Archive for Risk Management


To: Our Valued Readers

From: Paul Ferraresi, Founders Group

PRIVATE ALERT: 401(k), IRA and Personal Investment

Recently, we have been concerned about the over valuation in the stock market. All valuations methods show the market is in a “frothy” condition that cannot be justified by any logical methodology. This condition has transpired by the irresponsible easy money policies of the Federal Reserve with ultra low interest rates and an unbridled $4 trillion of money creation. An asset bubble exists in the stock and real estate markets. Can the stock market continue to go up? Yes. Forever? No.

The majority of the astute money managers we employ and other well regarded managers have moved to a 20% – 25% cash position in anticipation of a correction.

A top may be approaching as all the institutional and professional managers have been selling while the public is on a buying binge.

Timing the markets is a fool’s game.

Too many investors have over subscribed to passive indexed investing. Which, in general, holds Large Cap stocks. When the public tries to head for the exits in panic selling as the markets correct it will be very nasty.

For these groups:

• 401(k), 403(b) and TSP Investments:
Make sure you are up to date with your “Optimizer” program to enjoy the gains yet avoid the losses.

The Optimize program will signal when to move to cash and will preserve your capital. When it is time to reenter the markets you will get another signal to buy in.

• IRA and Personal Brokerage Accounts:
Make sure your risk level is up to date. Use your advisor to select the Tactical Money Manager that will move to cash as the markets turn down and then reenter as the markets turn up.

*Remember Mutual Funds and ETFs cannot move into 100% cash by their prospectus and will take a beating as in 2000 and 2008.

If you need more information on how to safeguard your investments contact us.

Founders Group, Inc.
(713) 871-5919


John Maynard Keynes had a great quotation: “A speculator is one who runs risks of which he is aware, and an investor is one who runs risks of which he is unaware.”

So which are you?

Americans for more than 200 years have participated in the stock market as “passive investors”. A more common term used is a “buy and hold” investor. Over a long period of time this has proven to be a good way to accumulate wealth. Mind you, not an optimal way, but rather, a good way. Just set it, leave it alone, add to the account on a consistent basis and deal with the inevitable ups and downs.

Wall Street pundits continue to sing this happy tune of buy and hold as the only way to invest (you see if you took another approach then they would have to “resell” you each time in order to get you back into the market after each correction). Many people do not have the knowledge or time to produce better results, hence, they stay passive investors.

Things began to change for passive investors in the 1970’s as computers came onto the scene of investment management. Many people today do online investing with discount brokers or with their retirement accounts thinking they are being active. Yet, they are still passive investors, in that they go through the ups and downs of the markets. Funny these same investors get out of the market after it corrects. Conversely, as the markets reach new highs they start buying.

These activities confirm academic research which shows the small passive investor has obtained about a 2% return while the markets have averaged 10% – 12%. The results: passive investors, trading or trying to time the market does not work.

Today, worldwide trading is being done 24 hours per day. So while you are sleeping, markets, and your wealth, can be crumbling. Thus, the challenges for the passive investor will continue to increase in an exponential way.

Many passive investors who hold accounts at, say, Vanguard, Fidelity or others have their monies invested in good mutual funds and think they are safe. Unfortunately, as listed in the fund’s prospectus (you have read every page), it states that the manager can never move to more than a 10% – 12% cash position. Consequently, when the market corrects the small investor panics and sells their mutual funds. With only 10% – 12% of assets in cash, this forces the fund manager to sell more shares in a declining market which creates an even larger debacle in share prices.

An alternative to passive money management is known as Tactical Money Management (TMM). Here, selected professional money managers, using computer algorithms, not timing, move client’s money into and out of the market. This is not done on a daily, weekly or monthly basis. Rather, the moves are done when changes in money flow or activities in the market change (their “secret sauce” algorithms).

A Tactical Money Manager’s objective is to capture 70% – 80% of the market upside while eliminating 70% – 80% of the downside. They never pick the exact top nor the exact bottom. At anytime they can move your money into 100% cash or 100% in the market or some combination. The results compared to “passive investing” have been remarkable on the investors behalf.

So, if you think the market will continue to go up and up and never drop then stick with passive investing. If you feel there will be a correction, and a pretty severe correction then you may want to investigate Tactical Money Management.

I believe passive investment strategies will come under severe selling pressure in the coming years. Many investors have their core (and retirement) portfolios in these passive strategies. If you are prepared to ride out another 2001 – 2002 or 2008 – 2009 and then go through what I think will be and even longer and weaker recovery (until our debt issue is fixed), then stick with your passive strategies.

If you are looking for another option let me offer you one.

Contact us at (713) 871-5919 or at and we will be pleased to educate you on the time tested successful Tactical Money Management strategies.

Here is to your safe wealth building strategies.

Insurance You Should Have by Paul Ferraresi

Most people try to buy the least amount of insurance in all areas hoping to save on premiums. But penny wise may be pound foolish…

Here is a short article written by Russell Hall. I suggest you share this with friends and family.

Most discussions of insurance and estate planning focus on the value of life insurance to your heirs. Not this one. Instead, let’s consider insurance to protect your income and assets now, and to shield your executor later.

What happens if you’re in a car accident with serious injuries or death – and it’s your fault? Expect to be sued, and to pay a large judgment. Every driver is at risk of losing bank accounts, stocks, bonds, mutual funds, rental property, and other non-exempt assets to a lawsuit.

In Texas, you may keep your homestead, pension, retirement accounts, annuities, and life insurance. However, cash distributions are not exempt, and may go to the alert creditor. You may have substantial non-exempt assets, but what good are they if you cannot spend them?

As a rule of thumb, carry liability insurance equal to your non-exempt assets plus five to ten years of income. Suppose you have a home, an IRA, a modest checking account, and $300,000 in CDs. The home and IRA are exempt from creditors’ claims. The CDs are not. That suggests at least $300,000 in liability insurance. If Social Security and IRA income total $50,000 a year, another $250,000 to $500,000 in liability insurance is indicated. Even someone of modest means may want $500,000 to $1 million in liability insurance.

The typical automobile or homeowners’ policy offers no more than $500,000 in coverage. However, our agent can often provide an inexpensive umbrella policy from the same carrier with limits of $1 to $5 million, which is more than enough for most people.

Suppose you stop driving, pay off the mortgage, and die, judgment-free, without any liability insurance. Who cares at that point? Your executor should. An executor is a fiduciary with the most dangerous, thankless task known to law. They must collect all your assets, pay all your debts, distribute the remainder to your beneficiaries and make no mistakes. As one summarized it, “Whatever happens, it’s the executor’s fault.”

Both liability and property insurance will go a long way to protect the executor, and, ultimately, your heirs. New executors should review the estate with an insurance agent. Existing policies may be adequate. If not, the executor may obtain insurance at the estate’s expense. Better though, that you yourself review your insurance, and develop a plan to protect yourself in retirement. Doing so minimizes everyone’s risk, and leaves one less task to be done when you’re gone.

Risk Management (Insurance)

A discussion on any type of insurance is a distasteful topic for most people. Yet each day you insure yourself in everyday activities: You bring an umbrella if their is a forecast for rain; have alternate routes to work or school in case of an accident on the main highway, store food and water in preparation for a weather emergency, or, maybe a backup plan for the summer BBQ. We all “insure” ourselves in many ways.

Here are some ideas and tips on insurance you purchase.

(1) Insure only for what you cannot afford to lose and self insure for everything else. Do not worry about a $100 or $1,000 loss (those monies should be in your emergency fund) rather, worry about the $200,000 loss.

• Some extreme example of when to self insure:

    (a) Stay away from the $30 one year extended warranties on a $100 item… Even if it breaks one day after you buy it… you can probably get a year old version on eBay for $50, so, you would only be out $20.

    (b) Forego collision insurance on a 10 year old car.

(2) Fight inertia and shop around for better prices on all your insurance. Keep in mind your FICO score does affect the pricing of many types of insurance.

(3) Insure your income to your family through life and disability insurance.

(4) Insure assets through liability coverage on your auto, home and umbrella policies.

(5) Insure against unmanageable expenses with health and long-term care*

    *There are cost effect ways to manage these risks that most advisors are totally unaware of.

    *It makes little sense to keep paying disability premiums in your mid 60’s if the benefits will stop at age 65.

(6) Self insuring is still important. Higher deductibles are still a form of self insurance. Remember whatever you are saving in premiums with higher deductibles should be “socked away” so when the event happens you have the deductible monies.

(7) Protect yourself from lawsuits with an umbrella policy. Do not get cheap here. Get minimum coverage at least equal or greater than your net worth.

(8) Health Insurance: Again do not worry about the small office copays… worry about the $800,000 surgery that will wipe you out. Look for higher deductible plans which will save you tremendously.
These are just a few tips. Visit with your Certified Financial Planner to make sure “all your bases are covered.”


Avoid Foreclosure on your home

The number one reason for home foreclosure and personal bankruptcies is…DISABILITY!

Today, employers are checking credit reports before extending a job offer. A bankruptcy or foreclosure would stonewall your job chances. So, are you really protected for a disability? You don’t have to be old to be seriously disabled.

Disability insurance is a way to protect your paycheck. When I quiz my clients about it they say… “Oh, I have that through work…I think?” Really? Only 25% of Americans have a disability policy through work. Those work policies are group policies, which are just bare bones. Sure, you may have short-term coverage for say one year and then long-term coverage takes over. Group policies classically only cover up to 60% of your pay (bonuses, stock options or other compensation is NOT counted). So, if you earn say $10,000 per month you will get $6,000 per month after the elimination period (which can be 30-90 days). So, what will you live on for 30-90 days? Now, the bad news…since your employer normally pays the premiums the $6,000 per month, in our example, is taxable to you. If you have a hard time living on $10,000 per month how will you live on before tax income of $6,000 per month. Most group policies will cover your “own” occupation during the short-term disability, once long-term kicks in then the definition changes to “any” occupation. What that means is…if you cannot do your own job for one year you get short-term disability pay. After one year if you can do ANY job by occupation, training or education, then you are NOT disabled. You get nothing from your group disability policy. Even, if your new job due to disability provides say, $4,000 in salary…you will NOT be paid by the group policy to get you back up to the $6,000 or $10,000.

Also, find out the definition of disability. Most group policies use the Social Security definition…which is basically…fully disabled, in essence, a quadriplegic!

You can purchase a private policy. Expect to pay 2% to 4% of your income annually to cover 60% of earnings after tax (since you are paying for the premiums then the benefits are not taxable). So the 60% after tax is equivalent to about 85% of your pay on a taxable basis. [Women are charged about a third more, since they have a greater chance of becoming disabled]. There may be excluded items in a personal policy that you should check on.

Disability insurance is more expensive than life coverage. At age 25, a male has a 32% greater chance of suffering a disability that lasts more than 90 days than of dying. Woman of the same age have a 147% greater chance.
Look at your group coverage. If it covers you for your own occupation say for one year, then, have your personal coverage kick in after one year. It will save you money. Or if you have planned properly and have a one year emergency fund, then, you can have your personal policy start after 2 years.

This is a complicated risk management coverage so spend time with your Certified Financial Planner that can tie all the aspects in your life together.