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A Better Way…

Kirk SpanoAccording to Warren Buffett, the top 2 investing rules are…

Rule No. 1: Never lose money. 

Rule No. 2: Never forget rule No. 1.  

What we can take from those rules is that the most important aspect of financial planning is having an investment approach that protects you from large losses and still gives you an opportunity to make money over the long-term. Very few people actually have that.

My name is Kirk Spano and I founded Bluemound Asset Management, LLC in 2010 as a response to what I saw the financial industry doing to people. I am widely published, including on MarketWatch.com of the Wall Street Journal network. I have also appeared on television and radio. Take some time to learn for yourself how I have helped people a lot like you. 

What I can tell you in short is this: if the way you have been invested has subjected you to large risks and not given you the returns you hoped for — there is a better way.

MarketWatch  Fox Business  WisBusiness.com  Seeking Alpha

The Second Act

This is an archived article written November 4, 2004 [edits added November 2005]

The Second Act: Things To Watch For In George W. Bush’s Second Term

Now that the American electorate has spoken it is time to examine what another Bush Presidency could mean to your pocketbook.  As many of you know, I am unabashedly moderate.  Such a stance puts me on par with a majority of Americans, but not particularly relevant in partisan politics.  If you find any of this article a little harsh, don’t worry, I was tough on the other guy too.  I wrote rough drafts of this article and one entitled “A New Face” (had John Kerry won the Presidency) a few weeks ago. 

With Republicans controlling the Presidency, Congress and increasingly the Judiciary, President Bush’s second Presidency will bring partisan power to the federal government not seen in over a generation.  It will be interesting to watch whether or not Congress and President Bush continue to cater to the far right factions of the Republican Party or if more moderate stances will predominate.  During election cycles, the extremes of each party get far more attention than their real numerical or common sense value.  However, once those votes aren’t needed to secure a government position, those extremists are usually left on the outside looking in.  For President Bush’s part, he appears ready to take a step towards the middle.  Congress and the Vice President may not be so willing. 

What are the financial implications of this lock on power?  Obviously, much will depend on what limits the President is willing to impose on some conservative sub-groups within the Congress.  Regardless of what does happen over the rest of President Bush’s term and a few years after, it is clear that the credit or blame will fall squarely at the feet of the Republicans. 

To this point, as my clients know, I have given a fairly blanket pass to the Republicans and President Bush regarding the nation’s economic and financial difficulties of the past few years.  I think a reasonable doubt exists that recent Republican policy has adversely affected the economy or finances of the country.  As I’ve discussed with many clients, much of the financial and economic negatives of the past four years were likely largely cyclical and due to the changing nature of the global economy.  Further, our necessary response to terrorism has clearly used resources that could have been allocated elsewhere.  Many of our problems are also due to the ridiculously low private savings rate in this nation.

Regardless, we can not deny some very serious negative occurrences of the past four years:

  • Net job losses
  • Lower median incomes
  • Energy price increases
  • Hard asset/materials price increases
  • Increasing environmental damage costs
  • Healthcare cost increases
  • Reduced access to affordable education
  • Record Trade Deficits
  • An expanding National Debt
  • A bear market in U.S. Stocks
  • A weaker dollar

Further, the housing market appears to be developing a bubble that may become dangerous.  Credit is extremely easy for reasons I do not fully understand.  The FBI has identified massive fraud in mortgage lending as mortgage lenders have been popping up in every other strip mall I see.  In a recent conversation with a real estate broker friend he made it clear to me that he believes that there is no way, short of a huge economic expansion or population boom that housing prices can continue to scream upward as they are.  It appears that action to limit a potential real estate collapse is necessary. [paragraph added November 2005]

Beyond noting the problems I see, I am not going to discuss specific policies other than to say that there don’t appear to be many new initiatives necessary for the government to create.  Funding existing programs properly and writing legislation to be inclusive rather than exclusive, along with effective regulation seems to be the only necessary changes apparent to me.  I am basically against new bureaucracies when fixing old ones will do.  Today, there is clearly some fixing that needs to be made as significant financial deregulation has created holes in our capitalist quilt.  Finally, just a note that politicians can not make, it is time that Americans stop asking for new programs and insist that the existing ones work or be eliminated. 

Next, let’s discuss the developing debt and currency crisis that will affect middle Americans more than any other issue. 

Debts, Deficits, Currency Devaluation, Growth Rates & Protectionism

Though the United States currency carries a lot of good will, a further decline in the value of our currency versus others is not unlikely.  In fact, due to our expanding national debt and trade deficits, further devaluation is almost a certainty.  If the devaluation is sudden and hard, it will trigger a series of events, likely culminating in protectionism and the global economy plunging into a recession that we would fully share in. 

What would it take to further devalue the dollar?  The foremost cause would be further erosion of the national balance sheet.  If we keep taking on debt in the amounts that we have been, our ability to pay back what we owe would eventually come into question.

The Republican method of improving the national balance sheet is to cut taxes in order to stimulate growth.  Continued deficit spending and tax cuts are a highly risky set of policies if more fully enacted.  For such policies to be successful, our growth rates would have to surge.  In theory, such a policy can work under ideal conditions.  The Republicans are currently married to this path of action.  Unfortunately the conditions for success have rarely existed in the history of man, and I don’t believe exist now. 

Compounding our financial challenge is that a major miscalculation was made with regard to Iraq financially.  Because the Iraqi insurgency has remained strong, and the Iraqi infrastructure and oil fields are in much worse disrepair than anticipated, the true cost of the war is going to be about what we spend on it; not less some recovered amount.  The cost of the Iraq war will have a much larger impact on our economy than originally anticipated.  The previous round of tax cuts and spending was clearly based on a more favorable financial outcome with regards to Iraq. 

There are significant risks from the neo-conservative factions of the Republican Party that implicitly support policies that lead to currency devaluation.  There are also some who argue that a devalued dollar is beneficial in that it makes American exports more competitive.  This is true, a weaker dollar will help a handful of corporations.  However, a weaker dollar will also increase the cost of imported goods– most notably energy.  A weak dollar acts as a deflator of income.  Can you think of a time in your life when you have been happier with less income?  I thought not.

Further, a deeply devalued dollar, especially in an age of increasing global markets, makes investment in America a less appealing opportunity for foreigners.  The risk of capital flight, which would likely lead to an American recession, and constrict debt and equity markets, is significant.  This event would derail the increases in productivity that are requisite to growing ourselves out of this quandary.

Solving our deficit issues require that we sell more to foreigners as they become more consumer oriented and save more of our money instead of spending it.  From a sales standpoint, we had better play nice with our neighbors.  Manipulating capital markets– which is antithesis to what many neo-conservatives espouse– is a dangerous game.  As a nation we need to produce more and spend less.  Clearly, working harder and tightening our belts is not what people want to hear.  I suppose that’s why politicians who talk about that usually lose elections.  Unfortunately, if we don’t take the path of patience and prudence, middle Americans will go through a period of more profound suffering. 

To offset our own financial shortcomings, we will have to rely on much of the rest of the world to support us as we dig out from this problem.  Frankly, I do not believe that enough foreign governments will stand for this– they have their own problems.  Implicitly letting the world know that we are going to deflate the dollar, which is what appears to be happening, runs the risk of damaging a fragile, and necessary, globalism.  Most likely, the politicians that support policies that devalue the dollar, would also support protectionist measures.  Protectionism sells at the ballot box, but does not work on any large scale.  What we must do instead is reduce consumption, trim our own debts and increase our savings rate.

What Can You Do

It is my belief that you have to plan for the possibility that the risks above both materialize into problems and don’t materialize into problems.  A tough task, but it can mostly be done.  Your asset allocation strategy will be the key.  Being over-weighted in the asset classes that historically benefit and underweighted in the asset classes that historically get hurt under the current conditions will be very important to your risk/return ratio.  If a rising tide occurs and lifts all ships, fine, you win that way too. 

One thing you can do that might make a lot of sense is sell your house if you are not planning to live in your house another fifteen to twenty and down-size or rent for a few years.  I have been criticized for this advice every time I bring it up, but real estate appears over-valued.  If real estate collapses, it will be a hard fall that takes a very long time to climb back from.  If you choose to wait and see, remember to significantly reduce your asking price immediately upon deciding to sell if you do not get a buyer quickly at your preferred price.  Falling behind a declining price curve in any asset, especially illiquid real estate is a recipe for losses. [paragraph added November 2005]

Also, get into a systematic investment plan for a Roth IRA if you aren’t already doing so.  This form of dollar cost averaging will help you invest without worry of getting in at the wrong time*.  If you are not closely managing (or having managed) you retirement plan at work, do so!  Under the likelihood that you don’t have access to several of the investment classes I mentioned above within your plan, check into an in-service non-hardship withdrawal from your plan.  Many plans will allow you to transfer money tax-free to an IRA that you will have greater investment flexibility with.  Remember, the “ownership society” will only work for those who invest in it and manage what they have invested.

At a more personal level, and I don’t say this completely in jest, insulate your house because energy prices are heading higher.  Also, learn additional higher value work skills.  Outsourcing of jobs will continue to occur as the economy is pushed towards higher skill levels.  Manufacturing in America will be defined by the work that is more highly skilled and requires continuing education.  Encourage your kids at every term to strive for more academic success– it will be the key to them not having to move back in more than once.

Finally, to close on a happier note, I do think that regardless of how the short term shakes out, the intermediate and longer terms appear to be looking very bright so long as we don’t allow the basic financial fabric of the nation to be damaged.  The United States continues to have a stronger spirit, resources and will than virtually any other nation. 

If you have any questions or thoughts, please contact me .

 

*Dollar Cost Averaging does not ensure a profit or protect against a loss in a declining market.

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Tactical Asset Allocation

The best offense is a great defense.

Tactical Asset Allocation

Are you utilizing the appropriate defensive strategies for your portfolio?

Today’s economic and financial climate are extremely dangerous and could lead to a large, fast drop in asset prices. Do you have a strategy to get out of the way quickly should that happen? 

“Set it and forget it” methods of investing like mutual funds, do not usually work. So-called “guaranteed” products, like annuities, are expensive, often lock people into low returns forever and aren’t always as safe as advertised. 

Tactical Asset Allocation using some of America’s top financial minds can offer protection that sales driven investment approaches don’t. Call today to find out how a tactical investment strategy can protect your retirement nest-egg and secure your lifestyle.

Punch Card Stocks

Buffett MungerWarren Buffett has famously said that investing in only twenty stocks, represented by a punch card, could improve your financial welfare. That is the impetus behind my “Punch Card” Stock Portfolio. These are the roughly twenty companies that I believe belong in the long-term growth portion of your portfolio and mine. 

Read my columns on MarketWatch, on my websites and elsewhere to see how a slow-handed and well thought out approach to stock investing can control risk and be profitable long-term. Learn more here.

 

Time for a Change

Do you want greater peace, security and freedom to pursue the lifestyle and legacy you really desire?

Do you want to avoid large losses in the next financial crash?

Do you want to take advantage of market opportunities when available?

Are you willing to take a few steps to secure your best future?

If so, call me today: 855445-4321

Monthly Investor Call

The second Saturday of each month at 9am.

Open to the public. My next call is on:

Saturday, August 9th, 2014 at 9:00AM (CDT

To join, follow this link or just call 262822-3677. No PIN needed.

Submit questions by email

Retirement Catch-up Plan

Behind on your retirement saving? Call us today to get back on track with a unique barbell approach to retirement saving.

Kirk’s Recent Quarterly Letters

Freedom to Unite and Invest in Tomorrow

UpWhen I was a kid I dreamed about being an astronaut, a baseball player, a rock star and the President. As I hit my teen years and I hadn’t done much musically, I dropped the Mick Jagger aspirations and focused on baseball. By senior year of high school I knew that baseball was fun, but that I wasn’t an elite player so I had to drop the Robin Yount dream too. 

When I got to college, I focused on having a good time and taking courses that might help me when I grew up. For awhile I thought I’d be a lawyer, but a great uncle gave me some guidance and I decided against that career path. I graduated from college with a degree in economics and a second in political science with a law certificate tossed in. That’s not what I dreamed about as a kid, but it has proven to be a good direction for me. I got there by taking one step at a time and just not stopping.

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The Great Retrenching Continues…

Total DebtIn September of 2008 I had coffee with a group of executives from local manufacturers, it was just after the financial crash had started. One company president in the group — a particularly political sort — asked me how long the economic slowdown would last? I said “until the middle of the next decade sometime.” He laughed at me.

Fast forward to today. What we know now is that the economy still has not recovered in real terms and that it will be a few more years until it does. The United States is just about in the middle of a demographic depression that can not be fixed with legislation or easy money. We must wait until household formation and spending by the very large millennial/ echo boom generation ramps up. Last year was the first year since 2008 that we saw an uptick in the birth rate, so that is a positive, however, it is only a baby step.

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2014 Another Crossroads

S&P 5002013 proved to be a profitable year for investors. The S&P 500 rose 29% and set new record highs. Global balanced indexes, more representative of most people’s portfolios, also did very well by returning about 20% despite a tough year in China which lost 9%.

The high return of the stock market had an expected effect on people. Many investors started to chase returns and look to be more aggressive after years of being risk averse. The result was that 2013 saw the most money from retail investors flow into stocks since 2000. I discussed this in a November article on MarketWatch titled “How Bad Will New Investors Get Hit.”   

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Volatility, Opportunity and the Next Crisis

Secular Bulls and BearsOver the past several years, I have discussed the monumental demographic changes that not only America is dealing with, but also that Europe, China and Japan are dealing with. The cumulative impact of national and personal debts, de-leveraging from the bubbles of the 2000s and the four largest economies in the world having aging populations has created global demand destruction that is not likely to end soon.  

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