4thQuarter 2011 Client Commentary
Dear Valued
Client:
The end of the year is always the time for reflection on the year just completed, and looking forward to the year ahead. Thus the Roman god Janus, for whom the first month of the year is named, had two faces, so that he could look forward and back simultaneously. Looking back, 2011 was a year marked by crises, both natural and man-made. The tsunami in Japan, in addition to the untold and incalculable human cost, had worldwide economic reverberations. The Arab spring brought instability to a region where the world desperately desires stability, but also the hope of change for the better for millions of people living under oppressive regimes. The “crisis” over raising the national debt ceiling, in quotes because it was both manufactured and a bit of political theater, highlighted more the dysfunction in our political system than any real effort to address the looming problem of our budget deficit. More than any of them, though, the European sovereign debt crisis will likely be the one that is best remembered for its impact on the world economy and investment markets, and may carry over into 2012.
It was a disappointing year in the equity markets, with the US markets just squeezing out a slight gain, thanks mostly to dividends, and the international markets posting steep losses, considerably worsened by a strong dollar. However, given the number of crises we faced, some of which remain unresolved, it could have been far worse. What investors will likely remember is the stomach churning volatility that plagued the entire year. In 96 of the 252 trading days last year the S&P 500 moved more than 1%. 35 of those days it moved more than 2% and 12 more than 3%! By October 3rd the market was down 12.6% from the beginning of the year, and more than 19% from the April peak. The international markets fared even worse, down more than 20% year to date at their worst, and more than 27% from their May peak. With all this volatility it is hard to believe that investors in a well diversified portfolio finished off the year close to even or slightly in the red depending on the risk level.
Extreme volatility and the threat of another global banking crisis have increased everyone’s anxiety over the near future of the investment markets. As is always the case at the start of a new year, everyone is looking for answers. Predictions range from the dire, with another 2008-type melt down, to the ebullient: One particular email received said “2012 looks like 2009.” If 2011 taught us anything it was the inanity of trying to predict short-term movements of the markets. In 2010 interest rates were supposed to rise precipitously, the dollar was supposed to weaken considerable, and the US economy was supposed to continue to strengthen. None of these happened, and, as we have seen so many times in past cycles, those who were hurt the most were those who made significant moves based on these ‘certainties.’
We have discussed many times in previous commentaries that investing is a necessarily long-term endeavor, and as such making predictions about what will happen in the next 12 months is of little value. With all of the various forces at work in the investment markets, the odds of consistently benefiting from predicting short-term movements is somewhere akin to the odds of picking 1 number out of 38 on a Roulette wheel. Since markets are volatile, there is a very real possibility that what you invest today may be worth less after one, three, or even five years. But volatility is not loss. By making sure you maintain the proper perspective on your investments, you will “generally [be able to] afford to wait for prices to converge toward economic reality.”[1] This avoids turning volatility into permanent impairment of capital.
We must always keep in mind that as equity investors, we are becoming part owners in a business, and, as anyone who has started a business can attest, there are often long periods where your investment exceeds the value of your interest. The successful businesses are those that accept the short-term temporary impairment of value, volatility, in order to reap the benefit of long-term value creation.
As we move forward into 2012, we hope that the markets and the economy will continue the gains we saw in the 4th quarter, but we remain cautious. There are still many challenges ahead. The European debt crisis is yet to be resolved, which poses significant risk to the world economy. China showed signs of weakness in 2011 that is cause for some concern. We are also facing a potentially rancorous Presidential election where economic issues will be at the fore. Based on these risks, we continue to maintain a balanced view of the near term. We recommend carefully estimating your cash needs for the next 12 to 18 months, and making sure those funds are held in safe, liquid investments, and only investing money that has an adequate time horizon to weather potentially continued volatility. At current yields, we suggest a bank account or FDIC insured CDs versus money markets. Since money market’ yields offer little to no premium, there is no reason to take the slightly higher risk they represent. For our part, we will continue to review our investment positioning and make those changes we feel are necessary to protect your capital, while preserving the opportunity to benefit should the markets continue along the path set in the 4th quarter.
We thank you for your trust in Comprehensive Investment Solutions®, and look forward to continuing to work with you in the years to come.
Sincerely,
Thomas N. Alvaré, CPA/PFS
President
Robert M Vogel, CFP®
Chair, Investment Advisory Committee
Ryan Barrett, CFP® William T. Reynard, CFP®
Financial Advisors
[1] Ben Inker, “The Hidden Risks of Risk Parity Portfolios”, GMO White Paper, March 2010