Return of Principal

RETURN OF PRINCIPAL--A NEW BLOG by Ivan Fatovic--07/24/09

People's financial goals have changed substantially in the last year. Back in the good old days of the dot com boom, people were upset if their stock portfolio went up only 26% because they heard that their neighbor’s friend became a millionaire after putting ten grand into an internet IPO.

It never crossed your mind that you might lose half your life savings or worse when buying stocks. Times have changed and people have gotten more conservative with their money and even started saving (who’d a thunk it?) People have become skeptical of the market and are now looking for return of their principal instead of return on their principal. What I mean by that is if you give a money manager a hundred grand, the worst thing you expect is to at least get your hundred grand back but hopefully you’d like to get a little more.

Some have dipped their feet back in and made some money in the last few months, but how long is that gonna last? Markets don’t go up forever and we’re bound to have a pullback at some point. Some are even predicting that the worst is yet to come and it’s a year or two out. Some say we are going to be in a secular bear market for the next 8-10 years. What do you think? I personally find it hard to believe that all of a sudden the banks are out of their rut and already making record profits a mere few months after they were telling us that they were on the precipice of destruction in early March. Uncle Sam bailed all the big ones out and some of those institutions have even paid that money back with interest a few months after they got it. So that’s it?? Problem solved?? I don’t think so.

So how should you build your portfolio so if and when the markets crash again, your 401k doesn’t turn into a 201k or worse all over again?? Most people in our business think diversification is one of the main methods to consider when building your portfolio. That’s true to an extent, but just because you have a dozen mutual funds in your portfolio, doesn’t necessarily mean you’re diversified. What you need to find is products that aren’t correlated to each other. You can have a large cap growth fund, a small cap value fund, and a mid cap blend fund and think you’re diversified but really you’re not because those funds tend to move in tandem together, so if the large cap growth is up, there’s a high probability that the other two are up a similar amount (+ or – a few percent), consequently when one’s down they’re all down.

The innovators in retail investing have made it possible so the average investor can spread their risk out among different asset classes like gold, real estate (U.S. and int’l), fixed income (corporate, municipal, and government), private equity, hedge funds strategies, international equity, international emerging debt, and currencies to name some. This kind of asset allocation used to only be available to the super rich, but now all of us have access to most of them thanks to ETF’s (exchange traded funds). ETF’s have also made it possible for investors to short sell entire sectors, which gives you the ability to make money when the markets go down. So what’s the best mix that’ll protect us when times are down while also allowing us to participate in the boom times when they come??

I wanted to introduce this blog by giving a general overview of what I’m going to be discussing and hopefully it will help you build a portfolio that you like for years to come which can help you reach your financial goals in life such as saving up for retirement or buying that first house or coming up with that extra cash to pay off your credit card or student loan. I welcome any feedback or questions, let me know what you think!

A lot of people freaked out last year when they woke up one morning and found out that they’re net worth was about half of what it used to be. Many sold off what they had left and put the rest into their savings or money market earning virtually 0% at the bank. Even CD’s are paying crap these days. Can’t a person earn a conservative 6-10% reliably without having to risk their principal? Well the answer is yes they can. Next time I’ll talk about one of the ways you can safely earn 3.3% federally tax free while being able to sleep at night knowing your principal is safe and have full liquidity. Till then start taking your money out from under the mattress before your daughter replaces it with a new mattress and throws your life savings in the garbage:

http://www.timesonline.co.uk/tol/news/world/middle_east/article6469706.ece

Happy Investing,

Ivan