What does this old assignment have to do with financial well-being in 2012? We are all continually challenged to reconcile accelerating technical progress with our ingrained human behavior – especially when it comes to investing.

The rate of technological change increases exponentially; and we will continue to have awe inspiring discovery and implementation. When you explore some of the recent advances like 3-D printers, regenerative medicine or energy science, it is hard not to be amazed. Back in high school, we couldn’t imagine the fully connected, information-rich life we have today. Nor can we imagine the life we will have even ten years from now. The coming changes will solve many existing problems and create new ones.

At the same time, we can’t escape the way we’re wired. While our natural responses protect us from many perils, they often impede our investment success. We hate stocks when prices are low and love them when prices are high. We feel regret if we don’t beat the market (any market) when it is rising. People most want to dump stocks at their cheapest when market declines have brought intense worry and pain. In our current sound-bite-driven, drama-laden, round-the-clock “news” our emotions ride a perpetual roller coaster. We make quick mental leaps from greed to fear and back.

The impact of having access 24/7 to almost anything changes behavior. An example: When Capelli Financial Services, Inc. was founded in 1994, Morningstar provided advisors with updates on mutual fund prices on a quarterly basis (by sending a floppy disk!). Today we can get stock quotes on our phones while shopping for shampoo – a huge technological advance. However, constant attention to “news” and pricing creates, in our traditional human brains, either fear or joy and prompts us to make more frequent changes. Studies clearly demonstrate that very frequent trading generally produces poorer long term results. In this case, we need to use the ability to get instant pricing to our advantage without letting it drive unproductive actions.

In addition, because so many people access the same data and have common responses, the impact of any “news” may feel far more significant than it is.

Effective investing requires a longer term mindset and the ability to separate emotion from actions. Being awash in “news” can handicap our ability to stick with well planned, effective strategies. Despite our ability to make projections and the necessity to do so, no one knows what future will actually unfold.

We’re all human beings and we’re in this together! At CFS, we challenge each other regularly on all of these matters, knowing that we’re susceptible to these same influences.

That high school essay is long gone but every once in a while I’m reminded of the issues it raised. Technical progress in our lifetimes has been stunning – and connectivity fosters even more exciting possibilities ahead. One great aspect of our human nature is the ability to adapt to change and use it to our advantage over time. Investment tools and resources will continue to advance. Let’s remember, however, that the dominant determinant of investment and financial success is behavior.

Therefore it is prudent – and in the long term, beneficial – to invest for growth while maintaining an appropriate cushion for protection. As you know we structure your portfolios to accomplish this end. I’m still waiting for the transporter with the ability to “Beam me up Scotty”.

The laughter stopped and the bus was utterly silent for several minutes. I remember thinking how easy it is to take democracy for granted.  And while our system is by no means perfect – and never has been, it provides us with precious individual freedom to make choices.

 So, bring on the debates, the ads, the speeches, recorded phone messages et al.  I like voting.

Our investment committee’s work was recognized as well.  The Purpose Aligned Portfolio™, our unique way of communicating the purpose of investment holdings, was highlighted.  You can read more about our methodology here.

Thanks to Financial Planning Magazine and Jim Grote for sharing our story.  Check it out here on www.financial-planning.com.

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.

Interest rates on mortgages have fallen to historic lows.  Check out the chart below, it details the history of 30 year fixed rate mortgages from the early 70’s to present:

 Why should you care?

Let’s use an example to illustrate.  You purchased a home four years ago, taking on a $200,000, 30 year mortgage with a 6.25% interest rate in the process. Before property taxes and homeowners insurance, your payment is about $1,230.  If you take 30 years to repay that mortgage, never refinancing, you will have paid a whopping $243,000 in cumulative interest!

It’s 2011 and you’re four years into your mortgage; it’s been paid down to $190,000.  Available to you in today’s market, if you meet the lenders’ underwriting requirements, are 30 year mortgage rates of 4.25%.  You qualify and decide to refinance.

Your monthly payment is now $934 because your interest rate has been reduced by 2%. But you have also extended the term of your mortgage.  (You only had 26 years left before you refinanced; now you have 30 again.)  Enter Marilyn (math-wizard) Dimitroff’s favorite strategy when it comes to mortgage refinancing:  Continue making your old payment ($1230 in this case) after you refinance.

If you were to do that in this scenario, you would reduce your interest costs by over $109,000 while shortening the term of your original mortgage by over seven years. No gimmicks or sketchy internet promises from a “Nigerian prince” involved with this strategy, just the use of mathematics to your advantage.

Recent and necessary improvements to the mortgage underwriting process make applying for a mortgage difficult and time consuming for borrowers (read fogging a mirror is no longer sufficient evidence of your ability to pay).  The improved process isn’t fun and there’s a lot of paperwork involved. But the example above is typical and it would be wasteful to ignore an opportunity to reduce a cost (interest) that brings us absolutely no enjoyment.

I don’t feel so bad if an occasional dinner out runs $100.  But that’s because I enjoy the experience, the opportunity for conversation and I have an undeniable love for food.  Oddly, I don’t feel the same way about interest payments.  There’s no experience to speak off and certainly no enjoyment.  Bottom line:  Don’t drag your feet. If your mortgage rate starts with a 5 or higher (4.875% even) and you plan on staying in your home for a while, START SHOPPING!

Capelli Financial Services, Inc. is a descendant of the financial planning firm Marilyn started in Hinsdale Illinois in the early 1980s.  In August 1982, the Dow Industrial average was under 780 (after having flirted with 1000 for the first time sixteen years earlier in January 1966).  Everyone hated the stock market.  Research done at the business library that summer (there was no internet, of course) mistakenly projected more years of dismal stock market values. 

As it turned out, stock prices began climbing as autumn approached and they never looked back.  Seventeen years later, when the century closed, the Dow stood at 11,500. 

We are now twelve years into another sequence of poor stock market results, with the Dow 500 points below where it was at the end of 1999.  Billions of dollars have been withdrawn from equity funds and billions of dollars have gone into treasury securities – even though the yield is at historic lows.  Everyone is nervous; and there is widespread malaise about the future.  The message in the media – on TV, radio, the internet and in print – is heavily pessimistic.  

Here are some things to consider:

• We human beings love stocks when values have climbed and want nothing to do with them when prices have fallen.  In other words, we mistakenly pile in when risk is highest and flee when risk is lowest.  There is less risk today, nearly twelve years into poor returns, than there was at the end of the 1990s (when investors couldn’t buy tech stocks fast enough).  We are wired to buy high and sell low.
• In this century, with falling interest rates, bonds have provided consistently better returns than broad stock indices.  Today the 10-year Treasury bond pays 1.9% interest and, if held to maturity, returns your principal.  People are loading up.  The dividend yield of the S&P 500 is over 2% and provides strong expectation of price appreciation over 10 years.  But, our brains are pattern makers; and we mistakenly project our recent experience – “bonds are better” – out into the future.
• Major market bottoms, when they are reached, have less to do with financial issues than with panic.  When we’re afraid, we tend to feel that we must do something.  As Warren Buffet says, “The stock market remains an exceptionally efficient mechanism for the transfer of wealth from the impatient to the patient.

We understand how anxious and fear-inducing this poor market environment has been and may be for some time.  It is absolutely normal for markets to languish and normal to be afraid.  The last, long bear market ended in 1982 and those who stayed invested then or who had the nerve to commit new funds were richly rewarded. 

History has shown that abandoning equities when the future looks darkest is a big mistake for investors with lifetime goals – and yet people do it over and over because fear is so powerful.  

Yes, there is much uncertainty about Europe, our tax code, about health care reform, the deficit and more.  But, at some point we will have solutions to and clarity about every one of these issues.  People solve problems.  The current crop of worries will eventually fade (to be replaced by others, of course). 

It is a mistake to underestimate the awesome ingenuity and drive for improvement of human beings.  Folks around the globe – now connected instantaneously by the internet – will continue to want new phones, new cars, healthier diets, access to medical breakthroughs, comfortable living conditions, more education and better lives for their children.  The pace of discovery accelerates geometrically.  In addition, the Wall Street Journal had a marvelous column September 24^th on how the world today has unprecedented levels of peace and civility (despite what one might infer from the media), describing the positive impact of this situation on future development.  Our great global companies have never been more productive or more awash in cash or been able to borrow at such low rates.  

No one knows or can know where the bottom of this bearish market will be or when it will occur.  It will end when we least expect it; and no one will recognize it for some time.

We view portfolios as a means to an end, as tools to empower you to achieve your life goals.  Effective investing takes into account shorter term needs and long term objectives.  Immediate needs must be covered with low volatility vehicles while longer goals may be met over years and even decades.  We continually assess trends and prospects, making modest moves as appropriate to take advantage of opportunities or to mitigate risks.  Long term decisions are based on analysis not emotion.  

While we will all continue to make our share of mistakes, Eleanor was right.  Applying the lessons learned from them is powerful.

Check out our new website at capellifs.com.  Jason Close has been instrumental in working with our designers to create a site that is informative and easy to navigate.  We welcome your feedback!

Congratulations to Steve Goodman, our Investment Director, who recently attained the Chartered Financial Analyst credential – a rigorous post graduate level portfolio management program.  Steve also holds the Chartered Market Technician designation.  Approximately 200 people nationwide hold both.  Steve’s enjoying actually having some time to golf.

We so enjoyed our evening at the Detroit Zoo.  The Butterfly Pavilion offered hidden delights as we searched the foliage for these remarkable creatures.  And we again were impressed with the pictures you, our clients, submitted that expressed the idea of generations and family history – the true treasures of life.  Please call if you have any comments or questions!

For the August 2011 issue of Financial Planning Magazine, Martin Shenkman explored how advisors approach estate planning in their relationships with clients. Our president, Marilyn Capelli Dimitroff, shared our philosophy:

“We work holistically. Estate planning is always part of what we address for clients. Estate planning is defined as the process of getting resources to where you want them to go with the least cost and least problem.”

Shenkman points out that estate planning begins with a conversation, and Marilyn agreed. “People don’t like doing estate planning,” Capelli Dimitroff says. “It is amazing how many people put it off. They don’t want to deal with it. Clients come to us for investment planning and financial planning, and we can slip in the estate planning discussion. We’ll open the conversation with the client by asking them about how they want their finances handled if they cannot function or after they pass away. We also get a complete set of documents, scan them and read them to get a sense of what happens at death under any existing plan.”