Sunday, January 27, 2008

Financial Markets In Turmoil

The media headlines continue to scream about recession and bear markets and the global stock markets continue to sell off with record volatility. Considering we haven't experienced such a violent downturn in the financial markets in several years, I thought I would provide some insight into the history of the stock market to underscore that fact that successful investing requires discipline and a long-term perspective.

Invariably, the individual investor looks to sell out of the market during turbulent times, hoping to spare themselves the pain of market declines and financial losses. This desire to avoid pain is human nature and natural. But in the end, this "market timing" approach to investing can result in significant long-term under performance of an individuals financial assets.

It is my view that for most investors, market timing does not pay. For example, during the years 1985 through 2006, the stock market was open for trading for a total of 5,297 days. Over that period, the S&P 500 produced an average annual rate of return of 12.12% for an investor who was invested in the market for all 5,297 trading days. However, an investor who missed the 10 best trading days during this period, but was invested for the remaining 5,287 days, achieved an average annual return of only 8.56%. An investor who missed only the 40 best trading days achieved a pitiful return of only 1.87%. Finally, an investor who missed the 70 best trading days during the 5,297 day period actually achieved a negative return of <3.02%>.

Clearly timing the market is a risky proposition for the long-term investor. Although some may be successful at market timing sometimes, most are unsuccessful over the long-term. I believe that having an investment strategy that emphasizes the concepts of Modern Portfolio Theory (i.e. using asset allocation, style management, and portfolio rebalancing) will provide a favorable risk/return result of time by managing a portfolio of financial assets in the most efficient manner possible.

Develop a sound financial plan and investment strategy that is appropriate for your personal goals and tolerance for risk and then stick to the plan for the long run, regardless of the current short-term market conditions.

Quote of the Week - 1/27/2008

"It is how people respond to stress that determines whether they will profit from misfortune or be miserable."

-- Mihaly Csikszentmihalyi

Sunday, January 20, 2008

Cause of the Minneapolis 35-W Bridge Collapse Revealed

With little fan fair and not much publicity from major media outlets, the National Safety Transportation Board (NTSB) released their findings of the cause of the horrific 35-W bridge collapse that occurred back on August 1st, 2007 in Minneapolis. According to the NTSB, a design error led to undersized gusset plates being used for the construction of the steel-deck truss bridge that opened for public use back in 1967. According to their findings, the gusset plates, which connect steel beams, were only half as thick as required for the bridge to meet federal guidelines. Thirteen (13) people were killed and more than 100 were injured when the bridge fell without warning into the mighty Mississippi River.

As I discussed in my previous article on this topic titled "The State of US Infrastructure," it was noted that the 35-W bridge was deemed "structurally deficient" by the Federal Government as far back as the year 1990. With the latest NTSB findings, the question of why the undersized gusset plates used for the construction of the bridge were not discovered during the multitude of additional bridge inspections that occurred over its 40 year lifetime.

Although the families of the bridge collapse victims may find some peace and gain some closure with the NTSB's findings, I still personally feel that the tragic accident was preventable and more should be being done now to ensure another horrific disaster like the 35-W bridge collapse doesn't occur again in the future.

Sources used for this article:


Quote of the Week - 1/20/2008

One in honor of the Great Martin Luther King Jr. as we celebrate a National Day of service in his memory.

"Let no man pull you low enough to hate him."

-- Martin Luther King Jr.

Sunday, January 13, 2008

Quote of the Week -- 1/13/2008

"You never know how a horse will pull until you hook him up to a heavy load."

-- Paul "Bear" Bryant

Sunday, January 6, 2008

Quote of the Week - 1/6/2008

"...the safest course is to do nothing against one's conscience. With this secret, we can enjoy life and have no fear from death."

-- Voltaire

Wednesday, January 2, 2008

The Need for Disability Income Insurance

Becoming disabled, whether permanently or temporarily, can be disastrous to one’s personal finances. Although most people think of disability as being confined to a wheelchair or a bed (typically permanent disabilities), temporary conditions can be just as disabling as permanent disabilities. As such, it should be apparent how important it is to protect your self from the perils of such a devastating event.

According to the “Commissioner’s Individual Disability Table A,” the following statistics have been reported :

  • One in three employees will become disabled for 90 days or more before the age of 65.

  • One in seven employees will be disabled for five years or more before retirement.

  • At age 32, disability of three months or longer before age 65 is six times more likely than death.

Further, according to a recent report from the Department of Housing and Urban Development:

  • One out of eighteen mortgages is not paid due to a disability of the mortgage holder.

  • Almost sixty percent of disability claims are denied by the Social Security Administration.

Such facts are scary and underscore how devastating a disability can become to a person’s finances. Yet given such data, people continue to place more emphasis on obtaining life insurance over disability income insurance. Clearly, both types of coverage are necessary in most cases, to ensure an adequate financial plan has been put into place. However, the statistics don’t lie: ODDS ARE THAT YOU HAVE A BETTER CHANCE OF BECOMING DISABLED THAN YOU DO OF DIEING!

The purpose of my message is not to preach, but to make you aware of the importance of looking more closely at the oft-over-looked disability income insurance coverage. Most employers offer some type of group disability income insurance coverage, so look into enrolling during your benefits open enrollment period. Given the statistics mentioned above, you may be glad you did someday.

DISCLOSURE: I am in no way suggesting or providing any specific or general financial planning or investment advice through this article and I disclaim any assertion to the contrary. The information provided is for informational purposes only. Prior to making any important financial decision, please consult a qualified, licensed professional to discuss your specific situation in detail.

Quote of the Week - 1/2/2008

"Wanting to be someone you're not is a waste of the person you are."

-- Kurt Cobain