From time to time we show a chart that compares the 20-year return of the stock market with the returns of the average investor.  I thought I'd take that one step further and see how the average investor performed against some other types of assets.  Once again, over the long term, the average investor continues to lag not only stocks, but also bonds, gold, real estate, even inflation!  
 

Sources: NAREIT, Standard & Poors, Barclays Capital, U.S. Energy Information Association, World Gold Council, Federal Housing Finance Agency, MSCI, Bureau of Labor Statistics, Dalbar, JPMorgan.

The obvious question is -- how can that be?  While there is no definitive answer, human behavior is the most likely culprit.  When it comes to investing, we as humans tend to attach more significance to recent events.  Combine that with our fear and greed impulses and the fact that the pain with taking a loss is 2.5 times stronger than the positive feeling that comes with a win, and it's no wonder average investors have trouble with their investments. 

This behavior continues today.  Right now, according to the Investment Company Institute, mutual fund investors as a whole have only just begun putting some money back into the stock market after taking out over $200 billion between October 1, 2008 and April 30, 2009, during the bottom of the last bear market.

Using the information in the chart above, even if the average investor puts together a conservative portfolio of 60% bonds, 15% U.S. stocks, 15% International stocks, and 10% gold, his annual return would have been 6.6%, over twice the rate of inflation.  To put this in real money, a $100,000 investment earning a 6.6% return over 20 years would be worth $359,000 while that same investment earning 2.3% would only be worth $158,000.  Many of these average investors could also be labeled amateur investors since they don't use a financial professional to assist them with their decision-making.  This brings to mind an old saying, "If you think professional help is expensive, you should see what an amateur costs."  

I have no doubt that average investor performance will continue to be poor as he continues to let his emotions get the better of him.  As a professional advisory firm, it is our job to not only navigate the investing landscape, but to also help you keep your emotions from derailing your financial future.  It's a role we take very seriously and we appreciate the confidence and trust you have placed with us. 

Each year we take on a limited number of new clients, primarily through referrals.  If someone you care about may be able to benefit from the services we provide, please let us know.  We'd be happy to speak with them to see if we may be able to help. 

- Mike Jones 

Tax season reminders!

• 1099s were mailed on or before February 16. Please wait until late February to call our office.
• K-1s will be mailed on or around March 15.

JSW Financial has some terrific events coming up. Please make plans to join us!

Client Appreciation Event

A celebration of you!

When: Tuesday, March 29th at 6:30 p.m.

Where: Holiday Inn, Blacksburg

Details to come 

Old Pros Band Benefit Concert

Sponsored by JSW Financial and the Lyric to benefit the YMCA of Blacksburg

When: Saturday, April 9th at 3 p.m.

Where: Lyric Theatre

Tickets are $5 each 

Joel's daughter, Emily, and her husband, Wilson "Wil" Smith, became the proud parents of a son, Emerson Smith, delivered on Feb. 4, 2011 at 1:28 a.m. Joel became a first-time grandfather, affectionately referred to as "Buddy."

I don't quite buy into the market theme by most mutual fund companies: "Don't Worry, Be Happy," Bobby Ferrin's old Grammy Award-winning song. "Be Wise, Be Happy" may be preferred. Here is my opinion on the current headlines:

Egypt: Good news. It may not be as bad as projected by the headlines.

There are a lot of young males unemployed in several Middle Eastern nations. Food prices are increasing with little hope of jobs within the near term, particularly in countries with little to no oil. Becoming active in a change for their country is certainly understandable, and can lead to a revolution.

There can be benefits and negatives. Benefits are obvious for a better life, but these are long term. The negatives are an unstable local region that could extend to a larger global problem in the short term.

In my opinion, this will likely be another Iran-scaled project during the days of Carter. Saudi Arabia has too much at stake to let the Egypt situation get out of hand. They will not allow this to create a disruption in oil prices. They can simply produce more oil to stabilize any price increases due to the Egypt situation.

Thus, given the data, I am not as concerned about oil prices spiking due to Egypt. Oil companies could use this as an excuse, however. But that will be short-lived.

Unemployment: Continued problem. Don't believe the media/government spin.

As we have discussed in previous newsletters, this is my single biggest concern.  I simply do not agree with this month's positive spin on unemployment dropping to 9% from 9 ½%. The largest two-month declined in unemployment since 1958. Right!

Here are the facts:

• "Structural unemployment" is a fancy economic term used to say the unemployment numbers are a lot worse than what is being reported. Snow storms in the Midwest and East last month caused many unemployed to simply stop looking. Thus they were not counted as unemployed, and the percentage looking for jobs went down. Voila! Unemployment is dropping!
• Another distortion is that those employed are laid-off supervisors and managers of companies that are now flipping hamburgers at McDonald's. So don't be surprised that increased real estate prices are NOT "just around the corner." That is not going to happen until we get real employment back up. In fact, there is a possibility of another real estate correction if these banks are allowed to continue current foreclosing practices as interest rates become due to reset (possibly 2012-13).

The Stock Market: Caution. The market is still on crack.

The stock market is breaking all normal resistance indicators. January 2011 was the best for the stock market in the last decade. Why? Here are some of my thoughts:

• Investors are concerned when hearing about all this inflation coming, and fixed investments are paying 2%. They are really confused and are re-entering the market, most likely at a top.
• Earnings have improved for large to small companies. Any time the economy stabilizes after a recession, earnings and profits are initially high because revenues are being generated with a smaller work force. Notice, in the short run this does not necessarily translate in to more jobs.
• The problem going forward is that we are entering what is referred to as a "stock picker's market." This simply means not all stocks will go up at the same time. The reasons for this are two basically:
• Those companies depending on basic raw products will be facing rising commodity prices. Thus their profits will be squeezing and unless they are in an industry that will allow them to raise prices, they will go down in value.
• As our economy comes out of this recession moving into a more high-tech manufacturing and service worker profile, there will be less qualified number of workers (Those displaced McDonald's workers will not be called back.) Wages (not number of workers) will go up, causing corporate earnings to decrease. This will lower stock values if these increased costs cannot be passed onto the consumer. This is the longer-term impact as we come out of this recession.

Points from today: Don't be hoodwinked by the current media or government spin.

• Don't spend your energy worrying about Egypt...yet.
• Unemployment is still the most serious issue with the U.S. economy.
• The stock market continues to remain in a dangerous position.
• Our strategy of "absolute return" managers is still correct in my opinion. (See recent past newsletters for more explanation.)

Meanwhile, remember life may not be a series of valleys and mountains. In my opinion, it is more like an interstate where there are always challenges moving in the opposite direction of our dreams, but we are also making progress toward our goals on the side we are traveling. Stays focused on the road in front of you and appreciate that we cannot see 10 miles down the road...because by the time we would have gotten there it would have changed anyway. I will be happy to discuss this philosophy in greater detail.

These are the reasons for my certainty we will all get through these times, as we have done over the past 28 years. Call Mike or me with concerns or questions.

Until next time,

- Joel Williams