S&P 500 at a 5 Year High

Yes, the S&P 500 Index is at its 5 year high, and you’ll hear it shouted from the rooftops this week. We’re happy, and so are many client portfolios.

However, as you will read below, much of the public is their own worst enemy when it comes to getting decent investment returns. They exhibit bad investor behavior, which could be why so many of the masses fail to meet their goals, achieve financial independence or pass on wealth to their families and selected charities.

So, if you pass along only one of our weekly missives this year to your friends, family, and business associates, pass this one along. Our goal is to help everyone we can in some way and whether they admit it or not, they need it! We all do.

Thanks to you as always for your business and kind referrals. We are honored to be actively engaged in helping you meet your lifetime financial goals.

All the best,
Lee and Jeremy


This Week's Quote:
"The Stock Market is designed to transfer money from the Active to the Patient."~Warren Buffett


J.L. Davis Thoughts This Week:

Predictably, the financial media is all atwitter over the fact that the S&P 500 stock index has reached a five-year high as of last week. Just as predictably, millions of investors will start committing larger amounts of money to stocks in the coming weeks and months in our view. Proving once again that investor behavior, taken as a whole, is often misguided. It’s not that markets might not move higher still, just that a wonderful run has been missed by many already…for no good reason.

In fact, committing large sums to the equity markets as a percentage of one’s wealth at market highs can often be a prescription for poor results. The idea is to buy low!

According to Greg Fisher, CFA, in his article Behavioral Finance: the High Cost of Emotional Investing, over the 15 year period ending in December 2010, the S&P 500 index generated a 6.66% annualized total return, while the average investor in mutual funds tracking the S&P 500 over the same period saw net returns of 1.03%*. Mr. Fisher opines that investors underperform because of their tendency to “exit before they make gains” and “chase results.” We think he nailed it!

By contrast, we generally advise clients to invest in a well-diversified portfolio that can include multiple sectors of the stock, bond, real estate, commodities, and currency markets among others. We suggest that their portfolios match their risk tolerance and be carefully constructed to support their personal goals. Often, we use “stops” on ETF positions, and a “sell discipline” based on the relationship of the monthly close of the S&P 500 index to its one year moving average to help protect equity accounts from significant loss.

While there is no perfect formula for investing, our observation is that over time those who have followed strong core investment principles like those above have tended to do quite well. Sadly, many “do-it-yourselfers” along with the misguided or uninformed seem to react to the emotional roller coaster promulgated by almost all media, getting into equities when news turns good (e.g. usually after a nice run) and getting out when the news turns bad (e.g. usually after a loss). That’s the opposite of what we believe to be smart investing.

So while we are delighted to see the S&P 500 trading at a five-year high, we will continue to emphasize themes of diversification, rebalancing, proper allocation, and proper alignment of portfolios to the risk and specific goal attributes of each individual client. And a well thought out, consistent approach.

Still, stock market highs do feel good, don’t they? Perhaps even better to us and our clients than most.**

*http://seekingalpha.com/article/1064971-behavioral-finance-the-high-cost-of-emotional-investing


Market Week: January 28, 2013

The Markets

Domestic equities had yet another good week (as long as they weren't Apple). The Dow was less than 2% away from its October 2007 all-time closing high of 14,164, and the S&P 500 was just under 4% away from a similar milestone. However, the Nasdaq struggled against the headwind created by Apple's post-earnings drop.

Last Week's Headlines

• Global economic growth will continue to be sluggish during the coming year if the International Monetary Fund's latest forecast proves correct. The IMF's latest report sees a 3.4% global growth rate; that's better than the 3.2% expected for 2012 but slightly lower than last October's forecast. The IMF also predicts a 2% growth rate in the United States and sees Europe slipping back into a 0.2% contraction, though the report also said a European recovery could help push global growth to 4.1% in 2014.

• Sales of new homes fell 7.3% in December, according to the Department of Commerce, but they were still 8.8% higher than the previous December. The median price of homes sold was up 1.3% for the month and 13.9% ahead of a year ago.

• Despite a 1% drop in December, existing home sales were still at their second highest level in more than three years, according to the National Association of Realtors.® The median home price was up 6.3% from a year ago--the biggest year-over-year increase in seven years--and the 4.4 months' worth of unsold homes was the lowest since the spring of 2005.

• Exxon Mobil reclaimed its status as the company with the world's largest capitalization when Apple capped off a months-long slide by plummeting below $450 a share after its Q4 earnings report disappointed analysts.

• As Timothy Geithner spent his last day as Treasury Secretary, President Obama nominated Mary Jo White to head the Securities and Exchange Commission. As a U.S. attorney, White prosecuted mobster John Gotti and terrorists responsible for the 1993 World Trade Center bombing. Obama also re-nominated Richard Cordray, who has been heading the Consumer Financial Protection Bureau on an interim basis since January 2012.

• The Bank of Japan increased its target level of inflation to 2%; the country has been battling deflation in recent years. The Japanese central bank also will maintain its key interest rate at near zero and extend its purchases of financial assets (similar to the Federal Reserve's quantitative easing program).


Eye on the Week Ahead

Unemployment and the Fed's first meeting of the new year are on tap, and earnings reports from several key tech bellwethers could help remind investors that Apple isn't the only Nasdaq company.

Key dates and data releases: durable goods orders (1/28); home prices (1/29); FOMC announcement, initial estimate of gross domestic product for Q4 2012 (1/30); personal income/spending (1/31); unemployment/payrolls, U.S. manufacturing, construction spending (2/1).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2013