The Orlando Sentinel named Charlie Fitzgerald one of the Orlando area’s most influential, non-elected “Power Brokers”. From time to time, we have noted the work Charlie has done with the Financial Planning Association of Florida to influence lawmakers, such the trip he led to Tallahassee in March. We are happy to see him recognized for his efforts.

Orlando magazine has named both Charlie and Ron Tamayo to their list of “Five Star Wealth Managers.” The magazine commissions a research firm to compile a list of professionals in the Orlando area who score high on a client satisfaction survey and have excellent regulatory records.

The April issue of the Journal of Financial Planning features a “10 Questions” interview with Dan Moisand as a lead up to FPA Retreat, the profession’s premier conference for advanced planners, where Dan served as chairman of the organizing task force. Our favorite quote was part of his response to a question about his biggest professional challenges. “The greatest challenge is helping clients find a balance between staying informed and being inundated with information. And it’s gotten worse over the years with 24/7 digital media,” Moisand said.

Financial fraud and exploitation of the elderly, and how financial advisors can help prevent it, was the subject of a series of articles Dan wrote for Financial Advisor magazine. “Financial professionals are squarely at the forefront of the effort because fraudsters aren’t after our clients’ knickknacks,” Moisand said. “They want the money.”

In The News…

As part of a partnership between the National Association of Personal Financial Advisors (NAPFA) and USA Today, Dan provided some guidance to a reader whose 81 year-old step-mother was taken advantage of by a stockbroker. He also got the last word in the “Your Money” column of the NY Times on the pros and cons of rental properties.

Charlie gave his perspective as Chairman of the FPA of Florida for a story for Financial Advisor on a bill in the Florida legislature designed to toughen laws against abusive annuity sales. “Anything that helps remove bad actors and protects consumers is a good thing,” he said. Unscrupulous salespeople who persuade seniors to sell their other investments or use their savings to buy annuities which are unsuitable for their age or economic status currently face a fine of up to $75,000. The pending bill expands the same suitability standards to all age groups.

Events

Dan Moisand opens FPA Retreat 2013

Dan served as a panelist for a discussion on some of the controversies surrounding retirement income and withdrawal strategies and later moderated a second panel on the implications of longevity in retirement planning at Financial Advisor magazine’s Retirement Symposium in March. He also attended the invitation-only Barron’s Top Independent Advisors Summit, hosted by Barron’s magazine to promote best practices in the industry and the value of advice to the investing public.

Given current conditions, should you buy or sell stocks?  This is the wrong question.

Over the past four years, the economy has been weak at best and faced many threats:  the European debt crisis, the U.S. debt ceiling debate and credit downgrade, a contentious and polarizing election, and the purported disaster that would ensue from the “fiscal cliff.”  Now, stories are appearing which suggest that after four years of being told the market cannot advance, investors are tired of the doomsayers and are now reentering the stock market. The data shows money flowing back into mutual funds that hold stocks.  Some think these recent deposits mark the end of the outflows that ensued since the ‘08/’09 decline in stock markets.  Unemployment is down, things have settled and people are more confident.  According to the quoted sources, it is once again safe to go back into stocks.

There have also been an abundance of stories touting the opposite conclusion.  As attention turned from the “fiscal cliff” and on to sequestration and the banking crisis in Cyprus, nervousness grew.  Some pundits say stocks are up because interest rates are so low, an artificial condition created and maintained by the Federal Reserve.  As soon as inflation ticks up or some other catalyst like a botched bank bailout in Europe happens, interest rates will spike and stocks will plunge.  According to the quoted sources, it is clear that the markets are more dangerous than ever.

So, one side says hit the gas while the other says hit the brake.  What should you do now given today’s uncertainty?  Good investors have learned that this is not even a question worth asking.  There are three main reasons why: the contradiction of opinion is neither new nor unusual, trying to make money by anticipating market moves is not effective, and the near term is irrelevant to long term success.  We’ll examine each of these more closely.

The contradiction of opinion is neither new nor unusual.

At every point in time, there are people crying doom and others touting boom.  It has to be this way because one cannot buy anything unless someone is willing to sell and one cannot sell unless another is willing to buy. The only thing that changes is the intensity, or rather our perception of the intensity, of these contrasting opinions.  We can help ourselves by remembering that the market pays no attention to our personal feelings.  If following the news makes you think there is little risk in the market, or that the risks are enormous, take it as a reminder that news reports are more likely to get you thinking about the short term than they are to make you money in the long term. Your expectation should always be that stocks can rise or fall, sometimes dramatically, and it doesn’t matter why, it just matters that sound decisions are made.   When stocks fall, the best course of action is almost always to hold them or buy more.  When stocks rise strongly, the best course of action is almost always to hold them or sell some.

Trying to make money by anticipating market moves is not effective.

If ever there were a period of time in which moving money in and out of the stock market in anticipation of economic, political and market events could have paid off, it was the last 5-15 years.  With two 50% declines, followed by two full recoveries, the possibility for outsized gains from prescient timing was enormous.  But looking at the results from mutual funds, separate accounts, hedge funds, newsletters, endowments, pensions, and other money managers with verifiable records, one clear conclusion can be drawn: over time, the most likely outcome from trying to out-maneuver the market is an inferior result.  Any success is short lived and the more notable the success, typically, the more notable the ensuing failure.  Four years ago, hedge fund manager John Paulson was a media darling, having followed up a strong 2007 with bold predications about a collapse in the financial market. He sidestepped the market drop and made 6.28% in 2008, according to gurufocus.com.  Unfortunately, his bet big approach cost his investors over 24% while U.S. stocks gained over 48% from 2009-2011. In 2012, the S&P gained over 16% and Paulson lost 25%.

The near term is irrelevant to long term success.

Irrelevant is such a strong word.  How could today’s conditions be irrelevant? Simple.  The best reason to own stocks is because you may need to spend money many years from now and stocks have a spectacular record of staying ahead of inflation over extended time frames.  If you own stocks for that reason, you aren’t counting on your stocks being worth any particular amount next month, next quarter, next year, or five years from now.  The relevant question today is, “Based on the goals I have for my family, how important is it that our assets keep pace with inflation?” The answer to that question should drive the decision about how much to have in stocks.  This is not the kind of question to which an answer changes frequently or emotionally.  Neither should your allocation to stocks. 

What to do next.

The markets have finally recovered from the worst financial conditions since the Great Depression.  This is a great time to revisit the real question and make any adjustments to your long term plan.  Not because it is time to hit the brakes or gas, but because your goals have changed.  Give us a call and we will explore the possibilities together.

Fraud is much easier to commit when dealing with complex and confusing matters. The American Tax Relief Act of 2012 (ATRA) passed at the eleventh hour of the “fiscal cliff” drama did little to reduce the complexity of our tax code. But confusion with tax changes does not have to result in fraud. By being aware, diligent, and working with reputable professionals, you can make it difficult for scam artists. The IRS maintains a “dirty dozen” of common tax scams. Here is a recent list with brief descriptions:

1. Identity Theft Refund Fraud – Scammers use your legitimate identity and personal information to file a tax return and claim a fraudulent refund before you have filed your actual return. Ron Tamayo discussed this issue on the evening news in a WFTV Channel 9 report in January. If you have been a victim of identity theft, you can call the IRS Identity Protection Specialized Unit at   1-800-908-4490 to obtain a special ID number to use when you file your return.

2. Phishing – No matter how legitimate it may look, the IRS does NOT alert taxpayers of problems or ask for personal information via email. If you get an email you suspect is phishing, forward a copy to the IRS.

3. Tax Return Preparer Fraud – A few tax return preparers try to steal parts of refunds, charge a percent of your refund rather than a flat fee, or promise large refunds. Avoid any tax preparer who won’t provide a copy of your return, lacks a tax preparer number or won’t sign your return as the preparer.

4. False or Inflated Income or Expenses –Popular versions involve fuel tax credits or maximizing earned income credit to generate a fraudulent refund.

5. “Free Money” and Social Security Tax Scams – Common with the elderly and low income earners, a fraudster will promise a high refund and charge a fee for advice that provides a refund by breaking the law.

6. False Form 1099 Refund Claims – Scammers play to conspiracy theorists and use this form to get refunds from a secret account that the IRS insists does not exist. Of course, if you are a conspiracy theorist, you don’t trust the IRS and may believe the scammers. This one put actor Wesley Snipes behind bars.

7. Hiding Income Offshore – It is illegal to hide income in offshore accounts. Advice to the contrary is suspect.

8. Frivolous Arguments – These scams are based on stories of secret loopholes in the tax code. Among the favorites are pretending you are not a U.S. citizen or that paying taxes is voluntary or unconstitutional. Checkout a full list of what the IRS considers “frivolous” arguments at http://www.irs.gov/Tax-Professionals/The-Truth-About-Frivolous-Tax-Arguments-Introduction.

9. Disguised Corporate Ownership – Sometimes used for money laundering, these scams seek to underreport income and inflate deductions under a complex web of false employer ID numbers and corporate entities.

10. Bogus Trusts – Trusts can be ideal management and tax planning tools but if the pitch for one includes hiding assets or income, it is probably a fraud.

11. Claiming Zero Wages – Usually based on frivolous arguments (see #8 above), a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used to reduce taxable wages to zero.

12. Unqualified Charitable Organizations and Inflated Deductions – Some charities are not particularly charitable and in fact don’t even qualify as a charitable 501(c)(3) organization. Avoid any charity which claims there are no restrictions on the value one can claim for a donated item.

It seems most people want a simpler tax code but its complexity has increased steadily since its inception. Below is a copy of the very first Form 1040. You will notice it is only one page and the highest rate charged is just 6%. Today, only 1 in 10 Americans prepare their own return. National Taxpayer Advocate Nina Olson estimates that including corporations, it takes 6.1 billion hours to prepare and file all our tax returns. As Congressman Dave Camp put it, “The code is 10 times the size of the Bible with none of the good news.”

First Form 1040 for Income Tax from 1913

Identity Theft

Your best defense to prevent identity theft is to be diligent and guarded about giving out personal information. If you receive correspondence requesting personal information, contact the company directly by looking up the telephone number separately from the correspondence, or check your last bill or statement. Do not rely on the correspondence, since scammers often provide phone numbers or web addresses that lead to bogus personnel. Always look over your bills and statements for any unusual activity.

In addition, diligent financial firms will monitor accounts for unusual activity.　 Some of our clients have received phone calls from us to verify that an unexpected check was indeed vaild.

If you do see unusual activity, what should you do?　 Our clients should alert us immediately. We can guide you through the things that need to be done, such as the items below:

• Put a fraud alert on your credit report(s) right away. Once you do it with one credit bureau, it should automatically be logged with all three of the credit bureaus: Experian, TransUnion and Equifax. Usually good for 90 days, this alert will prevent anyone (including you) from opening a new bank or brokerage account without extra ID.

• If your state allows it, and most do, freeze your credit file with all three bureaus so the bad guys can’t apply for new credit. In Florida, it is free for fraud victims and anyone over age 65. Otherwise, there is a $10 fee to freeze or unfreeze your file. You will have to unfreeze your report to apply for new bank and credit accounts, cell phone contracts, etc., but if frozen, no one can get your report or open credit in your name.

• Review ALL credit and bank accounts online to determine if transactions are accurate, and then change your passwords.

• Consider calling all creditors to ask for their guidance on the issue.

• Review what you are carrying in your wallet; removing unneeded credit cards and your Social Security card (NEVER carry that!).

• Check out the Identity Theft Resource Center for other consumer tips. They are available by phone and email if you have questions and have sample letters to use when corresponding with creditors.

Making News…

Ron Tamayo wrote an informative column on year-end tax planning for the Winter Park/Maitland Observer.

Dan Moisand’s monthly Q&A columns for Florida Today covered how the rules for Required Minimum Distributions from IRAs differ from those for Roth IRAs, 401(k)s, 403(b)s and other retirement accounts, the importance of controlling one’s intake of news, and lottery winners’ choice between taking a one-time lump sum or annual payments .

Dan was also selected for a weekly Q&A as a “RetireMentor” for MarketWatch, the personal finance website of the Wall Street Journal.

In his columns for Financial Advisor magazine, Dan appealed to his peers to take relatively simple steps to help thwart elder fraud and exploitation, The article prompted a slew of reader emails that led to a follow-up piece comprised of the scenarios planners have encountered.

Lynne Strynchuk has been named to the Board of Directors of the Community Foundation of Brevard.  The foundation makes it possible for donors to provide permanent funds without the costs and intricacies involved in setting up a private foundation.

In The News…

Charlie Fitzgerald received a unique honor when he was asked to write a piece on behalf of the Financial Planning Association of Florida for a special edition of the State of Florida’s Chief Financial Officer, Jeff Atwater’s newsletter, Florida’s Bottom Line.  The issue addressed the fiscal cliff from various angles.  Charlie wrote about the importance of creating, maintaining and adapting a sound financial plan.

Several of our team members were tapped as experts for various news items:

Ron appeared on the evening news in a WFTV Channel 9 report on  January 18th on tax related identity theft issues.

Charlie served as a source for a front page story in the Orlando Sentinel on November 25th.  He explained that while the financial markets and political arenas may or may not bring great drama, economically the term “fiscal cliff” is more catchy than accurate “If anything, it will probably be more of a fiscal drag, depending on what Congress comes up with,” Charlie explained.

Charlie responded to a Q&A in the Orlando Sentinel about the downside to high rate CD offers.  The high rate is typically only applied to a small amount and the end game is to sell you an expensive product, usually insurance or an annuity.

Dan was interviewed by the division of the Wall Street Journal that caters to financial advisors. The interview became a bylined article on elder fraud for their “Voices” series.  He was also quoted in a piece discussing how new taxes affect fund investors.

Events

Dan conducted a nationwide ethics webinar for the Financial Planning Association (FPA).  The CFP Board mandates all Certfied Financial Planner(R) licensees receive instruction on its Standards of Professional Conduct.  Attendees fulfilled this part of their bi-annual continuing education requirements.

Dan also served on a panel for a Retirement and Estate Planning at the World Money Show in Orlando.

Charlie, Derrick Chandler, Lynne, Mike Salmon and Morgan Tamayo attended the FPA of Central Florida Symposium where they attended sessions covering such diverse topics as global economic conditions, the new tax code changes, and reverse mortgages.

Derrick and Dan attended the T3 Technology conference in Miami in order to evaluate the latest and greatest software wealth managers can use to better serve their clients.

Download PDF Here

December 2012

In many areas of life, we are given the advice to focus on what we can control.  With respect to investments, the well informed will make sure, among other things, that they define a proper time frame, only take on appropriate risks, and manage their costs, especially taxes.  But even people who do very well on these items often have poor results.  Why?

Many studies show that people underperform the investments they select.  It is not the behavior of the investments – it’s the behavior of the investor. They try to make an inherently bumpy journey smooth by buying and selling in anticipation of the bumps.  In our experience, one of the biggest factors determining if a person’s investment portfolio succeeds is their relationship with news.  Most successful investors have learned to control their intake of news but for others, the news controls them.  To take control of the news, promise yourself you will remember these five points:

The Most Consistent Track Record in All of Investing? You Won’t Beat the Market

The record is, frankly, spectacular.  The most consistent track record in all of investing is probably the inferior track record of those who try to beat the market.  This is a function of simple math and not any theory.  Because those trying to beat the market incur costs that the market does not, the average dollar that tries to beat the market will earn less than the average dollar that does not make the attempt.  This is true for all individual securities, all combinations of securities, all time frames, all geographic locations, and in all types of markets whether they are rising, falling, displaying high volatility or are in a relatively calm period.  There are few certainties in financial markets but this is pure fact.

It is also a certainty that some people will beat the market over any given time frame. Unfortunately, they are hard to identify ahead of time.  The skilled are indistinguishable from the lucky.  According to a series of recent studies by Standard & Poors, you have a better chance of picking an above average fund by throwing a dart at a list of funds than  by selecting a manager with an above average track record.

News is Negative, So Don’t Try to Adjust Your Portfolio Accordingly

Bad news sells better than good news.  By design, provocative headlines get more attention. Put these two thoughts together with the huge number of media outlets from print, TV, radio, and the proliferation of blogs and social media, and we are blasted with attention-grabbing gloom 24/7.  We must recognize that most of what we see and hear is useless noise, not real news reported by good journalists.

It would seem that with all the attention paid to the economy and political events, changing a portfolio to take advantage of whatever scenario you believe will unfold would lead to a smoother ride.  The evidence is clear, however, that seeking and acting on market “insights” is folly.  One might profit on one prediction, but not necessarily on others.

If you fret over each new “crisis,” you will be fretting all the time.  Yes, some of these worries will come to fruition, but just in the last few years we have seen the European debt issue, the debt ceiling debate, a nuclear disaster and tsunami, outlandish predictions of trouble with municipal bonds, the Arab Spring, and the downgrade of the U.S. credit rating.  As soon as one issue died down another arose. Each event was presented as the “thing” that would cause the next drop in the markets.  In all these cases, the economy continued to be weak, yet our stock markets have been productive.

Each economic or political “issue of the day” comes with dramatic predictions of a terrible outcome for the economy and therefore the markets.  What do the U.S. GDP growth, the consensus estimate of future GDP growth, consensus estimate of corporate profits growth, the yield on the 10-year Treasury note, corporate profits as a percentage of GDP, the trailing one year return of the stock market, or the ratio of federal government debt to GDP (which we have heard much about lately) predict about future market returns?  Nothing.

In fact, a recent Vanguard study of popular economic fundamentals from 1926 to the present showed that the amount of rainfall was more predictive of stock market returns than any of the items in the above list, even over ten year periods.

News Affects Your Mood

To someone who is not a fan of college football, learning the score of the SEC championship game between Alabama and Georgia means little.  But to fans of either team, seeing the score may produce an emotional reaction.  But some fans in the stands may be left weeping after watching the action ebb and flow for four hours.

Being “informed” is a worthy goal, but you will have an easier time if you recognize that ingesting the noise, following each development, and taking in the blow-by-blow commentary in financial news can have a similar effect on your emotions as attending a live game of your favorite team.

Our moods are affected by what we give attention to.  Investing isn’t a game and information about it shouldn’t be consumed like it is one.  Are you happier after taking in political or business news? Most are not.  A recent paper by Kansas State professors Dr. Sonya Britt and Dr. John Grable found that 67% of clients’ stress level increased after watching just four minutes of political or business news—even if that news was positive news.

You Aren’t Missing Anything—So Unplug from the Noise!

November’s CondeNast Travel magazine has some interesting information about how the digital age is affecting our brains.  The anxiety many of us feel upon disconnecting from email while on vacation is quite normal, but as University of Texas neuroscientist Russell Poldrack tells us “..you can talk yourself out of it.  It’s not like being on heroin.”

Real news will persist. The very presence of so much noise assures us that if anything truly newsworthy happens we will hear about it quickly.

The key to unplugging from the noise is to have a replacement for your brain’s unceasing desire for new stimuli. If you cut down on news, you “…first experience tremendous anxiety.  We’re out of the loop. We feel like we’ve been left behind,” says Stanford’s Cliff Nass.  “..you may even feel a bit hyper at first.  That’s just the brain shouting ‘Stimuli! Stimuli!’ -because that is what it is used to.”  It will be looking for stuff. ‘There must be stuff, new stuff!’ and there is.  There is a whole other world out there.”

Opportunity Cost—A Waste of Your Time

When you are consuming news and noise, you are missing the opportunity to do other things, hence the term “opportunity cost.”  You are not doing your job, spending time with someone you care about, exercising your mind by reading a good book, or even learning something new.  Your brain is just sifting through the stimuli as fast as it can.  Think of Lucille Ball in the classic scene at the candy factory with the relentless flow of the conveyor belt.  It’s funny on TV but in real life, raising stress levels, souring one’s mood, and getting an inferior result is no laughing matter.

Our clients do not need to consume business news.  We do that for them.  We are not prone to hype or panic.  We don’t chase the hot hand or flee the next purported crisis.  We believe resilience will trump nimbleness.  It always has. You can control your intake of news or let the news control you.  It is a choice you should make purposefully.

Ron Tamayo wrote a column on how markets may or may not have been affected by the results of presidential elections for the Winter Park/Maitland Observer.

Dan Moisand was the subject of a two page “Practice Profile” in Financial Planning magazine.  The piece touched on a few of his career highlights, travels, advocacy for the financial planning profession, and expertise in retirement planning.

Dan‘s regular monthly Q&A’s for Florida Today urged inquirers to stay focused on their goals rather than get caught up in the emotion of the elections or fears of near term issues such as the fiscal cliff.  He also advised them to evaluate a slew of year end considerations with more than just one tax year in mind.

In his columns for Financial Advisor magazine, Dan reminded his peers that financial planning is about much more than number crunching. As he put it, during the 20+ years he has been in practice, “…. I have yet to find the (software) package that cares about a human being or a person’s family.” His October column encouraged planners to avoid becoming overly hyped-up about the elections. “Our view is if you want your clients to be level-headed and rational, you should be level-headed and rational yourself. We are in a period of high quantity but low quality information. Our clients need the opposite and we are committed to providing that to them.” In November, the subject was how a “live off interest and not touch principal” approach  never works for most people.

Dan‘s September column for the Journal of Financial Planning urged financial planners to continue to increase their professionalism and push for regulations that put clients’ interests ahead of Wall Street’s, something many in Congress resist.  “Putting the National Associaton of Securities Dealers in charge of investment advisors is little different than having drug companies regulate doctors,” said Dan.  

In The News…

Several of our team members were quoted in various articles:

Charlie Fitzgerald, Derrick Chandler, Lynne Strynchuk, and Mike Salmon participated in a hotline on October 7th at the Orlando Sentinel during Financial Planning Week. Their responses will appear in the Sentinel in the coming months. Close to 350 calls were fielded, with investment and retirement questions being the most popular subjects.

Dan shared our opinion about so-called “absolute returns” funds in a September Financial Advisor magazine article. “Advisors need to seriously assess how likely it is that the potential result (of these funds) will be good enough to overcome the added complications, added risks, added costs, tax inefficiency, etc. We think it is downright unlikely.”

Charlie was a significant source in an Orlando Sentinel piece following up on developments with recent legislation.  A provision, not mentioned in the article, concerned licensing. Several people, banned from the securities business, had subsequently become licensed as insurance agents and were selling market-indexed annuities as investments in the stock market.  The insurance regulators did not have the authority to consider these agent’s past indiscretions until this legislation was enacted.  Now several of these financial predators have been shut down.

Events

As President of Financial Planning Association (FPA) of Florida, Charlie and several colleagues travelled to Tallahassee on September 17th. They held meetings with state regulators, interviewed potential lobbyists, and attended a Cabinet meeting. They also met briefly with CFO Jeff Atwater to receive the Cabinet-wide resolution proclaiming October 1-7, 2012 as Financial Planning Week. Charlie took a second trip to Tallahassee to introduce officials from the Certified Financial Planner (CFP) Board to his regulatory contacts. State regulators received a solid education on the merits of the CFP mark and both the state and the CFP Board developed procedures to mutually share information regarding regulatory activities and investigations.

Dan moderated a “knowledge café” at the national conference of the FPA in San Antonio with attendees from outside the U.S. A knowledge café is a style of meeting that allows a large group to organize small group discussions and share the ideas of the smaller groups with all in attendance.

Members of our firm attend a fair number of conferences. One of our favorites is the FPA Retreat, one of the premier meetings for advanced practitioners. We are pleased to share that Dan will be chairing the task force organizing the 2013 meeting. “Bar none this is my favorite event of the year and I am thrilled to be part of putting it together,” explains Dan.

September 2012

Beginning in late summer of every election year, the media begins to predict how the markets may behave for the two major political parties and give airtime to the campaigns that are actively trying to get us worked up.  As financial advisors, we are now fielding questions like, “They say that if “Mr. X” wins this election, the economy will be devastated.  How can I position my portfolio to avoid getting wiped out if X wins?”   

We use “Mr. X” because we get the question, or a variation of it, with both President Obama and Governor Romney as Mr. X.  We have heard passionate and reasonable arguments about the approaches of both candidates and their parties as to our country’s economic issues.  We suspect concern will grow as we approach Election Day. With that in mind, let’s take a closer look at the question.

Historical data is often used to imply that one party is “better” for the markets. All candidates want you to believe that their election will ensure your prosperity. What does the data tell us?  Not much.  If you see a headline or story that claims that market history implies a specific election outcome will result in a specific market outcome, or that in certain years of an administration certain results will ensue, ignore the article.  The data and common sense do not support the article’s suggestion.

Markets have done well for both Democratic and Republican presidents, on average. Since the S&P 500 index was created in 1927, the average result is higher for Democratic presidents. However, the data shows that whenever the Republicans control either the House, the Senate, or both, the average result is better than when Democrats control both chambers of the legislature.

During the 2004 campaign, financial media made note of a statistic from Standard and Poors that showed since 1945, the S&P 500 index of stocks returned an average of 12.9% in the year after the party that occupies the White House stayed in the White House. However, when a change of party occurred, the average was a loss of 3.2%.  That’s a big enough gap that many would think it compelling. It isn’t. Those averages come from only 12 data points and the variance around the averages cited is large.

Mark Twain once said about averages: “A man with one foot in hot coals and the other in a bucket of ice is quite comfortable, on average.”

It is easy to read too much into statistics. This is a common flaw of how the human brain functions.  We seek patterns and cause and effect relationships to make sense of the world.  The media thrives on placing too much emphasis on, or surmising a pattern, based on a very small sample size. There is simply no statistically significant difference between the various combinations of Presidential and Congressional parties (Riepe 2004).

If you acted on the switching party statistic by loading up on stocks when President George W. Bush was reelected, you were probably disappointed as the S&P 500 earned just 4.9% in 2005, well below the average cited.  If you continued to believe the cause and effect implication of the statistic and bailed out of stocks when the Democrats took over expecting a loss, you would have missed out on the index’s 26.46% gain in 2009.

That is the data.  On the common sense front, consider the following:

• The market is far more complicated than these simplistic views imply. While there is no doubt the President is highly influential, he alone does not control economic policy and cannot pass laws without Congress. Just a few of the variables are Fed policy, geopolitical turmoil, globalization of trade, private sector competition, and consumer demand in various parts of the world.
• All of the House of Representatives and one-third of the Senate seats are up for grabs every two years. All campaigns for high office generally go the same way.  Politicians seek to take credit for anything you like and place blame on anything you do not like.  We don’t know who will win the election or how the markets will react. Whether you like how this one comes out or not, the same credit taking and blame placing is just around the corner. The call for change is not new or unique – it is a constant.
• The market is always creating both winners and losers. The policies of some politicians will inevitably benefit some businesses and hurt others. The market will rise and fall in anticipation of what policies will be instituted, which will be continued, and which will end. By the time the fate of these policies is clear, the market will look beyond these policies to other factors that may affect a company’s future and adjust prices based on those anticipations.
• Political labels are imprecise. Democratic President John F. Kennedy was regarded by many as a defense hawk and a tax cutter—positions more typically associated with today’s Republicans. 
• We have survived, even thrived, despite some pretty bad presidents and ineffective Congresses

From an investment perspective, we caution you about making big moves in anticipation of market reactions.  You should always expect the market to gyrate significantly because that is its normal behavior.  

Going back to President Hoover in 1928, we looked at the calendar quarters in which the elections took place and the first two quarters of the following year.  0f those 63 quarters, 32% (20) were negative. If you consider all 323 quarters of the S&P 500’s existence through June 2012, 108 were down.  That’s 33%.  Bad markets around elections do not happen any more frequently than other times.

In all time periods, you can find stories that place blame or take credit. The market may very well go down and some will want to place blame on the election results.  Has there been an election in which the candidates did not suggest trouble if their opponents were elected?  We couldn’t find one.  

In the coming months, remember these numbers and the simple fact that in all cases of a down market around an election, markets recovered in plenty of time for prudent investors. Rather than interpreting a market drop as a long term disaster, diversified, disciplined, and patient investors view drops as possible short term opportunities due to the lower prices. Whenever markets are down, our rebalancing approach makes us lean toward buying a little at the lower prices.   

The more you focus on playing short term events, the more likely you are to lose sight of your goals and the closer you are to being a speculator and not an investor.  A well-structured portfolio would be one that is not dependent upon an accurate prediction of who wins the election or the market’s reaction to that result.  A good portfolio won’t take more risk than is necessary to reach your goals in the first place.  It would be broadly diversified enough that the need to make big bets is avoided and any tactical changes would be done in context of your family’s best interests. 

You may have felt a similar anxiety in past elections.  Go ahead and formulate your opinions of the candidates and argue on their behalf with all the passion you wish to display but be careful not to go too far.  Getting people fired up is a big part of politics but heightened emotions are not conducive to sound financial decision-making. 

This is not to imply that who wins doesn’t matter. Without a doubt, the next president will have an effect on the markets, but speculating on what that effect will be is not a sound strategy for investors. We certainly agree that a candidate’s economic positions are relevant to deciding your vote. However, we want to encourage our clients to look at the candidates’ positions on the broader spectrum of issues and not place too much emphasis on meaningless and conflicting data. Mark your calendar – Election Day is Tuesday, November 6^th. Please vote but don’t let the hysteria of the race distract you from your family’s goals. 

Ron Tamayo contributed a piece to the Winter Park/Maitland Observer that explained the new taxes slated to take effect in 2013 from the greatly debated health care act.  As Ron pointed out, “The Affordable Care Act imposes new or increased taxes on some, but it will certainly increase the complexity of our tax system.”

Dan Moisand‘s regular monthly Q&A’s for Florida Today covered the differences in rules between spouses and non-spouses inheriting IRA money and cautioned one reader against funding her son’s business venture.

In his columns for Financial Advisor magazine, Dan took issue with the common arguments for including “alternative investments” such as hedge funds, managed futures programs, and non-traded real estate investment trusts as part of a portfolio.  He urged advisors to  consider the big picture, conduct more thorough research, and ignore the sales pitches for the products.   “There is a place for speculation in the world but it isn’t in the portfolios that are supposed to support my clients’ retirement income.”

We were honored to learn how well known we are in the financial planning profession.  Recently, Dan was asked to share some thoughts on the benefits of having more than one owner in a financial planning practice with members of NetworkFP, a group of practitioners in the budding financial planning profession in India.

In The News…

Several of our team members were quoted in various articles:

Lynne Strynchuk and Derrick Chandler answered ”Ask An Expert” questions for the Orlando Sentinel.  Lynne explained the basics of Rabbi Trusts while Derrick clarified some of the parameters of Catch Up contributions to Roth IRAs.

Charlie Fitzgerald added his observations to an Orlando Sentinel piece about people who are too focused on current events and take on new risks by trying to outguess market moves over short time frames.  Charlie cited “emotional overhang” from the ’08-’09 market plunge as a possible cause.

Dan Moisand was tapped by Florida Today in a column Business Editor Adam Lowenstein wrote about the frequent frauds against the elderly.  The piece highlighted our firm’s role as an advocate for the elderly and included three of Dan’s red flags: • Urgency: A ne’er-do-well will talk of how you have to act now or the amazing opportunity he’s peddling will go away. •  Special deal, but keep it quiet: Scammers will also talk about how this is a special offer but one that needs to be kept between you two. •  High returns with little or no risk: If it’s too good to be true, it almost certainly is. “People with legitimate deals are prepared to provide information and respect the time it can take to conduct due diligence,” Moisand said. “They don’t suggest people cut corners.”

It was hard to find a financial issue that got more attention in May than the Initial Public Offering (IPO) of Facebook (FB). Amid the hoopla, there are many lessons to be learned from the events leading up to and since FB went public on May 18th.

Chasing what’s hot can get you burned. It has never been a high probability way to make money, but losing money by doing so is almost a cliché. Hype and urgency don’t make for good decisions. How much was lost chasing tech stocks in the late 90’s for fear of “missing out?” How much was lost chasing the hot real estate markets of just a few years ago?

It doesn’t have to be something as grand as these bubbles were to be an issue. Several times, we have chronicled the folly of chasing hot mutual fund sectors and the tendency for money to flow into funds that have done well lately. Our commentary, “You Are the Key”, cited studies by DALBAR showing that the average mutual fund investor underperformed the market by 7% per year in part due to using weak funds but largely because people bought after rises and sold after drops. All other studies by the group before and since show the same pattern.

We highlighted a spectacular example of this dynamic in a single fund in a 2010 newsletter when we discussed CGM Focus, the best performing fund in the decade ended 12/31/2009. Morningstar analyzed the behavior of the “investors” in this highly volatile fund and determined that while the fund averaged an extraordinary 18% per year, the average dollar invested in the fund lost 11% per year over the ten years.

A stock is only worth what someone is willing to pay for it. Leading up to the IPO, much of the chatter was about what Facebook stock was really worth. On one hand were people that pointed to data such as that with over 900 million users, if Facebook were a country it would be the third largest behind only China and India. Further, each user spends an average of 20 minutes a day on Facebook, 48% of 18 – 34 year olds check their Facebook account as soon as they get up in the morning, and 2011 – 2012 revenue growth for Facebook was 88%, generating $3.15 billion in advertising revenue.

On the other hand, critics pointed out that over half of users have never clicked an ad and most probably won’t because they are considered a distraction not relevant to the user’s purpose of connecting with friends. General Motors just pulled $10 million in advertising off Facebook due to ineffectiveness. All the glowing things about Facebook were also said about Friendster and MySpace.

FB made only $1 billion yet came to market with a market capitalization bigger than McDonald’s. McDonald’s is one of the world’s most recognizable brands with a proven steady business model and management team. It made $5.5 billion in profits last year.

Facebook must grow exponentially to justify such a lofty valuation. Buyers think that will happen but the sellers from whom they are acquiring the stock have better places for their cash. That is how it is every day. People are guessing what a stock should be worth. At any point in time though, the reality is that any stock is only worth what a buyer will pay for it.

The people most likely to make money when a company goes public are the insiders who took on the substantial risk in funding the company before it became successful enough to go public. Any buyer of FB once it goes public will only make money if they subsequently sell it for more than they paid for it. The majority of current owners are insiders and big institutions who got their shares for the $38 price or less, far less in the case of the founders and early investors.

Anyone rushing in on that first day likely ended the day with a loss since almost all the trading activity occurred above the $38.23 closing price. See chart of first day trading in FB.

By the end of the first 5 trading days FB was down to $32 and $26 by early June.

Facebook is not at all unusual in this regard. The biggest IPO’s of the last year or so were Groupon, Pandora, LinkedIn, and Carbonite. All but LinkedIn were trading below their IPO price. Longer term results are generally weak too. Jay Ritter at UF studied IPO’s over a 23 year period and found that they lagged similar sized firms by 5.6% a year. Another study by Dealogic found even in the tech-fuelled 1990’s, IPO’s lagged the S&P 500 by 7.9% per year.

This should not be surprising since the insiders selling their shares to the public want to do so at the best possible price. A degree of excitement and anticipation helps in that effort even if it doesn’t reach the level of hype we see with some IPO’s. Regardless of what happens to the price of FB from here, Facebook has $16 billion in cash from the $38/share offering price.

From now on when you hear the term IPO instead of “Initial Public Offering” think of “It’s Probably Overpriced.”

Much of the financial news is really entertainment. With today’s 24/7 media, the press can go bonkers on just about any issue. Business and finance are not exciting subjects for most people, so when a cultural phenomenon like Facebook meets big money, media frenzy is almost inevitable. Media had no shortage of angles before and since the IPO. By noon on opening day, people were already speculating on why there wasn’t a “pop” in price when some had predicted spikes as high as $100/share. Given the lawsuits filed the first week of trading, FB will stay in the news a long time.

Hype and urgency can make fertile ground for fraud. We saw several scams aimed at getting the unsuspecting “in” on the IPO, these scams are common with well publicized IPO’s. We believe there is a chance they will be even more prevalent due to the Jumpstart Our Business Startup (JOBS) Act signed into law April 5th. One part of this legislation permits “crowd-sourced” funding. This allows firms to sell shares to the public at lower costs. That is a fine intention indeed but the JOBS Act also loosens regulatory controls. The opportunity to hype tiny stocks on the internet is a fertile breeding ground for a whole new set of scams.

The IPO didn’t matter to real investors. Media loves to use the term “investor” to describe anyone who buys any security. A real investor bears no resemblance to the people trying to trade FB on opening day. Most dictionaries include terms like “commitment” and “long term” to define investing but use terms like “short term”, “trading”, and “risky” to describe speculating. Real investors are diversified, disciplined, and patient and smart ones would never make their financial success contingent on answering a question like “should I buy Facebook stock?” To real investors, the fate of any one company or its stock should be irrelevant.

American capitalism is beautiful, warts and all. As headlines appear regarding how the IPO was “botched” or “failed”, coverage of the lawsuits arise, and commentators complain that Wall Street once again stuck it to Main Street, it can be easy to forget that a kid with an idea about a new way to communicate started this enterprise in his dorm room. With some financial backing and a lot of hard work, that kid made himself and many of his backers rich. He also has given many of his employees a chance to be financially secure. America’s financial system has flaws and our economy has its struggles, but it is still a place where people can start businesses, compete, and if people find value in what the business provides, improve their standard of living and provide jobs that help multitudes of people beyond the company. God Bless America.

March 2012

Buy low, sell high. This simple concept is far from easy because it is often difficult to assess whether or not a potential investment is being offered at a low value or high value. Just ask Rupert Murdoch.

In 2005, his conglomerate News Corp. bought arguably the hottest social media company among young internet users, My Space, for $580 million.  Shortly after the purchase, My Space signed a $900 million, three year deal with another internet giant, Google.  This got Murdoch, a 20^th century media mogul, a wave of publicity as he was lauded for adapting to the rapid change of the digital age and hailed as a 21^st century mogul of new media. Advertising revenue at My Space quickly jumped from $1 million to $50 million per month.

Yet only six years later, according to the Financial Times, what had been the top company in social media lost over $500 million in its fiscal year and Murdoch sold it for $35 million, a mere 6% of its purchase price.  What had seemed a great value became a bust and a massive loss.

When stock or bond markets fall, they often demonstrate low valuations. In these cases, we do not sell everything else in order to load up on what appears to be cheap asset classes but we will consider increasing our exposure to these more attractively valued segments of the market.  In essence, we are committing some additional capital after the risks have shown their ugliness and before the next rise in prices.

Valuation can be important over the long term but relying on any valuation measure as a short term timing mechanism is unreliable.  By investing, not speculating, we essentially eliminate unnecessary risks while increasing our clients’ chances of long term profitability and success.