The current renewed downward volatility in the world stock markets (Volatility is a nice way of my saying my stock portfolio looks like…****!) is reviving unwelcome feelings of anxiety, fear, and a sense of powerlessness. However, acting on our emotions we can end up doing more harm than good.
The increase in market volatility is an expression of uncertainty in the world. The debt strains in the US and Europe, together with renewed worries over financial institutions and fears of another recession, are leading stock market participants to apply a higher discount to risky assets. Example – You own a house in Key West, Florida and there is a category 5 hurricane over Cuba. What price could you demand for your house days before the storm hits? After the hurricane passes and the sun comes out again and the house is still standing, is the house worth more or less than just before the storm? An individual willing to buy during and before the storm deserves a lower price because of the uncertainty (RISK) at that time. If they buy right before the storm when risk is the highest, they are expecting a much greater return then when the weather returns to clear and sunny. So… developed world stock markets, oil and industrial commodities and emerging stock markets are going lower as risk aversion drives investors to the perceived safe havens of…YES, US government bonds, gold, and Swiss francs. As to what happens next, no one knows for sure (Hurricane example). When you hear investors are fleeing the stock market, remember they need a buyer to flee and buyers are demanding a lower price with all the uncertainty (RISK) – That is the nature of the markets. There are a few points we can keep in mind to make living with the downward volatility more bearable & a stock portfolio looking like…****!).• Remember that markets are unpredictable and do not always react the way the experts predict they will. The recent downgrade by S&P of the US government’s credit rating actually led to a strengthening in US Treasury bonds.
• Quitting the equity market at a time like this is like running away from a sale. While prices have been discounted to reflect higher risk, this is just another way of saying future expected returns are higher.
• Market recoveries can come just as quickly and just as violently as the prior correction. For instance, in March 2009—when market sentiment was at least this bad—the S&P 500 turned in seven consecutive months of gains totaling almost 80 percent. This is not a prediction of what will happen this time, but it is a reminder of the dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting around for the recovery. Remember, nothing lasts forever. Just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the correction back to higher valuation.
• Never forget the power of diversification. While equity markets have had a rocky time in 2011, fixed income markets have flourished making the overall losses for balanced investors a little more bearable. Diversification spreads risk and can lessen the bumps in the road. Suddenly US savings bonds, AMEX and ING accounts paying 1% look great!
• The global economy is forever changing and new forces are replacing old ones. We don’t know when and where the next great thing like the internet will come from and change our lives forever. Can you imagine what it would be like to live without the internet today? –Likewise, we can’t imagine the next great thing to improve our lives forever!
• Just as we do during times of stock market volatility upward and a stock portfolio looking good we should remember to do the little things; keep saving, working hard, enjoying a hard earned & well-deserved retirement, working together, striving to be our best, living within our means, avoiding bad mistakes, taking advantage of opportunities, tempering our emotions, taking advantage of low interest rates/“refinances”, reducing taxes paid, reviewing insurance and estate plans, recalibrating risk levels and time frames needed to achieve goals, rebalancing to target asset allocations and continuously updating our financial plans. The secret is to enjoy the long ride. Just as it is hard to grow old, the alternative is much worse.
The market volatility is worrisome and a stock portfolio looking like…****! generates feelings that are completely understandable. By doing the little things; fiscal discipline, diversification, and remembering how markets work, can make the long ride a little more bearable. At some point, value will re-emerge, risk appetites will re-awaken, and for those who acknowledged their emotions without acting on them, relief will replace anxiety and hopefully, a diversified stock portfolio looking healthier! I know you’re getting tired of reading emails from us – SO if you want/need to talk or vent about a stock portfolio looking like…****! please don’t hesitate to call or schedule an appointment. We would love to hear from you.

As a reminder to anyone who has not already read “The Investment Answer”, we highly recommend you take the time to read it. The book is a great read and gives tremendous insight into our investment philosophy. If you would like a copy please call the office and we will make sure you get a copy.

As previously posted on our blog; “The Investment Answer” http://www.theinvestmentanswerbook.com/ – Article in NY Times http://www.nytimes.com/2010/11/27/your-money/27money.html?_r=2 and video interview http://abcnews.go.com/Business/banker-brain-tumor-dedicates-final-months-average-investors/story?id=12647398.

Luke Carey, CFP® was recently quoted on Bankrate.com to discuss a few strategies for your college savings checkup. Please check out the link here: http://www.bankrate.com/finance/college-finance/4-strategies-for-resetting-college-savings-1.aspx

We also would like to share with you an interesting take on the state of education costs and thoughts on funding from one of our Alliance of Cambridge Advisors colleagues. It is a message that we strongly believe in at Lighthouse Financial Advisors.

Affordable College: Don’t Pay Retail!
Bert Whitehead, M.B.A., J.D.

Is college now only for the wealthy? The College Board announced that tuition and fees increased over 14% for public universities and 6% for private colleges in
2009. The posted prices for higher education have more than doubled over the last decade, a rate averaging over 7% a year, which far outpaces the general rate of inflation for that time period. Have we reached the point that only the wealthy can afford to send their children to college?

The New York Times reports that families earning $100,000 a year would have to save about $1,000 a month for 18 years in a 529 plan to send 2 children to a public college such as the University of Michigan ($51,000/year/per child for four years). That’s more than the parents are likely to be saving for their own retirement! Looking at the numbers can be disheartening, but the information I have outlined below for you will show how college can be within the reach of average American families.

It is interesting to speculate why tuition has risen so much so quickly. Critics point out that the answer may lie in the perceived importance of a college degree and the corresponding public and social policy of expecting, or even insisting, that children to go to college. As a result, colleges have increased their non-tuition sources of revenue from federal and state governments and from alumni contributions so that those sources now account for over 70% of college funding. The big secret is that over half of non-tuition funding is used to subsidize tuition expenses for students with more moxie than money.

You may conclude that colleges simply spend more as their funding increases. Having tenured faculty, building more buildings, and offering more courses are all huge status symbols in higher education. These involve costs that never do down, only up. So our culture’s emphasis on the importance of college leads to open-ended support for higher education, which in turn ratchets up college costs.

It is important to keep college costs in perspective. More than half of the four-year colleges in this country cost less than $9,000 per year. This includes tuition and fees, but not the other components of college costs: room and board, personal spending, books, and transportation. Is a college degree worth it? There is no question that college graduates earn much more than their cohorts (it is estimated $1million more over a lifetime) who are high school graduates and don’t go to college. College graduates are also half as likely to become unemployed as those with only a high school degree.

But there is increasing doubt whether ‘Ivy League’ schools are worth the price. Do Ivy League graduates earn that much more than graduates of other schools to justify shelling out $200,000 for a B.A. degree? The value of better schools is not just their faculty and facilities, but the other students. High-end colleges provide much stiffer competition, and that continuing challenge is ingrained in the experience, deepening student scholastic relationships. This results in very strong ties to the highest achievers in society; networking that can shape opportunities in later life.

Many parents ignore college options for their children because they look at only the ‘sticker price.’ In fact, the only parents who pay the full sticker price are the more affluent. There are huge amounts of grants, scholarships, loans, and other subsidies available to most students. The more modest the means of the parents, the more aid is available. Many of the most highly regarded colleges (Harvard, Yale, Princeton, etc.) have programs to pay 100% of a gifted student’s costs if their parents don’t have the means. Many schools have acceptance policies that are “need blind,” meaning that the student’s acceptance is not based on whether he or she can afford to pay the full tuition. (It’s a good idea to ask the admissions office of a prospective school whether or not their acceptance policies are “need blind.”)

With this in mind, I recommend that my clients consider the “1/3, 1/3, 1/3 College Strategy.” I am using this strategy to fund my seven grandchildren’s education, and my clients have used it successfully in one form or another for the past 20 years. I call it the “1/3, 1/3, 1/3” plan because the funding comes from three sources:
1. The student must come up with one-third of the total college costs. This may be from savings, working, scholarships, grants, gifts, — it is the student’s obligation to chip in this part.
2. Student loans, not cosigned by the parent, should make up another one-third of the costs and it’s up to the student to research the options and get a good deal.
3. Finally, the parents chip in one-third. And, if/when the student graduates, the parents commit to making the payments on the student loans. Upon the parents’ death, the students can use their inheritance to pay off the loans, if any still remain unpaid.

The advantage of the “1/3, 1/3, 1/3” plan is that the students have ‘skin in the game’. They can go to whichever school they choose, but they have to come up with their third of the correspondingly higher cost. And if they drop out without finishing college, they are on the hook to pay off their own student loans.

The bottom line of this strategy is that the student will find out very quickly that the ‘sticker price’ of college is much less when educational aid is subtracted. Most of the other things needed (textbooks, room and board, transportation, etc.) are either discretionary or are available inexpensively, if researched. For example, used text books, and now electronic books, cut the cost of books dramatically.

So even if you can’t pay the full freight for college at retail prices, if your student wants it enough to learn to find the grants, scholarships, loans, and other subsidies, any college is available. The plus is that finding out how not to have to pay retail will be a life-long financial lesson he or she will have mastered!

I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY

Refinance your mortgage to the lowest fixed rate possible for your situation. Remember you can’t time the market. Savings accounts, money markets and bonds are for liquidity. These holdings over the long term lower your portfolio’s standard deviation and allow you to stay fully invested in equities.

From the Warren Buffett annual newsletter – More money has been lost chasing yield (higher return on cash) then has been lostat the point of a gun.

Enjoy the current return on equities but remember it was your savings accounts, money markets, and bonds that gave you the confidence to stay invested through the equity market’s wild ups and downs.