DISCLAIMER: None of the information I share on this site is my own. I simply try to collect the best rumors and information I feel applies to a given day’s news and information that I hear or read about the "New Iraqi Dinar". Those I do speak with, I trust. So, any personal phone calls that I share on the blog, I have reason to believe they are sincere in their intent, and I believe they are in some way connected to those who do know what is going on. As for myself, I am connected to no “source”, just to those who tell me they are. I will never reveal a “contact” of mine, or their “source” for the purpose of giving more grounds or proof of their claims. Just take everything as a rumor and allow it to reveal itself over time. I have no hidden agenda for posting what I deem to be worthy reading. I’m just trying to make this difficult ride easier to follow for my family, friends, acquaintances, and anyone they deem to share this site with. I wish you all the very best! I hope this ride will end soon. It has definitely taken its toll… – Dinar Daddy

A BRIEF HISTORY OF THE "NEW IRAQI DINAR"

“How shipping tons of U.S. currency to Iraq remade its economy—and was roundly criticized all the same. Good decision, bad press.” - By John B. Taylor

In February, the House Committee on Oversight and Government Reform held a hearing that criticized the decision to ship U.S. currency into Iraq just after Saddam Hussein’s government fell. As the committee’s chairman, Henry Waxman (D-California), put it in his opening statement, “Who in their right mind would send 360 tons of cash into a war zone?” His criticism attracted wide attention, feeding antiwar sentiment and even providing material for comedians. But a careful investigation of the facts behind the currency shipment paints a far different picture.

The currency that was shipped into Iraq in the days after the fall of Saddam Hussein’s government was part of a successful financial operation that had been carefully planned months before the invasion. Its aims were to prevent a financial collapse in Iraq, put the financial system on a firm footing, and pave the way for a new Iraqi currency. Contrary to the criticism that such currency shipments were ill advised or poorly monitored, this financial plan was carried out with precision and was a complete success.

The plan, which had two stages, was designed to work in Iraq’s cash economy, in which checks or electronic funds transfers were virtually unknown and shipments of tons of cash were commonplace. In the first stage, the United States would pay Iraqi government employees and pensioners in American dollars. These were obtained from Saddam Hussein’s accounts in American banks, which were frozen after he attacked Kuwait in 1990 and amounted to about $1.7 billion. Because the dollar is a strong and reliable currency, bringing in dollars would create financial stability until a new Iraqi governing body could be established and design a new currency. The second stage of the plan was to print a new Iraqi currency for which Iraqis could exchange their old dinars.

One of the most successful and carefully planned operations of the war has been held up to criticism and ridicule.
The final details of the plan were reviewed in the White House Situation Room by President Bush and the National Security Council on March 12, 2003. I attended that meeting. Treasury Secretary John Snow opened the presentation with a series of slides. “As soon as control over the Iraqi government is established,” the first slide read, we plan to “use United States dollars to pay civil servants and pensioners. Later, depending on the situation on the ground, we would decide about the new currency.” Another slide indicated that we could ship $100 million in small denominations to Baghdad on one week’s notice. President Bush approved the plan with the understanding that we would review the options for a new Iraqi currency later, when we knew the situation on the ground.

To carry out the first stage of the plan, President Bush issued an executive order on March 20, 2003, instructing U.S. banks to relinquish Saddam’s frozen dollars. From that money, 237.3 tons in $1, $5, $10, and $20 bills were sent to Iraq. During April, U.S. Treasury officials in Baghdad worked with the military and Iraqi Finance Ministry officials—who had painstakingly kept the payroll records despite the looting of the ministry—to make sure the right people were paid. The Iraqis extensively documented each recipient of a pension or paycheck. Treasury officials who watched over the payment process in Baghdad in those first few weeks reported a culture of good record keeping.

On April 29, Jay Garner, the retired lieutenant general who headed the reconstruction effort in Iraq at the time, reported to Washington that the payments had lifted the mood of people in Baghdad during those first few confusing days. Even more important, a collapse of the financial system was avoided.

This success paved the way for the second stage of the plan. In only a few months, 27 planeloads (in Boeing 747 jumbo jets) of new Iraqi currency were flown into Iraq from seven printing plants around the world. Armed convoys delivered the currency to 240 sites around the country. From there, it was distributed to 25 million Iraqis in exchange for their old dinars, which were then dyed, collected into trucks, shipped to incinerators, and burned or simply buried.

The new currency proved very popular. It provided a sound underpinning for the financial system and remains strong, appreciating against the dollar even in the past few months. Hence, the second part of the currency plan was also a success.

The story of the currency plan is one of several that involved large sums of cash. For example, just before the war, Saddam stole $1 billion from the Iraqi central bank. American soldiers found that money in his palaces and shipped it to a base in Kuwait, where the U.S. Army’s 336th Finance Command kept it safe. To avoid any appearance of wrongdoing, American soldiers in Kuwait wore pocket less shorts and T-shirts whenever they counted the money.

A 2003 presidential order instructed U.S. banks to hand over Saddam Hussein’s frozen dollars. From that money, 237.3 tons in $1, $5, $10, and $20 bills was shipped to Iraq. Later, U.S. forces used the found cash to build schools and hospitals, and to repair roads and bridges. General David Petraeus has described these projects as more successful than the broader reconstruction effort. But that wasn’t the only source of dollars. Because the new Iraqi dinar was so popular, the central bank bought billions of U.S. dollars to keep the dinar from appreciating too much. As a result, billions in cash accumulated in the vaults of the central bank. Later, with American help, the Iraqi central bank deposited these billions at the New York Federal Reserve Bank, where they could earn interest.

Finally, when Iraq started to earn dollars selling oil, the United States transferred the cash revenue to the Finance Ministry, where it was used to finance government operations, including salaries and reconstruction. Many of these transfers occurred in 2004, long after the financial stabilization operation had concluded. Iraqi Finance Ministry officials had already demonstrated that they were serious about keeping the controls they had in place. The 360 tons mentioned by Henry Waxman includes these transfers as well as the 237.3 tons shipped in 2003 during the stabilization.

The new Iraqi currency proved to be very popular. It gave a sound underpinning to the financial system and remains strong. One of the most successful and carefully planned operations of the war has been held up for criticism and even ridicule. As these facts show, praise rather than ridicule is appropriate: praise for the brave experts in the U.S. Treasury who went to Iraq in April 2003 and established a working Finance Ministry and central bank, praise for the Iraqis in the Finance Ministry who carefully preserved payment records in the face of looting, praise for the American soldiers in the 336th Finance Command who safeguarded the found money, and, yes, even praise for planning and follow-through back in the United States.

This essay appeared in the New York Times on February 27, 2007. Available from the Hoover Press is Strategic Foreign Assistance: Civil Society in International Security, by A. Lawrence Chickering, Isobel Coleman, P. Edward Haley, and Emily Vargas-Baron. To order, call 800.935.2882 or visit www.hooverpress.org. John B. Taylor is the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution and the Mary and Robert Raymond Professor of Economics at Stanford University. He was previously the director of the Stanford Institute for Economic Policy Research and was founding director of Stanford's Introductory Economics Center. He has a long and distinguished record of public service. Among other roles, he served as a member of the President’s Council of Economic Advisors from 1989 to 1991 and as Under Secretary of the Treasury for International Affairs from 2001 to 2005. He is currently a member of the California Governor's Council of Economic Advisors.

http://www.hoover.org/publications/digest/7465402.html

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INVESTMENT CONCEPTS - Diversification, Risk Tolerance, and More

Asset Allocation is an investing a strategy for maximizing gains while minimizing risks in your investment portfolio. It involves diversifying your assets among different broad categories of investments, such as equity, fixed income, and money market, etc. By reducing your investment risks, you’re in a better position to meet your financial goals.

How Asset Allocation Works

The underlying mechanic that makes asset allocation a powerful tool for any investor, is the idea that best-performing asset varies from year to year (i.e., asset correlation) and is not easily predictable. For instance, your stock investments may do well for several years, but you will eventually run into a slow market or a Bear Market where other assets will outperform stocks.

This difference causes your allocation percentage to diverge from the original target over time, because better performing assets will grow larger as underperforming assets grow smaller relative to each other. Once the allocation no longer aligns with the original target, the investor then rebalance the portfolio to restore the original percentage. This involves selling some of the better performing assets to buy some of the underperforming assets. This is “buy low, sell high” at its best.

Four Asset Allocation Methods

When I work on my portfolio asset allocation, there are four different types of allocation that I consider to be the most important.

1. Traditional Asset Allocation

The traditional method of asset allocation breaks down your investment into four broad categories:

Domestic Large-Cap Stocks
Domestic Small-Cap Stocks
Bond
Foreign Stocks

The allocation is usually represented as a pie chart, which is further classified as aggressive, moderate, or conservative based on investor’s risk tolerance level and time horizon.

Aggressive – This type of portfolio is appropriate for investors with high risk-tolerance and/or long investment time horizon. This portfolio has a higher percentage of stocks relative to bonds.
Moderate — This type of portfolio is appropriate for investors with medium risk-tolerance and/or medium investment time horizon. This portfolio has a lower percentage of stocks relative to bonds.
Conservative – This type of portfolio is appropriate for investors with low risk tolerance and/or short investment time horizon. This portfolio has the lowest percentage of stocks relative to bonds

Graphics from CNN Asset Allocator

Your goal is to choose the right balance between stocks and bonds based on your risk tolerance level and investment time horizon. You can try the CNN Asset Allocator to see what a recommended portfolio looks like.

2. Morningstar Style Box Diversification

Another way to view asset allocation is based on the Morningstar Style Box, which divides your investment according to nine categories according to the market capitalization and valuation.

Graphic from Morningstar’s Portfolio X-Ray Tool

Since the traditional asset allocation accounts for market capitalization, the real value of this method is the value versus growth comparison.

Growth stocks are shares in a company whose earnings are expected to grow at an above-average rate relative to the market. The company is growing earnings and/or revenue faster than its industry or the overall market.
Value stocks are shares in a company that tends to trade at a lower price relative to its fundamentals (i.e. dividends, earnings, sales, etc.) and thus considered undervalued. Common characteristics of such stocks include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio.

It’s important that you do not mistaken “growth” for higher return on investment. Based on the Efficient Market Hypothesis, the market already taken the higher growth rate into account and it is already reflected in the price. A “value” stock could very well turnaround, become favorable, and outperform a “growth” stock. Just like before, it’s not possible to predict if value stocks will outperform growth stocks for any given year. There’s a good article called, Value Versus Growth Monthly Returns that illustrate this concept and explains the image below:

Your goal is to diversify and balance growth versus value so that you are not over invested in one area or another.

3. Stock Sectors Diversification

The next method deals with sector (or industry) that your investments belong to. The top five sectors based on the S&P 500 are: Energy (16%), Financial Services (14%), Industrial Materials (13%), Healthcare (12%), and Technology Hardware (10%).

Graphic from Morningstar’s Portfolio X-Ray Tool

Your goal is to spread your investments across many sectors, so that you are not over invested in any one sector. This is how you protect your portfolio against catastrophic events, such as the collapse of Dot-com Bubble of early 2000s and Subprime Mortgage Crisis of 2007/2008.

4. World Regions Asset Allocation

The last type of asset allocation deals with the geographical region of your investments. The top geographical markets includes:

North America
UK and Western Europe
Japan
Latin America
Asia

Graphic from Morningstar’s Portfolio X-Ray Tool

In my article How Much Should We Invest Internationally?, I argued that the traditional view of limiting foreign investments below 20% of your total assets is too conservative and we should be aiming for 30-50% mark. Larry Swedroe concurred with this assessment in the April 2008 issue of the Ask The Expert article:

I believe investors should consider having 50 percent of their equities in international stocks and have at least 30 percent.

Your goal is to spread your investments across geopolitical boundaries and position your portfolio to capture the growth potential of developing markets, while balancing it with the relative security of matured markets.

How To Determine Your Ideal Asset Allocation

Figuring out your ideal asset allocation is a very personal thing, and there is no right answer. When determining your asset allocation, the two most important factors are your risk tolerance level and your investment time horizon.

Risk tolerance level is your willingness to bear the risk of potentially losing some or all of your money in exchange for higher potential returns. For example, an aggressive investor, or one with a high-risk tolerance, is more likely to risk losing money in order to get better results. It’s important to be truthful to yourself when considering your risk tolerance level because the last thing you want to do is prematurely sell your investments in a panic.
Investment time horizon is the expected number of months or years you will be investing to achieve a particular financial goal. For example, if you are investing for retirement that is 35 years away, you could afford to take more risk because you can ride out the down periods. On the other hand, you want less risk if you are a retiree or if you are saving for a short-term goal.

Balancing Risk and Reward

One way to help you determine your ideal asset allocation is to first look at how much you need to have and how soon. Also, you need to determine if you could afford to wait a few more years if you don’t achieve your goal within the target deadline.

For example, let’s assume you need to save $100,000 for a down payment in 5 years, and can afford to save $1,200 a month for the next 60 months. If you calculate these numbers, your investments must have a combined average annual return of 12% per year. This requires an aggressive portfolio, but 5 years is a short time and you could lose some or all of your money.

Your possible alternatives are:

Extend your time horizon. For example, you can save $100,000 by adding $1,200 per month to an investment portfolio that has a combined average annual return of 5% in 6 years.
Increase your monthly contribution. For example, you save $100,000 by adding $1,500 per month to an investment portfolio that has a combined average annual return of 5% in 5 years.

Now that you understand what portfolio rate of return need to be at, you could more realistically decide your asset allocation. For example, if you are shooting for a 5% rate of return, you could construct a conservative portfolio. However, if you are shooting for a 12% rate of return, you will have to be more aggressive.

Other Factors Affecting Your Asset Allocation

Aside from the three main concepts above, there are other factors that you need to consider in your asset allocation strategy.

Investment Type And Performance

Although asset allocation supposed to make performance of individual investments less important, it is still a factor. When choosing stocks, you should perform your due diligence and understand the underlying fundamentals. A more effective way of construct a diversified portfolio is through the use of mutual funds and ETFs; preferably passively managed ones because the underlying assets are more predictable and their lower expenses.

Moreover, traditional asset allocation model only mentions stocks and bonds. But you are not limited to just these assets. There are many types of investment that you can use to build your portfolio — e.g., high yield savings, CDs, money markets, whole life insurance, bonds, treasury securities, REITs, futures, options, etc.

Expenses

When you are building a portfolio, it’s possible that you will be carrying out several transactions per year — i.e., adding new fund and rebalancing your portfolio. As such, it’s important to choose the right investment vehicles to keep your expenses as low as possible, because the impact of high expenses could be significant.

Stocks – Aside from Berkshire Hathaway, it would be difficult and not very cost effective to build a diversified portfolio with individual stocks
ETFs – If you are investing large amount of money, ETFs may be better than mutual funds because of their lower expense ratios.
Mutual Funds – Mutual funds may be the best option for building a diversified portfolio, especially if you stay with no load no fee mutual funds with low expense ratios. This type of funds allow you to purchase new shares in small increment at no cost and you could sell them after a period of time without paying any fee.

Asset Correlation

Another term you should understand is asset correlation. The power of asset allocation depends on having a combination of investments that have low correlation. This means that if a group of your investment is doing well, another group won’t — but this means your entire portfolio won’t tank at the same time and you’ll be able to rebalance to buy low, sell high.

Graphic from Stock Market Cook Book

Let’s take a look at the table above. You can see that Large Stocks has a correlation coefficient of -0.02 compare to Treasury Bills. This means that when Large Stocks go up in value, Treasury Bills go down. On the other hand, Large Stocks and Small Stocks with a correlation coefficient of 0.79 will track each other well but not perfectly.

In other word, you can think of Bonds and Treasury Bills as insurance policy against declining stock market condition for your stock investments.

Portfolio Rebalancing

This is where the magic happens with asset allocation. When your allocation shifted from it’s original percentage, you are selling some of the assets that have been doing well and use that proceed to buy more shares of assets that have been underperforming to restore the original percentages. This is basically a “buy low, sell high” technique.

However, you don’t want to rebalance your portfolio too often because you’ll have to deal with transactional expenses and taxes. It’s recommended that you rebalance your portfolio at least once a year and no more than once a quarter. Instead of rebalancing based on time period, a better strategy is to rebalance when the portfolio is a few percentages different from the original allocation.

A strategy that you can use to reduce trading costs and tax consequences is to slowly adjust your portfolio using new funds to buy more of the underperforming assets. This should bring things back into the proper allocation for a smaller portfolio. This technique may not be adequate for a larger portfolio.

Portfolio Realignment

Depending on your goal, you could have a portfolio that will last for several decades. As you grow older, your risk tolerance level and investment time horizon will change. Every few years, you should carefully reconsider your asset allocation against your financial goal to make sure they are still in agreement. Often, you’ll find that investors shift toward a more conservative portfolio as they grow older.

Tax consequences

Another factor is the tax consequences of your investment activities. How you manage your portfolio, the types of investment, and the nature of the account (i.e., taxable versus tax-sheltered) could have an impact on your investment performance.

Some strategies to consider with regard to taxes include:

Tax loss harvesting your taxable account
Put bonds and high-dividend yielding investments in tax-sheltered account
Minimize buy/sell to reduce capital gains tax liabilities

Target Retirement funds

If all these asset allocation ideas are giving you a headache, you may be a good candidate for target retirement fund. With target retirement fund, all you have to do is pick the one that has a target date closest to your financial goal

Other Resources:

Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing at U.S. SEC
Learn How to Invest – A Guide to Asset Allocation at The Dough Roller
Basic guide to Stocks and Shares ISAs part 4: all about allocation at Plonkee Money
My New Asset Allocation (Part XIV) at Quest For Four Pillars
Pick Investments Strategies That Fit Your Lifestyle at Blueprint for Financial Prosperity
My Asset Allocation: Total Market Approach at My Dollar Plan
Investing – Asset Allocation – Part 1 at FIRE Finance
The 120 Minus Your Age Stock Allocation Formula at No Debt Plan
Asset Allocation at Wikipedia

This article was featured in:

Carnival of Personal Finance #170 – Famous Last Sentences Edition

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A BRIEF HISTORY OF THE "NEW IRAQI DINAR"

INVESTMENT CONCEPTS - Diversification, Risk Tolerance, and More