By Jeff A. Christie, February 25, 2010

I have been hearing a lot of talk and reading quite a few articles about bonds lately, and whether or not now is a good time buy, sell or hold on to them.  This is a hot topic for a few reasons, concerns about inflation, expectation of rising interest rates, and recent floods of capital into the bond market causing a possible bubble.  I will address all three of these concerns and give you the reasons I am still a fan of these fixed income vehicles.  And as an aside, when I say I am a fan, it has nothing to do with my personal feelings.  At Ken Stern & Associates we believe that when managing money, you cannot rely on beliefs or hunches, but on comprehensive modeling and planning based on probabilities.

Lets start out with some quick background; the two worst things for bonds are inflation and rising interest rates.  Inflation erodes the return on bonds, as their interest rate is generally fixed, meaning you receive the same amount of dollars, but now each of those dollars will buy you less.

Rising interest rates hurt bonds by pushing down their price.  If I bought a bond a few years ago and it has an interest rate of 4%, but the current market rates are closer to 5%, then I will have to sell my bond at a discount in order to give it a comparable yield to current issues.  With that in mind, lets discuss the current market conditions.

Inflation:

Many people expect that inflation will become an issue in the U.S. within the next 6-18 months.  We have seen unprecedented government spending, and a market that has been flooded with liquidity to try to thaw out the credit freeze and boost the economy.  Knowing what you know about inflation, you can see why this would pose a threat to bond investors.  But, there are ways to combat this.  One specific way that many investors use to guard their bond portfolio against inflation is to use inflation-protected bonds.  The U.S. Treasury issues Treasury Inflation-Protected Securities (TIPS), which actually provide protection against inflation.  The principal of TIPS increase with inflation and decrease with deflation, as measured by the Consumer Price Index. When TIPS mature, you are paid the adjusted principal or original principal, whichever is greater.  Also, the interest rates on these notes are fixed, but if the principal is adjusted upward, then the actual dollar amount of the interest paid is higher, as it’s based off of a higher principal value.

Please note, bonds and TIPS investments may not be suitable for all investors.  Investing in bonds involves risks including, but not limited to, interest rate risk, credit risk, market risk, inflation and high-yield risk, and possible loss of principal.

TIPS are fixed income securities whose principal value is periodically adjusted according to the rate of inflation.  However, like other bonds, TIPS are subject to capital gains or losses in the marketplace prior to maturity; TIPS are based on the inflation adjusted principal value of the bond, which can adjust below the bond’s face value before maturity for the purpose of calculating interest payments, potentially causing decreasing interest payments in deflationary environments.  The U.S. Government guarantees repayment of either the inflation adjusted or original principal amount (whichever is greater) at maturity.  Neither the current market value of inflation-indexed bonds nor the value of a portfolio that invests in inflation-indexed bonds is guaranteed, either or both may fluctuate.

If you would like to hedge your bet on a falling dollar as well, you can purchase international inflation-protected notes.  The governments of developed and emerging economies issue these notes, and again the principal on these notes are adjusted upward or downward based on local inflation measures in their individual countries.  This type of security can offer the benefit of added diversification and may be a compliment to U.S. TIPS for those who think the dollar will continue the tumble it has in years past.

In addition to the risks mentioned above, foreign investments also present unpredictable risks.  International investments may involve risk of capital loss from unfavorable fluctuations in currency values, and from differences in generally acceptable accounting principals.  Also, losses may result from political or economic instability in other nations, and changes in interest rates.  Investments in emerging markets or concentrations within a single country are subject to greater risk of loss and volatility.  Diversification does not guarantee against losses, it is a strategy used to manage risk.  Just ask everyone who invested in Greek bonds over the past few years.

Rising Interest Rates:

Another headwind to the bond investor is the likely possibility of interest rates rising in the near future.  The Fed has done its best to keep the economy afloat by making money very cheap to invest, something that cannot be done in perpetuity.  Realistically, interest rates have almost nowhere to go but up.  Just this week, the Fed raised its discount rate, but has not moved the Fed funds rate.  So does this mean bond investors should sell and run for the hills?  I don’t think so, although there is real pricing risk in the near future for many bonds, I do not believe there are many alternatives that can generate bond-like yields in the meantime.  Many money markets and certificate’s of deposit (CD’s) are paying paltry amounts, moving all of your funds into high dividend equities carries along with it a whole different set of issues altogether, and real estate is still very unstable.

One way to combat the issue of rising interest rates is to vary or ladder the maturities of your bonds.  Longer-term bonds have more interest rate risk then shorter-term bonds.  Another thing to note is that if you hold individual bonds and plan to hold on to them until their maturity, rising interest rates are essentially a non-issue.  Although the price of the bond may fluctuate in the short-term, you will still receive 100% of par value when the bond comes due as long as the creditor is still viable.

The principal value of bonds will fluctuate with changes in market conditions.  If sold prior to maturity, bonds may be worth less than their original cost.  Depending on the types and amount of securities within it, a bond ladder may not ensure adequate diversification of an investment portfolio.  You should carefully evaluate whether a bond ladder and the securities within it are consistent with your investment objectives, risk tolerance, and financial circumstances.  You should discuss this with your financial consultant before implementing this strategy.

Another potential strategy to mitigate interest rate risk is to purchase various types of bonds, that way, although the overall price may be coming down, if you add in some corporate bonds, international bonds, even high-yield bonds, they will coming down from a higher place, and you may receive better interest rates then that of government paper.  You can still find a lot of bonds out there that are already trading at discounts to their par value, not because of interest rate issues, but due to the recent financial crisis.  If you can find bonds that you are comfortable with, and companies that you think will be around in the future, now may be a time to consider these types of bonds.

Bond Bubble:

Lately some analysts have been concerned that a “bond bubble” is forming due to very high capital flows into the fixed income market.  In 2009’s stock market rally, it has been calculated that for every $1 that went into equities, there were $7-8 going into bonds.  But, more capital inflows does not a bubble make, especially in a market that is very large, and based off of an instrument that has fixed cash flows (depending upon the credit quality of the issuer).  Of course there is risk in the bond market, if there wasn’t you would not receive a higher yield then insured investments.  But, I do not believe that too much money chasing too few bonds is really an issue.  I think the disparity between capital flows into stocks vs. bonds is the result of a huge number investors deciding they no longer wanted the higher risk of growth oriented investing, and have changed their tune for the long-term, not just parking cash until the stock market stabilizes.

Summary:

If you plan to buy or simply hold on to bonds, do so with your eyes open.  Bonds face a difficult and bouncy road ahead, but I feel, depending on your personal situation and investment objectives, it may be one worth traveling to receive the yields bonds offer, not to mention potential diversification benefit in a portfolio.  Take a look at different types of bonds, different issuers, maturities, credit-qualities, terms, and of course speak with your financial advisor before investing.  There may be some attractive buys out there in the fixed income market if you know where to look, it’s just not as easy to see as it may have been last year.

Good luck, and investing.

Jeff A. Christie
Wealth Manager

Ken Stern & Associates
CRD# 4889641
CA Insurance Lic.# 0F01343

Whether you have recently been laid off, have changed employers, or have been with the same company your entire career, you may be eligible and it may make sense to take a look at rolling your 401(k) to an IRA.  There are many benefits to rolling your 401(k) to an IRA, but there are also possible drawbacks to be aware of as well.

First, let’s examine why rolling may make sense.  The primary reason is control and flexibility of your investment options.  When you are investing inside of your 401(k), you are limited by your investment options.  You can only use the options that your employer has provided for you.  What if you are interested in gold or oil, and they don’t offer those alternative?  Or what if they don’t offer exposure to the international markets you are looking for?  If you roll into an IRA, you have now opened up a much broader spectrum of investments you can use, increasing your control and your flexibility.

What if I am still working, can I roll my 401(k) to an IRA?  It depends, each plan is different, but some plans to allow you to execute what is known as an in-service rollover.  An in-service rollover allows you to roll a portion of your current 401(k) into an IRA, while still continuing your contributions to the 401(k).  Many providers are flexible, especially if you are over age 59 ½.  Contact your employer’s human resource department or 401(k) provider for more information.

Are there any drawbacks?  There are, one specific drawback is withdrawals during early retirement.  You are eligible to begin withdrawals from a 401(k) at or after age 55, penalty free, if you sever your relationship with the employer once you have reached age 55.  You will of course still pay the taxes owed on your distribution, but no early withdrawal penalty of 10%.  This exception only applies to 401(k) accounts, and only the 401(k) account that is active at the time you turned 55.  Check out IRS Publication 575 for more details (http://www.irs.gov/publications/p575/index.html). Although there are a few exceptions, you cannot begin withdrawing assets from an IRA without penalty until age 59 ½, however you are still subject to ordinary income tax on the withdrawal.

Rolling your 401(k) to an IRA can be an easy and quick way to increase your investment options, and strengthen what may very well be the biggest vehicle in your retirement plan.  As with any decision concerning taxes and investments, please consult the proper professionals.

For more information, feel free to email me at jchristie@kenstern.com or call me 1-800-529-2884.

Jeff A. Christie

Wealth Manager
Ken Stern & Associates

CRD# 4889641
CA Insurance License# 0F01343

By Jeff A. Christie, February 16, 2010

This is a question that has been under great debate in recent years, and continues to be a hot topic.  Investors are always looking for a rule of thumb to point them in the right direction, but really, the answer lies in your personal goals and in your risk tolerance.

In the last ten years, many believers in Modern Portfolio Theory have generally kept their direct international exposure in an equity portfolio between 10-20%.  But, in the last few years, many investors are moving towards the upper end of this range, if not even higher.  There are a few reasons for this move, better information, more transparent accounting practices, increased globalization, and increased speculation on emerging economies and international markets outpacing the growth of the United States.  But, the question remains, how much makes sense for you?  Well, it depends.

My goal today is to give you food for thought, and allow you to make an educated decision.

For:

Many analysts estimate the United States is no longer going to be economic world power it once was.  We were once the mediator between many emerging trading partners, and this role is quickly diminishing as many international markets are now trading directly with each other.  We were also the major consumer of many countries’ goods & services, which is also changing, but more slowly.  If the last year is any indication, the U.S. is not going to lead the global economic recovery the way many expected, and in fact the emerging markets are fast becoming a hot beds of growth, and beginning to play well with their emerging neighbors.  If the U.S. is no longer their major trading partner or flow-through to their trading partner, this could point to higher growth in comparison to the U.S. markets.

One other thought to consider is prior performance, which as we all know, is not indicative of future performance, but especially so in this case.  Many investment models use past performance in order to try and predict future results, or to at least give a framework to do so.  I do not think that the back-testing of most international markets, especially emerging markets, is going to have much predictive power as we move forward.  They have been become much more stable, are more linked via technology, and in many cases have seen more democratic or flexible leadership emerge.  This makes using historical asset allocation models more difficult to use, as they may overstate the risk taken when investing abroad.

Against:

International investing brings along with it some of its own issues, particularly that of governmental risk, less market regulation and transparency, as well as currency valuation.  That means that although a foreign company’s growth may be fantastic, they may be using different accounting procedures then GAAP (Generally Accepted Accounting Principles), or they may be exploiting some type of corruption in their market, or if they are inside of a dictatorship or communist regime, they may be appropriated by the state.  When it comes to currency devaluation, many people remember the sharp drop of the Mexican Peso, or more recently the huge issues in Greece and Dubai.  These are the types of stories you may hear less and less, but are still a part of investing abroad.

International markets, especially emerging markets, many times do not have the solid and established capital markets that the U.S. enjoys.  Access to capital, and capital and competitive pricing is still an issue.  But beyond the access to it, there is the volatility that comes along with growth.  The “growing pains” of many of these emerging and even more established markets can be a major concern.  With the financial meltdown still fresh in many people’s minds, this has been a double-edged sword for investors.  Some feel the U.S. financial system is so far into ill-repair, that the more simplified capital markets will fare better.  Other’s see the lack of sophistication and derivative markets as evidence that those economies cannot last in their current state and their lending will stall at certain plateaus.

Final Thought:

If you are contemplating adding more international exposure to your portfolio, keep something in mind.  I am a proponent of diversification, but only when it makes sense, and only when it can truly add low or even negative correlation to the rest of the portfolio.   This means that I don’t want to add more international stocks to my portfolio if they are going to perform in a similar manner to U.S. equities.  Many U.S. companies receive much of their sales and revenue from their operations overseas.  It is estimated that nearly 50% of the earnings of the S&P 500 comes from foreign sales.  Many companies, although based in the U.S., have a multi-national or global footprint to consider.  In fact, some investors feel that by simply buying a diverse portfolio of large-cap U.S. companies, they are actually getting international exposure in a de facto manner.

Review your portfolio, your goals, and take into account the thoughts above.  It is important to be as efficient as possible when it comes to risk/reward, and to be sure you are making adjustments in your portfolio as the world changes.

I hope this helps you in creating your own portfolio.  I can tell you that our firm has recently increased our target international exposure in our equity portfolio.  For more information about our philosophies and outlook on the markets, or if you have any questions, please feel free to email me at jchristie@kenstern.com.

Good luck, and good investing.

Jeff A. Christie
Wealth Manager

Ken Stern & Associates
CRD# 4889641
CA Insurance Lic.# 0F01343

It is always difficult to foresee what a new year will bring, but one thing that you know you will receive, are wide-ranging market predictions to start the year off with extra confusion.

This year is no different, I have read outlooks for the year that range from a double dip in the equity markets, with the S&P 500 plummeting below the March 2009 lows, to this is the beginning of an 8-10 year bull rally and the S&P 500 should be around 1300 by mid-year.  It never ceases to amaze me how highly paid, so called market pundits, can be looking at the same data, yet come up with extremely different predictions.  But I’ve got to tell you, I love it.  If you take the time to look through them, pulling out the useful information, but not necessarily subscribe to their conclusions and seeing what they missed, there sensationalistic headlines may lead you to some fantastic opportunities in up or down markets.

I cannot predict whether or not the stock market will go up this year, and if the last few years have taught us nothing else, it is that very few people, if anybody, can.  But I can tell you that up or down, there will be some type of opportunity to pounce on if you are ready.

So the question remains, how do you prepare yourself for this 2010?  I suggest you create a strategy that works for you, stick to it, track it closely, and make adjustments as the market dictates.  As private wealth managers, our firm’s strategy is known as the Alpha System.

The Alpha System takes into account much more then just money management and investing, but for today’s discussion I will stick to the investment side of things.  Our strategy is comprised of three parts, core, tactical and uncorrelated or hedge.  Each part of the portfolio has its own purpose.

The core portfolio is built with longer-term holdings, we look to buy assets that are cheap by historical measures and sell them as they become overpriced.  The tactical portfolio has shorter-term holdings.  The strategy here is to take advantage of short-term market conditions, bubbles or busts, where we think we can make a quick buck and then move on.  The uncorrelated or hedge portion of the portfolio is created using asset classes that have little to no correlation with the stock market.  This portfolio is built to potentially bring absolute return, whether the stock market is up or down.  By combining these three pieces in various percentages depending upon your objective, we will hopefully be able to have the proper balance and flexibility in any market conditions.  If you would like to learn more about our Alpha System, feel free to email me a jchristie@kenstern.com to receive more information.

When it comes to turbulent markets, you have to stick to your strategy, and not outsmart yourself.  It’s like Denzel Washington said in one of my favorite movies, Remember the Titans, when describing his offense, “It’s like novocaine, give it time, always works.”

Good luck in 2010!

Jeff A. Christie
Wealth Manager

CRD# 4889641
CA Insurance License# 0F01343

Recently at the Blog

4 by 4 – Four year End Ideas for the Last Four Weeks of 2009
December 01, 2009
People always ask me what they should take care of before the end of the year;so today’s blog will touch on one idea you can implement each week for the next four weeks to get you prepared for 2010

Forget FAQs, What about SAQs?
October 22, 2009
People often understand the frequently asked questions (FAQ’s) but they also need to know the right questions,  the “should ask questions” (SAQ’s).  This week’s blog is about the questions you should be asking your investment advisor

Should I rollover my 401(k) to an IRA?
July 21, 2009
Whether you have recently been laid off, have changed employers, or have been with the same company your entire career, you may be eligible and it may make sense to take a look at rolling your 401(k) to an IRA.

Can converting to a Roth IRA save you money?
June 23, 2009
First, lets back up and define important differences between traditional IRA’s and Roth IRA’s.

What is Alpha?
June 16, 2009
As an introduction to my firm and to start this new blog, I wanted to answer a question that I receive all the time.  “What is Alpha?”

Jeff Christie is a registered representative of First Allied Securities, Inc. (FASI), a registered broker/dealer.  Ken Stern & Associates (KS&A) is a registered Investment Advisor.  FASI & KS&A are not related entities.

This site and or blog is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security which may be referenced herein.  We suggest that you consult with your financial or tax advisor with regard to your individual situation.

This site and or blog has been published in the United States of America for residence of the United States of America.  Persons mentioned in this site may only transact business in states in which they have been properly registered or are exempt from registration.

People always ask me what they should take care of before the end of the year; so today’s blog will touch on one idea you can implement each week for the next four weeks to get you prepared for 2010.

1. Review your capital gain/loss position in your taxable accounts.  This is important every year, but has added urgency this year, as many people expect the government to raise taxes on capital gains in 2010.  Many times, people will try to get this net gain/loss to zero, or a slight loss; but this year it may be worthwhile to recognize a net gain, as it may be the last time you can do so at the lower rate.
2. Conduct a beneficiary audit.  Although this may not sound like the most exciting tip, it is extremely important, and year-end is a great time to take care of it.  To conduct the audit, call each company you have a 401(k), IRA, annuity, or other type of account that has a beneficiary.  Ask that they send you written confirmation of who the beneficiaries are if you were to pass away.  I am willing to bet that you will be shocked, and that the majority of you will have some type of mistake.  You have worked hard for your assets, be sure they go where you want them.
3. Create a document locator with a password keeper.  A document locator is the compass rose of your estate plan.  It tells your trustee/executor where documents are, where accounts are held, insurance policies, and also what the passwords are to access each of these different pieces.  This can be extremely important and helpful to someone trying to settle your estate, or take care of you if you were to become incapacitated.  Our firm has created a document locator, if you would like a copy, feel free to email me at jchristie@kenstern.com and request a copy.
4. Give gifts that have special meaning to you.  I am not talking about just handing out your possessions, but really taking the time to give gifts to your beneficiaries that have a special meaning to you, that they may not realize.  It is your legacy; make sure they know why you have always worn that watch, or why that painting has always been in the hallway, or who gave you that set of china.  The holidays are a great time to do something like this, as families are already together, and you have the opportunity to take time to tell your story, and tell why that item meant so much to you, and why you want them to have it.

As a fifth and bonus tip, I would encourage you to look into the idea of converting your IRA to Roth IRA, please see one of my earlier blog posts for more details.

I hope this helps you get prepared for the New Year; we don’t have much time left to get ourselves ready.

For more information, feel free to email me at jchristie@kenstern.com or call me 1-800-529-2884.

Jeff A. Christie
Wealth Manager

CRD# 4889641
CA Insurance License# 0F01343

I was at an event recently when another attendee and I started a conversation, and he made a comment that I found to be very insightful.  He had heard of my firm, seen me on tv and listened to me on the radio, and he mentioned that one of the most important pieces of information people need to know is what type of questions they should ask about their investments and financial plan.  He mentioned that people understand the frequently asked questions (FAQ’s) but needed to know the should ask questions (SAQ’s).  So in response to his very wise comment, this week’s blog is about the questions you should be asking your investment advisor.

Question #1: Do you consider risk-adjusted returns as part of your investment strategy?

Risk-adjusted return measures the amount of return you received on an investment relative to the amount of risk you took.  One of the most common ways to monitor your risk-adjusted return is by calculating your portfolio’s Sharpe ratio.  Click here <http://www.investopedia.com/terms/s/sharperatio.asp> to learn how to calculate.  As a general rule of thumb, the higher the Sharpe ratio, the better.

Question #2: Do you measure your returns against an appropriate benchmark?

When it comes to your investments, you must constantly be measuring their performance.  But, do you compare that performance to the right benchmark?  There are many different benchmarks you can use, for instance, when it comes to large cap domestic stocks, most people use the Standard & Poor’s 500* (S&P 500).  But that does not mean it is a good measure for your portfolio.  If you have a high concentration of international stocks, or high yield bonds, or real estate in your portfolio, the S&P 500 would not be an appropriate benchmark.  Ask your advisor what benchmark they use to measure your returns, and be sure it is a good fit for your portfolio.

Question #3: Am I positioned to take advantage of the economic cycle?

The economic cycle is the continuous and variable degrees of economic activity the economy experiences over time.  There are four stages, they are expansion (growth), peak, contraction (recession), and trough.  Does your investment strategy take the current stage of the economic cycle into account?  There are specific sectors of the economy that perform better during the different cycles.  For instance, during a recession, the consumer staples sector tends to outperform consumer discretionary sector.  Does your portfolio have the flexibility to take advantage of this, or is it simply buy and hope?

There are  of course many other questions to ask your investment advisor, but I thought these three would be a good place to start.  I hope these ideas and questions help, and as always, should you have a question, please feel free to email me at jchristie@kenstern.com.

Questions are good, especially when it comes to your investments, so ask them.

Jeff A. Christie
Wealth Manager

Ken Stern & Associates

CRD# 4889641
CA Insurance Lic.# 0F01343

*The S&P 500 in an unmanaged index, investors cannot invest directly in an index.

Retirement Concerns, Sept. 2009

Essential Documents, Sept. 2009

The Economy,  Sept. 2009

Technology, Sept 2009