Rearview Mirror

“He’s that secure isn’t safe” Benjamin Franklin

We are approaching the time of the year when many families begin getting excited about their summer family vacations. Since it appears so much easier for people to plan their vacations, then make decisions on their investments we thought a simple driving analysis may make it a bit easier. While driving many travelers look through the front windshield, yet in investing it is not that easy.  Despite all the warnings against it many investors still look through the rearview mirror to analyze their investments.  Past performance is not a guarantee for future performance.

Isn't cash king? In October 2008 Warren Buffett, one of the best investors suggested that cash is not king(1). Recently, the bond king, Bill Gross, suggests US treasuries are not king either (2). Should an investor totally avoid cash and treasuries? In short, we do not think so. Mr. Buffett and Mr. Gross have different investing objectives and tolerances for risk in investing than you do. We do believe that you should be extremely careful in using these two categories in your portfolio.

The reason for caution is inflation. Since 1982 inflation rates have been going down, and they have been accompanied by interest rates going down. Currently the Federal Reserve is targeting short term rates near zero. Inflation can be described as a devaluing of your dollars. Over the short-term inflation is rarely a problem. When it compounds over the long-term, inflation can be quite troublesome.  This is one of the reasons both above do not like cash or treasuries as a long term investment.

The Federal Reserve is currently in a bailout of the economy mode. More specifically, they are attempting to bail out debtors.  The short-term objective is to stabilize or increase the price of the assets on which these debts were based. The long-term objective is to allow these debtors to repay these loans with less valuable dollars. The United States government is a very large debtor. We do not believe there is a free lunch. In trying to bail out these debtors, the Federal Reserve is artificially keeping interest rates low, and is thus punishing savers, and investors, who bailed out of their assets due to sharply declining prices during the financial crisis. While one should allocate some investment resources to these categories for the purposes of withdraws and holdings for future investment opportunities, one should also consider the cost of such holdings.

While no one can see through the front windshield of investing, we believe you should try to analyze where we are now, as well as where we have been, instead of relying on fear and enthusiasm to guide your decision making.  Below is a guide we have taken one from one of Ron Muhlenkamp’s memos(3). Below each we have updated this with current figures.

Therefore as the quote above suggest sometimes while attempting to make our portfolio “secure”, it can be at significant risk to long term inflation. We hope that your travels are safe this year.

See you next time.

James Pope

1. http://www.nytimes.com/2008/10/17/opinion/17buffett.html
2. http://www.bloomberg.com/news/2011-03-10/gross-dumping-treasuries-leads-managers-calling-rally-s-end.htm
3. http://www.muhlenkamp.com/investment/principles/problems_with_investing_for_income
4. http://www.bls.gov/news.release/cpi.nr0.htm
5. http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=tyx&insttype=&freq=&show

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_{Past performance may not be indicative of future results. The above individual account performance information reflects net of applicable transaction fees and other related account expenses. Account information has been compiled solely by Advisor.Investments, has not been independently verified, and does not reflect the impact of taxes on non-qualified accounts. In preparing this report, Advisor.Investments has relied upon information provided by the account custodian. Please defer to formal tax documents received from the account custodian for cost basis and tax reporting purposes. Please remember to contact Advisor.Investments in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct Advisor.Investments to effect any specific transactions for your account. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon request.}