PINBALL, ANYONE?

March 10 , 2006 - Long before "Pac Man" and today's sophisticated computer games there was PINBALL. You may remember, certainly if you're in my generation, that pin ball could be a very exciting pastime. In fact, at the local newspaper and magazine store we frequented after school, the proprietor made very sure that no one was actually gambling on the games, which I gather was often the case with the older (the guys that were already shaving) players.

I recall there were some half-dozen machines lined up in a row and for five balls for a nickel, one could play for a very long time presuming you kept winning and the owner of the store didn't throw you out. You had to make just the right movements of the machine, jiggling it sometimes left, sometimes right, after sending the ball hurtling into the labyrinth, bells ringing, lights flashing, doing everything possible to avoid the risk of the ball rolling back to the bottom and out of sight and out of play.

Wait a minute, you may be thinking, this is supposed to be a financial column. Indeed it is, and today we are all playing a game of "global pinball." Around every bend there's the risk of losing our ball, investments that is, to unseen or unexpected events. There's terrorism, the energy problem, the trade deficit, the budget deficit, political and economic unrest to name a few.

Just picture the pinball machine and trying to keep that ball from disappearing. How do we keep the ball in play? One way to keep the bells ringing and the lights flashing is to practice risk management. Just like those shifting movements as you gripped the sides of the machine being very careful not to make too drastic a move and achieve the dreaded "TILT," you should use the same care in building up a score for your portfolio. The graph illustrates how indices representing major asset classes have performed over different time periods (Source: Ibbotson & Associates). A dollar invested in 1974 if kept under your mattress would have been worth $3.80 at the end of 2005. That same dollar invested in the 500 largest capitalized U.S. companies as measured by the S&P 500 Index stocks would have returned nearly $50.

The percentage annual return by asset class for the ten-year period 1996-2005 looks like a checker board. As an example, in 1996 REITS were the top performers, the next year US stocks, in 1999 Emerging Markets performed best and in 2000 they were the worst performers. You don't have to be a professional investment advisor to understand that diversification is an essential element in building a portfolio for the long-term. Thus if a portfolio consists of just one asset class, in this case Emerging Markets, the results could be far different than those of an investor who spreads the risk over several asset classes.

The same scenario would hold true for a portfolio heavily weighted in one sector, Information Technology - think "dot com bubble", the best in 1998 and 1999, the worst in 2000.

In a world in which we all are players in the game of "global pinball", take aim, be on guard for surprises and protect those precious "pin balls;" they may turn out to be irreplaceable.

Please Email bob@cfsias.com with your questions.

Other Finance Archive Articles

INSIDE FINANCE will appear regularly, addressing financial matters of interest to our readers. Any questions? Email bob@cfsias.com

If you wish to review your investment portfolio, please contact me for a complimentary consultation: bob@cfsias.com 973-826-8800. Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member NASD/SIPC. Cambridge and CFS are not affiliated.

The preceding article is for informational purposes only and should not be used as the primary basis for an investment decision. Indices mentioned are unmanaged and cannot be invested into directly. Past performance does not guarantee future results. All examples given are hypothetical and do not reflect actual investments. The views expressed in this article are those of the author and are not necessarily those of Cambridge. Bob Jaffe is Managing Director of CFS Investment Advisory Services, LLC in Totowa and has been a Clifton resident since 1984. Active in community affairs, Bob is Past Board Chairman of the North Jersey Regional Chamber of Commerce and president of its foundation board. He serves as a commissioner on the Clifton Rent Leveling Board and is Vice President of the Clifton Rotary Club. Representatives of Cambridge do not offer tax or legal advice. Consult a professional for your personal situation.