Does Cash Still Serve a Purpose in Investment Portfolios?

By Rich Erwin on August 21, 2012

Interest rates on cash are currently near zero. Were it not for subsidies provided by mutual fund companies, most money market funds would carry a negative return. In other words, they cost more to run than they earn. This situation is unlikely to change any time soon since the Federal Reserve Board has vowed to keep interest rates reduced to nominal levels well into 2014. So the logical question is “why should I keep cash in my portfolio”?

IAM encourages clients to keep “rainy day” reserves outside of their long-term, managed investment portfolios. These are funds that can be used for unexpected events, or occasional occurrences, like purchasing a car or a boat. If you have such funds to draw on, you’re unlikely to have to liquidate a long-term security in an adverse market.

Sometimes clients want to keep some “rainy day” reserves in their managed accounts. In such cases, we encourage them to set a “cash buffer”. This is an amount below which we will not draw cash reserves when purchasing securities, so there is always a balance in place if needed.

Retired clients frequently establish monthly distribution plans and need buffers to make sure those payments are made in a timely manner. In addition, cash is needed to pay quarterly advisory fees.

There are also investment circumstances in which one might decide to maintain available cash. When equity markets are at high levels, it’s often good to take profits and hold sales proceeds until prices get more reasonable. Also, short-term cash may be maintained when new investment selections are in process and close to being purchased in portfolios.

Have you heard the term “near cash”? This term is commonly used when bonds are nearing maturity. (For a primer on bonds please reread our January 3, 2012 blog article Do Bonds Still Serve a Purpose in Investment Portfolios?) At IAM we build bond ladders. This means we purchase issues up to 6 or 7 years in length, staggering them by year. We try to cover all maturities in that timeframe. The result is a client will nearly always have an issue within 18 months of paying back its principal. This “near cash” often factors into client calculations of cash reserves and allows money to earn greater interest.

The bottom line on this subject is cash is of little value today unless you need it for safety, distribution requirements, or near-term investment timing. As of mid-August, IAM’s average cash balance is 6.5% of managed assets. Some of these funds serve as cash buffers. The remainder is being held for potential bond or equity purchases.

We always maintain a bond list showing portfolios needing additional fixed income purchases. These are often slated as replacement buys for bonds that have recently matured or been redeemed. Right now we’re looking to make 22 purchases. Several times a week we search through hundreds of available bonds searching for those with the best characteristics.

Our plan for the majority of current cash is to purchase additional equities at what we perceive to be attractive valuations. Right now we have three “blue chip” names under consideration for inclusion in IAM’s SELECT List. Should any or all of these issues be worthy of consideration by our Investment Committee and then approved for purchase, we will deploy reserves appropriately by buying shares suited to individual account needs. It’s expected that some of these equities will have income yields substantially higher than those of money market funds.

In conclusion, we believe cash does still serve a purpose in investment portfolios but excess cash should be deployed in more productive areas until market conditions warrant a defensive posture.

Any clients wishing to discuss their cash buffers, near cash, or excess cash should contact us so we can make sure we’re incorporating your desires into our investment management process. Otherwise, we will continue to work within the asset allocation guidelines established in your Investment Policy Statement.

And, as always, please don’t keep us a secret. Forward this article to a friend

Important Consumer Disclosure

This newsletter is limited to the dissemination of general information pertaining to Investors Asset Management, Inc.’s (“IAM”) investment advisory services and general economic market conditions. This communication contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice, and should not be considered as a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be construed as legal advice, and you should consult with a qualified attorney before taking any action. Information presented herein is subject to change without notice. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this newsletter will come to pass. Individual client needs, asset allocations, and investment strategies differ based on a variety of factors.

The Select List represents all of IAM’s recommendations as of April 18, 2012. The Select Dividend List as of January 24, 2012, represents a select set of IAM’s Select List. The securities discussed herein may appear on IAM’s Select List. A list of all recommendations made by IAM within the immediately preceding one year is available upon request at no charge. IAM is under no obligation to hold any equity position for any time period, and the recommendations on the Select List are subject to change at any time without notice. The Select List should not be considered as personalized investment advice, and the securities information contained therein should not be construed as an endorsement, solicitation, or recommendation to purchase or sell any security. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment on the Select List, or any recommendations in the future, will be profitable.

IAM is an SEC registered investment adviser with its principal place of business in the State of Texas. IAM and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which IAM maintains clients. IAM may only transact business in those states in which it is noticed filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by IAM with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of IAM, please contact IAM or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about IAM, including fees and services, send for our disclosure brochure as set forth on Form ADV using the contact information herein.

Investors Asset Management, Inc. ¬ 5000 Legacy Drive, Plano, TX 75024 ¬ www.iaminvest.com ¬ 972-985-7162

Posted in Customer Service, Estate Planning, Financial Planning, Stocks and Bonds | Tagged Bonds, Certified Financial Planner(tm), Certified Financial Planner®, Fee Only Financial Advisors, Fee Only Financial Planner, Financial Planning, fixed income, Plano Tx, SELECT Investing, Socially-Responsible

How Safe is Your Savings Rate?

By Neil Krishnaswamy on August 7, 2012

Are you aware of the personal savings crisis in the United States? Among all the other events happening in the world, the news media might not even consider this a crisis. But it is worth our attention. Like physical health issues, insufficient savings can lead to problems with our financial health. Sometimes the symptoms can be slow to detect, so we should hope to discover them while there is still time for “treatment.”

From a study conducted in April of this year, 49% of Americans say they aren’t contributing to any retirement plan. According to the Bureau of Economic Analysis, personal saving as percentage of disposable income was at 4.4 percent in June. So what are the implications of these statistics?

From a retirement planning perspective, a large concern is people are simply being forced to rely more on their personal savings. For example, take defined benefit pension plans where retirees receive a fixed monthly benefit for life after retirement. While these types of plans were common in the past, they have been rapidly disappearing. It is just becoming too costly for companies to fund and administer these plans. Those working today are fortunate if they have access to a good 401(k) plan with matching employer contributions.

But isn’t savings an essential component of a good retirement plan? You bet it is. Today I’d like to share with you recent research findings which suggest that your savings rate may be the most reliable indicator of your probability of success in retirement. Much of the following summary is based on a ground breaking article1 contributed to the Journal of Financial Planning last year.

Let’s first take a quick look at traditional retirement planning, which many practitioners use to help clients determine a safe withdrawal rate. As a simplified example, suppose a client had a safe withdrawal rate of 4% and needed $50,000 from her investment portfolio annually. Her wealth accumulation target would be $1,250,000 (i.e. $50,000 divided by 0.04). Let’s say at the start of retirement, this client achieved this target and then begins withdrawals following the 4% rule. She would withdraw $50,000 each year, with the only adjustments upward made for inflation. This sounds like a good deal, right?

The reality is that many folks often intend to retire in times following prolonged bull or bear markets. If we simply follow the safe withdrawal rate and base our initial withdrawals on amount saved at the onset of retirement, the risk is that our subsequent withdrawals could be too optimistic or overly conservative.

But the alternative approach focuses less on the withdrawal rate and more on your lifetime savings rate. Getting back to the Journal article I mentioned earlier, this study used historical market data and assumptions of a 60 year window for a base model retiree. Specifically this assumes one starts saving 30 years before retirement and then distributes from those savings for 30 years in retirement. The research found that the minimum savings rate that would have been sufficient to retire in any year from 1900 to 1980 was an eye opening 16.62%.

True there were years where you could’ve gotten away with a lower savings rate, but that rate never fell below 9.34%. Using the same assumptions but reducing the saving period from 30 to 20 years, the minimum safe savings rate rises from 16.62% to a whopping 35.91%! Conversely, should we increase the saving period to 40 years, the minimum safe savings rate drops down to 8.77%. I hope this clearly demonstrates the importance of getting the earliest start possible to savings.

Now we certainly realize every person has a different life circumstance and a safe savings rate that is unique to their situation. But the results from this study tell a sobering story when compared to the realities of how Americans are actually saving.

So how safe is your own savings rate? How much should you regularly save to meet your future life goals? A qualified financial advisor can help you answer these questions. At IAM, we’d love to help you find your own safe savings rate but also give you the tools and support for implementing it within a sound plan.

Financial experts are fond of using the saying “pay yourself first”. It simply means to save, or pay yourself, some percentage of your income before making any expenditures. The advice could be perceived as extreme, but the current research is making it clear how urgent it is for people to develop a focused savings habit now.

1. Journal of Financial Planning, May 2011, Safe Savings Rates: A New Approach to Retirement Planning over the Life Cycle, Wade D. Pfau, Ph.D.

Important Consumer Disclosure

Investors Asset Management, Inc. ¬ 5000 Legacy Drive, Plano, TX 75024 ¬ www.iaminvest.com ¬ 972-985-7162

Posted in Customer Service, Estate Planning, Financial Planning | Tagged Certified Financial Planner(tm), Ethical Investing, Fee Only Financial Advisors, Fee Only Financial Planner, Financial Advisor, Financial Planning, Investment Management, SELECT Investing

Primer on Asset Allocation

By Neil Krishnaswamy on July 10, 2012

What is the right mix of stocks, bonds and other asset classes in your portfolio? Financial scholars and practitioners have debated this question for decades, and it gets to the heart of asset allocation. The concept is important because asset allocation impacts not only your future return expectations, but also what level of volatility, also known as risk, you will have to endure along your investment journey. Today I’d like to share with you a brief history of asset allocation, its current challenges and IAM’s approach to this topic.

One of the key teachings widely accepted in financial circles is called Modern Portfolio Theory, hereinafter referred as MPT. MPT was introduced by Harry Markowitz back in 1952. At a high level, the way MPT works is by utilizing statistical data from the investment classes considered. This data takes on the fancy terminology of mean, variance and correlation. The output of MPT is basically a chart showing what is called the efficient frontier. The idea is that once you have a “frontier” established, you could use it to choose an asset allocation (e.g. 60% stocks / 40% bonds) based on how much risk you’re willing to accept.

Once you get past the statistical jargon and computational details, the end result can be simple and elegant. In fact, according to the Journal of Financial Planning, 82% of financial planners employ the basic assumptions of MPT in their investment strategies for clients 1.

Yet we need to be careful with MPT. One reason goes back to the statistical input I mentioned earlier, correlation. The idea behind correlation is that you want assets which have a negative or low correlation with one another. That way if one asset class falls, another rises (or has a lesser fall), and this minimizes the riskiness of the portfolio. If the asset classes in your portfolio have a positive correlation, then in a rising market, everything goes up, and people presumably wouldn’t complain much. However, in a falling market positive correlation doesn’t look so attractive. Ideally, some assets in your portfolio should “zig” when the others “zag”.

In today’s investing climate, it’s becoming a more difficult challenge to find investments that can blend together in this fashion. As more firms embrace the idea of diversification, correlations tend to converge and this puts firms back on the hunt for new, alternative strategies. According to other articles in the Journal, some of these strategies include managed futures, absolute return, illiquid market strategies and volatility indices. Are any of these strategies reliable? Time will tell.

Another interesting trend is emerging. Some firms are going back to valuation-based asset allocation. There have been several studies showing the effectiveness of this approach when back tested with historical data from the financial markets. The idea behind valuations is that you look at the current price levels of securities and compare them to historical averages. A key metric in such a comparison would the price-earnings, or P/E ratio. The goal is to shift more assets to equities (and away from bonds) when the data suggests they are cheap and vice versa when they are expensive.

So where does IAM stand on asset allocation? First we recognize that our clients are unique and we work with each of them to establish target asset allocations to match their risk tolerance, income needs and personal preferences.

But where the rubber meets the road, our asset allocation decisions are derived from our unique SELECT approach. We believe this approach is well-suited for those who can take a long-term view on investing. Our goal has always been to use a form of valuation-based asset allocation. Some firms will attempt to identify this value based on how the broader markets are performing. However, we try to identify value in the underlying businesses which comprise the stock and bond components of your portfolio. We don’t automatically buy and sell positions simply based on isolated financial metrics. Another way to view our approach is to watch Rich Erwin’s classic video, he compares building an investment portfolio to building a house.

None of this is meant to take anything away from MPT or other asset allocation strategies, which can serve people well when utilized properly. Just keep in mind that many strategies are based on acquiring and processing large amounts of financial data. We should be cautious when forming rules based on data like this and recognize there’s no magical formula to investing. As an engineer in my former profession, I must confess I sometimes wish investing could be systematized as such!

At IAM we continue to look for ways to reduce risk in our clients’ portfolios. We believe the best long term approach is to focus on the fundamentals and diversify across various companies which thrive under different economic conditions. Asset allocation decisions can then flow almost naturally from there. If you would like to learn more about IAM’s approach to investing and asset allocation, please give us a call at 972-985-7162.

1. Journal of Financial Planning, June 2012, Trends in Investing – Special Report

Important Consumer Disclosure

This newsletter is limited to the dissemination of general information pertaining to Investors Asset Managementg, Inc.’s (“IAM”) investment advisory services and general economic market conditions. This communication contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice, and should not be considered as a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be construed as legal advice, and you should consult with a qualified attorney before taking any action. Information presented herein is subject to change without notice. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this newsletter will come to pass. Individual client needs, asset allocations, and investment strategies differ based on a variety of factors.

Investors Asset Management, Inc. ¬ 5000 Legacy Drive, Plano, TX 75024 ¬ www.iaminvest.com ¬ 972-985-7162

Posted in Estate Planning, Financial Planning, Stocks and Bonds | Tagged Certified Financial Planner(tm), Ethical Investing, Fee Only Financial Advisors, Financial Advisor, Financial Planning, Investment Management, Investors Asset Management, Plano Tx, Texas 75024

State Street – NOT an “Itsy Bitsy” SPDR

By Leanne DeVey on June 5, 2012

All this talk about the upcoming “The Amazing Spider Man” movie has me thinking about SPDR’s. If you’ve heard of SPDR ETF’s, then you’re already somewhat familiar with State Street. In fact, the $69 billion SPDR Gold Trust is definitely not your typical “itsy bitsy.” But State Street Corporation is so much more than a “web” of SPDR’s. State Street (ticker symbol STT) is one of the world’s leading providers of financial services to institutional investors, through two lines of business: Investment Servicing and Investment Management.

State Street’s Investment Servicing includes custody of institutional accounts such as pension plans, public retirement funds, financial institutions, endowments and foundations. State Street prices mutual funds daily, performs record-keeping, and provides brokerage and trading services, securities finance, investment management and performance, risk and compliance analytics. Low cost operations are one key to their competitive success.

They are the largest provider of mutual fund custody and accounting in the US. As of 12/31/11, State Street calculated about 40 percent of the US mutual fund prices provided to NASDAQ and quoted daily in the Wall Street Journal, with an accuracy rate of 99.87%.

State Street’s Investment Management services are provided through their subsidiary State Street Global Advisors (SSgA). SSgA provides investment management research and securities finance. They offer ETF’s including the SPDR ETF brand.

State Street was recently awarded Custody Risk Magazine’s “2012 Outsourcing Provider of the Year” for the second consecutive year. The award recognizes outstanding achievers in the security services industry and evaluates such factors as innovations in service, cost control initiatives and factors.

As socially responsible investors, IAM purchases research from a leading analytical company which looks at environmental, social and governance (ESG) factors. It ranked State Street second out of 90 companies in its peer group. State Street has a green procurement policy with programs in place to use renewable energy and reduce greenhouse gas emissions. They have a human rights policy which references the Universal Declaration of Human Rights. State Street has adopted a strong policy on bribery and corruption and maintains a third-party administered whistleblower program. They are compliant with US Federal anti-money laundering policies.

The company currently trades around 10 times 2012 estimated earnings, while its median is 17 times. State Street passed its bank stress test and shows it’s capable of paying higher dividends. It boosted dividends back up to pre-2008 levels. Its 2.4% dividend yield is substantially higher than the 10 year Treasury rate of 1.5%. State Street recently improved its dividend to a new annual high of $0.96. With a modest payout ratio of 25%, we believe the company will have room to increase its distributions annually for many years into the future. As a leader in the trust banking industry, this is one of the less volatile companies in the financial services industry, according to Bank of America/Merrill Lynch. We like its leading market position, low relative P/E and attractive and increasing dividends.

State Street is a strong company with a unique niche in the financial services arena. There aren’t many like it “on the web!”

Important Consumer Disclosure

Investors Asset Management, Inc. ¬ 5000 Legacy Drive, Plano, TX 75024 ¬ www.iaminvest.com ¬ 972-985-7162

Posted in Estate Planning, Financial Planning, SELECT Investing, Stocks and Bonds | Tagged Fee Only Financial Advisors, Fee Only Financial Planner, Financial Advisor, Leanne DeVey, SELECT Investing, SELECT Methodology, Socially-Responsible

Will Your Finances Survive To Age 95?

By Rich Erwin on May 29, 2012

A 2012 survey by Northwestern Mutual Life of 1,015 American adults found that only 36% felt prepared to fund retirement through age 95. Just 56% said they could pay for it through age 75.

This is a huge challenge for most individuals. How do you build enough assets to support a long life? How much money do you really need? When you stop working, what is the right amount to draw from your reserves? Is there any way to earn a suitable income on your nest egg? Are there ways to avoid running out of money?

What is clear is the answers are not found in wishing and hoping. Preparing for the future is something that requires working and planning. And frankly, most Americans just don’t put forth the effort. Three top steps emerged for improving personal finances from those in the survey who are still working. They are: paying down debt, developing and sticking to a budget, and regularly saving a portion of each paycheck.

What about you? Have you adopted these timeless methods? If not it may be time to start. Enlisting a financial planner for guidance may be the first step. Collaboration with someone who will assist in analyzing your cash flow and establishing a solid plan could be a sound course of action. If not, don’t waste time starting on it yourself.

Even if you’re already retired, you can work on the first two steps – reducing and eliminating debt and developing a budget you can adopt and adhere to. You may be helped by engaging an advisor to provide assistance in figuring out the right withdrawal rate for your funds and what buckets to dip into first. A qualified professional can also check your investment assumptions to make sure they’re realistic.

On the investment front, more and more talk surrounds the idea of dividend investing. This is a subject we’ve been addressing for a decade – and we have solutions. IAM’s SELECT Dividend List, established in 2002, is currently yielding 3.4%. That’s not bad when 5-year U.S. Treasury notes pay just 0.7%. (See Dividend Stocks – the Power of Compounding for a good comparison of certain dividend stocks to Treasuries.) In fact, you might be surprised to learn that 30-year U.S. Treasury bonds presently earn only 2.8%. Remember, that rate won’t rise over the entire timeframe.

SELECT Dividend stocks, meanwhile, have a strong history of increasing dividends on a regular basis. Our current list of 27 equities has increased payouts for an average of 8.8 out of the last 10 years. Value Line Investment Survey predicts they will increase their dividends annually by 8% over the next 5 years. If that holds true, their yield will rise from 3.4% to 5.0% in that relatively short period. That can do a lot to help retirees afford retirement and workers prepare for it.

So, if you’re worried about how to finance life into your 90s, start now by establishing a sound plan. And consider infusing your portfolio with a good dollop of dividend stocks. They aren’t easy to find, but offer the potential for rising income – and appreciation, too. That appears to be a pretty good combination for those who think they are among the 64% of survey participants who are unsure of their financial future.

If you would like to see a copy of IAM’s SELECT Dividend List (dated 5/22/12), please let us know. We’d be happy to e-mail it to you. It’s been carefully developed over nearly 10 years. That’s why we call it SELECT!

Important Consumer Disclosure

Investors Asset Management, Inc. 5000 Legacy Drive, Plano, TX 75024 www.iaminvest.com 972-985-7162

Posted in Estate Planning, Financial Planning, News / Media, SELECT Investing, Stocks and Bonds | Tagged customer service, Financial Advisor, Financial Planning, fixed income, Investors Asset Management, SELECT Methodology

Planning for the Changing Tax Environment

By Neil Krishnaswamy on May 15, 2012

I imagine you’re relieved to have the 2011 tax season in the books. But today I’d like to suggest it’s not too early to start tax planning for next year. The reason is the Bush cuts are set to expire at the end of this year. You remember the Bush tax cuts, right? They were enacted back in 2001, so we’ve had over a decade of “low” taxes since. Well, we might brace ourselves. Here are just 3 of the tax provisions that would change, courtesy of the Tax Policy Center, if the tax cuts do indeed expire on schedule.

The 10% income tax bracket will disappear and the 25, 28, 33 and 35 percent rates will revert to 28, 31, 36 and 39.6 percent, respectively. (The 15% rate will remain in effect)
Long-term capital gains tax rates will increase from 15 to 20 percent for filers in the higher tax brackets. It will also increase from 0 percent to 10 percent for those in the 15 percent bracket and below.
Qualified dividends will be taxed at regular income tax rates rather than the lower long-term capital gains rates.

These potential changes, like any changes in life, force us to adapt. As planners we often try to do what’s called “tax harvesting” for clients. That is we sell securities with losses to offset other gains or even a portion of earned income. This helps minimize the total tax owed for the year.

But in a rising tax environment, consider a different approach. Instead of harvesting losses, it’s often more appropriate to harvest your gains. At a high level, you identify ways to accelerate your income into this year. Another method is to defer your deductions into later years where they can offset more income subject to a higher tax rate. Let’s take a look at a few strategies that accomplish these.

Say you have a sizable unrealized gain in a stock which you’ve held for a long period (at least 1 year) in a taxable, non-retirement account. If you were planning to sell some of that stock in the near future, you might consider realizing those gains this year. If you happen to be in the 15% tax bracket (or lower) this year, much of your capital gains will be not be taxed at all until your income, including those gains, reaches a certain level. Additional gains above that level will be taxed at the current 15% rate.

High income earners may choose a similar strategy but for different reasons, due to a provision of the 2010 Health Care bill which goes into effect Jan 1^st 2013. The bill calls for a Medicare surtax, which will tack an additional 3.8% tax on your investment income and annuity distributions. The bill defines a high income earner as an individual with a modified adjusted gross income (MAGI) above $200,000 or a married couple filing jointly with a MAGI above $250,000. Note that capital gains are included in the definition of investment income. So depending on your MAGI, it could push your effective long-term capital gains rates from 15% not just to 20%, but nearly to 24%!

If you’re in retirement, should you adjust your distributions from tax deferred accounts such as a traditional IRAs? It’s worth considering. These types of distributions are taxed at the ordinary income tax rates, which are set to rise. You might benefit from taking a higher distribution from a traditional IRA this year and a lesser distribution from, for example, a tax-free Roth IRA. On a related note, some recent financial planning research¹ suggests that taking your first distributions from tax-deferred accounts, at least to the amount of your deductions, is an optimal long-term strategy for tax efficiency.

Going back to Roth IRAs, we certainly don’t hide our love for them here at IAM. A great income accelerating strategy is the Roth IRA conversion. This tactic appeals to us for several reasons as Chris Troseth, CFP® explains in his video. Along with times when higher taxes are expected, the Roth conversion is also attractive in years where you expect to be in a lower tax bracket than normal. It often triggers a large tax liability, but if you’re in a position to pay that with non-IRA funds, we encourage you to give this serious consideration as the year progresses. The chances are we at IAM will remind you too!

Along with accelerating income, another strategy is to defer your deductions. For those of you who typically itemize your deductions on your tax return, see if you can hold off taking deductions this year and defer them to a later year where there is a higher income tax rate. For example, you might see if there is a way to defer the payment of medical bills or property taxes. Another strategy, which may not initially please the non-profits, is to defer your charitable deductions.

So these are just a few strategies you might find helpful when deal with a rising tax environment. Please remember that tax strategies should be used to supplement and enhance your investment strategy. We must all resist the temptation to overreact to changes in tax laws. Furthermore, keep in mind the extension of the tax cuts is not necessarily an ‘either-or’ proposition. Congress could extend the cuts for lower income folks and not do so for higher income folks. We should get more clarity on the law changes as the year progresses. Before taking action based on any of the discussion above, we highly encourage you to consult your financial advisor or tax professional.

Journal of Financial Planning, April 2012 (Sumutka, Sumutka & Coopersmith)

Important Consumer Disclosure

This newsletter is limited to the dissemination of general information pertaining to Investors Asset Management, Inc.’s (“IAM”) investment advisory services and general economic market conditions. This communication contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice, and should not be considered as a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be construed as legal or tax advice, and you should consult with a qualified attorney or tax professional before taking any action. Information presented herein is subject to change without notice. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this newsletter will come to pass. Individual client needs, asset allocations, and investment strategies differ based on a variety of factors.

Investors Asset Management, Inc. 5000 Legacy Drive, Plano, TX 75024 www.iaminvest.com 972-985-7162

Posted in Estate Planning, Financial Planning | Tagged Certified Financial Planner®, Ethical Investing, Fee Only Financial Planner, Investors Asset Management, Plano Tx

John Deere: Committed to Those Linked to the Land

By Leanne DeVey on May 8, 2012

It all started in 1837 when a pioneer blacksmith named John Deere took a broken steel sawmill blade and invented the first self-scouring plow. He knew the nearby farmers in Grand Detour, Illinois had problems with sticky prairie soil adhering to their plow blades. John crafted a creative solution using the sawmill blade with its highly polished steel to form the plow. This was the first in a long line of innovations developed by the John Deere Company.

Fast forward 175 years to today’s globally-diverse, technologically-advanced world. What part does a farm equipment manufacturer play? And why would anyone be interested in a company that’s involved in agricultural products?

Deere believes global macroeconomic trends, such as population and income growth in developing nations, will drive increased demand for agricultural output and infrastructure development. Forecasts show by the year 2050 the world’s population will expand to 9 billion people from the current 7 billion. This growth will come mostly from emerging countries such as China and India. Incomes in these countries are increasing and diets are improving. Heightened demand for food, fuel and fiber will require agricultural output to double at the very least.

Another trend Deere foresees is the migration from rural to urban areas in these countries. For the first time ever, in 2010, over 50% of the world’s population lived in cities. By 2050, 70% are expected to be urban-dwellers. Highly productive, mechanized farming processes will be required to produce more agricultural products with a smaller labor supply. Infrastructure needs will increase with the demand for new housing, roads and bridges to support the boom in urban development. Deere’s construction segment should benefit from this trend.

True, Deere & Company is the largest manufacturer of farm machinery in the world. But Deere is much more than just a farm equipment manufacturer and supplier. Deere’s Agricultural & Construction Equipment Solutions segment produces about 75% of revenues, while Forestry & Turf Equipment Solutions (17%) and Supporting Businesses (Financial Services, Power Systems, World Wide Parts & Intelligent Solutions Group) round out the company at 8%.

Deere is uniquely positioned to capitalize on “economic tailwinds,” through its interrelated business segments, business focus and core values. The Agricultural & Construction Equipment Solutions segment is its growth business. Management anticipates increased spending by farmers for higher efficiency equipment will continue. Deere maintains a dominant market share in the U.S. and sales in Germany, France and Britain are picking up. Significant growth opportunities exist in Brazil and South America, as well as in Russia, India and China.

Deere’s goal in the Turf & Forestry segment is to grow market share and strengthen global business channels. In the Supporting Businesses segment, the Intelligent Solutions Group has a system in place to transmit real-time data for working tractors to engineers and 500-plus independent dealers who monitor service needs. In the Financial Services segment, CEO Samuel Allen says “farmers are some of the best credit risks in the world – they can’t go away and can’t afford to see their equipment repossessed.” In the latest quarter, Deere’s credit portfolio had losses of .002% — incredibly low.

IAM likes Deere’s business model, and core values. Foundational success factors such as exceptional operating performance, disciplined shareholder value-added growth and aligned high-performance teamwork are strong. Deere has had 7 straight quarters of record earnings and pays a dividend, while most competitors don’t. And they’ve increased their dividend yield at a 14% annual rate for 5 years now. Were he alive today, John Deere would be pleased!

Important Consumer Disclosure

Investors Asset Management, Inc. 5000 Legacy Drive, Plano, TX 75024 www.iaminvest.com 972-985-7162

Posted in Financial Planning, SELECT Investing, Stocks and Bonds | Tagged Certified Financial Planner®, Ethical Investing, Fee Only Financial Advisors, Investors Asset Management, Plano Tx, SELECT Investing, Texas 75024

Siri Doesn’t Speak Chinese but Asian Consumers Still Like Apple

By Rich Erwin on May 1, 2012

Did you notice that Apple’s stock fell 76 points, or 12%, in April as investors grew uncertain about its first quarter earnings report? Yes, analysts began to wonder whether iPhone 4S sales might slow meaningfully following a blockbuster launch in Q4. That fear accelerated as AT&T and Verizon Wireless reported lower iPhone activations in reports that preceded that of Apple.

Our confidence in the shares never waned because we believed the global ramp-up in iPhone and iPad sales was still early in its cycle and more innovative products would follow. As it turned out, results would likely have proven modestly disappointing had Asian demand not ignited. Instead 35 million units were sold worldwide. That’s Apple’s shine, that consumers all over the globe demand its products. They may prefer its brilliant screen, ease of use, functional design, multitudinous apps, or just decide it’s a status item they must have. It doesn’t matter. Just like Americans, they’re enamored with the product.

Once reliant on strong domestic demand, Apple now generates 64% of its corporate revenue abroad. iPhone sales in mainland China rocketed 5x prior year numbers in the quarter just ended. Considering the new iPhone wasn’t launched until February, that’s quite a feat. Apple’s team deserves major kudos for getting so many handsets produced and delivered in a short-time frame. The company added China Telecom as a carrier in March, which likely means continued robust sales in the current period and beyond. Just imagine what would happen if management struck a distribution deal with China’s largest wireless provider, China Mobile!

Although the iPhone full touch interface allows its keyboard to be language-customized, Siri, the product’s voice-activated assistant, has yet to learn Chinese. You can bet she will. Expanded sales in 2013 and beyond may depend on the company’s ability to produce a product affordable to the average Asian. In China, annual per capital urban disposable income was $3,500 in 2011. A basic iPhone 4S runs $790, or 22% of that total. We’ll have to watch that trend. But this year China iPhone sales are expected to reach 137-140 million units, more than in the U.S.

Global iPad sales reached 11.8 million units in the first quarter, a 151% increase over last quarter. In fact, despite its large size, Apple’s companywide revenues rose 59%. That’s a big wow! No other company in the world has achieved such success. Getting back to the iPad, Apple’s tablet market share in China exceeds 70%. Not bad, given the fact the new iPad has yet to launch because of a lawsuit with Proview International Holdings, a near-bankrupt Chinese company. Once that suit is settled, it’s off to the races. As lead horse, the company will likely be rewarded with sales exceeding many bushels of shiny apples.

Now, let’s discuss the stock price. When first quarter earnings were reported in late January, shares rose more than 200 points through April 9 to $636, a gain of over 50% from trough to peak. Although it may be hard for many investors to conceive, we believe it possible the stock will rise as much as 40% from its pre-earnings trough of $560 to over $780 by year-end.

Then next year Siri will need to become multi-lingual!

Please contact us if you have questions about Apple or any IAM SELECT List stock.

Important Consumer Disclosure

Investors Asset Management, Inc. 5000 Legacy Drive, Plano, TX 75024 www.iaminvest.com 972-985-7162

Posted in Financial Planning, News / Media, SELECT Investing, Stocks and Bonds | Tagged Certified Financial Planner(tm), dividend income, Fee Only Financial Advisors, Fee Only Financial Planner, Investors Asset Management, Plano Tx, Rich Erwin, SELECT Investing, Texas 75024

Do You Have A Trader’s Mentality?

By Rich Erwin on April 17, 2012

While at lunch today I turned on CNBC. It frustrated me that Fast Money, a program for short-term traders, was on when I had just a few minutes to gather a tidbit or two of worthwhile information. I turned it right off, knowing little or nothing the panelists would say would be relevant to me. Their investing philosophy is diametrically opposed to that of IAM. In fact, I’d be more inclined to call it guessing (or gambling) than investing.

In this world of money management there are thousands of ways to invest. Each participant needs to find the way that works best for him or her and be consistent with it. For us, it’s high-quality, long-term investing based on SELECT qualities. We believe in it and demonstrate it every day.

There is a thought today that “buy and hold” investing is dead. Many professionals believe you have to be able to shift quickly between asset classes and individual securities to outperform your competitors. Such tactical changes are said to be based upon the portfolio manager’s superior ability to adapt to ever-changing markets.

This all sounds impressive, and for some it may work, but my opinion is if you try to out-time the market you will be right 50% of the time and wrong 50% of the time. I’ve yet to see someone create consistent long-term value by proving they are much smarter than the average investor. At IAM we see individuals hurting themselves, more than helping themselves, by guessing on market swings. Just take a look at the findings from this recent study on investor behavior.

We in fact believe that one of the best ways to add value is to be a long-term investor. Few participants in this era have the patience to keep an investment more than a year or two. We think you’ll have a better chance than most by identifying companies with sound 3-5 year strategic plans, proven records of delivering financial results, and histories of paying attention to their key constituencies: customers, employees, communities, and shareholders. For more on IAM’s SELECT approach follow this shortcut to a video on our philosophy.

Investment professionals who declare that “buy and hold is dead” may not understand that such an approach isn’t static and inattentive. Our sense of “buy and hold” is you take plenty of time to carefully select great companies and then consistently monitor them to make sure they don’t falter. If they do, it’s important to sell and move on.

You go into the markets knowing that it isn’t the next 3, 6, 9, or 12 months that matter. It’s the next 3, 5, or 10 years. You don’t invest with the goal of making 10% and then moving on to the next security. You choose securities you think can earn 100% or more over a reasonable time horizon.

I’ll reiterate this does take patience, something that is rare today. Attention spans are much shorter than they were when I started investing in the early 1970s. Yet, one thing has proven true for me over four decades. I’ve seen more investors succeed by stepping away from the crowd than following it. I also believe someone willing to become a stakeholder over an extended period of time is a true investor, not a gambler, and that feels better when you’re talking about real money.

Think about it. If you want to talk about this further, send us an e-mail or give us a call. It’s something we enjoy discussing with anyone interested in the securities’ markets.

Important Consumer Disclosure

The Select List represents all of IAM’s recommendations as of December 27, 2011. The Select Dividend List as of January 24, 2012, represents a select set of IAM’s Select List. The securities discussed herein may appear on IAM’s Select List. A list of all recommendations made by IAM within the immediately preceding one year is available upon request at no charge. IAM is under no obligation to hold any equity position for any time period, and the recommendations on the Select List are subject to change at any time without notice. The Select List should not be considered as personalized investment advice, and the securities information contained therein should not be construed as an endorsement, solicitation, or recommendation to purchase or sell any security. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment on the Select List, or any recommendations in the future, will be profitable.

Investors Asset Management, Inc. ¬ 5000 Legacy Drive, Plano, TX 75024 ¬ www.iaminvest.com ¬ 972-985-7162

Posted in Financial Planning, SELECT Investing, Stocks and Bonds | Tagged Certified Financial Planner(tm), Certified Financial Planner®, Ethical Investing, Financial Advisor, Financial Planning, IAM, Investors Asset Management, Plano Tx, SELECT Investing, SELECT Methodology, Socially-Responsible

Viewing Your Portfolio through a Farmer’s Eyes

By Neil Krishnaswamy on April 10, 2012

Did you know that farming and investing share much in common? On the surface these two endeavors may appear worlds apart. But if you look closely at the behavior of a successful farmer, you might find insights which could make you a better investor. This became apparent to me after reading some work by an experienced financial planner named Bert Whitehead¹. His insights gave me a new way to look at asset allocation, and perhaps the following 3 farming analogies can give you a fresh perspective on how you view your own portfolio.

Equities are the Crops in the Field – Having a sustainable crop yield is paramount to a farmer’s success. This requires planting a variety of different crops like corn, soy and wheat. Diversification is crucial because having just one crop exposes the farmer to too much risk. The onset of a disease could wipe out that crop and possibly bankrupt the farmer. Furthermore, repeatedly planting the same crop each year can deplete the soil of essential nutrients, leading to a lower yield. On the flip side, it’s possible for a farmer to have excess diversification by trying to plant too many crops. This can result in lower efficiency and productivity.

Perhaps you can see now the way crops are very much like equities. As crops provide for the livelihood of the farmer, equities provide the support for an investor’s portfolio. If properly selected and diversified, stocks can be a very suitable and efficient investment vehicle for achieving growth over the long run. With IAM’s goal of investing in ethical and social responsible companies, you might just call our approach “organic” investing!

Real Estate is the Garden – A farm often has a barn, animals and a vegetable garden. The garden serves as a great protection against inflation. If food prices rise, the farmer can sustain himself by drawing from the garden. There may also be many flowers growing in the garden which provide beauty and enjoyment. A personal residence can serve the same function for you. For one it can be a great inflation hedge. If you have a fixed-rate mortgage on that residence, you have even greater inflation protection. That’s because interest rates rise to combat inflation. Should inflation arise, you could find yourself paying off your debt with cheaper dollars. Of course we must always consider that more debt brings more risk, and ideally you will want to have an adequate cash position to service that debt if emergencies arise.

Besides a house, there are other sources of inflation protection. Gold and inflation protected treasuries (TIPS) fall in this category, although these are not currently recommended options by IAM. Investing in stocks of growing companies is another way to offset some inflation risk. See Rich Erwin’s article on Finding Growth in Smaller Socially-Responsible Companies. Of course compared to real estate, these other investments are not ones you can live in nor use to grow any flowers!

Interest Earning Investments are like the Pantry – A prudent farmer will always have a fully stocked pantry. Such a pantry may contain a variety of items like flour, grains, butter and frozen meats. A farmer never knows when lean years will hit due to events such as extreme weather and crop shortages. They need to be able to draw upon the pantry in times like these. Interest earning investments like bonds serve the same function for an investor. Different times in life require protection of capital and reliable income stream to be the most important investment criteria.

Ok, so you might not be too excited by the current yields on bonds, especially treasury bonds. But you should remember these, as well as cash, can serve as protection against deflation. In times of deflation, interest rates fall which will cause the prices of your fixed interest investments to rise. Now should deflation be a major concern to you? Perhaps not. But it’s worth being aware of the risk, even if most pundits say it’s a small one.

Let’s recap. The main take-away from these analogies are that the crops, garden and pantry are not competing with one another. They all serve a distinct purpose in a farm. I encourage you to look at the different investments you hold in the same light. Some assets will give you the potential for growth, some can protect you from inflation, and others will provide you safety and deflation protection. Each of you will have your own set of circumstances and risk tolerances which dictate how your portfolio will be weighted to address these concerns.

Keep the farming analogies in mind the next time you’re faced with an apparent ‘either-or’ scenario. Suppose you have a surplus to pay off a mortgage or invest? The right path is not necessarily which projects to give you a higher after-tax rate of return. Why not let the answer flow from your target asset allocation. You may not be a farmer, but it might be wise to tend your portfolio as if you were one.

1. Why Smart People Do Stupid Things With Money by Bert Whitehead (2007)

Important Consumer Disclosure

Investors Asset Management, Inc. 5000 Legacy Drive, Plano, TX 75024 www.iaminvest.com 972-985-7162

Posted in Estate Planning, Financial Planning, SELECT Investing, Stocks and Bonds | Tagged Certified Financial Planner(tm), Certified Financial Planner®, Environment, Ethical Investing, Financial Advisor, Financial Planning, Investors Asset Management, Socially-Responsible, Texas 75024

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John Deere: Committed to Those Linked to the Land

Siri Doesn’t Speak Chinese but Asian Consumers Still Like Apple

Do You Have A Trader’s Mentality?

Viewing Your Portfolio through a Farmer’s Eyes

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