Not So Fast

With the market off to a great start the first week of this New Year, many are quick to declare "the bottom" has been reached.

While it's human nature to want the pain of last year's market decline to come to an end, economic uncertainty and the longer term effects of the government bailout plan, provide significant risk to the bullish case being made in much of the popular press.

This interview with Jeremy Grantham, Chairman of the Board of Grantham Mayo Van Otterloo gives sold support for why investors should pause before fully allocating their funds to today's equity markets. Grantham Interview

Many analysts believe Gold will be one of the best performing assets in 2009. With portfolios values sitting 30-50% below the 2007 market peak, there’s no time like the present to consider investments outside traditional mutual funds, individual equities and fixed income offerings.

There are numerous economic and demand-driven reasons supporting an upward move in gold values, but two primary arguments lead us to believe a potentially explosive move in gold will occur some time this coming year.

First, Gold is well-recognized as an effective hedge against inflation. While deflation is the likely scenario in the near term, massive government liquidity infusions as a result of the government’s TARP program are likely to drive inflation much higher over the longer-term. As soon as the world accepts that higher inflation is inevitable, foreign demand for gold will increase.

Secondly, gold values have historically been negatively correlated with the dollar. While the dollar has enjoyed strength during the current credit crisis, that strength was driven by foreign investors taking short-term positions in the dollar as their own economies faced credit meltdowns and banking crises. As overseas markets gain strength and developing markets advance economically, the dollar’s attractiveness is likely to wane.

Depending on each clients’ individual financial situation, a commodity holding like gold typically ranges from 0-5% of their total portfolio allocation. Some potential investments to research for exposure to Gold include GLD (tracks the price of Gold Bullion), GG (Goldcorp, Inc., engages in the acquisition, exploration, development of precious metals properties), and GFI (Gold Fields Limited engages in the exploration, extraction, processing, and smelting of gold in South Africa, Ghana, Australia, and Peru).

Current Market Commentary from Dimensional

One of the great benefits of our association with Dimensional Funds is our access to some of the greatest academic minds in the fields of finance and investing. Check out these videos with market commentary from Ken French, Director of Investment Strategy for Dimensional and the Carl E. and Catherine M. Heidt Professor of Finance at the Tuck School of Business at Dartmouth College.
Buy and Hold vs. Market Timing
Stock Picking vs. Index Investing
Commodities and Your Portfolio

Things are Looking Brighter

Those who thought Tuesday’s rally was the beginning of a bull market, perhaps yesterday’s down day and today’s ho hum performance are disappointing. However, there is quite a bit of encouraging news:

• Governments in US, Europe and the UK have aggressively responded to the credit crisis. Monday's generous rate on commercial paper on Monday and yesterday’s Fed rate cut was further proof of our government’s willingness to do whatever it takes to get these markets moving again.
• Some governments are providing fiscal stimulus to bolster economic activity. Australia recently unveiled a $A10.4 billion package. In the US there is talk of a post-election stimulus plan.
• Oil prices, which until recently were seen as a major threat to global growth, have retraced significantly. From late July until early October, crude oil futures fell by 45 percent from a record $147.27.
• According to Dimensional research, the average duration of bear markets in the US from the end of 1965 until the middle of this year was about 14 months. This one has lasted about one year and the longer it goes on, the closer we are likely to be to the next bull market.
• Unless you have sold your holdings, your losses so far are only on paper. Market recoveries after prolonged downturns tend to come in quick sudden bursts. All you need to do to capture those recoveries is to stay in the market.
• Volatility is declining and the panic selling has diminished. As markets work toward more “normal” trading conditions, the world will move on and the appetite for equities will return.
  
  If you’re concerned about how you’re invested or wondering how your portfolio allocation can be improved, give me a call for a no obligation review and discussion. You have nothing to lose and years of future prosperity to gain.

Some Good News for Retirees

The 2009 Social Security benefits of our nation’s older Americans are slated to receive a 5.8% boost—the largest hike in 26 years. That compares to the 2008 increase of only 2.3%. In 2008, the average monthly Social Security payment for retirees amounted to $1,090. That will increase to $1,153 in January.

Another positive for retirees is the announcement that 2009 standard Medicare premiums will remain unchanged. However, premiums do increase for “higher income” individuals (defined as singles earning more than $85,000 and couples earning more than $170,000).

This development provides welcome positive news in light of recent price inflation in food and energy and the severe erosion of most retirement accounts. In addition, escalating health care costs in recent years have resulted in many retirees struggling to maintain their standards of living. More recently, the financial crisis and recessionary economy have left those dependent on fixed incomes amongst the hardest hit.