Insurance, Just In Case

I just learned that a friend's colleague, a young and healthy man, had a stroke today.  His wife is pregnant and they have a one year-old child also.  Prayers for them, and motivation for us.

Do you have enough of the right kind of Disability insurance and Life insurance?  Anything can happen, and if we have others depending on us for income, we can insure something is there if we die or if we are suddenly unable to earn a living.

My firm does not sell insurance, yet it is higher on my list of recommendations than saving and investing (things on which I earn my living).  Think about that, please, and then consider you own situation.

Thank you.

2011 Predictions: Three Different Scenarios

Here are three scenarios for 2011:

Worst...

• HOUSING DOUBLE-DIP of -20%, thanks to spike in foreclosures that were artificially on-hold 2010.
• BOND MARKETS TANK in the US and EuroZone, as over-indebted G20 countries struggle to sell bonds to pay for deficit spending and thus raise rates to attract buyers even though the economies are not strong enough yet to handle higher costs of capital.
• WAR IN KOREA, as S. Korea and USA become fed-up with N. Korea's aggressive antics.
• WAR IN IRAN, as Israel and USA strike preemptively at Iran's nuke facilities, fearing Iran getting "the bomb".
• CYBER-WAR BY CHINA disables critical systems of USA military and exposes its vulnerability.

Best...

• USA ECONOMY RECOVERS FASTER than expected, fueled by continued low interest rates thanks to relative strength compared to other developed-economy countries and by the accelerated roll-out of alternative fuels that reduce geopolitical heat and spur economic growth and hiring; taking advantage of this situation, the government embarks on massive infrastructure-rebuilding programs that create jobs and increase demand.
• USA STOCK MARKET BOOMS, going up 20+%, thanks to good economic/employment data and fueled by record amounts of cash in both corporate and personal coffers.
• IRAQ BECOMES MORE STABLE and the USA really does exit as planned.
• AFGHANISTAN IS BROUGHT UNDER CONTROL thanks to history-making counterinsurgency tactics, mastered in Iraq and modified for Afghanistan, are executed prudently and pecisely; Gen. Petraeus' status as a great leader is solidified.
• WEALTH GAP IN USA CLOSES while regulations and taxes remain limited; evidence provided for posterity that Keynesian pump-priming successfully, but temporarily, served the purpose of stopping the economic free-fall and re-igniting growth before more normal market forces take-over.

Likely...

• WEAK ECONOMIC RECOVER IN USA, but no double-dip recession or second housing-price collapse.
• COMMODITIES, DOLLAR, AND STOCKS all rise, signaling brighter future.
• UNEMPLOYMENT GOES TO 10% as new jobs are not being created fast enough.
• GOP CONGRESS OVERSHOOTS by trying to roll-back most of president Obama's agenda, costing some public opinion points for the Republicans.
• IRAQ INCREASES STABILITY and nurtures its new government, but US troops remain there and are still targeted for attacks by insurgents.
• AFGHANISTAN FLARES-UP as USA tries to maintain a non-kinetic posture and then overreacts to insurgents' attacks in ways that cost unnecessary civilian lives; "Obama's War" starts to look more like an actual war.
• CHINA ALLOWS ITS CURRENCY TO FLOAT as modernists want to be real global player and not be perceived as a manipulative economic bully.

RECOMMENDATIONS FOR YOUR PORTFOLIOS:

• Avoid long-dated bonds of developed-economy governments.
• Own high-quality stocks around the globe.
• Use global/flexible mutual funds and/or portfolio managers for most or all of your investments.
• Keep 5-15% in cash, in addition to whatever the global/flexible fund managers are doing--dry powder, so to speak, in case of emergency and/or opportunity.

GENERAL FINANCIAL RECOMMENDATIONS:

• Life insurance for your dependents
• Disability insurance for yourself and dependents
• Cash for rainy days
• Retirement savings next, before education and other savings (there's no work-study or SallieMae for retirement)
• Refinance your home and investment properties to lower rates, but don't extend your time-frame too much (if you have 18 years left on a mortgage at 7%, be careful about re-fi to 4.875% if you're then going to be right back at 30 years to go...)
• Give generously if you have extra, accept help gratefully if you need it.

What We Expect for 2011

I expect continued market volatility, for economic and political reasons.  This week's debt ceiling stuff is just part of the big picture that I think is already driving the ship.

Developed-market countries are laden with debt and suffering from declining, or no-better-than-anemic economies.  At some point, some major currencies could really devalue and the bond prices of the world's traditionally "best" economies could tank when the interest rates spike in the auction markets as they issue unprecedented amounts of new debt (via government-bond auctions) to fund their ongoing deficit spending.   The USA is not inherently exempt from this just because we're the greatest economic power in history.  Just ask the Romans and British about the notion of indefinite staying-power.

My best ideas for this year:

• opportunistic stock-picking (let's look at that--I like C, VCM, RIG, F, GM and some techies right now--seems they are under-valued and could skyrocket)
• opportunistic commodity bets (gold should go up, oil should go up, copper goes up especially if the USA recovers better than expected)
• global/emerging markets bond picking (as the Asian and other developing markets grow stronger, they can pay lower bond interest rates, boosting bond prices; and countries with rising rates, while posing risk to asset values, at least offer better income payments)
• dividend-paying stocks of high-quality, global companies are a great choice for income-oriented investors since quality bonds and cash alternatives are paying so little now

The big risk I fear, since all this macroeconomic knowledge is kinda baked into the cake, is China's efforts to slow down a bit to avoid the bad kind of inflation--if they over-do it and tank their economy, then it could lead to another global economic train-wreck and US bonds and dollar could go up suddenly.  This is unlikely, but staying nimble and diversified is nonetheless advisable.

 I still like my "Flex" portfolios for these reasons.  It is confidence-inspiring to have Dorsey Wright's Systematic Relative Strength strategy, Mssrs. Avery and Caldwell, and Mr. Cuggino running the opportunistic/unconventional stuff through their mutual funds, and all the more reason to have the Yacktmans and the Eveillard disciples picking our stocks, and Mssrs. Gross and Hasenstab picking our bonds.

Income and Tax Stratification

According to the IRS:

* The top 1% of income-earners ($380,354 and up) earn 20% of income; they pay 38% of all income taxes.

* The top 10% ($113,799 and up) earn 46% of income; they pay 70% of the income taxes.

* The bottom 90% (earning below $113,799) earn 54% of the income; they pay 30% of the income taxes.

* The bottom 50% earn 13% of income; they pay 3% of the income taxes.

Active Management CAN work!

Despite what we read in the press almost every week, there are plenty of mutual funds and some money managers that, after fees and costs and expenses, have outperformed their benchmarks both purely and adjusted-for-risk for long and consistent track records.

Even in bonds, where the margins are probably a lot thinner than with equities.

I don't know how to do it myself, so I am not a fund manager. But I know how to separate managers like we are warned warning against from those with track-records worthy of my clients' and my own money.

The minute I lose confidence in my ability to discern between the consistently worthy managers and the rest, we'll all be using index fund portfolios, and I'll be shifting from being an investment advisor to being a financial planner.

But that's not happening yet. No way!

Here's an example of how my mutual fund portfolio for "moderate" investors compares to the U.S. stock market and to a portfolio of low-cost index funds from Fidelity that represent a similar 60% stocks, 40% bonds portfolio:

Average Annual Return Comparison

Time Frame      PWS' 60 Flex      S&P 500      Index Funds 60/40
1 yr                      14.10                     16.52            11.31
3 yr                        7.04                     -6.49            -1.88
5 yr                      10.47                      1.73              4.30
10 yr                    11.06                     -0.02              3.71

*Data is through 10/31/10; volatility (Standard Deviation) for mine is lower and Alpha his higher, too.

Where Do Millionaires Get Their Money?

Most get their money by working, earning and saving.

80% of US millionaires are the first-generation of their families to get to that level.

Only a very few of them are celebrities and athletes and Wall St all-stars. Most of them are just like you and me, but with a bit more luck, or a better idea, or a better work-ethic. Or a better savings/investment plan...

If you save 5% of your income, you'll have some extra money in retirement to supplement Social Security and any pension you might have. If you save 15%, there's a very good chance you'll be a millionaire.

Talk to me about your strategy. It's what we do, and it works.

The Financial Crisis Was Worse Than We Thought

Per the information released this week by the Federal Reserve, there was a lot more scrambling, perhaps panicking, in the financial markets that most even know. And we knew it was bad. Cases in point:

1) The Federal Reserve has released details on the $3.3T (TRILLION) it extended via more than 21,000 transactions during the financial crisis. The extent of the Fed's aid included help to foreign firms

2) The Fed's Primary Dealer Credit Facility was tapped 84 times by Goldman Sachs, 212 times by Morgan Stanley, and almost daily by Citigroup through April 2009. And most of us know about Bear Stearns and Lehman Brothers.

3) The Fed lent cash to more than a thousand companies, including McDonald's, GE, and Harley-Davidson. Those companies are extremely sound financially, or maybe they weren't. All say they have paid-back their loans.

4) UBS, a Swiss bank whose retail brokerage unit is one of the biggest in the US (comparable to Morgan Stanley, Merrill Lynch and SmithBarney), borrowed a total of $74.5B. Barclays borrowed $47.9B.

5) Nine of the ten largest money-market fund companies, including BlackRock, arguably the best in the business for that ultra-conservativ-but-not-government-guaranteed cash management stuff, turned to the Fed for support.

6) Foreign central banks received nearly $600B of credit.

Say what you want about the politics and economics of the rescue and recovery plans, but the whole entire "city" was on fire, and wondering how to pay the water bill was, at the time, a bit beside the point.

WHAT DO WE DO? Live within or even below your means, have an emergency reserve fund, prioritize your priorities (saving for college is great, but are you on-track for at least a half-decent standard of living in retirement, and do you have life and disability insurance policies that will provide enough to your family if you die or can't work?), and invest around the globe in diversified and nimble portfolios.