Investor's Corner for October 18, 2004

Investor's Corner Newsletter

By Will W. Woodard, III, CFP®
President, Dare Capital Management & Advisory
October 18, 2004

"So much to say, so much to say, so much to say." ...Dave Matthews Band

In this newsletter:

The year in review

Portfolio performance

Owning real estate in a retirement account

Charts- SPY, ^TNX

Worthwhile links

A. The year in review. A professional investor can sharpen his performance by regularly reviewing prior decisions, looking for patterns to correct or successes to build on in future decisions. Let's look back at some of the items I highlighted in recent columns and see how things have turned out:

To the Downside:

1. Using technical market data to generate buy and sell signals on the broader market: (January 30, 2004) As my clients and readers know, I enjoy reading and using stock charts and find them very helpful in conveying price/market data. Thus the idea came about to use significant moving averages on sector and index charts for guidance in generating broader market buy and sell signals. Hasn't worked-yet. In the current trendless market we're in, when the index lights have flashed "Sell" we've generally been near a bottom, and when they have flashed "Buy" we've been near a market top.

This has not affected portfolio performance figures at all-it has been simply a "reading the tea leaves" issue. Thus the concept has been shelved until we reenter a trending market. (As for sell discipline, I'm still working on that, too-but that's a story for another newsletter.)

To the Upside:

1.  The benefits of commodities exposure: (Several times, most recently Spring '04) I have recommended that all investors consider allocating a piece of their portfolio capital to a commodities index fund. Good thing-the primary fund that I use for this purpose is up over 19 percent YTD through September 30 and up over 34 percent over the twelve months ending 9/30. With oil north of $55 a barrel as I write this (10/18), it's hard to imagine the trend towards higher commodity prices reversing-at least in the near term. See more on commodities in "B", below.

2.  Fiduciary standards for planners: (Most recent mention Summer '04) When I last addressed the topic of fiduciary standards for investment professionals-revisiting the issue that investors may be better served by working with a planner/advisor that placed the investor's needs above those of the advisor and the advisor's firm--I had no idea that the Financial Planning Association was planning to escalate the matter. Boy, did they--subsequently filing suit against the SEC seeking withdrawal of the so-called "Merrill Lynch" rule. That rule (actually an exception to the Investment Advisor's Act of 1940) has long served as a loophole, allowing financial advisors at the large brokerage houses to avoid registering as fiduciaries. Seen through the rear view mirror, it was the right action at the right time in the profession. Bravo, FPA!

3.  Richard Russell's "market is out of balance" bond call: (Summer '04) When I referenced a thoughtful comment by Dow Theory Letters publisher Richard Russell to the effect of "When everyone in the market is on one side of the trade, watch out for that side to be a loser," it was one gutsy call for Mr. Russell to make--but it ended up being spot-on. When the comment was published in late April the yield on the 10-year Treasury note had just broken 4.5% to the upside, and it seemed the entire market was ready for the yield to move higher, carrying consumer interest rates, especially mortgages, along for the ride. Higher the yield went, too-for two whole weeks. Then it reversed and started drifting down, bumping the 4% barrier not once but twice since the first of September. A lot of "smart" money presumably ended up on the wrong side of that trade--at least as it has played out over 2004.

B. Portfolios update: As long-time readers know, I keep track of several model portfolios in order to have comparison data on different areas of the market. Here's a brief update on how they're doing:

Gibson-Woodard "Modified" Portfolio. This portfolio is designed for broad, cost-effective exposure to the global equity markets. The portfolio uses Exchange Traded Funds and builds on the work of Roger Gibson, but with a couple of my own added twists thrown in. Since inception 1/15/03 it has returned 42.22% (assuming reinvestment of dividends and capital gains) versus 23.59% for the S&P 500 over the same time period. Emerging markets international, Real Estate Investment Trusts (REIT's) and commodities exposure has fueled the portfolio's upside result.

Gibson "Pure" Portfolio. Named for the author of the seminal Asset Allocation, this portfolio has returned a healthy 41.15% since inception 1/15/03 (assuming reinvestment of dividends and capital gains) versus 23.59% for the S&P over the same period. The portfolio's REIT and commodities exposure has helped it outperform to the upside.

Challenge Portfolio. This concentrated stock portfolio that I assembled in response to a "Beat the market if you dare" challenge from a colleague has returned 24.38% since inception 1/15/03, assuming reinvestment of dividends and capital gains. That is slightly above the cumulative 23.59% return for the S&P 500 over the same period. There have been no buys or sells in the portfolio in 2004.

Bond Fund Portfolio. This portfolio has returned 7.81% since inception 1/15/03 and 3.73% year to date, assuming reinvestment of dividends and capital gains. The bond market benchmark Lehmann Brothers Aggregate Bond Index has returned 3.12% YTD.

C. Real estate in a retirement account: I was recently asked to speak to the sales force of a local real estate firm on the topic of "Owning investment real estate in a retirement account." Here is the outline of that presentation:

Investment real estate can be owned in several types of retirement accounts, including IRA's, one-owner 401(k) plans, even defined benefit pension plans. There are several important issues that have to be addressed and steps that must be followed, however, for the transaction to go smoothly. Among these are:

1.  The transaction must be an "arm's length transaction"-in other words, it must be a deal that would be mutually agreeable to two emotionally detached investors.

2.  Only non-recourse financing is available on the target property--meaning that most conventional financing is not likely to be available. Non-recourse seller financing and other non-recourse financing may qualify, however.

3.  The transaction must not contain or come about as the result of "prohibited transactions"-including dealings with direct lineal descendants of the retirement account's owner, or involving property already owned by the retirement account's owner or lineal descendants.

4.  No personal loans can be made from the retirement account that owns the property to the owner of the account or a disqualified person. Loans can be made from the account to a non-disqualified person at mutually agreeable rates and terms, however.

5.  The property should be managed in a professional fashion (i.e. with rental and expense logs prepared on an ongoing basis).

6.  The plan to put the property into a retirement account should be started prior to purchase of the target property. This way a professional facilitator can help to properly structure the transaction.

As with any investment, there are risks involved in owning investment real estate, including liquidity and market risk. Additionally, the property (and its owners) may be the subject of a lawsuit related to use of or an incident on the property. There is also the risk of the property not generating an acceptable investment return.

That said, there are a lot of potential upsides to investors willing to take on and attempt to manage these risks, including negatively-correlated investment returns between investment real estate and other equities, the ability to own Outer Banks resort property in a tax deferred structure, and healthy investment appreciation over past years. (Of course, past performance is no guarantee of future return!) Persons wishing more information on owning real estate in a retirement account are welcome to call or email my firm for more information.

D. Charts

1. Here is a chart of the S&P 500.

2. Here is a chart of the ten year Treasury note:

4. Worthwhile links:

CERTIFIED FINANCIAL PLANNER™ Board of Standards - http://www.cfp.net/default.asp

NAPFA, the National Association of Personal Financial Advisors - http://www.napfa.org/

The Financial Planning Association - http://www.fpanet.org/public

The FPA's Hampton Roads chapter - http://www.fpahamptonroads.com/

Dare Capital Management & Advisory home page - http://www.darecapital.com/

Good Investing,

Will W. Woodard, III, CFP®
Dare Capital Management and Advisory
PO Box 1138
Kill Devil Hills, NC 27948-1138
252.480.0156
will@darecapital.com
www.darecapital.com

Will W. Woodard, III, CFP® is president of Dare Capital Management & Advisory, a Registered Investment Advisor and fee-only financial planning firm with offices at 2518 S. Croatan Hwy, Suite E, Nags Head, NC 27959. Dare Capital Management & Advisory offers ongoing investment management services and fee-only financial planning. Mr. Woodard, his firm, or his clients may own the investments mentioned herein. Contact Will at (252) 480-0156 or learn more about the firm at Will@darecapital.com

The fine print: This newsletter can be reprinted or forwarded--however, it is requested that reprints of any material in this newsletter include credit to Dare Capital Management and Advisory (252)480-0156 and an email link to will@darecapital.com. Thanks for spreading the word!

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Will W. Woodard, III and Dare Capital Management and Advisory, and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. Mr. Woodard, his firm, or his clients may own the investments discussed in this newsletter. Past performance is no guarantee of future returns.

The information presented herein and the company's web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future results may vary for many reasons.