 |
Remember way back to the beginning of the month when everything was new and there was a real sense of hope and excitement! Neither do we. We entered the year believing the equity markets were overly optimistic and still the markets moved upwards over the first couple of weeks. However, since January 19, the markets have been declining. The question is is it a correction or just a breather? We saw a similar decline in late October when the S&P fell from roughly 1,100 to 1,050 and then turned around and returned to 1,100 in two weeks. We could be replicating that round trip.
We've stated for a while that the markets were likely to correct as much as 15 to 20% during 2010. We didn't know when, however. Given the lack of crystal ball, we hedged our client portfolios exposure in U.S. equities so clients maintained equity exposure, which is valuable over the long-term, but had some downside protection if and when a decline occurred. If we're undergoing a correction now, it is earlier than expected but not a surprise and we'll be happy with whatever protection our hedged strategies can provide.
Entering the year, economists were forecasting GDP growth at roughly 3% for 2010, while investment strategists were forecasting earnings growth (S&P 500 constituents) of roughly 26%. Sustainable earnings growth like that can't occur at 3% GDP growth. It can be done short-term through cost containment but that can only be taken so far. To be sustainable, gross revenues need to increase and 3% GDP growth (particularly when most of that is via government spending) makes top-line growth challenging. Hence, the liklihood of a correction. Welcome to reality!
We continue to believe economic growth will be very low this year, unemployment will remain high and companies will be challenged to meet increasingly overly optimistic earnings expectations. To us, this view suggests a challenging year for U.S. equities.We're more optimistic outside of the U.S. and with regard to fixed income, though risks remain substantial.
|
|
The Survey Says!
|
The January Bulletin contained an article asking readers to click through and complete a short 5 question survey. We promised to report on the findings so here are the results!
1) Are you maximizing your 401k contribution? 75% stated yes. This remains the best method to improve your retirement income (for many it is the only method short of working indefinitely!).
2) Are you content with your current 401k asset allocation? 66% said yes. Several noted their plans offer poor options. Sadly, this is not uncommon. Plan advisors seem to fall into two common traps - too many options which causes information overload for participants or too few options which contribute to poor asset allocations. Remember to revisit your allocation at least semi-annually if not more frequently. If you have an advisor for other assets, ask the advisor to review your 401k as well.
3) Economists expect corporate earnings to increase by more than 25% in 2010, do you agree? 75% said no, earnings will increase by less than 25%. Good for you! You're listening to us! You also possess more common sense than most economists!
4) Do you expect to spend more or less in 2010? A slim majority expect to spend less. This may seem surprising (why was it not a clear majority?) but it isn't to us. Consumer spending was essentially flat year-over-year for the period ending 11/30/09. We are creatures of habit and spending is part necessity (food, mortgage, clothing, etc) and part habit. It's very difficult to change our habits. We have, as consumers, been good about cutting back on our use of credit cards, however, which is excellent for our long-term financial health.
5) As we enter 2010, what are your top financial concerns? The majority of answers centered around economics and government regulation and life events. All reflect the uncertainty surrounding our current government - will we see a return of high inflation, higher taxes, greater regulatory costs, etc. All tie together as well. More government spending leads by necessity to more taxation (government's only true form of income) and more fiscal stimulus increases the probability of inflation. Trying to plan with uncertainty is challenging and requires ongoing diligence. We believe we will see higher inflation though its unlikely before late 2011/early 2012 and higher taxes given the consistent increases in spending we're witnessing today. Good financial planning with realistic assumptions and realistic inputs (what are you really spending!), can help as will routine, frequent updates.
Thanks to everyone for participating! |
|
Your Job Matters
When Building Your Portfolio
|
 From Michael Zhuang @ Morningstar.com
Should Careers Affect Asset Allocation? |
|
Two
twin brothers are both attorneys. One practices merger and acquisition,
the other practices bankruptcy law. They married a pair of twin
sisters. Their financial situations, risk tolerance and goals are all
identical. Now given that merger-and-acquisition activities are cyclical
to the economy, while bankruptcy is counter-cyclical. Would you
construct different portfolio asset allocations for the two brothers?
How? Why?
|
This question was recently posted on Morningstar.com by one of the site's writers. I responded, something I rarely do, because I do believe this is an important component of effective asset allocation. My response was:
"I would treat each brother differently. I would consider this similar
to managing a corporate pension fund. Ideally, the pension fund is
allocated such that performance is counter cyclical to the performance
of the underlying business. As a result, when business is good, the
pension is funded and when business is not good, the pension is
self-sustaining. In the long-run this benefits both participants and
the company.
Similarly, incorporating the occupation of a
client into his/her asset allocation is, to me, prudent investment
management. I make a point of doing this with all clients and
frequently minimize portfolio exposure to the specific industry in
which the client works to minimize this risk."
Thus, the financial advisor should construct an asset allocation that will provide some downside protection relative to the respective occupation. For example, if you're in insurance, I would most likely reduce your portfolio exposure to financials. If your in technology, I'd reduce your exposure to technology. The assumption is you have enough exposure to the sector through your compensation and don't need more in your portfolio. Keep this in mind when constructing your portfolio or when you next meet with your advisor to discuss your portfolio.
|
|
|
Thank you for reading the Bulletin. I hope you find it enlightening. As always, if there is anything I can do for you, just let me know!
Sincerely,
John P. Middleton, CFA, CAIA
Brighton Financial Planning, Inc.
908-892-5958
john@brightonfinancial.com
|
|
|
 |
What If I Lose My Job?
|
|
Very few of us have the luxury of not considering this possibility at some point during our careers. It's certainly at the forefront now!
Even if you're confident about the security
of your current position, it never hurts to have a safety net Some of the primary steps are
outlined below.
Having an emergency fund in place can help if you suddenly find
yourself unemployed. Moreover, an emergency fund can also be helpful for unexpected and unreimbursed
medical expenses, big-ticket auto and home repairs, etc.
Conventional financial-planning
wisdom suggets you should keep three to six months' worth of living
expenses in highly liquid accounts like checking or savings accounts, certificates of deposit (CDs), money market
accounts or money market mutual fund.
However, the current environment highlights the value in considering a second line of defense. It is taking much longer than it has historically, to find a new position and many people are running short of funds as a result. Consider holding another cash reserve in short-term fixed income funds which will earn a modestly higher yield than CDs or money market funds and still provide for immediate liquidity if needed.
|
 |
|
|
