Stocks enjoyed very strong gains during the quarter. In fact, it was a quarter of milestones for the broad averages, with the Standard & Poor’s (S&P) 500 breaking through to new post-financial crisis highs, the Dow Jones Industrial Average (The Dow) eclipsing the 13,000 level for the first time since May 2008, and the NASDAQ reaching 3,000 for the first time in over a decade. The quarter’s gains leave the S&P 500 11% short of the all-time highs set in October 2007 and 30% above the 2011 lows set six months ago in October. The solid returns for the broad market were driven primarily by improving U.S. economic news, most notably jobs and consumer data, and investors increasing comfort with Europe’s challenges.
So what do you do after a quarter like that? Stay objective and keep things in balance! That’s why for our income and most conservative investors we recently took profits on our tech heavy positions. Hopefully you remember we made significant investments in that area in March 2009. So, after a large run up, over 20% in the 1st quarter alone, it made sense to trim those positions to more targeted weightings.
Where did we rebalance to? To a more conservative, out of favor, and/or more income oriented investments. We added to clients bond ladders, buying intermediate corporate bonds in the financial sector. We added a position in high quality preferred stocks that are expected to pay solid, tax efficient, qualified dividends. We also established a position with a real estate income focus. Yes, it really looks like prices are stabilizing and probably headed north.
You might ask, if we expect this bull market to continue, albeit with a possible significant correction and increased volatility, why was this action important for our investors taking income from their portfolio? There are two answers. The first lies in the difference between portfolios in distribution (ones that are taking regular withdrawals) and ones that are not. If you’re a growth investor and the market goes up 7%, down, and back up, you get the 7%. If you rely on your portfolios for living expenses and take money out regularly, some of that money will be taken out when the market is down and therefore will not be around to rebound. You won’t get the full 7%. So, managing fluctuations and volatility are critical to the success of an investor requiring withdrawals.
The second reason is that clients who rely on regular distributions also need to have a high percentage of their pay out funded by predictable interest and dividend payments – if they want their money to last. Selling something to pay expenses can be a disaster. Sometimes everything is down (think about the last few years). And we all know that if you have to sell when the market is down… it is not so pretty. So, taking profits from non income producing areas and using them to boost the cash flow that supports required payouts is a double benefit. Managing risk and structuring more certain outcomes are critical to successful retirement income planning. And you thought we were just buying low and selling high!
Well, that’s it for today. I hope you appreciate the market update and some insight into the science that guides our decision making. There’s a lot going on so I’m sure I will be in touch soon. In the meantime if you have any questions, do not hesitate to call.
Sincerely,
Donald J. Miller, CFP®
CEO/Principal
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield. Stock investing involves risk including loss of principal. Investing in specific industries is subject to higher risks and volatility than investing more broadly.
This entry was posted
on Monday, May 7th, 2012 at 1:41 pm and is filed under Market Commentary.
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May 2012 Market Update
WHAT A DIFFERENCE A QUARTER MAKES!
Stocks enjoyed very strong gains during the quarter. In fact, it was a quarter of milestones for the broad averages, with the Standard & Poor’s (S&P) 500 breaking through to new post-financial crisis highs, the Dow Jones Industrial Average (The Dow) eclipsing the 13,000 level for the first time since May 2008, and the NASDAQ reaching 3,000 for the first time in over a decade. The quarter’s gains leave the S&P 500 11% short of the all-time highs set in October 2007 and 30% above the 2011 lows set six months ago in October. The solid returns for the broad market were driven primarily by improving U.S. economic news, most notably jobs and consumer data, and investors increasing comfort with Europe’s challenges.
So what do you do after a quarter like that? Stay objective and keep things in balance! That’s why for our income and most conservative investors we recently took profits on our tech heavy positions. Hopefully you remember we made significant investments in that area in March 2009. So, after a large run up, over 20% in the 1st quarter alone, it made sense to trim those positions to more targeted weightings.
Where did we rebalance to? To a more conservative, out of favor, and/or more income oriented investments. We added to clients bond ladders, buying intermediate corporate bonds in the financial sector. We added a position in high quality preferred stocks that are expected to pay solid, tax efficient, qualified dividends. We also established a position with a real estate income focus. Yes, it really looks like prices are stabilizing and probably headed north.
You might ask, if we expect this bull market to continue, albeit with a possible significant correction and increased volatility, why was this action important for our investors taking income from their portfolio? There are two answers. The first lies in the difference between portfolios in distribution (ones that are taking regular withdrawals) and ones that are not. If you’re a growth investor and the market goes up 7%, down, and back up, you get the 7%. If you rely on your portfolios for living expenses and take money out regularly, some of that money will be taken out when the market is down and therefore will not be around to rebound. You won’t get the full 7%. So, managing fluctuations and volatility are critical to the success of an investor requiring withdrawals.
The second reason is that clients who rely on regular distributions also need to have a high percentage of their pay out funded by predictable interest and dividend payments – if they want their money to last. Selling something to pay expenses can be a disaster. Sometimes everything is down (think about the last few years). And we all know that if you have to sell when the market is down… it is not so pretty. So, taking profits from non income producing areas and using them to boost the cash flow that supports required payouts is a double benefit. Managing risk and structuring more certain outcomes are critical to successful retirement income planning. And you thought we were just buying low and selling high!
Well, that’s it for today. I hope you appreciate the market update and some insight into the science that guides our decision making. There’s a lot going on so I’m sure I will be in touch soon. In the meantime if you have any questions, do not hesitate to call.
Sincerely,
Donald J. Miller, CFP®
CEO/Principal
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield. Stock investing involves risk including loss of principal. Investing in specific industries is subject to higher risks and volatility than investing more broadly.
This entry was posted on Monday, May 7th, 2012 at 1:41 pm and is filed under Market Commentary. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.