Perspectives

March 29, 2012

It’s been 3 ½ years since Sept 2008 when we first experienced the start of the global financial incident and the following market decline and recovery. Portfolios are currently close to, or at pre-decline levels but we still need to make up for the 3 ½ years of the growth we expected. Global government debt levels have made the recovery volatile and challenging for us, believing a recovery would occur given the media coverage and predictions.

Investing requires patience and a double dose continues to be required of us now. When we look at the fundamentals of the businesses we are investing in, (P/E, revenues, sales, balance sheets) the eventual direction of their shares must be up. Changing our long term strategy now will impact our long term returns negatively.

We are experiencing something that has only happened once, maybe twice in investment history. Stocks are at valuations not seen other than at the bottom of market declines, businesses are increasing their dividends because they have strong balance sheets, with lots of cash and unlike governments, low or manageable debt. Bonds have ended a 30 year bull market with low interest rates predicted for some time. The global and US economy continues to grow slowly – against all odds. The only reason equity markets are lower than they should be is due to the high government debt in Europe and North America, who have on average, debt to GDP ratio’s not seen since after the second world war. This has caused many to be concerned with the value of our currency with governments printing money to stimulate growth.

The question investors will have to answer for themselves is where to put their faith and long term future financial security:

1 – in paper currency by remaining in cash, GIC’s, and bonds.
2 – gold – a metal that produces nothing and increases in value when fear of the future increases
3 – real estate – which has a long term average of 4%
4 – businesses – who collectively have increased shareholder value through their profits and dividends averaging 7% long term

Against all odds and the predictions of so called experts, quality businesses (which can be purchased through diversified equity portfolio’s) have prevailed throughout history. In a free market, most businesses earn a profit over time and distribute that profit to shareholders through capital growth and/or dividends. Having faith that this will endure is a necessary quality of the modern investor.

The following are interviews and articles with a few industry experts giving their opinion on the current equity market.

The following is a video interview with Warren Buffet on the US economy: video

This is an interview with Scott Richard and Jeremy Siegel, Wharton Professors of finance, on the current US market.

video

Dow Closes over 1300 for first time since 2008. Article

The following letter is an excerpt from Warren Buffet shareholder letter explaining his opinion on stocks, gold and bonds.

Letter

Defining Risk

Most investors, with the help of the media, define risk as the potential for loss of market value within the next 12 months, or shorter. Calling these individuals investors is a misnomer – they are speculators.

Warren Buffet, chairman of Berkshire, defined risk in his annual shareholders letter as potential for loss of purchasing power. He is now warning that those investments the media is focused on are exactly the wrong place to invest.

Letter

“Right now bonds should come with a warning label.”
— Warren Buffett, February
2012

Dollar Cost Averaging Works

In my review of client portfolio’s and performance over the last 10 years of volatile markets, the one strategy that maximized returns most was dollar cost averaging.

The client portfolio where a regular small monthly investment was made through up and down markets (referred to as dollar cost averaging or DCA) produced the best overall return. These portfolios also often experienced the lowest volatility and least risk of the portfolio dropping below its original investment.

DCA automatically purchases investments through up and down markets and eliminates the investor’s emotional response to negative news. It also “pays the investor first”, another proven winning strategy.

If you are not already making your investments using a monthly automatic withdrawal, I recommend calling our office to set up a plan.

How Motivation Really Works

Studies have been done for some time confirming how we like to be motivated – and its not necessarily through financial incentives. This Ted talk reviews the results of current studies on motivation – a must read for anyone who manages people.

Ted Talk – Motivation

Email delivery of Statements – It’s here and you need to sign up!

Our dealer, FundEX is now required to deliver statements to our clients’ quarterly vs annually. To help eliminate the paper mail you receive, FundEX has created a new client website allowing each client to set preferences for delivery of their statements.

If you want to receive hardcopy statements four times per year you do not have to do anything.

If you would prefer the convenience of email notifications and on-line statements and having on-line access to your accounts you need to sign up!

You’ll see a notice included in your 2011 statement mailing regarding our new on-line website for accessing your account and making changes to your profile and preferences.

You will need one of your recent statements from each account with a different name (individual, joint, ITF etc) to sign up. These statements have your client number and your fund company number.

Webconnect sign in site https://client.fundex.com

Sign up before March 31st and get the chance to win an Ipad2!
As always, if you need help setting this up, contact Nancy at 1-613-271-9994.