MOR iNvesting — Fall 2011

When the stock market goes through volatile periods like we have seen in recent weeks, and your portfolio goes along for the bumpy ride, it is important that you remember why you began your investment portfolio in the first place. In this issue of MOR Investing, see how you can avoid making costly mistakes during volatile markets and stay true to your long-term financial goals. Also, see how dividend paying stocks may be a good way to generate revenue in your portfolio. We know you have a choice of investment firms, and we thank you for choosing Morgan Keegan.

Stay True to Your Long-Term Goals

Although you have worked hard to choose the right investments and create a solid financial plan with your Morgan Keegan financial advisor, market volatility like we have had recently may prompt you to abandon your plan to ease the pain of losses in the short term. More often than not, such decisions can have consequences on your long-term plans. Indeed, making decisions based on fear can hurt your portfolio’s long-term performance, but we can avoid taking such drastic actions if we are aware of those psychological tendencies that provoke us.

One such tendency is loss aversion. Loss aversion is the inclination for you to be more sensitive to a loss than to a gain. And any time the stock market drops, that inclination gets all the stronger. In fact, one study showed that the pain investors feel from a loss is twice as strong as the joy associated with a gain.¹ Avoiding pain is a natural human instinct, but in the context of investing, it can lead to underperformance in your portfolio. The frequency of looking at your portfolio wealth over time also plays an important role in performance, as it has been found that the more often a person sees the gains and losses in their account, the more risk averse they become.²

To put it simply, when market volatility like we saw in early August of this year starts to make you nervous, remember to keep your focus on the long-term goals of your financial plan. Here are some tips you can use to avoid making costly decisions when looking at your portfolio performance.

Understand time as an asset
Time can help portfolio performance by effectively diminishing the volatility. The more time you add to the equation, the less negative impact short-term market drops will have on your psyche, and your portfolio.

Stock investors should understand the probabilities of investing over different time periods. For instance, on a daily basis the S&P 500 Index is almost as likely to return a positive number as it is a negative numbers. However, if you expand your timeframe, the probabilities of a positive return are greatly increased.

Don’t anchor
Do not base your decision to hold or sell an investment on its purchase price, because you may miss other, more profitable investment opportunities. Instead, ask yourself, based on today’s price, if your purpose for making the investment still makes sense. There are a number of reasons a stock’s value can fall—i.e., overvaluation or fundamental deterioration—that can be corrected over time. Don’t let the pain of a loss and resulting reluctance to sell an underperforming investment cause you to make the wrong decision. Certainly, there are times when the purchase price should be a factor in your decision making—i.e., for tax reasons—but you should always reevaluate the premise behind your original investment.

Ignore the herd
It has been well documented that “herding” behavior can adversely affect your decision-making. It is often easier to follow everyone else rather than step outside your comfort zone and go against the market. But sometimes the herd is wrong. In March 2000, after two decades of market enthusiasm surrounded the technology sector, 65.7% of individual investors were bullish on stocks, while 11.1% were bearish. During the same month, the Nasdaq Composite Index peaked and subsequently fell 74.5% until September 2002. Similarly, in October 2002, the Dow Jones and S&P 500 Indexes traded around 7,500 and 800, respectively, and 24.5% of investors felt that stock prices, in general, would increase while 54.8% thought that stocks would fall further. Stocks bottomed during that same month.3 Sometimes it is better to make decisions on your own, especially when those decisions keep you in line with your established, long-term investment plan.

Your investment lifecycle
Your financial plan is designed not only to take advantage of market ups, but also to protect you through market downs. Wherever you are in life, you should adhere to your stated financial plan and stick with it. We suggest following something similar to the area chart below. Know where you are on your journey and allocate your money correctly among the “buckets” of strategic, tactical, and cash reserve. The strategic portion is based on long-term risk and reward potential and is fully diversified. The tactical portion is based on more short-term dislocations in the market and may have higher turnover than the strategic allocation. The cash reserve is always there to pay the bills and keep you from having to sell investments during times of market panic and cheap valuations. Essentially, strategic keeps you in the game and tactical and cash are your relief valves—satisfying your need for action and providing a buffer to traumatic markets. Just keep in mind that you and your Morgan Keegan financial advisor have worked hard to devise a customized plan suited to your specific needs and your way of life. Before you make any decisions about your financial future, talk with your Morgan Keegan financial advisor first.

¹Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk.” 1979

²Source: Thaler, Tversky, Kahneman, Schwartz. “The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test.”The Quarterly Journal of Economics (May 1997).

³Source: Simon Maierhofer. “The Herding Effect—Why Investors Are Usually Wrong.” Retrieved October 13, 2009, from Yahoo Finance.

The opinions and forecasts expressed may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security. Information provided is obtained from sources deemed to be reliable, but is not represented to be complete and its accuracy is not guaranteed. This material is for informational purposes only. Past performance does not guarantee future results. Indices are unmanaged. You cannot invest directly into an index.

The Power of Dividends

It wasn't so long ago that many investors regarded dividends as roughly the financial equivalent of a record turntable at a gathering of MP3 users--a throwback to an earlier era, irrelevant to the real action. But fast-forward a few years, and things look a little different. Since 2003, when the top federal income tax rate on qualified dividends was reduced to 15% from a maximum of 38.6%, dividends have acquired renewed respect.

Dividends are portions of a company’s profit paid directly to its common or preferred shareholders. Many blue chip companies offer dividend yields above 3% on their stocks and these yields, when compared to other investments such as bonds (like a 10-year treasury at 2.24%¹) and CD’s (with a 1-year rate at 0.40%1), could be a good alternative for certain types of investors. Dividends can be especially attractive during times of relatively low or mediocre returns; in some cases, dividends could help turn a negative return positive, and also can mitigate the impact of a volatile market by helping to even out a portfolio's return. And if dividends are reinvested, their impact over time becomes even more dramatic. S&P calculates that $1 invested in the Standard and Poor's 500 in December 1929 would have grown to $57 over the following 75 years. However, when coupled with reinvested dividends, that same $1 investment would have resulted in $1,353. (Bear in mind that past performance is no guarantee of future results, and taxes were not factored into the calculations.)

Before investing for dividends, be sure to talk to your tax advisor. Some dividends, such as those paid by real estate investment trusts (REITs) and master limited partnerships, don't qualify for the 15% maximum tax rate, and a portion may be taxed as ordinary income. Also, the 15% maximum rate is once again scheduled to expire at the end of 2012, and there is no guarantee dividends will continue to receive favorable tax treatment. Keep in mind dividends paid on common stock are by no means guaranteed; a company’s board of directors can decide to reduce or eliminate them. Also, be aware that when compared to CDs and bonds, equities can be more volatile and therefore more risky. You should carefully consider your financial position before taking on the additional risk.

Until the stock markets settle, investing for dividends may help you ride it out. Ask your Morgan Keegan financial advisor for a quantitative list produced by the Morgan Keegan Equity Strategy Group of dividend paying stocks that either have a history of dividend increases or have characteristics which could lead to increasing dividends in the coming years.

¹Morgan Keegan Fixed Income Capital Markets Interest Rate Monitor 8/16/11

Content provided by Forefield, Inc. Copyright 2011.

Leader of the Bonds

The global equity markets have experienced historical volatility this year, and many investors are seeking the relative safety of the bond market. As a Morgan Keegan client, you have access to the one of the most extensive inventories of municipal bonds anywhere. In fact, Morgan Keegan was the #1 underwriter of municipal bonds in the South Central U.S.—and the ninth leading underwriter in the nation—for the first half of 2011, according to Thomson Reuters.

While other firms have reduced or even eliminated their Public Finance departments during the market turmoil of 2008 and 2009, Morgan Keegan has expanded our footprint and increased our services to issuers and bond investors alike. Talk to your Morgan Keegan financial advisor about adding bonds to your portfolio today.

Important Messages for All Morgan Keegan Account Holders

Investment Advisory Document
Available to you upon written request, at no cost, is an investment advisory document (Morgan Keegan's Schedule H and Part II of the Investment Advisor's ADV). If you would like a copy, contact your Morgan Keegan financial advisor.

Morgan Keegan’s Business Continuity Plan
As a member of the Financial Industry Regulatory Authority (FINRA), Morgan Keegan is required to create contingency plans in the event a disaster disrupts our ability to do business.

Our Business Continuity Plan includes an Incident Management Team of senior managers from various departments to assess the severity of the interruption; a Disaster Recovery Site equipped with back-up power and the tools needed to continue to do business; and, off-site computer back-up systems to preserve integral data and communications tools to disseminate information.>

More information on our Business Continuity Plan is available at the Morgan Keegan Web site at http://www.morgankeegan.com/MK/Ourstory/clientcomm/BusinessPlans.htm.