Are You Diversified

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Book recommendation:

How to measure Bear Market benefit to YOUR savings

Is the Bear Market good for me?

We've been talking about the advantages of the Bear market in our web seminars. You may have read the quotes by Warren Buffet about how he looks forward to declining stock prices. The 24/7 financial news channels are working hard to spin the Bear Market as, “not so bad” for investors. Why then, are folks still not comfortable seeing their 401k and other savings dropping 5%, 15% and 25%? Why are large investors pulling billions of dollars out of the stock markets? How come you don’t feel love for the Bear??

The reason is uncertainty! How much real risk is there? “What does the worst case look like?” “What if everyone else bounces back but I don’t?!” “How can I be sure I am not being played for a fool?”

There is a way to measure risk in your investment strategy. Harry Markowitz developed a theory in the 1950’s that he won a Nobel Prize for in 1990. We can apply his formula to your current investment strategy. We can calculate an expected return for different levels of volatility that you accept for your investments.

Learn how to build Peace of Mind into your investments. Depending on your tolerance for risk, you will still see ups and downs in your invested savings. Learn what acceptable volatility looks like for your investments. What potential is there for volatility next year?

Sign up for one of our informational web seminars and attend our next educational event in October. Register on line at www.vanderwey.com or simply choose the 'workshops' tab to the right and select the seminar tab at the bottom of the page.

Love The Bear

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The Market Has Always Recovered, Mutual Funds Have Not!

How many times have you heard “The market will recover, don’t panic, keep your money invested!” I confidently say it myself, BUT this statement may not be true for you!

While history shows that the broad index of companies that you can invest in have always recovered their value and provided a healthy return over time, individual mutual funds have not always recovered. In 2002 after the tech bubble burst and the market recovered there were thousands of mutual funds that were no longer around.

What happened to them?!? For many, the mutual fund companies quietly rolled these funds into other more successful funds and erased their awful track record! This is called Survivorship Bias. The dismal performance of the disappearing fund that you owned will not be included in the historical performance record of the fund that acquired it.

"Survivorship Bias. Fund companies statistics refer only to funds that currently exist. So when a fund has been performing poorly for several years, the mutual fund company simply terminates the fund or merges it with another. Either way, the offending fund's statistics are wiped away, as though the fund never existed. This misleads investors into believing that the company's overall performance is better than it really is.

Worse: When a fund terminates, it triggers tax liabilities you didn't want and forces you to find another investment. And when a fund is merged into another, you find yourself owning shares in a fund you might not want. In all of this, you have no advance warning and no say; the termination or merger will occur whether you like it or not."

--Ric Edelman: "The Continuing Evolution of Investment Management" 2007

This is legal but wrong. Track record investing not only does not work, the track record itself may be unreliable.

Stop letting active money managers play games with your hard earned savings! Learn how you can eliminate survivorship bias in your funds. Register for one of our Web Seminars this week or sign up and attend the next “Separating Myths” seminar at the Cornerstone Conference Center in Okemos on October 9 or at the Prince Conference Center in Grand Rapids on October 14. Register by clicking the "Workshops" Tab to the right.

Federal Housing Tax Credit

What is the first time homebuyers tax credit, who is it for and what are the benefits?

www.federalhousingtaxcredit.com

A History of Freddie Mac and Fannie Mae

1938 Fannie Mae created during the Great Depression as a government agency to ensure supply of mortgage funds. The aim was to boost banks’ capacity to offer home loans by buying up existing loans in exchange for cash

1968 Fannie Mae re-chartered by Congress as a shareholder-owned company, funded solely with private capital

1970 Freddie Mac created to provide competition in the secondary mortgage market and end Fannie Mae’s monopoly

1971 Freddie Mac introduces the first mortgage-related security

2003 US policy interest rates hit a low of 1%, further stoking the booming US housing market

2004 Following an accounting scandal, Fannie and Freddie’s regulator Ofheo requires the companies to raise their level of core capital 30 per cent above previous levels, in effect capping their ability to purchase mortgages

2006 A steep rise in the rate of subprime mortgage defaults and foreclosures lead a number of subprime mortgage lenders to fail. The failure of these companies causes prices in the mortgage-backed securities market to slip

August 2007 Rising defaults on subprime mortgages trigger a global credit crunch

March 2008 Ofheo gives both companies permission to add as much as $200bn financing into the mortgage markets by reducing their capital requirements

April 2008 Ofheo report reveals that Fannie and Freddie accounted for 75 per cent of new mortgages at the end of 2007 as other sources of financing pull back on lending

July 2008 Shares in Freddie Mac and Fannie Mae plummeted amid speculation that a bailout of the government-sponsored mortgage financiers may be required, and that such a bail-out would leave little if any value for current shareholders. Frantic trading on Thursday in New York dragged shares in both companies down to their lowest levels since 1991

September 2008 The US government seizes control of the troubled mortgage groups in what could become the world’s biggest financial bail-out. The government’s move, its most dramatic since the start of the credit crisis, is aimed at ensuring the two groups’ woes do not cripple the country’s housing market or worsen to the point that they fail and send shockwaves through global markets

Source: The Financial Times Limited 2008, A history of Freddie Mac and Fannie Mae

US Government Bails out Fannie and Freddie

$100 Billion, yes, with a "B". Over the weekend, the US government takes over the two huge mortgage guarantors. Until now, they were sanctioned by the government, but this morning, the language is much stronger. We own them now - you and me - and we'll vote for their new president on November 4th. And by the way, the $100 Billion is likely to be invested in each of the companies, not the two combined.

Notable Quotes from the Article:

"These necessary steps will help strengthen the U.S. housing market and promote stability in our financial markets. Bernanke said"

"James Lockhart, the head of Federal Housing Finance Agency which will now oversee Freddie and Fannie, said that the recession in the housing market ultimately ate away at the two firms' capital."