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Diversify AWAY From the Market

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Boy, has it been a rough few months in the market?  Enough to keep you awake at night wondering what will happen next.  We have been on quite a roller coaster ride over the last few months and, unfortunately, it is my opinion that we have not seen the end.   Money managers I respect and use have had my clients in mostly cash and fixed accounts for at least three months and don’t plan to make any changes any time soon. Add to that the sub-prime mortgage problems, that I also do not believe are over and this being an election year and the future does not bode well for the market.

So what is an average investor to do? I think Solomon said it best, “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.” [Ecclesiastes 11:2] Divide or diversify, diversify, diversify.  I’m sure many of you have heard this expression before.   While it’s true many financial professionals proclaim the importance of diversification when investing in the market the question remains, is diversifying within the market enough?  Many of you may feel you are already well diversified yet still have experienced significant losses.  Have you ever compared segments of the market’s history side by side?  Compare the S&P 500, The Dow Industrial average (both large company stock indexes), The NASDAQ 100 (a middle size company index) and The Russell 2000 (a small company index).   If you chart the history of these indexes and many others you will notice some similarities.   They all seem to be following the same basic pattern like waves in the ocean, up and down.  The peeks and valleys may be more or less substantial from one wave to the next but still following the same wavelength.   Now imagine several different size corks floating in the water.  Some of the corks sink or rise more than others while riding the wave but, they travel in basically the same direction.  So how do you stop motion?   Pull your corks out of the water!  You may be saying to yourself, “Now why would I do that?”   Have you ever considered diversifying outside the market?  Has anyone ever told you how or even that you could diversify outside the traditional stock market?  Some of you are getting seasick watching your corks bob along the tumultuous ocean that is today’s stock market.  It may be time for you to consider whether it is in your best interest to take some of those corks out of the water.  Over the next few paragraphs I will outline strategies I have found to be good market alternatives in order to reach your investment goals.  For those investors seeking income collateralized church mortgage bonds could be the answer.  If growth is your primary focus equity-linked CDs are a good bet.  Finally, for those seeking a little of both, private placements might be the ticket.

Collateralized church mortgage bonds are a great market alternative for anyone seeking income.  Throw out any preconceived notions you may have of church bonds because these are not your typical church bonds.  These bonds are used for mega-church and Christian university expansion.  One of the largest providers of these bonds is Strongtower Financial, a firm with a forty year history of success.  Strongtower bonds are backed with real estate and pay higher than average coupons compared to investment grade corporate bonds.  Couple that with bond values that are not as sensitive to fluctuations in the interest rate and you have a winning combination.

Equity linked CDs are one of the newest and fastest growing segments in the market.  These instruments are like CDs in the fact that they are FDIC insured from loss, however, equity linked CDs are able to offer much more upside potential than your run of the mill fixed CD. The CDs return is based on an underlying index or asset which allows you to tie yourself to a percentage of the upside potential of the market without the downside risk.  Imagine having the ability to tie yourself to a commodity like crude oil, a basket of foreign currency, or even a single stock without risking a penny of your principal!  Of course, there is always the risk that if the asset does not perform you could be left with only your principal.  These new types of CDs are issued in terms ranging from as short as six months to as long as seven years and are meant to be held to maturity.  They can be purchased in increments starting at $1,000 dollars.  They can even be customized to suit clients’ individual investment goals.  It is important to note that they are sold by prospectus so make sure to read carefully before investing.

And finally for those investors seeking both growth and income, there is a small but growing piece of the securities market known as private placements.  Private placements, for those of you not familiar with the term, allow investors to invest directly in the underlying asset, often but not limited to, commercial real estate.  The asset share price does not fluctuate with the ups and downs of the market.  Your income and return is solely dependent on the underlying performance of the real estate.  If the investment is successful, investors will receive a regular dividend based on the leases generated on the property and can also participate in any appreciation of the property when sold.  Private placements offer investors a unique opportunity to buy into a piece of what could be a billion dollar pool of assets for as little as $1,000.  Unlike the above mentioned investments this type of investment is not guaranteed from loss.  Individuals should carefully research the track record of the firm, cost of the investment, and any and all risks associated with the investment thoroughly before investing.

I would like to offer one last bit of advice in closing.   As in all times of crisis, it is important not to panic.  Plans fail for lack of counsel, but with many advisers they succeed. (Proverbs 15:22) With the help of a financial professional create a plan which will benefit your overall financial future.  Remember, it is best not to dwell on past mistakes but rather learn from them and move forward. God Bless!

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