Special Christmas offer from SMI doubles your giving!

Each year, SMI offers some sort of Christmas promotion. This year, however, our offer is unlike any we’ve done before. This year we want to tap into the real meaning of the season and focus on giving. In fact, this year we’re going to give you a special opportunity to double your giving!

This Christmas, when you give the gift of Sound Mind Investing, SMI will turn around and give to a child in need through Prison Fellowship's Angel Tree ministry. For those who may not be familiar with Angel Tree, it’s a unique opportunity to help moms and dads who are in prison connect with their children. Angel Tree provides gifts and the gospel to children on behalf of parents, including a personal message from mom or dad.

For every SMI web membership or print subscription you give between now and Christmas Day, Sound Mind Investing will sponsor a child. And there is no limit to the number of children we'll sponsor.

It’s not often you have the opportunity to double your investment — guaranteed. But this is one such opportunity. Give the gift of SMI to a friend or loved one, and at the same time give a gift to child who may not get one otherwise this year.

Take advantage of this rare opportunity and give the gift of Sound Mind Investing this Christmas. Your loved one, and someone else’s little loved one, will be happy you did!

Posted by Matthew at 3:26 PM | TrackBack
Category(s): SMI General Announcements

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It's back-to-basics time

Allow me to repeat part of what I wrote in my October editorial (web membership required to access full article, sign up here):

The past two years we've been dealing with [a recession], and some seasoned observers fear the worst is far from over. They advise avoiding the stock market and building your cash stockpile. Another group believes it's likely the economy has turned the corner and the market is looking forward to a recovery. These advisers recommend moving money off the sidelines out of cash and into stocks.

There's also a third group, which is a little harder to pin down as they vary in their expectations regarding economic recovery. What unites them is their expectation that the federal government's record-breaking deficits will increasingly cast doubt as to the soundness of the U.S. dollar and its value will decrease at an ever-quickening pace. In other words, they fear that sooner or later, we'll see much higher inflation.

Even if this third group is correct, the timing is uncertain. Thus, we have a situation where it can make perfect sense to believe in either scenario #1 or #2, and at the same time also believe in scenario #3. One can be concerned about deflation in the short-term, but also be concerned about inflation coming further down the road.

This is increasingly on our minds as Mark and I think through our suggested portfolio allocations for 2010. We want to offer inflation-hedge type investment options for our readers, yet do so in a way that doesn't over-emphasize them or imply that they're essential portfolio components quite yet.

At the individual level, as readers contemplate their current stock/bond mix and whether it still makes sense given the current environment, they must continue to balance their fear of loss (perhaps heightened after the recent bear market) and their need for growth (also heightened as a result of losses in 2008).

Daniel Fisher in Forbes recently highlighted the challenges facing investors next year:

In all of 2007 the Treasury issued $237 billion in new debt (net of retirements). This year, through early October alone, it has added $1.2 trillion to its obligations. That's $4 billion a day.

With a supply like that, logic would have it that prices would fall and yields rise. Instead, since approaching 4% in June, the yield on ten-year Treasurys has fallen steadily. On Oct. 7 a big chunk of the latest offering flowed through RBS at a yield of 3.2%, down from 3.5% a few weeks earlier....

What gives? Despite worries that the government's huge deficit will cause inflation and interest rates to spike, the bond market is signaling that we have a worse problem on our hands: a dismal economy.

Low interest rates aren't particularly good for investors... With few attractive alternatives, investors are squirreling away savings in Treasurys, which is pushing prices up and yields down.... "It's a strategy for losing money safely," says Erik Davidson, senior managing director at Wells Fargo's Private Bank, which is urging clients to move money into stocks.

Perhaps investors are not fools, though. Their willingness to buy Treasurys at crummy yields rather than stocks implies the economy will shrink next year rather than grow. Despite signs of a bottoming, industrial output is at 70% of capacity, the lowest level in two decades and ten percentage points below its 36-year average. Consumer credit outstanding, at $2.5 trillion, was off 6.5% in September from a year earlier and has now contracted for the longest period since the early 1990s. Unemployment is still going up.

The unwinding of the credit bubble is not over. U.S. banks have barely begun to digest their commercial real estate problems. A bolus of $600 billion in commercial mortgage-backed securities issued between 2005 and 2007 is likely to begin defaulting in earnest next year. All this could mean more economic weakness and a double-dip recession. In that case stocks are no bargain now.

Since none of us knows what 2010 holds for the economy or our investments, it's a good time to redouble our commitment to following biblical principles as we make money management decisions — get (and stay) debt free, build a contingency fund for the unexpected, and diversify our portfolios across a range of investments that march to different drummers.

Next year is shaping up as a time for caution, not investing heroics.

Posted by Matthew at 11:34 AM | TrackBack
Category(s): Current Market Events

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December issue of SMI just released

The December 2009 issue of the SMI newsletter has just been posted to the website.

SMI web members following our Fund Upgrading strategy are advised of two new fund changes to make this month.

This month, we've assembled a collection of great ideas to help you make significant financial (and spiritual) progress over the next 12 months. Your 10 Most Important Financial Moves for 2010 is designed to help you identify the most pressing financial priorities for you in the year to come. By identifying, prioritizing, and then checking these items off one by one as they are accomplished, you can make 2010 a year of great financial progress.

Other topics include investing in real estate, a free gift offer for SMI web members, how to make this a no-debt Christmas, our end-of-year tax guide, and much more.

Not a web member yet? Today's a great day to join and instantly gain access to all of the new December content and mutual fund changes!

Posted by Mark at 10:58 AM | TrackBack
Category(s): SMI General Announcements

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Mary Hunt's "Cash only approach"

"Banks and retailers benefited greatly over past decades by promoting a cashless lifestyle. They convinced us that it's safer and more convenient to carry plastic. Cash, they declared, is old-fashioned and clunky. Plastic is hip and cool. Gradually, we fell for the pitch and, in turn, got more than we bargained for. Going cashless turned us into a debt-ridden society.

But things are changing on the consumer front. Cash is making a comeback." Continue reading...

Special offer from Mary Hunt for SMI Members.

Posted by Matthew at 9:43 AM | TrackBack
Category(s): Family Finances

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Here's a quiz that attempts to measure how risk tolerant you are

Early on at SMI, I developed a brief quiz to help our readers determine how risk averse they are. The results from that quiz, in combination with our "seasons of life" chart, help them arrive at a stock/bond allocation suitable to their risk tolerance and age.

At least that's the idea. As we all know, however, the way you answer questions in what is essentially an academic exercise can lead to outcomes that are quite uncomfortable in the depths of a severe market selloff. As the recent bear market demonstrated, many folks are much more risk averse than they had imagined.

The current issue of Money magazine has an article on this subject, pointing out...

The asset-allocation tools you'll find online or that an adviser will employ when working with you routinely recommend stock allocations of 70% or more if you're younger than 55 or so.... That's because, over the long run, stocks return more than bonds, so odds are (notwithstanding the past decade's lousy returns) that a heavier stock allocation will give you more money in the end.

Rational, yes. But some of the best work done in the study of risk tolerance concludes that many people can't handle the swings that come with such big stock weightings. As a result, they'll frequently sell at or near market bottoms.

FinaMetrica, an Australian company that has developed a respected risk questionnaire used more than 250,000 times by financial planners, has found that only 7% of investors can stand to have more than 75% of their total investments in stock, and only 1% can handle more than 87%. "The investment industry tends to encourage people to take on more risk than they're emotionally equipped to handle," says FinaMetrica co-founder Geoff Davey....

Risk tolerance isn't about how much risk you ought to take when you invest; it's about how much you can take before you'll crack.

The article goes on to say that FinaMetrica usually charges $30 for the quiz and calculating/explaining your personalized results, but it's free via Money through the end of November. An opportunity to know my investing self better and free to boot? Irresistible. I clicked on the link and spent about 10 minutes taking the quiz.

For what it's worth, I ended up in Risk Group 5, meaning only about 7% of all investors are more tolerant of risk than I am. In terms of the SMI quiz, I'm a "daredevil." Even so, I was told I'm "somewhat less risk tolerant" than I thought I was. If that's true, I can only imagine the wild level of risk I thought I would be comfortable with.

If you'd like to take the quiz, click here. How'd it rank you?

Posted by Matthew at 1:34 PM | TrackBack
Category(s): Investing Principles

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Revisiting the homebuyer tax credit

Mark recently wrote about the misguided economics of renewing and expanding the federal homebuyer tax credit. Although the legislation (signed into law last week) gained the support of many economic conservatives in Congress, it "struck me as a bad idea," Mark wrote.

In its latest iteration, the credit applies to current homeowners in addition to first-time buyers, and Congress has raised the income limit for eligible buyers from $150,000 to $225,000.

Writing for the New York Times' Economix blog, Harvard economist Edward L. Glaeser explains why the expanded credit is likely to have limited economic impact.

I'm not a fan of the original home buyers' tax credit, which offered up to $8,000 to buyers who currently don't own a home, but at least that policy could be justified as a tool for increasing homeownership and selling our current stock of vacant homes. I'm not sure either of those goals is worth subsidizing, but I can't think of any significant benefit that comes from giving current homeowners a buyer's benefit.

Certainly, extending the tax credit to current owners doesn't increase homeownership.... There is also no reason to think that a tax credit that encourages house-trading among current owners will help the overall housing market.

A subsidy for existing homeowners provides an equal incentive for buying and selling. There will be no net decrease in the vacant housing inventory; basic economics suggests that any policy that provides equal incentives to buy and sell will do little to increase housing prices.

The good news, Prof. Glaeser writes, is that the homebuyer tax credit has an expiration date: May 2010. But, then again, that may not mean much.

Unfortunately, the events of the last week [the extension/expansion of the credit] lead me to suspect that the tax credit will continue to exist, like a B-movie zombie, long after it should have settled in its grave.

To read all of our mortage-related articles and receive our latest investment recommendations, become an SMI Web Member. It only costs $8.95 per month, and you can cancel anytime — no long-term commitments. Try it today.

Posted by Matthew at 2:03 PM | TrackBack
Category(s): Family Finances

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What next for gold?

It took some SMI readers by surprise when we started writing positively about gold in our May cover article, then came right out and suggested buying it in August's A Dollar in Danger Leads Many to Gold. Some believed it was too late to buy at that point, having seen gold rally from roughly $250 at the beginning of the decade all the way to nearly $900 at that time.

Now, with gold up another 20% in the six months since those articles were written, any such concerns of being too late to the party have only grown. Many are still wondering if it is too late to be buying gold.

A lot of this "is it too late" questioning reflects the split between the two approaches to gold that Austin discussed in the August cover article. The "short-term trader" mentality sees gold's recent run and thinks it may be due for a correction soon. The long-term accumulator sees the reasons for long-term appreciation in the years to come and recognizes those are still intact regardless of whether the price of gold corrects here.

What is the long-term case for gold? In a nutshell, it's a safe haven against poor stewardship of the world's fiat currencies. Most of us are focused on the dollar, given that we live here and conduct most of our business in dollars. But gold is also gaining popularity as an alternative to the British pound, the Euro, the Yen, and other currencies. The dollar isn't the only currency in trouble, it's just the biggest and most prominent.

One of the big dilemmas facing investors right now is the question of inflation vs. deflation. It's a tough call. On one hand, we see the dollar devaluation, the huge expansion of the money supply and easy money policies of the Fed, and signs of life from the economy. It's not a difficult task to connect the dots and construct a high inflation scenario.

On the other, there are all sorts of catalysts that could tip the world economy back into recession again, which would be distinctly deflationary (at least for the short-term). It's even easy to concoct a scenario where inflationary forces (like the rising price of oil) cause another deflationary recession. If you feel a little overwhelmed trying to sort through the possibilities, you're not alone.

The troubling part of all this as investors is that what works in an inflationary environment is typically the opposite of what works in a deflationary one. Bonds should do well with deflation and poorly with inflation. Stocks are the opposite.

Which brings me back around to gold. This Minyanville article quotes David Einhorn of Greenlight Capital with one of the better insights into gold that I've seen this year:

I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.

Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis.

In other words, while another deflationary round of recession may temporarily bring gold prices down, providing better buying levels for traders and accumulators alike, in reality it's the decisions being made regarding the fiat currencies that are going to drive gold's future prospects.

In one major respect, this makes the gold question much easier. Rather than having to figure out whether we're headed for inflation or deflation next, you really only have to decide whether those calling the shots are going to make decisions that are in the long-term best interests of the dollar and other currencies, or whether they will likely continue to make short-sighted decisions that put the future value of these currencies at risk.

Given the "fix it now, and worry about the consequences later" mentality so prevalent in this generation, that seems to be a relatively easy call.

To recap then, it's entirely possible that gold pulls back from these levels, perhaps even significantly if we slip into a double-dip recession (or if it looks like we may). However, longer-term, we still think the prospects are quite strong for gold.

To read SMI's coverage of how best to invest in gold, as well as to get all of our latest investment recommendations, become an SMI Web Member. It only costs $8.95 per month, and you can cancel anytime — no long-term commitments. Try it today.

Posted by Mark at 1:36 PM | TrackBack
Category(s): Inflation Watch

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Blog post roundup: credit card edition

Coming at you with another batch of interesting sightings, this time credit- and debit-card related. Who knew plastic could be so controversial?

How thieves can steal your card info without you knowing it: "Taking just 5 seconds to inspect any credit/debit card readers before you swipe could end up saving you from identity and credit card theft. I’ll show you what to look for before you swipe your next card. The con is called skimming..."

Identity Theft Hysteria Overblown, Watch Your Debit Card Instead: "I recently interviewed her (Avivah Litan, VP and distinguished analyst at Gartner research) over the phone about consumers can protect themselves in an era where just keeping your mother's maiden name a secret doesn't cut the mustard..."

Mary Hunt Hates Debit Cards: "MasterCard and Visa have really done a number on Americans by convincing hundreds of millions of people that they need to own and use debit cards so banks can collect fees every time they do..." Special offer from Mary Hunt for SMI Members.

3 new credit card fees you should know about: "Apparently since all the new rules for credit card companies go into effect in a few months, many of them are starting to try some new ways to squeeze out some more profits..."

Teens need debt driver's licenses: "Graduated drivers' licenses — which restrict when and with whom young people can drive — seem to do a pretty good job reducing auto accidents and fatalities. Perhaps it's time to adopt something similar to ease teenagers into their financial responsibilities..."

Posted by Matthew at 2:27 PM | TrackBack
Category(s): Family Finances

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