Commentary

Fourth Quarter 2011 Commentary
Bill Russo, CFP®

“Despair is inappropriate for a culture as buoyant as our own.” William F. Buckley Jr.

“ A society that place equality over freedom will end up with neither. A society which places freedom over equality will end up with a good deal of both.” Milton Friedman

What started out, as a great year for the markets, became a turbulent one as volatility took over. The fourth quarter was a summary of what took place in the prior three quarters. We had a very strong rebound in October followed by a sharp decline into Thanksgiving. This was then followed by a sharp rebound the following week and continued volatility in December.

Here is how we ended the 4th quarter and the year on a total return basis ¹:

                            4th                     
                        Quarter           2011
Dow Jones    12.78               8.38 
S &P 500        11.82              2.11
NASDAQ           7.86             -1.80

What has caused all of the angst and volatility? It started with the tsunami in Japan, followed by uprisings in the Middle East, the U. S. debt ceiling crisis and ending with concern over the European Sovereign Debt issues.

While it is easier said than done, we must get beyond the attention seeking headlines and market volatility and realize that there are opportunities ahead of us. While inundated with constant chatter about too much debt, extreme polarization of our politicians, high unemployment and concern about the income gap between the rich and the poor, we need to realize there is another side to the story. As opposed to Europe, we have one government and one currency. If our unemployment rate is 8.6% then 91.4% are employed. Our economy is growing at a 2% rate and is the most innovative in the world. Because we do have the freedom to move, choose our line of work and pursue our dreams, we have the opportunity to improve our situation. Those that have succumbed to become dependent on the Government will never improve their situation. If they remove the shackles of dependence, they have the same opportunity to achieve.

What have the last couple of years taught us? Decisions matter. Decisions that we have made throughout our lives have an impact on everything that we do. How seriously did we take our education, what did we learn from experiences that we had earlier and how we applied them as we moved through life? Maintaining and improving job skills are necessary to compete in today’s job market. Availability of information is increasing and causing change to accelerate. We have to adapt or we will find ourselves falling behind. 

This has increased stress and anxiety.  Causing some of us to search for quick solutions or easier methods to attain our goals. Unfortunately, doing so in investing leads to problems. One of the most common is pursuing higher yields in today’s low yield environment. Remember, any yield over that provided by Treasury Bills, Notes or Bonds has additional risk. This could be credit risk or reinvestment risk to name two. Another is tying up money in an investment that has a long surrender period. Realize that sales people tell you what you want to hear so that you purchase their product. A trusted advisor tells you what you need to hear to avoid making financial mistakes.

Make sure that you understand the pros and cons before you make any changes to your investments or savings plans. Long-term investments should not be changed based on short- term events. You cannot react your way to wealth accumulation. There are different investments that should be used for retirement savings versus emergency savings. Case in point, at the end of 2011, the dividend yield of the S & P 500 was higher than yield of the 10 Year U S Treasury Note. In most years, dividends will increase versus being locked into the low yield of Treasuries or CD’s over their term.

If you feel that you cannot stomach the volatility of the market, then you must accept the low returns provided by guaranteed investments. If you are in the accumulation stage, this means you will have to set aside more money, lower and or delay your goal. If you can get comfortable with the volatility of the markets, then you can use investments that will enable your money to work harder for you.

Remember, there will always be reasons not to invest. There will always be something going on in the world to make one fearful of putting their money in the market. Sir John Templeton and Warren Buffet are famous for buying when everyone else is selling because they know this time is never different. They prefer to buy when the market is on sale. Unfortunately, it takes a tremendous amount of intestinal fortitude to invest when fear is rampant.

As we enter 2012, expect more of what we saw in 2011. I expect the volatility to continue. This is normal after a financial crisis as the excesses leading up to the crisis take time to work themselves out of the system. My job is to help you navigate these turbulent times, not by recommending the best investments or allocation, but keeping you focused on what is within your control and to help you avoid making financial mistakes that will prevent you from achieving your goals.

Before making any financial decision, please call me at 440-349-4980 so we can discuss what you are thinking about doing. We can help you or someone you care about make an informed decision once all of the relevant information needed to make a decision is reviewed. Hope you have a healthy, prosperous New Year. Let’s make 2012 your best year ever.

[1] http://news.morningstar.com/index/indexReturn.htmlon January 3, 2012