AIG Bonuses and the Greatest Wealth Transfer in a Generation

The country is outraged at the $165M in taxpayer money paid out as AIG executive bonuses. The blame game in Washington DC is in full swing. But what is $165M in the big scheme of things? Once again, the crowd is missing the big picture.

Stocks are at or below 1997 levels. Unless they bought in the 80s, the sellers are selling at a loss. Who is selling and why? These things defy generalizations but I think there are some broad strokes we can use.

Some are selling because, having lost 50% or more, they are afraid to lose everything. They just want OUT. NOW. Financial sales professionals also know that distress and upheaval are good times to prospect. Nothing motivates a person more to switch than dissatisfaction with the current advisor. What happens when you switch? The new advisor has to earn a commission. First, he sells you out of whatever you’ve got to “save what’s left.” Then he proposes a new plan which may include dollar cost averaging. End result? More sales not fully offset by buying.

But who’s buying?

Stocks don’t go down because “there are more sellers than buyers.” There is a buyer for every seller. Stocks go down because sellers are more eager to sell than buyers are to buy. Buyers will buy from you if the price is right. At a discount. So, who’s buying?

Again, buying, like selling, defies generalization. But in very broad terms those who need the money sell, those who don’t - buy. If we exclude bottom fishers (who become sellers when they, in turn, are down 20%), the rest of the buying must be coming from people with really deep pockets who may not need the money next year or even next decade. The wealthy.

Now, think about it. What happens when you sell a stock? You relinquish the ownership of an asset. The buyer gains it. If current transactions constitute a flow of stock from the hands of the many into the hands of the few, then this country is busy transferring wealth from the middle class to the rich at an unprecedented rate. Since stocks rebound as certainly as they go down every three or four years, and businesses are the greatest creators of wealth, then when the economy recovers, along with profits, current assets will be worth a lot more than they are fetching at fire sale prices now. That wealth will be in the hands of fewer people who have the resources and wherewithal to be buying now. Will the $165M in bonuses matter in the big theme of things? I don’t think so. What will, in my opinion, is a society more polarized along asset ownership lines. Do I need to tell you who the net beneficiaries will be?

Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC - a provider of timely stock picks in small caps based on proprietary selection methods. http://www.tradingzoom.com/

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Does Portfolio Diversification Still Make Sense?

Portfolio diversification has always been touted by financial experts as a way to mitigate market risk. Owning different investment types such as stocks, bonds, and real estate is supposed to ensure that declines in value in any one investment vehicle will be offset with gains in another. Over the past fifty years, that has held itself out to be true. Over the past eight months, conventional investment wisdom has been shaken to the core.

Almost all types of investments across the market spectrum have suffered in the economic meltdown, with the exception of safe havens like gold and silver. There are many theories regarding the reason for the across-the-board decline but most agree that it has a lot to do with investment risk in general. With the uncertainties about the economy becoming so great so quickly, investors who would normally cut back their risk one or two notches- for example, selling stocks and buying bonds- have fled all the way back to the shelter of US Treasuries or even precious metals. The money has left most investment markets. Cash reserves are at an all time high as many investors sit on the sidelines waiting for whatever happens next. Those investors who sang the praises of flipping real estate five years ago are struggling to keep the properties afloat with For Sale signs hanging in the front windows.

Should you take all of your money out of the market and tuck it under your mattress or does diversifying your portfolio still hold some credibility? That depends on your short term and long term investment goals. Capital preservation is now the short term goal for most investors. Ensuring that you have enough money to meet short term obligations should be your first priority. That money should not be tied up in bonds, stocks or real estate because you may need those funds before the markets turn around. Keep at least two years worth of short term funds in T-bills or another easily-accessible vehicle. You won’t make a lot on those funds but you won’t lose a lot either.

Your longer-term retirement funds should still contain a variety of investments including equities and bonds. Over a longer horizon, these investments will produce a higher return. If you still have some discretionary speculative funds in your portfolio, now is an excellent time to seek out bargain basement deals on solid stocks that are getting pummeled by the overall market downturn. You should only use money that you can afford to lose or to keep invested for ten or more years.

Diversifying your portfolio is still solid advice and will keep your investments healthy and happy for many years.

Author and entrepreneur Bernz Jayma P. is the owner of a financial blog dedicated to helping people expand their knowledge on personal finance. You may visit his blog at http://www.Invesmint.com.

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