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"Planning is bringing
the future into the present so that you can do something
about it now."
~ Alan Lakein
The Markets It was once again another week filled with
fear and greed on both Wall Street and Main Street.
While fear
won out with more losses in the stock market, it remains
to be seen whether we will see a “Santa
Claus Rally” this year. To be sure, you'd have
to go back many years to find a market this depressed in
what traditionally is the best time of the year to be holding
stocks.
Any good news, especially on the retail
front, will likely be greeted with open arms. But, much like
the past
few weeks,
investors will have to remain on their toes to find ways
to profit from both the depressed sentiment and challenging
economy.
Looking ahead, we have a Fed meeting not
far away and a lot of economic data that will set the tone
for the
remainder
of the year. Until next week…
Article of Interest: Dow
Theory “Sell
Signal”……worth reading for hands-on
investors.
| Returns through 11/23/07 |
1-Week |
Y-T-D |
1-Year |
3-Year |
5-Year |
10-Year |
| Dow Jones Industrials |
-1.5 |
4.2 |
5.7 |
7.9 |
8.3 |
5.4 |
| Nasdaq Composite |
-1.5 |
7.5 |
5.5 |
8.2 |
12.2 |
5.2 |
| Standard & Poor's 500 |
-1.2 |
1.6 |
2.8 |
7.4 |
9.4 |
4.4 |
Source: Yahoo! Finance, Barrons
Past performance is no guarantee of future results. Indices
are unmanaged and cannot be invested into directly. Three-,
5-, and 10-year returns are annualized. Assumes dividends
are not reinvested.
As of tonight’s close it looks
like the streak has come to an end.
Both the S&P 500 and Dow average have fallen 10.1 percent
from their Oct. 9 records, marking a so-called correction
in the U.S. stock market. The S&P 500 last fell at least
10 percent from a high in the period ended March 11, 2003,
or 1,721 calendar days ago.
Today's decline ended the longest streak
without a correction in the S&P 500 since the 2,573-day stretch ended October
27, 1997, according to data compiled by Birinyi Associates
Inc. and Bloomberg News.
Keep Your Portfolio in Balance with an
Annual Review
Your target asset allocation, or the mix
of stocks and bonds you have chosen to pursue your investment
goals, provides
the foundation for your financial plan. However, even the
most appropriate asset allocation may be driven offtrack
by a number of factors, including bouts of market volatility.
Given the turbulence that has prevailed over the stock
market
during much of 2007, now may be an ideal time to determine
whether recent market performance has affected your asset
allocation's "balance."
A portfolio review should be an integral
part of an annual financial review that examines all aspects
of your financial
life - from income and expenses to college and retirement
planning, taxes and estate plans. The goal of such a
comprehensive review is to identify any important changes
in your life
and plan accordingly for the coming year.
The first step in conducting a portfolio
review is to calculate the percentage of your assets that
is invested
in stocks,
bonds and other asset classes. Next you will need to
decide whether you are comfortable with those allocations
or whether
you need to "rebalance" your investment mix
to bring the allocations back to their original intended
targets.
For instance, suppose that your portfolio
is currently a mix of 70% stocks and 30% bonds, but you'd
prefer a
60/40 mix. One way you could adjust your allocations
would be
to sell some of your stock investments to attain the
desired 60% allocation. Or you could do the opposite
and add more
bonds to your portfolio. Keep in mind that there may
be taxes, fees and strategic considerations associated
with
either option, so be sure to consult with a trusted investment
and/or tax professional before making any decisions.
Portfolio Drift: An Example
To illustrate how investment performance can affect a
portfolio over time - pushing it more and more out of
sync with its
original allocations - consider what would have happened
to a hypothetical portfolio left unbalanced for the 20
years ended June 30, 2007. What began as a 70% allocation
to U.S. stocks would have grown to 83.31% of the portfolio,
while 10% allocations to government bonds, foreign stocks
and money market instruments would have shrunk, reducing
their intended risk reduction role in the portfolio.1
Bonds haven't been as volatile as stocks
over long periods of time, but recent history shows that
they too can experience
performance patterns that may alter asset allocation.
Consider the divergence of the stock and bond markets
between 2000
and 2002 and how that may have affected asset allocations.
While the S&P 500 returned -9.1% in 2000, -11.9%
the following year and -22.1% in 2002, long-term U.S.
government
bonds gained 20.3% in 2000, 4.3% in 2001 and 17.0% in
2002.2
Likewise, the performance dynamics of various styles
of equities - e.g., small-cap stocks, foreign stocks,
growth
and value stocks - can effect your overall asset allocation
when left unchecked. As an example, large-cap value stocks
have outperformed large-cap growth stocks by an annualized
pace of about 12% since March of 2000 (as measured by
Russell 1000 Growth and Russell 1000 Value). This seven-year
run
would have left a portfolio that has not been rebalanced
tilting heavily toward value stocks - and positioned
poorly in terms of performance and risk - as the cycle
shifts
back toward growth.
Life and Lifestyle Changes
Market volatility is not the only factor that may cause
you to rethink and rebalance your investment mix. Any
new circumstances in your life or changes in your lifestyle
may necessitate a reshuffling of assets.
For example, getting married and starting
a family are two events that are likely to create a whole
new
set
of high-priority financial needs. Or maybe your change
was
of a different nature: Did you get divorced, take
a new job or embark on an entirely new career? Have you
experienced
a financial windfall? Did a loved one pass away?
Maybe one of your children got married. Or perhaps you've
become a grandparent. Each of these events - and
others
like
them - will probably require you to reevaluate and
enhance each
of your strategies for pursuing all-around financial
well being.
How often should you rebalance? The usual
answer is anytime your goals change; otherwise, at least
once
a year. However,
to keep close tabs on your investment plan and
make sure it doesn't drift far from your objectives, you
and your
advisor may prefer to set a percentage limit of
variance, say 5% on either side of your intended target,
that
would trigger a review and possible rebalancing.
Working Together Toward Your Goals
Although rebalancing your portfolio can be challenging,
it is generally the best way to stay focused
on stated goals. By working closely with a trusted
advisor
who understands your life goals and offers ongoing
advice
in support of
those goals, you will have a much better chance
of keeping your financial plans on track - whatever
life or the
investment markets send your way. This article is not intended to provide
specific investment or tax advice for any individual. Consult
me, your financial advisor, or your tax advisor with questions. 1Sources: Standard & Poor's; Morgan Stanley Capital
International; Lehman Brothers; Federal Reserve. Domestic
stocks are represented by the total returns of the S&P
500; foreign stocks by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE®) Index; bonds by
the Lehman Brothers Aggregate Bond Index; and money market
funds by the Lehman Brothers 3-Month Treasury Bill Index.
All are unmanaged indexes. Investors cannot invest directly
in any index. Past performance does not guarantee future
results.
2Source: Lehman Brothers. Represents the total returns
of the Lehman Long-Term Government Bond Index.
There is no guarantee that a diversified portfolio will
enhance overall returns or outperform a non-diversified
portfolio. Diversification does not ensure against market
risk.
Stock investing involves risk including loss of principal.
Bonds are subject to market and interest rate risk if sold
prior to maturity. Bond values will decline as interest
rates rise and are subject to availability and change in
price.
Best Regards,
P.S. Please feel free to forward
this newsletter to family, friends, or colleagues.
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