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Investor's Corner NewsletterBy Will W. Woodard, III, CFP® "Affluent Americans are successful because they're happy, not vice versa. Happiness and confidence are fuel sources for success." In my last report (Summer '04 NBS) I quoted the old market saw "Sell in May and go away" as a possibility for broader investment market performance over the summer, and, indeed, the trend has been lower since that letter went to print. The US equity market's "perception disconnect" between solid corporate earnings and the real and imagined distractions of oil prices, the upcoming Presidential election and global terrorism (especially relating to the Athens Olympics) continues. I use the term "perception disconnect" because in reality corporate performance has been very good. The market, perceiving there to be something afoot on the economic front (Economy slowing faster than expected? The trend on the monthly job reports has been soft, soft, SOFT, with the August number WAY below plan), or perhaps just in a low volume summer funk, doesn't want to hear about it. I read a great piece by PIMCO's Paul McCulley recently. In his August 2004 "Fed Focus" column (available at http://www.pimco.com/) McCulley makes a prescient case for low employment growth being Fed inflation fighting's "dirty little secret"-ie the price to pay for low inflation. While McCulley is not the author of this economic theory, he does a great job of explaining the phenomenon. Worth a read! The Draconian observer's viewpoint is that a short, sharp market haircut would bring equity valuations to more reasonable historic levels and build a base for future uptrends. (My bearish friends in the Outer Banks real estate market have been saying the same things for years, but it hasn't happened YET) In any event, some good investment alternatives will surface for those able to recognize quality and value and willing to do a little digging and be patient. In this issue of Investor's Corner:
1. Reader Mail - Dear Will, do Presidential elections affect the investment markets? Thanks, Ann Dear Ann, thanks for your question. In a word, YES, The US Presidential election can definitely affect the financial markets. The amount of uncertainty surrounding the election of our leader and, arguably the free world's most powerful human being can be especially troubling to a market that despises uncertainty. Different political parties, politicians, even politician's family members (as evidenced by the attention given Sen. Kerry's wife, Teresa) can be perceived as market friendly or market unfriendly, too. It would be all too tempting to take the bait and try to make a case as to which candidate would be better for Wall Street. I prefer, however, to discuss a somewhat less obvious angle: As mentioned in this column before, the market serves as a discounting mechanism for future events. Some observers believe that a market swoon from August through November in an election year could reflect fear of the incumbent President being unseated, and not simply from the standpoint of one candidate being better or worse for business than the other; rather, that a change of leadership, policy, staff, etc. would have to occur if the challenger were victorious. Through the market's eyes, that would involve the probability of a leadership vacuum and significant uncertainty as new staff and cabinet positions were chosen and the new administration got "up to speed". Hope this helps Ann! 2. Core and satellite portfolio construction - One of the most critical jobs of a financial planner is helping clients with asset allocation decisions. Even the most thoughtfully designed financial plan stands a good chance of failure if the asset allocation mix or employed investment strategy is not in line with the client's goals, time horizon, and risk tolerance. The sheer number of investment vehicles available to investors is overwhelming to most folks, too. (Investments geeks like yours truly aside, of course!) Core and satellite portfolio construction is an asset allocation model that addresses the above issues in a thoughtful fashion. I have found the strategy to be well suited for a broad range of client investment scenarios and to be well received by clients. The strategy involves defining a "core" of investment capital that is to be invested in index funds and Exchange Traded Funds (ETF's) mirroring major domestic and international equity indices-in other words, to be the market in a broadly diverse and passive fashion. This core is then augmented with a select "satellite" of individual investments (stocks, bonds, real estate, etc.) that attempts to outperform or beat the market. The result is a strategy that addresses one of the longest running and most heated debates in the field of money management-that of passive versus active management. (Note: I have covered this debate at length and in more depth in previous columns. if you are interested in reading and/or learning more, click on the Newsletter tab at www.darecapital.com and scroll the archives.) The core investment insures representation in different market sectors, low investment costs, and portfolio stability. The satellite allows for the potential of outperformance by an individual investment and offers the potential for gains in a flat broader market environment (such as 2004.) All in all, a potentially winning investment combination! 3. Charts
4. Worthwhile links: CERTIFIED FINANCIAL PLANNER™ Board of Standards - http://www.cfp.net/default.asp NAPFA, the National Association of Personal Financial Advisors - http://www.napfa.org/ The Financial Planning Association - http://www.fpanet.org/public The FPA's Hampton Roads chapter - http://www.fpahamptonroads.com/ Dare Capital Management & Advisory home page - http://www.darecapital.com/ Good Investing, Will W. Woodard, III, CFP® is president of Dare Capital Management & Advisory, a Registered Investment Advisor and fee-only financial planning firm with offices at 2518 S. Croatan Hwy, Suite E, Nags Head, NC 27959. Dare Capital Management & Advisory offers ongoing investment management services and fee-only financial planning. Mr. Woodard, his firm, or his clients may own the investments mentioned herein. Contact Will at (252) 480-0156 or learn more about the firm at Will@darecapital.com The fine print: This newsletter can be reprinted or forwarded--however, it is requested that reprints of any material in this newsletter include credit to Dare Capital Management and Advisory (252)480-0156 and an email link to will@darecapital.com. Thanks for spreading the word! All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Will W. Woodard, III and Dare Capital Management and Advisory, and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. Mr. Woodard, his firm, or his clients may own the investments discussed in this newsletter. Past performance is no guarantee of future returns. The information presented herein and the company's web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future results may vary for many reasons. Copyright 2004 Dare Capital Management and Advisory-all rights reserved. |
