Navigating Uncertainty

1Q 2010

In reviewing the statements that follow, you’ll notice that global equities extended their rally during the first quarter, albeit at a more moderate pace. The benchmark S&P 500 appreciated by just over 5%, Small Caps once again outperformed their larger brethren, and International equities lagged somewhat given currency fluctuations. Cash continues to provide a negative real return (rate less than inflation), but riskier Fixed Income products remained solid performers.

As we’ve now passed the one-year anniversary of the market’s low point, it’s historically consistent for the sprint upward to evolve into a more sustainable trot. Importantly, the major indexes battled back from a steep February selloff of nearly 10% amid continued global economic and political uncertainty. Still, with the list of future unknowns seemingly too long to comprehend, we thought it would be valuable to review our rather simple approach for navigating uncertainty.

In one of his annual letters to shareholders, Warren Buffett wrote that it only takes two things to invest successfully – “having a sound plan and sticking to it”. The first step can be satisfied in the development of a diversified portfolio appropriate to your risk tolerance, which is why we create custom asset structures for each relationship. The “sticking to it” part is clearly the harder of the two, and this is where your ongoing partnership with Brand Asset Management Group can truly pay dividends.

We generally do not participate in speculation surrounding the economy and markets, but there’s one thing we can say with virtual certainly: Most short-term forecasts will be wrong. When this lack of accurate predictions collides with the typical investor, subject to the additional errors of human nature, the achievement of goals becomes more challenging. In a famous 20-year study conducted by Dalbar, an analysis of funds flow data suggested that the average equity investor gained just 3.5% per year while the market compounded at 13.0% during the same period. Simply stated, failed attempts at market timing are extremely costly for the average investor.

In the field of behavioral finance, there is also a phenomenon called “barn door closing”. It describes the tendency of market participants to do today what would have worked yesterday – or last month, or last year. The best current example is the massive flight to perceived “low-risk” or “riskless” assets such as cash or bonds that fared well during the market slide of October 2007 through March 2009. Pessimism was born a giant in the aftermath of the credit crisis, and bond purchases have now exceeded equity purchases for 26 consecutive months despite the paltry yields being offered. As we embark on the second year of recovery, however, this same behavioral tendency may eventually cause investors to chase stocks higher. The rebalancing mechanism we have in place helps prevent you from falling victim to this harmful tendency, and actually produces the opposite result (buy low, sell high).

Aside from the portfolio management tactics described above, we as a firm continually apply effort to better understand the myriad factors that may impact the financial well-being of our clients. Increasingly, this leads us to robust discussions around other wealth related issues such as taxation, insurance, estate planning, and philanthropy. We look forward to having these conversations with you at the nearest opportunity.