Buy as the market goes down?

behaviorkeltonAugust 14, 2007

So the market looks like no fun lately.

Even when the market was going up, analysts were saying that stocks were still reasonably priced.

When things have looked their worst, I have tended to sit tight. Every single time, I have regretted it within only a few years.

So is anyone considering the current condition as a buying opportunity?

Given that we don't know where it will bottom, is anyone thinking of buying with each drop?

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Hi bk,

Buying/selling stocks on a timing basis is questionnable.
Buying/selling real estate on a timing basis is complete insanity!

There are always outstanding deals, at any time, in anyneighborhood. They're not always easy to find... but they always exist.

Also, anytime you have a high confidence of retaining ownership longer than 10 years, the trends are in your favor to simply buy & forget about it.

If you want the benefits of owning the home you live in... find something that fits your life.

If you want to buy real estate as an investment, it is critical to learn all the ins & outs of investment property negotiations, management, renting &/or selling.

Dave Donhoff
Strategic Equity & Mortgage Planner

    Bookmark   August 14, 2007 at 5:16PM
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I'm just a "workin' slob". I know how to roll outta the rack and get to work everyday. I know how to live BELOW my means, pay my loans on time, pay to principle, and INVEST on a regular schedule (weekly for my work plan and personal savings and monthly for my IRA).

What I've learned is that REGULARITY is good for more than colo-rectal health! "Timing the market" is not what I'm good at, and it's not what interests me; so I keep to the same "regular" schedule. And it's treated me pretty well; some ups and downs, but overall... pretty good. It's the regularity of investments that smooths out the bumps the market can provide. This is the basis of "dollar cost averaging".

The only exception to my measured approach occured on 9/11/01. I watched the market plummet and initially flipped out. THEN... I transferred some savings and "bought". I invested in good, solid funds that I knew I would hold for several years. It was a smart move, but it took a lot of guts to buy when all my instincts said, "NO! the end is near!".

I'm conservative about things like owning my home and not paying for new cars. I'm conservative about saving money and investing it... so that's why I do it on a regular basis. It's what keeps me "comfortable" and able to keep on sending my nickels out to play in hopes that they'll bring their little friends home...

Once you have an idea of your "time frame" you'll be able to make better informed decisions about when and how to invest your available monies.

    Bookmark   August 14, 2007 at 5:28PM
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I've had some money sitting on the sidelines and unfortunately missed the recent run up in the stock market.

The recent market fluctuations, I hope, are offering me the possibility of getting in at an especially good time. In my short and superficial experience with the market, it always seems that the very best time to have bought was when everyone else was saying "oh no! this is the end!".

Of course, once I bought Yahoo (around 1999) after it fell 50%.... and then it dropped by even more than THAT!

Overall, I don't time the market. But in terms of an entry point, it feels better to invest on a dipping period than a frenzied peak in the market.

So is there any reason to hold off at this point?

Thanks for your responses. I appreciate your experience in finances.

    Bookmark   August 14, 2007 at 8:01PM
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You ARE trying to "time the market". You need to "lose" that mindset and begin investing now in a controlled, moderate way.

Invest in things that reflect your personality when it comes to investments. Are you conservative, "riskier", or a still more "riskier"?

    Bookmark   August 14, 2007 at 8:32PM
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Thanks... I appreciate the advice and I'm taking it.

I almost started a sexy brokerage account, but canceled it. Instead, I'm going to do the boring thing and use my Vanguard account: 80%Total Stock Mkt index, 20% International index.
I'll set it up so that there are automatic/regular investments.

    Bookmark   August 14, 2007 at 10:29PM
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Any of us who work and who fund 401ks (or the equivalent) out of our paychecks are buying the market all the time. I think this is a fine time to buy but I absolutely agree with controlled, reasonable purchases. Set a time frame to buy over and just regularly put the money to work.

    Bookmark   August 14, 2007 at 10:44PM
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I think we are no where near bottom yet. However this depends on which scenario you believe. Do you believe that we are in a deflationary spiral and a fed rate cut will ease that. Also do you believe that all the market needs is more liquidity and everything will be fine? If that is what you believe then this is probably a good time to buy ahead of the next FED meeting. I would still avoid anything in Financials, Housing or Construction or Retail (outside of food which I would consider)

Do you believe the opposite, that inflation on an international scale is happening and while we may go into a recession, the rest of the world is having price increases in raw materials, food and energy and there is a general gradual appreciation in the value of the Chinese Yuan. At the same time the dollar due to eithere deliberate manipulation, excess liquidity or a rate cut actually floats lower. Triggering more price increases in the US so that we have even more inflation

Heck I have no clue although I know prices at my local grocery store are much higher. Also the two biggest periods of inflation in the 1970s were during periods of gas shortages. As a general rule I try never to buy between June and October. Traditionally the markets tend to go lower through October and then rally in November. I am waiting

    Bookmark   August 14, 2007 at 11:43PM
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Given that I can watch CNBC and observe six respected economic gurus have absolutely differing opinions, I am lead to believe that the economy is about as easy to wrap your head around as the environment.

Like the environment, there are so many variables swirling around that it's about impossible to look at just a few of them and claim that the market will, with certainty, behave in a particular way.

I'm trying to operate on the hunch that, even though the market can always have further downside, it will have recovered (at the very least) within a few year's time. I think that's a reasonable bet.

That said, I kicked myself for not dropping this idle money in the market six months ago. I don't mind re-entering the market as it takes a few steps back.

    Bookmark   August 15, 2007 at 8:19AM
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If you have watched the market for any length of time, you likely have at least an informal list of stocks you would like to buy when they go "on sale". This is probably as good a "sale" as we've seen in a long time (IMHO). I personally have been nibbling at the edges at some stocks I've had my eye on, but I haven't "loaded up the truck"" by any means as yet.
Certainly, one can't argue with the consistent dollar cost averaging strategy as a successful long term method; but when the large funds are liquidating to fund mass redemptions by the frightened masses, it always leads to overselling and likely presents a unique buying opportunity. This isn't market timing, it's bargain hunting.

    Bookmark   August 15, 2007 at 7:42PM
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I'm a mutual fund kinda gal. I'm not "wired" to follow individual stocks, at all! I've invested in good, solid funds invested in things I understand and use, and places I believe are on the "uptick".

I'm in it for the "long haul" and while recent developments in the markets make me wince, I'm OK with it. As long as I keep my eyes on the horizon... lol.

Look, any time credit gets so loose that lenders fail to check the earnings of people looking for NO MONEY DOWN mortgages, there's bound to be trouble close behind. And this is what we're seeing now. "Dubs" with little or no money, looking at and "buying" more home than they could possibly hope to afford. And greedy institutions settin' the trawls and reelin' 'em in when the rates increase. Wah, wah. "Life in the food chain". It'll suck for some time to come; but it will all settle out. My time frame for investments is long enough that I'm OK with this upheaval. As I get closer to my (statistically predicted) death I'll move my investments into things with less risk. But I'm not "there" yet. So I'm taking deep, cleansing breaths... ;)

Live below your means, invest regularly in funds/things you understand and USE. And hope for the best!

    Bookmark   August 16, 2007 at 5:44PM
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On TV news last night we heard a late-40's DINK couple with a "good credit rating" and a "six figure income" complain that they couldn't get "100% financing" on a $500K house in southern CA. They were going to have to "lose" their "dream house".

I don't know how to comprehend this. Did they not HAVE $10K to put down on the house?

    Bookmark   August 17, 2007 at 10:59AM
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behaviour kelton,

Do you like playing risky games ... e.g. trying to catch a falling knife?

Don't be in a hurry.

Usually the market drop is hard and fast, but it bounces around bottom for a time.

But the U.S. has some serious problems, these days, both governmental and private, in terms of high debt. And high annual deficits, as well.

Many people have been taking the equity out of their houses and using it to buy stuff.

Three or four years ago, my Canadian Dollar would have bought about 65 cents U.S. Last week, it'd buy 95 cents, now it's about 93 cents.

Probably a good idea to buy in stages, over a period. So you don't get stuck with buying once, at what appears to be bottom ... but finding that there's a heavy drop, later.

Over a period, many feel that investing regularly, the amount that one can afford on an ongoing basis, helps to even out the price levels.

I made a post at a nearby thread related to investing that gives a bit fuller explanation of my approach.

Good wishes for taking action that'll please you, later.

ole joyful

    Bookmark   August 18, 2007 at 3:24AM
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Timing is everything. Everything.

Don't buy when the mockit goes down: buy when it breaks up. Don't sell short when the mockit is rising; short just after it tops and breaks down. Learn the chart patterns; topping patterns and bottom patterns. Watch the trading volume. Learn to sell after reaching a good up target or cover a short after a good drop target. Learn how to define these targets, they are definable. This does involve watching the market continuously, not just an idle glance at days end or when you feel like it. Ahh so !! It involves - uh -uh -well- work! time! dedication! study! research! This is not for everybody but it can be done. Don't think it can't, it can.

Study. Stay away from brokers.

What is investing for the long haul? Buying regardles of mockit direction? Holding in a major down market? Ridiculus. This is a concept promulgated by mutual funds so they will have sufficient (your) funds ie a stable trading base, in hand for their continuous market timing trading. Do you think they sit still? Look at their turnover rates of 300 to 400 percent per year.

As for "the long haul" - just how long is that? Can you give me a definitive answer?

    Bookmark   August 19, 2007 at 12:28AM
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I don't believe there is a definitive answer the question about the duration of the "long haul". I think it varies greatly from one person to the next. For me, it will be until it's time for me to leave this world. And that means I will have to rethink my strategy to achieve my long range goals several times in the years remaining to me. :)

And yes, the "long haul" means that I stick to a regular regimen of investment; weekly for some things, monthly/twice monthly for others. It's that routine that makes investment easier for me, it simplifies an important aspect of my life. And it DOES, indeed, mean I buy "high" and I buy "low" sometimes... more often, I buy "in between" the two. But it has worked well for me and has rewarded me nicely over the years. Patience may well be a virtue, but it's also something we learn with time.

I agree that you have to be aware and you have to invest some "brain time". We use a financial advisor and it was a smart thing for us to do. Yes, it does "cost money". But neither the helpmeet nor I are disposed to sitting in front of a computer or behind a newspaper tracking stocks and/or buying/selling/trading. We work hard and prefer to spend our leisure time in more restful pursuits, I'm happy to pay someone who LIKES to do that sort of thing to do it for me. We meet with him every 3-4 mos. and go over our "portfolio", discussing world events and things that have caught our attention. We usually make some changes, too. We've worked with him for 15 years now and he understands our investment goals and mindset; this has been a probably the single most important confidence builder for us. More than a few times we've called him or he's called us to discuss something that's caught our attention.

I think most people avoid investing because it can be so intimidating. Our FA has boosted our confidence and that has made us more curious and that, in turn, has made us savvier investors. So, if your are disposed to doing all the work yourself, GO FOR IT! but if you're not I see nothing wrong with a measured, patient approach over seen by a good financial advisor.

    Bookmark   August 19, 2007 at 8:49AM
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I am not a stock picker, so mxyplxy's advice isn't quite right for me.

I'm going to do index funds and invest bad as that sounds.

There is a balanced Vanguard fund that is a "fund of funds" that I have always liked because some of those funds are among their most interesting/aggressive and are closed to new investers. It's called the STAR fund.

The talking-head experts that I have heard on radio and TV seem to mostly agree that stocks are priced very nicely and that... inspite of a near term future of bumpiness... things are looking promising.

    Bookmark   August 19, 2007 at 11:01AM
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Behav., if you want to know my thoughts, I think each and every one of us who decides to begin investing does so "blindly". I think the decision to send your first nickels out to play is done so with little more than "blind faith".

Index funds are a good way to "get your feet wet". The whole idea behind them is to spread risk and thereby minimize the impact of market fluctuations on your investment. We started out with really conservative investments, too.

We've gotten "braver" over the years. We've learned to "sit tight" and "wait and see"; more often than not, "sittin' tight" has proven the better strategy, but that doesn't mean we haven't been nervous or that we haven't made changes at less than opportune times.

And that harkens back to the REGULAR, modulated investment of our dollars... sometimes you buy really low, somethimes really high... most often, though, somewhere in between...

Patience is LEARNED. Invest patiently and regularly. Pay attention to the market and global politics... let your increasing knowledge guide you.

    Bookmark   August 19, 2007 at 1:02PM
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If you can find a financial advisor who sells no financial products, charging for his/her time, it would be a good idea to visit such a person on occasion, for often their recommendations are quite different from those who are salespersons for, usually, a limited number of financial instruments (frequently insurance or mutual funds), among a large variety available.

Good wishes for developing increasing skill in playing the investment game.

ole joyful

    Bookmark   August 21, 2007 at 6:21AM
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Regardless of whether you are buying individual stocks or mutual funds, the key is diversification. After 30 years of investment and going thru boom and bust times, it is the only thing that saved me.

I retired very early. And I did it right before the market dumped in 2001. I talked to a lot of other people in my situation who were living off their 401K and had to go back to work because they did not have it or other funds in diversified funds. That's the big problem with a lot of 401Ks---you are really limited in the funds you can choose. So you should back it up with a diversified Roth. And if you have more money after that, you can buy bond funds.

I've had bond funds for years in order to protect myself when the market goes down. Thru diversification, your higher risk funds make good money in good times, and the lower risk funds save you when the market tanks.

    Bookmark   August 21, 2007 at 12:29PM
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Trouble is, when using equity-based mutual funds, when, on average, you make about 5 bucks (maybe 6) ...

... the mutual fund managers get one of those bucks. And their income is for sure, whether yours may be or not.

A big incentive to make me choose ETFs, for wide exposure to the market, at a much lower fee structure.

Or, over time, get to know which stocks to buy directly ...

... and put that one buck in five or six into my pocket.

Actually, to use that one buck (that was gone from my pocket into that of the money mangers', earlier) to buy more shares (or ETFs).

That way, if the market goes down 16 - 20%, my core holding is untouched, even if I choose to sell out, for the 16 - 20% loss is the money that I lost to the fund managers' pay, when I was paying them.

And, if I choose to follow the smarter path, of refusing to sell when the market goes down, but buy more (waiting till after it hits bottom, or buying in chunks as the market passes through bottom).

How about this idea ...

... if I lack extra funds to invest, when the market is really low, to use some of my assets as collateral to make a bank loan, to buy more (of those bargains)?

Then to keep buying as I go along, using my ongoing savings that I'd planned to invest, less the interest on the borrowed money, but the dividends that the quality stocks that I'd bought helps pay for that.

After the market has recovered, and is getting long in the tooth, to use less of my regular savings for investment to buy more stocks, shifting instead to use it to pay off the loan ... which I continue to repay as the market goes over the top, and starts back down.

Then, as the market gets low again, I have much of the loan repaid, and can consider making the loan larger again, to buy more as the market moves through a low phase?

I've made a thread elsewhere that may be of interest, "How (Canadians, at least) can borrow for dang near no cost",(Money Saving Tips on Oct. 19, '06, about p. 5) telling how I can, when investing in quality stocks paying a high dividend outside of tax-deferred retirement accounts in Canada, borrow to invest at almost no net cost to me. Assuming that the proceeds of the loan are invested in a stock paying about 3% dividend, that is taxed at a low rate in Canada.

See also my thread, "Which investor gets hurt by inflation? Who gains?", on Money Saving Tips of Jan 17, '06, about p. 10.

For several years I've checked the progress of a plan involving buying 10 stocks (or 5, or 4), revising the plan annually, with usually 60 - 90% of the stocks carrying over to reduce friction costs, that has 20 year record of growth rate of about 13%, which is 25% better than the market average.

A plan that takes a couple of hours a year to implement and manage.

And very few money managers manage to beat the indices, over the long term (partly because of the Management Expense Rate).

Be careful of the money management types that pull your leg: their livelihood depends on it.

Happy investing, everyone.

ole joyful

    Bookmark   August 23, 2007 at 3:32AM
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Hi again well-behaved kelton,

Well, how do you assess the market recently?

Did you shoot most of your investment bolt in terms of current availability back in Aug. and Sept.?

Are you pleased with that decision, now?

Many like to try to invest on different occasions as the market shows signs of stabilizing and making several attempts to begin advancing again.

I bought a small stock that was promoted at an investment group that I attend for over $1.00 ... it's now down to 65 cents.

Then I bought some more of Canada's major telco, which I'd first bought a couple of years ago. There's been a buyout offer from fairly creditable purchasers who want to take it private, at a higher price.

Then it went down a few dollars per share and some said that there's a good chance that the purchasers may be willing to offer only a smaller amount per share, but some are saying that they think that the price will be paid as originally offered - about 15% above that price, about 10% above current price, probably before summer. Considering buying some more.

About a month ago I bought shares in a Canadian miner and processor ... one of the few left. Inco and Falconbridge, two large nickel producers, were bought by foreign-based companies, and Alcan was taken over by Alcoa or Rio Tinto, a major world miner. Ipsco, a pipe maker, was bought, as well.

Recently I've been considering buying shares of a major Canadian insurance company ... don't have such shares now. It's down about 10% or slightly more from last summer's prices.

Also considering some penny dreadfuls ... but usually they drop substantially in a down market and I don't think they've seen near bottom, yet.

I can borrow about enough for another investment, or two small ones, then have enough line of credit available for another purchase or two, which I can triple if I take in some more share certificates.

The buyout of the telco may take place by spring, adding a substantial increase in the cash position.

It's about three months till May, and many don't like to invest through summer, as things usually slip over summer.

October has provided some substantial drops, over the years. I'll probably have enough available to buy more then, if I choose. Also, if I have certificates issued for some recent purchses, can offer more collateral to undergird larger loans, should I so choose.

And, don't forget, I'll be 80 years old in about 11 months.

What's my potential time frame?

I'm in excellent health now ... but how long may that last?

Good wishes for increasingly wise investing and general management of both income and assets.

ole joyful

    Bookmark   February 11, 2008 at 6:37AM
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>>Trouble is, when using equity-based mutual funds, when, on average, you make about 5 bucks (maybe 6) ...
... the mutual fund managers get one of those bucks. And their income is for sure, whether yours may be or not. I love your posts, OJ, but that doesn't add up for me. Most CFPs charge no more than 1.75% of portfolio, depending on total asset size, and usually "layer" that so the charge decreases proportionately as the portfolio size increases. A $1M portfolio usually pays 1% or less in expense fees, and allows purchases at NAV to boot - something very few individual investors can manage on their own.

I don't see how that $6 you mention could possibly give $1 to the financial advisor, or even the average broker. I realize you were only being illustrative, but I think that gives beginners a totally incorrect message.

    Bookmark   February 11, 2008 at 11:14AM
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I can buy some mutual funds where there is a commission to be paid, going in, or going out, with the commission rate outgoing dropping over several years till it disappears after half a dozen years (partly to encourage me not to cash out over the short term).

Or there is a whole large class of mutual funds that charge no fees to buy or sell.

But it's my understanding that they all charge an annual management fee.

Don't your mutual funds in the U.S. charge annual Management Expense Rates/Ratio/fees (MER)?

I thought that many of your U.S. equity-based funds charge about 1.5%, somewhat lower than ours in Canada - many of ours charge about 2.5%, and seg funds often up around 3% or better. Excuse me, " ... 3% or more".

Over the long term, the market grows at an annual rate of about 8% or so - sometimes quite a lot more, sometimes a lot less, even having losses.

If your mutual fund's MER is about 1.5%, and the market maybe growing at about 8% ... doesn't that mean that when the market makes $6.00 for you, the mutual fund manager gets about $1.00 of it? And he gets his, every month, whether your account grows or not.

And if you're paying your financial advisor apart from that, that's even more outflow.

Most of the fund management companies pay part of their annual fee to the broker that sold the funds in the first place ...

... which led me a couple of years ago to ask here whether some of you mutual fund holders were paying for a service that you might not be getting.

Was your fund salesperson consulting with you on a regular basis as to how your money and your investments were doing?

S/he should - s/he was getting an annual fee to do just that.

Your mutual fund manager was taking money from the general accounts, in a ratio related directly to each account holder's holdings, keeping part of it to pay expenses, and sending part of it to the brokerage who sold you the funds in the first place (or to which you'd transferred your account, later).

Were you getting the service that that payment justified?

When I buy an individual stock from a stockbroker, I pay a fee when buying and a fee when selling. But no fees year by year as I go along. My relationship is directly with the company whose stock I own ... not with a go-between in the middle, who needs an annual fee.

I bought a bank stock over 40 years ago - that cost me a commission when I bought it, but no annual fees since. There'll be another commission fee to pay when I sell it ... don't know about what fee may be payable if I die next week and it gets transferred to my beneficiary's account.

There'll be a lot lower tax to pay if I die next week than if I had last May --- the bank is involved with the U.S. sub-prime mortgage business/fiasco, and backed an insurance company backing those mortgages, that may go broke.

Last May, with the value at $107., my executor would have deducted the $4.20 or so that I paid, divided the $102.80 in half, and paid tax at regular rate on $51.40 - but the estate would have received $51.40 tax-free.

Now, at $67.70, less $4.20, the capital gain would be $63.50, with income tax at regular rate to be paid on $31.75, and keeping $31.75 tax-free.

Some difference!

But no management company was charging about 1.5%, or 2.5% or so as an annual management fee to oversee that account, pay rent, phone bills, salaries, fees to brokers that had sold the asset in the first place, etc.

Over 40 years ... at 1.5% ... that'd be 60% of the account, right?

I prefer to learn about the market and buy stocks directly. The company sends me their annual reports ... and my dividends ... directly.

I can make some mistakes - and have - and will - but I prefer to put that $1.00 in $5.00 or so into my pocket.

As the members of an investment group that I attend monthly say, "Some losses here and there are the tuition fees in the University of Learning How Money Works".

If there were no activities in one of my stockbroker account for a year, one broker charged $125.00 per year for inactivity.

I didn't sit still for that long - they no longer have an account with my name on it.

As a matter of fact, I just came up with an idea. I've changed that account lately and was considering setting up another, related to a credit union, as I like their way of doing business - the people that are doing the business are the owners.

However ... maybe it'll be a good idea to set up a new account with the broker(s) where my offspring have theirs - will make it a lot simpler to arrange things on my death.

Good wishes for smarter use of your income and assets, year by year.

ole joyful

    Bookmark   February 12, 2008 at 6:14AM
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OJ, both the CFP I worked for and the CFP we use for MIL's investments, do charge a management fee. BUT, that management fee pays all mutual fund fees, and as I mentioned, allows asset purchases at NAV. So in this case, the financial scenario does not include additional fund fees.

And yes, speaking as one who was skeptical of the "paying somebody else to manage my money" scenario, now that I have seen (and done) some of the background work of what such professionals can do for their clients, I strongly feel that both these CFPs are worth every penny they are paid. These are not people who are paid by the number of transactions made on your behalf. There is a world of difference in the quality of service from a good CFP (and yes, there are bad ones) and an average stockbroker (of which there are certainly some good ones).

My biggest issue with personal finances - and not with you personally, I love your thoughtful and thought-provoking posts! - is that there is much more that goes into a holistic view of an individual's finances, legally and financially, than whether the stock market is going up, down, or sideways. There are inheritance issues, tax issues, retirement issues, insurance and benefit issues - the whole issue of personal finance has become enormously more complicated in the last 40 years.

Too many people are struggling to understand these legal/financial ramifications without any training or help besides that of well-meaning strangers on the Net or inexpensive brokers who aren't legally allowed to offer estate planning. Few of our parents understand these issues at all, so we struggle not only with our own estate matters but theirs as well.

When I need to ask someone to help reallocate our portfolio, based on a high risk-taking comfort level, I want to use someone who is licensed, certified, experienced, and has a fiduciary responsibility to give me the best advice possible.

Without that legal responsibility, free advice in the end remains worth only what you pay for it. I would guess you spend a fair amount of time on your investing, because it is clearly a pleasurable exercise for you. But for many people it is not - like my MIL, unfortunately - and therefore, we use a CFP to handle her portfolio in a low-risk, stable strategy.

Such a strategy is so wildly different from our personal investing philosophy, I would never dream of taking over her portfolio. The CFP is that "third person" whose advice and reassurance she is more likely to accept than from immediate family. This is not an uncommon behavior, unfortunately!

    Bookmark   February 15, 2008 at 1:13PM
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Hello again jkom51,

What is the business of the agency which employs your CFP? Are they solely into management of assets, not in any way a sales agency for mutual funds, insurance, stocks, etc.? Do you pay fees directly for their work of managing those assets?

Do they exist entirely on those fees, or do they have other sources of income related to the money that you've invested with them, i.e. does the fund company managing your mutual fund assets pay the agency/CFP any fees, either initially or ongoing?

Do you have to buy your funds from an outside agency, or can they sell them to you? If they were to recommend that you buy individual stocks directly, could they sell them to you,or would you have to buy them elsewhere? If the latter, what possibility do you think there might be that they might make such a recommendation?

By the way ... if your CFP can sell mutual funds ...can s/he also sell ETFs?

Is your financial advisor absolutely independent? Does s/he live entirely on the fees that you pay? No incentives to sell certain financial products because s/he earns part of the commission on sales? Does s/he receive any ongoing annual fees as long as you own that fund and the company continues as your advisor?

Does s/he sell mutual funds? The no-commission kind? Canadian banks, with nationwide networks, have sold the no-commission ones for years, as in-house products. Unfortunately, often the results which they produced were less than stellar - often in the lower quartiles as far as growth rates were concerned (bankers don't make capable fund managers).

There are other management agencies which sell no-load (i.e. no commission when buying or selling) funds, but many of the non-bank agencies (with no sales staff) want a substantial amount invested initially or they won't talk to you.

That's with regard to the folks who sell the mutual funds - and you say that you pay no commission, get your stuff at Net Asset Value, i.e, you pay no entry or exit commission.

Every mutual fund management company that I know of charges a management expense rate - to cover costs of renting the place, paying phones, staff, etc. ... plus many of them send part of that fee back to the sales agency that sold the things in the first place, much of which is passed on to the staff who made the original sale (if they're still there).

Some mutual fund management companies do a lot of buying and selling of stocks, sometimes turning over more than the whole portfolio during the course of the year. The brokerage fees are part of their cost of doing business, as well. Some very seldom buy and sell ... and I think that some of them pay the brokerage fees out of their management expense ratio, but I'm not sure.

That management fee, in the case of equity funds, the only kind that I'm interested in, for the guys who deal in bonds and other interest-bearing instruments charge commission to buy/sell, plus (lower) MER, as well, but that skims some of the already low rate of return that such instruments pay - I'll buy my own bonds, directly (and I don't own much of that stuff).

My asset comparable to them is a mortgage-related mutual fund (that charges an MER, granted - but at a lower rate). Bought when I was about 25 - 35 years younger and much more naive, money-wise.

If I'd owned that stock that I bought 41 years ago for $4. and change, as an equity-based mutual fund ...

... if I were in the U.S. my fund manager would have taken 1.5% or so, sometimes more, over the years, ...

... and in Canada 2.5% or more, annually. I calculate 40 years at 2.5% annually (part of which went back to the sales agency) to be 100% of the total value of the asset, taken out a small bit at at time. With costs of buying and selling stocks sometimes added to that.

Which is a good deal of the reason that about 85 - 90% of managers of equity mutual funds fail to equal the average growth rates of the underlying markets into which they invest.

If I have $100. invested and it grows at the average long-term growth rate of the market of 8% approximately, that means that I'd be worth $108. at year-end. But - the mutual fund manager gets $2.50 ... my share is $105.50.

And he gets his, guaranteed, whether I achieve any growth or not. If there were no growth, and my asset is $100. at year-end ... the amount in my account turns out to be $97.50 after he takes his slice.

With some smarts, maybe I can put that 1/4 of the growth rate that the mutual fund manager earns into my own pocket.

Especially since, following one project that a guy has followed in Canada for 15 years actual (25 years back-tested) that takes about 2 hours per year to manage, and which I learned of by paying less than $23. annual subscription for Canada's best personal financial magazine, has produced average growth rate of 14% over the years.

Another, reported in the same magazine, following Graham's parameters modified slightly and using U.S. stocks, grew 168% cumulative in 6 years, including losses in 2 years, while the S&P500 ETF (SPY) grew 42.1% (1 year loss) - that's about 4 times the rate of growth, it looks like to me.

If I'd bought those U.S. stocks that he recommended, my asset would be down by about 20% (rough guess) if I'd increased the amount invested over the years.

But to make it work properly, I should have made a major investment in the beginning, so that I get exposure to the whole project that he recommends, from the start. In which case, as I'd have got about U.S. 65 - 70 cents for each Canadian dollar invested, back then, it would have taken a lot of money for that exposure.

Now, were I to cash out ... I'd get within one penny of CDN$1.00 for each US$1.00 of the asset that I'd owned down there - for a loss on exchange of 30 - 35% or so.

Despite those last apples carrying a worm or two, it seems to me that they carry a better potential growth rate than my dropping a fair decent number of dollars into the pockets of the fund managers, every year.

Retire early - that makes every day weekend.

Everybody talks about how much they enjoy freedom - having enough money to manage well through the rest of your life lets you have financial freedom.

Enjoy your weekend.

ole joyful

    Bookmark   February 16, 2008 at 1:16AM
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jkom51 wrote: "OJ, both the CFP I worked for and the CFP we use for MIL's investments, do charge a management fee. BUT, that management fee pays all mutual fund fees, and as I mentioned, allows asset purchases at NAV. So in this case, the financial scenario does not include additional fund fees."

joyfulguy wrote: "Every mutual fund management company that I know of charges a management expense rate - to cover costs of renting the place, paying phones, staff, etc. ... plus many of them send part of that fee back to the sales agency that sold the things in the first place. I think that some of them pay the brokerage fees out of their management expense ratio, but I'm not sure. "

I'm not entirely sure myself, but think joyfulguy is on to something. Here is some more food for thought on the subject. Ric Edelman has to say this to say about Mutual fund fees in his book: "The lies about money-Achieving Financial Security and True Wealth by Avoiding the Lies Others Tell Us�"and the Lies We tell Ourselves"

"Chapter 4�"17. Hidden Fees

You know that all mutual funds charge fees, right? I mean, none of them works for free, right?

I ask because I've occasionally found myself arguing with people over this question. They adamantly claim that they do not pay any fees for their retail mutual funds because they own no-load funds. But as explained above, load means "sales charge"; by buying no-load funds, you avoid sales charges.

However, avoiding loads does not mean that you avoid fees. All mutual funds charge a fee, Actually, they charge two. The first is the Annual Expense Ratio. This pays for the fund's recurring operating costs, from the fund manager's salary to the toll-free phone number investors call to talk to customer service representatives. The average expense ratio of retail mutual funds is 1.33% per year, according to Morningstar, although many are more than 2%. The highest in the industry is a staggering 15%!

Although the expense ratio is expressed as an annual figure, it's actually debited on a daily basis. But you never notice it, because the charge does not appear on your monthly statement. (It's hidden.) To find it, you must look in the fund's prospectus. There the expense ratio is expressed as a percentage. (The fund further hides the amount you're paying by showing the figure as a percentage instead of dollars.)

Many investors�"and, astonishingly, even many investment advisors�"think the annual expense ratio covers all of the fund's expenses. But it doesn't. The expense ratio covers only the perennial costs: salaries, marketing, overhead, and the like. There are many variable costs for operating a fund, and these are excluded from the expense ratio. Indeed, a study by Wake Forest University, the University of Florida, and the Zero Alpha Group found that 44% of mutual fund fees are not disclosed in the prospectus.

The biggest of these omitted costs is trading expenses. Whenever the retail mutual fund manager buys or sells a security, he pays brokerage commissions (just like you would if you bought or sold a stock or bond). Considering that retail mutual funds trade millions of shares representing billions of dollars, their trading costs are huge�"and the more the fund trades, the more it spends on brokerage commissions. According to Greenwich Associates, the average retail mutual fund spends $16 million in trading costs per year.

But to find them, you must look in the fund's Statement of Additional Information, an arcane document that's even bigger, denser, and harder to read than the prospectus�"and which fund companies, stockbrokers, and brokerage firms are not required to give you. To get a copy, you must ask for it; something few investors do, since few have ever heard of the document.

These additional costs represent an average of 1.25% in annual expenses. When you add that to the expenses listed in the prospectus, you find that the average retail mutual fund charges its investors 2.58% per year, according to Morningstar. Compare that to 1945, when the average fund charged on 0.76% per year.

Instead of showing the fee you pay in dollars right on your statement, you must look for the fee in the prospectus. Then you must convert the percentage in to real numbers. And because almost half of the fund's expenses are not included in the prospectus, you must also turn to the Statement of Additional Information. There you must compute the expenses, determine the ratio of expenses to fund assets, and convert this figure into dollars based on the amount you have invested. In this way, you are able to determine how much you are paying to own your mutual fund. The retail mutual fund industry will tell you that it provides full disclosure about its fees. No, they say, nothing is hidden at all.

The fund industry is so good at hiding fees that even MBA students can't figure it out. As part of a test of mutual fund disclosure practices, MBA students at Harvard University, the University of Pennsylvania, and Yale University were given a list of retail mutual funds. Every fund on the list was an S&P 500 STock Index fund. Researchers asked the students just two questions:

1. What is the most important factor in selecting the best fund from this list?

The correct answer is "the fee"�" and every MBA student got it right.

2. Which fund is best?

Obviously, the correct answer is "the cheapest fund." After all, every fund on the list owns identical investments. The students had already agreed that the only difference was cost, so they went about determining which fund was cheapest. Yet, to the astonishment of the faculty, even after being given prospectuses on each fund so they could evaluate the costs, only 20% of the MBA students picked the cheapest one. Eighty percent were incapable of correctly reading the prospectus to determine the correct answer.

And these were MBA students at prestigious universities! What hope is there for ordinary investors?"

    Bookmark   February 16, 2008 at 4:31PM
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>>And these were MBA students at prestigious universities! What hope is there for ordinary investors?"And this is why the SEC is proposing that ALL funds change their prospectuses to a new 3-page summary format that would clearly indicate what fund costs are. Needless to say, the fund companies are fighting to keep from showing their costs relative to other companies' costs!

I, too, have talked to people who insist that because they are using a discount broker, they are "not paying those high fees advisors charge". They are often not aware that depending on the size of one's portfolio and amount of individual transactions, that they are in fact paying points over the NAV fund cost.

The point is not that brokers and fund companies don't deserve to be paid, but that it would certainly help customers if those various fees were more easily ascertained.

A more serious problem to me is the excessively high managements costs charged on many employer retirement accounts. Since the majority of Boomer assets are held in these types of accounts, many people are stuck with lousy fund selection, excessive management fees, and often poor ROIs, from brokers/funds selected by benefits people who are often indifferent and uninterested.

    Bookmark   February 16, 2008 at 5:01PM
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If you want to avoid excessive management fees, use one of the Big 3...Fidelity, T. Rowe Price, or Vanguard.

    Bookmark   February 17, 2008 at 5:18PM
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Greetings again, everyone,

Here's an idea worthy of consideration:

avoid *all* management fees related directly to your currently envisaged (and future?) investments!

Buy some shares of a high quality stock, paying a commission. Buy some shares of other companies, as well, in different industries, for diversification, paying a commission on each - lower if you purchase using a discount broker (but they don't give any advice).(1)

If you own mutual funds now, that'll help with your important and legitimate concern for diversification.

Hold it/them for 5 years - or 10, 20, 40 years, or for whatever length of time suits you. Even 10 - 20 months might do, now that the market's down - but there's major increased risk, especially if you *will* need the money in that time (but, with good credit, you might be able to defer liquidation by using the share certificates as collateral for a temporary loan till market recovers - how much steel do you have in your backbone?).

Having stock share certificates issued costs $35. - 50. each; having mutual funds' units' certificates issued usually is done at no fee.

With me, death may intervene ... but, crowding 80, I (who took the course that stockbrokers must take, 25 years ago - and others, later) have 80% of my assets in equity-based investments. Over 80% now, I guess, what with recent drops in the market, including, so far, drops in value of some recent purchases: but that's O.K., I expect them to come back, after while. In fact, I'm thinking of buying some more, likely will continue to do so from time to time during coming months. I live on less than my 3 + 1 pensions, so I don't need to draw on that money currently.

Fees paid during the holding period? None! Most high quality companies pay dividends annually, which the company sends to you directly: an exception being Berkshire Hathaway A, Warren Buffett's vehicle, that grew from $12.00+ in '65 to $139,400. today ... which is down $1,705. from yesterday, so it was $141,105. yesterday ... annual compound growth rate of 24.35%.(2) Some financial advisors claim that he's never paid a dividend: they're wrong - he paid 10 cents in '67.

In talking to a friend a while ago, he mentioned how I'd suggested to him something like 8 - 10 years ago that we share to purchase a share, when they were about US$22,000. (which would have required about CDN$30,000. then ... I almost went to the bank to borrow $8,000. to do it, but was a smidgeon short on nerve, though I then had no concern about the value of the stock).

Also ... the increased value of the Canadian Dollar, since then ... would now pay off the loan (if I were dumb enough to sell the shares just now)!

The shrinkage in value of the U.S. Dollar during those few years... would have paid the principal of my loan!

Note the usual disclaimer found with all mutual fund and stock-related people: providers, managers, etc. ... "Your experience may vary ..." - 'cause the value of such assets varies a lot.

Back to the story: sell the stock(s) now (though I usually don't like to sell several at the same time, either - same as not buy several at once), pay another commission.

Management fees paid in between ?

Zero. Not a cent ... unless you have a financial advisor and run your portfolio past that person for evaluation, occasionally, then pay evaluation fee directly.

Actually, if your advisor is licensed to sell mutual funds, I think that you'll find that if s/he gives advice regarding stocks, s/he may well be breaking the law!

In any case, if an advisor can sell one kind of products but not another, what possibility do you think that there may be that you might receive an occasional recommendation from him/her to purchase some of a product that s/he doesn't sell?

It's mild and sunny here today - I'm doing a wash to hang on the outside line.

Six hours later: Did - fairly comfortable hanging, but (not having slept last night), I overslept, took them down when some chillier, just before dark. Did it comfortably all in one go.

Now doing some final drying, spread out in living room - taking some of the desert-like dryness out of a northern-area home in winter.

I hope that you all have a fine winter weekend.

ole joyful

1. With, say, under $10,000 - $20,000. to invest and not wanting to buy shares in one company each in three or four sections of the market, you can choose to buy some Exchange Traded Funds, each of which will give you a cross-section of each of various sections of the market: construction, real estate, medical, gold, consumer products, oil and gas, lumber, grains, ... even overseas markets, etc.

Instead of about 1.5%(US) or 2.5%(CDN) annual management fee (or more) charged by most mutual fund managers, these (more passive) managers mostly charge about 0.4% annual management fee.

If you assume long-term average growth rate of the market being 8%, instead of paying $1.00 in $4.00, $5.00 or $6.00 of your earnings in fees ... you'll be paying about $1.00 in $20.00!

Some difference!

If you figure that the market grows at 10% average your own calculations.

Plus - don't forget, you don't get to keep all of the rest of the growth ... the Income Tax people want part of it.

Inflation accounts for part of it, as well.

If you're paying $1.00 in $5.00 growth to the mutual fund manager, that's 20% of assumed growth ... do you pay more than that percentage to the Income Tax people?

Have you ever thought that your mutual fund manager may be charging about the same rate as the income tax people?

Hey - remember how I've said that there are two rats that eat your cheese? If you're using regular mutual funds ... looks like there may be three, and your mutual fund guy gets more or less what your income tax friends do ... and if it's capital gain, the income tax people are willing to wait for their bite of the cheese.

Mutual fund managers ... and inflation ... get theirs every year!

But... ask your mutual fund sales guy whether s/he can sell Exchange Traded Funds (ETF) ... cause only stockbrokers can sell 'em, around here.

If your mutual fund salesperson can't sell 'em ... what's the probability that s/he might recommend that you buy them - from somebody else??

2. Don't have a financial calculator?

Use Rule of 72: Divide number of doubles of the asset value into the number of years invested, then divide that figure into 72 to find rate of growth.

You get $12.00(+?) doubles to 24, 48, 96, 192, 384, 768, 1,536, 3,072, 6,144, 12,288, 24,576, 49,152, 98,304, 196,608 ... 141,000 is about half way to the 196,608, so there are 13.5 doubles, right?

From 1965 to 2008 is 43 years, divided by 13.5 produces 3.185.

Divide 72 by 3.185 gives 23.59 - close to the 24.35% that my financial calculator indicated.

Didn't know the Rule of 72 before? Remember my oft-repeated phrase, "It's a poor day that one doesn't learn something"? Today's your lucky day!

See how much more power your brain has than you thought? Just needs a bit of exercise/sharpening from time to time, like a scythe, to get more/better work done!

Take that, all of you essential, but drattedly frustrating at times, computers!

o j

    Bookmark   February 23, 2008 at 2:05AM
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Another and possibly easier way to apply the rule of 72 is to divide 72 by your antipated rate of return. The result will be the number of years it will take your investment to double. For example, at a 12% annual return, it takes about 6 years for your investment to double (72/12=6).

Here's another interesting fact. When a person delays starting an investment program, he/she reduces the end value of his/her investment much more than it may first appear.

Let's assume a 12% return over 36 years and 30 years. Using the rule of 72 (72/12=6), we calculate that the investment will double every 6 years. Therefore, a 36 year timeframe provides 6 doubles and a 30 year timeframe provides 5 doubles.

Question: If an individual's investment time horizon is 36 years, how much money does the person loose from a 6 year delay assuming a $10,000 investment that yields 12%? If you said $10,000 you are wrong!!!

It's true that by delaying his/her investment by 6 years the person forgoes a double. What's not so obvious is that she/he looses the last double not the first double.

36 years (6 doubles)
10k to 20k to 40k to 80k to 160k to 320k to 640k

30 years (5 doubles)
10k to 20k to 40k to 80k to 160k to 320k

The 6 year delay cost the young investor a whopping $320,000 (the double from 320k to 640k)!

Also, consider the power of compounding. At 12%, a onetime $10,000 investment by a 30 year old becomes $640,000 by age 66!

That's why it is so important to start your investment program as early as possible. That last double may be $1 million to $2 million or more!

    Bookmark   February 23, 2008 at 3:17PM
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ETFs were an attractive option when there weren't many. Now, however, there are now 677 ETFs, most of which have opened in the last two years. And a great many of them are predicted to fold, especially in today's challenging market.

An excellent article appeared in the Feb 17th WSJournal, titled "Stability Counts as ETF World Gets Crowded". As the article points out, "Early this month, ETF provider Claymore Securities announced plans to liquidate 11 funds. Investors who don't sell their shares before Feb. 28 will be sent the value of their shares including any capital gains and dividends. ETF experts see more liquidations on the horizon.

Fund liquidations can be a headache for investors: They have to find a new place to put their money to work, and those holding the liquidated fund in a taxable account have to pay taxes on any gains received. If the ETF is less than a year old -- as are most of the Claymore funds being liquidated -- investors have short-term gains, which are generally taxed at higher rates than long-term gains."

Another excerpt:
"There's an awful lot of people out there carving out a few percent" of the market, says Lee Kranefuss, head of the iShares operation at Barclays Global Investors, the largest ETF provider. The market downturn is making the already-challenging environment for new ETFs even worse.

"I think there's going to be lots more [ETFs] that end up liquidating," and many of them may be funds that are not yet a year old, says Jeffrey Ptak, director of ETF analysis at investment research firm Morningstar.


This is food for thought, because as I've said before, I don't think most people are knowledgeable investors. And if you're not going to be one, you should definitely stay out of individual stocks, and aim your research at understanding basic investing principles and accumulating a diversified portfolio.

In this uncertain market, dollar cost averaging is going to work to your advantage, but it will work best with a cohesive, rational strategy that balances your goals with your comfort level in risk taking. And if it takes a professional CFP to help you understand how to do this, it is no different than paying a marriage counselor to help strengthen a damaged relationship, or a mental health pro to help rebuild a damaged psyche.

In today's complex environment, focusing solely on financial returns is like basing your car buying on which one goes the fastest. There are many elements that go into building individual financial security. If it were simple, every one of our parents and grandparents and peers would have accomplished it by now.

    Bookmark   February 23, 2008 at 4:34PM
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jkom, I agree regarding the proliferation of ETFs. However, the large ones like SPY (S&P 500), DIA (DOW Jones Industrials) and QQQQ (Nasdaq 100) will be around indefinetly.

I also agree with your points regarding holding individual stocks. I believe that newcomers or people that don't have the time or inclination to spend an hour per week, per stock reading news about the company are better served holding mutual funds or ETFs.

My portfolio has been on autpilot for many years. Fidelity Contra has been my core holding for the past 15 years. Before that, Fidelity Magellan was my core holding. Contra's long term return is over 11%. During the last few years it has returned 14% to 15%. Not many people can consistently beat returns like that by picking individual stocks on their own.

I focus on asset allocation and leave the stock picking to the pros. I've done fairly well considering that I spend very little time maintaining my portfolio. My focus has been on investing at a young age, investing as much as I can, and defering income taxes as long as I can. You saw what a $10,000 investment can produce in my earlier example. What do you think happens when you max out your 401(k) for 36 years?

Everyone that follows the above strategies can have a multimillion dollar portfolio. It's that simple.

    Bookmark   February 23, 2008 at 5:26PM
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deerslayer (love your name, BTW), I totally agree. And with the decline in company pensions, people will need a sizable portfolio to compensate.

I think the most frightening statistic (disclaimer: as Mark Twain said, there are 3 kinds of lies; lies, d**ned lies, and statistics!) I've read is the AARP survey that found 70% of Baby Boomers expect to receive a pension, when only 25% of them actually will.

Nowadays, once a person vests with a company, most companies buy an annuity which will pay a monthly amount to that (ex-)employee. I'm getting three of those, myself, once I turn 65. However, these are set amounts, with no indexing for inflation.

I agree, leave stock picking to the pros unless like Ole Joyful, you find it truly interesting and want to make a real hobby out of your investing.

As several studies have pointed out, NOT spending time frantically trading back and forth to find the next "hot sector" will actually improve your ROI.

    Bookmark   February 23, 2008 at 6:12PM
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Deerslayer is my one and only forum name. I adopted it in the early 80s. My favorite fictional character when I was a boy was Natty Bumppo, aka Deerslayer of the Leatherstocking Tales written by James Fenimore Cooper. The Last of the Mohicans was the most widely read book of the Leatherstocking Tales. The Deerslayer was second.

Deerslayer was a pragmatist with a streak of idealism. He could survive on his own in the wilderness where life was often cruel. He also was an idealist believing that serving ones neighbor was the highest calling.

    Bookmark   February 23, 2008 at 6:37PM
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