Yesterday’s (May 6th, 2010) Market Action and the Real Reason for the Fall
Stock markets fell sharply yesterday (see below) with the DJIA (Dow) falling nearly 1000 points intra-day. The market rallied back from the extreme losses but still closed the day down over 3% for the major indices on record level volume. You probably saw various headlines like: “Markets fall on European Debt Fears”, “Stock Markets Plunge on Trading Error” and “Markets Baffle Investors with Sharp Dive”. Although we believe the European sovereign debt fears are legitimate and there was a possibility that there was a trading error, we do not believe that to be the reason for the plunge of the market. Journalists want to point every market move to a catalyst that is taking place on the same day that the markets make their move. We believe the real reason for the fall was the stock market ran too far too fast and investors became overly complacent. When investors become complacent that means that they don’t fear a market drop. If investors don’t believe the market will drop then they will allocate the majority of their investment funds into the stock market. Once all their funds are invested then there is nothing left for them to do except hold on or sell. This will happen on a mass scale and effectively dry up all the demand (potential buyers). Once there is no one left to buy then the stock market will have a difficult time going higher which inevitably leads to the market being vulnerable to a sharp decline, like we saw yesterday. Computer trading programs can increase the markets moves in both directions, but the reason the markets fell was that people became too complacent and overly invested and that leaves no other option to sell at some point.

Market Conditions and Strategy Going Forward
We have been expressing for months that levels of complacency have become too high and the market is vulnerable to a sharp pullback. Other statistics that cause concern for us are the high level of insider sales to insider buys, near record levels of amateur money flows into mutual funds, lower levels of money market funds, overly bullish sentiment and high levels of margin debt. We believe yesterday’s move was just the beginning and we have positioned our assets accordingly months and weeks prior to today’s move. Our actively managed accounts hold over 50% cash and our passively managed accounts hold much higher levels of cash than normal. We have been invested in long-term U.S. Treasuries and Zero coupon bonds that have benefited from the market’s recent fears. In general, in our passively managed accounts we have lessened our exposure to riskier assets and invested in more domestic large cap that have historically held up better in bear markets. In our actively traded accounts we have a small short (inverse ETF) position in international markets (EAFE) that has appreciated as international markets have gone down. Most of our actively traded accounts were flat to up yesterday. After having terrific performance in our actively traded accounts for 2009 we have lagged the markets a bit in 2010. We have purposely been postured for a market correction as we believe the markets are extremely vulnerable for a significant decline. Going forward we plan on staying defensive, at the same time we are looking to take advantage of any hysterical selling by making small purchases in investments we believe will rebound quickly.

Allgen’s Investment Approach
Allgen specializes in active money management. Through technical and fundamental analysis, along with a contrarian mindset, we strive to navigate the markets during periods of prosperity and/or decline. We constantly research and study the markets to find the next emerging area even in asset classes that are typically not used in your “buy and hold” asset allocation portfolios. During the good times we focus on strength, and during the bad times we try to preserve wealth. During periods of stagnation, such as we are experiencing now and potentially years to come, we see ample opportunities to take advantage of this market. If you want to see how active money management may fit into your overall investment portfolio then please email us advisors@allgenfinancial.com or give us a call at 1-888-6ALLGEN (625-5436).

Written By:
Jason Martin, CFP®, CMT
Senior Partner & Chief Investment Officer
Allgen Financial Services, Inc.
martin@allgenfinancial.com
888.6ALLGEN

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Saving money is one of those tasks that’s so much easier said than done. There’s more to it than spending less money (although that part alone can be challenging). How much money will you save, where will you put it, and how can you make sure it stays there? Here’s how to set realistic goals, keep your spending in check, and pay yourself first.

Steps

1. Set savings goals. For short-term goals, this is easy. If you want to buy a video game, find out how much it costs; if you want to buy a house, determine how much of a down payment you’ll need. For long-term goals, such as retirement, you’ll need to do a lot more planning (figuring out how much money you’ll need to live comfortably for 20 or 30 years after you stop working), and you’ll also need to figure out how investments will help you achieve your goals.
   • Kill your debt first. Simply calculating how much you spend each month on your debts will illustrate that eliminating debt is the fastest way to free up money. Once the money is freed from debt payment, it can easily be re-purposed to savings.
2. Establish a timeframe. For example: “I want to be able to buy a house two years from today.” Set a particular date for accomplishing shorter-term goals, and make sure the goal is attainable within that time period. If it’s not attainable, you’ll just get discouraged.
3. Figure out how much you’ll have to save per week, per month, or per paycheck to attain each of your savings goals. Take each thing you want to save for and figure out how much you need to start saving now. For most savings goals, it’s best to save the same amount each period. For example, if you want to put a $20,000 down payment on a home in 36 months (three years), you’ll need to save about $550 per month every month. But if your paychecks amount to $1000, it might not be a realistic goal, so adjust your timeframe until you come up with an approachable amount.
4. Keep a record of your expenses. What you save falls between two activities and their difference: how much you make and how much you spend. Since you have more control over how much you spend, it’s wise to take a critical look at your expenses. Write down everything you spend your money on for a couple weeks or a month. Be as detailed as possible, and try not to leave out small purchases. Assign each purchase or expenditure a category such as: Rent, Car insurance, Car payments, Phone Bill, Cable Bill, Utilities, Gas, Food, Entertainment, etc.
   • Keep a small notebook with you at all times. Get in the habit of recording every expense and saving the receipts.
   • Sit down once a week with your small notebook and receipts. Record your expenses in a larger notebook or a spreadsheet program.
5. Trim your expenses. Take a good, hard look at your spending records after a month or two have passed. You’ll probably be surprised when you look back at your record of expenses: $300 on ice cream, $100 on parking tickets? You’ll likely see some obvious cuts you can make. Depending on how much you need to save, however, you may need to make some difficult decisions. Think about your priorities, and make cuts you can live with. Calculate how much those cuts will save you per year, and you’ll be much more motivated to pinch pennies.
   • Can you move to a less expensive apartment or house? Can you refinance your mortgage?
   • Can you consolidate your debts so that you’re not paying as much interest?
   • Can you save money on gas, or give up a car altogether? If your family has multiple cars, can you bring it down to one?
   • Can you drop a land line and only use your cell phone?
   • Can you live without cable or satellite TV?
   • Can you cut down on your utility bills?
   • Can you restrict eating out? Buy food in bulk? Cook more at home? You might be able to save a lot of money on food.
6. Reassess your savings goals. Subtract your expenses (the ones you can’t live without) from your take-home income (i.e. after taxes have been taken out). What is the difference? And does it match up with your savings goals? Let’s say you’ve decided you can definitely get by on $1500 per month, and your paychecks amount to $2300 per month. That leaves you with $800 to save. If there’s absolutely no way you can fit all your savings goals into your budget, take a look at what you’re saving for and cut the less important things or adjust the timeframe. Maybe you need to put off buying a new car for another year, or maybe you don’t really need a big-screen TV that badly.
7. Make a budget. Once you’ve managed to balance your earnings with your savings goals and spending, write down a budget so you’ll know each month or each paycheck how much you can spend on any given thing or category of things. This is especially important for expenses which tend to fluctuate, or which you know you’re going to have a particularly hard time restricting. (E.g. “I will only spend $30 a month on movies/chocolate/coffee/etc.”)
8. Stop using credit cards. Pay for everything with cash or money orders. Don’t even use checks. It’s easier to overspend when you’re pulling from a bank or credit account because you don’t know exactly how much is in there. If you have cash, you can see your supply running low. You can even bundle up the predetermined amount of cash allocated for each expense with a label or keep separate jars for each expense (e.g. a bundle/jar for coffee, another for gas, another for miscellaneous). As you pull money from a jar for that particular expense, you’ll see how much remains and you’ll also be reminded of your limit.
   • If you need to have credit cards but you don’t want the temptation of having them available to use day-to-day, restrict that section of your wallet with a note or picture reminding you of your savings goals.
   • Credit cards are not inherently evil; it’s all about your self control. If you use them responsibly (i.e. completely pay them off every month), you can benefit from them. But the reason most credit card companies make money, however, is because people end up spending money that they don’t have. Unless you are one of the people who can religiously pay off the balance in full every month, you’re better off foregoing the promotions that credit card companies use to lure you in (cash back, introductory APR, airline miles, and so on).
9. Open an interest-bearing savings account. It’s a lot easier to keep track of your savings if you have them separate from your spending money. You can also usually get better interest on savings accounts than on checking accounts (if you get interest on your checking account at all). Consider higher-interest options such as CDs or money-market accounts for longer savings goals.
10. Know where your money is. And how much of it, too. If you accidentally overdraw your bank account, you will incur hefty bank fees; worse yet, the place you paid with that check may slap a bounced check fee on top of that, and send the check in again, resulting in a second overdraft fee from the bank! So just a few cents missing to cover that check could result in over $100 in fees. To avoid that, you should always know how much money you’ve got in your account(s), so you never cut a check for more than what you have.
11. Pay yourself first. Savings should be your priority, so don’t just say that you’ll save whatever’s left over at the end of the month. Deposit savings into an account (or your piggybank) as soon as you get paid. An easy, effective way to start saving is to simply deposit 10% of every check in a savings account. If you get a check or sum of cash, say 710.68, move the decimal point one place to the left and deposit that amount: 71.07. This works well and requires little thought; over several years, you’ve a tidy sum in savings. Over decades, you’ll be a millionaire.
    • You can set up an automatic transfer from your checking account to your savings account.
    • Many employers allow you to deduct savings from your paycheck. The money is directly deposited in your savings account so you never even see it on your paycheck.
    • You can also have investments for retirement taken directly out of your pay, and the taxes may be deferred with this option.

Tips

• Always OVER estimate your expenses and UNDER estimate your income.
• If you can afford to share things you have, from food to living space to appliances, try to do so. What goes around comes around when it’s between close friends, soon enough, you’ll find your friends doing the same, and everybody benefits.
• Have a professional shopper go through your closet before you hit the mall. They will help you assess what you already have and what timeless items you can invest in to create more looks from those you already have. There are services that do this (e.g. Visual Therapy in NYC and TimePros in Los Angeles). Remember that this service can cost a pretty penny. Don’t use this method unless you have a tendency to make $250 - $400 shopping trips!
• Have a hobby? Match your funds. One important habit for saving is if you have a hobby, such as model airplanes, scrapbooking, dirt biking, scuba diving, etc., set a hard and fast rule that whatever you allow yourself to spend on your hobby, you match those funds to your savings. For example, if you buy yourself a $45 pair of riding gloves, another $45 goes to your savings. Serious about saving? Try doubling your matched funds! These savings plans will do two things: Save money regularly and quickly, and really show you how much you are spending on your hobby, when it costs you twice as much.
• If you receive unexpected cash, put all or most of it into your savings, but continue to set aside your regularly scheduled amount as well. You’ll reach your savings goals sooner.
• If you vacation normally, use the web to search for affordable vacation deals instead of paying full retail price. Some sites offer very discounted vacations by partnering with resorts across the country. Essentially, you are required to go on a 90 minute sales-pitch to buy a timeshare at the resort, and in exchange you receive an extra cheap luxury vacation and often freebies like theme park tickets, gas, or dinner certificates.
• Make purchases with paper money, not exact change, and always save the change. Use a piggy bank or jar for your coins. Coins and change may look insignificant but when accumulated over time they can help you save. Some banks now offer free coin counting machines. When you redeem your coins, ask to be paid by check so you won’t be tempted to spend your newfound cash.

Warnings

• Do not go out “window shopping” with any money on you. You will only be tempted to spend money you cannot afford to lose. Only shop with a predetermined shopping list.
• After a long week of working, you may want to indulge in some luxury, telling yourself, “I deserve this”. Remember that the things you buy are not gifts to yourself; they are trades, products for money. Say, “Of course I deserve this, but can I afford it? If I can’t afford it, I’m still a worthy person, and I still deserve to meet my savings goals!”
• Unless you’re in truly desperate financial straits (like 10 seconds from eviction and your three children are starving) don’t try to cut corners connected to health. Basic preventative care for yourself, your family, and your pets might cost you a $60 office visit or a $30 heartworm pill today, but the skipping it will contribute to expensive problems and heartache down the road.

Article provided by wikiHow, a collaborative writing project to build the world’s largest, highest quality how-to manual. Please edit this article and find author credits at the original wikiHow article on How to Save Money. All content on wikiHow can be shared under a Creative Commons license.

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A bear market creates fear, uncertainty and costly mistakes.
The conventional definition of a bear market is a decline in stock prices of 20% or more, lasting at least two months. Whether or not Wall Street is in a bear market, every investor can have his or her personal bear as well. Your personal bear market is an unbearable price fall in the value of your nest egg.
You can experience two types of bear markets, temporary and permanent. Markets tend to go up and down and then back up. In a temporary bear market, you lose 20% or more but eventually recover. In a permanent bear market, you lose 20% or more and you never get it back. All the historical evidence I’ve seen indicates that a properly diversified portfolio has never suffered a permanent bear market over the long term. Unfortunately, some common investor behaviors can easily turn temporary losses into permanent ones.

It’s challenging to tell anyone to hold on once they have witnessed an extreme downturn in their portfolio due to market conditions. Yet, that being the case…the best thing to do is reassess the composition of one’s portfolio in light of its purpose and time horizon for its use. The traditional mantras of “diversification across sectors, geography, asset classes” still hold true over the long term. However, these are highly ignored during severe bear markets where emotions usually take over and lead to costly mistakes.

So it might be a good time to remind ourselves that even during tough bear markets:
Diversify – well diversified portfolios have not dropped as far as the market on the whole. This allows for a better recovery when the market does recover.

Assess Time Horizon – The level of volatility should be directly correlated to the amount of time one has until the assets in the portfolio are needed. In other words, the closer to retirement one is, the more conservative one’s portfolio should be.

Rebalance – history has shown that rebalancing can minimize volatility while enhancing returns. The basic notion is that buy identifying and maintaining a proper asset allocation, one will sell off assets that have appreciated to buy into assets that have depreciated. Adherence to this rule should eliminate much of the emotional elements of portfolio management.

Assess portfolio goals – if a portfolio has taken too much of a hit, a reassessment may require a realignment of goals (ie retire later, invest more now, etc.)

Unfortunately, while the above mentioned principles are not new, they are continuously violated by common investors who let emotions take over investment decisions. Panic can lead to mistakes, including the mistake of ignoring the portfolio rather than reassessing in order to retool one’s portfolio. Volatile times require more proactive measures. The market will have its ups and downs. But if one can follow these basic rules, one should be able to minimize the impact of the volatility relatively speaking over the long term. If you cannot apply these rules objectively, you should resort to the assistance of a financial professional that will help you in this area.

For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com
www.allgenfinancial.com

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Technology advances have opened the arena for individuals to trade stocks on their own. Whereas lack of information used to pose a great challenge for individual investors, the Internet has made most investing related information readily available to the \”do-it-yourself\” investor. This has created a whole new spectrum of services and platforms for brokerage houses as companies such as Scottrade, Etrade, Ameritrade and others have spent considerable amount of time and focus on assisting individuals who want to trade stocks themselves. With all of these resources available, a new question has come to the forefront with regard to investing. While the lack of information was a challenge in a previous era, today too much information has raised the question of whether individuals should invest on their own. The breadth of information of available has heightened the awareness of individuals with regard to the level of time and effort necessary to research, pick, monitor and execute stock trades. This is not to dissuade anyone from doing so, but there are certain commitments to be made when determining if you are going to invest on your own or use the assistance of a broker, financial advisor or some other financial professional. Consider the following components of successful investing.

1) Stock Selection
There are a couple different schools of thought when it comes to picking stocks. The two basic camps are the 1) Fundamental approach and 2) Technical Analysis. The fundamental approach focuses on various financial ratios, earnings, revenues, etc. in order to determine which companies are fairly or undervalued with regard to their current stock price. Warren Buffet and Peter Lynch are notable fundamental style investors. Technical analysis has a different approach. This approach uses an underlying premise that investor behavior tends to repeat itself and can be traced based on certain stock chart patterns. This technique is not so concerned with the value of the stock but rather with the price movement, volume, industry trend, etc. Charles Dow and William O’Neil are notable technical analysts or investors.

The two different approaches and their underlying premises have created a divide among investing professionals with regard to picking stocks. The purpose here is not to establish one method or approach over another. In fact, there are investors that see the value in somehow incorporating both methods into their investment approach. Needless to say, it is important to familiarize oneself with such approaches and determine which style, if not both, is best suited for ones personality and philosophy on the market. Either way, both styles require extensive studying and research in order to ensure an efficient approach to picking stocks.

2) Portfolio Composition
Once you have chosen a strategy for choosing stocks, it is critical that one has a basic understanding of portfolio dynamics. To coin an old phrase, \”Do not put all your eggs in one basket.\” This principle in investing is called \”Diversification,\” and it plays a critical role in the performance of a portfolio. A study conducted by Brinson, Singer and Beebower demonstrated that proper diversification or \”asset allocation\” accounted for over 90 % of a portfolios return over a 10 year period. However, even this rule needs to be understood as it is often misapplied.

Diversification does not mean holding several different stocks in a portfolio. That is the first step towards diversification. But the follow up to that entails having stocks of different sectors (ie , retail, telecommunication, real estate, etc.), market capitalizations (sizes ie large cap, small cap, etc), and countries (domestic, international, emerging markets, etc). The next step is also determining how much of each is appropriate for one\’s level of risk tolerance. Many online risk tolerance questionnaires assist in helping to determine such factors.

3) Discipline, Discipline, Discipline
Once the above factors have been considered and employed, the element of discipline becomes the ultimate determinant of an investor having success. It is important to assess oneself and create an investment approach or strategy that fits one’s style. Once this has been developed, it is critical to implement the strategy with consistency and discipline. This has been the area that has led many to have disappointments in the world of investing. Investment decisions cannot be emotionally based. A consistent, disciplined approach to investing should eliminate the emotion out of investment decisions. But this has not been the case historically. A study by Dalbar showed that the average mutual fund investor attained a 2.57% annual return over a 19 year period while the S&P increased by 12.2% during the same timeframe. A lot of the reasoning behind the findings were attributed to investors getting in and out of the market at the wrong times due to emotionally charged events. Even conservative investors who invested in fixed income (ie bonds) instruments fared poorly. Such investors averaged 4.2% annually versus the long term government bond index that averaged 11.70% during the same time period.

So Should I do this myself?
This becomes the critical question. And the answer truly lies in the ability to commit to the above mentioned elements. Many investors have made the determination to become avid students of the market in order to qualify themselves in an arena where they will compete with institutional experts. However, for those that may not have the time, desire or ability to make such a commitment, a marketplace of financial advisors is available to provide assistance in this area. Of course, choosing the right one is important and should be based on some basic tenets. Here are a few quick questions to ask before hiring an advisor:

1) How long have you been doing this?
Financial Advisors have a high turn over rate when first coming into the industry. A typical rule of thumb is that a financial advisor with at least 5 years experience will probably be around for the long haul.

2) How do you get paid?
Some advisors get paid via commissions while others get paid via fees. There is an extensive debate over which is more advantageous. Typically, the fee based approach tends to be more favorable as such advice may lean towards more objectivity, without the influence of how much commissions are paid.

3) How do I get serviced?
One major complaint in the industry is that many clients get sold a bill of goods when first signing up and then never hear fro their advisor. This is typically true among commission based advisors as such compensation structure is based upon new sales and not ongoing service. Will you be serviced by the advisor, his assistant, some call center? Determine which way feels more comfortable for you.

4) How often do we review my portfolio?
Portfolios should be reviewed annually, at a minimum. But some advisors will provide quarterly reviews.

5) What is your retention rate?
One good indication of how well the advisor performs is the satisfaction of existing clients with the service provided. This is usually marked by clients not leaving.

These are just a few questions that provide some criteria for choosing a financial advisor. Of course, intangible elements come into play such as personality and connection.

The decision to be a \”do-it-yourself\” investor or use the services of a professional is one that many are facing, especially in light of many baby boomers retiring and having to manage their retirement funds. Which ever decision one decides, plan thoroughly as time is money, and making the wrong decision can be costly. In conclusion, personally assess which approach is right for you, prepare as you move in that direction and happy investing!

About Allgen Financial Services, Inc.
Allgen Financial Services, Inc. is a fee-based retirement and estate planning firm assisting individuals and organizations better manager their assets. Allgen services clients both domestically and internationally. Allgen’s service offerings include: personal retirement planning and investing, employee retirement benefits, estate planning for executives, estate planning for foreign investors, and business succession planning for entrepreneurs.

Written By:
Paul Roldan
Senior Partner at Allgen Financial Services, Inc.
Harvard University Graduate

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