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By Brian Holmes, Photos by Jose Mandojana

Published Oct 1, 2008 8:00 AM


What can you do to protect your money? What shouldn't you do? The economy is tanking 
and the market is dropping, but Brian Holmes can help you weather the storm. Named one 
of America's Top 100 Independent Financial Advisors in 2007 by Barron's magazine, Holmes 
is CEO of Century City-based Signature Estate & Investment Advisors, LLC (SEIA).

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Two best practices for protecting personal wealth.

There are two things that the savvy investor must absolutely do to protect and grow his or her wealth. On a macro basis, match your goals and objectives with an efficient and diversified asset allocation suitable for all market and economic conditions. We integrate principles found in the modern portfolio theory, or more commonly known as the efficient frontier. The efficient frontier maximizes portfolio returns for different levels of risk. In the two most recent S&P 500 bear markets (2000-2002 and 2007-2008), the S&P 500 index dropped 48 percent between September 1, 2000, and October 31, 2002. Between October 1, 2007, and July 15, 2008, the index declined by 23 percent. But a diversified and efficient allocation of indexed returns consisting of several asset classes would have declined only 14 percent and 5.5 percent, respectively, during our two examples of bear markets.

Secondly, on a micro basis, within your specific financial portfolio it is critical to monitor the individual underlying equity holdings. If basic historical price-to-earnings valuations do not support individual equity and/or asset class multiples, market forces will eventually lower the share prices. This occurred with the technology sector in 2000-2002 and real estate/financials in 2007-2008.

Different life stages require different strategies.

A young professional has time on his side to accumulate wealth. A 30-year-old who started investing $15,500 per year in 1988 (the current 401(k) contribution limit) would have accumulated well more than $1 million by the time he or she was 50 in 2007. This would have been achieved individually or collectively with three basic long-term asset classes: U.S. equities, REITs (real estate investment trusts), or commodities. Although these asset classes have suffered several substantial corrections the past two decades, they averaged 11 percent to 12.5 percent over the 
past 20 years.

Dollars and Sense

UCLA Alumni Association members are eligible to take full advantage of the many services and products available at the University Credit Union, including financial planning. Visit www.ucu.org. You can learn more about SEIA at www.seiallc.com.

On the other hand, a 65-year-old with a 20-year life expectancy and retirement income needs cannot afford — and doesn't have the time for — the same long-term investing opportunities as a young professional. If a portfolio dropped 35 percent during an asset class correction, it would take a 54-percent subsequent return just to get back to even. Add that to the typical 3-5 percent withdrawal rate needed during retirement and you have a recipe for financial disaster. Consequently, asset classes such as cash alternatives and bonds, which offer principal protection, should be between 35-65 percent of a retiree's portfolio allocation.

How to weather the current economic storm.

The most widely held belief is that a recession is defined by two consecutive negative Gross National Product (GNP) quarters. As economically troubling as things may currently seem, this hasn't officially occurred yet. However, the official definition is actually determined and declared by the National Bureau of Economic Research (NBER). It defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months. Based on this definition, we are currently in a recession, and it's already too late to protect against it.

Ironically, though, there are tremendous opportunities in the middle of recessions that are often missed while everyone waits for the announced end of the recession. Here's why: Recessions are a normal part of our economic cycles that cleanse our economy of its excesses and inefficiencies. NBER, on average, was 15 months late in officially declaring the end of the last four recessions. The stock market is forward-looking and has been a remarkable predictor of the past 10 recessions and recoveries. During the past 10 recessions, the markets have recovered more than 80 percent of their average bear market declines during a six-month period that began in the middle of the recessions. Most bull markets actually began in the middle of past recessions; they didn't wait for a belated official NBER declaration.

Participate in the trend toward international equities and alternative investments.

There are increasing numbers of energy, natural resource, basic material and commodity funds, and energy and commodity indices averaged almost 17.9 percent annual returns over the past five years. So that's one area to consider.

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Another way to take advantage of the worldwide growing demand for natural resources and commodities is to buy shares in the actual companies that produce commodities or natural resources. The agriculture index, for example, has enjoyed an almost 13-percent annualized increase over the past five years. And as the price of oil continues to soar, the oil service companies that refine, produce and transport oil and gas have gone up almost 34 percent in the past five years.

And a third option is investing in countries that produce commodities as a large part of their GDP. Canada and Brazil are both rich in natural resources and home to many of the world's largest mines. Their market indexes have averaged 18.27 percent this decade, far outperforming domestic markets.

What the market will make of the Presidential election.

Investment success depends more on the strength of the American and world economies than on which candidate or party holds office. The market can handle good and bad news; it can't handle uncertain news. This may explain why the fourth year of a presidential term is historically the worst for the markets.

Look toward the future.

If I had only one piece of advice to give regarding investment management, it would be that, in the decades to come, to achieve the highest returns with the most efficient portfolio allocation, international equities and global commodities must be a larger part of most portfolio allocations. Many foreign economies are growing at more than three times the rate of the United States; namely, China and India. Their combined population is eight times greater than ours. With the continued emergence of their middle classes, we will be competing for raw materials, natural resources and hard assets. A decade ago it was considered "too risky" to have one-third of a portfolio allocation in international equities and alternative investments. A decade from now, it will be considered too risky not to have it.

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