For financial markets, 2011 was a year marked by a battle between extremes in uncertainty and…
With the bank panic of 2008, our central bank, the Fed, intervened to protect our economy and reestablish a secure banking and lending system within our country and the world. What is happening now? The Fed is reducing how much it is intervening because our economy is healthier than it was in 2008. As a result, the markets are reacting up and down; bond interest rates are going up and down, and generally there is a funk across all sorts of investments.
By analogy, it is like we had a serious car accident in 2008. The Fed supplied IVs with morphine to deaden the pain and allow us time to recuperate. We are now at the point where sufficient health has been restored that the Fed is withdrawing the morphine. Although we are healthier, we are not happy.
Our health, the credit and lending system in our country, is now stronger and more resilient but it just doesn’t feel right without the drugs—the Fed’s extra programs like buying bonds every month. We are upset; we are fearful; but we are healing. This is what I think is happening.
In light of this, what principles do Sam and I follow when investing for you?
- Diversification – Our portfolio utilizes investments that invest all over the world and in every different industry. Very few, if any, investment professionals can accurately and consistently predict what economic or geographic sectors will outperform all others. Accordingly, we make sure our clients’ money is invested across all sectors and all countries rather than concentrated in the S&P 500 or just the United States.
- Manage Downside Volatility -We choose investment managers who mitigate against both downside and excessive swings, called volatility, in the bond and stock markets. The managers we choose won’t simply ride an investment all the way down as happened in 2008 with the expectation that it will eventually come back. No one can prevent all losses in the markets, but the managers we choose for our clients work hard to mitigate them.
Investing is about quantifying probabilities of outcomes and constructing portfolios that try to anticipate the different outcomes without betting the house on any one outcome. Our goal, and most of our clients’ goal, when investing is to protect against permanent loss of capital while obtaining reasonable appreciation so that your goals, as you have defined them to us, are met.
There are positives. The United States is in the midst of an energy boom. On the other hand, Europe’s banks have not engaged in the interventions that were so successful here. I do not know if cheaper energy in the US will propel the world into a new growth cycle, or if deflation coming from Europe and dropping growth rates throughout the world will duplicate the 20 year recession of Japan. In a world of unprecedented intervention by governments and its unintended consequences, we must be, and we are, vigilant and highly flexible in managing your assets to mitigate against excessive risk.
No strategy assures success or protects against loss. 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. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.