Paul Ferraresi

All the investment pundits and TV “talking heads” try to predict (guess) which asset class will be the next great performing group. That is like looking out a window, on a rainy day, and trying to guess whether raindrop “A” will beat raindrop “B” down the outside of the window.

History has proven to us that asset classes will produce their average risk adjusted rate of return over time. People try to load into the “hot” asset class only to be burned every time. Behavioral science shows that human beings will follow the herd instinct and be motivated by either “greed or fear”.

The greedy technology times of 1998 and 1999 led to the “tech wreck”. The housing bubble of 2005-2007 led to the housing crisis. These events are of late but we could go back in history to see many more. The “fear” times of the stock market in 1929, 1954, 1987, 2001-2003 (and many others) led to spectacular gains soon after. The philosophy I have always used with my clients and my personal investing is simply… “buy when there is blood on the streets” and “sell when everyone else wants in”. This is a general statement, but, is an offshoot of buy low, sell high. I have never been a trader, but rather, a long term investor. My dictum above simply means that my clients (or I), will over weight (load up or stock up) when an asset class is low. Correspondingly, we will reduce our allocation, in an asset class, as it becomes hot.

I have found after 50 years of investment study, simply…that which is hot today is cold tomorrow and the cold thing is hot tomorrow.

To prove my point… attached is a copy of The Callan Period Table of Investment Returns (1988 – 2007). You will see the years when certain asset classes are number one only to be the lowest performing group the following year…and vice versa.

My suggestion, as always,…develop your Investment Policy, set your Asset Allocation and adjust that allocation on, say, an annual basis at most. You will reach your investment goals.

http://www.callan.com/research/institute/download/?file=periodic/free/256.pdf

The finance mess taking place in our nation has a lot of guilty partners. It is not just the bankers, Congressmen or Wall Street executives.

I received this 1999 New York Times article from one of my clients. This is only the tip of the iceberg. If you are upset about this fiasco…do not yell or complain…instead, call or write your representative. Tell them how you feel and make suggestions. If you do not…then, you will suffer the consequences and cannot complain later.

Here is the short article and a link to the full article.

By STEVEN A. HOLMES

Published: September 30, 1999

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer (and current Obama advisor) . ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260

One of my duties for my clients, as a financial advisor, is to find long term investment trends. Fifty years ago… if you had only invested in Hoola Hoops. Forty years ago an investment into personal computers would have minted a gold mine for you. Did you catch the wave early with the internet???

I share with my clients what are relevant themes to invest for the future. You see, you do not invest today for today. Rather, you invest now to benefit in the future. (No I cannot give you those themes… that’s what my clients pay me for….)

In general, if you are a global minded investor then you must see the upcoming trend into…… (rim shot please….) “Infrastructure” As boring as it may seem this will be a major money maker. Here is why…

• An estimated 500 million rural Chinese are expected to migrate to cities and towns during the next few decades, and India’s urban population will double.

• Saudi Arabia is no longer content to pump massive quantities of crude oil out of the ground and ship it elsewhere for processing into more lucrative products.

• There are estimates that the U.S would have to lay out more than $1 trillion in the next few years to bring our nation’s highways, airports, water systems and other facilities into good repair.

These three items all relate to infrastructure. Infrastructure will be one of the best global investment opportunities for years to come. OECD estimates that the world will require more than $1.8 trillion per year in infrastructure investment in the coming decade. The cost of modernizing urban water, electricity and transportation systems over the next 25 years will be $41 trillion – a figure roughly equal to the 2006 market capitalization of all shares held in all stock markets in the world.

For emerging markets like China, India and the Middle East, the play is the massive build-out of infrastructure to support future growth ambitions. For North America, Western Europe and the rest of the developed world, there is a pressing need to repair or replace aging roads, bridges and the like.

You get a vague sense of this need when you’re dodging potholes or cursing a “no service available” message on your mobile phone. When a highway bridge in Minneapolis collapsed into the Mississippi River, killing 13 people, then things should have come into clearer focus for you.

Before the Minneapolis bridge there was Hurricane Katrina. Chicago’s crumbling mass transit system has been called the biggest hurdle to its bid for the 2016 Summer Olympics.

Infirm infrastructure is hardly unique to the United States. A recent study in Canada found that the country’s roadways, sewer systems, wastewater treatment facilities and bridges had passed the halfway point of their lives. A drought in London a few years back exposed a network of leak-riddled water pipes under the Thames that dated back to Queen Victoria’s reign, and in Russia and Eastern Europe, the post communist period has been one of growth and modernization.

Among developing nations, much of the demand for infrastructure boils down to a pair of keys trends: population growth and urbanization. The global population is expected to grow at an average rate of 1.6% annually. By 2030 there will be 8.3 billion people on Earth, with six out of every 10 living in cities. More than 80% of the planet’s people live in the emerging world, the giants being China and India. Chinese are flocking to cities in search of economic opportunities. The same phenomenon is true of India: an estimated 540 million Indians will be urban dwellers in 2025, roughly double today’s levels. Like the upwardly mobile in the West, these urban dwellers will expect better transportation and communication services.

Many of the top government and business leaders in China and India were educated at U.S. universities and have brought the “American Dream” back to their homeland. China’s current five year plan, which runs through 2010, calls for spending $200 billion for airports and subways, $175 billion for railroads and $80 billion for highways, and $70 billion for water and wastewater treatment. Morgan Stanley estimates that China will need $346 billion for electricity generation and distribution between 2006 and 2010. India, which announced in late 2007 that it intends to spend 8% of its GDP – that is, $500 billion – on infrastructure over the next five years in order to hit its desired economic growth rate of 10%. The country is plagued by power shortages, a dearth of multilane highways, and antiquated and overwhelmed ports.

Over the coming years, spending by the Gulf countries is expected to exceed that of India, even though their total population is just a small fraction of India’s billion plus one. Gulf nations are investing those petrodollars in their own infrastructure this time.

Saudi Arabia: A half-dozen “economic cities” are being built from scratch as part of a government plan to attract foreign capital and to capitalize on its location between Europe and Asia.

Many companies will be involved in this work, including heavy-equipment makers, cement suppliers, steel manufacturers, utilities, and engineering firms. On a broader level, there will be continued strong demand for copper, steel and other commodities. Governmental involvement is what separates the infrastructure build-out from regular construction. Activity, and I think the political will, exists to support long term infrastructure creation worldwide.

Make your investment now with a minimum of a 10 year benefit horizon. Don’t let your head be like “concrete” – that is all mixed up and permanently set! You will look back at today and see you made a “steel” by investing ahead of the crowd (I know bad puns). As you travel the U.S. please note how all major airports are expanding as you see all the cement trucks lining up to pour… image if you were getting a “buck $ a truck.”

Ah, discipline or regret!

Despite recent studies that paint a rosy picture of how well baby boomers are prepared for retirement, a study from Barclays Global Investors paints a gloomier scenario. Some of the results, which will be published in full in the fall issue of The Journal of Investing, are being released in Barclays’ InvestmentInsights.

The authors, who say optimistic conclusions for the retirement health of baby boomers are based on erroneous assumptions, have titled their analysis as a warning- The Future Shock of Retirement. Jonathan Cohen, Barclays Global Investors senior fixed income strategist; Matthew H. Scanlan, head of American institutional business; and Matthew O’Hara, head of securitized credit research, say changes are needed by government, employers and individuals to avert a retirement crisis.

They say errors in some recent studies occur because the researchers assume current costs and benefits will remain stable in the future. Instead, “current benefit levels (for Social Security and Medicare) are unsustainable,” the authors say. “Today, 6.9% of federal income taxes go toward the two programs. By 2020, as much as 26.6% of all federal income taxes would be required to sustain current Social Security and Medicare benefits for the greatly expanded retiree population.”

Defined contribution (DC) pension plans now outnumber defined benefit (DB) plans, a trend that won’t be reversed, and “DC plans typically fail to address longevity and inflation risk.” At the same time, pre-retirees are saving less than they were 10 and 20 years ago and less than people in countries such as Germany and Japan save now.

The wealthiest top half of pre-retirees “look reasonably well prepared for retirement under current conditions, but are highly sensitive to future changes,” the trio concludes.

(From Financial Advisor Magazine, June 2008)

The Typical Way an advisor helps clients save for their kids’ college education involves a savings vehicle like 529 plans. Here are some lesser-known ways to ease the fiscal bite of college.

1. Notify the auto insurance agent. A family auto insurance policy may cover the car that a child takes to college, as long as the vehicle is registered with the parent as the owner. Also, if the student’s education brings their car to a new locale, it might make a difference in your premiums. Furthermore, if a college-bound student resides at a campus at least 100 miles from home and is not taking the insured vehicle, you may be eligible for a reduction in auto insurance premiums.

2. Graduate in three years instead of four. Some colleges offer accelerated programs that allow students to graduate in three years instead of four, saving you a year’s worth of tuition and related expenses. Some colleges offer a similar program that combines an undergraduate/graduate degree in five years. The student may have to take a heavier course load each semester and skip summer breaks to meet academic requirements, but it can help parents financially. Students can also participate in advanced placement test (in high school), internships, and job training programs to trim tuition cost and earn college credit outside the classroom.

3. Save on college housing cost. To save on college housing cost, you can buy a rental property near the campus. In addition to the potential that the property will appreciate over the years, you can gain income by continuing to rent the property to other college students after their child has graduated.

4. Buy it used. Students should buy used books whenever possible. There are many online bookstores that will give you a better deal that the campus bookstore. Used books are usually in good condition and cost about half the price of new books.

5. Search early. Applications for most college scholarships aren’t due until the students’ senior year in high school. However, with talented children you should start searching for grants and scholarships their freshman year. By finding potential awards when they begin high school, the student can choose classes and participate in activities that will give them a better chance of getting free cash later on.