The Anna Maria Island Sun Newspaper

Vol. 9 No. 37 - June 3, 2009


A ‘PAR-ty’ in Anna Maria

Anna Maria Island Sun News Story

SUN PHOTO/TOM VAUGHT Chamber board member
Michael Vejins, of Raymond James & Associates, networks
with Chiles Group Marketing Director Caryn Hodge.

ANNA MARIA – The Anna Maria Island Chamber of Commerce Business Card Exchange drew a big crowd on Wednesday, May 27, to the Pine Avenue Restoration (PAR) project. You might call it a "PAR-ty."

The porches of the two new residence-over-business buildings served as a perfect place for a party, although the summer sun sapped some of the energy from the occasion.

Most of the visitors toured one of the residences and were wowed by the amount of space in the three-bedroom, two-bath unit and the interior decoration by Janet Aubrey.

Some of the principals in the Pine Avenue Restoration spoke to the crowd about their vision. Restaurateur Ed Chiles said the idea was to bring some commerce to that part of the city that was zoned for it.

"You have commerce," he said. "If you lose local commerce, you would end up having to travel off the Island more to get what could have been provided by Island businesses."

Mike Sales provided the live music at the event, and food was provided by The Chiles Group.

It was more than just a monthly business card exchange. It was a chance for many to get their first look at what is expected to be the future of the commercial district along Pine Avenue.

Anna Maria Island Sun News Story
Build your own ‘guarantee’

Investment Corner

History has shown that when most investors are doubtful or fearful, seeking safety is the wrong thing to do because the fears of these investors are caused by price declines which have usually already occurred. Presently, while the critical point of the recent credit market crisis appears to have passed, many investors are still in a state of shock and having trouble seeing themselves own any investment without some sort of guarantee.

Unfortunately, the yields currently provided by investments offering a decent guarantee are very low. Locking your money away in two- and three-year CDs will yield less than 3 percent. Even a 10-year government bond, where yields have been rising lately, only promises 3.6 percent as of the day I write this.

Sales of fixed annuities have gone through the roof in the last year, as investors clamor for the slightly higher "guarantee" offered by the issuing life insurance companies. Rates here can approach 4 percent or so, if you are willing to lock up your money for 5 to 10 years Read the fine print, though, because liquidating before maturity can cause a market value adjustment, which is insurance company lingo for "you don’t get 4 percent if you need your money before 10 years."

So let’s take a look at how you can construct your own guarantee of principal value at a future date. This method does not guarantee a rate of return, but gives you a reasonable chance to do better than the guaranteed rates, along with the knowledge that your principal is safe.

Here’s how this can work. It’s not really different than a normal balanced portfolio concept, but because the amounts are structured specifically to make sure your principal value is returned at some point in the future, it may be easier to put up with the inevitable market fluctuations that tend to make us nervous and perhaps bail out on our investment plan.

Let’s say we have $100,000 to invest and we want to ensure return of our principle 10 years from now. You can buy $100,000 face value of U.S. Zero Coupon STRIPS maturing in 2019 for approximately $65,000. Zero Coupon STRIPS are bonds which don’t pay interest like normal bonds, but which are bought at less than face value, with the investors profiting when receiving full face value at maturity. So the $65,000 purchase of STRIPS provides a U.S. government guarantee of you receiving $100,000 in 2019.

Now, you can take the remaining $35,000 of the $100,000 investment and purchase a diversified portfolio of common stocks or mutual funds or hire a professional manager to direct the equity portion of the account. On the broad assumption that equities provide a return over the next 10 years equal to their long-term average of around 10 percent, the $35,000 equity portfolio would grow to about $90,000. When added to the $100,000 of maturing bond proceeds in 2019, the total account value would be approximately $190,000 – about a 6.6 percent annualized rate of return.

But, even if the stock portfolio didn’t make any money over the next 10 years and just ended up breaking even, your account would still be worth $135,000, representing an annualized rate of return of 3.05 percent, which is in the same ballpark as the various guaranteed rates being offered today. And, if the stock market vaporized into thin air and went to zero, you would still have your principal of $100,000 from the maturing bonds. By the way, if this last doomsday scenario came to pass, no insurance company would be surviving to make good on its guarantee of the fixed annuities you have purchased.

So, this is what I like to call the chicken’s alternative to the packaged products Wall Street and the insurance companies have put together to sell you. It represents a good chance to do much better, a chance of doing about the same and a very slim chance, in my opinion, of doing worse, but even in that event, you get your original principal investment back.

The approach can be modified a little further to potentially earn a higher return by using investment grade corporate bonds, which don’t offer the same guarantee as the U.S. government bonds, but have a low incidence of default.

By way of disclosure, we have ignored the possible effects of taxes, which would apply to all the alternatives above unless the strategy was used in an IRA or other qualified account. Also, the rates used in the discussion above fluctuate daily, and the end result will depend both on the yield of the fixed portion of the portfolio as well as the returns achieved in the stock portion.

In summary, I believe the next 10 years have a good chance of providing above average returns on stocks and other investments where risk is involved – the exact opposite of the last 10 years. However, I may not turn out to be right. I would rather see someone invest a minority portion of its portfolio and earn a higher return by sticking with its plan, knowing at least the principal will be safe, than to accept the very low returns of absolute guaranteed investments and then find they are not earning enough to keep up with inflation.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing.

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