Runaas Resources Public Relations

by Ken Faulkenberry

Hedging has become somewhat of a dirty word lately.  People correlate it with Hedge Funds and “betting against America”.  In reality, hedging, like many things (i.e. alcohol), can be abused or used incorrectly and cause harm, but when hedging is used correctly it can be a useful tool or a prudent necessity.  A homeowner will usually hedge the chance of a fire destroying his home by purchasing fire insurance.  Hedges can also improve the safety and reduce risk in an investment portfolio.  Hedging is a portfolio diversification strategy to reduce risk by owning something that is correlated inversely to other assets in the investment portfolio.

Owning precious metals investments, including gold and silver mining stocks, are a hedge. The primary purpose of owning these investments is because they do well during times of rising inflation or economic and political turmoil.  These are the times other asset classes like stocks, bonds or real estate may not do well.  Therefore it is prudent to hedge a portfolio by owning some investments related to precious metals. During periods of economic stability most portfolio managers recommend a target of 3-7% of a portfolio in precious metals related investments, but that percentage could be much higher at certain times. It is important to constantly monitor economic and political risks to achieve the optimum asset allocation in precious metals.

A recent popular vehicle for investing, Exchange Traded Funds (ETFs), provides an instrument that moves inversely, or the opposite direction of a stock market index.  Some of these inverse ETFs even move 2 or 3 times as much as the underlying index.  The need for frequent rebalancing makes inverse ETFs dangerous for anyone who doesn’t understand how they work or does not pay close attention to the need for frequent rebalancing. In other words, inverse ETFs require an active asset allocation strategy.

For investors who employ an active asset allocation strategy, the inverse ETF can be a useful tool by allowing an investor to take the market risk partially or wholly out of one’s stock portfolio.  For example, let’s say you own $100,000 of 20 great companies with solid balance sheets and high dividends, but believed strongly the stock market is going to decrease in value. You may not want to sell your stocks so you buy $50,000 of an ETF that moves two times the inverse of the market.  You now have removed all the market risk from your portfolio of stocks.  If the market moves lower, as you believed, you will make money on the ETF to make up for losses in your stocks.  Of course, if you are wrong and the market moves higher, you will lose money on the ETF that will offset the gains in your stocks. The purpose is to continue receiving the dividends and not incur the taxes and commissions selling and buying your 20 stocks.

Hedging is an important and useful diversification strategy to reduce investment risk and improve long term portfolio performance.  It is also a strategy that requires careful application, monitoring, and frequent rebalancing.  Properly used, hedging can reduce investment risk.

About Arbor Investment Planner

The Arbor Investment Planner provides the Arbor Asset Allocation Model Portfolio (AAAMP) which uses hedges to reduce portfolio risk.  Investors use the AAAMP as a guide but stay in control of their assets, and make their own investment decisions.  The AAAMP uses precious metals investments and inverse index ETF’s to maintain asset allocations at levels believed to be optimum for the current investment environment.  Rebalancing is taken into consideration in Trade Alerts sent to subscribers. The AAAMP is updated with every trade or major market move in order to stay disciplined and focused on our asset allocation.  More Information is available at: www.ArborInvestmentPlanner.com.

By Ken Faulkenberry

Diversification is the single most important element of investment planning. Diversification is a portfolio strategy that reduces risk by combining different investments that are not correlated.  The volatility (risk) of the portfolio is reduced because not all asset groups, industries, or stocks move together.  The goal of diversification is to reduce risk.

Lack of diversification and over diversification are two common mistakes made by investors.  Lack of diversification (putting all your eggs in one basket) is the most dangerous and ruinous mistake possible.  Over diversification can result in a portfolio performing like the market. Many investors have experienced the bad results of over diversification during the current decade.  Most institutional vehicles (i.e. diversified mutual funds, pension funds, etc.) are over diversified and simultaneously lack an asset allocation needed for success in today’s challenging environment.

Proper Diversification can reduce many kinds of risk including company specific risk, poor fund management risk, industry risk, and market risk!

Company specific risk is risk that is specific… [ read more at http://blog.arborinvestmentplanner.com ]

More information available at: www.ArborInvestmentPlanner.com.

OBAMANOMICS

How Policy Affects Investment Management

By Ken Faulkenberry

The American people voted for change in 2008, not realizing they were going to get more of the same policies of the previous administration.  More government spending, more and greater deficits, more government bailouts and ownership of previously private businesses, more regulation, and more government interference are being continued on a much grander scale than many imagined.  The scale of which Obama policies are being proposed will have a profound affect on investment planning and portfolio management.

The health care industry accounts for about 1/6 of our economy.  It is clear the government will have a significantly increased role in picking the winners and losers of both care givers and care consumers.  Rationing of care is a fact of any health care system.  With the technology we have today it is physically and economically impossible to provide everyone with every drug, procedure, surgery, etc., available.  While health care reforms are needed, rationing decisions are more efficiently handled by patients and the free market than by government bureaucrats. Long waits and poor care in countries with a large government role in health care demonstrates our reform is headed in the direction of shortages and greater market inefficiencies.

Both political parties have played a large role in handing out trillions of dollars in corporate welfare, rewarding those who have failed. Worse yet, the government has taken ownership (i.e. AIG, General Motors) of companies and now compete against companies that have survived on their own.  Part of the efficiency of free enterprise is the weak die off during lean times allowing the efficient to innovate and compete in the future. It will be harder for surviving companies (i.e. Ford) to innovate and invest in the future because the government bailed out and now owns GM.

Many of the billions in the “stimulus” plan are being used to retard the natural cleansing of the system that is required to get back on solid ground.

Housing is another important segment of our economy.  Homeowners whose homes are worth less than they owe and are unable to meet current mortgage payments are being offered government backed mortgages at 125% of appraised value. Taking money from taxpayers to help those who have made purchases beyond their means does economic harm. These actions keep home prices artificially high and prevent potential homeowners who are capable of purchasing at lower prices from becoming homeowners.

Health care, corporate welfare, and housing are only a sample of the tidal wave of government involvement in our economy. Anytime the government gets overly involved in free markets, moral hazard and inefficiencies are created that cause the economy to operate at less than optimal growth rates. When government picks the winners and losers; there is a pattern of rewarding those who make poor choices and making those who have made good choices pay.  The government overreach is at such a grand scale it will affect our daily lives and our investments. The United States will have to become accustomed to much slower economic growth and lower corporate earnings for the foreseeable future.

The increased role of government means Obamanomics is having a profound affect on investment management. With slower economic growth and the government picking winners and losers; asset allocation and individual stock selection will play a greater role in investment returns.  While diversification is always crucial, choosing asset allocations that correspond with economic reality is equally important in this investment environment.  Investors can no longer afford to park money in equity index funds as they did successfully in the 80’s and 90’s. Broad index investing versus proper asset allocation and researching individual stocks with strategic advantages will be the difference between poor investment returns and achieving investment goals.

Investors who want to manage their own investments, but lack the knowledge and/or time for proper asset allocation and research of individual investments, need to obtain portfolio management advice from a trusted source. The Arbor Investment Planner provides the Arbor Asset Allocation Model Portfolio (AAAMP), Trade Alerts, Updates, and Special Reports to provide investors everything needed to manage their portfolio. The AAAMP uses Stocks and ETFs to provide a conservative diversified portfolio for long term growth.

More Information available at: www.ArborInvestmentPlanner.com.