Benedict Financial Advisors: Registered Investment Advisor

How does 3.6% sound?

Let’s say you have some serious money. Let’s also say you are a little concerned about the stock market right now? Let’s also say you have no interest in a real estate investing right now? While we are at it, let’s also say that you are fed up with everything that comes out of Wall Street that you don’t want to even talk to any real estate agent, even hearing the word mortgage makes you cringe and there isn’t a single Presidential candidate that you think is capable of doing anything positive.

When reading this you may feel this person is a little extreme, but my guess is that this person is pretty much our Average Joe, with money. Where does this Money Joe put his money in this scenario? The rather dramatic decline in the TEN YEAR Treasury rate tells us that a lot of Money Joes, along with Money Juans and Money Wongs and the rest of the world are satisfied with earning 3.6% for the next ten years.

Would you invest in a ten year certificate of deposit at 3.6% right now?

What do you think inflation will be over the next ten years? Three percent some of you say. Then, assuming that Money Joe pays no income taxes, it appears his “real” return, the return on his money after taking inflation into account, will be about 0.6% per year. If inflation runs a little higher than expected or if Money Joe has to share his profits with the government, then the “real” rate of return is even less, maybe even negative.

What does this tell us about Money Joe’s expectations? I believe it tells us that Money Joes is very fearful for the future and has very low expectations. Money Joe has no place else he would rather have his money at this time.

You may feel that is a sad commentary on our economic situation. I see it differently. When the big money gets very defensive it just may be telling us we are near the end of a cycle. You see it is when money is happily chasing the new stocks, the new real estate deals, etc that we should be concerned because that is usually near the top of a cycle. When money becomes very fearful, it is probably near the bottom of a cycle.

I’m quite certain it will take a few more months, maybe several months, but the stock market cycle just could be approaching the lowest point we will ever see it again. I’m not telling you this to encourage you to rush out and invest in more stocks; I’m just sharing an observation. My advice is to “stick with your plan” and if you don’t have a plan, then get one. Investing without a plan is like the dog chasing his tail…even when he catches it, there is no gratification. Get an investment plan that is part of your financial plan. Take charge and live in peace.

What’s the next Hot thing?

I don’t think he is a big-time investor or anything like that, but I found his question intriguing. “Phil, now that real estate is no longer a good investment and the stock market has bombed, what will be the next thing that skyrockets and then crashes?”

My immediate thought was the Chinese stock market or the Euro/US Dollar exchange rate, but those things are unlikely to capture the spirit of adventure and lust for riches like the Internet stocks of 1999 or coastal condos in 2005. Actually, right now as I write this, if you are able to see fields where corn will be growing in a few weeks, you may be in the next hot thing. By that I mean it is already hot whether it will skyrocket further and then crash, I have no idea. But, farmland is taking on some of the aspects of a financial “bubble.”

In many areas bidders for available farmland are not farmers at all, but “investors.” And, some of the land is being purchased by “overseas” owners who, because of the currency exchange rates, are finding they can buy farmland at truly bargain prices.

In October LandOwner magazine reported that more than 1000 acres of DeWitt County, Illinois farmland was rented, at auction, for $341 per acre. This is almost twice what most farm operators in the area are currently paying to rent land. Landlords of course were very pleased with the news. The same magazine reported in December that 160 acres in Pike County, Illinois was sold for $7,400 an acre, again almost twice the previous prices.

Now land prices may becomes the “bubble” of the day in the Corn Belt that extends from Ontario to Iowa, but I don’t think Suburban Joe in Atlanta, Dallas or Boston is going to get overly excited and push the frenzy to truly exorbitant levels. What will be the next “hot” thing to capture our culture? I don’t know, but it will be fun to see what it turns out to be. Stay tuned.

What are we teaching?

The week of January 22^nd was a rotten week for the stock market. During that week I spoke with a twenty-six year old lady who was very concerned about our future, learned of an eighteen year old girl that stayed at home from school to watch the economic disaster on television and talked to twenty-three year old college student who was demanding that the government keep this horrible experience from happening.

What are we teaching young people these days? The government cannot stop tornadoes, hurricanes, snow avalanches and neither can it keep the financial markets from incurring bursts of fear. The government can’t keep the cost of gasoline at some ridiculously low price or make the cost of milk and bread zero.

Let’s put our brain in gear and forget the emotion of the tube for a few minutes. Let’s look at the stock market over the last six months…the extremely LONG period of one-half of one year. Maybe that is a long time to a television talking-head and maybe to an eighteen year old, but to most people saving for retirement, six months is about as long as a wink. Anyway, six months it is.

At the end of July the Dow Jones Industrial Average was at 13,212 and at the end of January it was 12,650. That decline is hundreds of points or more calmly a decline of a little over four percent. Now we would all rather see the stock market index higher every six months, but that’s never happened in our history, thus I don’t think it is in the cards for the future.

I’ll even accept the argument that the stock market is very likely to decline even further. That certainly wouldn’t surprise me or a lot of others.

But, a decline of four percent is not exactly the end of the world…it’s actually just a very normal part of investing life, get used to it.

What Does It Mean to Me?

When we are putting together an investment strategy we realize we cannot control what the market will do, but we can control, at least to a degree, how sensitive a strategy is to the market. This sensitivity figure is a very important to us as it gives us an indication of how volatile an account will be. Here’s an example you can use for yourself:

Let’s use the last three months. The stock market was close to its high on November 1^st. From that date through January 31^st, in round figures, these stock market indices declined this much:

Dow -7%

Standard & Poor’s 500 Index -9%

Nasdaq -14%

To get a feeling for how sensitive your account is to one of these indices, calculate your percentage decline since November 1^st. (Use your October 31^st balance and subtract your January 31^st balance. Then, divide this change by the October 31^st figure.) For example we recently looked at an account that declined 3% during this period. This would tell us that this account is less than fifty percent sensitive to the volatility of the overall market…at least during this cycle.

You may think that a very low sensitivity to the market is good…it is during down market, but it also limits the growth of an account during good market cycles. There is no right or wrong on how sensitive an account should be to the market as a whole as it is just one piece of creating an investment strategy.

Enjoy it while you can…

She never would have thunk it. Sixteen years ago, the day after her fifty-eighth birthday, she had a major heart attack. She spent the next six or seven months either in surgery or recovering from it. She finally got feeling somewhat better but still found herself weak and somewhat depressed most of the time. The doctors didn’t help her mental state when they cautioned her about being too active and explained how the valve they replaced had a life expectancy of only about ten years…”so enjoy life while you can.”

Eight years ago her husband died. She missed him dearly, but did not miss his constant restrained spending lifestyle. After a few month of mourning she decided to take her doctor’s advice and “enjoy life while I can.” She didn’t travel the world and buy pockets full of diamonds, but she did get a new sporty car and upgraded to a nicer home. She also helped some friends who were in financial need. Ironically she was feeling far better than she did sixteen years ago, but the ticking bomb in her chest was always on her mind.

It still didn’t start to dawn on her until about six months ago that she was going to outlive her assets and her income. She will be left living on her $1,150 monthly social security check. She cashed in her last stock certificate. “What’s next in your life?”

“I never thought I would live this long, but it looks like I’m going to have to start looking for work next Monday. I hope someone will hire me.”

“If you could see tomorrow, would you change today?”

Bears can do good things…

Jimmy called: “I’m planning to retire in less than two years and this “bear” market hits. I wonder if I will be able to retire now.”

Let’s look at Jimmy’s account in a more rational manner. At the beginning of November his account was producing a monthly income of about $4,100. The day after the day fear stuck, January 22, his account was producing a monthly income of about $4,100.  (This is a hypothetical example and is not representative of any specific situation.  Your results will vary).

If Jimmy was dependent on a stock market index to provide his retirement withdrawals he had big reason to be concerned.  However in Jimmy’s case our plan is to provide all or at least the vast majority of his retirement income distributions from the income the account earns. And the income doesn’t fluctuate with the account value.

If fact, the market decline may allow us to increase the income in his account a little faster than we could have without the market drop. Let’s use a couple of examples to see how that works:

• A large North Carolina based electric company pays an annual dividend of $0.88 per share. On January 8^th the stock traded at $20.58, making the annual yield 4.2%. The same stock on January 24^th traded at $18.28, making the annual yield 4.8%. The dividend stayed the same, but the lower market price provided a higher return for new buyers. (Divide the annual income of $0.88 by their January 28^th share price of $20.58 and you get a yield of 4.2%. Divide the same income by the lower share price of January 24^th and the yield is 4.8%. In other words paying a lower price for the same income gives the new owner a higher yield.
• A propane gas distributor pays an annual dividend of $2.44. On January 14^th the stock traded for $36.90, making the annual yield 6.6%. On January 22^nd the stock dropped to a low of $20.30 per share, making the annual yield 9.8%.
• A real estate holding company pays an annual dividend of $1.68. On December 26^th the stock traded for $29.95, making the annual yield 5.7%. By January 22^nd, the share price had dropped to $20.30, making the annual yield 8.3%.

We don’t know if the stock market is going to go higher or lower over the next few months, but we do know that we are going to try and take advantage of some of the higher yields this bear market has given us. (In financial jargon a bear market is a declining market.)