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The most important question an investor can ask himself, according to Phil DeMuth is “what is your edge as an investor?” Unlike Warren Buffett, most of us aren’t market-beating stock pickers. But by admitting this, investors can have an edges or advantage over other investors.
Admitting this allows for 1.”The low-cost edge” — Accept that you can’t beat the market and become a smart indexer. “Instead of trying to beat the market, we can be the market.” 2. “The kitty-management edge — We can buy-and-hold. We can rebalance every year, even when it hurts. We can harvest tax losses. We can know ourselves well enough so that we don’t overinvest and then sell in despair when the market gets kneecapped. We can hold plenty of cash so we can sleep nights.”
The bottom-line is very few of us have a real edge, instead DeMuth writes that investors should admit they don’t have an edge and make that their edge.
Advisors Need To Help Clients Comply With FACTA (The Wall Street Journal)
The Foreign Account Tax Compliance Act (FATCA) passed in 2010 require foreign financial institutions with U.S. clients to report their clients’ earnings to the IRS, writes Paul Nixon of London-based Vestra U.S. Wealth Management in a new Wall Street Journal column. “After the announcement of FATCA, there was a knee-jerk reaction here in the U.K. for investment firms to abandon their U.S. clients for fear of the impending legislation,” he writes.
In the UK many financial institutions he points out want to or are in the process of walking away form their U.S. clients. But Nixon writes “the legislation makes sense, given the fact that there are more than six million Americans living outside the U.S. and only 600,000 were filing their taxes.” Instead he thinks advisors along with accountants and lawyers should work together to make sure their clients are compliant.
CITI: Gold $US3,500 (King World News)
Gold trading has been fairly choppy since April. But the precious metal is now 20% off of its lows. In an interview with King World News, Citi’s Tom Fitzpatrick writes that he expects gold to get to $US3,500.
“Within the gold dynamic, we believe this recent correction was very similar to what the gold market witnessed from 1974 to 1976 — as the equity markets recovered from the bear market bottom in 1974. In this instance, very recently gold went 14% below the 55-month moving average, exactly as it did back in 1976.
“After the low in gold in 1976, the equity market peaked 4 weeks later. So far, following the $US1,181 low in gold, the peak in the equity markets has been 5 weeks thereafter. And as we started that historic upward movement in gold, beginning in 1976, this was also when the equity market peaked and went into a corrective phase, and that is when gold really came into its own.
“So we believe we are back into that track where gold is the hard currency of choice, and we expect for this trend to accelerate going forward. We still believe that in the next couple of years we will be looking at a gold price of around $US3,500.”
The SEC’s Office of Compliance Inspections and Examinations (OCIE) has issued a risk alert on “business continuity and disaster recovery planning for investment advisers.” This comes in the aftermath of Hurricane Sandy and is intended for investment advisors to reassess their business continuity plans and speed up the time it takes to recover from an emergency.
“The Risk Alert makes observations in the following areas: 1. Preparation for widespread disruption. 2. Planning for alternative locations. 3. Preparedness of key vendors. 4. Telecommunications services and technology. 5. Communication plans. 6. Reviewing and testing”
The Greatest Risk To Bond Investors Is That Inflation Will Rise Again (Project Syndicate)
Martin Feldstein has previously warned that long-term interest rates would rise and push bond prices lower causing investors to lose more in terms of value than they would gain in terms of the difference between the bonds’ interest rate and the rates on short-term deposits. Now he says inflation poses the biggest threat to bond investors.
“The greatest risk to bond holders is that inflation will rise again, pushing up the interest rate on long-term bonds. History shows that rising inflation is eventually followed by higher nominal interest rates. It may therefore be tempting to invest in inflation-indexed bonds, which adjust both principal and interest payments to offset the effects of changes in price growth. But the protection against inflation does not prevent a loss of value if real interest rates rise, depressing the value of the bonds.
“The relatively low interest rates on both short-term and long-term bonds are now causing both individual investors and institutional fund managers to assume duration risk and credit-quality risk in the hope of achieving higher returns. That was the same risk strategy that preceded the financial crisis in 2008. Investors need to recognise that reaching for yield could end very badly yet again.”
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