Paul Ferraresi

In a typical off-year election, the opposition party to the presiding President gains seats. All the polls show a potential power swing for the Republicans in both houses of congress. This will provide gridlock….which means nothing gets done….and is music to the ears of stock market investors. This music is because no further damage can be done to businesses via additional regulation or taxes.

But beware….a powerful lame duck Democratic congress could steamroll insurmountable legislation through from November to January. All of the bills passed in the last two years will require multiple years to restore business and employment back to the previous higher levels, unless they are overturned.

Be prepared, as an investor, to change your thinking pattern of investing over the next few years because of the following:
• The large monetary and fiscal stimulus that was previously applied is running out of steam. (Most of the money was used to shore up union jobs and pensions. Very little was used for any new jobs.)
• Tightening of financial conditions.
• Leading indicators slowing down.
• Public and private deleveraging.
• Higher taxes, more regulation, trade tensions.
• European countries have slowed economically.
• Corporate profitability blossomed due to reduced expenses, but that is over. Consumer demand has fallen off, so corporate profits will drop.
• Deflationary pressure is coming on not just for prices but also for wages.
• Since fiscal and monetary stimuli have been used to the full extent, then another financial crisis will only lead to excessive money being printed.

Watch for the stock market to move sideways for a while with periodic deep drops. Gold will stay steady. Look at dividend paying stocks and short term bonds. By all means, begin moving into tax free, not tax deferred investments that provide guaranteed protection against loss with upside participation.

Watch the stock market during the week before the election. It will tell you which party will win.

• INCOME (EQUITY) FUNDS

Seek a high level of current income for shareholders by investing primarily in equity securities of companies with good dividend paying records. The objective is to provide an income that gradually increases each year.

• INCOME (MIXED) FUNDS

Seek a high level of current income for shareholders by investing in income producing securities, including both equity (stocks) and debt (bonds) instruments.

BOND FUNDS

The types of organizations that issue bonds fall into three broad categories:

• Publicly or closely traded for-profit corporations

• The federal government and its agencies

• State or local government agencies. (This also includes non-profit organizations.)

Each of these is subject to somewhat different tax treatment. This tax treatment has an effect on the price of the bonds and the bond interest (coupon) rate. Bonds issued directly by corporations are fully taxable to individuals at both state and federal level. For that reason, the rate must be higher. Bonds issued by the federal government are frequently exempt from state income tax, but are taxable by the federal government. Bonds issued by state or local agencies are exempt from federal tax and may also be exempt from taxation at the state level.

• CORPORATE BOND FUNDS

These funds seek to generate a high level of current income by investing primarily in the senior securities of profit corporations. Some funds concentrate primarily on high-grade bonds and thus are able to provide shareholders with a greater degree of safety, but usually with less income than bond funds that may have a mixture of high, medium and lower grade bonds. Some of the portfolio may be in U.S. Treasury bonds or bonds issued by a federal agency.

• HIGH YIELD BOND FUNDS

These funds specialize in selecting rated bonds to insure the highest yield possible with a reasonable degree of safety. This type of fund appeals to individuals who seek high current income or desire to reinvest dividends and capital gain distribution, thus
compounding income at a high rate of return. Usually, these funds maintain at least two-thirds of the portfolio in lower rated corporate bonds (Baa or lower by Moody’s rating service and BBB or lower by Standard and Poor’s rating service). In return for a higher yield, investors must bear a greater degree of risk than for higher rated bonds.

• MUNICIPAL BOND FUNDS

These funds invest in a broad range of tax-exempt bonds issued by states, cities and other local governments. Interest obtained from the bonds is passed through to shareowners free of federal tax.

• LONG TERM MUNICIPAL BOND FUNDS

Invest in bonds issued by states and municipalities to finance schools, highways, hospitals, airports, bridges, water and sewer works and other public projects. In most cases, income earned on these securities is not taxed under state and local laws. For some taxpayers, portions of income earned on these securities may be subject to the federal alternative minimum tax.

• SHORT TERM MUNICIPAL BOND FUNDS

Invest in municipal securities with relatively short maturities. They are also known as tax exempt money market funds. For some taxpayers, portions of income earned on these securities may be subject to the federal alternative minimum tax.

• STATE MUNICIPAL BOND FUNDS

Either short term or long term portfolios of bonds. These work just like other municipal bond funds (see above) except their portfolios contain the issues of only one state. A resident of that state has the advantage of receiving income free of both federal and state tax. For some taxpayers, portions of income earned on these securities may be subject to the federal alternative minimum tax.

• U.S. GOVERNMENT INCOME FUNDS

Invest in a variety of government securities. These include U.S. Treasury bonds, federally guaranteed mortgage backed securities, and other government notes.

• GNMA OR GINNIE MAE FUNDS

Invest in mortgage securities backed by the Government National Mortgage Association (GNMA). To qualify for this category, the majority of the portfolio must always be invested in mortgage backed securities. In some cases, these funds make distributions that are both principal and income.

• INTERNATIONAL FUNDS

Invest in equity securities of companies located outside the U.S. Two-thirds of the portfolios must be so invested at all times to be categorized here.

• GLOBAL BOND FUNDS

Invest in debt securities (bonds) of companies and countries worldwide. Some funds invest in U.S. Bonds, others do not.

• GLOBAL EQUITY FUNDS

Invest in securities traded worldwide, including the U.S. Compared to direct investments, global funds offer investors an easier avenue to investing abroad. The professional money managers of each fund handle the trading and record keeping details and deal with differences in currencies, languages, time zones, laws and regulations and business customs and practices. In addition to another layer of diversification, global funds add another layer of risk – exchange rate risk.

• GLOBAL COUNTRY OR REGION FUNDS

These invest in the securities of corporations or governments in a specific country or region. Thus, the owner has two areas of risk that also means two areas of opportunity:

• Growth in market value

• Currency changes

Thus, it is possible for a “Japan Fund” to increase in share value and at the same time increase in value to a U.S. owner if the yen/dollar rate change is also favorable.

• PRECIOUS METALS/GOLD FUNDS

Maintain two-thirds of the portfolios in securities associated with mining or processing of gold, silver and other precious metals.

Others types of mutual funds include:

• Special area funds, such as chemicals

• Special philosophy funds, social purpose, etc.

FAMILY OF FUNDS

These are a group of the above funds all managed by the same organization. Their structure permits investors to switch funds from one fund to the other for a nominal fee or none at all. These can be suitable for use with a Market Timing Service or within a qualified retirement plan where the owner may want to switch the underlying investment without incurring new acquisition costs.

Mutual Fund shares are not deposits or obligations of, or guaranteed by, any depository institution. The value of the shares will fluctuate so that when redeemed, shares or units may be worth more or less than the original cost. Past performance does not guarantee future results. Please read and understand the prospectus for a mutual fund before investing.

Mutual means a sharing of interests. A mutual fund is a practical and efficient way for individuals with similar goals to pool money in an effort to achieve those goals.

In a mutual fund, the combined dollars of many shareholders are invested in a select group of securities so each individual’s share of this portfolio represents a proportional interest in many individual companies.

A mutual fund is an investment company that collects, usually in small dollar amounts, the savings of many individuals. It then invests these funds in the securities of various other corporations. It is an arrangement whereby the savings of many small savers are pooled to become one large fund managed collectively for the benefit of all participants.

Mutual funds are managed by investment companies that receive a fee. Normally, it is a percentage of total assets within the fund. In some cases, commissions are paid for sales and marketing as a percentage of the initial investment.

Five general advantages may accrue to the buyer of mutual funds, especially to the small investor, as opposed to buying stocks or bonds directly:

• Diversification

• Professional management

• Constant surveillance

• The ability to invest in small amounts

• The ability to make periodic withdrawals

Some of the services offered include automatic reinvestment of both dividends and capital gains distributions, monthly investment plans, withdrawal plans, bank by telephone, discounted sales charges for larger deposits, exchange privileges from one fund to another, on line services and, frequently, checking services.

Each shareholder may then get the benefit of the many advantages otherwise available to only wealthier and more sophisticated investors who have the resources to spread investments among many businesses.

Just as there are different goals, there are many types of mutual funds with different investment objectives.

• AGGRESSIVE GROWTH FUNDS

These seek maximum capital gains as an investment objective. Current income is not a significant factor. Some may invest in stocks somewhat out of the mainstream, such as those in fledgling companies, new industries, companies fallen on hard times or industries temporarily out of favor. Some may also use specialized investment techniques, such as option writing or short-term trading.

• GROWTH FUNDS

The primary investment objective of these funds is long term growth of capital. To achieve this objective, they invest primarily in common stocks of well-established companies with growth potential. Their primary aim is to produce an increase in the value of the investments through capital gains, rather than a flow of dividends. This type of fund may be appropriate for the investor who is not concerned with current income.

• GROWTH AND INCOME FUNDS

These funds invest in common stocks of companies that have had increasing share value, but also have a solid record of paying dividends. The purpose is to potentially provide shareholders with attractive monthly income and with the opportunity to increase the value of investments through long term growth.

• BALANCED FUNDS

These generally have a three-part investment objective:

• To preserve principal

• To pay current income

• To promote long term growth of both principal and income

These funds have an investment policy of “balancing” the portfolio between bonds, preferred and common stocks, as they believe market conditions dictate. This type of fund generally appeals to individuals interested in a “timing” approach to investing.

• FLEXIBLE PORTFOLIO FUNDS

Might be 100 percent invested in stocks OR bonds OR money market securities, depending on market conditions. These funds give money managers the greatest flexibility in anticipating and responding to their perception of future economic changes.

• MONEY MARKET FUNDS

The primary objective of these funds is to make higher interest securities available to the average investor who wants immediate income, daily liquidity and high investment safety. This is potentially achieved through the purchase of high yield government or government backed notes. These are generally the safest; most stable securities available, and include Treasury bills, certificates of deposit of large banks and commercial paper (the short-term IOUs of large U.S. corporations). These funds generally offer checking and wire transfer services, and a few even offer a credit card that debits the account balance.

• INCOME FUNDS

For individuals whose primary investment objective is current income rather than growth of capital, income funds can potentially offer generous monthly income. These funds usually invest in stocks and bonds that normally pay high dividends and interest.

• OPTION INCOME FUNDS

For investors seeking a high current return, these funds invest primarily in dividend paying common stocks on which call options are traded on national securities exchanges. Current return generally consists of dividends, premiums from expired options, net short-term gains from sales of portfolio securities on exercises of options and any profits from closing purchase transactions.

• INCOME (BOND) FUNDS

Seek a high level of current income for shareholders by investing at all times in a mix of corporate and government bonds. If invested in long term bonds, the income might remain fairly constant, but the market value will fluctuate with changes in interest rates.

End Part 1 – Part 2 Next Week

We have just passed the halfway mark for this year. Those “Lazy, hazy, crazy days of summer” seem to take over our entire lives. The kids are out of school and vacation time is on people’s minds.

Just six months ago you made out a list of your goals for this year. You were filled with enthusiasm and an unquenchable thirst to complete every one of them. It has been shown that just “making a list” does ensure some of your goals will be completed. Unfortunately, for most people, life just gets in the way. Too many people have so many goals with no set timetable that your brain just shuts down and nothing gets done.

Rather than following the “typical” year, and lifetime, for most people….how about trying something else….a different approach. Heck, you have nothing to lose.

1) Pull out your January 1st list of goals.

• Cross off those that you have completed – congrats!
• Next, cross off those that do not seem to strike your fancy anymore

2) With the remaining list, choose one, just one, of your short term goals that you wanted to complete this year. Let’s say it is….lose 12 pounds by year end.

3) Now write that goal on 4-5 index cards. Place the cards on your desk, mirror, office, etc. so you constantly see it.

4) Now break the goal down into small parts (How do you eat an elephant? Hmm one bite at a time). Let’s see, 12 pounds over the next six months is two pounds per month, or ½ pound per week.

5) Now weight loss is easy math….simply…..less “guz-in-tahs” into the body (food) and more “guz-out-tahs”, namely, exercise (burning calories).

6) Now, lay out your plan of the little changes you will do each day to reach this goal. Let us say, eliminate 200 calories per day and burn, say, and extra 200 calories per day. Look at your food consumption daily, google to find out the calorie amount and decide upon the tiny change that is needed to eliminate 200 calories. None of these starvation diets are needed!!!! Lastly, find out how much brisk walking (or other exercise) is needed daily to burn 200 calories.

You will be shocked how your goal can be met.

Now before you start this program, you must write out….”Why” you are trying to reach this goal. Maybe it is to get into a new outfit, or because you want to get in shape and live longer. Whatever the main “why” is….write it down. You see, when the “why” is strong enough, then the “how” is easy.

The “why” will be the inner path that will get you up early to “walk” on the days you want to hit the snooze button and not “exercise.”

Ah yes, discipline or regret.