July was good to the market

jkom51July 25, 2009

Although like most people we are down after the losses in 2008 and 1Q09, July has been 'off to the races' with good yields on high-quality corporate bonds and corporate stocks battling back from the March lows.

We were very pleased to see a solid double-digit gain in our portfolio for 2Q09. Every little bit helps, for sure! I do agree with some of the experts that the market has gotten a little ahead of itself, with quite a few days' upswings due mostly to traders having to cover their shorts, rather than any real stampede back into equities.

One thing that really surprised me was that the sole fixed income bond fund offered by DH's pension fund (where all our portfolio is; we have no taxable accts) had a 7.8% gain in 2Q09. That very bright fund manager picked up attractive yields on intermediate-term Ford and AT&T bonds. I'm so thankful he didn't load up on GM bonds instead!

Just to be on the 'better safe than sorry' side (yeah, I'm a slow learner, LOL - should've moved our money back in Oct 2008), I took advantage of Friday 7/24's sideways move to take some profits and throw 30% of the portfolio into cash. I will probably hold it there for three months or so and look for a good dip in the market to buy back in. This is unusual behavior for me; I am normally a buy-and-hold type.

Still, I felt this was a good time to nudge our portfolio in a slightly more conservative direction. I only check our allocation balances once or twice a year, and noticed in early July that our preferred allocation had gone pretty far out of whack in a couple of sectors. So it was time to make a few changes based on what I thought the market might do in the next 2-6 quarters. Time will tell if we guessed right - the crystal ball is pretty fuzzy these days for everybody.

DH is still working/contributing, but he's counting the days now till retirement. We're aggressive investors so the portfolio is still 50% domestic and international equity funds. This isn't money we need to live on, so we are able to take more risk with it than if we needed to preserve capital for taking distributions.

What have you changed in your portfolio in the last six months due to the increased volatility of the markets?

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jkom: "What have you changed in your portfolio in the last six months due to the increased volatility of the markets?"

I loaded up on GE & DOW when they hit single digits in March. I did the same more recently with AA.

I've made some oil & gas plays, e.g., SLB, KMP, & LINE.

KMP & LINE also have the added advantage of paying extraordinary dividends. And speaking of dividends, I also added to my dividend-paying utility portfolio: D, FPL, & POM.

My tech stocks have all done well, so no major changes yet, although I did take some profits in June.

On the downside, I got spooked when there was talk of nationalizing the banks in March, and I dumped BAC. Big mistake!

    Bookmark   July 26, 2009 at 9:17AM
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bethesdamadman, sounds like you had more winners than losers - always a good thing! Just wondering if you have thought about Petrobras in the oil sector. We have friends who live in Brazil and the changes they've seen in the last twenty years have been remarkable. When the market really hit its lows Petrobras slid to $10/share and I knew it was way too low there. Unfortunately no energy funds offered in the portfolio, though, LOL.

    Bookmark   July 26, 2009 at 6:30PM
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Why do you have to find it in a fund?

Doesn't Petrobras have ADRs? If you have reasons to believe that it carries good value ... so buy the stock itself.

It'll pay dividends, most likely, also probably increasing over time (which bonds don't).

And you won't be paying 1.5% or so to the fund managers every year ... but you're lucky - they charge about 2.5 in Canada, more if they're seg funds or special types: too much!

As you gain more depth of knowledge of the markets, enough to feel comfortable buying individual stocks, you get that bonus.

I had Canadian Merrill Lynch, which turned into BAC and I've been wondering what to do about the few shares that I have.

Can I interest you in some Canadian banks? They have avoided most of the troubles besetting many of the U.S. banks, especially the big ones ... the ones too big to let fail.

Wouldn't the bailout have been better to have been given out to the usually smaller banks that carried their own mortgages so were careful about which mortgages they took on?

Seems to me that when managers of a company, bank or whatever darn near run their institution into the ground, they have a lot of gall expecting that they deserve a bonus!

I recommend putting some of your assets where they're based in non-U.S. Dollars, for I think that it's at risk these days. If you have all of your eggs in one basket ... better make darn sure that it's a bullet-proof basket!

As for me, I haven't bought (or sold) anything in recent months. I almost bought more (earlier bought at $35 and $7.00) of a Canadian mining stock .. should have, as it grew from $4.00 to $26.00!

We have some unit trusts in various fields of endeavour that are paying 8% - 20%.

Good wishes for increasing skill at managing income and assets effectively.

ole joyful

    Bookmark   July 27, 2009 at 3:31AM
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Hi, Joyful - hope life is treating you well.

We don't buy individual stocks. At this point in our lives we are comfortable with the fact that our only portfolio is pre-tax retirement assets. We always chose not to aim for making the most money from our jobs, but rather opting for time together and 'stop and smell the flowers' lifestyle. But that does mean that we don't have enough extra to open taxable investment accounts.

Fortunately, the retirement portfolio is held by one of the largest government pension funds, so fees are low, no cost on trading, and assets are purchased at NAV. Fund managers fight to get accepted by the pension management committee. But if they don't meet minimum performance standards over a three year period (they must meet or exceed their peer average returns), that individual fund is kicked out and replaced by one of their competitors. The list of funds available is varied and top notch.

In fact, quite a few of the funds offered in my DH's pension accounts were favored by the excellent independent CFP I used to work for.

The performance of the single International fund offered was outstanding in the 2Q09 - there was a 30% gain which put it solidly in the black for the year. And Petrobras is actually one of the holdings, as it turns out. So I own a bit of it, anyway! Although the International fund had a terrible 2008, their previous two year performance was well above average. At one point we were up to 50% invested in this fund, but in late 2007 I decided to take some profits, reducing our exposure down to its current 20%.

    Bookmark   August 2, 2009 at 4:42PM
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Hi again jkom51,

It is interesting that your pension manager has the fund companies compete, and if they don't outperform over three years, they're gone.

About 85% of the fund managers don't outperform the segments of the market in which they participate.

Do you know whether the pension manager is able to negotiate a lower cost system than individuals must pay? e.g., the Management Expemse Ratio, usually about 1.5% in the U.S., 2.5% (or higher) in Canada, is deducted as part of the fund company's cost of doing business from the total fund, not as a cost against the individual accounts.

It is possible that you are paying two management fees - one to your pension manager, and the second to the managers of the funds that they hold.

This is 25 years for some of my funds, and some of them have a lousy growth rate (also, some have transmorphed several times: it's a bit hard to keep up with the company/fund names). I think that it's time for some of them to go.

Some of my individual holdings have done well, some not so well, too.

As the Canadian market is about 2% of the world financial scene, it has been important for us to be involved outside of our national markets.

However, with the number and seriousness of the problems that the U.S. faces, it seems to me wise of the U.S. folks to seek substantial exposure outside of their own system.

Only about four or five years ago, about 65 cents U.S. would buy CA$1.00 and last year for a short time that Canadian Dollar would have cost slightly over US$1.00 ... then a few months ago, about the first of this year, CA$1.00 would have cost about US78 cents (and I should have exchanged some funds that I had left over after a trip to the U.S. - but didn't).

Now, it takes about US95 cents to buy CA$1.00 again.

It used to be that one Euro's value was under US$1.00 ... but it hasn't been like that for some time.

Soon you'll have your main man retired and looking for interesting activities, as well as some diversions.

Maybe learning how money works and playing some games by buying your own individual stocks might be an interesting enterprise.

Good wishes for a summer that's memorable for worthwhile reasons.

ole joyful

    Bookmark   August 2, 2009 at 6:36PM
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Hi Joyful,

In the US you always pay both the pension fund manager as well as the mutual fund. However, our pension fund charges only .012%. The average US pension fund administration charges 1.25%. In the funds available to DH, there are a few funds with 1% or 1-1/2% fees but most are in the .75% or lower range.

I agree with you that international exposure is critical these days. Our foreign exposure is low (to my way of thinking) at 22% total right now (DH's portfolio is 20% foreign invested but my smaller portfolio is invested 100% foreign fund). I do expect a pullback, however, which is why I took some profits and parked it in cash. I expect to reinvest before the end of the year, dividing it between domestic and foreign. We usually aim for around 28-30% foreign exposure total.

Because our total asset portfolio is relatively modest, we wouldn't reach sufficient breakpoints even with a discount brokerage to be able to buy at NAV (net asset value, for those who are reading this discussion and are unfamiliar with the abbreviation), let alone waiving trading commissions.

My ex-boss, the CFP, was very familiar with our pension fund (he has several clients who are also covered under it) and his advice to me was to leave our portfolio with the pension fund even after DH retires (he can take it out and rollover to another brokerage or advisor if he wishes); the quality of the funds and aggregate cost efficiencies can't be beaten.

Now, if we decide to sell our house (it isn't elderly- or disabled-friendly, unfortunately), that frees up a huge chunk of money which we can use to play with. But even so, I fear I'm more of a mutual-fund gal. There's very few stocks I feel strongly about (although when IBM went down to $25 during the dot-com bust I couldn't believe it). I'm more focused on business trends and corporate finance in a general historical environment.

Because of the estate planning we've done, it's not necessary for us to draw on our portfolio unless we need some 'mad money'. We can support a comfortable, if not lavish, lifestyle on DH's pension. To offset inflation, we will receive additional income at specific intervals in the future (my upcoming Social Security, my modest pensions, then his Social Security); DH's pension also has cost-of-living increases annually which will help a bit.

As a result, investing in taxable accounts is actually a drawback for us. The retirement portfolio automatically reinvests all dividends and everything compounds tax-free until you withdraw some/all of it. So, the fees and taxes we would pay on a modest taxable account make little bottom-line sense in our situation. When we sell the house, then it will be time to decide what to do with the proceeds. Much will depend on our health situation; senior housing here in the US is REALLY expensive for the nicer facilities.

My ex-boss liked to say, "Don't let the tax tail wag the dog!" But we do have to pay some attention to taxes, especially as they are unusually low in the US right now by historical standards. Even without the deficits, they were bound to swing upwards eventually!

I like to be prepared for various future financial scenarios, so my DH and I have discussed many times about doing XX if YY happens, or doing ZZ if QQ occurs. You can never tell when life is going to start throwing not just curveballs, but knuckleballs at you, LOL.

Thanks for the summer wish, and I hope yours is good as well. My DH's maternal relatives all live in Canada (most in Vancouver, some in Calgary) and it's a beautiful place.

    Bookmark   August 2, 2009 at 11:08PM
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Oh, and there's one other advantage to keeping the retirement portfolio with the pension fund, even after DH's retirement. There are no 12-b fees, either.

A lot of people don't realize how many fees they pay on brokerage accounts, both coming and going. But a large portion of it is the basis points added into the stock price, when you've got a smaller account that can't take advantage of the higher breakpoints offered to bigger/institutional investors. One discount broker did a huge ad campaign a few years back, advertising no fees and low trading commissions - but they also added 40 basis points to the cost of every stock or fund you bought!

    Bookmark   August 3, 2009 at 7:57PM
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