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August 9, 2006 - ICLUB News
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ICLUB Insider August 9, 2006


Club Accounting 2 is Going Extinct
by Per Ostman, ICLUBcentral Marketing Manager

Yes, Club Accounting 2 will suffer the same fate as the Tyrannosaurus Rex, the dodo, and the days when gasoline cost under $3 a gallon -- extinction.

As of October 16, 2006, ICLUBcentral will cease all support for Club Accounting 2, and will not be offering CA 2 tax printer software for the 2006 fiscal year and beyond. Additionally, only Club Accounting 3 and Club Accounting Online will be updated to reflect any future changes in Federal tax law.

So, why exactly are we doing this? Is it because we're mean people? It it because we don't care about the roughly 3,000 of you who are still using Club Accounting 2 (and the handful of you who still use version 1)? Did we just wake up on the wrong side of the bed this morning, cut ourselves shaving, spill hot coffee on our pants, and decide to pull the plug?

Obviously, that's not the case, although the jury is still out on whether or not we can successfully drink coffee while negotiating Boston traffic. And Doug is only mean to me, but that's just because I'm new and have a funny name.

No, we're ending our support of Club Accounting 2 because it's simply time for it to go. It launched way back in 2001, and in the lifecycle of a software program, five years is an eternity. Club Accounting 2 is like an old Volkswagen Rabbit (remember those old diesel hatchbacks?), and it's been successfully replaced over the past year by the far more powerful and comprehensive Club Accounting 3 -- a sleek new BMW 328i. The vast majority of our Club Accounting customers have already upgraded, but some of you are still chugging along the highway getting passed by minivans. While Club Accounting 2 still passes inspection (barely), as of Oct 16th, your mechanic (us) won't be able to get any more spare parts for it. If it breaks, it breaks. And that's no way to run an investment club.

Why else are we letting Club Accounting 2 fade into oblivion? It's simple -- if all of our customers are using the same generation of software, we will be able to dramatically improve the level of support we can provide, as well as the engineering solutions we can roll out. We can then focus on tailoring Club Accounting 3 to perfectly suit your needs instead of maintaining the usability of Club Accounting 2 -- a program that by software standards is considered ancient. By upgrading to Club Accounting 3, you'll get a faster more powerful accounting program, and better service from us. Plus, you'll be able to use the 2006 tax printer software (no more tax printers for Club Accounting 2, remember?), so that'll come in handy, don't you think?

Before the final bell tolls for Club Accounting 2 on October 16, make sure you've upgraded to Club Accounting 3 or Club Accounting Online. Don't let your club's books go extinct -- upgrade from Club Accounting 2 before it's too late!

(Note: it will be "too late" after October 16.)

Happy Investing,


Investment Wisdom: Diversification, Part I
by Ralph Seger, CFA

Ralph Seger co-founded Seger-Elvekrog Inc. in 1981 and is now Chairman Emeritus of the firm. He was also a founder of the Investor Advisory Service, now published by ICLUBcentral Inc. In this issue of ICLUB Insider, we are pleased to offer the third installment of a multi-part series called "Investment Wisdom" that will offer our readers access to Ralph's wealth of financial knowledge. Be sure to watch this space for future tips from Ralph.

It takes a bear market to teach the painful lesson of minimizing investment risk. In such a scenario, only those investors who have adequately diversified their portfolios will survive the lean times. An investor who ignores diversification, one of the principle fundamentals of constructing and managing a portfolio, risks a significant loss to his or her wealth.

Diversification is achieved by including approximately equal weighting of at least ten different market sectors. The theory is that not all sectors get hurt at the same time by a particular situation. A well-diversified stock portfolio should consist of 25% in high quality blue chip stocks that may yield more than the S&P 500, and exhibit a modest growth-of-earnings rate of five to seven percent. The portfolio should also be comprised of about 50% in medium size companies where earnings are growing at 8%-13%. Another 25% should be in small, faster growing companies.

If you buy ten stocks of well-managed growth companies purchased at reasonable prices, often you will find the following to be the result: Two will appreciate beyond your fondest dreams, two will be bitter disappointments, and six will do about as expected. This is known as the Rule of Ten.

By diversifying among at least ten different sectors with approximately equal weighting, you reduce risk. Consider a portfolio containing ten stocks. Say that one drops in value by 50%. Because this portfolio is diversified, the negative impact on the portfolio is only a 5% drop in value. If the portfolio consisted of three stocks, the hit to the portfolio would be almost 17%! With just a few securities, the element of risk is very high. Risk drops rapidly as the number of stocks of different sectors increases. However, adding more than ten stocks has little effect on reducing risk. Rather, it is not simply the number of stocks you own, but the number of different kinds of stocks -- i.e. how diverse your portfolio is.

Let's look at a few different market classifiers the smart investor will consider while seeking to diversify.

Company Size

One way to diversify is by varying your investments in companies of different sizes. Large company stocks are frequently huge and mature enterprises. Usually, the well-managed companies are known as "blue chips." However, investors should be wary of classifying all large company stocks as "blue chips." All too often they are ex-growth mature stocks. Obviously, the smaller the company, the easier it is for it to grow geometrically because of the size of the base.

It is appropriate to be diversified among large, mid-sized, and small companies. The percentage of each depends on the tolerance risk of the client, since small company stocks tend to be more risky than large company stocks. However, risk is also a function of management ability, the economic climate, competition, and a host of other factors.

Sector Diversification

There are a variety of industries to search through for growth stocks. The following sectors are important in diversifying any portfolio.

Retail stores and restaurants should demonstrate growth of same stores sales, otherwise growth will come only from added outlets which is expensive in terms of capital investment.

Healthcare companies are in a favorable position to benefit from the aging of America. Healthcare companies benefit from Research and Development as they bring to market new and improved products and services.

Financial companies such as banks and insurance companies have to set up reserves for future losses. For banks, the anticipated losses are related to loans that are not repaid. For insurance companies, the losses come from policy holders who make claims. Reserves for future losses have to be estimated. Money set aside to fund reserves for future losses comes from current earnings. While past experience is a guide to anticipated future losses, the amount of the reserve, whether optimistic or conservative, is subject to judgment. An investor does not find out if the reserve is adequate until the loss occurs. When the unanticipated loss is revealed, the price of the stock drops. This is one of the risks of a financial stock.

A REIT is a Real Estate Investment Trust. A REIT owns and operates a portfolio of income-producing real estate. A REIT is a way to invest in real estate, obtain diversification, and avoid the problems of operational management. REITs include shopping malls, office buildings, apartments, industrial sites, storage facilities, and golf courses. It is best to avoid mortgage REITs, as they operate on the spread between borrowed funds and interest earned on mortgages. An upward surge in interest rates can leave a mortgage REIT unable to pay its borrowing costs. It is known as the danger of borrowing short and lending long. (Investment clubs should also avoid REITs, since their handling of dividends and returns of capital are too complex to be easily recorded when filing the club's tax returns.)

Airlines are characterized by both operating and capitalization leverage. Operating leverage means profits are sensitive to the percentage of seats occupied and the level of the fares charged. It is easy to fill up seats with low fares, but that does not translate into profits. Airlines have computer programs which adjust ticket prices to time of day and demand for seats. Since airlines' profits are impacted by both operating leverage and balance sheet leverage plus the bargaining power of organized employees, the risk for the stockholder is high. Also, the cost of fuel is a major operating expense for an airline. Surges in the price of fuel can adversely affect profits.

Mature industries such as auto manufacturing, mining, and production of basic materials are seldom dependable growth situations. Competition from foreign producers can be tough. Frequently, employees of mature industries are organized by unions. Flexibility of operations is inhibited, resulting in inability to adjust to a changing economic or operating climate. Except for transportation costs, a ton of copper from overseas is just like a ton of copper produced in the U.S. When there is 25% excess production capacity for autos, it is an invitation for fierce competition among all players.

Clothing manufacturers have both exciting opportunities and potential problems. If these companies can design, manufacture and deliver products that sell well in the retail market, the results can be very rewarding. On the other hand, if the styles do not meet with customer acceptance, inventories get overloaded and are liquidated only at distressed prices. It takes an astute management to stay ahead of the curve of retail customer preferences in terms of design, style and demand.

Stay tuned next time for Part II, when Ralph tackles diversification strategies to increase total return

Club Accounting 3.1 is On its Way

ICLUBcentral is pleased to announce that all Club Accounting 3.1 upgrade CDs have shipped. All Club Accounting Maintenance subscribers will receive this free upgrade.

There are more than 20 new features in Club Accounting 3.1, including a new Capital Gains & Losses report, new Security Dividends reports, improved chart display, and faster report rendering. Visit the ICLUBcentral website for a full list of new and enhanced features.

The upgrade bundles should be arriving shortly, and will include the 3.1 CD and easy installation instructions. If your order of an earlier version of Club Accounting 3 was delayed to include the 3.1 upgrade, you will also receive an updated 3.1 Owner's Manual. If you already own a manual for a previous version of Club Accounting 3, you can download an electronic copy of the 3.1 manual.

After receiving your 3.1 CD, feel free to contact the ICLUBcentral support team with any installation problems or questions about the new features.

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Copyright 2006 ICLUBcentral Inc. All rights reserved.

Some ICLUBcentral products use the investing methodologies of BetterInvesting, a national nonprofit organization dedicated to investor education. BetterInvesting assumes no liability or obligations with respect to the investment education information or other content presented in the ICLUB Insider. For more information on BetterInvesting, please visit

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