Money Matters Radio Show #841

Notes March 4, 2007

This past week we got another lesson in the volatility of the stock market and the imperfection of the computer trading system that tracks stock market averages such as the widely followed – although largely irrelevant – Dow Jones Industrial Average.

I was in New York Tuesday when we saw the biggest down day since September 2001, and the eighth-biggest point drop in the history of the Dow Jones Industrial Average. Wednesday the New York tabloids screamed with headlines such as HOW NOW DOW? The TV anchors somberly intoned about a global market meltdown.

Friday, the market had another bad day and we finished this week with the Dow 600 points off of its record high.

The fact that we have had a correction comes as no surprise. Market watchers have been warning for weeks that stocks had been in a sharp upturn that could not continue. The old saying -- stock prices do not go up in a straight line without a correction turned out to be true – again. What surprised some people was the sudden sharp move downward on Tuesday, caused as we now know by a computer glitch. The standard advice – hang in there.

As the market climbs, the point declines in averages like the Dow will appear larger, although in percentage terms a decline of 1 from a high of 10 is the same as a decline of 10 from a high of 100.

However, it also points out what everyone should know by now. Stocks are volatile. They will continue to be volatile and may get even more volatile. The market gyrations of the past week should not be ignored and there are lessons to be learned.

• Stocks are very long term investments. A good holding period for stocks should be about 10 years. If you are 100% in stocks in your 401k with one year to go before retiring and in need of switching to income when you retire, then a money market fund is where you should be right now. Who knows what will happen the rest of 2007? My attitude is that I am in my stock index fund in my 401k because I don’t need my money for 15 years. This week means nothing to me – nothing.
• Speaking of 401k’s --- a drop in the market is good news for the long term investor in a 401k. As the market drops, you buy more shares than you did when the market was up. This is known as dollar cost averaging and every major study shows it is the single most powerful method of investing for consumers seeking to save money for retirement.
• Great quality companies that you own remain great quality companies. If they are dividend paying stocks, the sharp decline in the resale value of the stock did nothing to change its dividend payout to you as the holder of the stock in that company.
• If you are still relying on stock funds to grow each year and supply you with income for spending, this downturn proves again what a folly that approach is. If you need income, you need income investments that provide steady returns of around 7%. These are closed-end income funds, real estate funds, real estate stocks known as REITs, energy trusts and many more. For a complete discussion of income investments see the excellent web site www.incomeplanner.com or if you have a larger sum of money than you are comfortable with handling yourself, sit down with a fee-only financial planner who is an expert in income investments. I have assembled a team of such experts here in Atlanta --- you can come in for a free one hour appointment with any member of my Money Team by calling my office or sending me an e-mail --- details on the web site for this radio show www.moneybulletin.com (E mail me mikek@yourweatlh.com)
• A market decline will again show the inherent lies of the people selling variable annuities that in a market downturn these private plans supply a guaranteed income of 5,6 or 7%. Should the market drop this year, a withdrawal from a private variable annuity reduces your account by the amount of the withdrawal. The so-called income guarantee is not available for a withdrawal – something that comes as a huge shock to the holder of the annuity who takes money out when the market goes down.

Important news about one of my favorite real estate stocks – HR – Health Care Realty Trust. This stock has been paying a dividend between 6 and 7 percent for years. However, now the company is making a major move that deserves your attention.

Healthcare Realty Trust Inc. will sell its portfolio of senior living assets for $400 million and will use proceeds to pay a special dividend. The sale is expected to net the company about $57 million. It involves selling 62 properties and 16 mortgage investments. Following the sale, the company will have about $1.6 billion invested in 177 real estate properties and mortgages.

The sales are expected to close in the next 60 days. Proceeds will be used to repay debt and a special one-time dividend of $4.75. That dividend is expected to be paid May 2 to shareholders of record as of April 16. The company also said it is declaring a first-quarter dividend of 66 cents payable June 1 to shareholders of record as of May 15.

Healthcare Realty also said it will reduce its quarterly dividend to 38.5 cents per share starting in the second quarter due to the asset sale. The reset dividend will bring its yield in line with its peers, the company says.

The stock has fallen $7 a share from its all time high now. Assuming the news is priced in, the net decline from it’s all time high is just over $2 a share when you factor in the dividend payout of May 2nd. If the price of the stock stays where it is, the new dividend will be equal to a payout of about 4%. Other health care REITS I have mentioned on this show – HCN and SNH currently payout about 5.7%. I would continue to hold a stock like HR, but with the dividend cut, it may also be time for you to consider moving.

Moving to what you say? The answer may be to reduce your overall risk by moving from the individual stock to a diversified closed-end mutual fund. Again, the strength of owning a diversified closed-end fund can be seen by the steady dividends of the Cohen and Steers REIT & Preferred Income Fund – which pays a yield of 7% based on the all time high price of the fund --- and after the recent correction, the new price provides a yield of 7.6%. Those of you who were reluctant to buy at the 52 week high certainly have a buying opportunity now. This does not mean that I am forecasting this fund to continue to pay its current high dividend. However, since the fund is designed to maximize income in a broad diversified portfolio of holdings, it is certainly one of the things you can look at.

The nice thing about income investments is that up or down, they always pay a steady dividend. So, ten years from now, will this real estate fund be more valuable or less? If history is any guide, real estate, like stocks, gets more valuable over a long period of time. While we wait for that increase and while we have an opportunity to buy in a downturn, the rent check from such a fund is extremely generous and you do not have to dip into principal or sell shares to enjoy your income.

My theme for this year is for you to shockproof your portfolio. Divide your investments into four major camps:

• Stocks and stock index funds for long term growth
• Dividend stocks for long term growth and nice growing income to boot.
• Income investments that provide --- income!
• Finally, cash – providing security and peace of mind – although no growth and a lower yield than other investments.

Speaking of income investments, many of the funds we own for clients went up last week in value – as money left stocks for the relative safety of the bond market. The result however is many of those funds are now trading at or near their all time highs as well. So, moving to bonds now is something you do only because you need income, because sure enough, a move up is likely to be followed by a move down here as well.

Once again, it shows the folly of trying to time markets and move from one investment to another. Tuesday showed again how quickly things happen and no matter how fast you think you can be or any money manager can be, you are not going to be able to get out of the way on time.

Having a long term PLAN though does solve all your problems. When stocks go down, you say to yourself “I knew this would happen” and continue on. When stocks go down and you have a short term time frame, be glad you moved into a money market fund a year or two or three before you retired. As an older investor, having cash in the bank gives you peace of mind when your investments are bouncing around. The nice thing is when you are income investments and dividend stocks you are getting money while you wait for the inevitable market recovery from a downturn like the one we saw last week. Instead of HOW NO DOW?, how about WHO CARES DOW?

Finally, the usual note of caution. My commentary is not a complete look at any security or fund and is NOT a recommendation to buy or sell any security. Nothing in my words on this show are meant to be tax or legal advice. As always, make sure the investments you make are appropriate for you and suitable for you.

BEST NEW BOOK OF 2007 – New from John Bogle, founder of Vanguard. THE LITTLE BOOK OF COMMON SENSE INVESTING. In bookstores this week and on line sales underway Tuesday.