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|How The Financial Press Misleads Investors |

|by Gary D. Halbert |

|August 10, 2004 |

|IN THIS ISSUE: |

|1.  Financial Press Does Investors No Favors |

|2.  Are Stocks In A Trading Range Market? |

|3.  Some Strategies For A Sideways Market |

|4.  Why Most Investors Can’t Use These Strategies |

|5.  Why You Need (A Free) Financial Plan |

|Introduction |

|The stock markets have fallen back to the low end of the trading range that we haven’t seen since the |

|peak in March.  Investors are frustrated, really frustrated.  No one likes trading range markets, |

|except for the rare and nimble short-term traders and the small cadre of successful options writers.  |

|Everyone is wondering and speculating when the markets will come out of this sideways conundrum. |

|Meanwhile, the financial press continues to serve up advice for individual investors on how to beat |

|this market on their own.  Unfortunately, most individual investors are not skilled in doing the kinds |

|of things the talking heads in the financial press and on cable TV are suggesting.  This week, we look |

|at some of these ideas and why most people should avoid them. |

|Also, don’t forget that in frustrating times in the markets, there is an abundance of crooks out there |

|who prey on investors with new scams to separate them from their money.  Remember, if it sounds too |

|good to be true, it probably is. |

|Finally, if you are disappointed with your investment portfolio, if you are not getting the returns you|

|think are reasonable, or if you’re just not sure what you should be doing, maybe it’s time to get a |

|professional financial plan.  In this issue, I will tell you how you can get a thorough and objective |

|assessment of your investments and a professional financial plan at no cost.   |

|Financial Press Does Investors No Favors |

|What has the financial press learned after going through the most recent market cycle – the bear market|

|of 2000-2002, the bull market of 2003 to early this year, and now this trading range?  The answer: |

|NOTHING.  Their mantra continues to be that individual investors can beat the markets on their own, and|

|they continually roll out new advice on how to do so – including some strategies that they denounced |

|just a few years ago when we were in a bull market. |

|The problem is, most investors are not experienced in executing most of the strategies we have seen |

|touted this year.  Most investors don’t have the time to monitor the markets at least several times a |

|day, and they certainly don’t have the wealth of research and quantitative tools needed to follow some |

|of these strategies.  Yet the financial press keeps rolling them out, from one investment strategy to |

|the next, regardless of whether or not most investors can really implement those strategies on their |

|own.  They advise moving from one hot investment to the next without looking back.    |

|And investors are hungry for ideas that sound good.  The three-year bear market that ended in 2003 |

|dealt serious losses to most investors.  Based on mutual fund money flows, many investors bailed out of|

|the market either partially or completely in late 2002, very near the bottom. |

|We also know from those same money flow numbers that most of the investors who bailed out near the |

|bottom did not get back in to catch the huge recovery of apprx. 45% in the S&P 500 Index from March |

|2003 to March 2004.   So they are very frustrated at this point, and this includes millions of Baby |

|Boomers who don’t have that many more years to build their portfolios for retirement.  They are anxious|

|to find something that works. |

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|The Trading Range Market |

|Right now, the dilemma for investors is what to do in this sideways market we appear to be stuck in.  |

|The sideways market is causing a lot of second-guessing on the part of the financial press and |

|confusion on the part of investors who listen to them. |

|While the equity markets are under renewed pressure as this is written, the markets are pretty much |

|where they started the year.  It appears we may be at the bottom of a trading range with the S&P 500 at|

|around 1060.  The high side of the trading range appears to be around the 1160 mark.  Therefore, the |

|S&P 500 is down about 9% from its high for this year.  Again, considering that the S&P 500 was up about|

|45% from its March 2003 low to its March 2004 high point, being down less than 10% from the peak |

|doesn’t seem too bad to me.  |

|Of course, most investors don’t look at it that way.  They are very frustrated and eager to hear about |

|any strategy that can work in a trading range market.  And the financial press has all kinds of  ideas,|

|regardless of whether or not most investors can use them successfully.   Here are some examples. |

|Sector Rotation |

|In a July 16 “Managing Your Money” column in USA Today, an article dealt with how to play a sideways |

|market.  One piece of advice was to target winning sectors.  All you have to do is just pick the |

|winning sectors, ride them up until they are at a peak and then sell them before they fall.  Sounds |

|easy enough, right?  WRONG.  The problem is identifying these sectors before they get hot and in time |

|to make a profit.  |

|There are some professional portfolio managers who track the market day-by-day and use the “sector |

|rotation” strategy successfully.  Some of the professional Advisors we recommend have used this |

|strategy successfully for many years.  However, we’ve also seen a lot of professional managers who were|

|not successful (at least by our definition) in using sector rotation strategies, especially during the |

|bear market. |

|If professionals struggle with identifying winning sectors, how many individuals looking at the market |

|in their spare time can possibly pick the sectors that are going to perform well in time to get in and |

|make the big profits the pundits tout?  Who is going to blow the whistle and tell them when to get out |

|so they don’t ride those winning sectors down?  |

|And when was the last time anyone in the financial press told you when it was time to sell something |

|that they recommended earlier?  |

|Usually the press has moved onto the next hot investment for today and fails to follow up on the advice|

|they gave yesterday or last month – especially if that advice didn’t turn out so well.  After all, they|

|are in the business of selling the latest news.   Yesterday’s hot investment or strategy is now old |

|news.  |

|Traditional Market Timing |

|After decades of claiming that traditional market timing could not be done successfully, more and more |

|pundits in the financial press are now recommending that individual investors try it in this sideways |

|market.  As you well know, I believe market timing can be done successfully, but is best left to |

|professionals such as those we recommend.  |

|But just as with sector rotation, we’ve seen many more professional managers who don’t do well with |

|market timing than those who have been very successful.  Very few can do it consistently over time, |

|even with all the quantitative tools and research at their disposal.  |

|Market timing isn’t something that most individual investors should attempt on their own.  Most don’t |

|have the time for it.  They don’t have all the quantitative tools and research.  Even worse, most |

|investors tend to be too emotional and can end up buying high and selling low.  This can be a |

|disaster.  Yet some in the financial press, who loathed market timing for years, now embrace it and |

|make it sound easy. |

|Chasing The Latest Hot Funds |

|The amount of information and data available on mutual funds is nothing short of mind-boggling. With |

|the Internet juggernaut, there are now dozens of large organizations that track and analyze mutual fund|

|performance.  There are hundreds of websites that offer information on how to pick the best mutual |

|funds.  Almost all of these outlets focus on one thing: past performance. |

|With only limited knowledge of a computer, an investor can find the top performing funds over any given|

|period with just a few clicks on a keyboard.   You can “slice-and-dice” mutual fund performance |

|information endlessly – if you have the time, that is. |

|Even if you don’t use a computer, you can find mutual fund rankings in a host of different magazines.  |

|There are dozens of newsletters that focus only on mutual funds. And there is an endless stream of |

|“experts” on TV who will tell you about the hot mutual funds. |

|The problem, as always, is that today’s “hot” funds may go cold tomorrow.   Many investors make the |

|mistake of buying the hot funds of the day, and then when they underperform or go down, they sell and |

|go look for the latest hot funds.  I call it the “Mutual Fund Merry Go-Round.” |

|If you are on the Mutual Fund Merry Go-Round, and want to get off, read these three articles I wrote in|

|early 2003.  Find out how you can get successful professionals, with the quantitative tools and |

|research, to select the most suitable mutual funds for you. |

|Buying Only The Best Stocks |

|Another piece of advice I read recently was to concentrate your portfolio by buying only the 10 stocks |

|with the greatest potential for appreciation.  Can anyone reading this tell me which are the 10 best |

|stocks to buy?  If you can, we need to talk! |

|This article assumed, apparently, that most investors know how to pick the 10 best stocks.  And why |

|only 10 stocks?  I don’t know.  Anyway, the writer advises (almost casually I might add) that we should|

|all be able to identify the 10 winners, invest only in them and make a bunch of money.  Is this writer |

|naïve, stupid, or both?   |

|If it were that easy, professional managers would never have any losers in their portfolios.  Do you |

|really think a professional manager goes out purposely to buy stocks they expect to underperform?  If |

|managers could identify the losers in advance with any certainty, they wouldn't buy them in the first |

|place.  How much more difficult is it for amateurs to avoid losers while selecting the 10 best stocks? |

|Finally, if the people who write these articles could actually do what they suggest, do you think they |

|would be working for columnist pay?  I don’t think so! |

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|  |

|Portfolio Rebalancing Is Not The Silver Bullet |

|In a July 28 column in the Wall Street Journal, an article dealt with how to make money whether the |

|market goes up or down.  The article says that in reality you don’t need to guess the market’s |

|direction in order to profit from shifting valuations.  All it takes, the writer says, is a little |

|self-discipline.  Considering that it is very difficult to forecast the market’s short-term direction, |

|he suggested that all you have to do is annually “rebalance” your portfolio.  |

|Here’s how it’s supposed to work.  First, you initially construct a portfolio that is made up of the |

|various asset classes, such as large company stocks, small company stocks, international stocks, |

|various bonds, real estate investment trusts, etc.  Next, you determine the best weighting (allocation)|

|to give each of these asset classes.  Then once a year, you sell the profits from your winners and use |

|that money to buy more of your losers, to bring everything back into balance with your original |

|allocation.  |

|The idea is to force self-discipline by buying into depressed sectors that may be due for a rebound, |

|while lightening up on high-flying sectors that could be set to tumble.  It’s called portfolio |

|rebalancing. |

|I agree that it is important to diversify your portfolio with multiple asset classes and especially |

|with different investment strategies.  And I agree that it is a good idea to rebalance the portfolio |

|periodically.  |

|Most People Don’t Know How To Do This |

|The problem I have with so many of these investment articles in the financial press is that they assume|

|their readers already know how to allocate their portfolios; they know which asset classes are |

|appropriate for them; they know what percentages should be allocated to each asset class and/or |

|strategy; they have the software and quantitative tools to identify the top performing funds in each |

|asset class; and finally, that they know their own level of risk tolerance.  |

|Yet my 28 years of experience in this field tells me just the opposite, that most investors DON’T |

|really know these things.  Most investors need a professional to help them with these decisions.  They |

|need a professional financial plan designed specifically for their needs, risk tolerance and financial |

|objectives. |

|What Is A Financial Plan? |

|There are different types of financial planners, and thus different types of plans.  For the purposes |

|of this discussion, I will be referring to financial planners who specialize in investments, rather |

|than other professionals who may specialize in insurance and/or estate planning. |

|A good financial planner will start by learning about you, your current financial situation and what |

|your goals are.  He/she will need to know about your income (all sources), the amount you have in |

|savings, your living expenses, any debt that you may have (any kind), ages of your children (for |

|college planning), any medical conditions, etc., etc. |

|Next, a good financial planner will spend plenty of time with you discussing your goals and |

|objectives.  This will certainly include when you want to retire, what kind of lifestyle you want to |

|have in retirement, do you need to set aside money for kids’ college, buy a bigger (or smaller) house, |

|etc., etc. |

|[Maybe this sounds too personal for you.  Maybe you are uncomfortable sharing this detailed information|

|with someone you don’t really know.  Yet the truth is, all good financial planners have a “Privacy |

|Policy” which states, in writing, that they will not share your information with others.  Always ask to|

|see their Privacy Policy and read it carefully.] |

|Next, a good financial planner will have sophisticated software that can analyze all of your financial |

|information and determine how much you need to save and what rate of return you need to make on your |

|investments in order to meet your goals.  While this is not rocket science, very few investors know how|

|to calculate this information on their own. |

|All too often, unfortunately, financial planners find, after running the numbers, that the client will |

|have to achieve an unreasonably high rate of return on his/her investments, and save much more than |

|they had expected, in order to reach their financial/retirement goals. |

|While it is not pleasant to learn this, it is absolutely critical when it comes to realistic financial |

|planning.  And the good news is, the sooner you find out where you stand, the better – so you can start|

|making the necessary adjustments to reach your goals. |

|The Hardest Part: Deciding On The Investments |

|Now we get to the really hard part: deciding on the investments and the allocations.  By this time, you|

|and your financial planner should have decided on a realistic rate of return on your investments and |

|how much risk you are willing to take to get there. |

|Since everyone’s financial situation is different, I cannot offer a specific list of investments I |

|would recommend.  Generally speaking, however, most portfolios will include a mix of large, medium and |

|small cap stocks, international stocks, a mix of bonds and perhaps some real estate.  Usually these |

|asset classes are in the form of mutual funds. |

|A good financial planner will have sophisticated software for analyzing the mutual funds in each asset |

|class and be able to recommend the top performers in each group.  He/she should show you the historical|

|data on each fund, including long-term rate of return, worst losing periods (drawdowns), standard |

|deviation, etc., etc.  He/she should also advise you if there have been any changes in the managers of |

|the funds recommended. |

|Many financial planners will also recommend some “alternative investments” such as hedge funds, |

|professionally managed futures funds, etc., especially for larger portfolios that can diversify more.  |

|These types of investments are not suitable for all investors and should be carefully selected. |

|It may be that some of the investments you already have are worth keeping.  A good financial planner |

|will not assume that everything in your portfolio is bad.  He/she should be able to analyze each of |

|your current investments to see if they are comparable to any of those he/she would recommend.  If they|

|are, keep them and perhaps avoid some transaction costs. |

|Once the investments have been selected, the next step is to fund the accounts and make the purchases. |

|A good financial planner will monitor your portfolio on an ongoing basis.  You should get an easy to |

|understand quarterly statement with a detailed breakdown on how each of your investments is doing, as |

|well as your overall portfolio return. |

|A good financial planner will also stay in touch with you with a periodic phone call to see if your |

|financial situation has changed.  He/she should also call you if any changes need to be made in the |

|portfolio.  As an example, maybe a fund changes managers and together you decide to move to another |

|fund.  He/she should also call at least once a year (or more often if need be) to discuss rebalancing |

|the portfolio as discussed above. |

|A good financial planner should also be constantly searching for better funds, better managers and |

|better alternative investments. |

|Finally, when it comes to fees, there are several types of financial planners.  There are “fee-only” |

|planners who charge a fixed fee for providing the service.  There are “commission-based” planners who |

|are paid by the commissions on the products they sell (which, of course, can lead to conflicts of |

|interest).  And there are “asset-based” planners who are paid a pre-determined management fee based on |

|the size of the assets under management.  There are pros and cons to each fee arrangement, but I |

|generally prefer the asset-based fee.  |

|Conclusions |

|I wish the press would stop telling individual investors that they can do all these complicated things |

|on their own.  As discussed above, most investors don’t know how to do sector rotation, market timing, |

|etc.  No one – not even Warren Buffett - knows which 10 stocks will be the best over any given period. |

|The press should be advising them to seek professional help in their investment selection and portfolio|

|management.    |

|At ProFutures Investments, we provide financial planning.  We have three Investor Representatives with |

|years of financial planning experience, including one Certified Financial Planner.  We are an |

|asset-based planner, so there is no charge for the financial plan.  At no cost or obligation, and based|

|on the information you give us, we will do a full analysis of your investment portfolio, and we will |

|give you a formal recommendation including any changes we would suggest. |

|As noted above, we do believe that diversification is very important - both in terms of asset classes |

|AND strategies.  Where we differ from most financial planning firms is that, in addition to mutual fund|

|portfolios, we also have specific managers that bring you different strategies such as sector rotation,|

|market timing, etc., as well as alternative investments. While not suitable for everyone, most |

|investors who come to us want to add these strategies and others to their portfolio. |

|We do customized financial plans for clients all across the country.  Your financial planner does not |

|have to live in your city or even nearby.  Some clients tell us they are more comfortable sharing their|

|financial information with a firm that is not in the local neighborhood. We have a very strict Privacy |

|Policy, so you can be certain that your information stays CONFIDENTIAL with us. |

|If you would like to take advantage of the financial planning services we offer, you need only to give |

|us a call at 800-348-3601 to get started.   There is no cost to get a financial plan, tailored to your |

|specific situation, and there is never any pressure to invest in any of the services we offer. |

|Very best regards, |

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|Gary D. Halbert |

|SPECIAL ARTICLES |

|Keyes to a fiasco. |

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|This band of brothers has a different view of Kerry. |

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|A few questions for Kerry. |

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|Should Bush tap the oil reserve? |

| |

|Copyright 2004 Gary D. Halbert. |

|Send to a Friend   |   Print View   |   Contact Gary D. Halbert Here |

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|Gary Halbert is president and CEO of ProFutures, Inc. (), a diversified investment |

|advisory firm located in Austin, Texas. All material presented herein is believed to be reliable but we|

|cannot attest to its accuracy. Investment recommendations may change and readers are urged to check |

|with their investment counselors before making any investment decisions. |

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|Opinions expressed in these reports may change without prior notice. Gary Halbert and/or the staffs at |

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