When we stand at the beginning of a new year, we always long for clarity on how the year will go – which investments will look great by December and which will be losers. As always, we have a formidable mountain of investment research, opinions, warnings and projections on which to draw. Today, with a click, we can find well-supported reports that make the case for strong equity performance ahead and equally credible predictions for the opposite. Each January, the previous year’s results are crystal clear and the future is not.
Still, that doesn’t stop us human beings from trying to visualize, analyze, calculate and even divine our way to results. People pour over the tea leaves of history hunting for patterns. For example: looking back at data reported by S&P since 1926, in years the index closes within 5% of even, the average annual return of the following year is up 26%. Since last year was flat, will the market be strongly higher in 2012? Maybe yes. Maybe no. Patterns work until they don’t.
It would have been comforting if, in January 2011, we had known that the S&P 500 was going to close virtually where it began (1258). It would have made the 3200 points that it traveled up and down during the year a little less nail biting. The problem, of course, comes from not knowing the meaningful events of the coming year – because they haven’t happened. And even if we knew the events, we wouldn’t know their impact on investments. We’ve had positive markets in otherwise depressing years and vice versa.
Understanding that we can’t predict for sure where the market will be at the end of 2012 is critical to good investing. It results in more balanced portfolios that are much less likely to fall apart if the wrong future unfolds and that will benefit when good times return. It means that you have your fingers in many pots and can find many ways to profit – or to cushion your loss in downturns.
We’re pleased with the feedback we received regarding our Purpose Aligned Portfolios™. As a reminder this is our unique way of communicating to you the purpose of your investments. With acknowledgement to our motor city inspiration, we construct your portfolios with an engine and an airbag. Because needs are different, higher risk portfolios resemble muscle cars (larger engine, fewer airbags) and lower risk portfolios are more akin to a family sedan (smaller engine, lots of airbags). We refer to your investment engine as “Growth” and your airbag as “Stability.” Using these descriptions to guide investment strategy helps us stay true to the purpose of your holdings and positioned for a variety of scenarios.
We have little doubt that you noticed trading activity in your portfolio for 2011. The investment committee had a busy year and certainly not a boring one from the perspective of news affecting capital markets. Maybe you noticed reduced holdings in international stocks in favor of large US based companies, particularly those with a history of strong dividends. This shift reflects our view that the seventeen countries of the Eurozone and their banking industry have a lot of work to do (and bonds to sell). We can’t know the outcome. We’d prefer to have a larger presence in the United States while the drama unfolds. In the opportunity portion of your Growth allocation, we’ve introduced high yield bonds and a number of other income oriented assets as substitutes for stocks. In this environment, we like the idea of focusing on yield generation as policymakers create the news that drives the markets.
Keep in mind that there are always two sources of investment return: income and price appreciation. For stocks that means dividends and price changes based on the market’s perception of future earnings. For bonds that means interest payments and price changes based on the direction and magnitude of interest rate changes.
The 10-Year US Treasury, the DJIA of bond yields, continues to flirt with 2% – a level well below inflation. There could still be negative surprises lurking that send safe haven assets like US Treasuries soaring for 2012. The opposite could also prove to be the case. Asked to choose stocks over bonds for the long term though? We’d confidently tender those 2% Treasuries to the doom’s-dayers and the naysayers for a piece of future corporate profits.
Housekeeping note: Going forward, we will deduct management fees for retirement accounts from those accounts themselves rather than from associated taxable portfolios. If fees come from taxable portfolios, they may be fully, partially or non- deductible as a Miscellaneous Expense on Schedule A (only the amount of the total in this section that exceeds 2% of Adjusted Gross Income can be deducted). When the fee is deducted from the retirement account itself you may well be paying with tax-free dollars – since the fees are not considered a taxable withdrawal.
Also, we especially want to thank you for connecting us with your friends, family and colleagues in 2011. We’re so glad to have the opportunity to help them approach financial decisions with clarity and confidence and we appreciate being able to work with people who are important to you!
Wishing a healthy, satisfying and prosperous New Year.
