Spring 2012 – Newsletter
There’s little doubt that he’ll beat me like a drum once he figures out that the object of the game is to get the ball in the hoop and that strong fundamentals supersede aesthetically pleasing endeavors. The first two months of 2011 saw the market rise 12.41 percent, only to be dead even at the end of the year – some buzz kill that was. Right on cue: 2012 is off to a blistering start.
It’s doubtful that many comfortably retired people complain about the returns on their portfolios. It would, on the other hand, be interesting to know how many investors who can’t afford to leave the workforce once boasted huge gains at a time when they were on track to retire, right before the bottom fell out in 2000 or 2008. We never seem to learn our lesson. According to Standard & Poor’s, there have been 16 bear markets since 1929, they happen every 4.8 years and the average decline is 38.24 percent.
It can be said that I have an unconventional way of managing money. Perhaps, but how did the traditional approach help you in 2000 and 2008? Despite evidence to the contrary, style box bingo hasn’t saved anyone’s life savings and the blue chip buy and hold fairytale has seen better days – of the largest 10 stocks on Jan 1, 2000, nine were underwater 10 years later and five of them still haven’t recovered as of this writing .
The remedy, of course, is to diversify accounts with baskets of stocks that in aggregate reduce risk, albeit at exorbitant costs invisible to the lazy eye of regulators. Sure, the prospectus might suggest a one percent expense ratio, but dig deeper and you’ll see that once trading costs and other expenses are taken into account, investors pay an average of more than three percent , and that’s before their financial advisor charges an additional fee to manage the portfolio.
In fact, investors who review their portfolios will likely see the names of firms owned directly or indirectly by a who’s who list of well-respected Wall Street companies with strong ties to Washington. You might also recall that Lehman Brothers, Bear Stearns, Merrill Lynch, Drexel Burnham, Dean Witter, Paine Webber, Solomon Brothers, AIG, Prudential Bache and EF Hutton all had their day in the sun, losing money the old fashion way. All of this begs the question: if the titans of Wall Street are so adept at managing risk, why are there so many dead bodies?
At the end of the day, the object of retirement planning is to retire. The purpose of estate planning is to give what you want to who you want when you want with the least amount of taxes and administrative costs possible. We invest our money so that the funds will be there when we need it, and in such supply that it will last throughout our lifespan, regardless of who becomes president or which country is on the verge of default. These objectives are not ancillary missions; they’re the point of the entire exercise.
And while investors seek comfort in green lines, orange numbers and those iconic pictures of middle aged couples strolling along the beach holding hands, the world has grown increasingly complicated. When Quantitative Easing II expired in July of 2011, the market dropped by 15 percent over the next six weeks and only rallied after the Fed stated they would keep interest rates artificially low . Once again, stocks avoided a day of reckoning, their unofficial bailout financed by people who diligently saved money and have no yield to show for their efforts.
To its credit, Europe resisted counterfeit measures to fix decades of reckless economic policies, fearful of hyperinflation that engulfed Germany during the Weimar Republic. Each unflattering headline, however, led to market declines later rectified by news of stabilization funds, long term refinancing operations and IMF assistance. Talk might be cheap, but fake money is quite the bargain.
The stock market used to be a place where companies could attract capital to finance business activities in exchange for equity. Share prices cooperated accordingly, reflecting potential profit and fundamental analysis to determine a fair value. Today’s climate demands a different approach, one that addresses both the symptom and the disease.
Fervent monetary policy is government’s reaction to a terrible cold, a sign that the unimaginable has become possible, a functioning system atrophied into something far less authentic. These are the actions of sovereign nations who can’t possible pay their bills, and still in possession of unparalleled survival instincts, resort to methods that go beyond the scope of free market activities.
The argument can be made that the Federal Reserve’s actions were unconstitutional; that our founding fathers believed only Congress had the ability to create money. A valid argument indeed, except that time was short, dominoes began to lean on one another and consumer spending wasn’t 70 percent of America’s 18th century economy.
How ironic that the fountain of hope may come from a most unlikely source. Health care is 17.9 percent of the economy and threatens to bankrupt the country, although costs have slowed substantially. In fact, total nationwide health care spending grew less than four percent per year in 2009 and 2010 , the slowest annual pace in more than five decades. If the growth in Medicare were to come down to a rate of only one percentage point a year faster than the economy’s growth, the projected long-term deficit would fall by more than one-third.
Even the economic recovery has been accomplished without the usual government jobs gimmick, in which the federal government hands out work to support a struggling economy. To the contrary, since June 2009, 584,000 public sector jobs have actually disappeared . Had these jobs increased at the same rate as they did in the previous three recessions, the economy would have an additional 1.2 million government and 500,000 private sector jobs, bringing the unemployment rate below an estimated seven percent . Look dad, no training wheels!
Nevertheless, investors have the unenviable task of protecting assets against fiat currency while simultaneously participating in central bank induced rallies and navigating a nebulous web of economic growth. Ben Bernanke’s most recent carrot remains intact, as stocks are enamored by the Fed’s latest peace offering. We’ll know in due time if somebody else holds the stick.
It has, however, become a race against time, our economy speeding towards an oncoming truck carrying $15 trillion of debt and explosive derivatives, hoping to make it to the exit ramp just in time. Congress and the administration have borrowed money to reinvest in a family business that’s seen better days, banking on higher tax receipts and reduced dependence on a federal government that subsidizes 50 percent of all U.S. households through one program or another .
But if we can be honest, we know what doesn’t work and who doesn’t work for our best interest. So with all of that said, what’s your game plan? How much money will you need, how did you arrive at the number and how can you protect it against all of the unprecedented uncertainties? My son seems to think I’m old school, and maybe that’s not such a bad thing. After all, sound defense, strong fundamentals and talented players win championships, not the network sponsors paying top dollar to keep the cameras rolling.
Securities offered through LPL Financial, Member FINRA/SIPC (http://brokercheck.finra.org/). Investment advice offered through Delancey Wealth Management, LLC, A registered investment advisor and separate entity from LPL Financial.
1. The ten largest stocks on 1/1/00 were Coca Cola, General Electric, Altria, Disney, Merck, WalMart, Exxon, Alcoa, Home Depot and Hewlett Packard.
2. The Real Cost of Owning a Mutual Fund; Forbes.com; 4/4/11
3. Wild day on Wall Street; Dow soars 430 points after Fed telegraphs a slow recovery; CNBC.com; 8/9/11
4. In Hopeful Sign, Health Spending Is Flattening Out; New York Times; 4/28/12
5. Public-sector job losses, An unprecedented drag on the recovery; Economic Policy Institute; 4/4/12
6. American Austerity; New York Times; 4/25/12
7. Government assistance expands; CNN.com; 2/7/12