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!

When the greatest bull market in our history began in the summer of 1982, they did not participate. It was only years later, after the price of gold had crashed and stocks prices had risen nearly 20% annually, that they again began to invest in the market. Their commitment to one scenario for the future greatly reduced their lifetime economic choices. In 1999, a retired neighbor who had read Harry S Dent’s book, The Roaring 2000′s, invested 100% of his portfolio in stocks. Mr. Dent was forecasting a DOW of 35,000 by 2008, based in large part on demographics. The book jacket describes the “uncanny accuracy” of Dent’s predictions.

In March 2000, the stock market began a three year decline of nearly 50%.

Here’s the thing: While we all can and do make projections about themes and trends, those forecasts are based on everything we know. First, no one knows everything. The world economy is so complex that it is impossible for anyone to capture all the possibilities. Second, how the future actually unfolds will depend on the events that will occur. Since those events haven’t happened, the future is always murky.

In 1980, no one foresaw the impact of the personal computer and the internet or the tax cut stimulus or the new discount models for financial services like Schwab and Fidelity. In 1999, no one imagined the 9/11 attack or the real estate derivative bubble.

Staying diversified, to be able to protect/profit in a variety of possible futures, is fundamental to long term financial well being – even if it doesn’t always feel like the best course of action.

The stock market performance in September is a great example. Last summer, gloom prevailed. At one point, talk of the “Hindenburg Omen” and “Death Cross” technical indicators, which supposedly signal a “crash”, were all over the news programs (we’ve attached some related examples). In August, pundits reminded everyone that September is historically the worst month for stocks. The messages would make anyone think that the only sensible thing to do was sell. Actually, the most sensible thing to do was to turn off the TV. September was a terrific month for equity markets.

 A month certainly does not make a trend. However, the experience highlights the futility of relying too heavily on media predictions.

We all very much enjoyed the 5th Annual Cient Even and Photo Contest at the Bloomfield Open Hunt Club. The venue was quite special; and watching the horseback rider was a treat. Once again, our clients showed talent and creativity in sharing their images – thank you to all who participated (and to Lee Ann Capelli Mattes for all the planning). We have additional informational webinar events being developed and will keep you posted.

We’re pleased to announce that Jason Close, CFP® can now add “CFA Charterholder” to his name. Jay completed the multiyear studies to become a Chartered Financial Analyst this summer, passing the last of three very challenging exams.

All of us at CFS are enjoying (and learning!) our new computers. This week we completed replacing every computer as well as our server – and it all works! In addition, this quarter we are converting to a new internal management program (Junxure) from one we’ve used for twelve years (Goldmine) – a major endeavor. This conversion will enable us to more efficiently access all of your information without having to navigate multiple programs. Cindy Jones has planned and managed these projects and will be thrilled when the whole venture is finished.

Enjoy these colorful autumn days and don’t hesitate to call with questions.

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.”

The folks who were promoting day trading had a program to sell. Their unstated
implication was that day trading would make you a lot of money and that having
money would enable you to control the future – neither of which makes sense.
Day trading success is luck. And nothing really gives us control of the future.

The future, by definition, hasn’t happened yet and therefore is unknowable. The
only control we ever have is of the moment. Right now.

Still, all of us think about the future and plan for the future. Neuroscience
continues to build evidence that one of the human brain’s main activities is
prediction. The mind detects a familiar pattern and then uses past experiences to
project coming events. The problem here is that, as Matt Ridley writes, we are
“remembering the future”.

One thing that makes investing so challenging is that, although there are always
many possible futures, our brains often get attached to one. In the late 1990s, the
shared vision of the future was a “new paradigm” in which investments would only
rise in value. This message dominated the media. Congress made legislative
changes based on this view. People would have scoffed at the thought that the
Dow Jones Industrial Average would be at almost the same level in 2011 that it
was in 1999.

Today the opposite outlook prevails. We face many problems. You know the list.
Top of mind now, because it is discussed nonstop and it has a deadline, is the
possible default of the US government on August 2nd. We don’t know if there will
be a default or not. We don’t know what the impact would be if it does occur. We
“remember” the Depression (even though most of us weren’t born yet) and apply
it to what lies ahead. That is one possible future. There are many others.

In world finance, the real story is usually the one the media is not covering.

How do we effectively reconcile our unstoppable prediction making and our
inability to know what’s going to happen? It may seem paradoxical that, as
Certified Financial Planners®, we admit that we cannot tell you what the financial
world will be like in a month, a year or a decade. In reality, thinking we could
foretell would be dangerous.

At Capelli Financial Services, we embrace our lack of predictive powers and build
strategies and portfolios that are purposely designed to weather a variety of
outcomes. It means we create and stress test various scenarios. Any other
approach intensifies your risks.

Implementing this approach is not simple. It requires effective technical tools and
research. And, perhaps even more difficult, it demands considerable discipline –
sometimes calling for actions that feel counterintuitive. Making sure your portfolios
have an appropriate cushion and still have solid growth potential is our objective.
The reward is more stability and greater probability of meeting your goals.

We’ve enclosed an article from Dimensional Funds on media messages and
market performance over the last year. Had you based your portfolio on the story
du jour, you would have missed pretty good returns.

The Best of Times, the Worst of Times

Over the last few months we’ve been working on redesigning our website, making
it easier to find and to navigate. We think we’re close to completion; and we’ll let
you know when it officially launches.

Please contact us if you have questions or comments or just want to chat. Our
clients are all nice, smart and interesting – a prerequisite – and we welcome the
conversation!

There is a legal limit to government spending. The Treasury Secretary estimates that the current US debt ceiling of 14.29 trillion dollars will be reached on May 16th (with some accounting maneuvers, the date may be extended to approximately July 8th). In the past, Congress has always approved higher caps – sometimes routinely and sometimes on the brink. The debt ceiling has been raised 74 times in under 50 years.

Oh, and Congress will be out of session the last two weeks of April.

Our expectation is that the gamesmanship will once again go to the edge and result in a last minute agreement to temporarily raise the limit. Just a guess. As a result, you can bet that the media will cover this issue night and day for the next month – or till resolved. Keep in mind that the media has a bias to predict the worst outcome whether it’s finance or weather. TV stations get the most complaints when good weather is forecasted and it rains.

There is no question that the US needs to revise finances. The revisions will be painful; and are likely to put a heavier burden on citizens through higher taxes and/or lower benefits and services. But, for the first time, the chances are at least greater than zero that some action will be taken and that untouchable issues are touched. That is very good news. Both Republicans and Democrats will have proposals that include changes to Medicare, Medicaid and even Social Security – amazing. Even though we can expect much debate and posturing as this process unfolds, the process has started.

Crisis can create opportunity. At least with the conversation out in the open, problems can be addressed. Even if major financial change doesn’t occur until after the 2012 elections, it will occur because, for once, the political cost of inaction is higher than acting.

How do we plan for the potential changes resulting from major financial restructuring? Until we have details we can only speculate. One of our big concerns, however, is around health care. With the aging Boomer population, the addition of millions of currently uninsured people into the system and with reduced reimbursement to medical providers, we worry about the cost of and access to quality medical services. As a result, we have begun to add a separate medical expense goal to plans for many clients.

The events of the last decade make financial planning more valuable than ever. Understanding your current position and what happens if everything continues “as is” provides a baseline for making decisions. Having clarity on the impact of various scenarios and actions increases your potential to be secure.

Regarding investments, the debt ceiling issue has not caused equity values to plummet – at least so far. The situation is certainly no secret and known risks are already factored into pricing levels. Markets are forward looking and continue to be resilient. As is always the case, it is unexpected dangers – the things we don’t know – that will most impact prices going forward.

So enjoy the debate that will ensue and be grateful that we live in a system that, clunky as it often is, ultimately relies on debate for change.

All of us at Capelli Financial Services, Inc. are looking forward to the warmer weather that is finally showing up. The sunshine is most welcome after a long winter! Please call if you have any questions.