What’s in a Name?
Turning once again to William Shakespeare for the title of an article, I’d like to consider some ways that commonly understood words might be used for uncommon purposes.
Members of “The Greatest Generation” knew Packard Bell as a well respected manufacturer of radios and other consumer electronic devices. The company later became a defense contractor and was eventually bought by Teledyne in 1978. Once the famous old Packard Bell name was no longer in use, it was bought by some Israeli entrepreneurs in 1986 and applied to an inexpensive line of personal computers. Although there was no connection between the original and subsequent companies, there was still name recognition and the new company went on to briefly become the largest seller of personal computers in the US with 15% of the market in the mid 1990’s. In 2005, PC World magazine ranked their computers the worst PCs of all time. The name is now owned by a competitor but is unused in the US. If you were the owner of one of those Packard Bell machines, my guess is that you do not remember the experience fondly.
Moving on to two more words that seem familiar, let’s consider Stanford and Certificate of Deposit (CD). It seems that a man who shares his last name with the honored past governor of California and founder of a great university has been issuing Certificates of Deposit from his bank, headquartered in Antigua. His assertions to the contrary however, R. Allen Stanford is no relation to Leland Stanford. And, unfortunately, CDs issued by such non US-based institutions are not “insured by an agency of the US government” as are those available at banks located on almost every street corner in the US. Offering returns that were much higher than legitimate CDs, Stanford’s salespeople pitched them to investors in the US and several Eastern Caribbean nations. According to our Securities and Exchange Commission, those sales totaled about $6.7 billion in 2007. Stanford’s institution is now in receivership and it may be years before the total of the (un-insured) losses is known.
It might seem that a single multi-billion dollar scandal would be enough but apparently not, as Stanford has joined Madoff in allegedly having stolen enormous amounts of money from trusting investors. Although his modus operandi was different, the underlying lure was the same: a return that seemed too good to be true.
I have said before that we begin our investment research at Warren Ward Associates by asking “Who will buy this from our clients when they are ready to sell?”. Another question that’s part of our process is: “If a risk-free investment (a direct obligation of the US government) is paying X%, what additional risk will our clients have to assume in order to achieve some multiple of that?”. In the case of stock investments, we know (as do all who read newspapers or watch TV) that volatility is part of the equation and it is possible to lose money on a specific investment. In the case of bond investments, while we know that they too can fluctuate in value, we generally expect something quite different.
Let me close this article with one more name: FDIC. The Federal Deposit Insurance Corporation is the agency which guarantees domestic CD investments. It’s name means exactly what it says. Although the FDIC takeover of a financial institution is somewhat cumbersome, it absolutely works. If someone promises you a “secure” investment without an FDIC guarantee, investigate further. Always be sure you know what the name of your investment really means, especially if it promises an unusually high rate of return and especially if the promise includes a “guarantee”.
The Serenity Prayer
Reinhold Niebuhr’s oft quoted Serenity Prayer asks for guidance in knowing the difference between the things that can be changed and those that can’t. At a time when layoffs and multi-billion dollar rescue packages vie for the headlines, we can easily name situations which fall beyond the ability of mere mortals to alter. On the other hand, stepping back from those headlines might make it possible to identify situations in which some control is possible allowing outcomes to be affected.
During this period of falling stock, bond and real estate values, we hear people discussing safer, i.e. less volatile, investments. Unfortunately, the ideal time to have changed strategies and moved money to the sidelines was last year when all of those investments were more valuable, not today, when literally the entire world is on sale. We believe that reviewing the allocation of assets based on each individual situation is the best investment-related decision most people can make. Focusing on the long-term and trying not to be overly influenced by emotion are key elements in developing a consistent and successful long-term investment strategy.
The amount of time remaining until retirement certainly influences all financial choices but we believe that cutting back on retirement plan contributions rarely makes sense. As with other purchases, the best time to buy is when prices are low. There are no guarantees in the short-term but for those who have five or more years until they need their money, it’s hard to envision a scenario that won’t be improved by investing (or remaining invested) now.
Mortgage interest rates are falling and we think they could drop further. Those who have equity in their homes and rates over 6% will probably be able to choose between lower payments and a shorter term. Some of the national lenders who played a role in getting the country so overly-mortgaged are back running ads, so please consider doing business locally. Also, rates and closing costs vary by institution so sure to check around. Depending on the specific situation, some aspects of the deal may be negotiable; it never hurts to ask.
With natural disasters in the headlines (especially the flood here in Columbus last June), we think reviewing insurance coverage is a very good idea. People have to face many of life’s risks alone but there are quite a few which can be easily shared with others. Flood insurance is available even for persons not living in a flood zone and it would simply be prudent to evaluate the cost of coverage vs the potential for loss. Most homeowners policies cover direct wind damage but perhaps not those resulting from power lines having been blown down: food lost when the refrigerator goes off or damage from water rising in the basement when the sump pump fails. Those and other ancillary events can be covered at reasonable cost and we think everyone should at least examine their options.
Thinking a bit more about insurance, many older people no longer need all the life insurance they bought when they were younger, perhaps when they had children at home, a substantial mortgage or other obligations requiring high coverage levels. Conversely, liability insurance needs tend to rise with age as people accumulate more assets which should be protected. It would be awful to be nearing retirement and be wiped out due to insufficient insurance coverage following an auto accident. If you are a business owner or professional practitioner you might look especially appealing to a plaintiff, so please be certain to maintain ample coverage.
Another area which should be reviewed periodically is wills, trusts and related documents. Both laws and situations change over time so anyone who hasn’t visited this subject in the past five or six years should do so. Whether the person who was chosen as trustee or personal representative is no longer able (or available) to serve or there’s one more (or less) beneficiary to receive the inheritance, the various documents can be brought up to date easily and inexpensively. In Columbus, a simple will rarely costs more than $500 with updates costing proportionally less. We believe that writing a new will or reviewing your current one is likely to offer considerable peace of mind at a very reasonable cost. Just like life insurance, these documents do not provide a benefit to the owner but to that person’s loved ones. Don’t miss out on a chance to take care of those people, causes and institutions which are most important to you.
Niebuhr’s prayer offers a sensible approach, especially in this time of political and economic turmoil. Focusing on things that can be controlled is one way to avoid feeling overwhelmed by the world’s problems. Taking action on those issues which are within your power may provide at least a bit of serenity. If you want to begin, Jalene and I are here to help; all you have to do is ask.
