investors would be wise to do the same thing.

Foster Group attempts to combine the best available academic research about markets and investing with our years of experience in prudent and comprehensive wealth management. We believe this approach gives our clients a much greater probability of achieving their most highly desired outcomes.

*Source: Standard and Poor's Indices Versus Active Funds Scorecard, March 30, 2010

Re-Taking Control

noreply@fostergrp.com (Kent Kramer) — Fri, 10 Sep 2010 14:33:00 CDT

In today's environment of "change," it's becoming more important than ever to remember what we can and cannot control, especially with regard to our financial well-being.

I've become a follower of a blogger named Carl Richards (behaviorgap.com) over the past year. Carl has a knack for creating "napkin art" that communicates simple, but important points. Here's my own "napkin art," describing the result of how we focus our thinking and activity.

What kinds of things go in the "Things we can't control sphere?" Here's a very
partial list - the comprehensive list is way too long, but you'll get the picture:

Stock market returns
Interest rates
Inflation
Tax policy
United States unemployment / employment
Government spending & deficits
Next week's Lotto numbers
The weather on your next vacation

Ok, so that's kind of a distressing list. Here's a partial list of what goes in the "Things we can control" sphere:

Increases or decreases to our personal debt level
Lifestyle spending
How much we save and invest
How much insurance we carry
The allocation of our investment portfolios to stocks, bonds, cash and other alternatives
How much we give, and to which people and causes
Who and what we read, listen to and watch
Whether to take a vacation

We're all adults reading this, so let's just admit that we know where this is going. Good, common sense advice is to focus on the things we can control, while at the same time preparing, as best we can, for those things that are out of our control and unpredictable (e.g., why we purchase life insurance). Each of us has a limited amount of time and energy to focus on what's truly important, and we'll make the most progress toward our goals if we focus that time and energy on activities that are effective.

I'm writing to myself here, as well, now. Take a 3x5 card or create a new daily reminder on your Blackberry or iPhone and answer the question, "To which financial events that I cannot control am I paying too much attention?" Make a short list of two or three things and commit to ignore those things for two weeks. Just don't pay attention and see what happens . . . to your peace of mind. The Dow will still be there, Congress will still be passing legislation that is too complex to understand, Jim Cramer will still . . . well, you get the picture. The second list to make comes from the other sphere. "Which goal-oriented, financial actions that I could take am I not implementing?" Make your short list of two or three actions and use the time that you were previously wasting in futility and misery, paying attention to things out of your control, to make progress on those things within your control. Your feelings may not immediately change, but effectiveness and progress have a way of improving both our circumstances and our frame of mind

Opportunity: the Upside of Uncertainty

noreply@fostergrp.com (Kent Kramer) — Tue, 10 Aug 2010 08:49:00 CDT

"The problem, of course, is essentially one of human emotion. We are essentially somewhere between Armageddon and Nirvana"
David Rosenberg, Chief Economist at Gluskin Sheff as cited in Bloomberg Businessweek, June 20, 2010

Things are certainly uncertain!

I don't know about you, but everyday the "news" seems to provide less clarity about the future and what to expect than the day before. Whether we're talking health care policy, tax rates, soundness in the world banking system, employment, housing, oil spills, where LeBron James will play basketball (Miami) what we mean by "financial regulatory reform"... well, you get the picture. It's a little like Iowa weather, if you don't like it, just stick around for a day or two, I'm sure it will change!

A few weeks ago, I penned a short article about how in times of great disruption there is potential great opportunity. As we've experienced the return of greater intra-day volatility to stock markets (May and June daily volatility in the S&P 500 was double what we experienced in March and April) I believe we can see that this disruption has created a "hangover" called uncertainty. Our uncertainty is expressed through wild swings in market indices from day to day, or even within the same trading day. Every little bit of information is parsed and pored over to see if it holds the key to the return of economic growth or is the harbinger of ultimate financial disaster.

Of course the truth (as we all know in our more sane moments) is that the world is a very complex place and no single piece of monthly financial data is going to save or sink our economic ship. But we're led to feel like it may, because that's the nature of our news cycle, which reflects and plays to our human nature as well. We want more certainty, even if it's negative because then we will KNOW what's going to happen next and we'll KNOW what to do.

But, as an investor, don't we really need some uncertainty? When an outcome is certain (or very close to certain) there is little risk present. If you purchase a 30-day Treasury Bill, you'll be paid very little interest. Why? Because no one (well, at least very few people) expect the US Government to default on its debt in the next 30 days. Where there is very little risk (uncertainty), there is very little potential return.

However, if you're buying shares of BP right now, the success of your investment five years from now is far less certain. The Gulf oil spill could bankrupt the company in claims and litigation. Or the problem leak could be plugged in July or early August, and in eighteen months BP could be back to paying dividends and making relatively large profits. So, what will happen? It's uncertain and that uncertainty means the range of possible outcomes is very wide. This also explains why BP's stock price has fallen so far, so fast. Investors are unwilling to pay a high price for taking on such risk, such uncertainty.

If BP returns to financial strength, those brave souls who are buying the stock today will be rewarded generously. If it goes into bankruptcy, those same brave souls may be called "foolish" for making such a bet. In either event, it's the uncertainty that presents the opportunity.

On a larger scale, this is what investors are faced with in terms of general stock market investing. Instead of an oil spill affecting one company, we've had a financial crisis affecting many companies and countries. So, the question is, five or ten years from now will we look back and see a cleaner Gulf of Mexico as well as a clearer economic environment? History supports the idea that we'll find solutions to problems like the ones we are facing today, whether oil spills or economic disruption. When will we find the solutions? That's entirely uncertain. And therein lies the opportunity!

Questions For Eduardo

noreply@fostergrp.com (Kent Kramer) — Fri, 16 Jul 2010 09:55:00 CDT

"Good questions outrank easy answers."
Economist, Paul E. Samuelson

Do you have questions about the future of global investment markets and the world's biggest economies? Who doesn't! What if you could ask one of the brightest thinkers in the investment world today your number one question? What would you ask?

On October 7, 2010, Foster Group will host our Fall 2010 Foster Group Lecture Series event, "Global Markets: Has Everything Changed?" featuring Eduardo Repetto. Mr. Repetto is Co-CEO and Chief Investment Officer of Dimensional Fund Advisors (DFA) and is, literally, a "rocket scientist" (more on this later).

At past Foster Group Lecture Series events, we've asked our distinguished guest speakers to give presentations about topics of particular interest to them with only limited time for client questions at the end. This year, we've decided to allocate the majority of our time with Mr. Repetto to an interview format where we'll be asking him your most compelling questions.

We need your help! Send us your GOOD, TOUGH, NAGGING questions!

In order to make sure that our clients' most important, compelling and widespread questions are addressed, we need to hear from you. We'll be collecting your questions and comments over the next three months and building an interview-style presentation with Eduardo and Foster Group partner, Kent Kramer. By gathering questions in advance, we hope to identify your most common concerns along with related follow-up queries. We'll have conversations with Eduardo in advance of the October event so he has ample time to develop the kinds of answers and supporting material that we hope will make this a truly relevant and informative event.

Here's how to "Ask Eduardo"

As you think of questions you'd like to ask, go to the end of this blog entry and submit your question in the "Responses to Ask Eduardo" fields.

Did I mention he was a rocket scientist?

If you haven't already listened to our most recent quarterly audio update, you can click here and listen to a short interview that Foster Group partner Ed Green conducted with Eduardo in early July. In the interview Eduardo shares how his path to the world of finance included aeronautical engineering ("rocket science") first as a student and then as a professor at Cal Tech.

So, yes, this event really will be rocket science!

Taxes Due $182.50 or $30,645.40? More Reasons Why a Roth Conversion May Be a Mistake

noreply@fostergrp.com (Brad Rempe) — Thu, 15 Jul 2010 09:26:00 CDT

Have you wondered whether a Roth IRA conversion is something you should consider? In the past several months, we've had numerous discussions with clients regarding Roth IRA conversions, and whether this makes sense for them.

We've also written on the merits of conversion, and why it's important to evaluate this closely before proceeding: http://www.fostergrp.com/assets/fostergroup/RothIRAConversion.pdf. In one of our recent Wise Wealth Lecture Series events, Kent Kramer provided a fantastic overview of how and why the new rules on conversion came into existence, why a conversion may not be so black and white, and some brief examples of how the math behind conversion actually works. Kent's presentation is available here: http://www.fostergrp.com/resource-center/wise-wealth-lecture/kent-roth-ira.

The variables influencing this analysis are really limitless, but it almost always hinges on comparing the taxes you will pay today (to convert) to the taxes you expect to pay in the future when you withdraw dollars from the IRA (if you don't convert) - which brings us to the point of this blog. If, in retirement, you have charitable gifts, medical bills, long-term care expenses, mortgage interest or property taxes, the tax-deductibility of these items could be lost or minimized without income to support the deductions. Let's use one of these as an example to illustrate:

Let's say I have an elderly friend who is forced to enter a long-term care facility which charges $200 per day, or $73,000 annually, for his care. Let's also assume the entire $73,000 is paid by withdrawals from his IRA, requiring him to recognize this as income. However, because long-term care expenses are considered deductible medical expenses, he can deduct these expenses to the degree that they exceed 7.5% of his adjusted gross income. So of the $73,000 withdrawn from the IRA, only $5,475 remains taxable. His personal exemption amount of $3,650 {for 2010} further reduces his taxable income to $1,825, putting him in the 10% tax bracket and incurring a tax liability of $182.50 {or 0.25% of $73,000}.

As a comparison, someone in the 33% federal and 8.98% (Iowa) state tax brackets would incur a tax liability of $30,645.40 in 2010 to convert this same $73,000 to a Roth IRA {or 41.98%}.

For those who are charitably inclined, there may be an even greater cost of converting IRA assets to a Roth. Charities can be named as beneficiaries of traditional IRA assets, essentially converting them to 'non-taxed' dollars at your death, to the charity of choice.

To be clear, there are certainly circumstances that warrant the conversion of IRA assets to a Roth. We've seen several that are virtual 'no brainers'. However, the tax liability from eventual withdrawals from your IRA may not be as much as you think.

Good Time for Decision Making

noreply@fostergrp.com (Kent Kramer) — Mon, 03 May 2010 15:07:00 CDT

Could you be at your peak effectiveness regarding financial decision-making right now? It’s quite possible you are very near that point, if we accept a couple of ideas about how our brains function.

Since October 2007, most investors have seen the value of their portfolios decline precipitously (global stocks lost 53% between October 1, 2007 and February 29, 2009) and rebound dramatically (those same global stocks have risen 69% from March 1, 2009 through March 31, 2010 **). So, while portfolio values are likely still well below those peak 2007 values, they are likely well above their early 2009 lows.

Sitting here with your coffee (or tea) on April 1, 2010, which experience - the big drop or the rapid rebound - is having the most influence on your thinking and actions today?

“Recency Bias,” an accepted psychological phenomenon, would lead us to conclude that the most recent events (rapid rebound) would likely leave the strongest impression. But University of Oregon Professor Paul Slovic observes that another aspect of our brain function means, “it takes far more good news to build our confidence than it takes bad news to destroy it”. He goes on to say that, “In the past few years, we’ve seen a lot of things that caused us to lose faith in the institutions that we would like to be able to trust. These feelings tend to override our ability to analyze things in a logical way.” (As quoted in the April 2010 edition of Money Magazine).

By acknowledging both influences on our thinking, we may be entering a unique opportunity for good thinking and decision making. Our tendency toward Recency Bias as we look at the strong market returns of the past 13 months - which could lead us into feelings of overconfidence and greed - is being tempered by our tendency to hold onto negative experiences too long and project those feelings forward indefinitely. Perhaps we are at a balancing point, moving away from fear but not yet to overconfidence. This would be a very good place from which to make sound, long-term financial decisions. This balance is achieved not by forgetting the extreme experiences of the past 2 years, but by clearly looking at them together, and making decisions we can live with, knowing that we will likely go through many more short-term boom-and-bust cycles in investment markets.

So, if you’ve been wondering when to revisit your portfolio balance between stocks, bonds and cash, or how long you may need to work to realistically achieve your long-term lifestyle expectations, perhaps now is the ideal time for assessment and taking action.

** As measured by the MSCI AC World

Today's Economy in Historical Perspective

noreply@fostergrp.com (Ed Green) — Thu, 08 Apr 2010 13:50:00 CDT

The significant rebound in equities markets over the past year notwithstanding, much of what we hear and read about the national economy these days is dismal. In fact, you could easily get the impression that these are the worst economic times we’ve ever been through. From our Fall 2009 Wise Wealth Lecture Series event, our featured speaker Brian Wesbury offers some historical perspective on that notion. He also addresses what he believes were contributors to the financial panic of late 2008 and early 2009.

To watch Brian’s entire presentation, including the audience Q&A, click here: (Presentation – 43 minutes; Q&A – 22 minutes)

Inflation Expectations

noreply@fostergrp.com (Kent Kramer) — Fri, 26 Mar 2010 09:08:00 CDT

"Should I be worried about hyper-inflation?"

Many clients have asked some form of this question over the past year. It’s a great question, because if inflation gets out of control, the ability to maintain current lifestyle is threatened.

I have begun following the recent bi-monthly US Treasury auctions of regular Treasury Notes and Bonds as well as Treasury Inflation Protected Securities (TIPS) to get an idea of what “The Market” is predicting for inflation. By “The Market,” I’m referring to all of the investors (institutional and individual) who are buying these securities month after month.

One measure of the expected rate of inflation is the “spread”, or interest rate differential, between issues of 10-Year Treasury Notes and 10-Year TIPS. The January 15, 2010 auction of 10-Year TIPS sold at a coupon rate of 1.375%. The February 15, 2010 auction of 10-Year Treasury Notes sold at a coupon rate of 3.625%, a difference of 2.25%. This means that the buyers of both types of bonds were expecting inflation to average 2.25%, which would equalize the overall returns achieved by all holders at the end of 10 years. The regular Treasury would provide level 3.625% interest payments each year. The TIPS holders would see their coupon payments rise over 10 years as observed inflation increased the value of the bond, so that the final average annual return would equal 3.625%.

At that same February 15, 2010 auction, 30-Year Treasury Bonds sold at 4.625% and 30-Year TIPS sold at 2.125%, an implied inflation rate “prediction” of 2.5%.

We would make two observations regarding the implications of these recent Treasury interest rates:

This is only one measure of expected inflation. It represents the opinion of hundreds of institutions and thousands of individuals who together set the rates as they “bid” and purchase regular Treasuries and TIPS. These auctions happen every two weeks and the “inflation spreads” have been fairly consistent between 2 and 2.5%, depending on years to maturity. If you think (as Foster Group does) that “The Market” sets reasonable prices between willing buyers and sellers, this “inflation spread” likely represents as defensible an estimate of future inflation as any other.
For Foster Group clients who have engaged us to do financial planning, you may remember that our Required Rate of Return (the growth rate assumption we use to project your retirement portfolio growth) is normally between 6% and 7%. We also assume a 4% inflation factor on your ongoing living expenses. The recent 30-Year TIPS yield of 2.125% would actually exceed our required rate of return of 6%, which works out to a 2% real rate of return when adjusted for inflation (6% return less 4% inflation equals 2% real rate of return). We point this out not to encourage you to adopt a 100% TIPS portfolio, but to show how conservative Foster Group’s assumptions are when we make projections regarding your future financial security.

If you would like check out these Treasury Rates for yourself you can find the results of each week’s auctions at www.treasurydirect.gov.

Questioning Conventional Wisdom

noreply@fostergrp.com (Ed Green) — Wed, 17 Mar 2010 10:47:00 CDT

In the aftermath of the financial panic of late 2008 and early 2009, investors have questioned virtually every previously-accepted tenet of investment ideology. One long-held assumption, that stocks outperform bonds over longer time frames, came under intense scrutiny after a widely-known financial personality published findings which appeared to show that, in fact, bonds outperformed stocks instead.

At our Fall 2009 Wise Wealth Lecture Series event, featured speaker Brian Wesbury, addressed this seeming contradiction and offered his take on which view investors should accept.

To watch Brian’s entire presentation, including the audience Q&A, clickhere: (Presentation – 43 minutes; Q&A – 22 minutes)

Are Markets Rational?

noreply@fostergrp.com (Ed Green) — Mon, 01 Mar 2010 11:42:00 CDT

Debate has raged for years about whether markets are “rational.” In late 2008 and early 2009, that certainly didn’t appear to be the case! Many investors interpret “rational” to mean that all market participants must make rational, perhaps even unemotional, investing decisions in order for the premise to be true.

At our Wise Wealth Lecture Series event last October, featured speaker and economist Brian Wesbury addressed this question in his talk and described how irrational investors combine to create the rational market.

To watch Brian’s entire presentation, including the audience Q&A, click here: (Presentation – 43 minutes; Q&A – 22 minutes)

Should I invest more in stocks of non-US companies?

noreply@fostergrp.com (Kent Kramer) — Mon, 15 Feb 2010 14:51:00 CDT

Does it make sense to increase exposure to the stocks of foreign companies relative to US companies? Many US investors are wondering if our current economic policies will prevent US-based companies from continuing to be among the world’s highest-performing and what this might mean for overall US stock market returns.

“48% of the revenue being generated by S&P 500 companies already comes from their overseas sales,” was part of the response given by economist Brian Wesbury in this clip from Foster Group’s WiseWealth 2009 Fall Lecture Series event. His answer implies that even investors who hold only shares in domestic companies already participate in the global economy. However, Wesbury goes on to say that if the regulatory and tax environment in the US becomes less favorable relative to other countries, investors may be rewarded in the medium- and long-term by increasing their allocation to foreign stocks.

To watch Brian’s entire presentation, including the audience Q&A, click here: (Presentation - 43 minutes; Q&A – 22 minutes

The Decline and Fall of the U.S. Manufacturing Empire

noreply@fostergrp.com (Ed Green) — Fri, 29 Jan 2010 12:46:00 CDT

length 6:25

We don’t have to look far to find someone bemoaning tHe loss of US manufacturing jobs. The thought expreSsed generally goes something like this: “The United States can’t remain a leader in the global economy if we continue losing manufacturing jobs. We’re not making much here in the US any longer; we can’t base our whole economy on information and services.” This is an understandable, but incomplete, assessmentof what’s really taking place in our ever-changing economy. Brian Wesbury, featured speaker for our October 2009 Wise Wealth Lecture Series event, says this sort of change is not new; we’ve been here before.

To watch Brian’s entire presentation, including the audience Q&A, please clickhere: (Brian’s talk - 43 minutes, Q&A - 22 minutes)

Wondering how to help the people of Haiti ?

noreply@fostergrp.com (Martha Gribble) — Mon, 25 Jan 2010 09:00:00 CDT

Aid is desperately needed in Haiti and we know many of you are looking for opportunities to help. Consider these guidelines as you make your decisions:

As with any financial planning decision, deciding whether to give, the amount to give and where to give is best made by thinking through your objectives and allowing your gifts to be an integral part of your overall planned giving strategy. If you have children, including them in your family giving can have a multi-generational impact.

Gifts of cash are most appreciated – remember even a small amount of money goes a long way to provide necessities to the people of Haiti. Cash allows charitable organizations to buy in volume at lower prices and distribute goods and services most efficiently. That’s especially important in a country such as Haiti, where infrastructure is lacking.

Direct your gifts through reputable charities that are already on the ground and have been actively involved in Haiti for some time. These organizations are most likely to be able to assess needs and distribute necessities most effectively. A few such organizations are: The American Red Cross, Doctors Without Borders, Habitat for Humanity, World Vision and UNICEF. Be extremely cautious about responding to telemarketing or e-mail appeals for donations; it can be very difficult to confirm the legitimacy of the organizations behind these requests.

There are many ways to fund your gift. You can write a check, give online using your credit card, or even use your cell phone to text a donation. If your gift to any organization will be $100 or more, we welcome the opportunity to serve you in facilitating gifts of cash, appreciated stocks or mutual funds through the lifeWealth Donor Advised Fund. Give us a call or send us an e-mail and we’ll be happy to initiate your grant request.

What about the Clinton Bush Haiti Fund? This is a newly-formed organization founded by former presidents Bill Clinton and George W. Bush, at the request of President Obama. They guarantee that 100% of funds received will go to help the people of Haiti. Gifts will flow through this fund to various other charitable organizations at the discretion of the two leaders and their professional staff through the William J. Clinton Foundation and the Communities Foundation of Texas. You can learn more at: www.clintonbushhaitifund.org.

Of course, there are many other reputable charities and agencies involved in delivering aid to the island nation. If you hear of one or two that interest you, but you’re unsure of how effective they have been in the past, you may find Charity Navigator’s information (http://www.charitynavigator.org) helpful in your decision-making.

To make an online gift, charged to your debit or credit card, or to learn more about the charities, go to the websites below:

The Red Cross: http://www.redcross.org/

The Clinton Bush Haiti Fund: http://clintonbushhaitifund.org/

Habitat for Humanity: http://www.habitat.org/

UNICEF: http://www.unicefusa.org/

Doctors Without Borders: http://doctorswithoutborders.org/

World Vision: http://donate.worldvision.org/

To give by check:

The websites list addresses for sending your check by mail.

To text a donation that will be billed to your cell phone:

Text “HAITI” to “90999” to make a $10 donation to the Red Cross

Text “QUAKE” to 20222 to make a $10 donation to the Clinton Bush Haiti Fund

Want to check out some charities on your own?

Take a look at Charity Navigator at: http://www.charitynavigator.org

Don’t forget to retain confirmation of your gift for your tax records.

As always, contact us if you have questions. We look forward to discussing your opportunities for charitable giving!

Unemployment Prevents Recovery? Not so Fast....

noreply@fostergrp.com (Ed Green) — Mon, 18 Jan 2010 09:00:00 CDT

The statistics on national unemployment still look pretty grim. Conventional wisdom says the economy will do poorly until more people find work; more people with jobs, more disposable income, faster economic recovery. Brian Wesbury, the featured speaker at our October 2009 Wise Wealth Lecture Series event, points to instances where this conventional wisdom proved false in the past, and says employment is always the last indicator to turn positive after a period of recession.

To watch Brian’s entire presentation, including the audience Q&A, please click here: (Brian’s talk - 43 minutes, Q&A - 22 minutes)

What REALLY Caused the Meltdown?

noreply@fostergrp.com (Kent Kramer) — Mon, 14 Dec 2009 16:30:00 CDT

A widely-expressed opinion during the financial crisis last fall and winter was that the huge decline in global equity and credit markets was evidence that the system of capitalism itself had failed. Brian Wesbury, the featured speaker at our fall Wise Wealth Lecture Series event takes issue with that view, and offers a different conclusion.

To watch Brian’s entire presentation, including the audience Q&A, please click here: Wesbury Presentation (Brian’s talk 43 minutes, Q&A 22 minutes)

IMS President and Economist Address Health Care Reform, Economy

noreply@fostergrp.com (Kent Kramer) — Thu, 05 Nov 2009 10:04:00 CDT

IMS and Foster Group co-host successful Wise Wealth Lecture Series with Economist Brian Wesbury and IMS President Michael Kitchell, MD.

Uncertainty. Turbulence. Two words describing the economic environment physicians are coping with today. Between the general economic conditions found in the United States as we recover from 2008’s financial crisis, and the twists and turns of the national healthcare reform debate, physicians can feel like they are looking at live weather radar showing two storms simultaneously tracking toward them from the east and the west.

Storm A: Healthcare Reform

On October 8, 2009, physicians gathered at the Embassy Suites in downtown Des Moines to hear about these storms. IMS President Michael Kitchell, MD led off the evening describing the current legislative proposals being debated in Washington, D.C. Referring to the problems created by having over 40 million uninsured Americans, Dr. Kitchell helpfully differentiated between the “Public Option” for creating universal coverage in the House bill (government-funded and government-run) versus the private insurance approaches in the current Senate bill. Proposals in the Senate bill include a health benefit exchange where “affordability credits” are offered to lower-income Americans so that every American can, and likely will be mandated to, purchase health insurance coverage.

The bigger question about how damaging this “storm” could be for physicians becomes who will ultimately pay for the goal of reducing healthcare costs while accomplishing universal coverage. Iowa physicians are already “paying” some of these costs through the geographic penalty imposed by Medicare reimbursement formulas (only North Dakota and Arkansas doctors are paid less), even though Iowa is ranked second in the nation by the Commonwealth Fund for healthcare quality and value. Dr. Kitchell cited numerous statistics and examples, including the fact that physicians are effectively being reimbursed by Medicare at 1998 levels, but the bottom line seemed to be that while lawmakers are hoping for a “magic bullet” solution, the likelihood is that it will take multiple strategies to get there. Key cost drivers that must be addressed include:

75% of all medical bills are related to treatment of chronic diseases, many of which could be reduced through healthier lifestyles,
3% of the population is responsible for 50% of the healthcare costs in the U.S.,
On average, physicians are spending $68,000 per year filling out pre-authorization and related paperwork, and
“Defensive Medicine” due to the threat of litigation, seems to imply that some form of tort reform must be a part of the solution.

Without some type of healthcare reform, Iowa physicians are already set to receive a 21% reduction in Medicare payments on January 1, 2010.

Storm B: Economic Uncertainty

Immediately following Dr. Kitchell, nationally known economist Brian Wesbury addressed an even larger group of physicians and investors about the condition of the US and world economies, as well as investment markets. Wesbury, a regular contributor to the Wall Street Journal, commentator on CNBC and Fox Business and the economics editor of the American Spectator magazine, started his comments answering the question “Has capitalism failed us?” The short answer according to Wesbury was that capitalism had not failed; rather government (the Federal Reserve and Treasury) had failed by creating and sustaining artificially low interest rates during the mid 1990s and again in the early 2000s. These low interest rates created an “unnaturally” low cost of capital that led people to take risks that higher rates would have discouraged.

While Wesbury had a number of reasons to explain how and why the “panic” of 2008 happened, his comments on the future centered on the strength of capitalism to create recovery and growth. Citing historical examples ranging from the banking crisis of 1907 to the recession of 1972-1973 to the banking and lending problems of the 1980s, Wesbury expressed confidence the “V-shaped” recovery of the stock market that began in March 2009 would continue. This “V-shaped” recovery seems to indicate the recession has indeed ended, and that job losses will continue to slow and turn to job creation, possibly by year-end.

What to do about the radar warnings

Both experts, Dr. Kitchell and Mr. Wesbury, were quick to point out that many uncertainties still exist, so the end result is far from certain. In an interview immediately following his talk, Dr. Kitchell reflected that he thought the healthcare reform debate was likely in the fifth inning of a nine inning baseball game, and that there would be many arguments and surprises before any laws were signed by President Obama.

For his part, Wesbury, who was named the top economic forecaster by the Wall Street Journal in 2001 and one of the top ten forecasters in 2004 by USA Today, admitted that he originally believed the U.S would not go into recession in 2008. But Congress’ commitment to “mark-to-market” accounting created problems not seen since the Great Depression (coincidentally, strict “mark-to-market” accounting rules were modified in 1938, helping end the Great Depression, only to be reinstated in 2007 when they at least contributed to the 2007-2008 economic decline). So, while there are no guarantees regarding the economy, the title of Wesbury’s new book, due out in November, reflects his optimism: It’s Not as Bad as You Think - Why capitalism trumps fear and the economy will thrive.

In light of both presentations, Foster Group is more committed than ever to offering evidence-based, comprehensive financial planning and investment management. In uncertain environments of any kind, managing risk by preparing for a variety of future outcomes is always wise. In this current uncertain financial “weather pattern,” Foster Group is offering a “Second Opinion” service to physicians who would like a no-obligation, unbiased review of their current portfolio and general financial condition. If this is of interest to you, please contact us at (800) 798-1012 or go to www.fostergrp.com/second-opinion for more information. We continue to consider it a privilege to be a trusted advisor to physicians like you.

Turbulence Ahead

noreply@fostergrp.com (Kent Kramer) — Tue, 20 Oct 2009 13:15:00 CDT

Turbulence ahead? Better check your gauges.

“A thunderstorm is never as bad on the inside of an airplane as it appears on the outside. It’s worse.”

Accepted pilot wisdom

Turbulence - it causes stomachs to flip-flop while traveling through storms in airplanes as well as when trying to ride out investment markets during times of economic uncertainty.

When pilots engage in steep turns they can experience vertigo which, in the extreme, can feel like a straight and level descent when the plane is actually plummeting in a tight, ever-steepening turn known as a “graveyard spiral”. In the book “Mastering Instrument Flying,” would-be pilots are reminded that when they are flying at night, or in turbulence, they may experience

“…vertigo, or spatial disorientation as it is technically called. One cardinal rule for coping with any kind of vertigo, dizziness, or confusion between what your eyes see on the instruments and what your senses are telling you is trust your instruments. Accept the fact that in many circumstances the senses are wrong when the instruments are correct. When flying by reference to instruments, the eyes are seeing symbolic rather than actual references. The input is not as strong nor as vivid as the real world. Other senses – particularly the motion senses – tend to take over the eyes' role.”

Note that the vividness of how we “feel” makes it very hard to trust the instruments and to act in accordance with what they are telling us about reality.

Pilots rely on altimeters for altitude, attitude indicators for staying level with the horizon, and directional gyros for course correction. Wouldn’t it be helpful if there were gauges for the condition and performance of investment portfolios?

While there are no fool-proof indicators, there are at least five “gauges” that any investor can, and should, check often, regardless of the economic turbulence.

1. Directional Gyro

“Never let an airplane take you somewhere your brain didn’t get to five minutes earlier.”

Do you know the goals or “destinations” of your investments? When do you need to access money from the portfolio? How much and for how long? These are very basic, but important, questions that can be answered within the context of a financial plan. Before we send our money on a journey, we should know where and when we want it to arrive!

2. Fuel Gauge

“The only time you have too much fuel is when you are on fire.”

In our earning years, when we are converting our human capital into financial capital, how much human capital we have left can represent the amount of fuel in the financial tank. The more earning years remaining, along with the prospects for increasing pay, the longer we can stay in the air, until we choose to land (retire).

In retirement, fuel can be represented by liquidity. How many years of living expenses do we have in cash and conservative fixed income? If you need $100,000/year for lifestyle expenses, then $800,000 of short-term (1-2 year maturity) high-quality bonds and cash means you have, at minimum, 8 years of fuel. This liquidity allows investors to ride out equity market turbulence, waiting for better times to convert stocks to cash.

3. Airspeed Indicator

“A fool and his money are soon flying more airplane than he can handle.”

To make the portfolio perform at higher rates of return (go or grow faster), investors have traditionally looked to stock-type investments. But all stocks are not created equal in terms of expected and observed returns. While there are many ideas being thrown around today, three factors still stand out as academically-supportable ways to increase the probability of higher portfolio returns over the long term (10-20 years).

Factor 1: The Market. Favor stocks (“the market”) over cash or traditional bonds.
Factor 2: Small vs. Big. Favor small company stocks over large company stocks.
Factor 3: Value vs. Growth. Favor value company stocks over growth company stocks.

Investors who emphasize these factors, in a broadly diversified portfolio, have historically achieved higher returns over periods of 10 years and longer.

4. Altimeter

“If speed is life, altitude is life insurance. No one has ever collided with the sky.”

One thing that investors seem to be learning (again) is that no one can reliably predict the future, especially the near-term future, when it comes to investment market direction. If that’s true, then broad diversification in our portfolios is like having lots of altitude while flying. If some of our investments do poorly when they encounter a turbulent stretch, we have many other types of investments in the portfolio to keep us in the air. US large and small companies, foreign large and small companies, emerging markets, real estate, bonds, cash, and insurance contracts all represent types of diversification available to investors today.

5. Artificial Horizon / Attitude Indicator

“Accept the fact that in many circumstances the senses are wrong when the instruments are correct.”

A good Investment Policy Statement (IPS) describes the long-term goals of the portfolio in terms of return requirement, potential risks, liquidity requirements, acceptable investments, the underlying principles of the portfolio’s management style and how success will be measured. When these are in place prior to “take-off”, investors have a much better chance of surviving the turbulence that they are certain to encounter. They can refer back to the IPS and see that turbulence was an expected condition, and that their financial plan and portfolio were prepared for it. If we have carefully chosen and calibrated our instruments prior to take-off, they can see us through even a very rough ride.

If, during this very turbulent time, you’ve been feeling like your investments are going in the wrong direction or that you need some gauges to check, perhaps a meeting with your financial advisor to discuss these ideas and your financial plan and portfolio is in order. At Foster Group, we are offering a “Second Opinion” to investors. We will review your financial plan and current financial condition along with your portfolio, at no charge or obligation to you. We will then present you with an evaluation, our “opinion,” regarding the general “flight-readiness” of your investment portfolio and overall financial health. You can learn more about our Second Opinion offer at www.fostergrp.com/second-opinion.

Are Markets Still Efficient

noreply@fostergrp.com (Kent Kramer) — Mon, 05 Oct 2009 15:16:00 CDT

Are Markets Still Efficient?

Professor Gene Fama reflects on recent stock market volatility and the Efficient Markets Hypothesis.

2008 and 2009 stock market events left may investors wondering about the long term viability of capital markets and whether there were irrefutable signs that investors should have seen early on (e.g. the Bear Stearns collapse in May of 2008) that would have led them to exit the stock market avoiding it’s “predictable collapse” in September and October of 2008.

These types of questions are addressed by an idea called “The Efficient Markets Hypothesis” (EMH) first proposed by Professor Eugene Fama, an academic at the University of Chicago. Dr. Fama’s research demonstrated that there was little to no actionable information regarding stock prices that was not already factored into the current stock price. In essence, the “market”, made up of millions of investors, sets stock prices every day, all day, based on all information available.

In a recent interview, Dr. Fama took a few minutes to explain and defend the ongoing empirical evidence for the EMH and what that means for investors. To summarize, Dr. Fama’s counsel to investors is that they are (still) best served by holding a highly diversified portfolio of stocks and bonds. The way to mitigate risk is to hold a smaller percentage of stocks relative to cash and that higher returns require exposure to increased risk, i.e. more stocks.

In the interview Dr. Fama also addresses questions about whether the incredible increase in price volatility somehow weakens or contradicts the Efficient Market Hypothesis. His answer was given in two parts:

1. The market can only know what is knowable, it cannot resolve uncertainty.

2. The increase in volatility (in 2008) was to be expected given the incredible economic uncertainty of the previous 12 months.

On reflection I think we can all agree that economic uncertainty was at an all time high in mid to late 2008. Every day brought about new “revelations” of weakness in financial companies and by extension in larger economies. In addition the US government and foreign governments were taking unprecedented actions to try and stabilize the world economy. Each of these revelations (something new for the market to know) created more volatility, in this case downward volatility.

The lesson for investors though, according to Dr. Fama, is not to think that they should have made better decisions about when to exit or enter the market (that knowledge did not reliably exist), but whether they have an appetite or tolerance for risk commensurate with the volatility associated with the amount of stocks that they owned.

Dimensional Fund Advisors (on whose Board of Directors Dr. Fama still serves) has made this interview available on their public website. It’s eight and one half minutes long and well worth watching. You can find it at:

http://www.dimensional.com/famafrench/2009/08/fama-on-market-efficiency-in-a-volatile-market.html

Anchors Away?

noreply@fostergrp.com (Kent Kramer) — Thu, 10 Sep 2009 15:27:00 CDT

Try the following mental exercise.

Read aloud Question #1 below and answer it before reading and thinking about Question #2.

Question #1: What do you expect your stock portfolio to be worth when the economy recovers?

Question #2: How much was your stock portfolio worth prior to October of 2008?

Now, ask yourself these same questions again, but start with Question #2.

In their book “Nudge,” behavioral economists Richard Thaler and Cass Sunstein have a chapter entitled “Biases and Blunders” in which they cite a concept called “anchoring”. To illustrate this bias / blunder in the way we automatically think, they offer examples that show, “We can influence the figure you will choose in a particular situation by ever so subtly suggesting a starting point for your thought process.”

If you are like the majority of investors, Thaler and Sunstein’s research would suggest that when you answer Question #2 first, the answer to Question #1 will be relatively close to your answer for Question #2. For example, if your stock portfolio was worth $500,000 in mid-2008 and you answered Question #2 first, your answer to Question #1 about how much your portfolio should be worth when the economy recovers is likely to be close to $500,000. Your answer to Question #2 has “anchored” your estimation of the “right” portfolio value.

In recent conversations with investors I have introduced this idea of anchoring as we discuss what kinds of results it will take for people to be happy with their portfolio again. For some, they are focused on getting back to “break even” and break even represents the high point of their portfolio value, likely somewhere in mid- to late-2007. The Dow Jones 30 Industrials index closed at 14,165 on October 10, 2007. On March 9, 2009 the Dow closed at 6,547, a decline of 53.7%. So if an investor was 100% invested in these 30 large US companies, their portfolio that had been worth $500,000 was now worth $231,098, a “loss” of $268,902.

The question I ask next is whether they think the Dow was fairly valued in October of 2007. We now know that there were all sorts of undisclosed and little-understood risks in the financial system at that date. Mortgage-backed securities that were rated AAA were really sub-prime, investment banks and hedge funds were dramatically over-leveraged, and it would only take a slight economic headwind to blow the whole thing over. Usually, on reflection, investors think that the stock market was probably over-valued by at least 20%. Translated into our $500,000 portfolio, that means it really “should” have been worth only $400,000 (20% lower).

Back to March 9^th and our portfolio is still worth only $231,098, but measured from our new starting point of $400,000, our dollar loss has shrunk to $168,902. We still don’t feel good, but our loss is “lower” by $100,000. It’s lower because we are now “anchored” to a different number.

So, is $500,000 or $400,000 the “correct” expectation of what our portfolio should be worth when the economy recovers? The answer is, there is no correct answer! Anchoring is a “Blunder or Bias” because we assume that there is a correct answer to a question that has no single, or permanent, answer. Stock market price levels are temporary and the direction and degree of price movements from day to day tend toward randomness. This is what makes anchoring such a crazy-maker for investors. Every time we anchor a value, our portfolios push or pull us away from that number.

Investment writer Nick Murray once observed of world stock markets that, “The advance is permanent. The declines are temporary.” In terms of modern economic history (at least since the mid- 1860’s in the United States for example) his observation has been absolutely correct. In 1947, during the first post-World War II recession, the S&P 500 stood at 19.6. Today (August 27, 2009), that same stock index stands at 1,031. There have been declines along the way, to be sure, but the advance looks to be permanent.

For most of us, the major function of our investment portfolio is to provide for long-term financial independence in retirement. We will not need 100% of our portfolio on any single day, month or even year. We cannot afford to have our portfolio anchored at one value. We need it to grow over relatively long periods of time, keeping us ahead of inflation and providing income for 25 to 35 years. Instead of being anchored to a past or future number, refocus on a reasonable long-term growth rate from today forward. It’s a much more achievable goal, and a more important one, as it relates to your long-term financial security.

Worried About Inflation?

noreply@fostergrp.com (Kent Kramer) — Wed, 26 Aug 2009 10:46:00 CDT

Increasing concern about inflation has prompted investors to ask questions about at least two “inflation hedges”: Gold and TIPS (Treasury Inflation Protected Securities). While there are plenty of things that could be said about both, here a couple of caveats that have caused us to not include these in our client portfolios.

Recent history for gold as an inflation hedge is less than conclusive.

“In the five highest inflation years since World War II – 1946, 1974, 1975, 1979 and 1980 – the average real return on stocks, as measured by the Dow, was minus 12.33 percent compared to 130.4 percent for gold, according to metals dealer Blanchard & Co. But there are problems with relying on gold alone as a hedge to inflation. Specifically from 1980 to 2001, prices in general doubled, but gold’s price fell from $850 to $257.” Research Magazine, July 2009, Inflation Proofing

Investors thinking about gold as a hedge or alternative to equity markets need to look carefully at gold’s price history. As the article mentions, gold’s price in 1980 (29 years ago) was $850 / ounce. Gold was trading in the mid $800’s as recently as December 2008 representing a 0% return over 29 years, before inflation. That would have been an expensive “hedge” compared to stock and bond returns over the same period. To capture positive return from gold, investors must be able to buy and sell at the right time. Historically, the ability for any investor to consistently do this has proven to be very, very difficult.

Compared to gold, using TIPS as a long-term hedge against inflation should prove to be far more effective if investors can buy and hold them to maturity. TIPS are government bonds whose principal value is adjusted monthly based on changes in the CPI-U. Future coupon payments are based on this adjusted principal value. At maturity, the inflation adjusted par value is repaid to the investor. If the period has been deflationary, the principal value repaid would not fall below the original par value.

But this inflation hedging comes at a price. TIPS are relatively long-term bonds, making them subject to price volatility as interest rates change. For example, the market price for TIPS fluctuated between 89.3 and 135 in 2008 (Wealth Manager, July/August 2009, “Riskier Than You Think”.) This price volatility means that an investment in TIPS should be considered a long-term holding since short-term liquidity cannot be counted on. Also, TIPS generate taxable income on both the coupon payment and the increase in principal value each month. This increase in principal value is a type of “phantom income”, causing an increase in taxable income with no increase in current cash flow to the investor. As a result, TIPS are best held in a tax-sheltered account.

Foster Group continues to believe that short-term, high quality bonds provide stability and liquidity in the portfolio versus longer-term bonds which may add unwanted volatility. In today’s very low interest rate environment, rates seem more likely to rise than fall in the near- or intermediate-term, putting downward pressure on the price of long-term bonds, whether they are inflation-protected or not. TIPS represent an interesting inflation hedge, but they may not be able to provide the short-term liquidity and stability many investors want in times of economic and market uncertainty.

How to make excess cash work for you

noreply@fostergrp.com (Kent Kramer) — Mon, 13 Jul 2009 09:55:00 CDT

How much cash is too much cash?

Today there are plenty of measures which indicate Americans are currently sitting on more cash assets (Money Market accounts, CD’s, checking and savings accounts, etc.) than at any time in history. Of course, some of this is due to the incredible declines experienced in stock markets during 2008 and early 2009 which chased numerous investors out of equity markets, but some of these cash balances are the result of individuals and families slowing down spending and creating short-term reserves (a healthy development in our view).

The question today is, “What should individuals and families be doing with these cash reserves that in most cases are earning well less than 1%?”

We’re recommending that clients consider these cash reserves as providing a great opportunity to shore up their overall balance sheet as well as to invest additional dollars into long-term portfolios at relative low prices.

For many, paying off mortgages, home equity lines of credit (HELOC) and auto loans, or funding emergency cash reserves and education savings accounts have been hard-to-reach goals that may now be within reach. These goals have always been worthwhile, but when stocks markets were “always going up” and credit was easy to get, they didn’t seem as urgent.

After paying off high-interest credit cards, the goal of first importance is your cash reserve. Holding 3-6 months of actual living expenses in a money market account (separate from your ordinary checking account) is nearly always advisable. This has proven to be especially true in today’s employment and business environment. In the past year almost every worker has felt some type of pressure, whether concern about losing a job or seeing income from their profession or business decrease. These circumstances highlight the wisdom of having a cash reserve.

After the cash reserve, consider further reducing debts. Any debt with a rate more expensive than your cash return is fair game. For example, an average HELOC with an interest rate of 3.5% would, historically, be considered “cheap money”. However, if you’re currently holding cash, the return on that is likely to be two-and-a-half percentage points lower. Now’s a good time to eliminate debt like this, especially if it has a variable rate. Short-term interest rates really have nowhere to go but up. By eliminating debt now, it won’t become more expensive later and you’ll have the peace of mind of having fewer obligations.

Funding education accounts can be an excellent use for extra cash. If your children are nearing college age (high school sophomores or older), consider a moderate or conservative asset allocation inside a 529 plan. Younger children could have more equity exposure inside their 529 plan accounts since long-term growth is still a reasonable goal (just remember to not be too aggressive if you are holding cash due to fears over this past market decline!). For Iowa parents and grandparents, utilizing College Savings Iowa generates an immediate tax deduction (an automatic positive return) as well as tax-deferred, or tax-free, returns over time.

Finally, we believe that you should use some of that excess cash to invest in a portfolio of globally diversified fixed income and equity mutual funds. You will likely find that to be an excellent decision five to ten years from now. Stock market indices are at levels not seen for ten years or more and it’s reasonable to expect some good (though possibly very volatile) returns in the coming years.

As always, Foster Group recommends a highly diversified investment strategy when considering stock market investing. Some people will be tempted to invest in unusually beaten down individual companies, trying to magnify their return. Unfortunately, history shows that investors who engage in this type of stock picking tend to do worse than if they held a portfolio consisting of broad asset classes made up of thousands of stocks from all over the world.

The past 18 months have reminded all of us that our investment strategy needs to be driven by an overall financial plan. Good financial plans include appropriate cash reserves, regular funding of short- and long-term goals using appropriate vehicles, and limited use of debt, among other things. If you haven’t updated your financial plan recently, there’s no better time than the present.

What NOT to do...

noreply@fostergrp.com (Kent Kramer) — Fri, 19 Jun 2009 09:18:00 CDT

“If you want to reverse decline, be rigorous about what not to do.”

Jim Collins, author of “Good to Great” and “How the Mighty Fall”, quoted in Business Week, May 25, 2009

I must admit to loving quotations. Two of my favorite books are actually collections of quotations. Shorter than books, journals or magazine articles, the best quotations usually convey one very powerful idea in a memorable way; they offer something you can immediately apply to your everyday living and thinking. They change your perspective just enough to cause you to look at things in a different light.

Jim Collins’ statement struck me that way. I could think of all kinds of applications. I want to lose weight; be rigorous about what not to eat. I want to increase my cash reserve; be rigorous about what not to buy. I want to improve the relationship with my wife and children; be rigorous about what not to spend my time on that keeps me from being with them. One application for the federal government might be, “We want to improve the economic well being of taxpayers; be rigorous about what programs not to spend money on” (Hmmm…maybe that’s a little too optimistic).

In the Business Week article where the quote appeared, Collins is summarizing some key ideas from his recent book on corporate failures, “How the Mighty Fall.” He enumerates five stages of organizational decline, calling the fourth stage “Grasping for Salvation.” In this section, he describes the actions of leaders succumbing to Stage 4 thinking this way:

“. . . our survival instinct and our fear can prompt lurching – reactive behavior absolutely contrary to survival. The very moment when we need to take calm, deliberate action, we run the risk of doing the exact opposite and bringing about the very outcomes we most fear. By grasping about in fearful, frantic reaction…(they)…accelerate their own demise.”

Of course, I could not help applying this idea to investors. In periods of financial uncertainty we, as investors, are tempted to look for something (or someone) new - the silver bullet that will quickly solve our current portfolio or financial problem. Predictably, the financial industry is fully aware of this and has already redoubled its effort to package and sell lots of “new and improved” investments and strategies. For example, how about:

1. A CD tied to the daily return of the S&P500,

2. A “private equity” hedge fund, now marketed as a very public no-load mutual fund,

3. Gold, preferably purchased from someone with a British accent, because “it’s never been worth zero”,

4. “Green” company stocks, almost guaranteed to benefit from the federal stimulus package,

5. A variable annuity with a minimum 7% “guaranteed” growth rate (though your income from the annuity will be “somewhat” less).

While some of these “new” or newly repackaged ideas may have merit in some situations, chasing them all moves us away from an effective simplicity toward a confused, and potentially destructive, complexity.

Collins’ words serve as a warning for those of us who think that to reverse decline we must not only do something new, but we must do many new things, as though an increase in quantity of action will increase the quality of result. As one wise and experienced portfolio manager said during the stock market boom of the late 1990’s, “Don’t confuse activity with genius.” Those words are applicable in today’s difficult market as well.

Candor, Transparency & Simplicity

noreply@fostergrp.com (Ed Green) — Fri, 19 Jun 2009 09:09:00 CDT

In late April, I had the opportunity to attend an investment symposium offered by Vanguard Funds. The lead-off speaker was Bill McNabb, their current CEO. Bill’s talk centered on how Vanguard has navigated the past year or so, as global equity markets got trounced.

I’m sure the talk was designed to instill confidence in the investment advisors in the room; Bill did a good job of that. As an aside, many of our clients hold Vanguard funds in their portfolio; if you’re among those, rest assured Vanguard has weathered the storm well and will likely emerge a stronger, better firm when this is all over. Now, back to the story.

Bill talked about three things he believes are critical in the relationship between investment advisors and the investment firms they deal with; candor, transparency and simplicity. I won’t take the time here to relate his thoughts on the advisor/fund company relationship, but his comments got me thinking. Perhaps now, more than ever, those items are equally critical in the investor/advisor relationship.

Given everything investors have endured over the past year-and-a-half, if they need anything from their advisor right now, it’s candor. Not smoke and mirrors, not technical jargon, not “tell me whatever it takes to make me feel good”. They need an advisor who will tell them straight out how their future plans have been altered by a decline in the value of their assets, even if it’s unpleasant, and how to effectively make choices and plans for the future based on this new reality.

Investors need transparency from their advisor. Transparency on how the advisor has been affected from a business standpoint (Are you financially solid? Can you continue delivering the services you promised?) and an emotional standpoint (Are you still capable of giving me rational advice?). And transparency in their investment strategy. There shouldn’t be anything about how or why the advisor does things that they can’t explain or won’t tell you.

Investors needing simplicity from their advisor may seem counter-intuitive, but you can bet one outcome of this downturn will be a rash of “sophisticated” investment products (many with very high sales charges) being pushed on vulnerable investors who feel the need to “make up lost ground.” I read a recent Wall Street Journal article where, in a single paragraph, an advisor recommended more exposure to hedge funds, church construction bonds, gas-drilling projects, managed futures and private partnerships in real estate and railroad cars. The fact that there are people smart enough to construct these investment vehicles doesn’t necessarily make them good ideas for investors. If the basic concept can’t be explained in five minutes so you understand it, red flags should go up. Sound, long-term investing borders on “boring”. If you want thrills from your money, take just a little and go to the casino. Invest the rest in a broadly diversified, prudently engineered portfolio of solid and boring assets and securities. In our professional opinion and experience, this is what will give a high probability of success to your investment endeavors.

Four Wonderfully Powerful Truths About Investing

noreply@fostergrp.com (Kent Kramer) — Mon, 15 Jun 2009 16:47:00 CDT

Wisdom: The ability to see life and circumstances as they really are (not as we’d like them to be) and the courage to act in accord with that reality.

There are many definitions of wisdom and knowledge that have been offered over the centuries. The difference seems to be that knowledge is based on receiving information and facts, while wisdom makes sense of those facts, interpreting them and organizing them so that life and circumstances can be navigated more successfully. For most of us, navigating the world of personal finance and investment is a part of our journey.

In the forward to the recent fourth edition of Roger C. Gibson’s book Asset Allocation – Balancing Risk and Return, Charles Ellis lists “four wonderfully powerful truths about investing” that can certainly be described as wisdom for the contemporary investor. Here they are:

1. The dominant reality is that the most important decision is your long-term mix of assets: how much in stocks, real estate, bonds or cash.

2. That mix should be determined by the real purpose and time of use of money.

3. Diversify within each asset class – and between asset classes. Bad things do happen – usually as surprises.

4. Be patient and persistent. Good things come in spurts – usually when least expected – and fidgety investors fare badly. “Stay the course” is also wise. So is setting the right course – which takes you back to great truth 1.

We don’t have to look very hard to recognize that Ellis’s wisdom from decades of investing as well serving on the faculties of Harvard, Yale and NYU, is on display in these words, given recent events. Truth number three; “Bad things do happen – usually as surprises” basically defines calendar year 2008. Who would have thought the US investment banking community, the financial “masters of the universe”, would so badly misjudge risk as to basically take down their entire industry with ripple effects throughout every world economy? Calendar year 2008 saw one financial “bad thing” after another, and each time people asked in surprise, “How did that happen?”

Truth number 4 seems to be on display during the second quarter of 2009. “Good things come in spurts – usually when least expected”. On or around March 9, 2009 most news sources were (and many still are) full of negative reports and economic forecasts. And why not? Every world equity market was continuing to decline; most were down between 40% and 60% from their high and showed no signs of stopping their descent. Now, three months later, those same equity markets have risen from 20+% in the US to well over 50% in some foreign markets! Good things coming in surprising spurts indeed! While there is quite a ways to go in terms of fully recovering all market losses, these past three months seem to confirm Ellis’s fourth great truth.

By the way, did you notice the common factor in Ellis’s third and fourth truth? Surprise! To manage surprise, Ellis refers investors back to great truth number one having to do with setting the right course through the choice of a long-term asset mix.

At Foster Group we agree with Ellis on all four of his “great truths”. Our commitment is that every investor will have a long term Investment Policy Statement (IPS). At the core of our IPS is a highly diversified asset allocation based on the specific personal needs and circumstances of the investor. See great truths 1 and 2 above.

While we did not “foresee” all the bad news of 2008, nor the remarkable “spurt” of good returns this past quarter, both experiences lead us to believe that Ellis and others are right about the wisdom of long-term discipline in the portfolio. Regardless of the current media noise claiming the world has completely changed, Ellis’s “four great truths” represent the kind of wisdom that continues to correspond with reality and provide investors with the courage to act.

Gene Fama, Jr. on the Power and Resiliency of Capital Markets

noreply@fostergrp.com (Kent Kramer) — Thu, 16 Apr 2009 09:05:00 CDT

“One of the best leading indicators is when even the most diligent and careful investors are ready to leave equity markets. Then the cost of capital is the highest and prices are the lowest.”

“The cost of capital has been rising…as prices fall the expected return of stocks is rising and right now capital market investing may be less risky.”

“Political risk is priced risk…countries will choose in their self interest to keep capitalism and markets alive.”

These three comments are just a sample of the many interesting ideas shared by Gene Fama, Jr. in an April 6, 2009 conference call with Foster Group’s financial planning and investment team. Gene’s thoughts and comments during this call (and at the April 22^nd Wise Wealth lecture – see below) combine his insights on the global economy, investment markets, capitalism, and the current political environment.

In a period of such great global upheaval and uncertainty it is easy for investors of all types, from professionals to novices to get caught up in the short term noise of media punditry and political posturing. There has likely never been a more “noisy” time to be an investor than the period that began with the collapse of Bear Stearns in March of 2008 and continues today.

In these times we all need to be reminded about the foundational ideas which continue to support successful economies and capital markets. Because these ideas are not the ‘Headline News” of the day, they are easily crowded out and forgotten in the frenzied discussion. This is why voices like Gene Fama, Jr are so helpful.

Regarding the strength and resiliency of capital markets, he reminds us that this system has produced enormous wealth and improved the standard of living for billions of people over the centuries. No other economic system has come close. China, one of the most “successful” communist regimes in history has realized that even it must allow for capital markets to function relatively freely within its economic borders because the benefits both to the government and to its citizens are too great to ignore. On the subject of China and capital markets, Fama commented that “they (markets) do not need a careful or gentle gardener…they are pervasive and resilient…they are adaptive…It is only the constant assault of the politicos and media that make belief in capital markets so tough.”

Foster Group is very pleased to be able to host Gene Fama, Jr. for our first Wise Wealth lecture series event on April 22, 2009 at the Des Moines Golf and Country Club. Eugene F. Fama Jr. is a Vice President for Dimensional Fund Advisors and adapts academic research to the real world of investing. His presentations make complex ideas not only understandable, but useful and fun. Gene has spent more than fifteen years cultivating, refining, and discussing Dimensional's efficient markets investment philosophy. His writing and speaking helps clarify detailed ideas like asset pricing and diversification, and explains why these principles are so important for investment plans. He holds a B.A. in economics from the University of Chicago.

The event starts at 6:30pm with appetizers and refreshments. Gene will begin his comments at 7:00pm. You can register for the event on the Foster Group website or by calling 515-226-9000 or (800) 798-1012.

The Reliability of Economic Forecasting

noreply@fostergrp.com (Ed Green) — Thu, 12 Mar 2009 15:42:00 CDT

Investors thinking about making a change in their portfolio allocation often look to the world of economics for guidance. Their decisions will be based largely on their expectation for economic conditions to improve, or worsen, in the future.

The data informing these decisions come from numerous sources: newspaper and magazine articles, cable financial shows, internet sources – the list is long. Some form their view of the future by independently studying the data and drawing their own conclusions. Many simply repeat data and opinion that originated with other sources. Regardless the source of the information, investors make important and perhaps life-changing decisions based on its presumed accuracy.

In an article posted on the website of the Federal Reserve Bank of St. Louis (www.stlouisfed.org), author Michael W. McCracken briefly discusses the reliability of economic forecasting in a study of the Survey of Professional Forecasters. Of particular interest is the finding that the error rate of the forecasters actually rises dramatically during periods of recession, exactly when most investors need the greatest accuracy. Specifically, the forecasters seem to have little ability to predict the turning point, when the economy shifts from being in recession to a growth phase or vice versa.

Read the full text of the article here:

http://research.stlouisfed.org/publications/es/09/ES0909.pdf

Our belief in the premise of “efficient markets” suggests that all available information and expectations about present and future economic conditions is already factored into today’s prices. Changing your portfolio based on an economic forecast implies you have information not widely available to the market or that you’ve identified something in the data that the majority has missed. The likelihood of either condition being true is remote.

While we may not like the prices as markets have currently set them, there’s a high probability that they account fairly for the possible risk of the economy performing poorly in the future. As a result, they adequately compensate investors who are willing to buy at today’s prices for accepting that risk.