Credit has seized at home and abroad. Stable funds scandalously collapse. The market lies somewhere between bearish and total hibernation. Recession predictions are definitely for long term. So what’s an investor to do? Where can one even temporarily store working business capital?
“Every ten years, someone finds a new way to screw up the market,” notes Roy Williams, founder of Prestige Wealth Management Group. “And as it plummets, the bears come out, knowing what we all know: the market will eventually rise and then killings may be made.” Williams’ optimistic perspective is designating the end of 2008 as a time of opportunity for those who have learned the lessons of history and can avoid prior investing mistakes.
* Bonds. “Generally, now is a good time for highly rated bond funds,” says Williams. While the hordes who have currently rushed to hide in 10-year Treasury Bills are receiving a mere 2.17 percent, solid AA bond funds are yielding seven to eight percent.
High rated single bond issues may serve well for the $1 million and up investments, but below that, beware the resale capability. “A $50,000 investment may be able to get buyers in on a single bond buy at 93 cents on the dollar, but when it comes time to sell, his holding is so small that he may be lucky to walk away with 75 cents on his dollar,” says Williams.
* Municipals. As always, the benefits of tax free municipals depends on one’s tax bracket. Generally, those in the top federal tax bracket - 31 percent - will be facing a six percent state liability. Even though we have witnessed municipals compress from 5.77 to 5.5 percent, this still makes them a good deal for that tax level. Those below the 25 percent IRS rate, and thus facing only a two to three percent state liability, will find themselves a better overall return in corporate bonds.
The “secure” factor in securities remains more important now than ever. With this in mind, Williams suggests general obligation municipals, preferably intermediate term instruments. These are backed by the state treasury, as opposed to revenue bonds which are tied to a host of indexes ranging market prices to a bridge project.
* Stocks. Yes, says Williams, now is an excellent time to buy low in the stock market. But before taking the plunge, he advises a brief review of how the market got where it now stands. Early this spring, when all the economic downturn headlines were only proclaiming the record high foreclosure rates, brokerages began to worry. For several years major houses had bundled sub-prime home mortgages, selling some packages, and holding some in immense dollar amounts.
As thousands of home loans became non-producing and credit began to constrict, one financial house after another raced to sell their mortgage bundles. Exactly which mega-brokerage began the rush is still rumored. But the result was a dumping of these funds at 22 cents on the dollar. Since the brokerages had structured these sub-prime mortgage bundles to be held in banks, this meant that the banks had to revalue these assets downwards. Many banks carrying this depressed debt fell below their net capital requirements. And thither we plunged.
The key here is that unlike the Great Depression, there’s no dustbowl - no loss of production capacity, no real loss of actual cash. Vast numbers of people pulled stocks out of the market when the DOW was 14,000, and when the rise returns to around 12,000, the great majority will deem it safe to reinvest. However, now is the time when all prices, even those of fast track firms, are at a nadir. Many investors await the coming of the new President. If Wall Street likes Mr. Obama, the market is sure to take at least a brief, profitable rise. “But if you wait until January 20, you will be too late,” says Williams. “Count on it. The market will rise before Obama steps in. You’ve got to invest ahead of the inauguration.”
Williams suggests taking your 2008 losses while you can claim them on IRS Schedule D, and then investing in a non-speculative, balanced portfolio. “Balance is the prime point. I’ve had a few clients who put all their holdings in energy or emerging market holdings. Some have been faced with an 80 percent downturn, as opposed to the balanced investors who currently survive with only a 50 percent loss,” says Williams.
* Hedge Funds. “In a word -No,” says Williams. “Hedge funds are too non-transparent, and too unregulated for you to know where your money is.” If you are the one managing a hedge fund, the carte blanche secret dealings may serve you well. But that benefits the investor very little, as Bernard Madoff has so exquisitely demonstrated. Doubtless, new regulations for hedge funds are coming. but thus far, the sole government attempt has been to survey the ten top hedge funds, and have them develop a voluntary code of how they might like to be regulated.
While it is cold comfort to those who have lost home, jobs and life savings, such recessions have happened before. We have weathered them and we will endure this one. Indeed, your money will be safe in Government Savings Bonds or your mattress until the crisis has passed. But for very little more risk and a lot more income, dependable investments await. And with a little more courage, somewhere out there is a new enterprise just waiting to make you rich. However much heat you can stand, the market is ready to cook up some profits for its investors. Biz4
Roy Williams has been handling other people’s money profitably for 26 years. A native of Old Bridge, Williams attended Lycoming College in Pennsylvania, graduating with a Bachelor’s in business in l982. He began his financial career, working for Prudential Insurance. He then garnered his Chartered Finance Consultant designation from the American College Bryn Mawr, Pennsylvania. In l994, he answered the entrepreneurial urge and founded Prestige Wealth Management Group, a firm which has been listed by Forbes as among “The Ten Most Dependable Wealth Managers.” Research Magazine has rated Williams as one of its “Top Wealth Managers in America.”
