Where from Here?

Rarely a day goes by without someone (at the store, in a doctor's office,etc.) asking about which direction the stock market is heading. A few days ago I was asked if I was a "bull or a bear"? My response was simple- if you plan on being around for awhile then you have to be a bull. That is the long term answer. The short term- this day; this week; this month may be different but that is not really investing anyway...it is speculating. The headline at lunchtime today on one of the financial news channels was "Should you buy/sell or hold? " What may well serve their "news" interests in filling air time should not be confused with an investment strategy. Long term investors are in the markets for the long term. They expect both good times and bad . It is really just that simple.

Pursuit of Perfromance

As all of our clients know, chasing short term performance is a poor strategy. Generally it is the triumph of emotion over intellect. The simple truth is this: diversified long term investors win as a group and undiversified short term investors lose as a group. Short term out-performance often turns out to be anti-prologue.

Some investors bailed out of the markets earlier this year and are likely still waiting for a good time to re-enter (and have missed a 55% gain). Others have put money into gold fearful of future inflation. These are 2 sides of the same coin and likely will disappoint. Financial goals are accomplished by action not re-action. Our philosophy is grounded in the science of the markets and based on individual client goals. Vanguard founder John Bogle calls this "client stewardship over salesmanship".

Winners and Losers

The turmoil within the markets over the past year has put Washington in the position of picking winners and losers. Much has been written about those institutions that in one way or another are deemed "too big to fail". If an entity is really too big to fail then it is just too big. If we don't have losers in our capitalistic system then we very soon won't have winners either. Much of what is transpiring in Washington today seems to be aimed at "leveling" the range between winners and losers so that everyone wins. This has never worked ...anywhere. Remember one of the precepts of our philosophy is that risk and return are related. This is a fundamental rule of capitalism and cannot be abrogated except by fiat which is what may be transpiring now.

A quick observation- without question we are enjoying a very nice 7 month rally from the March 9 market lows. About two-thirds of the S&P 500 entities are beating analysts estimates of earnings. It is important, however, to recall that even with these better than expected earnings, the average company is reporting a 19% decline from the same period last year.

Financial Planning vs. Financial Plan

In times like this (uncertainty, unknown), it is crucial to understand the distinction between the dynamic wealth management process as opposed to a static financial plan (the kind marketed endlessly by the large financial firms).

Over the past couple years our clients, while not immune to the ravages of market volatility, have benefited from our ongoing advice concerning adjustments to the underlying assumptions in their plans, portfolio risk levels and expectations for future withdrawal rates. Theses dynamic course corrections help neutralize the predictive difficulties in the assumptions and produce more reliable long term positive outcomes.

There simply is no substitute for objective, ongoing advice.

Remember- markets go up and down...not up and up

The almost linear run up in the stock market since early March is among the fastest in history. By some measures it is among the top 10 of all time. In early March many investors were thinking seriously about abandoning ship but now they are equally as concerned about maximizing their gains from this almost 50% rally.

Moat of you have heard our mantra about the markets before: Markets go up and down , not up and up. The point is to place emphasis on the long term and not become emotionally tied to the sometimes extreme short term gyrations in the stock market. We instead have to remind ourselves that the reason we invest is for our long term goals. We can't time the market successfully so in order to reap the long term equity returns , we have to actually be in equities.

The month of September has been among the cruelest months to the market in the recent past. We have no way of knowing if this September will be great,good, okay or terrible. What we do know is the market noise is just that...noise and should largely be ignored. Stay focused on the long term.

July and Jobs

The month just ended was the best overall month for the stock market in 7 years. That is cause to celebrate for sure! Year to date the S&P 500 Index shows an 11% gain. A diversified portfolio (like those we manage) with a 60% stocks/40% fixed allocation is up  about 14% for the year (this is because small and international have outperformed). 

On the jobs front I came across an interview with Charles (Chuck) Schwab . He said "we haven't restored the confidence of the people that create jobs". I think that is very well put. To a large extent confidence in the markets and the banking system has been restored but the big missing link is confidence among small businesses. Schwab goes on to say "there are 6 million businesses that employ more than 1 person. What would it take to get them to hire 1 more?"

Happy Birthday and Magic Tricks

Hope everyone had an enjoyable 4th of July weekend. On the occasion of our nations birth I always try to read something from the founders and this year I settled on some of Madison's Federalist Papers #51. I have read this many times but each time seems different. The particular passage I like best starts "If men were angels, no government would be necessary". The passage concludes " the great difficulty lies in this : you must first enable the government to control the governed ; and in the next place oblige it to control itself". Seems like something worth considering today.

The past quarter was the best in several years. No one knows what the immediate future in the markets might be but over time discipline is rewarded. The deficit, debt, jobless rate etc. all weigh on the markets so the path to progress will not likely be straight.

I read a piece this morning on the subject of the pending approval of GM's emergence from bankruptcy. Viola! Abracadabra ! Seems like the government has elected to rely on a series of magic tricks instead of actually correcting the problems. Unlike most bankruptcies where pensions are modified and everything is changed going forward, the GM pension obligations remain hugely underfunded. The company has not made a contribution to the pension plan since 2003. The pension benefits are likely unsustainable and sooner or later will have to be brought into line for the firm to avoid yet another bankruptcy