Welcome to the August 2009 Brighton Bulletin. This marks the 1 year anniversary of the newsletter. I hope you've found it informative and beneficial and will continue to do so going forward. As always, feel free to forward to anyone you believe may also find it useful.
This month's topics include a brief review of the 2nd quarter economic and market data with a link to a post on my blog, Brighton Perspective which includes a presentation which can be downloaded. I also cover the details of a new white paper I've written regarding using an endowment approach to portfolio management. Finally, I discuss the benefits of using an advisor to help manage your 401k plan both from the plan sponsor's and the participant's perspectives.
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Are We Getting Better Yet?
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The 2nd quarter was a mixed bag. Economic data was weak as unemployment continued to rise, interest rates continued to rise and government debt levels continued to rise. The data generally did not show any evidence of meaningful economic improvement. So why did the equity markets rally so substantially?
My belief is that market performance was driven by the effects of elasticity. Essentially, investors had over-reacted during the fourth quarter of 2008 and first quarter of 2009 and caused prices to decline to a level below "fair value". This isn't surprising as it is occurs frequently in the investment markets. Near the end of March, savvy investors recognized that prices were probably too low and re-entered the market. As they did, markets recovered lead by lower, quality stocks and emerging markets. The question now is will stocks continue higher?
I believe the evidence suggests that the developed markets economies - the U.S., Western Europe and Japan, will improve very slowly over the next 18 months. Consumers continue to pay down debt and save cash as they hedge the risk of unemployment. Corporations continue to run down inventory and cut costs to maintain earnings growth and meet earnings estimates. The increase in savings and "de-levering" of consumer and corporate balance sheets translates to a much lower growth economy. Low economic growth without the benefit of debt to create leverage translates to low market growth.
Click HERE to read more at my blog including my thoughts on which markets may offer more promise in he near future and to download the 2nd quarter review.
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Sentinel Portfolio
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 Endowments are well-known for managing investment portfolios with significant exposure to alternative investments. These portfolios often out-perform traditional balanced portfolios particularly in poor markets. Endowments typically target a return of roughly 10% annually. They aren't required to spend a set percentage of their value but assume they'll spend 5% each year to meet University obligations. They then intend to match inflation and cover fees and expenses. Hence, the 10% target.
Most individual investors should have a similar objective. As individuals, you're investing for the future - retirement, generally, but you're also saving for future weddings or college or family trips. You have real spending objectives that are probably increasing at the rate of inflation, if not more, as you age. Consequently, you should have an absolute, not a relative, return objective. You need your investments, whether taxable or tax-deferred (such as 401ks) to earn a return that covers your fees, meets inflation and provides some upside. At the same time, you need to hedge downside risk such as we experienced in 2008 and early 2009.
How do you accomplish this? I argue that it can be accomplished by building a portfolio with two key components - a core portfolio and a satellite portfolio. The core is a lower volatility portfolio comprising strategies that may short stocks or otherwise hedge long market exposure. This portfolio is considered strategic and will be left alone with only periodic rebalancing. The satellite portfolio is a higher volatility, higher return portfolio comprising strategies that are typically long only. This portfolio is considered tactical and will be rebalanced more regularly.
The strategy is implemented using open-end, closed-end and exchange-traded funds. There are limitations when incorporating retirement plans but the possibilities for a Sentinel Portfolio exist.
To learn more click HERE to visit my blog post and download my white paper on the Sentinel Portfolio.
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401k Management |
 Much has been written about 401k's over the past 12 months. Many investors over-allocated to equities and consequently had more risk than was necessary. There are many possible causes for this most stemming from a lack of investment knowledge.
Plan sponsors and participants can benefit from retaining a financial advisor to provide educational services. The plan sponsor has a fiduciary responsibility to the plan participants to provide diversified investment options and reasonable expenses. An advisor can assist in investment plan design and implementation and can help with investment option selection. This can help the plan sponsor meet the fiduciary obligation.
Participants can benefit from educational sessions that help improve their awareness of investment options, asset allocation and economic and market performance. Participants can potentially improve their performance via better understanding of their risk tolerance, time left until retirement, value of asset allocation, etc. Thus, plan sponsors and plan participants can benefit from introducing a financial advisor into the plan arrangement.
Participants using a financial advisor can also benefit by including their 401k assets in the advisory arrangement. Advisors can provide participants advice regarding asset allocation and investment selection on a periodic basis. Often, this involves providing the advisor the plan information on a quarterly basis. Another approach involves the use of an aggregation service. Under this arrangement, the participant provides the advisor the account information so he/she can automatically download the information an a daily basis and can provide potentially real-time advice to participants. Either arrangement can work well and can provide benefits to participants. If you're working with an advisor now and haven't included your 401k, considering doing so.
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As always, consider your personal situation before implementing an investment strategy. Understand your own risk tolerance, investment objectives, time horizon, etc (essentially your personal investment policy statement) and consider the effect any new investment or strategy may have on your plan. Feel free to contact me if you have any questions, comments or future article topics. Again, also feel free to forward this to anyone you believe may find it interesting.
Sincerely,
John P. Middleton, CFA, CAIA
john@brightonfinancial.com
Brighton Financial Planning, Inc.
1728 Rt. 31
Clinton, NJ 08809
908-730-7000
908-892-5958
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What is an ETF?
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From Wikipedia: An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.
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