|
Flourishing in Changing Times
 A look back at 2009
If you believe that every bull market needs a wall of worry to climb on, then 2009 did not disappoint. Last year the financial crisis sparked fears of an economic depression. Such fears provided the perfect background for stocks to stage a powerful recovery.
The recovery benefited riskier investments the most. Financials, technology, the consumer discretionary sector, as well as emerging markets stocks, have led the way. In the bond world, mortgage-backed securities and corporate bonds were the place to be - the higher the risk, the better the return. Municipal bonds have also seen their value recover.
As of November 30, 2009, major market index year-to-date returns were as follows:
| |
Stocks |
|
| |
Large US stocks (S&P 500) |
+24.1% |
| |
Small US stocks (Russell 2000) |
+17.7% |
| |
Foreign - developed markets - stocks (MSCI EAFE) |
+30.6% |
| |
Foreign – emerging markets - stocks (MSCI Emerging Markets) |
+72.2% |
| |
|
|
| |
Bonds |
|
| |
US Taxable Bonds (Barclay's US Aggregate Bond) |
+7.6% |
| |
Muni Bonds (Barclay's Municipal) |
+12.5% |
| |
|
|
2010 Outlook
The financial crisis is behind us, but there will always be things that will be of concern. Unemployment is high, consumer credit keeps on shrinking and the housing market recovery is stop and go. Manufacturing reports that just came out this morning (December 1st), confirmed expectation of a slow recovery.
Paradoxically, we view such “not so great” news as providing some support for the markets. The biggest short-term risk to both stocks and bonds is that economic recovery may in fact be much stronger than expected! Yes, Wall Street logic may seem twisted at first glance.
In a weak economy, the Federal Reserve has no choice but to keep interest rates pinned near zero, essentially, flooding markets with liquidity for the foreseeable future. Sustained, near zero rates provide fuel for all assets to appreciate because investors find it increasingly painful to sit on the sidelines. In such environment, stocks may continue to rise even if the economic recovery in the US does not impress.
Prices may at times stray far away from fundamentally justified values. As fear gradually dissipates, more and more investors decide to jump in. Ironically again, the more comfortable investors become, the higher the risk of a correction. What type of event might trigger a pull back?
We may have just witnessed an example of such a trigger: the inability of Dubai to meet its debt obligations. For now, the Dubai crisis appears contained by the willingness of resource rich Abu Dhabi to stop any contagion spreading through the affected banks. Despite shrugging the event off with not much fuss, investors will take some time to sort out all of the global implications. If anything, the event served as a stark reminder that the lagged effects of the financial crisis are still very much around.
How can investors find the right balance between the fear of missing out on a good party and the fear of a mean hangover the morning after? The most tempting answer is to set that wine bottle down just before things start getting out of hand. Sell investments right before they start going down. Of course, that is much easier said then done - attempting to time markets is a futile exercise.
The action plan
We believe in a more sensible approach with a proven track record of success. We should focus our attention on activities that we can squarely control; the type of planning opportunities most likely to deliver on your financial goals.
In the upcoming year our financial advisors will work hard to ensure that our clients’ financial house is in order. The implementation of new technologies will make it possible to track progress towards goals in real time.
- Financial goals and objectives should be updated to reflect any recent material changes
- Income and assets should be appropriately protected from the risk of loss
- Tax management strategies should be thoroughly explored
- Estates should be structured for the benefit of the desired recipients
- Retirement sufficiency projections should be updated based on the latest information
- Education funding should be analyzed
It is the thorough application of sound financial planning principles that should also ultimately dictate the looks of investment portfolios. Following an updated review of your overall financial picture, our financial advisors will ensure that your specific combination of goals, risk tolerance, and expectations are accurately reflected in your investment portfolios.
Fortunately, new technology also allows for higher degrees of portfolio customization, the ability to adapt quicker and navigate confidently through shifting winds.
Portfolio Construction Process
We customize investment portfolios through a process-oriented approach of aligning investors’ unique investment goals with the appropriate asset allocation, investment themes and various other features.
We proactively implement tactical shifts to the asset allocation weightings based on market conditions and economic outlook across all managed portfolios. We also proactively implement changes in specific holdings based on economic fundamentals, cyclicality and valuation.
A second major factor to influence investment portfolio design is the investment climate likely to dominate over the next decade. The tail winds that have pushed the world economy over the last three decades (deregulation, globalization and declining interest rates) are now replaced with headwinds (reregulation, protectionism and, eventually, rising rates).
Investors everywhere are facing the dilemma of maintaining adequate levels of income and growth while resisting the temptation of taking on excessive risk. To help clients strike the right balance we have added various new types of specialized investments to our toolbox. Their main purpose is to provide increased stability and benefit from likely sources of future global growth. Investments in infrastructure development, market neutral strategies, hedged strategies and various structured notes are helpful additions to the arsenal of necessary tools needed to navigate through both the opportunities and storms ahead.
As always, your financial advisor is ready to discuss the specifics of your individual situation and the best way to employ all tools at our disposal to help you reach your goals.
|
