This from Investor’s Daily Edge:

“Fear frustration; Some Call it Quits,” a recent Wall Street Journal article, unknowingly summarizes what I have been saying for a long, long time.

The article is a short list of people who have thrown in the towel on the stock market. In every instance, the people described themselves as having everything or most of their money in the stock market.

A formula for disaster.

All of the people were professionals, all were successful, or sounded so from the description of them, and all must try, very hard, to ignore all the good advice that’s out there about how to invest your money.

After many years of trying to get investors to listen to good advice, I know it’s a waste of time to say this again, but you cannot have all your money in stocks. In fact, I left the brokerage business because I was sick of my clients ignoring what I told them to do and then blaming me because they were losing money. Here we go again.

It is financial suicide to invest only in stock.

Here’s one of the saddest stories I know about learning this lesson the hard way.

Paul, a former client of mine, just retired from a Fortune 500 company with a huge stock, stock option and 401K-rollover portfolio. This guy was the poster child for how to do your retirement planning right, around $4 million.

He took his entire 401K and rolled it over into some great mutual funds. Good move, he didn’t want to be bothered with the day-to-day stuff and knew this particular group very well. He also understood the fee structure and was ok with it. This portion was about 25 percent of his entire net worth.

The rest of his money was in stock options and stock in his former company, one that he rightfully held close to heart. He credited this company with everything he had.

Two problems that are common to many retirees: one, he had too much in this wonderful company. Investments are not collectables or mementos. Paul refused to accept this.

Two, he had everything in stock. Despite my best efforts, he refused to budge from his positions. When I first met with him, his company stock was at 94. Within three years, it was at 12. That’s an 87 percent drop in value. Three fourths of his total worth dropped 87 percent.

Leaving yourself open to the full brunt of the stock market will always have the same outcome.

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INTERNAL ENDORSEMENT Stop Playing the Stock Market Lottery! In the ongoing destruction of the capital markets, no haven is safe. Gold… down. Blue chips… down. Utilities… down. Consumer staples… down. Cash? Well, maybe for a little while, but we all know the dollar is doomed. Why risk your precious funds in the stock market lottery? Did you know you can make stock market returns… without stock market risk? You can! And there has never been a better time than RIGHT NOW for this investment…

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The past six months should be enough to prove to you that the stock market, while it has great long-term returns, is a risky proposition. There are techniques that if used properly will reduce that risk, but can’t ever eliminate it. Not diversifying properly in stocks, bonds and cash, as everyone now knows, is as close to a guaranteed loss as you get in this business.

Investors have severe tunnel vision and an unwillingness to allow for failure in their investment planning, or lack of planning. If you do not plan for the type of market we are in now, you will not survive.

There have been six different “end of the world markets” since I have been investing and working in the investment industry. Every one came after a period of crazy increases in real estate and/or stocks. It is the nature of the beast.

In case you haven’t figured it out yet, there will be another market just like this one; maybe worse, it is how the market works. Call it financial selection, market cycles or just craziness, but you must plan for the next inevitable crash or be a victim again.

How do you survive these killer markets? Diversify with stocks, bonds and cash investments, use reliable research, avoid listening to conversations about investing at parties, and stick with the tried and true. This advice may seem boring and nonproductive at times, but it is the only way I have found to be there to fight another day.

Source: A Survivor of the “End Of The World Market”

These problems should be stated in financial reports. But sometimes they are hidden in plain sight.  A bit of dubious padding in pension plan earnings projections can neatly camouflage millions in shortfall.

By the way—even if you are not buying dozens of stocks for their dividends, this is something good to know. It will help you evaluate those slick plans that brokers, bankers and insurance salesmen hold out to you when you take out life insurance, buy an annuity, set up a 401(k) or do any long-term planning yourself.

Let’s start with a choice: Which would you rather have? $311.80 today to put in a 20-year bond that pays 6% a year? Or would you rather have $1,000 on Nov. 13, 2028?

They are the same. The $1000 is the “future value” of taking $311 today and investing it for 6% per annum for 20 years.

Or to reverse the order, assuming 6% a year return, $214 is the “present value” of $1000 in 2028.

And the 6% assumption? That is the “discount rate.”

The problem with Lockheed Martin and several other companies is that the potential for big pension shortfalls is craftily understated in the discount rates they use in their projections. Lockheed has been using a discount rate of 7.5% for its pension plan returns.

Is that reasonable? No way! Nor should you accept a rate like that in an annuity or life insurance plan’s projections.

First of all, a pension plan should be conservative. It should hold bonds along with blue-chip stocks, and bonds do not pay anything near 7.5% unless they are of poor credit quality and highly risky.

For reality, we’ll go to the guidelines Charles Schwab has published—a 20-year average return for large-cap stocks is 8.2%, and for bonds it’s 4%. If the pension fund is half stocks and half bonds, a reasonable discount rate would be 6.1%. In truth, the balance for pension funds today according to Watson Wyatt and several other firms is 60% stocks. With a 60-40 ratio (bonds to stocks), the discount rate should be 6.5%.

Jiggling with this number makes a huge difference. A million dollars worth of obligation in 20 years can be fully covered with $235,000 in the pension plan today if it really can average a 7.5% return. But if the proper discount rate is only 6.5%, then the fund should have $283,000 in it. That’s 20% more money.

On top of this, many pension fund managers have been switching to more bonds in the past year. If the ratio turns back to 60% bonds rather than 60% stocks, the discount rate should fall to 5.7%, and Lockheed’s pension fund would need 40% more money in it today than it would at a 7.5% discount rate. Ditto any other companies using high discount rates.

This isn’t hard to check. It’s all in a company’s annual report, and often in the quarterly reports. If a company says that it needs to add to its pension fund, or is barely covered, take a second look at the discount rate it is using to be sure it is stating the full measure of the problem.

And you can tell your broker, banker, and insurance salesman to use a reasonable rate in his projections the next time you’re doing some financial planning, too.

Source: Pension Problems Part II

This from Investor’s Daily Edge:

Reacting to market moves guarantees you will be on the losing end of the equation. Jumping in and out of investments as the market swings up and down is the absolute worst way to invest. It amounts to market timing with a broken clock.

Sometime around the late eighties, a real brain found a way to quantify what we in the investment business had been recommending for many years, a balanced portfolio. He called it asset allocation.

What asset allocation did for investors is to prove, once and for all, that investing over many asset classes, and leaving it alone, will make more money than putting all your eggs in one basket, or trying to time the market.

Essentially, a balanced portfolio, or asset allocation, means you don’t have all your money in one asset class. You spread it around over stocks, bonds, gold, cash, etc.

How much you put in each category is directly related to your age or your ability to assume risk, which goes down as you age.

In my experience, investors usually ignore this advice. The urge to get rich quickly is too great. But, the fact remains; you will make more money if you spread your risk around.

The market’s insanity over the past year was driving many investors to gold and cash, or money markets. People who would never have considered gold were pouring money into it. All they were doing was shifting the risk from equities to another investment class. And now that gold has fallen over 20 percent in the last four months, they have jumped off that ship too.  This is not a solution. This is another problem waiting to happen.

This type of activity is called, “detaching from fundamentals.” Everyone has forgotten everything we know about the markets and has just started following the noise of the herd in front of them.

In the ongoing destruction of the capital markets, no haven is safe. Gold… down. Blue chips… down. Utilities… down. Consumer staples… down. Cash? Well, maybe for a little while, but we all know the dollar is doomed.

As the markets recover, and they will, the same investors will run back into stocks long after they have been fully priced. Essentially, people are throwing money at the back of the money train. Too late!

As I pound the desk every week pushing you to look at bonds, it is with the assumption that you are using a balanced approach. That is, you have the appropriate percentage of stocks to bonds for your age.

The formula is very simple, the discipline and patience to make it work is not. Subtract your age from 100. The remainder is what you should have in stock; the balance should be in bonds, or other low risk investments. As you get older, the percentage in bonds should increase, a lot.

Here’s the problem. The get-rich-quick urge kicks in for just about everyone and no one is able to see beyond the end of his or her nose. The best advice available is thrown out the window and time horizons are about six days.

The reverse is also true. You can never have all your money in bonds. As the market churns out the timid it may seem plausible to think, “I will never invest in stocks again.”…

I will never recommend a portfolio invested entirely in bonds.

From an inflation standpoint, it is not recommended, but that’s another article.

Go back over your accounts for the past few years. I guarantee if you work a reasonable return for an appropriate percentage of bonds into the problem, you would have made more money in a balanced approach than in the get rich quick method.

If nothing else, bonds will give you a steady return on a portion of your portfolio when the markets are flat or down, which is most of the time. This investing thing is as much about finesse as information. Patience plays a big part in it as well.

While the markets spin their wheels, take a step back and evaluate what and how you have been doing things for the past few years. From here, it can only get better.

Keep your powder dry.

Source: A Balanced Approach

The Sovereign Society’s Eric Roseman predicts a far harsher global outlook. He says the world economy is staring down the barrel of the worst recession in 20 years.

This means it’s time to shift your focus to the securities that can protect your wealth from deflation. Eric says gold, high-quality Treasury bonds, non-financial A and AA corporate bonds and the U.S. dollar are your best bets…

The economic slowdown now threatening the United States and other industrialized economies will probably lead to the worst recession in almost 20 years.

The world economy will continue to struggle with the heavy burdens of rising food and energy inflation. On top of that, industrialized nations are facing deflation in housing and bank credit. And all the while, consumption will continue to erode because consumers will save more and spend less to address balance-sheet erosion.

For the first time in the post-WWII era consumers are facing a bizarre mix of lethal food and energy price inflation and deflation (or declining prices) in real estate and financial assets (stocks and bonds).

Never in the post-war period have consumers and investors alike faced such a challenging environment. We’ve simply never had to deal with two powerful economic forces converging with lightening speed.

Deflation, not inflation, does far more destruction to consumers and the global economy. That’s because debt burdens become increasingly difficult if not impossible to finance.

That’s the lesson of the 1997-1998 Asian economic crisis, the Russian ruble collapse in 1998 and now, the credit and real estate deflation attacking the United States and Western Europe since August 2007.

Inflate or Die

In a typical deflation environment, credit “bubbles” deflate. This process or monetary phenomenon can take several years to control until finally the forces of inflation eventually win. At that point, global central banks usually try to print their way out of economic distress.

The only way to beat deflation or an environment of rapidly declining prices is to expand bank credit like there’s no tomorrow. That’s what Asian central banks did in 1998 and the United States started in 2001.

The last U.S. deflation, back in the 1930s, was eventually cured by the Second World War. The war led to renewed economic production as the United States converted from a sleepy, peaceful country to a wartime economic juggernaut.

But today, the sub-prime crisis has morphed into a diabolical monster as it spreads from one facet of credit to the next. In the process, debt deflation or credit destruction is now underway.

The entire gamut of credit deflation reads like a bad movie script – and it’s still unfolding.

Bank credit continues to tighten in the United States and Europe, particularly in the United Kingdom, Ireland and Spain. As a result, default rates are now rising for companies and consumers.

Credit card delinquencies are surging and even top-notch investment-grade companies are being denied credit. Corporate bond spreads trade at multi-year highs, banks’ capital ratios have plunged amid a blizzard of unprecedented losses, and mortgage markets are hemorrhaging.

The Debt Deflation Strategy

According to data from Morgan Stanley (NYSE:MS), only U.S. Treasury bonds posted gains during the last deflation or Great Depression of the 1930s. Gold, however, might have gained in value had FDR not confiscated ownership in 1933.

In my view, gold along with the U.S. dollar would post significant gains versus most assets, including foreign currencies in a debt deflation.

Silver, however, might not appreciate as strongly as gold in a severe recession.

Silver remains mostly an industrial metal and I doubt it would appreciate in the same context as gold during price deflation. That’s because industrial demand for silver would collapse in a hard recession, unlike gold – viewed universally as a surrogate currency and a long-term store of value against fiat currencies.

Other commodities, including oil, are unlikely to rise in value if the current economic situation deteriorates further. There’s no historical case to be made for holding raw materials in a debt deflation.

Not even China will save commodities from a major decline.

High quality Treasury bonds and non-financial A and AA-rated corporate bonds are also ideal hedges against credit destruction. As interest rates collapse amid an outright deflation or severe recession, long-term debt prices should rise markedly. Avoid junk bonds and any other category of bonds that aren’t of the highest quality.

The U.S. dollar is also poised to rise vis-à-vis most currencies as the recession unfolds. That’s because foreign economies lag behind the U.S. credit squeeze by about 12 months and will increasingly find debt deflation at their doorstep.

Foreign central banks will begin cutting interest rates in 2009 to offset rapidly deteriorating output. That makes the dollar more attractive on a relative basis because the Fed has already aggressively reduced lending rates to boost growth. That’s certainly not the case in Europe and Asia.

Source: How to Duck for Cover During the Worst Worldwide Recession in 20 Years

The spread of yields between investment grade corporate bonds and treasury bonds is at its highest since 2002. Soon after that point came a sharp correction back to the long-running average.

A similar adjustment now, says Steve, will make someone a lot of money. He’s calling it a “once-in-a-generation opportunity”…

Someone Will Make a Lot of Money on This Market Anomaly

By Steve Sjuggerud

In the latest issue of True Wealth, I shared with subscribers “The Next Big Thing(s) – Nine ideas for a difficult market. “To me, it’s exciting to be able to have that many unique opportunities to share. That’s the biggest unseen benefit of the rough market we’ve had over the last 12 months.

The nine ideas I shared come from all over the globe, in all kinds of investments (stocks, bonds, and whatever else). So they’re not all correlated… If one doesn’t work, another will more than make up for it.

And I believe a few of those ideas will turn out to be “life changing” investments. The opportunities are that good. Most of them are “once in a generation” trades.

Today, I want to share with you yet another possible once-in-a-generation opportunity…

Right now, “investment grade” corporate bonds are as cheap as they’ve ever been, relative to Treasury bonds.

The only time we saw a similar anomaly in the last 50 years was in October 2002. It was a great buy signal…

In less than eight months, “boring” investment-grade bonds soared 19% in price. And don’t forget, the bonds were paying more than 7% (compared to just 4% in Treasury bonds)… So you’d have picked up a good amount of interest in addition to your capital gains.

Today, we’re seeing a nearly identical situation… Investment-grade corporate bonds are paying more than 7%, while Treasury bonds are paying around 4%. Take a look at the chart and you’ll see what I mean:

There’s another way to put the trade on… You could do it hedge-fund style, where you buy LQD and make the equal and opposite bet against Treasuries. One way to bet against Treasuries is through the ProFunds Rising Rates 10 (RTPIX), which will profit if Treasury prices fall.Again, I’m not bold enough for these trades yet. The trends are against me so far. And with all the turmoil in anything related to borrowing money, I can’t recommend getting in right now.

But it is an extraordinary anomaly… one we should only see once in a generation. Soon, we will have a safer moment to capitalize on it. Someday, someone will make a lot of money here. We’ll do our best to pick the right time to get in…

Source: Someone Will Make a Lot of Money on This Market Anomaly