Faith Based Investing

In a rising rate environment, where do you turn for fixed income ideas?  As we know when rates rise, bond prices fall.  So what’s a fixed income investor to do?  How about considering a few preferred stocks in the portfolio?  Let’s look at some of the pros and cons.

Stocks that tend to pay sizable dividends

Institutional and individual investors buy preferred stocks because they offer fixed dividends – in fact, dividend yields are typically greater than those of common shares.

Preferred stocks are occasionally called hybrid securities, because they have characteristics of debt instruments as well as equities. Let’s review some of their features and pitfalls.

Priority dividend payouts

As the “preferred” adjective implies, these shares are a step above common stock. If you own preferred stock in a company, you will get your dividend first; all the common shareholders will get theirs second. You also have preference if a corporation declares bankruptcy or liquidates and sells assets. In that instance, debt holders are paid first, then the preferred shares, and finally the common shares.

Dividend determination

Dividends paid out on preferreds are akin to coupon payments on a bond. A preferred stock obviously doesn’t have a maturity date like a bond, but it does have a par value, which is used to figure out the payouts. (A good stock research website can help you find the par value and preferred dividend rate of return.) You determine the preferred dividend by multiplying the preferred dividend rate percentage by the par value.

If you need to figure out the market value of a preferred stock, you can do that simply. Divide the dividend amount by the yield (required rate of return stated by the issuer). A visit to a stock research website will give you the yield percentage on a preferred.

Similarly, the price of a preferred stock equals the preferred dividend divided by the yield percentage.

Accumulating dividends

Sometimes a corporation can’t pay dividends to preferred shareholders. If that’s the case, the company will often let the preferred stock dividends accumulate until cash flow improves.

The five kinds of preferreds

Most preferred stocks are cumulative – that is, any missed dividend payments accumulate for an eventual payout. Most preferreds are also callable – that is, the stock issuer has a chance to call (redeem) the shares at par value. Yields on preferred shares sometimes include premiums in recognition of this risk.

Some preferred stocks are convertible, with embedded options allowing you the chance to exchange preferred shares for common ones. (Sometimes a provision is allowed that gives the issuer the chance to call for the conversion.)

Some preferreds are participating – when a company does well, the dividends from these shares may be greater than the published yield. Finally, when a corporation issues multiple rounds of preferred stock, there may be preference-preferred shares; if you own shares from the first issuance, your preferreds take priority over preferreds issued later.

Possible pitfalls

So what is the downside of owning a preferred stock? Well, they do present potential and actual disadvantages. When a market sector heats up and common shares take off, preferreds often lag behind. Interest rate hikes can reduce the value of preferred shares. Additionally, you have no voting rights as a preferred shareholder.

Ratings

There is no “official” rating system for preferred stocks; however, the big credit agencies that rate bonds rate preferreds as well. Standard & Poor’s and Moody’s do, and when they downgrade, it can hit a preferred stock hard. Preferred stocks rated beneath BBB- at Standard & Poor’s or beneath Baa3 by Moody’s are considered junk preferreds.² If you have to go outside of S&P or Moody’s to find a preferred stock’s rating, that’s a red flag – it might mean that it couldn’t get a decent rating from S&P or Moody’s.

A preferred stock investor would do well to research a company’s financial ratios and cash flow, and its interest coverage ratio (higher is usually better).

Consider the variables

Preferred stocks have looked attractive to retirees and others seeking consistent dividends. Rather than explore them alone, you should see a financial consultant who can help you thoroughly understand your options in this area and compare them to other choices you may have.

Are there too many hands in the cookie jar?

There are five major problems with tax-deferred plans at work, whether you have a 401(k), 403(b) or another plan at work.  Here are 5 reasons your plan may be a bad investment:

1st Problem: Limited Choices.

For most, this provides two challenges: the limited ability to screen your investments for moral or social issues important to you and the limited ability to find the best investment vehicles (place to get the highest potential return).

2nd Problem: No personal relevance.

When you simply select funds from a plan at work, there is no personal meaning or connection to your life. You are handing your money over to someone else who does not know you or anything about your situation. Your faith is in the hands of a money manager or team of managers and fully out of your control. Why do you think so many people stop contributing to a 401(k) when the markets are going down? If instead your investments had relevance to your life and were in full alignment with your faith, values, belief, and mission in life don’t you think you would continue investing?

3rd Problem: High Fees.

Most retirement plan fees are hidden beneath layers and layers of costs assumed by mutual funds. There are the widely publicized expenses reflected in the prospectus of the mutual fund listed under the expense ratio. But there are also broker fees, trading costs, commissions, and other fees that you can find only in what is called the Statement of Additional Information (SAI). These additional expenses are difficult to determine, but a 2007 analysis by Virginia Tech, the University of Virginia, and Boston College revealed that the average SAI charge is 1.44 percent per year. This is in addition to the 1.56 percent charged by the average Annual Expense Ratio. In other words, the total charge of the average mutual fund is 3.00 percent per year.

4th Problem: Ticking Tax Time Bomb.

Make no mistake about it. The government knows how to generate future tax revenue at your expense. They do this by allowing you to take tax breaks today in exchange for much larger tax bills in the future. Many people just look at the tax benefits of tax deferral and neglect to factor in that what used to be a $5,000 tax write-off is now a tax bill for tens or even hundreds of thousands of dollars. Uncle Sam is no fool. He’s figured out how to entice you into funding his future spending.

5th Problem: Lack of Liquidity and Accessibility.

If you need access to your funds prior to age 59 1/2, your retirement plan generally will have a 10% penalty and you may also owe federal and state taxes. Often a withdrawal from a retirement account can cost you 40% of more. That means every $10,000 would lose $4,000 in taxes and penalties…that’s not what you can easily accessible. Of course there are exceptions to the rule, but in most cases, your retirement plan at work is very inflexible and costly if you need to access the funds.

Also SEE:

401ks: see what you’re really paying

Is Nationwide on your Side?

“Every moment of our lives we are either growing or dying…” – Robert Cooper

“Without continual growth and progress, such words as improvement, achievement, and success have no meaning.” – Benjamin Franklin

We are either growing or dying spiritually.  There is no status quo!  God calls us to a life of commitment to Him.  Our finances reveal our commitments in life.  Where we spend, invest, and give our money reveals our priorities in life.   As we grow in our faith, we should long to have our finances line up with God’s word.  This means that we need to make a commitment to Him to make changes in our lives.  Over the next year we will look at various ways to combine our faith and finances.  Your journey begins today. 

Make a commitment to God that you will seek to learn His ways.

Psalm 37:4-6 sums it up:

 Delight yourself in the LORD and he will give you the desires of your heart. Commit your way to the LORD; trust in him and he will do this:     He will make your righteousness shine like the dawn, the justice of your cause like the noonday sun.

Judy came to see me frustrated and upset. She was tired of the long hours, unfulfilling work, and lack of passion for what she did.  As a telephone worker for nearly thirty years she had enough.  She couldn’t take it anymore.  When the company offered her a voluntary early retirement package, she thought it was an answer to prayer.  However her lifestyle of living beyond her means had overtaken any chance of accepting this package.

In order to prepare her for a future package and as a requirement to become a client of mine, I made Judy sign a commitment that she would change her habits and open her mind to learn new strategies to improve her financial situation.  She needed to make changes and commitments in order to have any chance of ever retiring.  The commitment was her first step in the right direction.

The definition of insanity is doing the same thing over and over and expecting different results.  If you do not commit to change, you will not learn and get past your mistakes.  Turn to God today and ask for the strength and discipline to seek change.  Make a commitment today and stick with the plan.

In what areas is change needed?

What are your biggest financial obstacles today?

What are some steps you can take to change your situation?

Someone asked me the other day, why I recommend and use FolioFn.  Who are they and why use them? 

FolioFn:     

The company was founded in 1999 by Steven Wallman, a former commissioner of the U.S. Securities and Exchange Commission widely recognized for advocacy on behalf of investors. We are based in the Washington, D.C. suburb of McLean, in the heart of the Northern Virginia high-technology corridor.

Mr. Wallman gained a unique perspective on Wall Street during his years as a Commissioner of the U.S. Securities and Exchange Commission. He saw first-hand how the needs of many investors were not being fully met by existing financial institutions and existing financial investment vehicles. Folio Institutional was founded, in part, to provide advisors and other professionals the tools they need to deliver better solutions to their clients:

With Folios, investors of all sizes and investment styles can enjoy the advantages of a flexible and diversified portfolio.

Folios help reduce the drain on your earnings from fees, trading commissions, and capital gains taxes.

Folios, in contrast to mutual funds, provide you transparency and control over the securities your money is invested in.

Here are five reasons, I use FolioFn:

1. Screening portfolios:  We are able to screen out of our portfolios, companies involved in:

* Abortion

* Pornography

* Homosexual activism

* Violent and sexually explicit entertainment

* Embryonic stem cell research

* Gambling

* Tobacco

* Alcohol

2.  Unlimited trading:  We also can do unlimited trading for a flat fee, saving our clients hundreds or even thousands of dollars a year in trading costs!

3.  Low cost diversification: We can build our own mutual funds using state of the art technology. Instead of paying upwards of 3-4% to have a mutual fund manage your assets (expense ratio and statement of additional info fees), we can manage accounts for a fraction of the cost of most mutual funds. 

4.  Convenience: All your assets and holdings appear on one statement.  Your account can be accessed 24 hours a day/ 7 days a week.

5. Tax efficiency:  You can control when investments are bought and sold and can harvest gains and losses and take advantage of favorable tax laws.

The market has rebounded … is it poised to keep rising?

Remember when people were getting out of stocks? In the last quarter of 2008 and the first quarter of 2009, some people made the decision to move money into forms of investment with low or no stock market correlation. The recession was going full blast; the Dow was falling. But recessions are temporary, and markets improve.

The recent recovery wowed even the most jaded market analysts. From the March 9, 2009 market lows to the end of the year, the S&P 500 shot up 64.83%, the DJIA gained 59.28%, the NASDAQ 78.87% and the Russell 2000 82.19%. The CBOE VIX, the so-called fear index, dropped 56.14% in that stretch.

Was March 9, 2009 the point of capitulation? Have you heard of that term? It references a point of “surrender” or maximum exodus from stocks to CDs and Treasuries in a bear market. The theory goes that when that point of capitulation is reached, a measured, rational market recovery will begin leading to either a cyclical bull market or (fingers crossed) a new long-term bull market.  

The rebound off the March 9 lows wasn’t measured, it was phenomenal. On August 6, 2009, the head of Goldman Sachs’ investment policy committee declared that “the new bull market has begun.” On CNBC, Abby Joseph Cohen shared her belief that the S&P 500 would finish 2009 in the 1,050-1,100 range, up from a March 9 trough of 666.79. It exceeded her expectations, ending the year at 1,115.10.

Will stocks keep advancing in 2010? There’s an old phrase people like to cite: past performance is no indication of future success. That disclaimer aside, many analysts think that the stock market will realize at least moderate gains in 2010. The mood is certainly more optimistic and the economy seems to be improving.

Will investors be patient? Good question. In late 2008, you had people swearing off stocks. In 2009, some of those same people changed their mind and ran back to stocks. If 2010 brings a correction, will these investors ditch stocks again? History suggests that these short-term shifts may be damaging.

DALBAR, that goldmine of investment research, looked at the behavior of the average mutual fund investor over a 20-year period ending December 31, 2007. The 20-year survey found that while the broad stock market (S&P 500) returned an average of 11.82% over those 20 years, the average mutual fund investor bailed out at times, missed out on great market days, and only realized an average return of 4.48%. This is a really compelling argument for patience and sustained investment. In late 2008, both Warren Buffett and John Bogle made the case that investors should stay in the market, as some major values were available as a result of the downturn.

How are you invested these days? We’ve seen a lot of change in the last three years, and many people have really changed up their portfolios. How about yours? Is your asset allocation still appropriate for your long-term objectives? You might want to talk to a qualified financial advisor today to review where you are at and how you might position yourself for the years ahead.

The 2000s in Review

What did the last decade teach us about stocks, bonds, and commodities?

A turbulent ten years. The 2000s gave us remarkable opportunity and remarkable volatility. They tested our patience, and many investment strategies. They taught us to hold on, hang in there and diversify.

Stocks. Was it really a “lost decade”? It depends on how you were invested. Yes, the Dow ended the 1990s at 11,497.12 and ended the 2000s at 10,428.05, amounting to a 9.30% slip. The S&P 500 lost 24.10% in the same interval. If you had invested a lump sum into an index fund tracking the S&P 500 on December 31, 1999 and left those assets untouched for ten years, you would have ended up with a sizable loss.

Well, that sounds dismal – but how many of us actually invest this way? Very few of us make one lump sum investment and just watch it for ten years. Thanks to diversification, rebalancing and constant inflows of new money, quite a few investors were able to grow their assets and/or outperform the S&P 500 in the past decade.

The fact is, five sectors of the S&P 500 gained 10% or more across the 2000s – health care (+10.85%), utilities (+10.92%), materials (+24.91%), consumer staples (+31.84%) and energy (+102.12%).

Few articles about the “lost decade” mention this notable factoid: the Russell 2000 advanced 23.90% during the 2000s. Mutual funds that focused on buying undervalued small-company stocks gained an average of 8.3% annually in the 2000s.

Outside America, developing stock markets shattered all expectations while the developed markets mirrored American performance. Look at the decade-long gains in key indices in some of the BRIC nations, as measured by CNBC.com: China, +72%; India, +249%; Brazil, +301%; Russia, +863%. Compare all that with the benchmark indices in Japan (-44%), France (-34%), Great Britain (-22%) and Germany (-14%) in the past decade.⁴ Emerging market mutual funds gained an average of 9.3% per year in the last ten years.

Commodities. It was a decade of amazing gains in the broad commodities market. From the end of 1999 to the end of 2009, gold advanced 278.52%. How about silver and copper? Silver gained 208.91% and king copper rose 287.78%. Crude oil rose 210.00% during the 2000s.

How great a decade was it for the commodities sector? Only one notable commodity posted a ten-year loss from 12/31/1999 to 12/31/2009. That was palladium, which retreated 8.98%. On the other hand, we know that 16 commodities gained 100% or more across the decade.

The two biggest gainers during the 2000s were a pair of crops: sugar (+340.36%) and cocoa (+293.31%).

Highs and lows. We are 10 years past the bursting of the tech bubble – March 10 will mark the 10^th anniversary of the NASDAQ’s all-time high of 5,132.50.⁵ And of course, a decade-defining geopolitical event rocked the markets 18 months later.

General Motors and Chrysler filed for bankruptcy protection in 2009; at the start of the decade, so did Enron – the company that Fortune Magazine ranked as “most innovative” each year from 1995-2000.⁶ In 2008, Lehman Brothers, Morgan Stanley, Goldman Sachs, Merrill Lynch, and Washington Mutual either folded, mutated, or were bought up while AIG, Freddie Mac and Fannie Mae were bailed out.

The Dow hit a new high of 11,723 in January 2000, a post-9/11 closing low of 7,286 in October 2002, and then ended 2003 at 10,453 (as the DJIA gained 25.32% that year while the dollar lost 14.67%). The Dow hit new peaks of 11,727 on October 3, 2006 and 14,164 on October 9, 2007. A close of 11,215 on July 2, 2008 officially marked the start of a bear market.

From March 9, 2009 closing lows to the end of the year, the Dow shot up 59.28% and the S&P 500 advanced 64.83%. This led to some to entertain tantalizing thoughts about the birth of a new bull market. Or it is simply a cyclical bull in a secular bear? The jury is still out, as the saying goes; we can hope for the best.

What did we learn? The 2000s taught us lessons about irrational exuberance (companies that had never made a dime were probably not worth billions) and lessons about the value of diversifying your portfolio. We also learned lessons in perseverance – those who stayed invested have seen their portfolios make a strong recovery.

The 2000s put investors through some seemingly unimaginable financial headlines. It was a rare decade, an aberrant one in stock market history – for example, the Dow hadn’t had a negative decade since the 1930s, and it had advanced 228.25% over the 1980s and 317.59% for the 1990s. Will we see it make a double- or triple-digit advance in the next ten years? We don’t know. Past performance is no indicator of future success. Yet the awesome potential of the stock market and commodities markets should not be dismissed – and with economies healing the world over, it is clearly time to look forward and stay invested.

Today is Martin Luther King Day and the markets are closed in his honor.  Martin Luther King, Jr. (January 15, 1929 – April 4, 1968) was an American clergyman, activist and prominent leader in the American civil rights movement. His main legacy was to secure progress on civil rights in the United States, and he has become a human rights icon: King is recognized as a martyr by two Christian churches.^[1] A Baptist minister,^[2] King became a civil rights activist early in his career.

His most famous speech is where he declares, “I have a dream”.  Now I ask you: Do you have a dream?  Is there something deep down inside you long to happen?  Maybe, it’s not as big as Martin Luther King’s dream, or maybe it is.

For me, I personally would like to see a revival in America.  For us as a nation to get back to our Christian roots and place values first in America! Jayperoni.com exists to help people all across the nation put their values first in their finances, in their investments, and most of all in their lives. We are only here on earth for a short time, yet eternity is forever.  As a Christ-follower I strive to help millions incorporate a biblical worldview each day as they face the uncertainties of this world.

My dream is that I help you grow closer to God and achieve the goals and dreams He has placed on your heart.  If I can answer any questions or help you in any way, please let me know.