Money Management & Retirement Planning Advice by Barry Unterbrink, Chartered Retirement Planning Counselor

Wednesday, December 22, 2010

Year-end notes: 2010

The year end is fast approaching, I want to thank everyone for your patronage to my blog posts and ruminations on the markets. May you be blessed with good health and fortune this holiday season and beyond into 2011.


Financially-speaking, we should have much to be thankful for also. The equity (stock) markets have delivered to us a better than norm year of performance. If the year ended today, the popular stock market averages are ahead 11-13%. Narrower indexes are ahead 15-18%, some higher. So a buy-and-hold investor has more coin than when this year started. Our hard work appears to have paid off for clients too - as our mixture of non-US based ETF's and market timing reduced the "risk" of playing catch-up during the Spring and early summer market sell-offs.

But, it's been a rather rocky road to riches. How so, you say? The above results were garnered with five market declines along the way between 4 and 12 percent on the Dow Jones. First, a loss of 5%, then gain of 13%, loss of 12%, gain of 6%, loss of 7%, gain of 10%, loss of 7%, gain of 14%, loss of 4%, then gain of 5% to end up where we are today near Dow 11,560. Recall that every bear market starts with a 5% decline - and you just cannot predict which sell-off will be the "big one" like the 53% decline from 2007-2009 which many investors are still remembering vividly.

Not to toot our own horn too much, but our exchange-traded investments worked quite well this year. Silver, Gold, single country funds, and lately commodity-based investments like energy, grains and coal have kept us ahead nicely ahead of the market averages, while having a measure of cash out of the market or in bond-type investments.

We can take a page from a professional gamblers playbook here. Gamblers are most worried about drawdown, that is...what's the worse loss they can experience and still stay in the game. The deeper the loss, the bigger hole you have to climb out of ... agree? A 10% loss takes 11% to get to even; a 20% loss takes 25% to even, and a 33% loss takes 50% to get to even. As losses mount, the tendency is to make bigger bets to get whole again...a very risky strategy. Using the example above of the actual markets performance, a 14.4% drawdown was the maximum for this year (late April to July 2nd). By early August you were back to even, and by Election Day you surpassed the high value achieved in late April.

Bonds have experienced ups and downs as well. With all the monetary and fiscal schemes our government has tried this year, the end result has not made much of a difference to the average American's pocketbook or job prospects I feel. Savers and investors really have overlapping 'wish lists" when it comes to fixed income or bonds. Savers hope for high fixed rates to provide a decent income, and low inflation that will not eat that income up when they spend it. CD's, money markets and fixed annuities are favored here. Investors wish for that also, but also desire falling interest rates and a slow economy that will raise their bond investment values. Again, it circles back to price stability. How much drawdown can you afford?

Since early November, bond savers and investors have now become subject to principal loss akin to stocks. Interest rates are up about 1% for long term bonds since mid-September - a big jump. They are approaching the 4.85% high near Easter time. Bonds and bond mutual funds had a terrible November, many falling 5% or more since election day to now. When bond interest rates rise, bond prices fall. Cities and states are in financial trouble, and their borrowing costs are rising as well. Today, we just cannot find many reasonable places to put money to work that is not in stock-related investments - so we'll sit on cash for now until more favorable entry points arise.

The balance between stocks and bonds will work out over time. As bond rates rise, and you can lock in higher yields, say a 5% interest yield, then money should flow from stocks back into bonds; now it appears that stocks are favored.

We don't try to predict the markets; they will usually give signs on our charts as to what's working when trends develop. We'll continue to uncover profitable opportunities to invest client wealth while limiting drawdowns in 2011.

We'll check back with you next month.

Barry Unterbrink
Chartered Retirement Planning Counselor

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