“Buy bonds, they’re safe.” “You can’t get safer than bonds.” “If you hold them to maturity they will always pay back your interest and principal.” “You just saw what happens when you take stock market risk, you get burned. That kind of thing doesn’t happen in the bond market.”

I don't really like doing things just because everyone else is doing it. But I just can't help it. I feel this great responsibility for this January 1st column to give you some fodder for your New Year's Resolution.

Almost everyone makes New Year's Resolutions and most people don't keep them. I think that so many resolutions are broken because they are unrealistic. People will say, "I am going to go to the gym 5 days a week". When in reality that would be probably 5 days more a week than they have been going. That's pretty hard to do. "I am going to lose 25 pounds this year." That one works for a bit, but after losing three pounds the first month and feeling miserable in the effort, 11 more months just doesn't seem possible and so you say, "Maybe next year."

I believe that making a commitment to a new lifestyle is more attainable. "I am going to commit to making exercise a priority this year!" "I am going to watch what I eat and commit myself to eating more healthy food in the coming year!" At the end of the year you look back and find yourself healthier because of your commitment to a better diet and exercise. That healthier eating throughout the year has also probably resulted in you losing ten pounds. Your commitment has you feeling motivated instead of a feeling like a failure.

So, instead of promising to only buy stocks that go up in 2012, why don't you do something that will really make a difference? Why don't you promise yourself, your family, and your children that you will treat your investments with the respect they deserve? I have been in the investment business for more than a quarter of a century and I can say that in my experience, most of the folks I talk to do not do this. They want to know the next big payoff. They want to hit the home run. They want to "make a big lick". And they will use anyone that has a good story to tell to help them.

I know people who have spent 15 hours doing due diligence on which new point and shoot camera to buy, but will start working with an investment professional without doing any due diligence. That just doesn't make sense. It's not a game. I know it feels like a game a lot of the time, but underlying all of those stock trades and mutual fund purchases is the money you are counting on. Counting on to retire, to educate, to use for special projects. It is important stuff. Why don't more people act like it?

We have bad role models, to be sure. I am incensed that our governments, both State and Federal, seem to regularly take money set aside for future commitments. For instance, Social Security, and in my state, the Public Employees Retirement System, and use it for immediate needs when they know that the math doesn't make sense. They know that we are walking on a steep cliff with a soft overhang, but they do it anyway. Maybe to get re-elected or maybe because it is easier to manage today’s problems and "kick the can down the road" on less immediate needs. People do that all the time. You borrow money to buy something you want even though you know you have to pay it back. You keep doing that until you can't pay it back anymore and so you sell off some of your retirement plan at a huge cost in penalties and taxes in order to pay the debt. Or you decide to take a risk in the stock market because it sounds so good you just know it will pay off. And that is really okay if you have the money set aside, but when you risk money that you shouldn't risk you are playing a loser's game.

This year, set some ground rules for investing. Find a time when you can think rationally about what you really need from your investments. Put down on paper how you will invest your money, what you will do and what you won't do. Put some work into finding the right person to help you. And the last and hardest part; don't let your emotions mess up your plan. Have a great 2012!

Today I was doing my part to stimulate the economy by Christmas shopping. That’s not totally accurate. I was Christmas waiting. My wife and one of my children were actually doing the shopping. They would acknowledge me occasionally for consultation on important matters like: should we pay cash or use the credit card? Although this has little to do with the subject of this column, I have to interject something here. I use credit cards all the time. I would say that in an average month 85% of what I buy goes on my credit card. Credit cards are not, in and of themselves, bad. They are a great way to build a good credit score. Debit cards do nothing for your credit score because they work like cash. If you don’t have a balance in your account, you don’t get to use them. The key to using credit cards is to pay the total amount in full every month…period. No exceptions. It took me a long time to learn that lesson, but it hit home before my thirtieth birthday and it has made a big difference in my financial life.

Back to the story. I was standing next to the checkout counter hoping to encourage my shopping partners to a faster finish when I saw a sign. It was one of those catch phrases that you see on napkins or aprons. It said, “Keep Calm and Carry On.” At first I thought that it wasn’t as creative as, “I used to be indecisive, now I’m not so sure.” But the more my crew shopped, the more I thought about that saying. It’s not that fancy, but it is good advice. As a matter of fact, it is the main thing that separates the institutional investors from the amateurs.

So much of investing is about being pulled one way when you should go the other. When the economy is in the tank and you are about to lose your job; buy stocks. When we are at full employment and everyone you know has made a killing in the stock market; it’s time to sell. Nothing about that feels right. Your emotions beg you to do the wrong thing when investing your own money. It is easier to be objective when it is someone else’s money. Investment committees have to make decisions that are important to other people, but those decisions, for the most part, don’t affect them personally. That’s why it is easier for an investment committee to stay the course.

Our stock markets have become very volatile over recent years. The volatility is pretty normal after a big correction, but it doesn’t make investors feel very confident. Just when you think you have figured out the markets, they do something else that you didn’t see coming. That’s why it helps so much to have a plan in place. Put down on paper how you plan to invest your money and what you will and won’t allow yourself to do. Don’t do that in the middle of a crisis. Do it when you are calm and thinking reasonably about the future. The rule is that you can’t do anything that is not written down in your Investment Policy Statement. You can change things in your investment policy, but you can’t do so when you are an emotional wreck because you will make bad decisions. Write it out, sign it, and date it. Now you have your own Investment Policy Statement that tells you how you are going to invest your assets.

With your Investment Policy Statement in hand, you are ready for the next challenge of investing. Whatever it is, you will want to react to it. In all likelihood you will want to do something harmful to yourself and your family. But now you are able to pull out your Investment Policy Statement and read what you created when you weren’t so emotional. And if you are really lucky, you will be wearing your new Christmas gift, an apron that says, “Keep Calm and Carry On.” Out of the blue the answer to your problems will come to you. “Keep Calm and Carry On.”

Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed, LLC
Tupelo, MS

When I began in the financial industry twenty-seven years ago, it was easy to make the case for having a financial advisor. You didn’t have much of a choice. In the 1980’s we held the keys to the gate. Back then it was almost impossible to invest on your own. You had to have professional help just to place an order. The reason our fees were so high back then was not because our advice was so much better, it was because we got to charge a cover charge at the door.

Occupy Wall Street. Most of you should have heard of this movement by now. It is a protest that began in Liberty Square in the Wall Street section of New York City on September 17th and has grown to include over 100 different cities across the country. It is a serious movement dealing with serious issues. For the most part, this group has been civil and has illuminated issues that need to be dealt with in our country. From my particular viewpoint, it seems that people from all walks of life have joined together to protest against, for the most part, corporate greed.

I can understand this sentiment. It seems that almost every bad thing that has happened to our financial system in the past few years can be linked to corporate greed in some form or fashion. I am as frustrated and sickened by what I have seen in the past decade as anyone I know. However, the problem is not corporate greed. There is no such thing as corporate greed.

Corporations don’t have emotions. Corporations simply exist under a predefined framework of governance. There is no greed nor is there such a thing as corporate ethics. The framework within which our system is run is the Free Enterprise System. In the Free Enterprise System corporations are encouraged to move to the most efficient and profitable track. Corporations that don’t move that way cease to exist. Their competitors take over their space and the system moves on.

Greed and moral fortitude come from those who run these companies. A company’s “corporate ethics” can change drastically from one leader to the next, for better or for worse. Lately, it seems like it has been for the worse. However, as much as we want someone to pay for all the bad things that are going on, I am reminded of the cartoon Pogo in which Pogo says, “We have met the enemy, and he is us.” Pogo was talking about the environment on Earth Day in 1970, but the quote still applies.

Our corporate leaders have been hired by us, its’ shareholders. Most companies are so broadly owned that shareholders pay little attention to the prospectuses that are mailed out every year requiring shareholders to vote on issues like executive pay, golden parachutes, stock options, etc. We allow executives to act as if they are the real owners of the company we have entrusted them to run, yet they don’t share the downside that real owners share. If the stock doesn’t do well they can simply vote themselves a raise, and we shareholders will probably approve it without a second thought because we really don’t read about the things we are asked to vote on.

But God forbid if our companies have a bad quarter. We have become very impatient. If a bad earnings cycle occurs, shareholders will bail from the best of companies and look for another place to invest their assets. So corporate leaders have learned to do whatever they have to do to make their numbers. That way the stock options they just awarded themselves that we voted for will be worth more; at least for the moment. And if the company plays too many games and gets in real trouble, the leaders will simply take their golden parachute that we voted for and jump ship.

We don’t need to change our Free Enterprise System. It has proven time and again that it works better than the alternatives. It is the creativity that is born from our system that has kept us on top for so long. We simply need to require more from our leaders. We need to hold them responsible for their actions and we need to pay attention to what they are doing. They work for us. It’s not the other way around. We, the investors in this country, need to take responsibility for what has happened and vow to do better.

Our government wants to stop corporate greed. Occupy Wall Street wants to stop corporate greed. It’s hard to stop something that doesn’t exist. Let’s start working on stopping personal greed and we can change the actions of corporations. Changing from within takes much more time and effort and doesn’t really have the allure of camping out in Liberty Square, but it is the only way I know of to make a real difference.

Written by:
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed, LLC
Tupelo, MS

Amidst all of the negative news that continues to abound in the financial world, I have also heard investors who are having a change of heart; investors who are beginning to view the equity markets with optimism instead of pessimism. Is it the result of an economy that is showing real signs of improvement? I don’t think so. I do think that the U.S. economy is showing real signs of improvement; I just don’t think that the average investor is feeling that yet. If they don’t feel it, they are going to have a hard time acting on it.

“Don’t just do something; Stand there!” It’s the opposite of what your mother said to you hundreds of times while you were growing up. That’s why I had to read it twice before I got the point in an article I was reading a few weeks ago. I do not credit this play on words to my personal wit, however, since I can’t find the article to give proper credit to the author that thought of it. I hope he or she will forgive me.

I spent a couple of hours this morning listening to Ben Bernanke, the Federal Reserve Chairman, testify to Congress. Testifying to Congress sounds like a big deal but Bernanke does it all the time. Nevertheless, it does give us a glimpse into the thought process of the most powerful man in the investment world. He gave his speech and then he took questions….and questions and questions.

He confirmed the fact that the country has made good money from our investment in the TARP program. You remember the TARP program: we loaned money to the banks that got us in this mess in the first place. There was a lot of banter about that investment, but we have received most of the principal back into our coffers plus interest, and those that have not paid us back in full as of yet are still paying on their note. He said that historically our economy would take a hit of somewhere between 5% and 20% of our Gross Domestic Product in order to stabilize our system after an event such as we have just survived. We were able to stabilize our system and make money in the process. I have written about this before, but I think that was a remarkable outcome for the crisis he and others were managing. It took the foresight to see what we needed and the intelligence to realize that it might have felt better punishing those that deserved it, but it would not have accomplished what we needed as a country.

There was much talk about entitlements and the debt ceiling. Sometimes I think we act like the guy who fell off the Empire State Building and, as he hurtled passed the 85th floor, he said to himself, “Well, so good so far.” Bernanke said that he didn’t think we could solve the problems with Social Security, etc., in the next two weeks before we have to come up with a solution for the debt ceiling, but he was encouraged that many in Congress seem to be willing to look at major reform in this area. I am encouraged by that statement as well. This isn’t rocket science. Social Security was adopted in 1935 to be a supplement to retirement for the American elderly. Originally, Social Security was paid to only the major breadwinner in the family and could be drawn starting at the age of 65. At the time there were many more young folks than there were old folks and life expectancy for males was two years shy of 65. Now we have an age chart that looks more like a rectangle than a pyramid and a life expectancy in the mid-eighties. No wonder that the model is unsustainable. To hold sacred an unsustainable model is fruitless and inexcusable. We are drinking water in order to avoid drowning. It doesn’t make sense. It was good to hear Bernanke speak so eloquently to this issue.

Finally, Bernanke was asked by one of the Congressmen why he was in favor of raising the debt ceiling. Wasn’t raising the debt ceiling irresponsible? Bernanke answered by saying he wasn’t in favor of raising the debt ceiling, he was in favor of paying our debts. Raising the debt ceiling was what we have to do to pay our debts and the ramification of not paying our debts is unthinkable. We are considered the safest investment in the world. If we give the world markets a reason to question that safety, then we will be sailing into uncharted and unsafe waters. Bernanke said that we have spent years spending money with no plan for paying it back and then we say we will never raise taxes or decrease benefits. Then we complain about raising the debt ceiling. Does any of that make sense?

The reason the two party system has done so well over the years is that it forces us to compromise on major issues. One party can’t have it all, but it tends to fall apart when there is no compromise. That is what we seem to have in Washington these days. The Republicans refuse to raise taxes and the Democrats refuse to cut services, yet we know that we have too little money and too many services. I think one of the best things you can do for your investments this year is to tell your Congressmen and women that we are past the point of good sound bites for your next election and we need real change to the system. That will take willingness to compromise and a desire to do what is right for this country. Not easy, but necessary.

Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed, LLC
Tupelo, MS

Last week I wrote about not spending time worrying about things you can’t control. I was surprised by the response to that column. Obviously there are a lot of people out there that are worried about things they can’t control and wish that they could stop. It’s not easy to stop worrying about the uncontrollable. We humans tend to think we can control the outcome of almost anything. We humans also hate to lose about twice as much as we love to win. So when the financial press and all the financial authors out there start writing and talking about how bad things are and how likely we are to have a “double dip” recession, it is a short step for most people to start trying to figure out how to stop it. Or at least how to stop it from affecting them.

That’s when patience and reason have to take over the decision making process. We investors often make a big mistake. We don’t really look at the stock market with the idea of “cause and effect”; we look at it as “effect and cause”. We tend to wait for something to happen and then figure out what is to blame. To complicate matters we have hundreds of people trying to be viewed as experts. They want to tell you their version of what happened and their version has to be different from everybody else or they won’t get noticed. How many times have you seen three analysts on TV who all agree with each other? It is very hard to pick the right cause.

I hear a lot of people talking again about Greece and how Greece is bringing down the market. Greece is certainly something to worry about, but the stock market was going down regardless of the problems with Greece. Markets don’t go in straight lines and markets have to take a breath every now and then. Markets consist of a bunch of individual investors who make up their own minds and then throw their decisions in with every other investor’s decision to come up with a direction. When the market goes down it doesn’t mean that there were no buyers. There is a buyer for every seller. There is someone who thinks they paid a good price for a stock and someone who thinks they got a good price for a stock. The conglomerate of these decisions tells us which way the market is going.

If you knew nothing of the world around us and were simply presented with a chart of the Dow Jones Industrial Average (DJIA), would you be able to make an educated guess on which way the DJIA was going to go? Let’s see, the DJIA bottomed out at the close of trading on March 6th, 2009, at around 6,400. Between March 2009 and May 2011, just two short years, the DJIA more than doubled in price. The further up the charts the DJIA goes, the more investors want to lock in their profits and sell some of their positions. So, you have to believe at some point the Dow is going to go down. It just makes sense. What will the trigger be? No one really knows that, because to know that you have to get in the heads of every individual investor and then figure out how that is going to play out with the whole group. It’s impossible. Remember my last column? Don’t spend so much time trying to figure out the impossible. What you do know is that you have every reason to believe that the DJIA, after such a tremendous run, will go down at some point. If you believe that statement, then it won’t surprise you when it happens, and you won’t attach so much importance to the event that triggered the decline.

That’s a good thing. When you are not surprised by an event you tend to make better decisions regarding your investments and that will pay off down the road. I feel sorry for Greece and I have no doubt that their struggles will ripple through the economies of Europe and eventually find its way into ours as well. I believe the DJIA went down recently because it has gone up too fast and it was time for a break. This is Behavioral Finance 101 and what has happened this past month is simply business as usual in the investing world.

What does that mean for the rest of this year? Your guess is as good as mine. Just keep things in perspective and don’t lose your focus, no matter what the “experts” say.

I am writing my column from Colorado this week. Our family tries to get away for a week every other year or so with my siblings and my dad. One of my siblings has a cabin in Colorado and he invited us to spend a long weekend there. Lex is my sibling, even though not by blood. I have found that you can have siblings a number of ways. Your parents can make a sibling for you or they can adopt a sibling for you, but sometimes siblings just happen. Lex Jackson came into our lives about 40 years ago as an employee at our family business, Reed’s Department Store, and has been with us ever since. I don’t remember when I started thinking of Lex as a brother, it just happened. I do know that when my mother and father came up with the idea of taking all of their children and spouses on a trip there was never a question that Lex and his wife, Judith, would be coming.

I have said this before, but I am fascinated by how people make decisions. Decisions have a great impact on every part of your life, which includes your investment goals. I am always looking for real life experiences that people can relate to that will help them understand how to better invest their assets.

I have been writing a financial column for a long time; somewhere around seventeen years or so. It’s not unusual for people to ask me what I think about other financial columnists. I must admit that I don’t read most of their columns and am acquainted with a very small number of my compatriots in the investment publishing world. Probably the most questions I receive about other financial columnists are about Dave Ramsey. He is a no nonsense guy who gives you advice you can understand. He has gained credibility through having gone from bankruptcy to achieving wealth that most Americans only dream of. He is well liked by many and revered by his flock.

I have read Dave’s biography. Although he built a portfolio of real estate in his twenties and was licensed to sell insurance, there is very little that would indicate that his investment expertise was anything other than self taught. That may be why his reaction to certain investments appears to be rude and a bit uninformed.

This past Sunday, April 10th, Dave answered a question in his column from a reader who wanted to know more about a managed futures fund that was recommended by her broker. Instead of attempting to inform the reader, he decided to bash the entire asset class. He said the broker had “jumped off a cliff and became a roulette dealer.” He called her recommendation a “stunt” and a “joke.” He also called the broker “dumb” and indicated that she was untrustworthy.

All of the comments he made were about one of the most intriguing asset classes available. People such as I, who make our living constructing appropriate asset allocation models, have been looking at managed futures with interest for quite some time. The asset class has been around for more than thirty years and there is good, credible research on how managed futures fit into a portfolio of investments. In the asset allocation world, the Holy Grail is an asset class that will provide decent returns over a long period of time but will get those returns in a different way than other assets in the portfolio. When we plot portfolios on a graph we want to add assets that will take the portfolio up and to the left. On a map of the United States we would want to be living in the Pacific Northwest.

Adding managed futures to a portfolio will almost always move your portfolio up and to the left. Up means more return and left means less volatility. Less volatility in our world means less risk. So, to refresh, adding managed futures to a portfolio will almost always result in a portfolio that, over the long run, will have better returns and less risk. I would like to jump off of that kind of cliff as much as possible. Maybe he meant the kind of cliff like the Falls at Pickwick Lake, where people jump off on a sunny summer day into the cool water. Maybe that’s the kind of cliff he meant.

We have used managed futures in our portfolios for a while and so far they have done exactly what we have expected. You may not have that kind of performance depending on who you use to manage your managed futures. And the fact is that I don’t know anything about the broker that made the recommendation of managed futures that Dave mentions in his column. She could be everything Dave said about her, but not simply because she recommended managed futures. I would never venture to say that any asset class was appropriate or inappropriate for a certain individual without knowing a lot about the individual.

Investment options are like bullets in a gun. They have no effect at all until put into the hands of someone who can pull the trigger and then their effect has a lot to do with who pulls the trigger. Bullets are neither good nor bad until they are used. Treasury Bonds can be misused so badly that they could trigger a lawsuit and they are considered by most to be the safest investment in the world. It’s all in how you use them and how you pick them. The same is true for managed futures.

Don’t trust everything you read in the paper....except...of course...my column.

Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed Capital Advisors
Tupelo, MS

Author’s Note – As happens with columnists from time to time, especially in fields that can be a bit time sensitive, you always take the chance of having things change between the time you write your column and the time that it is published. I wrote this current column while on the road, Monday of this past week. I didn’t know the Japanese stock market was about to fall dramatically due to unexpected nuclear consequences of the recent earthquake and tsunami. I write about the likelihood that the stock market will fall and why I think so. Well, it has fallen since I wrote that column. Maybe the market has not fallen as far as it will or maybe so. Either way, I think the point I try to make in the column is still accurate and still viable, so I have approved this column even though the timing of the column may seem awkward. I hope you enjoy it and possibly learn from it.

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I thought I would write this week about what seems to be on everyone’s mind these days. Are we going to have a double-dip downturn in the stock market? It is the number one question I get on the street. It is the number one question I get from my clients. I would venture to say it is the number one question around the world.

I feel very comfortable going out on a limb here. I’m sure you are aware that our industry has trained us well in the art of evasive tactics. We have learned how to sound smart without really saying anything of substance. For instance, if you asked a financial advisor about their opinion on a certain stock they might say, “Well, last I saw it was trading around $32.00. A lot of analysts think this next earnings cycle could be good for their stock price, but if they miss their mark it will probably retrench into the $20’s.” It all sounds good but what they are really saying is, “Anything could happen. Good luck.”

That is not the case with me and the question of “Will the market go down?” I can’t guarantee that the market will go down, but I can say without question that I would be shocked if it didn’t. Nothing in the investment world goes in a straight line, up or down. There are just too many variables. The markets are made up of buyers and sellers; the greedy and the fearful; the smart and the....less smart; the institutions and the individuals; and the computers and the real, live investors. Every movement in the market, no matter how small, will change the perception of someone who either has invested or is trying to invest and that will change the pricing structure.

I know what you are thinking. If we know that the market is going down, why don’t we do something about it? Well, doing something about a falling market gets a little harder to do. How far down the market goes is a psychological thing that has to do with fear and greed, not fundamentals of economics. We could have a 20% downslide or a 10% downslide and we don’t know when it will happen. It is so easy to be wrong when you are dealing with the collective mindset of the investing world and being wrong can become a heavy burden on your goals. It is much easier, much safer, and more reliable to base your decisions on market fundamentals. Basing your decisions on economics is the gold standard for long-term investors. It takes the emotions out of your decisions and gives you something real to hold onto when the short-term fluctuations of the market drive you crazy.

Since March of 2009, the Dow Jones Industrial Average has moved from 6,400 to over 12,000. It just isn’t reasonable to think we will keep going up without having some downturns in the process. But the good news is that the economy is on the rebound and that bodes well for the long-term performance of your equities. It seems to me that short-term investing in the markets is the sexiest part of what we do. You have to be up on world news, currency issues, earnings reports....in essence you have to be up on everything. And if you are right you can make a lot of money in a short period of time. Your endorphins kick in and your hormone levels increase; basically the same things that happen when you are falling in love. You have emotional highs and lows that can make you euphoric or miserable, but you keep coming back for more. I admit to you that short-term trading is very attractive to me. I guess I could lead a session of Short-Term Traders Anonymous. People quit drinking, not because they don’t want to drink anymore, they quit drinking because the drink is killing them. That’s the same reason you should quit trading on the short. It tends to kill your financial goals. I have been at this for a quarter of a century and that’s probably the most important thing I have learned.

So, don’t worry about whether the market is going up or down this Spring. Try to figure out where you think the market is going to be in five years and position yourself for that outcome. Then go home and romance your spouse for that endorphin fix.

Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed Capital Advisors
Tupelo, MS

“The economy isn’t growing as fast as we would like.” I heard that statement on the news this week. Really? I mean…Really? Weren’t these the same people that were saying just two years ago that we were likely to go down to 350 on the S&P 500 and 2,500 on the Dow Jones Industrial Average? Aren’t these the same people that said it would take decades to recover from the greatest financial crisis since the Great Depression?

How fickle and petty we have become. Have you ever seen an interview with one of those sailors who has been lost at sea for a long time? When asked how they are doing now that they have been rescued I have yet to hear, “Well, ok I guess. The pasta was a little salty on the rescue vessel.” They don’t complain about the loud engine noise or rusty railings of the rescue vessel. They look to the future with unbridled optimism because they understand that they are fortunate to be here.

I think that attitude and a healthy amount of respect for the resiliency of the American Free Enterprise System would be helpful to today’s investors. The fact is that our economy is getting better. For a long time it was getting worse and then it rotated from getting worse to getting less worse. We were in the “getting less worse” cycle when the equity markets began to turn around. Now we are actually getting better. I know that there are still too many people without a job and too many businesses still hurting, but we are getting better. This day to day barrage of comments from the financial press is simply a way to keep people tuned to their channel, and it is difficult to make good decisions when you pay attention to whatever spin the press puts on today’s news.

Some of you who read my column regularly will remember that I put the fair market value of the Dow Jones Industrial Average at about 12,000 when the Dow was hovering around 6,500. I projected that when the market turned around, it would move toward that fair market value pretty quickly and then we would have to “earn our way up” from there. So far, that has been a pretty accurate statement. Most people were telling you how far down the Dow could go if this happened and that happened. Few people in the financial media were telling you how positive things were. I will be the first to admit that I am not a soothsayer. I am not a financial genius. I do not have access to insider information that would allow me to know things the average person does not know and I am not, as Charlie Sheen might say, “a $#$^@ing rock star from Mars” in the financial world. The truth is much less exciting than that. I do have the ability to tune out most of the “white noise” that comes to us every day explaining the importance of what happens “today” in the financial world. This ability has come from a quarter of a century of experiencing the utter failure of trying to figure out the day to day significance of the markets. 

My prediction on the Dow moving toward 12,000 was based mostly on pure math and a small bit of intuition. The Q ratio is a mathematical formula that calculates the replacement value of assets. We can use the Q ratio to figure out the replacement value of the market. Once I get that number I add a touch of investor sentiment to the number and round it off. When I made that prediction back in the early spring of 2009, the answer was 12,000 on the Dow and it was very close. That prediction had nothing to do with what was happening the day I calculated the number or any day since. If there is anything I have learned in the past twenty-five years in this business it is this:

• The financial markets will move toward fair market value over the long term.
• I have no idea what the markets will do in the short term.

I know that you would like to know where we are going from here. I can tell you a couple of things with a great degree of certainty.

• Markets never go straight up or straight down, so it’s not rocket science to think that we might have a falloff in the stock market sometime soon.
• The economy is getting better, so it’s not rocket science to think that the stock market might go higher as the economy improves.

My mantra every day is to block out the white noise in the media and make decisions based on facts. Also, invest for the long term because no one knows what will happen in the short term.

Written by:

Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed LLC
Tupelo, MS

“Buy bonds, they’re safe.” “You can’t get safer than bonds.” “If you hold them to maturity they will always pay back your interest and principal.” “You just saw what happens when you take stock market risk, you get burned. That kind of thing doesn’t happen in the bond market.”

We have barely gotten through one of the biggest events in my lifetime. I am still a bit overwhelmed. When I see people around town they seem to be trying to figure out what to do next. They seem confused by this new world. Everything looks different now than it did before. Some are scared, some are excited and some seem to just want to stay home, hunker down and wait until things look more normal before venturing out into the world again.

I hear you talking. I know what you are saying. And it makes sense. Anyone who says it doesn’t make sense isn’t being realistic. The market has had a heck of a run. With only two trading days left in the year 2010 as I write this column, the Dow Jones Industrial Average is up 11.10% year to date and it is up a whopping 80% since the bottom of the latest bear market in March of 2009. The economy is still having problems that, it seems, will take years to fix. Unemployment is still high and houses are still not selling.

We all know that the investment world is a reversion to the mean business. With all the bad news that’s still out there, isn’t it reasonable, almost a foregone conclusion, that the market will certainly tank again and give back all the profit we have seen over the past year and nine months? It seems like everyone thinks so....wait....there is your first problem. If everyone thinks so, it may not be true because the majority is wrong so often that there are contrary indicators that are used with great regularity by professional investors to determine what the majority thinks and how to bet against it. The equity markets have been blown way off course in the past few years but let me give you a few reasons why I think the equity markets may have a tail wind instead of a head wind over the next few years.

First, it is important to remember the difference between the economy getting “less worse” and “more better”. For a long while the economy was getting worse at a slower pace. The bleeding was less, but we were still bleeding. Now the economy is actually showing signs of improvement. Granted the pace is not as fast as we would like to see, but improvement is very different from getting worse.

Second, it is hard to believe that this country is going to stay on a straight line of steady growth. After everything we have been through and all the money that the government has spent to regenerate this economy, it seems only reasonable that we will either move toward a deflationary environment or an inflationary environment. With Bernanke at the helm of the Federal Reserve, it seems more likely that we will move toward inflation. Inflation means that fixed income securities like Treasury Bonds will decrease in price as the yield on bonds goes up. Inflationary environments are not a good place to be if you own a lot of bonds. Investors fare much better by owning stocks, real estate, commodities, and the relatively new Treasury Inflation Protected Securities issued by the government. As investors move out of bonds and into stocks, stock prices should rise. That’s kind of what the free market system is based upon - greater demand makes prices rise.

Still, we’ve got to deal with this reversion to the mean business. I certainly can’t claim to be an opponent of that theory. I have written in defense of the reversion to the mean theory so many times I couldn’t possibly count them all. So how could I believe in reversion to the mean and still be bullish on the stock market? Well, that goes back to time horizon. I have never been very short-term oriented. And I know that the markets don’t move in a straight line. I certainly plan to see the market go up and down quite a bit in the short-term, and I would expect to see the equity markets take some of their short-term profits from this extraordinary run we have seen. But, if you look back you will notice that, as far as we have come, we are still 2,695 points or 19% below our previous high in October of 2007. Even more significant to me is that we have made virtually no progress in the stock market over the past eleven years. Eleven years!! That’s saying something. The Dow Jones Industrial Average ended the century at a price of 11,497. On 12/29/2010, the Dow Jones closed at a price of 11,585. Virtually dead even. For an index that has averaged over 9.0% per year since year 1900, that is an awfully long period with no return. If you believe in a reversion to the mean, you must believe that the equity markets have some real upside over the next few years.

The tricky part is to know when that return is going to come. I’m not smart enough or confident enough to know when that will happen. In my twenty-five years in the business I have met many who claim to know that, but no one who has proved it with any regularity. My advice, as always, is to make your decisions based on reason, facts, and a long-term horizon. Leave the gambling to those that don’t need their money down the road.

Happy New Year and Good Investing.

Written by:
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed LLC
Tupelo, MS

Tim Coker brought the Millsap’s Chamber Singers to my church last Sunday. Tim has directed the Millsap’s Choral Program for quite some time and it is a real treat to hear them perform. Tim and his wife, Cheryl, are a State treasure. I can’t imagine how many young lives they have shaped in a positive way. Some have become singers, some have become columnists, and some are now doctors. Many of his students have become citizens who have given back much to the places they live.

I had not seen Tim and Cheryl in a few years, and I was excited to hear their newest version of the Millsap’s Chamber Singers. I didn’t realize that it would be an emotional experience for me. But it was. I started thinking about how much music had become a part of my life and how much happiness it had given me over the years. I will be the first to admit that no one will mistake me for a prodigy in the music world, but then again, by definition most people aren’t. But Tim gave me the tools to make music a part of my life. He taught me to read music, to interpret music, to understand music, and to sing music. Since my time with Tim in high school I have played in bands, sung with the Tupelo Symphony Chorus, spent twenty years in the church choir, and most importantly play guitar and sing to my children almost every night. I don’t think it would have happened without Tim.

The Cokers directed the music program at my church in the seventies and Tim was the director of music at Tupelo High School as well. I was in the youth choir at the church, probably as much to see my friends as anything and I was not particularly motivated. One day Tim came to our house and explained to my parents that he needed more men in the Tupelo High School Chorus. He would appreciate it if my parents would sign me up. I didn’t have any friends in the chorus and didn’t want to be part of it. But somehow I got signed up along with a few of my friends from church. Mr. Coker was tough and he expected a lot from me. I wasn’t there to be coddled or to feel good. I was there to learn about music. And that is what I did.

I wouldn’t trade those hours in the chorus room for anything now, and I wouldn’t trade my time with Mr. Coker. He changed my life in a very positive way. And as I look back on how much music has meant to me since I left high school in 1976, I realize how much he has meant to me since then as well.

You must be wondering by now how I am going to tie this in to investing. So many investors that I see want to have fun. They want to buy stock in Disney because they are taking the kids to Disney World or they want to buy stock in John Deere because they have a John Deere tractor. There isn’t anything wrong with that, just as there is nothing wrong with singing to the radio in the car without taking singing lessons first. But you can’t expect to be good at it unless you work at it. Hard work will pay off in any endeavor. Investing is about serious issues. It’s about college education, it’s about a safety net if you lose your job, it’s about retiring without having to change the way you live. If you want to look back on your life and realize how much you have enjoyed sending your children to the college of their choice, buying the cabin in the woods, the vacation to Europe or your retirement years, then you have to put in the work now. You need to find the Tim Coker in yourself or find someone who is willing to treat your investment education as seriously as he teaches music. Then one day you will look back and realize just how much your investments have meant to your life and it will be an emotional and a satisfying experience.

Written by:
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed LLC
Tupelo, MS

My sister-in-law is getting married this weekend. The wedding should be a lovely affair. Outdoors in the Northwest in October. I like the guy she’s marrying, not that it would matter that much. They didn’t consult me before they got engaged, nevertheless, it is a big bonus for me that I like him. My in-laws tend to spend a lot of time in the mountains together and it helps to like your tent mates, as well as love them.

My sister-in-law asked me to speak at the wedding about marriage. That is a bit scary as I am only eighteen years into my marriage and am under no illusions that I have gotten it right yet. Marriage is a struggle, but that’s not a bad thing. Successes in endeavors within which you struggle are some of the greatest successes. The harder it is, the more you appreciate the outcome. So I have been thinking about what I want to say to this young couple who has decided to spend the rest of their life together. And of course, I have also been thinking about how that might fit into a financial column. This is what I have come up with.

There are four different words in the Latin language for love: Agape, Eros, Philia, and Storge. Agape love is the love generally used to describe the love of God for us. Not just Christians, but other religions as well. It is a deep or true love. Storge love is a love of natural affection such as between a mother and child. The two words I want to discuss are Eros and Philia. Eros is a passionate love. It is emotional. It is about beauty, attraction and all those things that make you do stupid things, “in the name of love”. It is the love that gets you to the altar and what you hope your life will be like forever. The problem with Eros love is that it is unsustainable over long periods of time. It comes and goes as easily as your emotions come and go. And if you have nothing but Eros to hold your marriage together, it is very difficult to make it last. Philia love means friendship. It includes loyalty, family, and community. It requires virtue, equality, and familiarity. It is the love that holds your relationship together as the Eros love ebbs and flows. It is not the most fun part of a marriage, but it is the foundation of a marriage. Those that understand the importance of a love that is always there and never lets you down are usually the ones that look back over the years and realize how good life has been. Philia is the offensive line of a relationship. Rarely does the offensive line get the credit that they deserve, but without them the quarterback and the receivers will never make Sports Center.

Investing is really no different. When you go to a party or a civic event and the discussion turns to investments, rarely do you hear someone talk about a really good ten year municipal bond. Or hear about a stock with a good, solid dividend and slow consistent growth. People want to talk about what has stirred their emotions. The stock that doubled in the last year or the high-yield bond that is currently paying 12%. But if you want to be a successful investor you have to have a solid base. You have to have investments that are going to be there for you day in and day out. If you don’t have that base, you can’t afford to go out and try all the fancy stuff you hear everyone talking about.

It is easy to see why so many marriages don’t last. They are based on the feeling you get when you are in Eros and there is little Philia to fall back on. I couldn’t think of a better way to understand why so many portfolios fail as well. Too much Eros and not enough Philia. I believe in a healthy combination of both. Maybe it will help me get through the next eighteen years...with my marriage and my portfolio.

Written by:
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed LLC
Tupelo, MS

Everyone has mentors in their lives. I have had a few. Some have been teachers, some business leaders, but most have been coaches. Coaches have a significant impact on the lives of those they coach. They can be the best or the worst of your childhood memories and they can have a great effect on how you live your life. It doesn’t matter if they coached you in little league or in college, they will always be your coach. My oldest daughter’s principal is one of my former football coaches. When I go to the school I find it humorous to hear the staff and the children call him Mr. Beard. To me his name will always be Coach Beard. If I ran into him in the parking lot at Wal-Mart and he told me to give him 20 wind sprints, I would do it. Or at least I would try.

I lost one of my coaches recently. Coach Puddie Ruff was my tennis coach in high school. She was one of the best coaches the city of Tupelo has ever seen. She was voted the National Tennis Coach of the Year in 1984, but that year represented a lifetime of her commitment to our town, our school system, and our students. Even though Puddie taught tennis at her home court for years and started many people down the path of that lifelong sport, she often told me that she was not the best tennis teacher around. She would work hard to schedule good adult tennis players to come work out with our tennis team and teach “strokes and strategy” to the team. That was helpful on a number of levels because we were allowed the opportunity to play matches against players better than we were, they became committed to our program, and they came to our matches. We always had a crowd at our matches and most of them thought of themselves as assistant coaches on some level.

Puddie may not have thought of herself as a great tennis teacher, but it was impossible to deny that she was a great tennis coach. She once said, “I will teach you how to win and I will make sure you are never beaten by someone because they were in better shape than you.” She made good on those promises. I only remember our team losing one match in the regular season during my tenure with Puddie. She ran us before and after practice. She made us run “suicides” during practice and she made us hit hundreds and hundreds of balls. In other words, she took care of the basics. You cannot win if you don’t take care of the basics.

It is easy in investing to think you know what you are talking about because you understand the language. Just because you know what a P/E ratio is doesn’t mean that you know what to do with it. It takes a lot of practice to be good at analyzing potential investments. You have to do your wind sprints and your suicides to get yourself in shape for investing. That means that you have to do your homework. Not just understand the language, but how it applies to your world. You also have to hit hundreds of balls, which means that you have to practice investing your hard earned money before you actually put it to work. It is very painful to only practice when you are playing a match. The match is where the practice pays off, not where the practice is done. Be good before you play for keeps.

I have been watching the US Open Tennis Tournament this week. I watch it every year. I have played tennis since I was old enough to remember, maybe earlier than that. I dreamed as a kid of playing in the US Open...ok, I admit I still dream of playing in the US Open, but reality has set in and I know that it’s not going to happen. Not unless I can really kick my game up a level as a senior. There is always hope. You never know.

The US Open has become famous for its night matches. I have no doubt that they started playing their marquee matches at night because that’s when television wanted them played, but I always enjoy them. I can get my daughters put to bed for the night, slip into my easy chair, and watch some tennis. The only problem is that the great matches can go past midnight and I am old enough to have to pay for that privilege.

Earlier this week I was watching a match between a Croatian and an American. The announcers were talking about how the Croatian’s game had really come around this past year. They said that he had always had the shots, but he had just been too impatient. He wanted to finish the point and win quickly, but he had found that playing the kind of game it would take to win quickly was just too risky. Consequently, he kept losing the big matches. In his post match interview he said he had finally learned to play with patience and wait for the right opportunity to finish a point. That’s why he was winning more, his world ranking had gotten much better, and his earnings had increased significantly. All of this had come not from changing his strokes or his fitness, but by changing his strategy; getting his mind right.

I think that many investors want to use what they have learned as quickly as possible. They want to see the proof of their hard work immediately even if their goals are years away. It is the gratification of knowing you are good at what you do combined with the fear of having to wait ten years or more to find out if you are right that makes it so hard to be patient with your investments. But that is what the great investors seem to have in common. They have a long term view that is unshakable, and they are not sucked in by the day to day fluctuations of the markets.

In tennis it’s not having the shots that matters, it is what you do with those shots that makes the difference. Just having a great cross court forehand that you can hit five times in a row doesn’t help a bit if your opponent can hit his back to you six times in a row. And I know no one who can win every point. The greatest players in the world lose a lot of points in every match. What makes them great is that they know how to manage the match in order to win games, sets, and matches. They play within themselves. Jimmy Conners, one of the all-time tennis greats of my generation, once said that he was not a great champion because he was such a great player. He said he was a great champion because he was never scared to hit the right shot at the right time. He said that so many players get nervous when they are about to lose or win a match and they start playing “not to lose” instead of “playing to win”. When that happens you get into trouble.

I can easily relate that to the investment world. Those that play not to lose will change their strategy every time they hear someone on CNBC who sounds smart and says something that doesn’t agree with their investment strategy. Those that play to win have done their homework, have picked a course and have confidence in their strategy. They know their strengths and they play to their strengths.

Many good tennis players are flashy and hit big shots. They have physical talent and natural ability. But the great players have discipline and focus. Learn from them and take your investment expertise to the next level. Go pro in investing by taking what you have learned and applying discipline and patience to the process. It could make all the difference.

Written by:
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed LLC
Tupelo, MS

Strategic versus Tactical investing. What are they and which one should I be using in my portfolio? If you haven’t thought about this it doesn’t mean that you don’t use one or the other, it may just mean that you don’t know which one you are using. It’s important to know what these strategies are and even more important to know which one you should use.

Strategic investing is investing for the long term. It means that you analyze your needs and your goals, and you create a portfolio that should meet those goals over your targeted time frame. When implementing strategic investing it is important to have patience and fortitude. Strategic investing doesn’t work well if you keep changing your strategy and hanging onto a strategy is sometimes difficult; extraordinarily difficult in the past decade. We have seen two of the worst bear markets in history in the past decade and they have been preceded by two of the best bull markets. Volatile markets such as we have seen just beg you to do something. It doesn’t make much sense in your brain to stay the course. That is why during difficult times many investors become tactical investors.

Tactical investors are constantly changing their portfolios. Tactical investors are always trying to decide what the next best move might be. They look at the markets every day with the idea that there must be something better out there for their portfolio. And when they find an investment that they think is better, they sell their current investments and buy something new. Tactical investing is much more of a hands on investment strategy and investors feel like they are “in the game”. They are making decisions all the time that they believe will get them closer to reaching their goals. And….let’s face it…it’s much more fun. It’s more fun to be “in the game”. It’s more fun to make things happen than it is to let things happen and it is much more akin to our generation’s way of thinking, which is immediate response. You are either immediately gratified or mortified. It’s the 100 yard dash versus the strategic investor’s marathon. And most importantly, for some, it gives you much more to talk about at a cocktail party. Let’s face it; which sounds like more fun, Lori the tactical investor or Beverly the strategic investor?

“Hey, Beverly, I didn’t know you were going to be at this party? How are things? I haven’t seen you in a while.”
“Everything is great. Are you still doing the investing thing?”
“Oh, yea. As a matter of fact, I just found a really hot emerging markets fund that was up sixty percent last year. I bought in at the market close this afternoon. Some analysts think it will double this year. How about you?”
“Oh, I’m still doing the same old thing. I took a hard look at everything at the end of last quarter and was still pretty pleased, so I just left things where they were.”

Lori sounds like the most fun to me. The problem is that I just can’t find many people who are successful over the long run using a tactical approach to investing. It is very difficult for the experts to use a tactical approach, and they are experts. The good ones have to use an enormous amount of discipline to be successful and that takes using a different part of the brain than most people want to use when they are being tactical. It takes a kind of commitment that is rare to find in people who are doing something else for a living.

I like that commercial that is aired throughout the year during major college athletic events. It shows college athletes playing a sport at a high level and the announcer says, “Most college athletes turn pro…in something else.” Well, most investors turn pro in something else as well. That statement means that if you are doing your real job right, you don’t have the time to spend on investing that it would require to use most tactical strategies. And so you fail.

Remember when you decide on a strategy, the real goal is to succeed. In my experience, using a long-term strategic approach has provided the most successful outcomes. Don’t worry, you can find something else to talk about at your next cocktail party. Talk about the 118° heat index.

Written by:
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed LLC
Tupelo, MS

My cousin bugged me for a year or more to watch the television show “House”. I thought the name of the show, “House”, was kind of dumb and I refused to watch on principle. I also felt like that I just didn’t have any more room in my life for watching another television show. Then one day more than a year ago I was home alone. My family was out somewhere and I didn’t really know what to do with myself. I sat in my most comfortable chair; the one they say is mine but my children didn’t ever get that message. I propped up my feet and I turned on the TV. That’s when I met House. House is the last name of the main character and he is rude, cantankerous, and anti-social. He is played to perfection by Hugh Laurie. House is also brilliant. His job is to solve medical problems that confound conventional thought and medicine. Often by the time the show ends the answer to the problem is simple, but the path to the answer is very complex.

A couple of weeks ago House was working on a patient. Nothing he and his team tried had worked. House wanted to stop the patient’s heart and “kill” her, then try to restart the heart to test a theory. The other doctors insisted that they must start treating the symptoms of the patient or the patient would die. House said, in his snarly, obnoxious way, “If we just treat the symptoms the patient will die anyway, it will just take longer. We have to treat the problem.” I don’t know how many different areas of our lives that statement can apply to, but it is a lot.

It certainly applies to the issue of financial reform. Our Congress has passed a bill for Financial Reform recently. Much of it is good, some of it…not so much. Everyone seems to have their heart in the right place, but much of the time we seem to be treating the symptoms instead of the problem.

As you might expect, I have a particular issue on my mind. It is the “Fiduciary Standard of Care” issue. Congress has called for a study to be done to see if there really needs to be a uniform standard of care for advisors that includes the fiduciary duty to make decisions that are in the best interest of the client. However, Congress has also been willing to enact a mountain of rules and regulations that will attempt to protect investors from those financial advisors who have acted in a way that is not in their best interest. For instance, our government is going to try through legislation to limit an investor’s access to certain financial instruments that have previously been sold to an investor inappropriately. The problem is that much of the time it is not the fault of the investment, but the fault of the advisor for selling the investment inappropriately. To treat the problem you don’t take away the inventory of potential investments, you require investment professionals who claim to give investment advice (as opposed to selling investment products) to work under a standard of care that puts the clients’ interests above their own and you hold them legally responsible for their actions. In my opinion, legally being held to a certain standard of care will change the actions of financial industry professionals and will significantly limit or erase altogether the need for Congress to legislate by product.

For the most part investors buy what is recommended to them by those they trust, not necessarily by those they should trust. To fix the problem, we must make sure that those they trust have the same responsibility legally that they are perceived to have by their clients. If Congress won’t make that happen after this new study is finished, then you can take matters in your own hands by making sure you understand how an advisor makes his/her money and asking them to sign a statement of fiduciary responsibility for your account. Getting your relationship right with your advisor should go a long way toward meeting your financial goals down the road.

Written by:
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed LLC
Tupelo, MS

I have been thinking about correlation, or the lack thereof, a lot lately. Correlation is a very important part of how I invest. When I create a portfolio of investments for a client the first thing I do is pick the different asset classes that I want to use. Examples of asset classes would be U.S. stocks, foreign stocks, U.S. bonds, foreign bonds, real estate, etc., etc. And when I create these portfolios of asset classes, one of my main goals is to find asset classes that are non-correlating because non-correlating asset classes are good for each other and they are good for my clients.

Even as I write this I am aware of how boring this subject must sound to the reader. That’s the problem with much of investment philosophy. It’s pretty boring. But that doesn’t mean that it lacks importance. Understanding the idea of non-correlating asset classes and how they work to benefit your long term investment goals is the equivalent of understanding the technique of chewing and how beneficial it is to the eating process.

As many of you are aware, I spend a lot of time thinking of different analogies that I can use to explain the investment process. Last week I found one for non-correlating assets while I was paying my bills. I was recording my payments for my water and light bill and my gas bill. Both are set up to draft because I want to make sure I get those two paid on time every month. It occurred to me that my gas services and my water and light services are pretty good examples of non-correlating assets. Every year I spend about the same amount of money on both services. However, there is a big difference in how much I spend on water and light during the summer and the winter. During the summer my water and light bill is enormous. During the winter months it is hardly worth noticing. The opposite is true for my gas bill. It soars during the winter months and in July it was less than $25.00. What is interesting is that if you add the two bills together each month, I pay pretty much the same amount each month. As one decreases, the other increases. When one is at its lowest, the other is at its highest. The nice thing about that occurrence is when you put the two bills together it is easy to plan for those expenses. It’s always about the same.

This is actually an example of negative correlation as opposed to non-correlation. Negative correlation is very hard to find in the investing world, but hopefully you get the picture. One of the biggest challenges for investors is not that their investments will fluctuate; it is that they might be down when the investor needs their money. So, if you can find two investments that are both expected to have an 8% return per year for the next ten years and have a negative correlation, that means that when one of the investments is up the other should be down. Even though there may not be a single year that either of your investments is up exactly 8%, when you put them together you should come much closer to that 8% mark than by using either one of the investments on its own.

If you take that one step further, it means that if you end up needing your money in five years instead of ten, there is much less of a chance that your investments will be in a place that makes it unwise for you to take your money out of your investments. Less correlation means a smoother ride and a smoother ride means that you are more likely to be able to use your money when you want it or need it. And that is a good thing.

I spend a great deal of time trying to find the equivalent of my water and light bill and my gas bill in the investment world. It is one of the biggest factors in allowing my clients to use their investments to better their lives. Because when it is time to pay for college or put a down payment on a house, you need to be able to use your money. You may not have time to wait for your portfolio to turn around.

Written by:
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed LLC
Tupelo, MS

I wrote a column back in the late 1990’s about the effects of the rescission of the Glass- Steagall Act. I know that doesn’t sound very interesting and that you are probably not kicking yourself for your lack of memory in regards to its content. Nevertheless, it seemed to be a pretty big deal to me. Glass-Steagall was an act that, as quoted from Investopedia, “…prohibited commercial banks from collaborating with full-service brokerage firms or participating in investment banking activities.” Investopedia goes on to say, “The Glass-Steagall Act was enacted during the Great Depression. It protected bank depositors from the additional risks associated with security transactions. The act was dismantled in 1999. Consequently, the distinction between commercial banks and brokerage firms has blurred; many banks own brokerage firms and provide investment services.” In other words, it prohibited banking institutions from doing things that weren’t considered “bank like”. For example, most investors considered investments in their bank to be safe and insured so it wouldn’t be proper for a bank to start selling stock that could go up or down in value because investors might expect it to be safe and insured. The rescission of Glass-Steagall allowed banks to get in the business of selling all kinds of investment products. The good news is that with Glass-Steagall out of the way many more investment brokers were out there selling product and the golden era of investment product development continued on. I believe that many of the investment products we see today may have never made it to the average investor if it weren’t for Congress rescinding Glass-Steagall. The bad news is that many investors bought investments with a misunderstanding of the risks involved and who was monitoring that risk.

The column that I wrote back then was about the even more confusing problem of having so many different types of investment firms pretending to do the same thing in the same way. Investment professionals all over the country began changing their titles. Stockbrokers might become investment advisors or investment consultants. Insurance agents might become financial consultants. Bankers; financial advisors, etc., etc. Investors understandably got confused about who was supposed to be selling a product and who was supposed to be advising them on what type of product to buy. Both are honorable professions but there is a big difference in the roles of the two.

I had a man tell me the other day that he liked a column I wrote recently on the subject. I told him that I seemed to be singularly focused on the issue of “Fiduciary Responsibility” these days. I talk about it a lot and I am writing about it a lot these days. I don’t want to become redundant or boring but this seems to be a subject whose time has come.

I have found in my past twenty-five years in this profession that no one cares much about upside risk. The chance that something might go up more than we expected is not a scary thing. So, when the financial markets are doing well investors tend to ignore the fact that they may be in investments that are too risky for them. Most of those same investors have gotten to see first hand the downside aspect of risk over the past decade much more than they would have liked. We had the 2nd worst bear market in history from 2000-2003 and then the bear market from late 2007- early 2009 took over the title of 2nd worst bear market in history giving us two miserable bear markets in a decade. Investors began asking questions about their investment performance and in many cases they didn’t like the answers they were hearing. What was the case more often than it should have been was that the investor believed that the investment professional was looking out for their “best interest”. What they found was that the investment representative was selling a product, earning a commission and not going through the process of determining what was in their “best interest”. This is a big revelation and one that was too late for some. However, it has shoved the often boring fiduciary issue to the front of the debate on financial reform. The Senate is having a tough time getting this legislation passed and the death of Senator Robert Byrd put the bill’s passage in jeopardy. But we are at a crossroad in the investment world where fiduciary issues are colliding with the investment product part of our world. Investors are taking note, regulators are taking note and Congress is taking note. We have a short window of time to put things back into what I consider their proper place. A world where investment professionals’ business cards, business models, and business ethos are all in line and are understood by the general public Everybody does what they say they do and investors are able to make an informed decision on what is best for them. Call your members of Congress and tell them that you think this is important…possibly boring, but certainly important.

Written by:
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed LLC
Tupelo, MS

It seems to me that to be good in the investment business you just can’t think straight. Thinking straight will get you in trouble every time. Now I didn’t say think smart, I said think straight. Thinking straight to me means thinking in a straight line. Let me give you an example. My business partner and I took a flight to New York just two weeks after the September 11th World Trade Center disaster. It was a very surreal day. As we approached New York City it was impossible to avoid noticing the fighter jets escorting us to LaGuardia Airport. As we got closer to the airport I noticed military helicopters patrolling the river. The straight line thought process would be to think exactly what I heard the man behind me say. He said, “This is a pretty stupid time to fly into New York.” My business partner looked at me and said, “This has to be one of the safest times ever to fly into New York.”

Exactly. If you think about it there have been very few times when it would have been safer to fly into New York. We had a safe plane on a safe airline. We had a military escort to the runway. It was very unlikely that terrorists would have put together two attack plans of that magnitude back to back. And if they did, passengers would have acted differently with potentially different outcomes. Any way you look at it we were safer than I had been just a few weeks earlier when I last flew to New York. The mere fact that we were aware of the potential danger made us safer. But there was no doubt that we felt the inherent risk much more deeply on that trip. The reminders were everywhere that flying can be hazardous to your health.

I think that we have a lot of reminders that investing can be hazardous to your health. The losses are still fresh and the government has once again called in the troops to protect us from what has just happened. We have needed a financial reform package for years but it just didn’t seem that important when everyone was making money. I mean, who cares if your investment vehicle is hiding a lot of its fees in places you will never find and taking much more out of your return than you realize? As long as the investor is making good money, everyone can just look the other way.

That has rarely been more evident than in the hedge fund industry. For so long hedge funds just weren’t available for the average investor. That, of course, made them even more desirable. And for years the hedge fund industry has been able to keep their “trading secrets” hidden from regulators by claiming that if they disclosed how they did things they would lose their advantage. Now we have found that some of them had the advantage of just lying to their clients about their actual returns creating a shadow of doubt over the entire group. The final blow came to the hedge fund industry when the financial markets began the second worse crash in history at the end of 2007. By September of 2008 we were in the middle of a full blown credit crisis. The one thing most investors expect in a full blown crash is for their hedge funds to step up and make things ok. That didn’t happen. They were a hedge if you consider the Hedge Fund Index was down less than 30% in 2008 and the stock market was down even more. But still it is hard to feel as if you were really protected when your insurance was down 27%.

So, here we have an industry that has had a very rough couple of years. It has been the victim of graft, corruption, and bad markets. And because of this loss of faith, many hedge funds have opened their doors to smaller investors trying to attract money back to the table. It seems to me that this would be a pretty good time to consider whether hedge funds would be an appropriate investment for you. They have probably never been under more scrutiny than now and the investing world is suspect. What’s more, it appears that the markets will be volatile for a while and hedge funds normally have success dampening the negative effects of a volatile marketplace.

So why would you look at hedging your portfolio right now? I guess because it just feels wrong and that’s usually a good sign.

Written by:
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed LLC
Tupelo, MS

I am just finishing Andrew Ross Sorkin’s book, “Too Big to Fail”. It is touted as the “Inside story of how Wall Street and Washington fought to save the financial system…and themselves.” I almost decided to skip reading the book. I thought that it would be informative, but I also had lived through those times personally, professionally, and through the eyes of my clients. The financial crisis of 2008 was a historical period and one that I hope we don’t forget for generations. Nevertheless, it was a painful time for the country and not that much fun to revisit. Then my niece, Kirk, who is a former editor for a major publishing company and is not easily impressed by the written word, asked if I had read the book. I said no and she encouraged me to read it. It was well written and read like a novel even though the facts were backed up by 42 pages of notes, sources and bibliography.

I decided to read the book because I did not want to disappoint my niece and, more than that, I respect her opinion. I am glad I read it because it was a good choice. I thought that I knew much of the inside workings of the financial crisis of 2008, but there was so much going on behind the scenes that was truly amazing even for those of us who live in this world every day.

The big picture view of what needed to be done by our country ruled in the end. From the leaders of Wall Street, the White House, the Treasury, the Fed and to Congress, this country put aside their myriad points of view, their philosophical differences and their basic dislike for the other side and did what they felt they had to do to keep this country afloat. It was impressive, it was reassuring, and it scared the heck out of me. Sorkin’s book will show you that, no matter how closely you followed the events in September of 2008 that led to the demise of Lehman Brothers and changed the landscape of the financial industry for the foreseeable future, you couldn’t have had a clue of what was really going on behind the scenes.

I remember when we started the second war with Iraq and people would ask what I thought about the US going to war. My response was, “I can’t really tell you what I think because I don’t have the information the President has and if I did my view might be much different.” Taking hard stands on subjects where you have little real information can get you in a lot of trouble.

Long ago I decided to not get sucked in by the white noise of the Wall Street press. I listen to CNBC and Bloomberg for the facts that they give out, but I try to be very selective of the advice that is given out hour after hour by those that say they know more than we do. This book makes clear the point that even those who claim to be on the inside had very little understanding of what was going on behind the scenes in Washington and on Wall Street. What I have found is that successful investing for the long term requires an understanding of the history of the financial markets and how they have reacted at certain times. Seeing the big picture and understanding why markets do what they do is within your reach. Combining that understanding with a portfolio that is diversified well enough to take away security risk and manager risk will get your portfolio a long way down the road to whatever goals you have.

And if you ever thought that you had the inside track on what is going on in the financial world, reading “Too Big to Fail” ought to bring you back to reality pretty quickly.

Written by:
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed LLC
Tupelo, MS

With all due respect to John Grisham, his fictional characters, the unlikely situations in which they find themselves, and the evil that lurks inside the corporate legal system in his novels, is no less compelling a story than the story of Goldman Sachs. Their alleged scheme to create a package of investments that they think will fail, sell that package to “unsuspecting” investors, and then profit from betting on the failure is a perfect story line for a financial thriller.

It’s interesting to me that this happens as I am in the middle of reading the non-fiction book, “Too Big to Fail” by Andrew Ross Sorkin. The book offers a deep look into how our financial industry could have found itself on the brink of destruction. Sorkin interviewed hundreds of key players in the financial world to gain insight into what happened and why and Goldman Sachs plays a major part in the story he tells.

All the facts have yet to emerge concerning Goldman’s actions in this latest controversy. However, it does seem to be generally agreed upon that Goldman created an investment vehicle to sell to the public and later made a great deal of money by betting against the investments.

It is pretty easy to understand why Congress and the general public would be angry that this sort of thing can happen. At the least it feels that there must have been a breach of ethics in selling something to someone with the expectation that it will rise in price when you constructed the investment from mortgages you thought would most likely fail.

Many think that the Goldman issue will solidify Congress in its attempt to move forward on the Financial Services Bill that will supposedly stop this from ever happening again. It’s interesting that most people when caught with their hand in the cookie jar will admit to trying to get a cookie. However, executives involved in the Goldman Sachs issue testified before Congress yesterday with seemingly little remorse for what they had done. How can that be? How could they have the gall?

Their argument is that as a market maker they have no fiduciary responsibility to the counterparty. Notice that they consider their customers as counterparties, not clients. In the role of counterparty their job is to be fair and try to win, not look out for your best interests. Lloyd Blankfein, CEO of Goldman, in testimony before the Financial Crisis Inquiry Commission in January explained it this way, “In our market-making function, we are a principal. We represent the other side of what people want to do. We are not a fiduciary. We are not an agent. Of course, we have an obligation to fully disclose what an instrument is and to be honest in our dealings, but we are not managing somebody else’s money.”

Many members of Congress want to put new regulations in place that will stop companies like Goldman Sachs from creating investments such as those that started this mess. That sounds good when you say it out loud and it plays well in the press. However, the investment world has always relied on the big wire houses and investment banks to create new types of investments for us all to use and we should be very careful when we decide to bridle those creative efforts. The bigger problem as I see it is that these investments are being sold by people who are paid to sell them yet are not required to have the client’s best interests in mind when they do. In my mind, the most crucial aspect of the Financial Services Bill currently in the Senate is the part that deals with a “Fiduciary Standard of Care”. Some investment professionals are already under a fiduciary standard of care, but most are not. A uniform fiduciary standard of care for all investment professionals who give advice to clients would mean that everyone giving advice would be required by law to do so with the clients “best interest” as their objective. Failing to do so would put the advisor in jeopardy of prosecution. It seems simple enough and I have found it is what investors have expected from their advisors all along. However, there is a great amount of pushback from the industry. Many firms in our business like the idea of selling product with a minimum risk to their firm if things go wrong. I can’t blame them for that, but that doesn’t make it right. There is a difference between selling product and using product and it is a difference that can have enormous consequences for the investor. It is not the creation of a product that causes problems for investors; it is the implementation of a product. Holding Investment Advisers responsible for what they recommend is the fastest way to see real change in the industry and, in my mind, the best way to protect investors from the greed of Wall Street.

If this makes sense to you, call your Congressman and tell him/her that you are for a “Uniform Standard of Care for Investment Advisors”. You might be surprised at how few products like the Goldman deal would be sold if the advisors who sold it had to act as fiduciaries under the law.

Written by:
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed LLC
Tupelo, MS

I was at home minding my own business. I had the Today Show on in the background as my children were getting ready for school. For some reason they like the Today Show better than CNBC, which works for me because I like it better than the Disney Channel. Actually, it probably fits in somewhere between a real news show and a gossip show. Nevertheless, it was my news source that morning. My ears perked up when I heard Matt Lauer teasing an upcoming segment. He said something to the effect of, “The Dow Jones Industrial Average has rallied back to just under 11,000. Is it safe to get back into the market or have you already missed the move?”

Those kinds of questions really get to me. I looked at the screen and asked, “What kind of question is that?” My children looked at me and wondered who I was talking to. The problem with his question is that it makes perfect sense to most of the people watching the show. It is exactly how they feel. When the Dow was at 6,400 very few people thought it was safe to invest in the stock market. They wanted to see some resilience before putting their hard-earned money to work in equities. They wanted to know that the stock market would rebound. Now that it has rebounded they feel better and are ready to put their money to work again. The problem is that the Dow Jones Industrial Average was a much safer place to be when its price was at 6,400 than where it is currently. The replacement value of the market, or the Q Ratio during the worst of the market decline, would have put the Dow Jones Industrial Average at around 11,000. That means that you could buy the Dow Jones Industrial Average at about 40% off. That’s a heck of a deal. It’s hard to think that you could buy something at a 40% discount from the value of its hard assets and go too far wrong.

Now the DJIA is back to almost 11,000 and the question is, “Is it ok to invest now or is it too late?” I think the question should be, “How much of my investments should be in equities in order for me to meet my long term objectives?” Trying to decide on the merit of market timing with the DJIA bumping 11,000 seems like a sucker’s bet to me. I have said before that I don’t believe in market timing. I don’t mean that I don’t believe that it exists. I mean that I don’t believe it works over the long run. I remember the old joke about the Methodist preacher who asked one of his parishioners, “Do you believe in infant baptism?” He said, “Believe it, sure. I’ve seen it done.”

I understand that many investors just couldn’t talk themselves into investing in the market when it was at its cheapest. And I understand that many investors are worried that they missed the move and are nervous about getting into a market that has just had an almost 70% move to the upside in just over a year. I don’t blame them. I worry about the same things. That is why, at times like this, I believe we have to go back to the fundamentals. I believe that the fundamental principles of investing should withstand the day to day events of the markets. The question is not, “Should I invest in stocks right now?” It is, “Should I be investing in stocks at all?” If so, then you should be doing it now. Then the question becomes, “How can I best implement a long-term strategy that includes equities and minimize the risk that currently resides in the stock market?” That’s a loaded question but that question is more important and more pertinent to your financial quest than the overly simplistic query, “Should I get into the stock market right now?”

Investment committees already know the answers to these questions. Investment committees are required to think in the long term and not get caught up in the day to day fluctuations of the markets when they make decisions. They have to base their decisions on fundamental, basic, investment philosophy. I believe that is why portfolios managed by investment committees, on average, perform much better than portfolios managed by individuals.

Sometimes success is not as much about knowing the right answer as it is about knowing the right question.

Written by:
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed LLC
Tupelo, MS

My family went to Washington for Spring Break this year; the nation’s Capital, not the State. I wanted to show them our government at work and I wanted them to experience the history through our monuments and our museums. It is a trip worth taking, not only for the children but to remind ourselves that what we do in Washington is important. It was the week of the Health Care bill debate in the House of Representatives and there was a lot of commotion on that side of the capital. The line to get in the viewing gallery of the House was extremely long so we decided to see what was going on in the Senate. The Senate wasn’t debating Health Care when we were there. They were debating funding of a project that would affect public schools in the Washington D.C. area. It wasn’t a particularly hot debate. We heard speeches from Senator Feinstein from California and Senator Joe Lieberman, two of the stars of the political scene. It would have been even more impressive if anyone else had been in the room. I mean other than the pages, stenographers, and other folks required to be there, the room was empty. The Senators were simply giving speeches to be recorded for the record. The oddity of the experience did not escape my daughters who both wanted to know where everyone was hiding. It was a good question.

While we were there I thought it would be a good opportunity to show my daughters how the average citizen gets there voice heard in Washington. I arranged to meet with both of our Senators, Cochran and Wicker, and our First Congressional District Representative Travis Childers. I also asked to speak to their Congressional Aides who handle Financial Services issues. All three Congressmen were happy to oblige. There are bills being bantered around in both the House and Senate regarding significant changes in my world and I was interested in how the Mississippi Delegation felt about the proposed changes.

The bad news is that none of our delegation seems to have formed an opinion on the parts of the Financial Services bill that I am most interested in. The good news is that none of our delegation seems to have formed and opinion on the parts of the Financial Services bill that I am most interested in. They are all very aware of the marquee issues such as “Too Big to Fail”. “Too Big to Fail” is the notion that Government needs to intercede when a company gets to a size and influence that would make their existence an imperative for economic stability, such as was the debate over Lehman Brothers, Bear Stearns, AIG, etc. etc. etc.

However, I am most interested in two pieces of the proposed legislation that I believe you should be interested in as well. I am interested in “Fee Transparency” and a “Uniform Fiduciary Standard of Care”. Both issues are pretty straight forward and easy to understand. Fee Transparency, in layman’s terms, simply means that investors should be able to distinguish how much it costs them to invest in something or with somebody. It seems easy enough, but the financial services industry has been phenomenally successful in masking fees inside of their investment vehicles. Just last week I had a client who told me that someone made a pitch to take my place as the advisor to his retirement plan. His pitch was, “Why would you use them when we would do the work for free?” It’s amazing that someone would actually make that pitch, but it is more amazing that many people actually believe it’s true. I think that it is time for the financial services industry to come clean about how much it cost to do business. Once investors know what they are truly paying, then they can make an educated judgment as to the worth of the advice.

The second issue is pretty simple as well. Most investment professionals in our country are not required to act in the best interest of their clients. Let’s be clear on this. Many investment professionals do act in the best interest of their clients; I said that they weren’t required to act that way. Many of us would like to make it a legal thing. I don’t think that investors should have to wonder if we are acting in their best interest. When I first started in the investment business my business card said “Stockbroker”, a term of which I was very proud. Now my card says that I am an “Investment Consultant”, something I am equally proud of. However, there is a difference in those two roles. I no longer trade securities for a commission and it would be wrong to indicate that I do. I gave up my Series 7 license that allows payment of commissions. I give advice to my clients and, in my case, manage their portfolios at my discretion. That is why I now have a Series 65 license am officially a Registered Investment Advisor which requires me to put my client’s interests above my own. It is called a “Fiduciary Standard of Care”. The problem today is that a lot of investment professionals want to call themselves an advisor or a consultant, even if they are still trading securities for a commission. That is confusing to clients who, in my experience, are expecting a standard of care that puts their interests first. I want the financial services bill to require a Fiduciary Standard of Care for every investment professional who claims to give advice to their clients. It’s a simple concept but one that would, I think, significantly change the delivery of investment products to potential investors. I believe this change would be very good for our industry as well as our clients.

We have a chance to help form the opinion of our Congressional leaders on these issues. I encourage you to call their offices and let them know how you feel. It’s the way we get things done in this country.

Written by:
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed LLC
Tupelo, MS