American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

Jul. 2010 – The Perils of Predicting

“It seemed so obvious. With the economy slowly recovering last year from the worst recession in decades and the federal government seeking to tap the credit markets for over $2 trillion to fund an ambitious spending program, both laymen and experts alike seemed to agree that interest rates had nowhere to go but up. The yield on the ten-year U.S. Treasury note as of June 30, 2009 was 3.52%, down from 5.25% in June 2007 but well above the 2.09% level registered amidst the depths of the credit crisis the previous December. With retail sales and housing activity showing signs of gradual improvement, the only question appeared to be how much higher interest rates would go.

Among fifty economic forecasters surveyed by the Wall Street Journal in June 2009, forty-three expected the ten-year U.S. Treasury note yield to move higher over the year ahead, with an average estimate of 4.13%. Seven expected a rate of 5.00% or higher while only two predicted rates to fall below 3.00%. The result? The ten-year Treasury yield slumped to 2.95% on June 30, 2010 and rates on 30-year mortgages fell to their lowest level since Fannie Mae began tracking them in 1971. How many of us would have expected this during a period when gold prices soared over 33% to a record high?”

The lesson to be drawn is that bond prices (and interest rates, which move inversely with bond prices) are unpredictable, as are the prices of all publicly traded securities. Attempts to improve returns through forecasting can be very costly. Investors should instead focus on diversification, discipline and minimizing their investment related costs.

Price Wars Benefit ETF Investors

Costs have fallen for owners of BlackRock iShares Comex Gold Trust (IAU). Management has reduced the fund’s annual expense ratio from 0.40 percent to 0.25 percent. The move undercuts the SPDR Gold Trust (GLD) ETF, which levies a 0.40 percent annually. GLD weighs in with $53 billion in assets versus IAU’s $3.4 billion. IAU also split 10 for 1 for shareholders of record as of June 21, 2010, payable after the close of trading on June 23. The split, which reduced IAU’s share price from $118 share to $11.80 per share on the first day of trading, is intended to attract more retail investors by increasing trading volume and improving liquidity. 

Also in This Issue:

Quarterly Review of Investment Policy
Diversifying a Portfolio with Real Estate
The High-Yield Dow Investment Strategy
Verizon Spins Off Rural Assets to Frontier Communications
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles