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sscascadeinv / March 26, 2013

Wealth Notes – March 26, 2013

New DOW Record.  What Does That Mean For You?

By Rob Wrubel, CFP®, AIF®

Last week the Dow Jones Industrial Average, the DOW for short, hit a new all-time high at the close on Monday March 11 at 14,447.29. The DOW hit a low in recent years in March of 2009 and it was hard to find an optimistic person or commentator who thought the US stock market would ever regain any of its value. Today, cocktail party conversations have turned back to conversations of how “my stock did better than that” and “can you believe this market?” The panic, fear and dread of opening statements have turned into a renewed expectation of gain in a portfolio.

So where does a rational investor, who is planning for future income and asset growth, go from here? We invest for several reasons. One is to have our asset values keep pace with inflation over time. Another is to generate income to be used for current living expenses, especially true for those who live off wealth, have money in trusts or are retired. We invest to take advantage of the potential of compound growth – to have our money make more than inflation over time to increase the chances of generating future wealth. We also invest to pass assets along to future generations or charity by having our current values increase over time.

Investing for the long haul requires a certain amount of patience and determination. Successful investors have a plan, an investment policy and goals – and stick to and manage to those over time. Short term movements of markets do not mean the plan changes though it does often cause the need for portfolios to be reviewed and rebalanced.

One part of the process of comprehensive wealth management includes creating target asset allocations and building portfolios. This is the investment process we follow when working with clients before making the decision about what securities to buy. Investment managers and financial planners like those of us at Cascade Investment Group have thousands of options before us each day when making investment decisions. We could buy Coke, Pepsi, Budweiser, Absolut or many other companies in the beverages sector alone. Or, we can take investor capital and buy a bond, a certificate of deposit, a Treasury bill, real estate investment trusts, gold trust shares or put money to work in dozens of asset classes or styles.

So where do we start and what does this have to do with the recent run up in stock prices in the United States that got the DOW to an all-time price high? Do we keep chasing stock market returns, reallocate to bonds or something different?

One issue that jumps out is that it is difficult in today’s interest rate environment to maintain target allocations or reallocate capital into traditional US government bonds and bond funds that track the overall US bond market. The Federal Reserve has had a multi-year policy of seeking to keep short-term and long-term bond rates low. They have wanted to stabilize banks, let companies borrow at low rates to invest in business growth and to help individuals refinance mortgages at low rates. We think it will be hard to maintain income or asset levels over the next three to five years in US government bonds.

Cash pays next to nothing whether in money market funds or CDs.

The stock market in the US is looking slightly under-priced to fairly-priced in our view. There are two areas where we think support for current levels and higher levels in stocks look likely. First, significant amount of funds sit in cash and bonds and those funds have been moving into stocks. It looks like this trend will continue. Second, the US economy keeps moving along at its slow and steady pace. This is positive for stocks even if the pace of growth does not change. We could see an uptick in the growth of the economy, which means even higher stock prices if corporate profits rise as a result. This trend looks to be similar in China, Brazil, Europe, Japan and more countries so our thoughts on the US and international markets are similar.

Building portfolios to last a lifetime does not mean taking excess risk even if it looks like one asset class is over-priced and another under-priced. No one has invented the crystal ball of investing that tells us when markets will change and in which direction. You can find economists, media talking heads, market “experts” and commentators to support any view you wish to take.

Your review this year with us will include a discussion about bond prices and opportunities to generate income in bonds, stocks and other asset classes. We will review why we invest in stocks, especially, and whether or not your portfolio contains enough, too much or the right amount according to where we think the market is headed and your planning needs.

The level of the DOW matters to each of us as investors. It matters differently to each of us depending on our age, income needs, planning goals and tolerances for risk.

Our meetings and conversations are vitally important as part of the process of managing your money and wealth over time. We look forward to talking with you soon.

Rob Wrubel CFP®, AIF®,is a Senior Vice President, Investments with Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.

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Cascade Investment Group, Inc. is a dully registered broker-dealer and registered investment adviser. Advisory services are only offered to clients or prospective clients where Cascade Investment Group, Inc. and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Cascade Investment Group, Inc. unless a client service agreement is in place.

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