TAKING CARE OF YOU
ISSUE#: One Hundred-Forty-Six
September, 2008
INSIDE THIS ISSUE:
1. Active Investment Management
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2. Markets
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3. Current Best Funds
=
4. Comprehensive Financial Planning =
Find Tuning Strategies
Credit Crisis/Market Conditions
Issue# 146 Fund Changes/Why
Teaching Kids/Grandkids to Fish
ACTIVE
INVESTMENT
MANAGEMENT
1. ACTIVE INVESTMENT MANAGEMENT
OBJECTIVE
•Participate In Up Markets
•Control In Down Markets
You’ve heard R.O.I. state many times that we DO NOT KNOW what is going to happen
in the short term. We BELIEVE that in the long term markets will go up (assuming we
are in a Secular [i.e., long-term] Bull or Blah Market and not a Secular Bear Market). So
what are “Fine Tuning” strategies, and why does R.O.I. employ them?
ALLOCATIONS
•Asset Allocations
(Secular/Cyclical Markets)
•Opposite Categories
•Different Classes
•Independent Classes
“FINE TUNING” STRATEGIES
Why does R.O.I. use “Fine Tuning” strategies when R.O.I. DOES NOT KNOW
what is going to happen in the short term? Sometimes things are such a: (1) Sure
FILL ALLOCATIONS
bet; (2) Constant enough; or, (3) So good or so bad; that R.O.I. is willing to make
•Use Best Funds
•Monitor Choices
some SMALL bets, e.g.:
1. Sure Bet: Remember the Y2K End of The World Scare, i.e., between
CONTROL SWINGS
•Diversify Manager Styles•
12/31/1999 11:59:59 p.m. and 01/01/2000 12:00:00 a.m. all the computers,
•Control Sector
technology, satellites, utilities, banks, air control terminals, et. al., would shut
Concentration
•Allow Fund Managers
down? Everyone was positive something bad would happen. As you well know,
To Make S/T Decisions
•Rebalance
virtually nothing bad happened. Well R.O.I. had made some SMALL “Fine
•Fine Tuning Strategies
Tuning” strategies for Y2K, and thank goodness we made SMALL changes,
ADVISOR/CLIENT
because we didn’t miss much of the wonderful upswing that actually occurred in
•Motivate Advisor
early 2000;
•No Conflicts
•% Of Assets Basis
2. Constant: Summers seem to be dead or down periods. Recall that for several
•Help Build Business
summers R.O.I. implemented some SMALL summer “Fine Tuning” strategies
that worked very well for us during those common summer dead or down
periods;
3. So Good or So Bad: Periodically we have implemented some “Fine Tuning”
strategies because things have been very good (e.g., during much of 2003 to take advantage of the
continuing Cyclical Bull Market that started in late 2002) that worked extremely well for us, or very bad
(e.g., (1) After 9/11/01 we bought some gold mutual funds to help protect against possible, further
disastrous declines, but gold went down quickly and we soon sold out – this didn’t work, but our other
allocations worked well during the October–December growth spurts; (2) Early 2002 we cut back on
long term bonds because interest rates were obviously going up – this didn’t work because interest rates
didn’t go up; (3) In early Summer 2002 we replenished our long term bond positions, and in July we
bought some gold mutual funds and some “short sale” mutual funds -- they all worked very well).
“TAKING CARE OF YOU”, Page 2
Over all, our “Fine Tuning” strategies have been a great success, but R.O.I. is not so haughty to think we know
what is going to happen for sure in the short run, so we will continue to implement SMALL (though larger
during Cyclical Bull Markets [late 2002 through 2003] within Secular Blah Markets [2000 through 2010+, ?])
“Fine Tuning” strategies. The professional terminology that is akin to “Fine Tuning” strategies is Dynamic
Asset Allocation (entirely moving in or out of asset classes). We do Dynamic Asset Allocation in a minor way
so we call it “Fine Tuning” strategies. Aggressive Dynamic Asset Allocation can lead to “Timing The Markets”
which R.O.I. believes is eventually a big “loser’s game”.
2. MARKETS
Credit Crisis/Market Conditions
One of the major reasons the credit markets have recently had so much trouble is due to the deep connection
between the banking system and the housing market. As the housing market went south so did the credit
position of many banks. Ever hear of Citibank, or Wachovia, just to name two? The point is, as the housing
market went, so did the credit position of the banking system as a whole and, more importantly, its ability and
willingness to
lend.
In the past month or two the housing market has been looking as if the intensity of the decline is easing. One
notable sign is that the rate of decline of home prices is easing off and in July nine of twenty metropolitan areas
actually showed price increases, although the entire index declined. While improving performance for housing
has been showing up, the financial conditions for housing have not followed suit. And that is the reason why
the takeover of Fannie and Freddie is so important.
The two are by far the major source of funding for housing. They buy the mortgages that mortgage lenders
make. If they are not there, who knows how much mortgage money will be available, especially now that
mortgage is a four-letter word. The two have been badly wounded by the collapse of the housing market. They
have managed to function, but the markets have been asking, how much longer?
Basically, what happened was that the source of funding for Fannie and Freddie has all but dried up. That is
why the government acted to revive the source through the good credit of the U.S. Treasury, and if need be,
provide some of the source itself.
Now, how does this government action affect us as investors? This interference will allow the small
improvements that we have seen in the housing market continue instead of being stopped dead in its tracks.
Morningstar, for example, commented, “We’re likely done lowing our fair value estimates for
homebuilders.”
If the Fed’s action continues to stabilize the housing market, credit will flow more freely. It is extremely
important that this occurs if the economy is to pick up. Finally, we should see the Fed’s interest rate moves
showing up where it matter, in the bond market.
None of this means that the economic data are suddenly going to depict an economy that is on the move.
Nor are the employment numbers next month going to show a plunge in the unemployment rate. Neither
“TAKING CARE OF YOU”, Page 3
the economy nor the data work that way. What the data are going to show with a lag is that the
economy is improving.
Recently, the national and international stock markets have really taken a beating. These deep down swings have
been caused mainly by the bankruptcy of Lehman Brothers and the liquidity struggles of AIG. This is a very
difficult time for all of us and may be a very scary time for some of you. R.O.I.’s opinion is the world is not
coming to end. The world is experiencing the affect of the bursting of a large real estate bubble that has lead to
huge problems in the financial sector. These problems will eventually come to an end.
We feel it is an unwise decision to put everything in cash now. If you put everything in cash now you are
selling low. Not just when the U.S. stock market is low, but when almost everything is low. Your portfolios
are invested in the U.S. stock market, international stock markets (both developed countries and emerging
markets), U.S short-term and long-term bonds, international short-term and long-term bonds, national and
international real estate, commodities (oil, gold, silver) and other areas. Currently, most of these areas are
down due to the issues listed above. The likelihood that all of these investment areas stay down for a long
period of time is very unlikely. We are also entering the fall season, and generally the fall and early
winter are the best times of year for the stock market. We are also in an election year, which, generally,
is a good year for the stock market.
R.O.I. is currently making small adjustments to clients’ portfolios to provide more protection to them in
case of further market downswings due to more problems in the financial sector. These changes consist
of allocating more dollars to cash and bonds and we are considering shorting (buying funds that perform
well when the U.S. stock market does not) the U.S. stock market even more than we currently are. R.O.I.
is here for you and will be happy to visit with you about your particular situation. Please feel free to
contact us to visit over the phone or come in and have an annual review
3. CURRENT BEST FUNDS
ROI’S MPT INDEX*
ROI’S “BEST FUNDS”**
LAST MONTH
-.5%
-.8%
’08 YEAR TO DATE
-8.1%
-9.6%
1/1/97 THROUGH ‘08
+ 81.6%
+118.5%
* ROI’s MPT INDEX = An index based solely upon one Modern Portfolio Theory type of Asset Allocation to each of the following
12 Asset Classes, assuming from: (1) 1/1/97, an 11% Target Re
turn (i.e., 70% in Stocks; 15% in Bonds; 15% in Anti-Inflation); and, (2) 3/1/03, a Moderate allocation (i.e., 50% in Stocks; 25% in
Bonds; 25% in Anti-Inflation); using the average returns of all mutual funds in each Asset Class, Rebalanced on a monthly basis (data
supplied by Morningstar).
** ROI’s “BEST FUNDS” = Using the accumulated yearly IRR % of an actual client’s account that uses the same Moderate Asset
allocation as in ROI’s MPT INDEX, but includes all of ROI’s other strategies.
ISSUE# ONE HUNDRED-FORTY-SIX BEST FUND CHANGES & WHY?
(Funds or % in < > are new funds and allocations replacing prior choices. Current through Newsletter date.)
STOCKS
Aggressive Growth
Janus Orion <108%>
Growth
BONDS
US/LT, ST, Mtg, Convertible
<Calamos Gth I> (58%)
WF Adv S/T Gov (66.67%)
<MFS Gov> (92%)
“TAKING CARE OF YOU”, Page 4
American Cent Heritage <175.0%>
Pro Funds Ultra Mid (119%)
Small Cap
Brown Cap Smal Co. (87.5%)
ING Small Co. (87.5%)
Equity Income
W/F Adv. Cap. Gth Inv (100%)
Stock Index
Fidelity Spartan Market Index <158%>
Overseas: Int’l, World, SC, EM
Janus Overseas <91.25%>
Black Rock Global (75%)
Pioneer Emg Mkts (53.7)
Junk
Pax World High (31%)
Global
<DWS Global Bnd> (100%)
Morgan Stan Ins Em (87.5%)
ANTI-INFLATION
Asset Manager
Ivy Asset Strategy (100%)
Pro Funds Bear <18%>
Ntrl Res, Utilities & Metals
<Alliance Ber Util> <75%>
Van EckGlobalHrdAs <56.26%>
Real Estate
Pimco RE Real Rtrns (139%)
Ing Global RE <72.25%>
THE “WHYS”
1. Allocation Changes- Since our last newsletter we have decreased our allocation to our Aggressive Growth
Asset class (Janus Orion) and increased our Growth Growth (American Cent Heritage) allocation. The
decrease was done to control participation in a down market and the increase was in anticipation of an
upswing in the Growth Growth asset class. We increased our allocation to the Stock Index class (Fidelity
Spartan Market Index) because we anticipate an increase in this class due to an increase in the U.S. indexes.
We decreased our allocation to our Overseas International Asset class (Janus Overseas) because of
the negative economic news coming from these areas. We decreased our allocation to our Shorting Asset
class (Pro Funds Bear) in order to sell high due to the huge downswing in the U.S. stock market on
09/15/2008. We increased our allocation to Utilities class (Alliance Ber Util) because we anticipate
improved performance in this area. We decreased our allocation to the Natural Resources class (Van Eck
Global Hard Assets) in anticipation of a decrease in the price of gold and oil. We increased our allocation to
our International Real Estate class (Ing Global RE) as a result of strong recent performance.
2. Calamos Gth Inc for Fidelity Convertibles- We replaced Fidelity with Calamos because the Fidelity
Convertibles fund had a large position in gold that was performing poorly.
3. MFS Gov for Loomis Sayles- MFS Gov has had better performance recently and appears that it should
perform better in the long-term future.
4. DWS Global for Frank Tem Hard Cu- Frank Tem Hard Cu has lagged behind its peers over the last
few months and we feel a change is needed. DWS has had strong long-term performance and we anticipate
this will continue.
5. Allianz Bear Util for MFS Util – Allianz has outperformed MFS for some time now and we think it will
be a good choice for the future due to its strong recent performance and high star rating.
[R.O.I. tracks each month’s consensus predictions for the Dow Jones Industrial Average (DJIA) for the
upcoming six months, by the panel of “experts” in the Investment Advisor Magazine.]
THE PREDICTION WAS:
THE DJIA WAS: THE PREDICTION WAS OFF BY:
“TAKING CARE OF YOU”, Page 5
MADE
FOR
DJIA
ACTUALLY
POINTS
PERCENT
5/07
10/07
12276
13676
- 990
- 7%
6/07
11/07
12491
13176
- 990
- 7%
7/07
12/07
12686
13549
- 863
- 6%
8/07
1/08
12981
11971
+1010
+ 8%
9/07
2/08
13353
12348
+1005
+ 8%
10/07
03/08
13367
12100
+1267
+10%
11/07
04/08
13305
12338
+ 967
+ 8%
12/07
05/08
13277
12957
+ 320
+ 2%
01/08
06/08
13446
12265
+1181
+ 9%
02/08
07/08
13320
11170
+2150
+16%
03/08
08/08
12939
11658
+1281
+ 9%
04/08
09/08
12498
10917
+1581
+12.7%
TWELVE MONTH ERROR RANGE =
-990/+2150
-7%/+16%
!!R.O.I. believes it is impossible to predict the short-term future. If the “experts” can’t reliably do so what
chance do you or R.O.I. have? Should we make large bets on short-term predictions?
4. COMPREHENSIVE FINANCIAL PLANNING (CFP)
TEACHING KIDS/GRANDKIDS TO “FISH”
COMPREHENSIVE
FINANCIAL
PLANNING
INCOME & EXPENSE
•Emergency Planning
•Budgeting
•Taxes
KIDS/GRANDKIDS’ GOALS
•”Teach Them To Fish”
•Missions, Education, Marriages,
and Home Down Payments
RETIREMENT
LONG TERM CARE
DEATH & DISABILITY
IDENTITY THEFT
PROTECTION
ESTATE PLANNING
BUSINESS & ASSET
PROTECTION PLANNING
This title comes from this line of thinking: What is better to do, to teach a needy
father how to fish, or simply give him a fish? You could certainly afford to give the
needy father a fish, maybe even enough to feed his whole family a meal of fish –
wouldn’t you be stingy or worse, if you didn’t? Why go to all the trouble to teach the
father to fish – the time invested would certainly cost you more than the cost of one
fish and probably less than the cost of feeding the whole family a meal of fish – so
why not feed him and his family a meal… after all, are we “cheapskates?”
Here is why. You can’t afford to feed the needy father, and especially his whole
family, for a lifetime, and, lifetimes to come. But if you teach the needy father how
to fish, it is likely he can feed himself, and, his family, not for just one meal, but
possibly for life. And, if he is a good father, what will he teach his children? He
will teach them how to fish, and encourage them to find ways to fish even better than
he. Thus, you may not only help the father, you may help generations. Now what
is better to do, to help the father just once, or to help an individual, a family and a
generation, for possibly lifetimes?
Now, father and mother (grandfather/grandmother), who do we love most and
owe the most to – some stranger, or our own children (and grandchildren)? Have we
taught any children (or grandchildren) how to “fish” lately, i.e., to budget their
allowance, have an emergency fund, reconcile a checking account, work-saveinvest for their own mission, marriage, education and home down-payments (it is o.k. to financially help
kids and grandkids, but it is so much better to do it in a way that develops their attitude they did most or
all of it by themselves)? Or in other words, are you preparing them to financially take care of
themselves? Or, are you teaching them to be always financially dependent upon you? Have you been
“TAKING CARE OF YOU”, Page 6
willing to spend the time and effort required to teach, or are you going to just keep “handing out fish” to your
children and grandchildren (by the way, relative to kids’ mission, marriage, education and home downpayments, we are talking about TRUCK LOADS OF FISH!)?
TAKING CARE OF YOU” is a publication of R.O.I., a Registered Investment Advisor (RIA), a member of, and is produced for the
sole benefit of R.O.I.’s clients. Editors: Benjamin A. Olson, J. Grant Olson and Ronald H. Olson. 351 East 140 North, Lindon, Utah
84042-2004, 801-785-3254, 801-785-3244 (Fax), 801-580-7672 (Mobile), ronolson@itsnet.com (e-mail), www.roionweb.com (Web
Site).