An Issue of Trust

Who can you trust with your money? 
If you ask the individual investor, the answer is "no one."  Not after the likes of Bernard Madoff, Allen Sanford and, now, Goldman Sachs, the crown jewel of investment banks.  So, if you follow the thinking of the individual investor by measuring "Investor Sentiment," you would have drastically cut back in stock investments in December, 2008, and you would not have returned to the stock market yet. 
In other words, you would have sold near the market low.  No wonder Warren Buffett cautions, "Be greedy when others are fearful; be fearful when others are greedy."
I follow a proprietary investment model that measures twenty one economic indicators.  I've built this model over a period of over twenty years, and use it exclusively for two purposes:

1. It is my model, and I use only data from apolitical, independent sources for analysis.  That keeps me protected from data that may have been skewed by someone who has a vested interest in whether I choose to invest or not;
2. It removes all emotion from investment decisions.  If it says that I should be 70% invested, I'm 70% invested.  No panic.  No euphoria.  No need to trust anyone but me.

 When I invested money for other people, it was an invaluable tool.  If my clients wanted to sell low, I showed them that they were doing just that.  If they wanted to buy high, again, I showed them that was a less than stellar strategy.
Discussing each indicator, and how it relates to the overall decision was the subject of a semester's work in an advanced class at UCLA for professional financial planners who chose an emphasis in investment.  Mostly geeks.  I will, however, discuss one part of this analysis, Investor Sentiment, and tie that discussion to the general feeling of mistrust that is currently pervasive with the individual investor.
If you had followed Investor Sentiment as discussed above, you would have sold when the S and P 500 was at 888.61.  It is now at 1192.13.  As reflected above, you'd have sold low and, if you buy back in, it will undoubtedly be higher. 
If, on the other hand, you would have read Investor Sentiment as a negative indicator, i.e., you did the opposite of what it suggested, you would have enjoyed a 34% increase.   Hmmm.  I'm reminded of what my grandmother said when I based my plea to do something on, "Everybody else is doing it."  Her familiar response was, "If everybody jumped off a cliff, would you do it, too?"
So, now we have both Warren Buffett and my sweet little Meema advising us to think for ourselves, and even consider doing the opposite of what others are doing.  In the particular case of the last market correction, that would have been good advice.  But, does it hold true most of the time?
As it turns out, yes.  Investor Sentiment is the most predictive of all twenty one of my indicators, if you do the opposite of what it says to do.  And, I will add, that the stock market is nowhere near the bargain it was in March, 2008, when its cost (P/E)  was about its long term average of $15.82 for every dollar of S and P 500 earnings, but even though the market has come back 75% from its low (25% lower than its high), the individual investor is still not buying.
Back to trust.  Yes, Bernie Madoff is a thief.  Yes, Allen Sanford appears to have bilked thousands of investors out of their money, touting "safe" international CDs.  Yes, it looks like Goldman Sachs took both sides of the bet that the housing bubble would burst.  But does that mean you should keep your money in the bank?  Let's take a look at how that will work for you in the long term.
The best rate I could find for a two and one-half year insured CD was 2.1%.  To calculate your "real return," that is, your return after inflation and taxes, subtract from that 2.1% the current inflation rate, or 2.1%.  Now you're at zero, but you still have to pay taxes on your interest.  For most people,  your marginal tax rate is about 16%.  16% tax on 3% is .48.  So, tax of .48 plus inflation of 2.1 is 2.58.  2.1 - 2.58 = -.48  You're losing about 1/2% annually.
If you're a woman with $100,000 that must last you for 30 years, at that rate, this money will produce about $3100 per year.  On the other hand, if you were to invest in the stock market, using its long term average return of 9%, this money will produce about $9,700 per year.
We live longer.  Inflation hits us harder.  We can put our money in "safe" investments that are guaranteed to lose money over the long term, or we can listen to Warren Buffett and my sweet little Meema.
The choice is yours.

Mid-November Economic Outlook

Some very smart women I know noted recently that some women financial columnists, not unlike some of their male counterparts, sway their commentary toward a political point of view.  In my opinion, that does justice to neither financial analysis, which one would hope would lead where the data follow, nor politics, which one would hope to be policy-driven.  Whatever our point of view, data show both parties have contributed to the deficits we currently have. 
In this column, I endeavor to give financial information as it is, and put it into some historical context, in order that we might understand our best individual financial strategies and which governmental policy decisions one would support which are consistent with a given outcome.
I.  Unemployment
The unemployment rate rose to 10.2% last month.  Anyone who read the July 13 column was expecting this rise, when comparing the recent recession to that in the early 1980's, wherein I noted "the average unemployment rate in the last five months of the recession ended Nov, 1982 was 10.18%, and it averaged 9.8% for the year after that recession was over." 
Although this was expected, it is not good news.  Coupled with the fact that consumer confidence is trending lower, it does not bode well for any sector of the ecomony reliant on discretionary spending.
II.  Other Economic Indicators
Here, the outlook is inconsistent. 

• Housing is trending upward
• Manufacturing is improving
• Non-manufacturing sectors look questionable
• Car sales have slowed after the "cash for clunkers" program ended
• Discount and luxury retail sales are moving slightly upward
• Corporate profits are improving

III.  Conclusion
Economy as a Whole
Given these general economic conditions, it is unlikely that the US Gross Domestic Product will match previous 3.5% growth in the fourth quater.  Given current data and trends, it appears that the year will close with a 2% - 2.5% quarter, and possible decline to 2% at the beginning of 2010.  As the year progresses, if pos-recession employment trends hold true, growth will likely rise to 3% as 2011 approaches.
Investors
Investor sentiment has been very positive of late.  My macroeconomic analysis includes 22 indicators, and of all of them, I think sentiment is most predictive.  It is, however, a negative corollary, i.e., the higher the sentiment, the worse the outcome.  It's not the bargain it was before it rose 50%, and I'll quote Warren Buffett, "Be fearful when others are greedy: be greedy when others are fearful." 
I've started hearing, "Get in before you miss the boat."  That always makes me want to jump ship.

Greed and Fear

I was just looking over a list of the cities where the highest percentage of homes was "under water," i.e., the mortgage is higher than the house is worth. 
And a light went on in my head.
I used to manage money.  I heard people throw around the words "greed and fear" almost every day.  When markets were expensive, EVERYBODY wanted to buy.  When they crashed, you couldn't give stock away.
So, back to mortgages, more than half of the people in these cities owe more on their houses than they can get from a buyer.

• Bakersfield, CA
• Riverside, CA
• Fort Meyers, FL
• Fairfield, CA
• Orlando, FL
• Reno, NV
• Port St. Lucie, FL
• Phoenix, AZ
• Stockton, CA
• Modesto, CA
• Merced, CA
• Las Vegas, NV

That's over 1.8 million households, with houses worth about what they were sometime between 1998 and 2003.  Some of these people had to buy their homes for a new job, etc.  But most, I imagine, saw housing prices go straight up during that period and bought or refinanced, thinking they could make money when they sold.  Now, unfortunately, the majority of people in these cities are on the "fear" side of "greed and fear."
The return on investment for investors in the stock and real estate market, over the long term, is very similar.  Apparently, so is the motivation to buy.  We know, as investors, we should strive to "buy low and sell high," or as Warren Buffett says, "Be greedy when others are fearful: be fearful when others are greedy."  But that's not what we do.
Back to the stock market, you may have noticed it's going up.  A lot.  Let's take a look at that for a moment.
First of all, it's up about 50% from its low.  It came down 50% from its high.  So, does that mean we're back where we started?  Far from it.
Since we're near Thanksgiving, let's use the example of pie.  If we put a pie on the table, and the kids eat half of it, it's easy to visualize what's left: half a pie.  If we increase that half a pie by 50%, we add a quarter of a pie.  We've got 3/4 of a pie, or 25% less than the full pie that we put on the table.
So, if the market is down 25% from its high, does that mean that it's cheap?
If we look at history, the average price investors pay for every dollar the S&P 500 earns is $15.82.  Right now, you'll pay about $21 for next year's earnings.  At the market low, you'd have paid under $11.  So, it's more expensive than its average price, but that's not surprising, since it's roared back over 50% from last March.  Does that make you feel greedy (I've got to get in before I miss the boat) or fearful (I should have bought when it was down, and now it's probably due for a correction).
The best way to feel, in my opinion is emotionless.  Being rational, rather than greedy or fearful, is the best strategy.  One very good strategy is to review your spending, put some money aside every month and invest it no matter where the market is, making sure, of course that what you invest is long term money.  That means you won't be using it for ten years or so.
This constant investing strategy is called "dollar cost averaging," and will result in you buying sometimes when the market is low, and sometimes when it's high.  Overall, you'll average out the peaks and valleys and invest rationally - for the long term.
Then you can leave greed and fear for the drama queens.

Economic Highs and Lows

After a third quarter that dazzled like a diamond in the pile of coal our economy had been for the prior year and a half, we seem to be standing at a crossroads.  The stock market seems economically cheery, but most of us are not.  What's the best action to take in times like these?

I.  Define your goal in dollars

This sounds simple, but is not.  As a matter of fact, if it's done properly, it requires soul searching.  What is your economic goal?  Not your neighbors', not your friends', not your colleagues'.  Yours.
To know that answer is to define what makes you happy.  If you're doing the things that make you happy, then all you need to do is write down how much you spend on your happy life, and ensure you have the means to live it.
If you're not doing the things that bring you joy, however, this is a big job.  You need to visualize yourself in your fulfilled state, and calculate its economic cost.  That may take some time.
But, it's an investment well worth your effort.

II.  Identify your financial challenges

• DEBT

Now, we're going to do the things that will get you to, or maintain your happy life.   If you're paying off debt, especially credit cards, your first step is easy.  Keep paying them down.  This is the singularly most treacherous obstacle to financial health.

• INVESTING

But, what if you were on the verge of retirement, and all of a sudden, BOOM!  You heard the sound of your crashing 401(k).  Or, what about any of us that are on the path toward financial security, but not there yet?  What is the best course of action to take now?
First of all, as you have seen from the stock market's 60% rise since March, selling in a panic is a very bad idea.  If you did, you learned a valuable, if expensive lesson.  You sold when you should have been buying.  You learned why billionaire investor Warren Buffett says, "Be greedy when others are fearful, and fearful when others are greedy."
If you didn't sell, you're down 30% from the highs, and wish you'd invested more earlier in the year. I advised moving back into the markets slowly last November in order to "buy low."  The price of stocks is not as cheap as it was then.  So what do you do?
First, you put nothing into the market you need within the next five years.  You NEVER put money into the stock market that you need in the next five years.  The last year is a perfect example of why that is true.
Next, you realize that, at the last market top the price (or P/E) was 19.7, and at the last low, it was 10.3.  We're at 16.9 - not cheap.  So, it's very important that you think very carefully about buying stocks that have gone up in price very quickly, like Apple, Google and AIG.  A safer strategy right now is quality value stocks, like Microsoft, GE and Bank of America, whose prices have risen less quickly.
Finally, be judicious, but keep investing.  You're not buying on sale, so don't buy all at once.  Buy more when the market is down, and less on days when it's risen quickly, and put in a little every month rather than a lot all at once. 
But, keep in mind this is where your investments return more than inflation, and don't be deterred in saving for your goals.


III.  Watch your personal sentiment
The positive outlook for the US investor is very high right now.  Warren Buffett's advice is worth repeating here, "Be fearful when others are greedy."  Yet, the sentiment outside of Wall St. is decidedly more somber.
Here, we are discussing your personal sentiment.
No one is advocating a Pollyanna attitude.  Things are tough.
But, it is under our complete control how to face our tough situation.  One of my favorite stories about Thomas Edison included his reaction to a devastating fire that destroyed much of his expensive equipment and scientific notes.  Surveying the damage, he noted that, with "all the mistakes destroyed," he could begin anew with a fresh perspective.
Like him many women welcome less spending over the holidays, making gifts instead of buying them, focusing on spending time, rather than money on loved ones.  Some intend to keep these new rituals as part of their lives even after our financial challenges are behind us.
There is much to be gained by seeing obstacles as opportunities.

A Woman's World Economic View

I. The United States
You know we've been in a recession. If you're employed, you're probably nervous about keeping your job. And if you're unemployed, you know we've been in recession better than I could ever tell you.

It's up to the National Bureau of Economic Research to provide the official beginning and ending dates for recessions, and if you're interested in how they do it, you can read about it here. For the rest of us, we saw a banking crisis start late last year, and while we may not have known the details of how it happened, we certainly knew why.

We saw every Jane, Jean and Judy buying houses they couldn't afford, getting a mortgage based on her ability to fog a mirror, and saw real estate prices zoom upward - like the Internet stock prices did in the late 1990's. A familiar pattern, with a familiar "pop" end the end of the bubble, accompanied by falling housing prices.

Then we really saw the force of this nasty recession.

Unlike the past, though, it is not the US that is leading the world out of recession. We're mired in debt and have failed to pass even one piece of financial reform legislation more than a year after causing a worldwide economic downturn. Although we appear to have stopped our economy from shrinking, we expect anemic growth at best for the next year or so.

II. Our Place in the World Economy

From the end of WWII through the remainder twentieth century, the US was the world's economic powerhouse. A significant reason for that was attributable to "good old Yankee ingenuity." During the war, we focused our best and brightest toward the war effort. Because military technology at that time had civilian application, our best minds transitioned easily from the war effort to consumer technology.

In the latter part of the 1900s, the US voted with our pocketbooks to stop looking for the union label and outsourced much of our manufacturing to countries who could produce our goods with lower employment costs. As a result, we became less a manufacturer and more a service provider to the world. Our techies were golden, and Wal-Mart, our merchant.

We imported much more than we exported, and became a debtor nation to our manufacturers, especially China. Thus, a great wealth transfer took place in the so-called "third world," where manufacturing jobs expanded feverishly. The Chinese built an enormous middle class from their export business.

Now, they finance about 25% of our national debt, which is the sum of all the deficits, or overspending we have accumulated every year - plus interest. For a look at our historic debt levels, read my July 15 article.

III. Popular Misconception

There is no doubt that our deficit is high. Without mitigating the seriousness of that situation, though, understanding China's reliance on the US as a major buyer of their manufactured goods is critically important as we evaluate our status as a debtor nation. Their population has accepted Communist rule with an unspoken financial contract that it expects to reap the benefits of newly acquired wealth. Should China stop buying our debt, which continues to be the highest quality in the world, it will also assist in further lessening the value of our dollar and likely fuel an inflationary fall into another recession.

Smart sellers don't bankrupt their main customers, and China is not stupid.

Further, while anyone can see that both China and India have been growing rapidly, we are not on the verge of losing our position as the primary financial powerhouse in the world. Much has been made of the meager savings rate in the States as compared with the thrifty Chinese. Upon closer look, however, it's apparent that the Chinese are thrifty largely because they cannot rely on their government to care for them. For example, the Chinese social security system currently has $94 per retiree, according to Steven Roach, head of Asian Operations at Morgan Stanley. Yes, our system also has problems, as the Social Security trust fund remains an IOU by Congress, but ours does have a long, unbroken history of payment. The Chinese are accustomed to caring for themselves during disasters, both natural and financial, and therefore tend to put more aside.

Last, while we attempt to once again define ourselves as the technological leader in such growth industries as "green technology," we have, without question, both the best institutions of higher learning that are necessary for cutting edge research and development, and an open door to the best minds in the world.

Having taught math-based analysis courses at UCLA, I can attest to the great difficulty I had during roll call in our first sessions. These unpronounceable names were from every corner of the world, and the university was delighted to have them.

Once again, a combination of our open door to great world minds, with Silicon Valley innovation may be our economic savior, moving from high technology to green energy, and selling it to the world.

IV. Future Course

Once we have economic stability and a health care policy that will not bankrupt our country, our next priority must be to get our financial house in order. Let's look what high debt does to the country by personalizing it a bit. Let's say you earn $60,000 per year. After taxes, you net $4,000 per month. Your mortgage payment is $1,500 per month, you have a second mortgage of $500 for major home repairs, your car payment is $600, and you have eight credit cards on which you pay an aggregate monthly payment of $850. That leaves you only $550 every month for food, clothes, medical, utilities, gasoline and car repairs, movies, and all other incidental expenses. You're in trouble. You're probably increasing your credit card debt every month, paying for necessities you couldn't afford after paying your debt. So, your credit card debt is growing, and you're barely hanging on.

Magnify that situation, and you have our Federal government. Yes, we had to pass the stimulus package to save ourselves from financial ruin. Yes, we have to address the unsustainably high cost of health care. But once that's done, we must cut expenses and pay down our debt, just like the person in our example, or risk the future of our economy.

We must also acknowledge that, within the next century, the US will be one of the world financial powerhouses, but not the only one. If China learns to cooperate with the rule of international trade, and if India streamlines its impossibly difficult tangle of red tape, than a less indebted US will share its position with them.

V. What We Do

What we do matters. We shopped at Wal-Mart. By doing so, we exported manufacturing jobs.

Now, we must demand that our deficits be reduced and focus on educating our young people to work in a much more competitive and complex world.

Education has always been a women's issue. We know that the answer to education is not primarily money. It's a contract between teachers, parents and children that excellence is expected, and failure is failure on a world order.

What we do matters.

The Female Retirement Dilemma

Issues involved with planning for retirement are different for women than they are for men.  And understanding them can be the difference between comfort and poverty in our old age.

I.  By Saving the Same Percentage, We Retire with Less Than Half Than Men

Let's look at the result of both men and women putting aside 10% of their earnings for retirement.

First, women current earn, on average $.80 for every dollar men earn.  So now, for every $.10 in men's retirement accounts, women have $.08 - 20% less.

Next, women spend an average of eleven years of their productive working lives as an unpaid caregiver for a family member.  Assuming a work life from college graduation at 22 to retirement at 65, that unpaid absence lessens our earning years by another 25%.  That reduction in lifetime earnings, added to the fact that we lower salaries, results in us having $.06 for every $.10 men save for retirement - or 40% less.

So, if we assume average annual earnings of $60,000 during their careers, men will save $258,000 and women, $154,800, assuming that those savings are invested in assets that keep up with inflation. 

At 65, a man will need ten years of retirement income from savings of $258,000.  Invested in assets that keep up with inflation and taxes, he will have $25,800 per year for ten years. 

A woman, because of her additional life expectancy will have a sixteen year retirement with savings of $154,800.  Invested in assets that keep up with inflation and taxes, she will have $9,675 per year.

No wonder twice as many women than men live in poverty.

II.  What To Do

First, homemakers who care for children or parents should have Spousal IRA accounts funded on their behalf every year.  Considering that replacing all the functions provided would total approximately $30 thousand per year (Source:  http://www.womenwork.org/resources/tipsheets/valuehomemaking.htm), it is only reasonable that your retirement is funded while you provide these services at no charge.

Second, women must learn to invest their retirement assets in a way that will maximize growth without taking an inordinate amount of risk.  The two long term investments that provide the highest return are stocks and real estate.

In the last few years, we have witnessed the volatility both these investments have.  But, let's put this into perspective.  The stock market high was in August, 2007.  Just over two years later, the market is down about 30% from its high.  There are two considerations we must make:

• These are long term investments, intended for use in ten years or more.  In the 30+ years since I've been in the business, I've witnessed a years-long 50%+ correction in the 70's, a heart-stopping drop in the '80's, a precipitous fall in the 90's, the dot com bubble bursting in the early part of this decade and the current correction.  These are predictable, and those who have made wise stock investments and held them have fared far better, even at this point, from those who put their money in so-called "safe" investments, like money market accounts, Treasury Bills and insured savings accounts, which fail to stay ahead of inflation and taxes.  Note that there were two times billionaire investor Warren Buffett publicly admitted to buying stock in US companies:  once, during the correction in the 1970's; and the other, from March to year end, 2008.
• Even at retirement, we have life expectancies that mandate we stay ahead of inflation and taxes, and therefore advise consideration of keeping at least a portion of our long term portfolios in capital markets.
• Conversely, our short term (five years or less) cash flow needs must be kept in safe investments, so that our expenses are met and we are not tempted to sell our long term investments during market lows. 

Third, we've seen the outcome of abdicating responsibility for our financial lives with the likes of Madoff, Stanford, Enron, WorldCom and others.  There is no one who will take more of an interest in our financial health that ourselves.

It requires only that we gain the knowledge to take action and the willingness to provide for our future.

Executive Pay

Lexington, Kentucky realtor Diana Nave suggested, “I think it is important for people to understand the spread between executives and workers and how far apart it has become.” Agreed. Let’s take a look.
A Little History
In 1940, executives (the three highest-paid officers in the 50 largest US companies) earned 56 times their average worker’s pay. In 1950, that ratio slipped to 34 times, and fell further in 1960 and 1970 to 27 and 25 times, respectively.
Then, in 1980, executive pay grew to 33 times their average worker, and in 1990, to 55 times, approximately equal to that of 1940. In the year 2000, executives were paid nearly 120 times that of their average worker.
So, what was the economic situation in 1940, how was it similar to 1990, and what happened between 1990 and 2000 that caused the average worker to lose so much ground?
1940
The Great Depression may have improved to a recessionary status from 1938 to early 1940, but no economic recovery of significance could take place without government fiscal intervention. The recovery would have likely taken much longer if left to the private sector.
The US Gross National Product had passed the $100 billion mark in 1940, but was just 9 percent above the GNP level of 1929. It was the federal purchases of goods and services for national defense in the pre-war period - a rise from $1.2 billion in 1939 to $2.2 billion in 1940 - when the economy felt the rise in government spending that marked the end of an economically depressed era through the injection of government funds directly into the economy. While many credit the “New Deal,” evidence points more heavily toward defense spending.
After a protracted period of 14%+ unemployment, a combination of a “take any job” mentality, and a new, somewhat underpaid female workforce during the war exacerbated the CEO vs. average worker chasm during this decade, which was not again achieved until fifty years later in 1990.
1990
After a protracted recession in the 1970’s, the 1980’s was a decade during which economic growth depended on a steady rise in consumer spending supported by both increasing debt and prices of stocks and homes. The present U.S. slump signals the end of that consumption-led growth, with an overbuilt housing market and an over employed consumption sector, from car dealers to malls. The question is whether our system can adapt to create new growth to fill the void left by embattled consumers.
The 1940s was a “boom” cycle due to government defense spending, and the 1990s, a “boom” cycle due to consumer spending. Neither was sustainable.
However, in the 1990s, a fundamental economic change took place – a “monetizing” of the financial asset growth – that largely rewarded the financing side of cash flow more than the operating side. Basically, there are three components of Cash Flow:
· Operating Activities, or producing revenue by operating the business at a profit
· Investing Activities, or buying and selling investments like property and equipment
· Financing Activities, or issuing/repaying long term debt (bonds) and issuing/buying back company stock.
As seen in both the Internet bubble in the 1990s and housing bubble in the 2000s, investors often were more highly rewarded for “flipping” their investments (or selling after owning them for a very short period) than for investing for the long-term. Both capital (stock and bond) and real estate investors saw a dramatic increase over the historic long term returns during these periods, and accepted and expected a continuation of those unsustainable returns.
Further, with the focus upon “short term” returns, management compensation became rooted in their ability to produce and sustain those returns by lessening their percentage of “salary” and increasing their percentage of “stock options” and the like, justified by their having the same stake in achieving profitability as their stock holders. Unfortunately, as seen by the collapse of the financial system, incenting management to achieve short-term profits over long-term viability can have disastrous consequences.
Now What?
It’s back to basics, now, for the capital and real estate markets. Real estate loans are again being made as they were for decades – 20% down, 30 year terms, with housing costs no more than 30% of gross income to borrowers with good credit. Stock prices are again reflecting management’s ability to turn a long term profit on the business more than their ability to buy back their own stock at a high return on investment. And executive pay is again reflected primarily in salary rather than stock options.
Are salary caps now appropriate? In my opinion, no. Any attempt to artificially cap prices, as was attempted in the 1970s, has ended in disaster. But, it has also not worked well to “let the market dictate,” as we are well aware now.
Companies must find a way to have the freedom to “bid” for talented people to run their businesses without undue interference, while recognizing that paying those talented people 120 times the salary of their average worker is a poor investment. It’s a complex problem that is fraught with both the tendency to over regulate and do nothing, both of which would be a terrible mistake.
And, while consumer consumption is severely mitigated by unemployment rates not seen since the 1980s, a return to conspicuous consumption seems, at least for the foreseeable future, passé. It is incumbent upon the US to convert the financial to the operating side of its future cash flow by innovating, i.e., producing new goods and services that address the needs of a global population in need of sustainable sources of food, housing and energy. As those businesses form, those who provide capital for their formation must demand a more horizontal business model that compensates innovators more closely to the level of their managers.
It’s a big job.

Researching Investments

We briefly touched on how to research investments in our previous discussion, but will do so more thoroughly here.

Independence

As we said before, the first consideration regarding research is independence. Why? Let's think for a moment about the way investment banks (now chartered as commerical banks, by enlarge, but still fulfilling the primary roll of raising capital for publicly owned businesses) are structured.

The part of brokerage firms with which women are most familiar is that of the investment advisers. This consists of brokers who invest money on behalf of clients, and either:

• Earn commissions for buying and selling securities; or
• Earn a commission based on a percentage of assets under management.

In a related part of the firm, the brokerage earns fees from companies for raising money for them by

• Selling ownership in the company (stock) to their brokers' clients
• Borrowing money for the company (bonds) from their brokers' clients
• Providing strategic management advice to the company about their capitalization (stock and bonds outstanding)

In a separate part of the firm, the brokerage owns stocks and bonds in its own account, and buys and sells those securities to make a profit.

In an additionally separate part of the firm, the brokerage provides investment advice (buy and sell recommendations) to its brokers and to the general public.

While legally, there is a "Chinese wall" separating these various functions in a brokerage firm, it is apparent that there exists the possibility that, if a brokerage wanted to sell a stock from its own account, its analysts could be encouraged to provide a "buy" recommendation on that stock in order to provide both a market and favorable price to sell that stock to its brokers' clients and the general public who follows its research. I am not saying that this does happen; rather, I am saying that it could happen, and therefore there is the a possibilty of impropriety.

Remember, too, that Standard & Poor's and Moodys both provided their highest ratings to so-called Auction Rate Securities, securities that were backed by mortgages, some of which were sub-prime. When reviewing the procedures used to qualify for that rating, it became clear that the fact the issuers of those securities were paying fees to these rating agencies for the rating, resulted at least in part to receiving that highest available rating- the same as is provided to US Treasury debt. Here, the conflict of interest was obvious.

So, researcher independence is critical. Who, then, independent?

Some companies are paid for their research by their clients who are subscibers - not by the companies they analyze. The largest, and most experienced of these companies are

• Value Line (specializing in stock research)
• Morningstar (specializing in mutual fund research)

MORAL: Your research is best when in comes from a company that does not benefit from your decision of whether to buy or sell a security, and has a lengthy track record.

MORAL: Even if you use a full service broker, ask what research she uses. If it's not independent, neither is your broker.

Methodogy

Broadly, there are three types of investing: growth, value and passive.

• Growth investors choose securities that are growing faster than the stock market as a whole, and try to take profits before any negative news causes the stock to drop
• Value investors buy high quality but out-of-favor companies that are inexpensive because of a negative short-term situation
• Passive investors buy an "index" that replicates the market averages, thinking that no one, after trading costs and taxes on sales, beats long term market performance

Growth investors will find Value Line stocks rated as 1 for timeliness as meeting their general criteria. It is noteworthy that, over the last 25 years, a portfolio of such stocks beat the S&P 500 average significantly.

Perhaps the most famous value investor in our time is Warren Buffett. Those securities in his Berkshire Hathaway portfolio are examples of long term value investing. For individual stock research, Mary Buffett's "Buffettology" series is a good way to learn to select and evaluate such stocks. I have worked and taught with Mary, and find her books the most accurate and easy to understand approach to learning value investing research and principles.

Passive investors, and those who prefer to buy mutual funds can use Morningstar reports to find funds that meet their investment goals.

Value Line, Morningstar and the Buffettology series should all be available to you through your public libraries.

There are many other sources of independent research. If you choose to use one, check the author's experience and portfolio performance carefully, and ensure that both have been evaluated independently over at least ten years.

MORAL: Pick an investment strategy and stick to it. Moving back and forth (e.g., growth and value) does not work. Once you know your preferred strategy, use the best source of information available for that method of investing.

Part I - How to Find an Adviser - Investing (cont'd)

In the previous discussion, we discussed the issues involved in selecting an investment adviser if you require that person to do virtually all of your work for you.

This is for those of you who take more of a "hands on" approach, and are likely to do your business through a discount, or deep discount broker.

1. Research

By far the most important aspect of your investing issues is where you get your information. Any company which benefits from you taking their advice is, in my opinion, automatically suspect. You may recall the recent stories about Standard & Poor's providing the highest available safety rating for so-called "Auction Rate Securities" consisting of mortgage securities, which became unsaleable soon after the mortgage crisis. The issuers of the mortgage securities were paying S&P for the rating. Whether there was actually a conflict of interest or not, there was certainly the appearance of potential impropriety.

Moral? The more independent the research, the more reliable it is.

So, who is the author of the "research reports" provided by your broker? The best sources would be those who earn their revenue from their subscribers, like Value Line and Morningstar.

2. Fees

a. Mutual Funds

If you are a mutual fund investor, keep an eye on your fees. No-load does NOT mean no fees.

Mutual funds that do not pay a "load," or commission to a broker or planner to sell the fund, instead pay advertising and marketing fees to sell the fund directly to you. These are called 12(b)1 fees, and vary widely from company to company. Your fund will also charge you "management fees" to compensate the person(s) who manage the fund.

You will pay these fees every year, and these fees will be deducted from the return on your investment.

If you are a mutual fund investor, know your fees.

b. Brokerage

Before opening your account, get a complete fee schedule. Will there be a charge:

• To close your account?
• If you fail to keep a minimum amount?
• Annually to maintain your retirement plan?
• To talk to a representative?
• If you don't make a minimum number of trades per year?

3. A Second Pair of Eyes

In previous discussions, we talked about financial planners. They may practice similarly to a broker, i.e., charging commissions only when selling a product or "fee only," which is similar to the way an attorney or accountant charges.

Periodically, even if you are a very experienced investor, it is a good idea to have a review of your portfolio. This can be accomplished very cost-effectively by finding a financial planner who specializes in investments review and comment on your portfolio. Generally, unless you have an extraordinarily complex situation, this should be about a two hour project, and will be well worth the time and expense if you have overlooked anything critical in your portfolio.

Part I - How to Find a Financial Adviser - Investing (cont'd)

From the previous article, you have a general idea of whether you need a lot, a little, or almost no guidance in choosing investment from your adviser.

If you are a woman who is best suited with an adviser who will walk you through the entire investing process, this discussion is for you.

Broadly, there are two type of advisers who fit your needs:

• Full service brokers (like those employed by Goldman Sachs, JP Morgan, etc.)
• Fee-only financial planners

Full Service Brokers

Education and Experience

Series 7 License

A full service broker will have a Series 7 (General Securities Registered Representative)licence, that shows at least 70% accuracy in answering 250 questions about

• Stocks
• Bonds
• Mutual Funds
• Options (derivative instruments)
• Commissions

as well as a Series 63 (State specific) license.

This individual will have passed a background check by the employing firm and be fingerprinted.

Most investment bankers (Goldman Sachs, JP Morgan, Morgan Stanley, etc.) have changed their charter to commercial bankers because it allows them to raise money more cost effectively. If, for example, you bank at Chase, you will find that it is owned by JP Morgan, formerly an investment bank. In your bank branch, you may find a person who sells securities. This person is not a bank employee, but works under a separate "umbrella" company - which is different and separate from JP Morgan brokerage.

Series 6 License

These advisers may have only a Series 6 (mutual fund representative) license, and are not authorized to sell individual stocks and bonds.

These advisers will be familiar with general guidelines as to whether a particular fund or group of funds is appropriate for your level of risk.

CFP - Certified Financial Planner

This is a national designation that the adviser has passed a rigorous course of study that includes budgeting and cash flow, investments, taxation, risk management, education financing and estate planning. There are additional requirements for continued education.

CFA - Chartered Financial Analyst

This person will be skilled in analyzing both portfolios and individual securities.

Other Professional Designations

Advisers may also have licenses to sell insurance products (such as annuities), regional professional designations issued by the American Banker's Association, various universities and other financial education providers. Contacting the issuer will give you the scope of training represented by the license or designation.

ASK THE ADVISER

• What licences she has
• What professional designations she has
• The length of experience she has

and verify that information through:

http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm

or http://www.cfp.net/search/ for a fee only planner.

You want a person that has significant experience and training.

2. Type of Client

The type of adviser that will likely serve you best is one who serves people like you. If your adviser's clients are primarily 70 year old retired executives from Boeing and you are a 30 year old middle management woman, your adviser may not have the background to best address your particular financial needs.

ASK THE ADVISER TO DESCRIBE HER TYPICAL CLIENT.

• Age
• Average account size
• Occupation
• Risk tolerance

If the description is significantly different from your situation, you may be best advised to keep looking.

3. Historic performance

Over very long periods of time

• The stock market yields about 8 - 10% per year
• The bond market yields about 4.5% - 6.5% per year
• A portfolio of 60% stock and 40% bonds yields about 6.6% to 8.6% per year
• With significant differences from year to year.

One of the red flags that should have been seen by Madoff and Standford's clients was consistently beating market averages year after year after year, with no apparent increase in risk. Not Peter Lynch, not Warren Buffett, not ANYONE has achieved this performance, and no credible investment managers would intimate that such returns are either probably or possible.

Ask your adviser what her average annual performance for clients has been with similar risk tolerance as yours over the past 5 years, and verify that information with her employer.

4. A word about risk tolerance

As it applies to you as an investor, risk tolerance is the answer to "How far can your portfolio go down before you freak out and

• Sell
• Wake up in the middle of the night with cold sweats
• Call you broker and ask what the heck happened to all your money

Markets predictably and regularly correct by 20% +, and as you can see from the recent correction, sometimes 50% +. In the mid-1970's when I was but a babe in the financial industry, such a correction occurred. Another one is in process now. Answer the question about risk tolerance in terms of what percentage of your portfolio are you capable of losing before you panic.

State your risk tolerance in terms of a percentage, and obtain a commitment that your portfolio volatility will remain within an amount acceptable to you.

5. Charges

Keeping in mind the general market returns provided in 3 above, ask what percentage of your portfolio you will pay for management on an annual basis. Fees will vary (some mutual funds charge 5% to buy as a one-time charge), so ask for estimated fees over a 5 year term. Ask the adviser to subtract her fees from your expected portfolio annual return, provide this estimate in writing, and tell that adviser that you're comparing fees with other investment professionals.

6. Discretion

Never ever ever ever grant discretionary trading authority to an adviser, unless you open a "wrap" account, i.e., one where your broker assigns your money to a private money manager. Under any other circumstances, this is a highly inadvisable practice.

Part I -How to Find a Financial Adviser - Investing

Types of Investment Advisers

Recently I asked a group of very bright women in what subjects they were most interested in their financial lives, and one question was "how to find a financial adviser."

When thinking about that subject, that simple question became a very complex answer, so we'll discuss this in the form of a series of articles.

Personal finance is generally split into categories that include:

• Budgeting and Spending
• Risk Management (Insurance)
• Investing (capital markets and real estate)
• Estate Planning (wills and trusts)
• Tax Planning

We'll start with Investing, since that's the category most women equate with having "Financial Advisers." There are many types of financial advisers available for investors, and the first way to narrow down that huge number is to ask, "How much work do YOU want to do?"

Do you want a person to manage the entire process for you? That person will be very different from (and charge much more than) a person who just buys and sells what you tell them to.

1. Full Investment Management

This person will

• Determine your financial goals
• Determine your tolerance for risk
• Suggest a portfolio that reflects both your goals and risk tolerance
• Suggest when it is appropriate to reconfigure your portfolio
• Periodically review your progress and answer any questions you may have.

Examples of this type of manager include advisers with Investment Bankers such as Goldman Sachs, JP Morgan and Raymond James.

2. Discount Broker

A person will be available for you to ask periodic questions, but research assistance is provided primarily through source material for you to use independently. Investors who are best candidates for this type of service will know

• The type of investor she is (growth, value, modern portfolio theorist)
• The level of risk she can tolerate (maximum level of price fluctuation she will accept before being tempted to sell)
• Both when to buy and when to sell an investment, and how to best replace it when selling

Examples of this type of service are Fidelity and Charles Schwab.

3. Deep Discount Broker

Assistance is provided in the form of research material, but no advice is given. Investors best suited for this type of broker are experienced investors, generally those with at least ten years' experience in investing for themselves and make all their own decisions. Some clients of deep discount brokers will employ a "Fee Only" financial planner every year of so to review her portfolio.

Examples of deep discount brokers are Scottrade and eTrade.

Now that you have made a categorical decision about the type of advisor you may wish you employ, we will discuss the level of training you can likely expect and some questions to ask that advisor before employing her in our next installment.

Please feel free to comment and share your experiences, and we do encourage you to subscribe to this blog as well.

Welcome

Dr. Tessa Warshaw, author of "Rich is Better," titled her book after Sophie Tucker's quote, "I've been rich and I've been poor. Rich is better."
Dr. Warshaw, Mary Buffet and I all participated in developing and presenting a UCLA seminar titled "Financial Planning for Women." Why just for women, you ask?
Having developed and taught much of the Investing portion of the Financial Planning curriculum for UCLA, I noticed that a significant number of my students were male, and those few women who did attend these classes tended to sit in the rear of the auditorium and rarely participated in discussions. Yet, these women had longer life expectencies and earned less money than men. Mastering investment skills is more critical for women.
In order to attract women attendees, we developed a seminar just for them, and found every one nearly filled to capacity.
Perhaps women prefer to discuss money with each other.
This is a forum to do that very thing in the virtual world, and you are invited to ask questions, recommend content or share your experiences that may benefit others.
Welcome.
I look forward to our discussions.