Single stock purchases don't make sense.

2008 was a year to easily illustrate why you shouldn't buy individual stocks. Some of the largest and so called "fundamentally strong and well ran companies" saw their stock prices dwindle to almost zero and some even did go to zero.

This came as a surprise to some investors and they subsequently lost a lot of money. They didn't believe advisors when they told them to diversify or remember the tech bust of 2000 or the heartache Enron and Tyco shareholders experienced. It is hard to believe that so many people forget what happened less than 8 years ago.

AIG. Largest insurance company in the U.S. and was thought to be on sound financial footing. Stock dropped 97% this year. 

Merrill Lynch. One of the largest wealth management firms in the world. Established 94 years ago. Before being saved by B of A stock fell 88% from its peak in 2007.

Lehman Brothers. Established in 1844. Went bankrupt in 08. Stock all time high $86 now worth $0.

Citigroup, the largest bank in the world, down 77% in 2008. 

Research in Motion maker of blackberry phones down 65%. 

Google down 55% this year.

Do yourself a favor. Don't buy anymore individual stocks. No one is smart enough to know which individual companies are going to be good now or in 20 years. The market, as a whole, has shown that if you stay invested you will earn more on average than any other investment. 

Stay diversified amongst different assets and use index funds. 

Personal Finance Rules

With a new found on saving and living within your means, here are a few financial rules to guide you to prosperity.

• Have enough cash to cover 6 months of living expenses: Give yourself a cushion of cash so you are prepared if you lose your job or have an unexpected expense. With more and more layoffs, you want to make sure you have money saved to help until you land your next job.
  

• Owe less than 30% of your allowable credit line on any one credit card: Card "utilization" is the second biggest factor in your credit score (payment history is #1). If you have an credit card with an available line of $11,000 the most you should charge on it is $3300. Any more than that and you risk having your credit score fall. Even if you pay off your balance every month, the amount you charge on your card counts toward your credit score. To get around the utilization issue, call or login to your credit card company and ask for an increase in your credit line.

• Monthly mortgage should not exceed 28% of your monthly income: The federal government formulated this percentage when they started insuring mortgages after the Great Depression. The historical home foreclosure rate in the U.S. was less than 1%. People and lending institutions started getting in financial trouble after they deviated from the 28% figure and as you know foreclosures are a national problem. (Check my previous post titled "Your Home is Not an Investment")

• Amount you need to retire on equals 25 times your desired income: Many academic study's have finding the optimal amount a person should withdraw each year in retirement. The recommended rate of withdrawal in retirement has been 4%. If you want to live on $120,000 a year, you will have to save $3,000,000. If you want to take more money out or retire with less saved up you with have to take more investment risk which can lead to higher losses in short time periods. 

• Keep auto loans to 60 months or less: If you extend a car loan past 5 years, you will have a much higher interest rate and the loan will be higher than the value of the car even after paying on it for at least 4 years.

PetersonWealthAdvisory.com

2009 Retirement Plan Contributions

Now is the time to start planning your retirement contributions for 2009. Here are the contribution limits for 2009. 

Remember you are able to make contributions to your Traditional and Roth IRA's for 2008 up to April 15th, 2009.

CONTRIBUTIONS LIMITS 2009

401(k): $16,500

     age 50 or older: $22,000

SIMPLE IRA: $11,500

age 5o or older: $14,000

SEP: Up to 25% of compensation, maximum contribution of $49,000.

Traditional IRA: $5,000

    age 50 or older: $6,000

Roth IRA: $5,000

age 50 or older: $6,000

Consult with your accountant for more information.

Do Better with Index funds

On CNBC this morning, John Vogel, the founder of Vanguard and index mutual funds had two very interesting statistics.

1.  The performance of the Total Stock Market Index is better than 80% of actively managed stock mutual funds.

2. The performance of the Total Bond Market Index is better than 85% of actively managed bond funds.

Why are you wasting 2.5% to 5.75% of your hard earned money on managers who can't beat an index?

If you have not done so already, switch to low cost, tax efficient index funds. 

How Millionaires & Billionaires lose money

Last week, wealthy people throughout the world saw large amounts of their money disappear. Bernard Madoff, owner of a financial services company which acts as the middle man for stock trades, started an unregistered advisory business which took money from one client to give to another.

Madoff was able to swindle some of the wealthiest and so called brightest minds in the world to invest their money with him. He provided no background information or details about his advisory business to his clients and if they asked too many questions he would tell them to leave.

There are many lessons to be learned from the money these wealthy people lost.

1. Transparency- Work with a registered investment advisor (RIA), make sure you receive their Form ADV II and look up their records online. They have to be registered with individual State(s) or the SEC. Receive an updated Form ADV II. This is a disclosure document and includes information such as services provided, fee schedule, background information of the advisor(s), etc.
2. Keep it Simple- Stay away from complex products be they funds, structured notes, hedge funds, funds of funds. These types of securities are not easy to understand, have layers of details, and can not be sold easily. No gimmicks.
   
3. Ask Questions- Do your homework on the person advising you. When you meet with them treat it like an interview. Find out their background, their values, and how they do business. Work with someone who shares your ideals.
4. Anyone who says they never lost clients money is lying- Mr. Madoff showed investors 12% annual returns for 15 years. Other fund managers ran tests of his investment style/decisions and could not replicate his returns.
5. Passive investing will keep you out of trouble- Once again, an active management style lost clients money. Stick with a diversified mix of index funds with low expenses, low taxes, and transparent holdings.

http://petersonwealthadvisory.com

Treasuries and Cutting Costs

Investors are so scared that they are willing to give their money to the government and receive nothing or even lose money in return. 

This week,  3 month U.S. Treasury Bills had an interest rate less than 0%. This is the first time rates have gone below 0% since the U.S. started selling the debt in 1929. The reason for the 0% rate is investors have lost confidence in other types of investments and see Treasuries as the safest place for their money.

All of this is happening while the Treasury is increasing supply which should be producing higher interest rates. Fundamentally, prices should be falling and rates should be going up. At some point, the trend will reverse and Treasury bond prices will fall either because there are too many bonds, investors believe the economy is getting better, or international bond holders sell U.S. Treasuries to fund their own economies. 

The economy will not stay in the doldrums forever. Start your search now for areas that are beaten down and that offer higher interest rates. The stock market will turn around before the economy does (See post from December 10th).

Cutting Costs

Many people are looking for ways to cut costs. One thing to consider is raising your deductible on your car insurance. If you have a $200 deductible on your policy, raising it to $500 could reduce the cost of collision and comprehensive coverage by up to 30%. Raising your deductible to $1,000 could lower your premium by 40% or more, according to the Insurance Information Institute. Just make sure you have enough money put aside to cover the higher deductible amount in case you're in an accident.

If you are in the market for a new car consult your insurance agent before you buy a car or truck. Premiums vary significantly from one type of car or truck to another. Insurers review several factors, including repair costs, the likelihood the vehicle will be stolen and the model's safety record. 

Past is repeating itself

Companies are failing. Layoffs are spreading. Businesses are cutting expenses.

These are familiar responses to recessions.  I remember the stock market reaction to the recessions of 1990-91 and 2000-02 and was confused at the time. I came to learn valuable lessons that could help us going forward.

In 1990, I was 13, and I started investing with summer job money. George Bush, the 41st President, was in office and the economy was in a recession. The S&P 500 went down 6.56% for all of 1990. Unemployment started going up in 1989 and peaked in 1992.  

Businesses started to cut costs, jobs, and became more efficient and the stock market rewarded them for the changes they made. Starting in November of 1990 the stock market had 7 straight months of positive returns. I remember wondering why the stock market was going up in the face of all the bad news. I learned that stocks are forward looking and investors knew that the actions companies were taking in the present will bring profits in the near future.

The S&P 500 gave investors positive returns from 1991 to 1999. If you left the market at the bottom in October of 1990 after losing 16.25% you really messed up. The S&P 500 went up 383% from November 1990 through December 1999.

After years of expansion in the 90's, the U.S. economy suffered another recession in 2000-2002. The recession started while Bill Clinton was in office and followed George W. Bush into office. The events of 9/11 created further instability in the economy and made it last longer. 

Once again, businesses made tough decisions. They cut costs, laid off workers, and became more efficient. Unemployment peaked in the last half of 2003. The low in the S&P 500 came in February 2003 at 841.15, down 43.87% from December 31st, 1999. In March of 2003, the market turned around and had 5 years of positive returns. From the bottom in February 2003 to December 2007, the S&P 500 grew 74.57%. 

Companies are now cutting costs, laying off workers, and becoming more efficient. No one nows when the market will turn around, maybe it already has. If you are not buying more stocks now or you are completely out of stocks, you will not participate in the the gains to come in the future. This is a mistake that can be avoided by looking back at the past and learning from history.

www2.standardandpoors.com/spf/xls/index/MONTHLY.xls

http://caps.fool.com/blogs/viewpost.aspx?bpid=117070&t=01004553487438585767

Car Purchase

Next time you are out looking for a car, what car dealership will you head to? Ford, GM, Dodge or Honda, Toyota, or Hyundai? 

My wife and I are looking for a new car right now. Our situation is changing and we will need more room to haul around more people. The first 3 manufacturers, the so called "domestic" automakers, are losing sales, closing facilities and asking for a government bailout. At the same time, the other 3, the "foreign" manufacturers, are convincing more consumers to buy their cars and building more manufacturing facilities here in the U.S. For me, the definition of a domestic car is: it is built here in the U.S. and is uses American workers.

At first, we considered the GMC Acadia. It looks nice and has the 3 rows we are looking for. The price for a new basic Acadia with leather is about $35,000. We test drove it and it handled nicely and was comfortable. But, Consumer Reports recently put the Acadia on its "Unreliable" list of new cars. Also, if we wanted to finance it through GMAC, the GM unit that provides loans to GM car buyers, the interest rate is 13%. Granted, you can find better financing at a bank, but GM was offering 0% financing just this year.

We started doing more research on what car to purchase and came across the Honda Pilot. Motor Trend, Car and Driver, Consumer Reports give the 2009 Pilot great reviews. So, we took it for a test drive. We loved the car. It ran smooth, felt secure and stable, and had plenty of room to fit 8 and luggage. The Pilot has more standard features than the Acadia and MSRP is about $1,000 less than the Acadia. On top of that, Honda Financing is offering 1.9% or 3.9% financing depending on the length of the loan.

Running the numbers, the monthly payment on the Acadia would be $938 for 48 months. The Honda Pilot monthly payment would come to $767. Total savings of $171 a month. Take those savings and invest them for 4 years in a 60% stocks, 30% bonds, and 10% cash allocation. This has an average return of 9.41% and would give you an extra $10,000. 

For those 4 years, we drove a car that more than likely did not have any major mechanical problems, provided a pleasurable driving, and Honda is almost certainly here to service the warranty. Plus, we saved a substantial amount of money to use on other priorities. 

www.PetersonWealthAdvisory.com

Your Home is Not an Investment

I have recently heard people saying they are looking at buying a house. Some want to move up to something bigger and others are first time home buyers. Mortgage rates have fallen substantially over the last week and look to be heading lower. With all of the foreclosed homes adding to too much inventory, there are many great deals for buyers.

Many home purchases look at their primary residence as an investment that will return outsize returns over time. However, when you run the numbers, home owners should come back to reality.

After researching the true costs and returns of housing, there are definite short comings to thinking your house as an investment similar to stocks. The following is the average cost of owning a home from 1977 to 2007. 

The Cost of Homeownership Over 30 years (1977-2007)

Mortgage: $50,000 (Median Home Price in 1977 $48,800)

Down Payment: $10,000

Interest: $50,000 (average rate in 1977 = 8.72%; includes tax deduction for 33% bracket)

Taxes & Insurance: $90,000 ($3,000 a year)

Maintenance: $54,000 ($150 a month)

Major Repairs & Improvements:  $150,000

Total Costs: $394,000

Estimated Value in 2007: $290,500

Loss = $103,500

Remember these numbers assume you stay in the house for 30 years. The average homeowner moves within 7 years. This raises the cost of homeownership significantly because of realtor costs, higher taxes because of increased assessed values, multiple repair/improvements, and moving costs.

House Appreciation

According to the S&P Case-Shiller home-price index, since 1890, home prices have increased between 2.5% and 3.0% a year. This increase is adjusted for inflation. Various researchers project average prices will increase between 1% and 4% per year after inflation over the next 20 years. These numbers reflect an increase in value and not the total cost of owning a home. If you include those costs you are likely to be slightly if at all ahead.

Stock Appreciation

From 1926 to 2006, a diversified mix of 50% stocks, 40% bonds, and 10% cash would have returned 5.61% after inflation. If you take 1% off for expenses you are left with a return of 4.61%.

Stocks vs. Home Ownership (1977 to 2007)

Earlier we discovered a home bought for $50,000 in 1977 would be worth $290,500 in 2007.

Take $50,000 and invest it in a mix of 50% stocks, 40% bonds, and 10% cash. From 1977 to 2007 this mix returned an average of 10.33% giving you $945,505. 

We all need a place to live but realize that putting money in a mortgage is not investing.

Source for Costs of Ownership from Office of Federal Housing Enterprise Oversight

Market Return information from Ibbotson Associates.

Lessons on Investment Choices

CMO, CDO, CDS, ARS. Confused? Well, you are not the only one. These are just some of the "engineered" products firms on Wall Street produced to help put the economy in its current doldrums. They also caused many investors portfolios to explode and suffer huge losses. Instead of investing in complex investments which have no history, stick with the following:

• Buy from established, well regarded fund companies - Vanguard and iShares are two of the biggest in the industry with sound reputations. 
• Buy passive index mutual funds or Exchange Traded Funds (ETF) - Index funds over low cost investing and perform better than 80% of actively managed mutual funds.
• Stay Diversified - Do not look for the hot stock, sector, or country. Broad diversification amongst Growth, Value, U.S., Euro/Pacific, Emerging Markets, and a couple others will serve you well.
• Keep costs low - Index funds charge investors the least amount while actively managed funds charge the most. What do you get when compared to index funds for the extra cost: underperformance, higher taxes, and less transparency, less money for you. Vanguard Large Cap Value ETF (VTV) charges 0.10% while American Funds Value Fund (AMECX) charges 0.58% plus 5.75% upfront sales charge. Excluding costs, over the past 5 years VTV performed 1% better than AMECX.