Homeowners in the Denver Metro area are receiving solicitation letters from Home Serve, a Florida-based company that offers a warranty plan on residential water service lines. The warranty covers repair costs to water lines in the event of a residential water line leakage or break. According to the company’s literature, homeowners are responsible for water line damage that is located on residential property adjacent to  public areas maintained by the municipal water company. Are such warranties necessary? Only the homeowner can determine the value of such a service and this requires some work on the front end. The following are points to consider before making a decision:

• Know and fully understand what you as a homeowner are responsible for if a water line breaks between your house and common areas maintained by your local water company. City and County of Denver residents can access this information by clicking on the Denver Water website at http:/ /www.denverwater.org/WaterServiceSupport/TroubleshootingRepairs/Leaks/. *Note that Denver Water services most, but not all areas of the Denver Metro area. To determine your local water utility, go to http://www.denverwater.org/AboutUs/ServiceArea/ and click on Service Area Map in the right-hand box.
• Next, review your homeowner’s insurance policy carefully to determine your extent of coverage and to identify coverage gaps. As a precaution, it is always a good idea to sit down with your insurance agent annually, and prior to a catastrophe.
• Home Serve, a Florida-based company, contracts with local plumbers to perform the warrantied work. Check with your local building department to make certain that the service meets local plumbing codes.
• Understand all inclusions and exclusions which are listed in the fine print at the bottom of the Home Serve letter.
• Consider paying by credit card. If a problem arises, charges on your CC can be disputed.
• To access Home Serve’s rating by the Denver/Boulder Better Business Bureau, go to http:// www.denver.bbb.org and click on Check out a Business or Charity.

Denver DA’s Fraud Line: 720-913-9179

This new series of articles will focus on issues facing Seniors.  As a founding member and the Board Director of Colorado Senior Advisors, I have the opportunity to work with and learn from a number of people who provide services that Seniors sometimes need. This series will cover a variety of topics including emergency contacts, Aging-in-Place, Medicare issues, senior real-estate issues, decluttering, long-term care, hospice, and funeral planning.

So, let’s get started.

“Hi Mom! Just calling to see how you’re doing today.”  It’s great when Mom answers the phone or your email so that you know she’s okay. But what do you do when you can’t reach her for a day or two … or three?  What is your plan?  Perhaps you have the phone number of a neighbor or someone who works in her building that you can call if you’re concerned.  But, do they have your contact information?

These are very basic issues that we need to work through with family members, and sometimes close friends, as we and they, travel life’s path. Similar to having an emergency plan in case of a hurricane, tornado, or earthquake, families need to establish protocols for staying in touch.

In the 1990s, the “Help, I’ve fallen and I can’t get up” commercials became such a cliche that we forgot that falls in the home are actually very common. Research shows that one-third of all people over the age of 65 and half of all people over age 90 will fall each year. Getting help within four hours can dramatically reduce the severity and long-term effects of these falls. There are a number of organizations that provide electronic monitoring, but that means that you or your loved one must be willing to wear a bracelet or pendant with an emergency button. Depending on the set of instructions you’ve set up with the monitoring company, a press of the button can call an ambulance, call your doctor, notify you or someone you’ve designated, or have a neighbor check in on the person. There are even automated medication dispensers that can simplify medication management.

As you have taken the time to work with us to create a Financial Plan, please make the effort to create an emergency plan with family and friends, and perhaps consider electronic monitoring for those living alone. There are many options available to help you monitor your loved ones, even if they are far away. While it can be a difficult topic to bring up, when you have a plan in place, everyone will sleep better at night.  And if an emergency arises, it might make a big difference in the life of that family member or friend.

The graph below documents investor behavior during the stock market downturn in 2008 and subsequent market rebound. It offers a few key lessons about investing in turbulent markets.

Figure 1: Quarterly Equity Mutual Fund Flows

Industry vs. Dimensional Relative to S&P 500 Index Performance

January 2008–June 2011

For illustration purposes only. Industry net new cash flow data for US-domiciled equity funds provided by Investment Company Institute ©2011. Quarterly cash flows are estimates that are adjusted to represent industry totals, based on reporting covering 95% of industry assets. Dimensional’s figures are based on net new cash from financial advisors in US-domiciled funds. Industry and Dimensional data reflect investment in US and international equity markets and do not include funds of funds. S&P 500 Index performance is based on monthly returns data. The S&P data are provided by Standard & Poor’s Index Services Group. The S&P 500 includes 500 US stocks chosen for market size. Past performance is no guarantee of future results.

Reading the Graph

First, look at the shaded graph in the background, which plots the performance of the S&P 500 Index (measured by growth of a dollar) over this three-and-a-half-year period. The market began falling in late 2008 and hit bottom in early March 2009. It then reversed sharply and began a long climb through June 2011.

Now consider how mutual fund investors responded to the stock market’s downturn and recovery. The orange line plots quarterly net cash equity flows for the US mutual fund industry over the same period. (Net cash flow is the difference between redemptions and purchases of shares in a mutual fund. A net cash outflow occurs when redemptions exceed purchases.) Equity fund flows were cumulatively negative over the period. Investors were redeeming more shares than they were buying, and on a net basis, capital was leaving mutual funds.¹

Note that these fund industry outflows followed the stock market downturn, and net flows stayed negative even after the market rebound. Investors were reacting to the falling stock market by either redeeming their fund shares or delaying the purchase of additional shares.² When the stock market suddenly rebounded in March 2009, investors who had reduced their exposure to equities missed a good part of the recovery.

This apparent lack of discipline is well established over longer time periods too. Industry analyses and academic research suggest that investors tend to focus on recent performance and make decisions that compromise long-term returns in their portfolio.³

Recent history illustrates why the average fund investor may fail to earn returns comparable to those of the average fund or market index. Markets change quickly, and investors must be in their seats to capture returns. Unfortunately, many investors let their emotions get in the way of participating in long-term market performance.

Now consider the upward-sloping blue line, which plots quarterly net flows into equity strategies offered by Dimensional Fund Advisors. These flows were cumulatively positive throughout the entire period, suggesting that shareholders in Dimensional’s funds continued to purchase shares during the 2008–2009 market decline and after the March 2009 rebound.

As a group, these investors did not flee stocks en masse. In fact, they did the opposite by adding to their portfolios. Their discipline positioned them for the market rebound.

A mutual fund’s net cash flows also may reveal the collective discipline—or lack of discipline—among its shareholders. In fact, the direction of net flows can impact portfolio management and performance, especially for funds invested in less liquid markets. Large net redemptions typically increase the direct and indirect costs of a mutual fund, which compromise fund returns.⁴ The assorted costs are not borne by redeeming shareholders but by the shareholders who remain in the fund.⁵ Therefore, consistently positive net cash flows are helpful to a fund’s expenses, strategy, and performance.

Summary

The large net cash outflows from US-based mutual funds since 2008 document investor reaction to market volatility, while Dimensional’s stable and positive net fund flows suggest disciplined behavior. So why would shareholders in Dimensional’s funds behave differently? One reason might be the education, encouragement, and discipline offered by their financial advisor at that difficult time, underscoring the value of sound investment advice.

An advisor’s steady hand helps investors apply discipline in all types of markets, which can positively impact individual performance over time. Moreover, when advisors influence the collective decisions of shareholders in a fund, the greater cash flow stability can prove beneficial to the fund’s strategy, cost management, and returns.

Endnotes:

1. Mutual fund investors redeem their shares by selling them back to the mutual fund and receiving cash proceeds based on the net asset value (NAV) of the shares at day’s end. Redemption is a normal activity in a mutual fund, and liquidity is one benefit of owning fund shares. A fund manager may use inflowing cash to cover the redemptions or keep cash in a “liquidity reserve” for this purpose. When cash balances do not suffice, the manager may execute trades to raise the cash.

2. According to the Investment Company Institute, mutual fund flows do not offer a good measure of total demand for equities since funds hold only about 20% of the total US equities outstanding, with the balance held directly by individuals, institutions, and governments. Academic research offers some evidence that mutual fund flows do not drive market returns but reflect investor reaction to markets. (Roger M. Edelen and Jerold B. Warner, “Aggregate Price Effects of Institutional Trading: A Study of Mutual Fund Flow and Market Returns,” Journal of Financial Economics 59, no. 2 (2001): 195–220.)

3. A Morningstar study compared the dollar-weighted returns of the average investor in a fund with the fund’s published total return for the ten-year period ending Dec. 31, 2009. In US equities, the average investor in all funds earned 0.22% annualized, compared with 1.59% for the average fund. (Russel Kinnel, “Bad Timing Eats Away at Investor Returns,” Morningstar.com, February 15, 2010.) Lack of investment discipline also is documented among individual investors who hold common stocks directly. Those who trade frequently pay a tremendous performance penalty for their actions. (Brad M. Barber and Terrance Odean, “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors,” The Journal of Finance, April 2000.)

4. Direct transaction costs include commissions, bid-ask spreads, and price impact incurred when a fund makes trades in response to shareholder redemptions. Net outflows also may generate indirect costs on a fund by forcing its manager to alter the target asset allocation or make disadvantageous, uninformed trades to raise cash. See Qi Chen, Itay Goldstein, and Wei Jiang, “Payoff Complementarities and Financial Fragility: Evidence from Mutual Fund Outflows” (white paper, February, 2007).

5. Mutual funds typically meet a redemption based on the NAV at day’s end but may execute a trade to raise cash on the following day. The redeeming shareholder cashes out at an NAV that does not reflect the trade, and the resulting costs are borne by remaining shareholders. See: “On the Run: Examining Patterns in Mutual Fund Redemptions,” Knowledge at Wharton,http://knowledge.wharton.upenn.edu/article.cfm?articleid=2133, accessed September 27, 2011.

Disclaimer:

The information presented above was prepared by Dimensional Fund Advisors, a non-affiliated third party. Diversification neither assures a profit nor guarantees against loss in a declining market. Past performance is no guarantee of future results. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services.

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at www.dimensional.com. Dimensional funds are distributed by DFA Securities LLC. 

Recent studies indicate that parents are doing a good job of keeping their children safe while online. As parents know, children are especially vulnerable to exposure through chat rooms and social networking sites. By taking advantage of filters and monitoring systems, parents are better able to control their children’s access to unsuitable internet sites. Parents have also gained more confidence at identifying trustworthy sites for downloading age-appropriate music and games. However, without proper education and instruction, children can also fall victim to internet scams and identity theft. Likewise, they run the risk of introducing viruses to the home computer. For adults who spend only a limited amount of time around children – such as grandparents, the following are some safeguards to consider:

• Become knowledgeable of the filters and monitoring software that restricts children’s access to inappropriate internet sites.
• Educate children on ways in which viruses and scams can be introduced online.
• Demand that permission be granted first, before allowing children to download anything over the internet.
• Set ground rules regarding the use of social networking sites. Vigilance is especially important when it comes to protecting the identity of children and other family members. Children should be instructed to never post their personal information such as complete name, birth-date, pictures or address; or that of their friends or family members.

While parents are fairly knowledgeable about ways to keep their children safe when accessing the internet via the computer, they are much less so about controls that are offered for different technologies such wireless, smartphones and other mobile devices. For more information on these resources, go to:
www.connectsafely.org or www.safekids.com

Denver DA’s Fraud Line: 720-913-9179

After the downgrade, yields on US government securities fell across the term spectrum as investors around the world fled to the safe haven of US bonds. US stocks experienced negative returns in the following weeks but logged positive performance from the day of the downgrade to month end.2

These events raise questions about whether changes in sovereign debt ratings impact the financial markets. The short answer is that results are mixed, and that many other factors affect a country’s cost of capital and stock market returns.

Regarding bond markets, history offers examples of major developed countries that experienced a credit downgrade without a significant rise in interest rates.3 Examples include Australia, Canada, and Japan, which lost their top ratings in 1986, 1992, and 1998, respectively.

Other research suggests that countries with high credit ratings may withstand a downgrade better than countries with lower ratings. One study looked at sovereign credit rating downgrades since 1990 and found that bond yields changed little among countries downgraded from the highest triple-A rating. However, countries with lower credit ratings (single A or below) experienced significant interest rate increases following their downgrade.4

Stock market impact

Another question is whether the US downgrade has played a role in the US market downturn—and research does not provide convincing evidence.

Below is a chart that summarizes stock market performance of respective countries before and after a ratings change. It is based upon a study of ratings changes made by Moody’s from 1983 to 2009. During the twenty-seven-year period, the ratings agency made seventy-one upgrades and twenty-five downgrades to governments in the developed and emerging markets tracked by MSCI.

The study identified the date of each change and logged each country’s market performance in the twelve months before and twelve months after the event. Each country’s market returns were compared to the respective market index and the excess return averaged for all events. (Excess return refers to performance above or below the respective market index, either MSCI EAFE or MSCI Emerging Markets, as appropriate.)

The aggregate results show that stock markets of upgraded countries outperformed their respective market index in the twelve months before the rating change (13.83%), while stocks in downgraded countries aggregately underperformed the market index before the event. However, cumulative returns in the twelve months following a ratings change were almost the same for the upgraded and downgraded countries (3.87% vs. 3.73%).5

These results suggest that market prices reflect all available information and expectations about a country’s economic prospects—including the possibility of a ratings change. By the time a country’s debt rating is upgraded or downgraded, the market has already integrated the news into prices. Stock markets reflected positive economic developments prior to a ratings upgrade and negative developments before a ratings downgrade. After the event, markets did not appear to perform much differently, in aggregate.

Conclusion

This research underscores the importance of looking to market prices for signals about the fiscal health and prospects of a country or a company. Based on the foregoing analysis, markets appear to work faster and more accurately than ratings firms to assess a country’s financial condition and evaluate the potential impact on its cost of capital and equity market.

Endnotes:

1. A sovereign credit rating is an assessment of a government’s ability to pay its debts. The US had held S&P’s top rating since 1941. S&P made the announcement after business hours on Friday, August 5, but word of the downgrade leaked during the day. Although timing of the announcement was a surprise, the downgrade was mostly expected, as S&P had issued a negative long-term outlook for the US in April and July. The other top credit agencies, Moody’s Investors Service and Fitch Ratings, have maintained top ratings for the US.

2. Two weeks following the downgrade, the US market, as measured by the Russell 3000 Index, logged a negative 6.82% return (August 5– 19). However, from the day of the announcement to month end, the market returned a positive 1.6%. Russell data copyright © Russell Investment Group 1995–2011, all rights reserved.
3. Tom Lauricella, “Lessons of Lower Ratings,” Wall Street Journal, July 30, 2011.
4. Ivan Rudolph-Shabinsky and Dennis Shen, “When ‘Risk-Free’ Isn’t Risk Free: The Impact of a US Treasury Downgrade” (white paper, Alliance Bernstein, June 2011), www.alliancebernstein.com/CmsObjectABD/PDF/Research_WhitePaper/Treasury-Downgrade_110706.pdf.
5. The twelve-month aggregate excess performance prior to the ratings change was statistically significant, while the twelve-month returns after the ratings change were not.

Disclaimer:

The information presented above was prepared by Dimensional Fund Advisors, a non-affiliated third party. Diversification neither assures a profit nor guarantees against loss in a declining market.

Past performance is no guarantee of future results. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services.

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.