Fun Facts Newsletter - September 2011

“Honesty is the best policy” is one of our firm’s guiding principles and August was a particularly brutal month for our investment strategy. Not only did the stock market decline, but international stocks, value style stocks and small company stocks were among the hardest hit in August.

Through both June and July, our diversified stock portfolio strategy provided very competitive returns compared to a U.S. large company benchmark, providing a return of about 5.8% vs 6% for the S&P 500 through June and about 3.8% return through July that was about exactly equal to the U.S. large company universe. Remember that the stock market was down slightly in July and that shaved off a few points off the June year-to-date gain.

“Risk and return are related” is one of our investment principles and there was clearly a “flight to safety” in August both towards U.S. large company stocks and U.S. Treasury bonds.

All of the above figures are for stocks only and bonds have cushioned the stock market volatility exactly as we expected to moderate your portfolio total return. However, as we have stated before, the “expected return” for bonds going forward is very low due to low current interest rates.

Broad stock market risk cannot be diversified away but can be managed with a given investor’s asset allocation between stocks, bonds and cash. Investors notoriously make mistakes by switching back and forth between stocks and bonds at the wrong time by buying stocks after they have gone up a lot and selling stocks after they have declined. We executed the “buy low, sell high” strategy during August by reviewing client portfolios based on target stock and bond allocations and selling bonds at high prices to buy stocks at low prices where appropriate. Given that, while August was a down month overall, there were 4 major down days early in the month, a market bottom around August 19th and a stock market rally late in the month, it was hard to time the peaks and valleys. Such is almost always the case.

Risk has many dimensions, by definition, and risk “perception” is very high right now. Reality will prevail over perception and reward long term investors. As always, please contact us to discuss your portfolio whenever you have questions or concerns. Our phones have been remarkably quiet!