Rotendaokab Articles

The Dow Theory

Charles H. Dow
Robert Rhea
E. George Schaefer
Richard Russell
The Dow Theory Today

Charles H. Dow

It is interesting and amazing to note that not until Charles Dow started compiling the Dow Jones Industrial and Dow Jones Rail Index and started writing about the stock market a little over a hundred years ago, stock speculation was regarded merely as a game for the rich or as gambling for the brave. Sure, there were the tape readers, but the majority of the public regarded Wall Street as a source of excitement – the entertainment provided freely (unless you were on the wrong side) by figures such as Cornelius Vanderbilt, Jay Gould, and the infamous Daniel Drew.

In a series of stunning editorials for the Wall Street Journal at the turn of the century, Dow laid out the foundation of his own theory on the stock market. Among them were:

• The market is always to be considered as having three movements, all going on at the same time.

• The first thing to consider is the value of the stock in which the speculator proposes to trade, the second the direction of the main movement, and the third the direction of the secondary movement (i.e. stocks fluctuate together, but prices are controlled by values in the long run).

• There are three phases to both a primary bull market and a primary bear market (not to be confused with the three movements mentioned above).

• The formation of a “line” in the averages indicates accumulation or distribution

• The market represents a serious well-considered effort on the part of far-sighted and well-informed men to adjust prices to such values as exist or which are expected to exist in the not too remote future.

The method of making money in stocks, according to Dow, was to study basic conditions and exercise enough patience to capture the major movements. One of the few speculators who discovered this relatively new concept of making money on Wall Street at the time was Jesse Livermore. He was able to accomplish this only through trial and error and the making and losing of several fortunes.

William P. Hamilton

William P. Hamilton, Dow’s understudy and the fourth editor of the Wall Street Journal, continued Dow’s legacy after his death in 1903. The Dow Theory as interpreted by Hamilton forms the basis of all modern technical analysis today. He wrote about the Dow Theory for the Wall Street Journal for more than 20 years. His additions to the Theory included:

• The Averages discount everything

• The primary trend cannot be manipulated

• Both the Industrials and Rails (the modern day Transports) must confirm each other in order for the signal to have authority

• The Theory is not infallible. If someone did find such a system, then he or she will own the world in relatively short order and speculation as we know it will not exist.

• Determining the trend by spotting “higher highs” or “lower lows”

Hamilton’s predictions of the trends were uncannily accurate, even as he developed a wide following from his editorials. A major reason why he was accurate almost all the time was his lack of a writing schedule – choosing only to write when he had something to say about the market, sometimes going for weeks without writing a single word.

The one significant time when he erred was in late 1925 and early 1926 when he erroneously labeled a serious secondary reaction in a primary bull market as a bear market. Followers of Hamilton lost heavily during that period, as the market bottomed out in March 1926 (Industrials 135.20 and Rails 102.41) and was getting ready to resume its long advance that would not end (tragically) until September 1929.

Even so, Hamilton would always be remembered for penning the following editorial on October 25, 1929, just days before the crash. His words proved prophetic – calling for the beginning of a new primary bear market. Part of his now-famous editorial is reproduced below:

A Turn in the Tide – October 25, 1929

On the late Charles H. Dow’s well known method of reading the stock market movement from the Dow-Jones averages, the twenty railroad stocks on Wednesday, October 23 confirmed a bearish indication given by the industrials two days before. Together the averages gave the signal for a bear market in stocks after a major bull market with the unprecedented duration of almost six years. It is noteworthy that Barron’s and the Dow-Jones NEWS service on October 21 pointed out the significance of the industrial signal, given subsequent confirmation by the railroad average.

Hamilton passed away six weeks after he wrote the above editorial. It is a tragedy that probably not a great number of people at the Wall Street Journal or Barron’s today have even heard of the Dow Theory, let alone have a complete understanding of it.

Robert Rhea

The next great Dow theorist, Robert Rhea, initially stumbled upon the Dow Theory during his endeavor to find “a system” for helping him make money in the stock market. In his attempts to disprove the theory, he became a convert. Rhea was a very serious student, and he was able to utilize the Dow Theory as interpreted by Hamilton to his advantage, buying and holding stocks in 1921, and basically holding them until late 1928 (he reversed his short position when he realized Hamilton’s advice was incorrect in early 1926), missing only the final blowoff phase. He also “played” the short side successfully during the subsequent deflation. In 1932, he began publishing his newsletter based on the Dow Theory, called the “Dow Theory Comment.”

Rhea called the bottom of the stock market in July 1932 almost to the exact day and the subsequent top in 1937. On July 21, 1932, with the Industrials at 46.50 and the Rails at 16.76, Rhea instructed his broker to tell his friends “the Dow Theory implied heavy buying for the first time in over three years.” Further, on July 25, 1932, Rhea sent a memo to 50 correspondents, part of which is reproduced below:

The declines of both Rail and Industrial averages between early March and midsummer were without precedent. The thirty-five year record of the averages shows a fairly uniform recovery after every major primary action, and such recoveries average around 50% of the ground lost on the decline; are seldom less than a third and more than two thirds. Such recovery periods tend to run to about 40 days, but are sometimes only three weeks – and occasionally three months.

The time element is in favor of a normal reaction at this time – because the slideoff was normal (the normal time interval of major declines being about 100 days).

The market gave the unusual picture of hovering near the lows for more than seven weeks, and might be said to have made a “line” during the latter weeks of that period.

Because of all these things, and because the volume tended to diminish on recessions and increase on rallies during the ten days preceding July 21, almost any one trading on the Dow Theory would have bought stocks on July 19th. Those who did not, had a clean cut signal again on the 21st. Since that date the implications of the averages have been uniformly bullish, and it is reasonable to expect that a normal secondary will be completed, even though the primary trend may not have changed to “bull”. So much for the speculative viewpoint.

Followers of Rhea who bought stocks during that period and held until 1937 made a fortune.

E. George Schaefer

In July 1949, with the Dow Jones Industrials registering a low at 161.60 and with the country in the midst of a severe recession, a new primary bull market was born. E. George Schaefer, a Dow Theory disciple for more than 20 years, started his newsletter writing career near that time, calling his subscribers to load up on common stocks in June 1949. He remained steadfastly bullish in the great corrections of 1953 and 1957 and cautiously bullish since 1960 until the final top in 1966.

Schaefer believed that Hamilton strayed away from Dow’s original principle of investing in “values” and that Rhea spent most of his life improvising Hamiltons “system” of trying to trade the markets when 95% of the population just cannot duplicate what the emotional-less professional traders can do. He also emphasized that some of the “rules” that Hamilton and Rhea developed did not apply to the more modern and more emotional markets of today (such as the claim that secondary reactions tend to retrace one-third to two-thirds of the preceding primary swings). The best course of action was to buy “great values” and staying fully invested through the primary trend.

In his 1960 book “How I Helped More than 10,000 Investors to Profit in Stocks,” Schaefer stated:

As noted before, my extremely bullish market letters of June and July, 1949, appeared just a few days and weeks after the low day of 161.60 was registered on June 13, 1949 by the Dow-Jones Industrials. Since that time, and for the next 11 years, my letters have been consistently bullish on the Primary Trend. The stock market has borne me out, and I would say that the majority of my readers have benefited as they stayed fully-invested in the way I have counseled.

Schaefer also developed some additional technical tools and made additional observations along with his study of the Dow Theory. Among them are:

• The 50% retracement concept

• The yield cycle

• The ratio of short interest to daily volume

• The study of odd-lot trading

• The 200-day investment line (the 200-day simple moving average)

Schaefer turned bearish at the most opportune time in 1966 and became bullish in gold and gold mining shares shortly afterwards. He was, however, too early with his bullish calls when he asked his subscribers to buy them in 1974. Gold immediately proceeded to suffer a huge short-term correction. The losses may have broken him since he committed suicide shortly afterwards. From thereon, the Dow Theory torch was passed on to Richard Russell.

Richard Russell

Richard Russell was another Dow Theorist who stumbled upon the Dow Theory during a quest to find useful literature regarding the stock market. He became a convert after reading the writings of Robert Rhea. Russell decided to follow in the footsteps of Rhea and Schaefer – establishing his newsletter “Dow Theory Letters” in 1958, partly inspired by the extreme bearishness of the public during the great correction of late 1957 (Russell was bullish at the time).

He also urged subscribers to sell at the top in February 1966, and he rightly turned bullish in December 1974. Following are excerpts from his newsletter during those periods.

February 10, 1966 (two days after the final top) – While Russell mentioned that although technical conditions are getting weaker, there is no indication that the bull market was over yet. However, on the simultaneous decline of the Dow Jones 40 Bond Average and the Dow Jones Utility Average, he commented: “In the present … instance the 40 Bonds turned down in February, 1965. The real decline in Utilities began in April, 1965. Therefore, the joint decline in both components can be said to have started in April, 1965, nine months ago. Based on past history, the decline of Utilities and Bonds together should be taken as a warning of dangerous monetary conditions ahead as well as a warning of unsatisfactory stock market conditions. At very least, the shaded areas identify periods in which informed investment money is distributing or leaving the market.”

Russell began his February 22, 1966 newsletter with the following paragraph: I dislike emphasizing “the drama of the marketplace” (in contrast with the cold, analytic approach), but it does seem to me that 1966 is shaping up as a most exciting year for market students. Not since 1907 has a booming economy run head-on into a monetary crisis, but I believe there is a reasonable chance that 1966 will see just that type of situation repeated. Furthermore, the monetary squeeze is occurring at a time when (unlike 1907) few businessmen, economists or Governmental leaders have the foggiest idea of the overall situation or the vaguest notion of how to deal with it. What we are seeing is an explosive demand for money from all sectors of the economy with a “built in” booster of $1 billion a month for the Vietnam war – all this in the face of world money markets which are literally “panting for breath.”

Note that these were very strong comments since the public was very enthusiastic about the stock market at that time. In fact, according to Russell in the same newsletter, mutual fund purchases by the public in December 1965 were the highest of any December in history. At the same time, the initial offering by the newly-formed Manhattan Fund (headed by Gerald Tsai) was nearly five times oversubscribed. 1966 was a very speculative period, indeed.

The period during late 1974 was a world full of contrasts to that of early 1966. Pessimism was prevalent. The Dow Jones Industrials was selling at a P/E ratio of 6 and at below book value. Some subscribers canceled their subscriptions of Dow Theory Letters after Russell’s special report on December 20, 1974 – thinking that Russell had clearly gone out of his mind. Part of that newsletter is reproduced below:

Now this is how I view it. I think the odds are probably better than 50/ 50 that the Dow and most shares hit a bottom in December 1974. I put this thesis together with a number of other facts. As you will see in a later section, the unweighted NYSE average is now down around 77% from the high. In 1929-32 the unweighted NYSE average went 12% further on the downside – to an 89% loss. I feel that most shares have now discounted all the forthcoming bad news, and I am including recession-depression conditions in 1975. We have been in the third phase of a great primary bear market. We are finally in the zone of “great values”. In many cases, stocks are selling “below known values”. Here’s an interesting statistic: The price/ earnings ratio for the 30-Dow Industrials is now around 6.0 while the yield on the Dow is 6.36. This means that the Dow P/E is below the yield on the Dow. This happened only once before in the last forty years, and that was during 1948-50.

Second item: The Dow is now selling below its book (or break-up) value. This has not occurred since 1942. Are these two above Dow “tests” infallible indications of the final bottom? Not at all, but they do indicate that the Dow is sure getting down there.

There is no doubt that the 1974 bottom call was one of the greatest stock market calls in modern history, right up there with Hamilton’s 1929, Rhea’s 1932, and Schaefer’s 1949 calls. Based on the Dow Theory and his own observations, he told his subscribers the market was a “sell” in August 1987, even though no Dow Theory sell signal has been triggered at the time (Hamilton and Rhea has always emphasized that one does not usually need to wait for a Dow Theory buy or sell signal to tell one to buy or sell). That signal, however, was triggered just days before Black Monday, October 19, 1987, as the Dow Transports confirmed the Dow Industrials on the downside by breaking through its preceding secondary lows on October 15 (such a signal in the third phase of a primary bull market is taken to be a primary bear market signal).

Russell stayed cautiously bullish during the late 1990s. In September 1999, the Dow Theory generated a primary bear sell signal. Today, Russell still maintains that we are in a primary bear market, and that the market will not bottom until stocks have reached the point of “great values” with P/E ratios below 10 and with dividend yields of greater than 5%. At the age of 79, Russell is still going strong, publishing a market commentary every Monday to Saturday.

The Dow Theory Today

The Dow Theory has withstood the test of time – the latest “proof” being Russell’s primary bear market call based on the Dow Theory in September 1999. As with his 1974 primary bull market call, numerous stock market analysts ignored him, including some of his own subscribers. Various “trading systems” come and go, but the Dow Theory has been a reliable tool for the trader/investor for over a century – mainly because the Dow Theory is not a system, but merely a theory based on the principles as first developed by Charles Dow, and which is open to interpretation.

Since the 1999 primary bear market signal, a great deal of interest has been revived in the Dow Theory. However, not a day goes by without spotting someone who claims an understanding of Dow Theory but who actually only has a cursory understanding at best. More recently, numerous traders have tried to reduce the Dow Theory to a “system,” where a series of confirmations of the Dow Jones Industrials by the Dow Jones Transports (or vice-versa) is taken to be “buy” or “sell” signals without regards to other factors such as valuation, economic conditions, and investor sentiment.

It is to be said here at none of the above Dow Theorists interpreted the confirmations of the indexes in that manner. None of them actually waited for such “signals” to buy or sell – they bought or sold in advance. Waiting for such “signals,” they claimed, would cause them to have missed a significant part of the move, and such moves can be costly. The primary purpose of this indicator is to serve as a confirmation of the current trend, and if one index does not confirm the other (or if it takes a long time to confirm) then it is a warning sign that the current trend may be over, and positions may need to be liquidated (or stops may have to be tightened) or may need to be covered if one is short. Again, the confirmation of one index by the other is not to be taken as a buy or sell indicator.

Another variation of this fallacy is that the July and October 2002 bottom were the true bottoms, and that unless those bottoms were jointly penetrated by the Dow Jones Industrials and Transports, we are now in a bull market as interpreted by the Dow Theory since we have made higher highs in both indexes. Nothing can be further from the truth. Please remember that Dow’s original emphasis was on valuation and economic conditions. All the major indexes are still overvalued today judging by their P/E and P/D ratios. Moreover, the higher highs indicator can only be treated seriously in the third phase of a primary bear market, when pessimism runs extreme and when stocks are liquidated without regards to values. We had none of that in this bear market so far.

We believe any serious investor/trader should take the time and try to gain a true understanding of the Dow Theory. I sincerely believe that the Dow Theory is even more valuable today than it ever was – in a world full of hedge funds using price, volume, and volatility breakout systems and with anyone willing to jump in at the sign of a potential trend. Today’s markets are more emotional than ever and only by knowing the true tenets of the Dow Theory can one stay firmly planted on the ground with both feet. Ignore the presses and anyone else who has not taken the time to learn the Theory. Read all the historical writings by the above Dow Theorists, and I promise you that this education will be immensely more valuable than any secondary education you can obtain in a top ten business school or a top five investment bank today. Our site will try to incorporate the Dow Theory in our analysis, but please bear with us from time to time since we are still students of the Dow Theory ourselves.

Henry To, CFA, is co-founder and partner of the economic advisory firm, MarketThoughts LLC, an advisor to the hedge fund Independence Partners, LP. Marketthoughts.com is a service provided by MarkertThoughts LLC, and provides a twice-a-week commentary designed to educate subscribers about the stock market and the economy beyond the headlines. This commentary usually involves focusing on the fundamentals and technicals of the current stock market, but may also include individual sector and stock analyses – as well as more general investing topics such as the Dow Theory, investing psychology, and financial history.

If it seems as if all investors are selling, who is buying?

If trading has become entertainment for you, it may be time to refocus on profits.

If your stock has reached an annual low, can it go any lower?

If your stock has reached an annual high, can it go any higher?

If all the television analysts jumped off a bridge, would anyone care?

If your portfolio is based solely on fundamental analysis, perhaps it is time to learn technical analysis.

If I said you had a beautiful portfolio, would you hold it against an index?

If you are tired of losing value on the long side, perhaps its time to learn both sides of the market.

If you do not have a written financial plan, you should.

If you could put aside $205 at the beginning of each month for thirty-five years, with an 11% annualized return you may save over $1 million.

If you have stopped looking at your portfolio statements, does that mean your game plan is off?

If a fool and his money are easily separated, who introduced the two?

If buy and hold is your philosophy, why do you need a broker?

If a tree falls in the forest, does it ruin the stock market for the day?

If someone invented a computer program for investments that proved 100% correct all the time, we would never know about it.

If you think the market capitulated, you are not in a state of selling hysteria.

If 1,000,000 lemmings jump, can they all be wrong?

If you want to know what Greenspan thinks about economics, count the times he smiles.

If you expect nothing of your portfolio, you will not be disappointed.

If you are a rational investor, can you benefit from an irrational market?

If you managed your money like the government, you would take money from your neighbor and spend it on stock options that expire this week.

If you are confused with the opinions of the media, create your own.

Wardlaw has been involved in the fields of investments and insurance for over twelve years. The author’s belief is that familiar life elements best illustrate practical investment strategies; not typical investment jargon. For comments and questions, please contact the author at tools2invest@yahoo.com.

For many investors, and even some tax professionals, sorting through the complex IRS rules on investment taxes can be a nightmare. Pitfalls abound, and the penalties for even simple mistakes can be severe. As April 15 rolls around, keep the following five common tax mistakes in mind and help keep a little more money in your own pocket.

1. Failing To Offset Gains

Normally, when you sell an investment for a profit, you owe a tax on the gain. One way to lower that tax burden is to also sell some of your losing investments. You can then use those losses to offset your gains.

Say you own two stocks. You have a gain of $1,000 on the first stock, and a loss of $1,000 on the second. If you sell your winning stock, you will owe tax on the $1,000 gain. But if you sell both stocks, your $1,000 gain will be offset by your $1,000 loss. That’s good news from a tax standpoint, since it means you don’t have to pay any taxes on either position.

Sounds like a good plan, right? Well, it is, but be aware it can get a bit complicated. Under what is commonly called the “wash sale rule,” if you repurchase the losing stock within 30 days of selling it, you can’t deduct your loss. In fact, not only are you precluded from repurchasing the same stock, you are precluded from purchasing stock that is “substantially identical” to it a vague phrase that is a constant source of confusion to investors and tax professionals alike. Finally, the IRS mandates that you must match long-term and short-term gains and losses against each other first.

2. Miscalculating The Basis Of Mutual Funds

Calculating gains or losses from the sale of an individual stock is fairly straightforward. Your basis is simply the price you paid for the shares (including commissions), and the gain or loss is the difference between your basis and the net proceeds from the sale. However, it gets much more complicated when dealing with mutual funds.

When calculating your basis after selling a mutual fund, it’s easy to forget to factor in the dividends and capital gains distributions you reinvested in the fund. The IRS considers these distributions as taxable earnings in the year they are made. As a result, you have already paid taxes on them. By failing to add these distributions to your basis, you will end up reporting a larger gain than you received from the sale, and ultimately paying more in taxes than necessary.

There is no easy solution to this problem, other than keeping good records and being diligent in organizing your dividend and distribution information. The extra paperwork may be a headache, but it could mean extra cash in your wallet at tax time.

3. Failing To Use Tax-managed Funds

Most investors hold their mutual funds for the long term. That’s why they’re often surprised when they get hit with a tax bill for short term gains realized by their funds. These gains result from sales of stock held by a fund for less than a year, and are passed on to shareholders to report on their own returns — even if they never sold their mutual fund shares.

Recently, more mutual funds have been focusing on effective tax-management. These funds try to not only buy shares in good companies, but also minimize the tax burden on shareholders by holding those shares for extended periods of time. By investing in funds geared towards “tax-managed” returns, you can increase your net gains and save yourself some tax-related headaches. To be worthwhile, though, a tax-efficient fund must have both ingredients: good investment performance and low taxable distributions to shareholders.

4. Missing Deadlines

Keogh plans, traditional IRAs, and Roth IRAs are great ways to stretch your investing dollars and provide for your future retirement. Sadly, millions of investors let these gems slip through their fingers by failing to make contributions before the applicable IRS deadlines. For Keogh plans, the deadline is December 31. For traditional and Roth IRA’s, you have until April 15 to make contributions. Mark these dates in your calendar and make those deposits on time.

5. Putting Investments In The Wrong Accounts

Most investors have two types of investment accounts: tax-advantaged, such as an IRA or 401(k), and traditional. What many people don’t realize is that holding the right type of assets in each account can save them thousands of dollars each year in unnecessary taxes.

Generally, investments that produce lots of taxable income or short-term capital gains should be held in tax advantaged accounts, while investments that pay dividends or produce long-term capital gains should be held in traditional accounts.

For example, let’s say you own 200 shares of Duke Power, and intend to hold the shares for several years. This investment will generate a quarterly stream of dividend payments, which will be taxed at 15% or less, and a long-term capital gain or loss once it is finally sold, which will also be taxed at 15% or less. Consequently, since these shares already have a favorable tax treatment, there is no need to shelter them in a tax-advantaged account.

In contrast, most treasury and corporate bond funds produce a steady stream of interest income. Since, this income does not qualify for special tax treatment like dividends, you will have to pay taxes on it at your marginal rate. Unless you are in a very low tax bracket, holding these funds in a tax-advantaged account makes sense because it allows you to defer these tax payments far into the future, or possibly avoid them altogether.

David Twibell is President and Chief Investment Officer of Flagship Capital Management, LLC, an investment advisory firm in Colorado Springs, Colorado. Flagship provides portfolio management services to high-net-worth individuals, corporations, and non-profit entities. For more information, please visit http://www.flagship-capital.com.

The Federal Reserve recently raised its target federal funds rate for the first time since March 2000. This could be just the tip of the iceberg, though, as many experts believe rising inflation and a strengthening economy will spur continued rate hikes for the foreseeable future.

This is bad news for bond investors, since bonds lose value as interest rates rise. The reason stems from the fact coupon rates for most bonds are fixed when the bonds are issued. So, as rates rise and new bonds with higher coupon rates become available, investors are willing to pay less for existing bonds with lower coupon rates.

So what can you do to protect your fixed-income investments as rates rise? Well, here are five ideas to help you, and your portfolio, weather the storm.

1. Treasury Inflation Protected Securities (TIPS)

First issued by the U.S. Treasury in 1997, TIPS are bonds with a portion of their value pegged to the inflation rate. As a result, if inflation rises, so will the value of your TIPS. Since interest rates rarely move higher unless accompanied by rising inflation, TIPS can be a good hedge against higher rates. Because the Federal government issues TIPS, they carry no default risk and are easy to purchase, either through a broker or directly from the government at www.treasurydirect.gov.

TIPS are not for everyone, though. First, while inflation and interest rates often move in tandem, their correlation is not perfect. As a result, it is possible rates could rise even without inflation moving higher. Second, TIPS generally yield less than traditional Treasuries. For example, the 10-year Treasury note recently yielded 4.75 percent, while the corresponding 10-year TIPS yielded just 2.0 percent. And finally, because the principal of TIPS increases with inflation, not the coupon payments, you do not get any benefit from the inflation component of these bonds until they mature.

If you decide TIPS makes sense for you, try to hold them in a tax-sheltered account like a 401(k) or IRA. While TIPS are not subject to state or local taxes, you are required to pay annual federal taxes not only on the interest payments you receive, but also on the inflation-based principal gain, even though you receive no benefit from this gain until your bonds mature.

2. Floating rate loan funds

Floating rate loan funds are mutual funds that invest in adjustable-rate commercial loans. These are a bit like adjustable-rate mortgages, but the loans are issued to large corporations in need of short-term financing. They are unique in that the yields on these loans, also called senior secured or bank loans, adjust periodically to mirror changes in market interest rates. As rates rise, so do the coupon payments on these loans. This helps bond investors in two ways: (1) it provides them more income as rates rise, and (2) it keeps the principal value of these loans stable, so they dont suffer the same deterioration that afflicts most bond investments when rates increase.

Investors need to be careful, though. Most floating rate loans are made to below-investment-grade companies. While there are provisions in these loans to help ease the pain in case of a default, investors should still look for funds that have a broadly diversified portfolio and a good track record for avoiding troubled companies.

3. Short-term bond funds

Another option for bond investors is to shift their holdings from intermediate and long-term bond funds into short-term bond funds (those with average maturities between 1 and 3 years). While prices of short-term bond funds do fall when interest rates rise, they do not fall as fast or as far as their longer-term cousins. And historically, the decline in value of these short-term bond funds is more than offset by their yields, which gradually increase as rates climb.

4. Money-market funds

If capital preservation is your concern, money market funds are for you. A money-market fund is a special type of mutual fund that invests only in very short-term money market instruments. Since these instruments usually mature within 60 days, they are not affected by changes in market interest rates. As a result, funds that invest in them are able to maintain a stable net asset value, usually $1.00 per share, even when interest rates climb.

While money-market funds are safe, their yields are so low they hardly qualify as investments. In fact, the average seven-day yield on money-market funds is just 0.70 percent. Since the average management fee for these funds is 0.60 percent, it does not take a genius to see that putting your capital in a money-market fund is only slightly better than stashing it under your mattress. But, because the yields on money-market funds track changes in market rates with only a short lag, these funds could be yielding substantially more than 0.70 percent by the end of the year if the Federal Reserve continues to hike rates as expected.

5. Bond ladders

Laddering your bond portfolio simply means buying individual bonds with staggered maturities and holding them until they mature. Since you are holding these bonds for their full duration, you will be able to redeem them for face value regardless of their current market value. This strategy allows you to not only avoid the ravages of higher rates, it also allows you to use these higher rates to your advantage by reinvesting the proceeds from your maturing bonds in newly-issued bonds with higher coupon rates. Diversifying your bond portfolio among 2-year, 3-year, and 5-year Treasuries is a good start to a laddering strategy. As rates rise, you can then broaden the ladder to include longer maturity bonds.

David Twibell is President and Chief Investment Officer of Flagship Capital Management, LLC, an investment advisory firm in Colorado Springs, Colorado. Flagship provides portfolio management services to high-net-worth individuals, corporations, and non-profit entities. For more information, please visit http://www.flagship-capital.com.

Rich people: fortunate, lucky, selfish, and arrogant? Or highly educated, caring, brilliant individuals? Becoming rich isnt hard, but it does require a bit of time and knowledge. Having time to get rich, educating oneself, and buying assets are the three key factors in attaining untold wealth.

Rich people usually either have or make time to get rich. Most people that now own huge mansions, have wonderful riches, and drive the nicest cars usually begin taking the road to riches in their spare time. One plan, the most common, is to work at a low-risk, steady job until one has enough money to invest in something that will feed one for the rest of their life. But before one can invest in anything, one first has to educate oneself.

Although the best way to educate oneself in a particular investment is to have a mentor, and thereby gaining valuable hands-on experience, another excellent way to do this is to listen to tapes and CDs and to read books on the subject. I have done both, mainly pertaining to real estate, but also I have read a wonderful book about making money on the Internet, called Multiple Streams of Internet Income, by Robert Allen.

Lastly, after creating time to get rich, and educating oneself, one simply MUST buy assets that will create money for one, and not liabilities and toys such as a new car every other year, and boats. These come only after one can prove that he is capable of handling and keeping money. Simply put, according to multi-millionaire Robert Kiyosaki: Assets will feed you, and liabilities will eat you. An example of an asset is a rent-house, or stocks and bonds in a certain company. Only, that is, if the company is good and the stocks are ultimately going up in value.

In conclusion, we see that the three most important ways the rich keep getting richer are: having or making time, subject education, and buying assets. These are the key factors influencing wealth. I personally plan on educating myself in real estate, as it seems the simplest and safest way of getting rich.**

**Note: If youd like to use this article, feel free to do so, but please remember to include this message, and my resource box in every copy. Thank you!

Aaron Kater has been writing articles for quite a while, and has his own weekly newsletter, Katerzine! If youd like to subscribe, please visit his website at http://www.aaronkater.4t.com, or send him an email at aaron_kater@yahoo.com