Money Matters Radio Show #816

Notes for September 10, 2006

First this morning, a big thank you to Centennial High School in Roswell and to Lisa Poole with the Metro Atlanta Payroll Association, for allowing me to take part in Friday’s extraordinary special class on financial literacy, which was video conferenced live to high schools throughout Fulton County. Lisa and I teamed up to teach students about dealing with paycheck issues --- withholding, taxes and of course, investments. It was an extraordinary experience --- and the students seemed to get a lot out of it --- judging by their pointed questions to the two of us. Thanks to Lisa and to Centennial High for what was a terrific experience for me Friday.

The next Money Matters class will be held Saturday morning September 16, 2006 from 10am to 12 noon at Rehoboth Baptist Church in Tucker. Mike will talk about financial planning, estate planning and the best things you can do with your money.
We ask that you pre-register for the course so we can reserve a seat for you. To do so, simply send an e-mail to my assistant Barbara or call our office and speak to Barbara, Holly or Amanda who will take down your name.

Barbara's e-mail is barbara@yourwealth.com.
Or to register by phone, call 404-531-0018 at Capital Investment Advisors, Inc. - the financial planning office where Mike is a senior partner.

A note of caution to pass along to you this week about the closed end income funds I have talked about with you for the past few years. Discounts have narrowed substantially and virtually all of the funds I use for my clients – yielding well over 7%, are now trading at their 52 week highs. Traditionally, there is year end tax selling that hits these funds, especially before they make December capital gains distributions. Buying into these funds now with a large lump sum therefore may not be a good idea. Instead, I suggest that if you are looking at these income funds that you either hold off until January, or dollar cost average into the funds over the next five to six months.

Now, I know I should not do this, but I can’t resist…. About a year ago a listener to this show chastised me as income closed end funds dropped in value as the Federal Reserve pushed forward on its campaign to raise interest rates. That listener said at the time I was trying to fool her and she felt that I misled her as she was not expecting the funds to drop so suddenly after she invested. My answer at the time was simple – if I had known ahead of time that the funds would drop, I would have held off naturally. But these are not CD’s and Money Markets – these are funds with market risk and with rising rates, income yield sensitive funds of all sorts took a hit. I felt her criticism that I was trying to fool her or mislead her was at the very least – misdirected anger at the marketplace. It was also, may I be very blunt – plain ignorant. This morning, I would ask that listener to take another look at those funds she owned and see where she would have been if she had held on for a year, instead of five months.

Let me repeat advice I have given on this show many times. Short term investments are CD’s, money market funds and the like. When you take risk in stocks, bonds and real estate, you want to hold these investments for 10 years and longer, not five months. While I am on this subject, let me also address the listener who sent me a scathing letter a few years ago when a guest on this show recommended an energy stock – Kinder Morgan. The letter dressed me down for being dumb enough to allow anyone to recommend a stock so awful, so terrible that any idiot would know how awful it was. Well, we know what happened since that letter to energy stocks. On top of that, Kinder Morgan has now been bought out. At the time of the letter Kinder Morgan was selling for just under $40 a share. In the coming weeks, shareholders of Kinder Morgan will be getting cashed out in a buyout – for $107.50 a share.

Let me emphasize again – that when securities are mentioned on this show, it is for educational purposes only. I do not give buy and sell recommendations. When you hear discussions of investments, they have good points and they have bad points. Only you can balance these things for yourself. Investments are long term and you have to understand the upside and downside. The only way I know to balance market risk is asset allocation – putting your money into a variety of things.

It is instructive to note though that had these two listeners understood market risk and reward and had held on for more than a few weeks or months, these excellent investments would have turned out to be extraordinary vehicles for their portfolios.

Trading and market timing is for fools and newsletter writers who make a living selling their wares to people who believe their lines. Selling an investment because it is now at a lower price is a terrible idea, as we can see so clearly with these investments this morning.

When do you sell an investment? There are many reasons to sell and let me list a few:

• The nature of the fund has changed. This is known as style drift. For example, you bought the fund because it was a mid-cap value fund, but it has become a large cap growth fund. Sell it to rebalance your asset allocation.
• The fund manager has left. I bought the fund because of the manager, not the fund. If I am not convinced the replacing manager is as good as the one I originally hired, I leave that fund behind.
• A financial emergency has come up and I need the money.
• I am retiring and I need to switch from growth to income.
• I no longer like the direction of the company whose stock I own.
• I no longer like the management of the company whose stock I own.

Do I sell because the stock or the fund has dropped in value? NEVER!! In fact, if the stock or fund is as good as ever, I will buy more shares instead of selling, as long as it fits into my overall plan. Questions – call the show or e-mail me – mikek@yourwealth.com.

Check out manager changes for the month of September at www.fundalarm.com.

A study by Merrill Lynch researchers and high-yield strategists Christopher Garman and Oleg Melentyev, while limited in scope, suggests some interesting findings on market reactions to recent terrorist attacks around the globe. Markets, the research suggests, may be more resilient to these disruptions than we might think. See the full discussion of this study at www.morningstar.com - article entitled Fund Times: Global Terror's Impact on Capital Markets.