Tag Archives: investing

Role of Bonds in a Portfolio – Bonds and a rising interest rate

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In an age when data can be churned out for hungry consumers in the blink of an eye (in fact, much faster than it can be studied and the underlying meaning accurately assessed) there is never a shortage of pundits ready to point the way to a new and better ways to invest. With all that hype, it is understandable how you might sometimes feel like abandoning your current investment plan for on recommended by the latest ‘experts’.

In the last quarter of 2013, the bond gurus accepted that it was time to exit bonds and to move to equity assets. The evidence was clear that bonds were ready to collapse since rising interest rate and the end of QE3 would not support bond investments in early 2014.

What actually came to pass was quite different. The first quarter of 2014 was one of the best for US bonds, much better than most equity asset classes. In addition, this last month when all asset classes swooned for about 3-4 weeks, the bond assets of your portfolio remained unchanged or grew. But when have bonds been useful in a real portfolio? I want to draw your attention to the role that bonds played in these specific years between 1997 and 2013: Below, I’ve selected years when large company equity (in developed markets) was down while bonds were up. Note that in each of these year it is the bonds that help a well-diversified portfolio retain its value.

The applicable percentage for US Large Cap, then Non-US Large Cap, then US Bonds, then Global Bonds follow after each listed year from 2000 to 2011:

2000 -9% -14% 11% 9%

2001 -12% -21% 8% 6%

2002 -22% -15% 8% 11%

2007 5% 12% 7% 7%

2008 -37% -41% 5% 1%

2011 2% -12% 8% 9%

This is an example of how bonds play an important role in a diversified portfolio. It is also a reminder of the value that rebalancing plays between asset classes.

In summary, we must not forget the importance of bonds as diversifiers of equity risk in a balanced portfolio, even during low-interest rate periods.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

How insiders can legally profit from insider information

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 Insight on how company insiders can still profit from insider information

Despite efforts by the Senate and president to reduce profiting from inside information there remain loopholds for corporate insiders that may be useful to those who are observant. Corporate insiders whose companies are about to be bought by rivals are forbidden from buying shares ahead of time to profit from the price jumps that takeover announcements often bring. But they accumulate plenty of shares just the same.
That’s because company managers are often paid partly in stock. Many sell these shares at regular intervals, whether to use the cash for other purposes or to keep their personal assets from becoming too concentrated in a single stock.
For this reason, managers who decline to buy their companies’ shares ahead of takeovers may nonetheless accumulate them if they also halt their typical selling.

Anup Agrawal of the University of Alabama and Tareque Nasser of Kansas State University studied 3,700 takeovers announced between 1988 and 2006. They compared trading in the year before takeover announcements (the “informed period”) with the year before that (the “control period”).  They found that insiders tended to reduce their buying during the informed period, but they reduced their selling even more. The result was an increase in net buying. Over the six months prior to deal announcements, the dollar amount of net purchases for officers and directors at target firms rose 50% relative to ordinary net purchase levels.

This “passive insider trading,” as the authors call it, is legal. But it is profitable? Agrawal and Nasser didn’t look at returns, but a study published a year ago in the Journal of Multinational Financial Management offers clues. Researchers from Australia’s Commonwealth Bank and Deakin University looked at U.S. takeovers between 2001 and 2006. They found that shares of target firms tended to outperform by nearly seven percentage points during the 50 trading days preceding deal announcements.

Nothing illegal in these situation just good old fashion financial planning can yield a net gain if properly structured.

*Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

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*Inspired by “An Insider Trading Loophole Congress Didn’t Close” by Jack Hough | SmartMoney | March 23, 2012

Buffett or Buffet – an extra ‘t’ does matter

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Buffet or Buffett which one would you choose to invest with? Does an additional T in your name matter?*

A firm that bears no relationship to Berkshire Hathaway filed offering with the SEC last month.

Warren Buffet is getting into the high-risk business of Regulation D private placements. This is Warren Buffet, with one T, not Warren E. Buffett.

The Buffet that’s short one ‘t’ is the moniker of a new private placement connected to a stockbroker and investment adviser based in Boca Raton, Fla., named Peter Bruno.

According to Mr. Bruno’s website, he is chief executive of Wall Street Money Management Group Inc., a registered investment advisory firm. According to filings with the SEC, the firm has $17.1 million in assets under management and 122 client accounts. At the end of September, Berkshire Hathaway reported assets of $385.5 billion.

It would seem clear that the Buffet name is being used to cash in on the Buffett record and confuse consumers. Could there be any other explanation?

*Original article by Bruce Kelly, December 2, 2011.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Greek Reaction Demonstrates Fragility of EU

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European Unity and Global Markets
Reaction by Greek Prime Minister

Greek Prime Minister George Papandreou seemingly took the world back to square one. Papandreou will have a referendum to approve the latest, second, bailout for his country.  The agreement signed last week and agreed to by Greece is now up for a referendum.

With that, global markets crumbled. In early trading here the S&P, DAX and FTSE are off and dropping. Bank stocks are leading the way with 10% drops not at all uncommon as the Greek vote calls into question whether or not the entire deal struck last week will need to be renegotiated. What is surprising is that the referendum does not seem to have a date.

Some believe that “The Papandreou decision is kinda smart, who is he to unilaterally commit his country to financial servitude for the next decade or so without the backing of Parliament?”  Considering that his government did the bulk of the spending it is a political calculation to refuse to now comply with the Maastricht Treaty which forced other member nations to bail Greece out, again.

The net result is an unexpected sell-off, that could last – ending a rather positive run of data regarding the U.S. economy.

It is time to buy during smaller market growth and then selling each time fear rises.  The super committee meets this month – prepare for another period of volatility.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com