A Spring Update

Spring is in the air and the stock market has been on a tear over the past several weeks. Hopefully, this time the light at the end of the tunnel isn’t another train coming at us, but, may truly be the light at the end of the tunnel after 15 months of darkness!

By March 6th the Dow Jones Industrial average was down (-25%) for 2009 and 7,617 points below its record high on October 9, 2007. The market then took a turn for the better thanks to news that fueled optimism about the economy stabilizing and March finished +8.5% higher than where it started. The first quarter ended with the Dow losing (-13.3%) and the S&P 500 Index giving back (-11%). I was happy that our portfolios ended the quarter outperforming the indexes.

It was only a couple months back when some economists were talking about another depression and out of the blue, stocks had their best five week rise since 1938, rallying +27%. Markets frequently begin to turn around well before it is clear that economic conditions are improving and that is what has happened since early March. History has shown that the biggest gains usually happen immediately following a recession and investors who were absent from the markets over the last five weeks missed an opportunity to reclaim some of their losses. This doesn’t mean that we won’t re-test or even make new market lows, but I do feel the worst is behind us and all eyes need to be focused on where will the markets be five years from now, not five days or weeks from now.

I’m a big believer that volatility creates opportunity and I have been repositioning some holdings into areas that will hopefully perform well over the next several years. The areas that I think will add alpha to the portfolios are US stocks rather than developed foreign countries; emerging markets with an emphasis in China and Brazil; technology; financials and real estate. After trillions of dollars being pumped into economies all around the world, inflation may heat up and Treasury Inflation Protected Securities, commodities and sometimes gold are good investments as a hedge against inflation. As an insurance policy against the stock market, long-short funds can help offset any unwanted volatility.

Where we can, we have been selling some of our mutual funds and replacing them with ETF’s (Exchange Traded Funds) that track their respective indexes. 1) Mutual funds have internal management fees on average of 1.4% compared to most ETF’s that are less than 0.25% (1/4 of 1%). 2) 2008 proved that even some of the industry’s most competent mutual fund managers were affected by shareholders withdrawing money out of their funds that caused more havoc in the funds than needed. 3) With ETF’s, we know exactly what the makeup of the portfolio is and we can make trades as we see fit anytime during any trading day.

So how much equity exposure is right for you? It all depends, but the right answer may be the most you can hold while still being able to sleep at night. If your tolerance for risk has changed and you aren’t sleeping at night, then you need to contact your investment advisor.