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News & Views |
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July
2009 |
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In This Issue ·
New
PFPG website ·
PFPG
investment strategy ·
Markets
update ·
Professional
education ·
Time
to speak up for the fiduciary standard ·
Changes
to credit card rules Contact Us |
New
PFPG website
Welcome to the first
e-version of our newsletter. In addition to introducing an e-newsletter,
we’re happy to announce the launch of our new website, www.pfpg.com.
Please take a look and update the bookmarks in your browser, since the server
address has changed. In addition to a streamlined new look, you’ll find
some useful new links. We welcome your
comments, and hope you’ll forward this newsletter to others who might
benefit from our services. PFPG investment
strategy
Since last fall,
we’ve been working hard to monitor unprecedented market developments,
to evaluate investment risks and opportunities, and to use our knowledge and skills
to guide clients through an extremely challenging period. We’re pleased
to report that so far no one has liquidated stock funds in favor of stuffing
dollars under a mattress. While portfolios (including our own) have lost
significant amounts in the past 18 months, typical client returns for 2008
and 2009 YTD have been in line with the relevant benchmarks. In light of the
upheaval in the financial markets and global economy, we’ve spent the
last couple of months revisiting PFPG’s core investment philosophy and
strategies. Our process included
extensive reading, participating in conference calls with mutual fund
managers, and deliberating at length with each other. Among the topics we
have explored is whether the era of “buy and hold” investing via
traditional stock and bond portfolios is coming to an end. In a world where many diversified
portfolios experienced 20 - 30% losses last year, perhaps 50-year-old Modern
Portfolio Theory (the foundation for the principles of asset allocation and
diversification) has outlived its usefulness. Is it possible that we’ve
entered a new era in which investors are better off seeking out short-term
trading opportunities rather than sticking with traditional long-term
investment strategies? Our conclusion is
that the investment fundamentals we’ve employed since launching PFPG
back in 1998 continue to be applicable today.
Buy and hold is not dead. The
tenets of Modern Portfolio Theory – both asset allocation and
diversification – remain relevant.
Using low-cost index funds rather than high-cost, actively managed
funds as the foundation of client portfolios is as compelling in
today’s environment as it was 11 years ago. “'The New Rules for Investing: Same as the Old Rules”,
which appears in the June issue of Schwab Investing Insights, points out the
pitfalls of abandoning traditional approaches. That isn’t to say that
we haven’t learned anything from weathering the Great Recession. While PFPG’s core investment
philosophy remains intact, we are in the process of introducing some fresh
thinking into client portfolios. On a
firm-wide basis, we are re-evaluating client risk tolerance/capacity. For some clients, we will recommend changes
intended to lower portfolio volatility and enhance long-term, risk-adjusted
investment performance. We have
refined the target allocations for certain sub asset classes, such as
international stocks, real estate, and inflation-linked bonds. We are exploring promising diversification
strategies, including absolute return and managed futures funds.
Markets update
Here are 1st half
investment returns for selected Vanguard mutual funds: Fund Return Vanguard
Balanced Index +4.2% Vanguard
Total Bond Market Index +2.1% Vanguard
500 Index +3.2% Vanguard
Small Cap Index +7.3% Vanguard
Total Int’l Stock Index +10.7% *Returns
include reinvested dividends & capital gains If you were living in
outer space during the first 6 months of 2009, you might conclude from
comparing your December & June statements that the financial markets were
relatively quiet during the period. Of
course, you’d be wrong. After suffering
a 38% decline in 2008, the S&P 500 Index had lost an additional 25% by
March 9. Fortunately, the
gut-wrenching trend then reversed itself, enabling the S&P 500 Index to
end the 1st half in positive territory.
While the percentages were different, the same pattern held true for
the majority of stock & bond indices.
In a mid-March email
to clients, we wrote “We agree with the consensus view about a
sustained economic dislocation that may take a further toll on stocks in the
near term…Our expectation is that we could see several rallies and
declines before we move on to another bull market…” Where do things stand
today? We anticipate further market
disruptions in 2009, and recommend investors keep short-term expectations in
check. Professional
education
To learn the
perspectives of visionaries in the money management business, Tom traveled to
o
Discipline is part and parcel of being a successful investor. o
Short-term financial forecasting is impossible (whether it be interest
rates,
inflation, stock/bond returns), even by
experts. o
Prices and investment returns are inexorably linked. o
Tactical asset allocation is tricky. o
Equity and fixed income returns are likely to be modest in the next
decade. o
Inflation hedges are essential for investors of all ages: human
capital, stocks, tips,
real estate. The jury is split on using commodities.
Time to speak
up for the fiduciary standard
It’s high time
that regulations were enacted to protect the investing public from the
self-serving practices of many investment banks, broker-dealers, and
lobbyists who argue for the maintenance of the status quo. We strongly
support the efforts of the Obama Administration to bring the fiduciary
standard of care to bear on the entire financial services industry. This
means simply that all those who provide investment advice would have to act
in the best interest of the customer. The Administration’s recently
issued white paper, Financial Regulatory Reform: A New Foundation, calls for
legislation that would require brokers to recommend investments based solely
on the customer’s needs. A new Consumer Financial Protection Agency
would control the sale of investment products that excessively reward
brokerage and financial product organizations at the expense of consumers.
Plain-English disclosures of sales commissions, expenses and risks would be
required. The brokerage
industry has long fought against being held to the same fiduciary standard as
investment advisors because it would cut into their sales profits. If you
want to support this legislation, follow the links to find out how to contact
the Senate Banking Committee, the House
Financial Services Committee, your U.S.
Senator, and your Congressperson. For more information about what a fiduciary is
and why PFPG has always held to this standard, please look at Fee Only
Financial Planning on our website. Changes to
credit card rules
The new legislation
signed into law by President Obama offers many new protections to credit card
holders who carry a balance. Among the provisions effective in February 2010,
credit card lenders will be required to: give 45 days notice before raising
interest rates; refrain from raising rates on existing balances until
payments are 60 days late (and if six consecutive payments are made on time,
the prior rate must be restored); mail statements no later than 21 days
before the due date; honor payments as timely if they arrive by 5 pm on the due
date (or the following business day if the due date is Sunday or a holiday);
cease issuing cards to 18 – 21 year olds with insufficient income or no
co-signer; apply payments to highest rate balances first. Cardholders who
routinely pay their balances in full (ironically called
“deadbeats” in the credit card industry) or reap benefits from
rewards programs may also see changes as credit card companies scramble to
make up the lost revenue. Peruse the mailings from your lender carefully for changes
in the annual fee or the credit limit, reductions in rewards programs,
shorter grace periods, and higher interest rates. As an alternative, check
out debit cards that offer rewards programs (usually with an annual fee).
Note that terms of credit union-issued cards are often preferable to those of
bank-issued cards. We wish you a happy,
healthy, and fun-filled summer! Sincerely,
Information
contained in this newsletter does not serve as the receipt of, or as a
substitute for, personalized investment advice from |
