TIMING THE MARKET.

Is The Long-Anticipated Correction Finally Here? The market lost about 5% last week; however, I have little faith in my ability to get in and out of the market at the appropriate time. As a result, I may make a few adustments but I will always be allotting some of my investment capital to the stock market. There are numerous examples that show most investors "shoot themselves in the foot" when they try to get out of the market to avoid a downward correction. As an example, consider a recent article in the AAII Journal where they published a list of 15 mutual funds that returned from 10.1 to 19.2% per year over the past ten years. When they looked at the average returns received by the average investor in these funds, none of these produced a positive return for their investors. The problem is that most folks make investments around market peaks and get discouraged and pull their money out after a downward correction. We observed this same behavior from some clients during the recent severe market sell-off of the past 2 years.



One investment principle I always follow is never to buy a stock just because the price went up and never sell just because the price went down. There are many reasons to buy or sell a stock but reacting to price fluctuations never seems to work for me. In a sentence, my philosophy can be summarized as: Buy good companies that offer me an opportunity to start receiving a return on my investment right away. For example, over the past18 months I have accumulated 2000 shares of AT&T at an average price of 30.77. Today, the stock sells for around $25.39. If I sold the stock today, I would have a loss of more than $10,000. While there is no way to put a positive spin on this, one bright spot is that I have generated $6,500 in option premiums and $2,440 in dividends during this holding period. This cash flow, coupled with the fact that I still own 2000 shares of a good company, allows me to sleep at night.

Still Not Getting Around Too Well. Although my back is considerably improved, I still am limited in my mobility. I can get around the house and yard; however, I don't have the courage to navigate the airport and fly to Denver. I will keep you informed as to what my travel plans are.

A FEW INVESTING TIPS FOR THE NEW DECADE.

This Year Finds Me A Bit Immobile. I am not sure what is causing this back problem but, as of today, I can barely walk. As soon as the weekend is over, I'll seek medical attention. I am tired of doing nothing so I thought I would put down a few thoughts on what we might expect for next year. As most of you know, I have always believed that you have to have a set of assumptions about the future in order to make sound investment decisions. Although, you can probably never plan for occurrences like those of the past two years, you have to play attention to what's going on and plan accordingly. Here are a few ideas.

Interest Rates Will Go Up Across The Board. Duh! You have probably heard this from a hundred sources. While all of these sources can be wrong, I don't think so. The real question is what are the implications. Some of the obvious ones are: Don't hang in there with an adjustable rate mortgage unless you have a firm exit strategy in place. Possible exit strategies are, 1. Pay off the loan. 2. Sell the property. 3. Refinance now before rates go up.

Don't tie up your cash in long-term, fixed- rate investments. You don't want to increase your yield by buying a 5 year CD instead of a 1-year. If you buy a 10-year bond, you will either have to stick with a low yield for 10 years or sell early at a substantial loss. If you insist on staying in so called safe investments, keep your investments short term for now.

There are a number of other implications from increased rates, but those are a couple of the major ones.

The Stock Market Will Become More Volatile. This is a prediction you may not hear elsewhere. Volatility is a measure of fear in the markets. Right now it is at a major low. If we have a correction, (as many analysts, including me have predicted) volatility should increase. Again, we need to decide the implications of this increase. My major strategy involves options.

Options prices go up with increased volatility. Although there are a number of factors that influence option prices, if all these are constant, option prices are directly correlated with volatility. In periods of low volatility, buying a long-term option is sometimes better than buying the stock. For example, suppose you believe the long-term prospects for Johnson and Johnson are favorable. If you want to buy 1000 shares, it will cost you $64,000. A better move might be to buy an option to purchase Johnson at $60 per share anytime between now and January 2012. You can buy this at $8,150 for 1000 shares. This strategy is not without risk; however, your maximum risk is limited to the price of the option as opposed to 64,000 with the stock. If the market becomes more volatile the option price will increase even of stock prices stay the same. Long-term options also increase with increasing interest rates. I am certainly going to emphasize this strategy in my own portfolio.

This does not mean I recommend it for do-it-yourself investors. I do recommend that you spend some time learning about the details of option investing. In order to do this, you need to spend time studying McMillan's book Options a a Strategic Investment. I've been studying this book for 1o years and I still find new things to help me invest in this area.

I Have Left Out A Lot. This post is just a few ideas to help you with your financial management during the next year. Stay tuned for others.