MONEY & INVESTING

Though money and investing columns cover unique topics each week, the column should probably offer some continuity. The reason is fairly simple: readers are trying to formulate a financial and investment view of the world; they are trying to integrate random facts and concepts into some type of whole and, based on that, create an actionable plan for themselves. Anyone can write about a new topic each week and leave it up to the reader to put the financial jigsaw together. This week’s column attempts to recap and integrate the articles written over the past three months.

Four concepts have been put before the readers. First, our economy’s “new normal” is emerging and no one knows exactly what it will look like or how to best invest. The key variables are whether inflation or deflation emerges; whether the U.S. dollar continues to fall and loses status as a reserve currency and gold continues to take position as an alternative to the dollar (not transactional medium but as a store of wealth); how the U.S. will finance a trillion dollar deficit and, as postulated by others, a two trillion dollar deficit; and how, GDP growth will be generated in the fourth quarter and thereafter (absent Cash for Clunkers and the initial impetus of TARP felt during the third quarter). These issues are extremely complex and interwoven.

The second concept has been about how many advisers/consultants you need and what to look for in an adviser. It has been recommended that an investor garner counsel from a variety of sources and certainly an investor have additional conversations with existing advisers so that you can glean more from them: new strategies, ideas and solutions. If you are not talking and writing, brain reading is the only alternative — not such a good idea.

Eventually, if you talk to a variety of people, an actionable plan might emerge. Certainly you can take your asset base and income and plug it into software programs that will spit out numbers for assets and income 20 years hence. But we all now know that the best laid plans for assets and income can go very far awry. Sometimes the best plan is to have a broad base of assets generating income and not count on capital gains for a retirement lifestyle. The challenge therein is how and where to find such sources of income.

If you get one really great idea from an adviser, you got a lot: two great ideas… a windfall. Also suggested is the concept that you are not married to an adviser and you can talk to others.

The reality is that 85 percent of money managers do not outperform their relative index. Some money managers consistently outperform. You, too, might be able to outperform but most people don’t for an extended period of time.

Commonplace is an investment allocation that is heavy into real estate and 401K plans. A diversified real estate portfolio is not a diversified asset base. A diversified equity portfolio is not a diversified asset base. Capital gain does not fulfill the role that income does. To the extent that you want your portfolio to generate retirement income, then you need to be looking at assets that create income. The dislocation in the credit markets has created opportunities previously not available at the retail level and brokers, advisers, bankers and agents can and should be talking to you about these opportunities.

The third concept has been to suggest some new perspectives for looking at the U.S. equity market and some strategies for you to implement or for you to find a money manager to implement for you. While it is widely believed that the stock market’s volatility of recent years is unique or unusual, it is not. There has been huge dispersion in the yearly gains or losses over the past 100 years; these large swings average out and produce an acceptable annual average rate of return. Only stating an average annul return can mislead the investors to think such return can be expected. Also, it was shown that boring products (CDs) or products with a stigma (whole life insurance) fared better than U.S. equities in the last decade.

An article written by Jack Brown laid out the case that dividend-paying stocks are a hedge against inflation. Frank Fontana wrote a piece about covered calls and how such a strategy generates some upside capital gain and some income from expired calls and, if dividend paying, more income from a dividend.

All in all, the ideas are create as much diversification as possible, create income sources and consider possible ways to hedge against inflation should it occur and, the ultimate recurring theme: talk to your advisers and consultants and get their best ideas. 

— Jeannette Rohn Showalter is a Southwest Florida-based chartered financial analyst, considered to be the highest designation for investment professionals. She can be reached at jshowaltercfa@ yahoo.com.