Permanent Value

Week in Review 2/4/13

Bruce Doole
February 6th, 2013
THE MARKETS

WHAT IS AN INVESTMENT?

This is actually an important question to answer because the range of “investments” available today goes far beyond traditional stocks and bonds. Understanding the unique characteristics of these “alternative investments” may help you avoid a negative surprise sometime down the road.

According to Investopedia, an investment is defined as “An asset or item that is purchased with the hope that it will generate income or appreciate in the future.” Sounds simple enough yet, ironically, investment professionals don’t necessarily agree on what constitutes an investment. For example, some disagree on whether gold and other commodities should be considered an investment.

On one side, some pros argue gold is an investment because it has been traded for thousands of years and has an established market where it can be bought and sold. On the other side, some say gold is not an investment because it does not generate cash flow, has no “earnings” that can be valued, and has little economic use.

Let’s contrast gold with stocks. Stocks represent a claim on a company’s assets and earnings. Using established norms of financial analysis, investment pros can place a value on those assets and earnings and come up with an estimated “fair value” for the stock (which may or may not be close to its actual trading price). However, with gold, there’s no underlying productive asset to value or earnings to capitalize so determining “fair value” is really not even possible.

Where does this leave us?

Successful investors need to know the difference between a traditional investment that consists of underlying assets and potential earnings versus an alternative investment like gold that may look like an investment, but is difficult to value using traditional financial analysis. This doesn’t mean these non-traditional “investments” are a bad idea. It means they bear close monitoring… which we try to do.

WEEKLY FOCUS – THINK ABOUT IT

WHAT ARE BABY BOOMERS’ LATEST THOUGHTS ABOUT RETIREMENT?

Here are some highlights from a survey released by MFS Investment Management®:

•59% of non-retired Boomers agree with the statement, “I’m more concerned than ever about being able to retire when I thought I would.”

•50% agreed that they have lowered their expectations about what life would be like in retirement.

•30% of Boomers reported a net decrease in the risk they were willing to take to achieve higher returns over the last 12 months; only 12% reported a net increase.

•Boomers are approximately evenly split when describing their primary investing goal: 34% reported it to be growing assets/increasing portfolio value as much as possible while 33% reported protecting principal/not losing money as their primary goal.

•Nearly four times as many Boomers would describe themselves as protective investors (37%) vs. opportunistic investors (10%).

•Only 13% of Boomers surveyed reported having $1 million or more in median household investable assets, while, on average, retirement was within 10 years.

If you’re a Baby Boomer, do these survey results surprise you?