Analyzing The Cause Behind The Ever Climbing Stock Market

Since the election of Donald Trump as President of the United States, the markets have continued to climb higher and higher. Initially, it was believed that a Trump presidency could potentially cause the markets to crash. This couldn’t have been further from the truth. Of course, it is also important to realize that the Trump administration is not solely responsible for the health of the markets. During the first quarter of the year, several major factors have helped to support the market’s climb. Below, you will learn more about these factors and their influence on the markets.

The French Election

It is downright imperative to realize that the upcoming French election and the events leading up to it have played heavily on American and global markets. During the leadup to the election, markets experience turmoil and volatility as Marine Le Pen led the polls. However, a shift has begun to take place and it has substantially helped global markets. The Centralist candidate Emmanuel Macron managed to secure a higher vote total than Le Pen during the first stage of the election process. This has helped to dim the fire burning for Le Pen and it has subsequently convinced analysts that a Le Pen president is unlikely.

Now that the European Union will likely remain intact, markets are rejoicing. While there is still some concern that Marine Le Pen could pull off the upset, Emmanuel Macron has proven to be a shining light for stocks.

Excellent Earning Reports

There are many political factors that can take the markets higher or lower. However, at its heart and soul, the markets are primarily driven by the economy and the performance of companies. Several companies have experienced tumultuous quarters, but you wouldn’t know it by looking at the recently released earning reports. In fact, recent earnings have helped to fuel the market’s rise, while simultaneously pushing the NASDAQ over the 6,000 point threshold. The kickoff was led by McDonald’s and Caterpillar. While the 6,000-point milestone might not be significant, it will undoubtedly give consumers and investors more confidence and this could result in stocks climbing even higher.

It is also important to take a look at the latest Nasdaq penny stocks. While they’re low at this point in time, they could easily climb alongside their bigger counterparts.

Tax Reform

It has been nearly impossible for the Trump administration to make it through an entire week without some type of political setback. This has led to increased volatility here and there. Nevertheless, investors are well aware that the markets could climber higher should Trump be able to get some of his agenda passed over the next few months. After healthcare fell through the cracks, the Trump administration quickly shifted their focus to tax reform. Now, the government has put out snippets of information about the tax reform plan and corporations are hopeful.

President Trump hopes to be able to decrease the corporate tax rate to just fifteen percent. This has definitely given hope to investors. However, it is important to remain skeptical at this point. Another setback for the administration could send the markets south in a hurry.

Four Guidance Points to Building Successful Family Business Governance

A 2014 survey by PricewaterhouseCoopers found that 71 percent of family-owned businesses didn’t have procedures in place to resolve conflict issues.

Statistics such as these make it all the more imperative that family members in business together set up a clear and agreed-upon structural plan, a constitution for business governance as it were.

Items in this structural plan can include mission and vision statements, an employment policy, strategies to develop the next generation of leadership for the business, a liquidity policy, a succession plan, and information regarding any shareholder meetings.

Understandably, the details of what is relevant when it comes to successful family governance can change from business to business.  With that said, the below guidance points can prove useful for a wide range of family-run organizations. 

Independent Board of Advisors

Many family businesses have boards of directors comprised mostly or entirely of family members. Although boards of directors with this kind of composition can be successful, independent, non-family-related directors do bring value. 

Some family businesses ensure more balanced boards of directors through policies that limit the number of family directors.  Some also compliment their family board members with non-equity holding directors. If the governance structure doesn’t allow for outsiders on the board, setting up an advisory committee to the CEO that is composed of individuals recruited from outside the family may bring fresh perspective and expertise.

Avoiding Conflict During Management Changes

Policies that encourage meritocracy are certainly beneficial to any family-run company, especially when it comes to setting boundaries and avoiding conflict during times of management change.

The reality is that leadership change happens in most businesses.  Intelligently-run organizations understand this reality and plan ahead to make leadership transitions as smooth as possible.

To build on the previous point, outside directors and advisers can help make management changes smooth, after all non-family related advisors or directors can provide both the perception and the reality of objectivity during leadership selection decisions.

Regardless if a business is hiring new management from within the family or outside of it, new management should be in line with the organization’s culture and should be evaluated based on core leadership qualities like respect, integrity, quality, humility, passion, modesty, and ambition.

Transparency

To prosper, businesses need to raise financing from time to time and if a company is still private, that usually means depending on a bank to provide a loan. Family-run firms that insist on maintaining a veil of secrecy over their affairs will find it difficult to raise the financing needed to grow.

The so-called “family premium” — the idea that family-owned and -led businesses are stricter when it comes to standards, capital distribution and governance — is typically only applicable to entities with high levels of transparency. Conversely, opaque firms trade at a discount because investors simply don’t know enough about that business, especially those firms with governance practices that may be questionable in other respects.

A Well-Organized CEO Succession

When examining large family-run corporations that have failed in the past, CEO successions, or rather failed CEO successions, have played an unfortunate pivotal role.  When considering the integrity of their own CEO succession process, businesses should ask three questions: one, how vigorous is their candidate selection process and does it allow for the inclusion of multiple candidates?  Two, will all family members who are significantly part of the business be involved in the selection of the new CEO?  Three, what is involved when it comes to integrating and developing the successor in his or her new role as CEO? 

The latter point should be particularly emphasized if a new CEO is being introduced into the business who is not part of the family.  After all, this will be a leader who will not only have to efficiently and successfully integrate into the company, it will also be someone who will need to integrate into the family business dynamic and navigate the occasionally choppy waters of inter-family relationships.

The World’s Reaction to President-elect Donald Trump

In the run-up to the US presidential elections, the media was fervently anti-Trump. We saw network after network lambasting Trump as a bigot, racist, sexist, unsavoury individual and corrupt businessman. Trump was effectively disowned by a large section of the GOP caucus, left high and dry without the endorsement of key political figures in Paul Ryan, Mitt Romney, Mitch McConnell and others. Wall Street bigwigs by and large refused to fund the Trump campaign, instead preferring to lend their support to Hillary.

Trump’s campaign manager, Kellyanne Conway – a masterful pollster and strategist – stuck to her proverbial guns and drove her mark over the line. The net effect of Trump’s outsider status, and strong message brought it home for the Republicans. His crowds were energized, his words were inspirational and his go-it alone approach amid a sea of criticism appealed to the underdog. Trump neither had the backing of the mainstream media, the pundits, the pollsters, the market or the international contingent. True, he is a bold, daring, flamboyant and boorish character but he has a steel spine and plenty of American pride.

This begs the question: How will the global economy react to President-elect Donald J. Trump?

As the final votes were coming in, sentiment started shifting towards a strong bull run on equities markets. There is tremendous enthusiasm on Wall Street that Trump could well drive US economic growth in a big way. His plans for rebuilding American infrastructure (roads, highways, tunnels, hospitals, schools etcetera) will generate trillions of dollars’ worth of fiscal stimulus for the economy. This will require massive employment, especially when coal and steel industries are put to work. Trump’s economic advisors understand that synergy will propel the US to prosperity and it begins at grassroots level. Clinton and Trump were shrouded in scandal, and unsavoury behaviour but Trump’s outsider status won him the vote. Now, the real job begins.

What should Canadian investors expect from the Trump effect?

That Trump was able to break through critical rustbelt states that were traditional Democratic strongholds is remarkable. It goes to the heart of the movement that Trump has championed. Ohio, Pennsylvania, Michigan, Wisconsin, West Virginia, Iowa, Nebraska and other states either voted overwhelmingly in favour of Trump, or narrowly elected Clinton. The message is clear: the people want change and Trump is the champion of that change. The economic impact of Tornado Trump will be interesting. It is already evident that the pundits were wrong about Trump’s chances of winning and they were wrong about the market reaction to his victory.

This begs the question: Are we seeing a Brexit-style change taking place in North America?

In Canada, Stephen Harper won the Conservative ticket while Obama took the United States in the other direction. Now, conservatives hold the reins in the United Kingdom with Prime Minister Theresa May and the Brexit vote, and conservatives hold the Oval Office, the Senate and The House in the US. This is a movement and not an anomaly. Trump has come to drain the swamp of Washington insiders, pay to play politics, and he will be held to an extremely high standard.

Among the stocks that rose after Trump’s selection were biotechnology stocks, healthcare stocks, banking and financial stocks and others. The Clinton campaign promised increased scrutiny of the financial sector, but that appears to have dissipated with the President-elect. There is reason to celebrate with the fiscal expenditure programs that Trump will implement as president. This is a remarkable appreciation given the result. The impact of a stronger greenback against the Canadian dollar naturally lends itself to more expensive imports from Canada. Companies will be borrowing more to pay for their imports, but exports will surge. The US dollar index rose unexpectedly after Trump’s trouncing of Clinton, and more gains are likely to take place moving forward.

Trump’s performance as president will be evident in the financial markets

Analysts were overly negative on the Trump Effect on markets. Wall Street has endured multiple years of bullish sentiment, and there were echoes of bearish trends taking root soon after Trump was elected. The knee-jerk selloff to Trump’s election was countered by a strong turnaround. The S&P 500 index, the Dow Jones, the NASDAQ composite index and the New York Stock Exchange all rallied the day after.

Financial companies desperately need regulatory reforms to be able to function fluidly. American enterprise is hampered by regulatory constraints that prevent effective management, maximum employment possibilities and more. It is too early to tell how financial markets will react when President Obama officially hands over the reins to the newly elected Donald Trump. The office of President of the United States comes with tremendous responsibility. Trump will have to fill that role and lead like an executive to garner the support of the public and the world community. If he performs, he will be judged by the numbers in the financial markets.

Please Mr. Obama, Lend Us Your Crystal Ball

The President wants the DOL to fine professionals who make money allowing 401k participants to make “bad” investments.
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So what’s the difference between a “bad” and “good” investment? Right, well in the Will Rogersian world of politicians and regulators, “the good ones only go up in price; the bad ones go down”.

“Don’t gamble; take all your savings and buy some good stocks and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.” WR

Plan sponsors and other financial professionals are supposed to know which ones will go in what direction… and NEVER (as Will would admonish) buy a security that is going to go down.

“Where have all the crystal balls gone? Gone to hindsightful regulators, all of them.” PP&M, sort of.

POTUS wants investment advisors to only select the “good ones”, and they are expected to know in advance where the market may be going, in both the short run and the long. And getting paid for their efforts, well that can’t be “good”, especially when the market value goes down.

Remember, “advisors” are mostly salespeople; regulators are mostly cops.

Do any of these guys have a clue about the workings of the stock market? Which is worse: having the foxes (advisors) in charge of the hen house (401k investment (not pension) plans), or having the lunatics (politicians & regulators) running the asylum (stock market expectations)?

Both are bad, unrealistic, and counterproductive. Markets rise and fall in price… the advisory deal is to limit the amount of risk in a portfolio. Risk of loss is always involved, but it can be minimized… regulators just don’t really get it.

Participants need to be educated not coddled; costs are not the most important aspect of retirement investing, net spendable income at retirement is; stock market values will always go up and down… and that’s a good thing.

If 401k participants are expected to be retirement ready, they need to know the importance of growing income and to have investment options that can get the job done.

I’m not sure that can be accomplished in the current 401k space, but the education has been available for a long time… and it can be applied fairly easily in a “self directed” 401k environment.

And that, Mr. President, is all you should be lecturing the investment advisory community about. If a plan participant is too lazy, busy, greedy, or preoccupied to determine “what’s inside” an investment option, it is not the fault of his or her employer.

The education is out there: just read The Brainwashing of the American Investor

… and here are two Self Directed IRA or 401k income investment presentations for you to think about. 

Next Webinar April 8th

To Rollover 401k Plan Assets or Not To… That Is The Question

The major purveyors of 401k products, and those who benefit from using them remind me of politicians… they press the party line, and use their power to demonize the competition.

Their position and deep pockets allow them to get their message out while we who have neither can only shake our heads and whimper about the sacred purpose of retirement income programs.

But, in the simplest of terms, since when has 2% been better than 6% (both after expenses)? The DOL, fiduciaries, and plan sponsors are staring back at me, eyes wide shut.

LinkedIn discussion groups have been talking about the pros and cons of 401k rollovers to private IRA portfolios. Most of the articles, and not by a slim margin, are institutionally biased advertisements for low cost Mutual Funds and ETFs, despite the fact that have absolutely no “preparation for retirement income bones” in their mass marketed bodies.

When the market corrects, the results will be what they have always been for market-value-growth-only programs. This time though, the DOL will fine the Plan Sponsors (i.e., the corporations so bitterly hated by our government), for allowing plan participants to make investment judgment errors with their own money plus the matching contributions…. let hindsight reign in the 401k space!

The 401k “space” as they call it, has become a lucrative product shopping mall, totally out of touch with what should be the long run purpose of these “quasi” retirement programs: it’s the monthly retirement income that pays the bills, Charlie Brown, not the market value.

If a person were a conspiracy theorist, he or she could make a case for institutional/congressional manipulation of interest rates… keeping them near zero so that gurus will continue to predict that stock market “returns” will outpace those of income purpose securities. Hmmm.

None, absolutely none, of the products provided by the top institutional peddlers produce nearly as much after “expense-ratio” income as Closed End Income Funds. These outstanding (and income paying far longer than any income ETF) managed portfolios are never, ever, found in 401k Plans… except the Self Directed, “safe harbor” variety.

Interestingly, all the major 401k product providers, also manage Closed End Fund product lines that generate generous income, even after higher fees. These fees, so important to regulators and politicians, are never paid by the recipients of the much higher income.

CEFS paying 6% to 9% after expenses are commonplace, but not available in 401k plans. Similarly, there are no restrictions on speculation in the equity markets, where similar high quality managed equity portfolios have been available for decades.

The retirement plan (401k) community has gotten so paranoid over goose-stepping DOL auditors and other regulators armed with crystal clear hindsight, that they have completely lost site of “spending money” as the be all and end all purpose of retirement portfolios. They must “outperform” half their brethren, and be dirt cheap to boot.

Yeah, I know that 401k Plans are not retirement portfolios, but neither the regulators, plan sponsors, congressional leaders, POTUSs, fiduciaries, or plan participants seem able or willing to accept that reality… why should they?

Looking inside the multi-billion dollar Vanguard 2020 TDF, we find 60% invested in equities (no less than 7000 individual positions) and income of about 1.5%. Wake up regulators… the “unfairness” is in the “emperor’s new clothes” products provided to the plan sponsors for inclusion in employee product menus.

You the fiduciaries, you the regulators, you the witch hunters, and you the do-gooders need to look at the product providers instead of their victims.

If you insist upon looking at investment plans as retirement programs (ERISA = Employee Retirement Income Act), perhaps you need to mandate that an outside-the-mainstream, “Self Directed”, income program be a major part programs you supervise. Until the focus changes from market value and expense control to after expenses income, these plans cannot provide what is expected of them… retirement readiness.

So in answering the “To rollover the 401k or not to rollover the 401k” question, I would say: “Run like _ _ _ _, just as fast as you can, to get out of that 401k and never ever buy a low income or no income security in the Rollover IRA you move to.

As long as plain vanilla portfolios of high quality equity (IGVSI companies) and Income CEFs yielding an experienced average, net/net 6% or more, are banned from participating in the 401k marketplace by (possibly) illegal monopolistic practices, rollovers to IRAs should be a requirement, not an option.

See how they run: https://www.dropbox.com/s/b4i8b5nnq3hafaq/2015-02-24%2011.30%20Income%20Investing_%20The%206_%20Solution.wmv?dl=0

As long as regulators are blaming generous employers for the investment mistakes of their employees, self-directed, income purpose, 401k plans are a much less scary, “almost a retirement plan”, option.

Dodging the DOL Chainsaw: Small Business Owner Protection

The DOL is Coming!   The DOL is Coming!

As if you weren’t already up to your elbows in rules, regulations, and expenses, the Department of Labor has empowered itself to fine at least half of the Employer/Plan Sponsors it audits… for multiple investment related reasons.

These include, among other things, the cost of the products in your investment menu and the market value performance of those products. As a plan fiduciary (right, you are a plan fiduciary), it’s your job to keep costs below average and performance above average…. and, yes, you are deemed responsible for your employees private investment decisions… no matter how foolish.

Hardly seems fair, does it. You give them money to invest, and you’re too blame when they mess up.

But, true to form within the 401k “space”, no one (other than the plan participants) seems to care about the retirement income benefit that 401k plans should provide to employers and employees alike… not even the DOL, ERISA champions of the interests of employees.

Since roughly half the plans will always be below average, it’s fair to expect that large numbers of plans will be fined….

In fact, 70% of plans audited in 2013 were penalized or forced to make reimbursements. Neither ETF providers nor Mutual Fund promoters share this responsibility with you, and all of this stress is on top of the “top heavy” problems you deal with year, after year, after year…

You may be able to protect yourself from the fines and the “top heavy” audits in one fell swoop by switching your plan to a professionally-managed-by-a-fiduciary, self-directed 401k they call a “Safe Harbor” Plan. In this type of plan, there is no menu of one size fits all products, none of which focus on income purpose investments that support the ultimate benefit of the program.

You see, the goal of the providers is to keep your money in their funds forever, hoping for upward only markets and their ability to convince you that you just can’t do better than 2% income anywhere. That’s the 401k space “end game”, but you can do much better, and considerably safer in a… “Safe Harbor”, managed growth and income program…

In the self directed, private portfolio “space”, you can require the safest equity selections, and growing retirement income, in a flexible asset allocation geared to the age and risk profile of each participating employee. Employees don’t have to participate, but you have to provide an immediately vested matching contribution if they do…. BUT, the top heavy problems disappear, and your contribution levels have no backdated limitations.

Not so long ago, I brought a QDI (Quality, Diversification, and Income) portfolio series to the 401k space. None of the product pushers were even slightly interested in any facet of the program… not even the superior retirement income generation capabilities… the “good ‘ole boys club” just couldn’t be bothered.

With the stock market at the peak of a six year sustained rally, what protections do you have from a correction? In the managed programs I’m describing, equity profits have already been taken, and the income keeps growing… monthly, in most cases. The Target Date Funds 401k providers are in love with are low quality equity, seriously low income time bombs, ready to go… KABOOM!

The Vanguard 2015 Fund, for example, was 50% invested in no less than 5,000 stocks at the end of January 2015; the total portfolio income was just barely 2%. What do you think the 2020 or 2025 portfolio looks like?

Here’s a look at the workings of a professionally managed retirement income program: a high quality, individual security, 30% Equity portfolio, generating three times the Vanguard 2015 TDF income, with a whole lot less risk:

https://www.dropbox.com/s/28ty6z5dkgn5ulu/Retirement%20Income%20Webinar.wmv?dl=0

Hmmmm, Small Business Owners, seems to me that would resolve your fiduciary issues.

Retirement Income Investing: The Dreaded RMD

All of us are approaching retirement, many of us are already there, and some of us (myself included) are thinking about the ultimate IRS slap-in-the-face… The Required Minimum Distribution. It’s time to make sure that your retirement income program is actually ready.

Every investment program becomes a retirement income program eventually.

First off, you need to get to a place where you can say:

“a stock market downturn will have no significant impact on my retirement income”

This applies to everyone; income development is always important, and Tax Free Income (outside the IRA or 401k) is The Very Best. Only private “safe haven” 401k plans are capable of focusing on income development.

Retirement readiness requires active consideration of your asset allocation, your overall diversification, and most importantly, the quality of your holdings. Those of you who are relying on 401k assets to fund your retirement income requirements need to look inside the program.

If you are within five years of retirement, repositioning at the top of a stock market cycle (now) is essential; if you are in retirement, get your portfolio out of any employer plans and into your IRA… you just can’t protect yourself  (and especially, your income) in Mutual Funds or ETFs.

If you are approaching 70, the RMD is “in your face”… here’s how to handle it:

• Position the portfolio to produce slightly more income than you must take from the program.

• Take the income monthly and DO NOT pay the taxes in advance. Lump sum withdrawals require uninvested cash reserves and/or untimely sell transactions.

• Move the RMD disbursements into an individual or joint account and reinvest at least 30% in Tax Free Income CEFs.

• If you hold equities (in addition to the RMD income producers you need), set your profit taking targets lower than usual… and maintain the Cost Based Asset Allocation.

I’m relatively sure that some of you are currently dealing with the RMD incorrectly… with “lump sum + the taxes” distributions.

Some of you have been to my ongoing series of “live SRS portfolio review, Income Investing Webinars”.

Follow this link to the recording of the January 22nd private presentation and don’t hesitate to post it where ever you like… wouldn’t it be cool to have this presentation show up on YouTube.

https://www.dropbox.com/s/28ty6z5dkgn5ulu/Retirement%20Income%20Webinar.wmv?dl=0

The Microsoft Retirement Income Program

Reading Between the Lines

Once we recognize that all investment portfolios eventually become retirement income portfolios, we can begin to focus on the regular recurring income that they produce… retired or not, the market value of your private portfolio (or of your 401k plan) has no purchasing power.

Yet all 401k programs are performance evaluated on market value growth as opposed to income production.

In late 1999, Microsoft Corporation (MSFT) common stock was at an all time high of $58.38 (split adjusted), and there were thousands of MSFT multi-millionaires out there confident that their retirement was secure…. with a guaranteed monthly income of ?

Please send me an email with the amount of income produced by a million dollars worth of Microsoft in 1999… or your favorite ETF or TDF today.

Several years later, one of those millionaires, and a golf buddy of mine, disclosed that he had just sold the 7 series BMW he had purchased with the proceeds of his MSFT stock… the one “asset” he still had from his dot.com fortune. Pushing 65, he just couldn’t bear the memory any longer.

If only he had sold the entire portfolio… or converted enough to tax free Closed End Funds to assure a lifetime income.

Yet no 401k programs today will hold income Closed End Funds (yielding 7% or so right now). Why? Because, according to the Department of Labor, 2% after low expenses is better than 7% after higher expenses.

By September 2000, MSFT stock had fallen by almost 50%; nearly 15 years later, with the market near its highest numberl ever, MSFT (at $47.60) remains 18% below its 1999 level… it didn’t pay a dividend until 2003, and its dividend yield today is only 2.6%, after many increases.

Back then, most Mutual Fund portfolios contained MSFT and hundreds of similar NASDAQ securities…  and this was OK with all varieties of regulators and plan fiduciaries because the markets, after all, were trending upward.

MCIM portfolios contained no NASDAQ equities, no Mutual Funds at all, and a growing income component of at least 30%… hmmm.

It took more than 15 years for NASDAQ to regain its 1999 level… how many of the heroes survived?

Today, most Mutual Fund investment portfolios and ETF gaming devices contain 1999 Microsoft look alikes, and most pay very little income…

MCIM portfolios? Well, no… no Mutual Funds, and no ETFs, just IGVSI (NYSE dividend paying) equities, and an income CEF component of at least 40%.

Can you get an MCIM Income Purpose portfolio in your IRA… absolutely;  in your 401k…  it’s a long sad story.

What’s in your wallet?

Retirement Income Webinar Sign-Up

Expectations of entitlement – where do you sit?

This is coming from Panama – Coronado on the Pacific Coast to be exact. We are here for 12 days. An interesting country – some very lovely spots and the people have been universally friendly so far! Lots of expats here – both Canadian and US. They have their own currency, the Balboa – but it is on a par with US currency so both are used interchangeably. Their driving habits rival those of Montreal – glad we are using professional, private transportation.

The expanded canal is the most amazing feat of construction in the world and they are justifiably proud of the work in progress and the eventual result. Apparently will add $6 Billion (over operating costs) to the Panamanian economy each year!

With that said, there are many deficiencies in services that we take for granted. Some of the more interesting gaps is there is no proper ambulance service, and they do not have any paramedics! You phone a private Ambulance, they locate a doctor who is available and then they come and get you – wait times up to 6 hours – yes hours – all are privately operated – cost for pickup ranges from about $300 to over $600 – CASH only – and they stop at a cash machine for you! No postal system as we know it. There is a strange courier/package system that some people use where mail is sent to PO Boxes in Miami, Florida – and sent here by air freight. No bills are mailed – everything is a cash transaction from cell phones to satellite TV to gas – cheap – $.898 per litre for diesel and about $.92 for regular gas.

Lots of stores but overall quality is “dollar-store” level – including groceries and fresh veggies and meat. Fruit is great quality as is the local seafood – the prawns and bass in particular. Meat is a huge disappointment to someone used to high quality everything. Chicken and turkeys are good – the rest – ?????

Residential water service is an interesting mix of on and off. All residences have water storage – where we are staying – 700 gallons (US) – which lasts about 2 days for the 4 of us here – wasteful aren’t we!

So what is the point of all this? First, Canadians are blessed with unbelievable wealth (and I am not talking money) and public and private services that have no equivalents here (or in many other parts of the world of course); second we don’t acknowledge that wealth even to ourselves; third as a group, Canadians have developed a very unhealthy sense of entitlement without appreciation for that which we have and fourth, we have universal access to medical and a social welfare/social services net (no, it is NOT perfect) – Panamanians have none of these.

Now they do have some advantages: there is no personal income tax; property taxes are very low; they have some low-quality grocery products that are price-frozen for low-income people; and the climate is very pleasant, with the exception of the high humidity.

My blogging colleague, Becky Wong, CFP, has done a few excellent blogs on the topic of entitlement in Canada. I am adding another voice to her message. A great many Canadians do not seem to be grateful for all that we have – most clamour for more and more but loathe paying the cost – let the Governments (all 3, or 4 levels if you include the new First Nations bureaucracy).

The ONLY source of Government and First Nations’ revenue is you and I – the people. Let us not forget this key point.

Corporations have never paid any taxes – they are merely conduits down to the people and this has nothing to do with politics either – they are simply hired tax collectors – another branch of Government taxation. This concept applies to property taxes and every other type of taxation. The idea is to hide these extra taxes from us poor taxpayers – not citizens either as Daphne Bramham of the Vancouver Sun tried to make out. Hi Daphne – many non-citizens pay more taxes than many citizens and there are more citizens who do not pay taxes than taxpayers – time to come in from the cold!

Rather than demanding or expecting more or thinking we are entitled to more, let’s think about GIVING more for a change – to paraphrase John F. Kennedy: “ask not what your country can do for you but what you can do for your country.” Shouldn’t we be a country of givers rather than takers?

The S&P 500: 15 Years to Nowhere!

On November 30 1999, the S & P 500 Index was around 1,400, basking in the sunlight of what many analysts were calling the “No Value At All” or “Dot Com” Bubble. Roughly ten years later, December 31 2009, the Index was about 20% lower (@ 1,120) a mere ten months off a second major hit, the “Financial Crisis” bottom.

Most investors are intimately aware of these numbers, they lived through both major meltdowns and possibly a third way back in  October 1987… but they seem generally unfamiliar with S&P performance “backtesting” of companies it ranks “highest in fundamental quality” vs. the Index itself.

S&P backtesting shows that the higher quality companies have: less risk, lower debt levels, higher profit margins, and higher return on equity. They are also less likely to engage in accounting manipulations. AND, the highest quality ranked companies (B+ through A+) outperform the S&P Index itself. (research by K Gillogly, 2005)

What makes this especially interesting is the fact that the S&P 500 is representative of all sectors now mirrored by MPT birthed ETFs and conventional Mutual Funds… both of these investment (speculation?) vehicles ignore the S & P conclusions as they seem to make a concerted effort to avoid higher quality/lower risk possibilities… incom? What income.

In June 2005, S & P ranked just 1,100 companies “average” or above; less than half (518) were “above average”.

The November 1999 through December 2009 investment climate (the media dubbed “Dismal Decade”) was not so dismal at all, for investors who used S&P quality rankings in their equity investment strategy. In looking at this time frame, and studying investment portfolios containing only S&P B+ and higher ranked companies in their equity asset allocation, researches found an alternative investment performance universe.

The portfolios contained a “refined” collection of companies, tracked since 2007 as “The Investment Grade Value Stock Index” (IGVSI). In addition to the B+ or better S&P ranking, these companies were NYSE only, and dividend paying… fewer than 500 companies ever qualified, and portfolio management used several other risk minimizers in an active trading environment…

For “quality” comparison purposes, mutual funds contained in the most conservative of Target Return Funds now contain over 5,000 individual equities!

Additionally, the 55 separately managed portfolios in the study had an overall asset allocation of roughly 60% equity and 40% income purpose securities… and all asset allocation/diversification decisions were made using a “cost based” methodology called “The Working Capital Model”.

So for the ten years studied by the original researcher and two other entities, while the passive S & P 500 slid 20%, these actively managed portfolios grew between 18% and 253%… an average 72.5%, while NASDAQ fell 32% and the “Blue Chip” DJIA fell 4.5%.

So for analysis sake, lets superimpose the more recent 5 years of annual market value growth of the Investment Grade Value Stock Index and the S&P 500 on top of the performance of hypothetical $100,000 portfolios since November 30th 1999.

The S&P Portfolio fell to $80,000 from November ’99 through December 2009. Since then, it’s 69.2% gain produces a right now portfolio value of $135,392… a gain of roughly 2.36% per year. On the income side, the portfolio would have produced roughly 2% spending money per year.

The 60% IGVSI Equity + 40% income purpose securities portfolios rose to $172,500 through December 2009. The past 5 years have pushed the portfolio totals to roughly $271,843 while producing an income only cash flow in the 7% neighborhood.

So this hypothetical combination of supported research and educated estimation produce a quality equity +  40% income purpose based portfolio growth rate roughly five times the rate of the equity only S&P 500 Index… and this without even considering the compounding effect of higher income and 15 years worth of profit taking.

Yet in spite of all this evidence, 401k participants are not allowed access to such old fashioned programs… the “catch 22” of the “why” will amaze you. Plan investment policy statements preclude investments that have a limited track record, and or a small amount under management….

The program described above has been around longer than any ETF anywhere, longer than most of the Mutual Funds in the 401k space, and has been managed longer by the same person, in the same format, than (just guessing with 44 years of operation), than any other out there. Yet, a new package makes the product unacceptable….

As you think about the recent carnage in your 401k account balances (even if it proves to be temporary), shouldn’t you, your employer, your plan advisor, your plan fiduciary, have had the chance to say: “hey, high-quality dividend paying companies and 40% or more invested to grow my retirement income… makes sense to me!”