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Market Commentary 12/31/2013

Faces of a Market

We have just completed the best year for US stocks since 1995.  This puts the S&P 500 up 126% over the past five years leaving some people feeling extremely optimistic about the new year’s prospects.  Others, however, are looking at the same figures and drawing a completely different conclusion.  We are hearing so many different opinions, from market pros to market participants, we think it makes sense to step back a bit.

Acclaimed author Stephen Covey wrote a book, “7 Habits of Highly Effective People,” where he talks about how our perception of things is influenced and shaped internally.  He argues that sometimes we need to shift ‘paradigms’ or the perspective from where we look to see the whole picture.  He illustrates how each of us can look at the same thing but come away with a very different impression.  Our paradigm influences our view.  The picture below is a classic example.  Most people will look at it and see either a young lady or an old woman.


Which one you see depends on many things and it can take some time for a person to see both.  Often, each of us will see a different thing based on the place we come from, or as Covey would say, our paradigm.  Covey also describes paradigms as maps.  Each of us has many, many maps in our head that have been drawn from experiences, influences, etc.  These maps can be divided into two main categories.  The first category is actual reality or the way things are, the second is the way we think things should be.  We interpret everything through these mental maps.  When we view the picture, our interpretation is based more on our psychological view than a logical view.

As we enter a new year, investors are viewing the market through the lens of their own experience.  Many are feeling good again about their investments, especially when looking at the equity returns of the last few years.  Other investors still have the declines of 2008 fresh in their minds.  In addition to how good or bad we perceive our returns to be, we are also influenced by a lifetime of experiences.  When Covey makes a case for shifting our paradigm, he also suggests that we reflect on the conditioning that has shaped our perceptions.  The shaping of these views can come from experiences as broad as childhood memories of watching our parents handle money, to how we spent our first paycheck, to what we expect for our retirement.  The more aware we become of what influences us, the more we can examine our paradigms, and test them against reality.  This is the first step in shifting our investment paradigm.

While none of Covey’s writing is specifically geared to investing, we think his approach is well suited for today’s investor.  He explains that while paradigms may need to shift to see a whole picture, there are principles that are immovable.  Investing principles are sometimes forgotten, but that doesn’t make them less constant.  Here are several that we’d like to highlight:

  1. Know yourself- This is critical to investing and relates to the above discussion.  As financial advisors, we will ask many questions to better understand your objectives as well as what emotions will impact your investing.
  2. Focus on the fundamentals- In this age of instant information, fundamentals can be overshadowed by sound bites.  Each investment has to be analyzed on its fundamentals, including but not limited to valuation and growth prospects.  In the short run, stocks can move on emotion, but in the long run fundamentals always win.
  3. Build a diversified portfolio- This is a time-tested approach that balances risk and reward.  Investors often resist diversification when they look back at historical returns and want to buy what has been successful.  Our job is to find the best investments across the spectrum and use our tools to maintain diversification inside of an allocation customized for you.

With this in mind, the full picture or perspective will differ for each client and will revolve around each client’s needs.  We realize that your expectations will be set by these perspectives.  Our years of experience have taught us that your expectations will determine how you view volatility as it relates to your situation.  Therefore, understanding your perspective helps us to guide you in accomplishing your objectives.  It is our role to take your views and beliefs and incorporate them into the philosophies we use on long-term investing.

We continue to believe the market holds opportunities and we realize that investments don’t move in straight lines forever.  In 2014, we expect some volatility in the U.S. as the economy finds its legs with less Fed support.  Even in this positive market environment we need to take defensive action to prepare for the next downturn.  In 2013, we shifted some of the gains to safer investments for clients that used the portfolio for current and future funding needs.  This is one of the strategies we’ve used for many years.  We may also begin to shift another round of profits to fixed/cash as we begin the year to allow for the volatility that will come in the future.  We have learned, as many of you have, that the market moves in all directions—without warning in most cases.  We believe that the diversified approach that we apply to all our clients’ portfolios is well positioned for the next cycle.  We also don’t want to be myopic.  Few regions around the world participated in the recovery the way the US did.  Value investors are finding select opportunities overseas.  In fixed income, we face a low interest rate environment that makes some of the traditional approaches challenging.

There will always be many distractions to derail your thoughts, just keep in mind that having the right portfolio allocation allows you to stay the course.  Selling into an up market makes more sense than selling after the market declines.  We like profits.  We will continue to evaluate all asset categories to find opportunities that should be incorporated into a diversified portfolio.  As with the two faces in the picture, investors sometimes only see what they can see.  We as advisors will help you understand what applies to your situation to help you through all types of market conditions.

We are honored to be working with so many wonderful individuals and look forward to speaking with you throughout the year.

Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA     
Asset Manager                                                            Asset Manager
“Turn the Page: Outlook for Economy/Stocks in 2014” Charles Schwab, January 2014; “Ten Principles of Investing” Charles Schwab, 2008; “The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change”, Stephen R. Covey, 1989

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