TCI 2012 Fall Newsletter

Michael GrossoMarket Perspective, Diversification and the Importance of Rebalancing

by Michael Grosso, CFP®

For more than a year the stock market has been stuck in a trading range, frustrating bulls and bears alike. Optimism about the economy has given way to anxiety, then as quickly as the last, despair is displaced by hope. Investing in this world with near-zero interest rates and low stock returns is extremely tough. Retirees are finding they cannot earn … well, anything on their savings accounts. Sponsors of pension plans cannot earn the 8% to 12% returns “experts” promised them in the late 1990s. As a result, they are terminating their plans and handing out lump sum payments to their employees. People with little or no investment expertise are now in charge of their retirement nest eggs.

We would counsel clients to stick to the basic ABC’s of investing and be wary of any new or “sophisticated” strategies. Almost all exotic investments ultimately can be reduced to the common denominators of stocks, bonds, and money market funds. So what is our advice?

  • Accept that most investors won’t earn 10% or 12% a year on their nest eggs without taking risks that are unacceptably high. One of the fundamental truths to investing is that in order to earn a higher return, one has to accept a greater risk of loss. We all would like high returns and little risk. If somebody promises you a high return with minimal risk, the odds are that they either don’t understand the investment or they are misleading you.
  • Match your investment strategy to your time horizon. If you are planning to buy a house or pay for your child’s education in the next year or two, don’t invest (much) in the stock market. Over such a short period of time the stock market is just as likely to be up as down in value. Don’t put yourself into a position where you may have to sell when prices are low.
  • There are not many home run investments in today’s world. Rather than swinging for the fence we follow a strategy of singles with an occasional sacrifice bunt or walk. While this is not very exciting, it will most likely lead to more victories than trying for the homerun on one swing of the bat.

How do we stay on target with our plan?

If you initially choose a 60 equity (growth assets) / 40 fixed income (safe assets) allocation, you may have come back to find out that because of market movements your portfolio has actually become a 70/30 or a 50/50. This is where the importance of rebalancing comes in. Rebalancing forces us to eliminate the desire to time or react emotionally to what market behavior influences us to feel. It really acts as a neutralizer to the biggest risk to you as an investor. Short-term volatility in the portfolio is truly noise—often painful and scary noise, but noise nonetheless. The largest risk you accept as an investor is should you go through a period of 15-20 years where the growth assets severely underperform what was expected by staying flat or even being down over that entire period. The only way to possibly grow your wealth in an environment like that is to accept a disciplined rebalancing strategy. You may have heard that the S&P 500 was flat for the last decade, but that doesn’t accurately capture the severe ups and downs you experienced along the way. Those ups and downs are opportunities to the long-term investor. If you had followed a disciplined rebalance process, you would have forced yourself to buy growth assets when they were low and sell them after a significant gain slowly growing your wealth along the way despite a “flat” market.

Many of you may have noticed a few more trades over the last couple months. After the drop in the market caused by the most recent political and economic uncertainty, many portfolios had drifted far enough away from their targets to justify rebalancing. This time, rebalancing meant selling safe assets and buying more growth assets at depressed prices. Rebalancing forces us to sell growth assets at Euphoria (the point of maximum financial risk) and buy at Depression (the point of maximum financial opportunity) and reduce the emotion tied to financial decisions. In all of the research TCI has done, we haven’t found anyone that went broke buying low and selling high.

A friend of mine recently sent me a book titled, “10 Years that Shook the World. A Timeline of Events from 2001.” What I found interesting was that in 2001 there were 6.2 billion people in the world producing $32 trillion in goods and services. In 2010 there were 6.9 billion people in the world, producing $63 trillion worth of goods and services. In other words, an 11% increase in the world population managed to nearly double the output of goods and services. This feat was accomplished in the face of so many market moving events; the 9/11 attacks, the bursting of the tech bubble, the greatest financial collapse since the 1930s and the prospect of the breakup of the Eurozone. It is always insightful to look back at recent history for healthy perspective.

What does this mean for your portfolio?

  • For retired clients, I believe in maintaining secure, liquid funds to cover three years of expenses. Having that buffer means that we reduce the risk of having to sell holdings at depressed levels; this also lessens the stress and anxiety for us both.
  • Regardless of what happens to markets in the short term, we should adhere to the agreed to investment parameters, barring a significant change in circumstances.
  • When building equity portfolios, we have always advocated strong diversification outside the U.S. This has helped our clients through most of the 2000s and hurt them in other times such as the past year. Going forward, I have no idea whether the U.S. dollar and market will do better or worse than global markets, but I do know that the U.S. represents less than half of investing opportunities around the world and one needs to stay geographically diversified as a result.

Should you have questions, please feel free to give me or one of the members of TCI a call. And as always, thank you for the trust you provide us and the opportunity to serve as your advisor.

The Two Keys to Investing: Pickiness and Persistence

By Carl Richards, NY Times Blog Contributor

Will someone please remind me why we’re surprised when the market has periods — sometimes long periods — of turbulence and even decline?

We have a word for this: risk. Sometimes, we swap it out with the word volatility. You hear people complain that the market sure seems volatile lately, or they use the market’s ups and downs as a reason (or excuse) for putting all of their money in cash until things “clear up.”

But here’s the deal: the reason that stocks are likely to return more over time than bonds, and bonds more than cash, is precisely because they are more volatile (risky).

When it comes to investing, risk and reward are related. It’s as close as we get to a fundamental law in finance. If you want or need a greater expected return, you’ll have to accept more risk. The times I’ve tried to skirt this law, it’s been painful.

So if we believe that risk and reward are related, then investing becomes a pretty simple exercise. You buy good things and hold on to them for a long time.

Buying good things is easier than it’s ever been. Diversified, low-cost investments, like index funds, are good things and seem to be available on every online street corner. Also, figuring out how much to put into stocks versus bonds or international versus United States investments has been made easier by the introduction of target retirement date funds that use low-cost index funds like the ones at Vanguard.

A great place to start would be using the Vanguard fund that matches your retirement goal, like the 2045 fund. Then there’s the option of taking your age and putting that percentage of your portfolio in a bond index fund or taking 100 minus your age and putting that percentage in a global stock index fund.

Like Vanguard’s founder, John Bogle, said, you could find advice that was better than this, but the amount of advice that was worse was infinite. If you need more specific help, find an adviser you trust who uses index or other passive investment funds to make more customized portfolios.

Now, just because buying good things has become simple and easy doesn’t mean long-term success is guaranteed. You can design the best portfolio in the world, make one behaviorial mistake and blow the whole thing up. This natural tendency to react to the endless stream of useless news we get from the financial pornography networks is hard to overcome.

Of course, we want to do something (anything!) when the world is coming to an end. The problem is that it seems like the world is coming to an end — a different end — every week. If it wasn’t, what would they talk about on CNBC?

So that is where this second part of my little plan comes in: after you have bought good things, hold on to them for a long time.

If you’re invested in the stock market, I’m assuming you believe that risk and reward are related. If you don’t believe that, or if you think that it used to be true but now the game is rigged, get out and stay out. You can’t have it both ways. If risk and reward are no longer related then there is no reason to invest in stocks.

So much of what we think of as investing would be recognized as little more than a fantasy of market timing when viewed in this light:

  • The idea that you can be in the market when it goes up and out when it goes down: Fantasy.
  • The idea that you can pick stocks that will go up when the market goes down: Fantasy.
  • The idea that your buddy from college who worked on a trading desk for years and has now started a hedge fund that uses a proprietary trading algorithm that can get the same return as the market with less risk: Fantasy.

The tricky thing about all these fantasies is that someone is always successful just often enough, for just long enough, to get a spot on television or to make the cover of a magazine. At that point, we’re enticed into believing we can get in on the action. Then, just about the time you think you have found investing Shangri-La, it disappears, right after you commit your capital to it.

Because we can’t have it both ways, if someone promises you higher returns, you need to ask the question: What’s the corresponding risk? If you can’t identify it, don’t be fooled into thinking it isn’t there. It is, and it’s likely to show up when you least expect it.

If you still believe that risk and reward are related, buy good things and hold on to them for a long time. If you no longer believe, then get out and stay out. The thing to remember is that either choice is O.K., but trying to do both is a very bad idea.

TCI Holiday Office Closures

Our offices will be closed the following dates for the upcoming holiday season:

Thursday, November 22nd & Friday, November 23rd, 2012
Monday, December 24th  –  Wednesday, December 26th, 2012
Monday, December 31st 2012  –  Wednesday, January 2nd, 2013

Please advise TCI as soon as possible of any end of the year business or transactions that need to take place since we will have reduced staff during the final 2 business days of the year. We want to ensure that we can complete all requests in an efficient and timely manner. Thank you in advance for your help!

Upcoming TCI Events

TCI Art Exhibit: Tucson

Opening Reception – November 28th, 2012

TCI Winter Webinar

Wednesday, December 5th, 2012
4:00pm – 5:00pm Arizona/Mountain Time


4011 E. Sunrise Dr.
Tucson, AZ 85718
Phone: (520) 733-1477
Fax: (520) 733-1488


6929 Greenway Pkwy.
Scottsdale, AZ 85254
Phone: (480) 991-0401
Fax: (480) 991-0574


150 W. Dale Ave.
Flagstaff, AZ 86001
Phone: (928) 226 -0868


4757 Caughlin Pkwy.
Reno, Nevada 89519
Phone: (775) 746-6255
Fax: (775) 746-6254

Santa Fe

215 W. San Francisco
Santa Fe, NM 87501
Phone: (505) 982-3808


1228 15th St.,
Denver, CO 80202
Phone: (303) 296-2196
Fax: (303) 623-1144

Santa Monica

312 Arizona Ave.
Office 302
Santa Monica, CA 90401
Phone: (310) 319-6545
Fax: (520) 733-1488

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