CIG Wealth Notes 1/3/11

Farm Inspired Colors and Other New Year’s Thoughts
By Rob Wrubel, CFP®

At this time of year, it is next to impossible to turn around without someone making some prediction about what is coming in the New Year.

Technology writers and show hosts predict that tablet computers will flood the market, that the iPhone will finally come to Verizon and that 3D televisions will replace the current flat-panels. Sports columnists are looking at who will win everything from the Super Bowl to the World Series to the next World Cup (and you can go to Vegas if you think any of them know what they are talking about). Trend and fashion watchers are picking their colors and design styles for next year. According to one blogger, “farm” inspired colors will be hot in 2011 as the trend towards back to basics continues in American society. Look for me to sport pumpkin and corn designed ties next year.

Of course, the investment and economic world is rife with its own share of predictions and prognosticators. We hear it all almost every year. Inflation, deflation, stagflation. Buy stocks, sell stocks. Hoard gold. Only invest in commodities. The debt markets will crush the world. China owns us. Japan owns us. Germany owns us. The dollar is too strong, too weak or irrelevant.

Here at Cascade Investment Group, we do not get too caught up in the trader mentality of trying to time the market for each fluctuation in sentiment, news and the latest craze. You will not find us making predictions about where the S&P 500 will be on December 31, 2011 or whether the economic growth in the US will be 3.1% or 2.6%. We invest for our clients according to their plan, their risk tolerance and their long-term needs. We do know that all the significant asset classes have opportunity for growth and income over time.
To profit in investing, we do want to be sensitive to the economic, investment and political currents of our day. We need to take into account the potential for rising inflation or interest rates, unemployment rates, US, European and Chinese monetary policy and other macro factors that impact trends in investment opportunities.

Ken Beach writes an excellent report on the market a few times each month and most everyone on this list should be getting that as well. Let us know if you are not.

Overall, we prefer a policy-driven investment model, not an event-driven one. We look first to determine a client’s needs. Those include the need for immediate income, asset accumulation, legacy and charitable planning, insurance and other protection and more. We then determine an appropriate asset allocation including holdings in cash, fixed-income, equities and maybe other asset classes like precious metals, commodities and real estate.

We do need to factor in expected returns for each asset class over time and whether we believe those asset classes are undervalued or overvalued at any given time. Unfortunately, many investors act like moths, darting around every time a new candle is lit. They do not remember the path they are on, the reasons they are invested and that investing success means living with the ups and downs along the way.

Right now, we believe fixed income securities—municipal bonds, treasuries and corporate bonds—have a higher than usual expectation of seeing values decline over the next few years. Bonds typically act in the opposite direction of interest rates. When rates rise, values fall and when rates fall, values rise.

Interest rates for both long and short term bonds remain near historic lows. According to Yahoo, the 10 year treasury (one of the key benchmark bond indicators) did not yield less than 4% from 1970 until earlier this decade. The yield on the 10-year in October was under 2.5% and now stands at 3.4%, still low compared to history. We expect interest rates to rise and have expected it for some time. The Federal Reserve keeps unleashing torrents of money to attempt to keep interest rates low in hopes of stimulating the economy and providing cheap money to residential and commercial property owners who need to refinance.

So do we jump out of bonds? Generally, the answer is no. No one can accurately predict when interest rates will actually begin to rise and maintain the increase. Two years ago, many analysts predicted quick spikes in interest rates. So far, nothing dramatic has happened. Investors who jumped out of the bond market were punished with lower yields on their move to cash.

Additionally, investors with bond portfolio could actually benefit over time from the increased yields as those yields are reinvested. Depending on several factors, including how much of the income is reinvested, the speed of rate increases and the maturities of the bonds, an investor may not experience any losses as a result of increasing rates.

If pressed, I am likely to tell you that I think large company stocks offer a good opportunity in 2011. I believe that over the next few years, economies around the world will continue to grow. It could be slower here in the US than China, India or Brazil but large, multinational companies based here and in Europe should profit from the emerging markets exposure. Additionally, many of these companies pay dividends in excess of what can be earned on cash or short or midterm bonds.

I also think investments in emerging market companies have an excellent chance of higher than usual returns over the next decade. Many people throughout the developing world will join the middle class over the next decade and they seem to want everything we have here (and is sold by many of our companies).
Generally, we believe it is best to trim positions we think have become overvalued, add to ones undervalued and rebalance portfolios to target allocations as part of a regular process. Time is on the side of all investors and keeping a steady hand on the wheel of the portfolio usually pays off.

We look forward to speaking with you and reviewing your plans, portfolios and opportunities in 2011.

Happy Holidays.