2010 Wrap Up
To begin, we thought it would be helpful to revisit the significant financial events along with some of the Lowe Wealth Advisors perspectives for 2010.
Last year began with an atmosphere of anticipation for continued economic recovery. The market responses were going “as expected” until late spring when the European Debt Crisis erupted and sent shockwaves around the world. Ironically and almost simultaneously, most economic data began to reflect a peak in the economic recovery.
Risks factors, then, increased and the prospect of a “double dip recession” seemed possible. At this time, Lowe Wealth Advisors made a strategic decision to position our actively managed client portfolios toward potential asset preservation. We recognized and communicated with clients regularly that if the market rallied unexpectedly, we would lag the benchmarks. However, we believed that the risks mandated a conservative financial management approach.
As 2010 progressed, new asset classes were added to most allocations. These included infrastructure and holdings that could benefit from merger and acquisition strategies.
When we fast forward to the fall a surprise market rally developed and, as predicted, most of our portfolios lagged benchmarks due to the conservative approach we adopted earlier (in light of the prevalent risk factors). Most economists and analysts felt that absent a significant improvement in unemployment and other key economic improvements the rally would not be sustainable and the risk of a stock market decline remained.
The market rally was followed by the Federal Reserve’s actions (QE2) that they hoped would result in stimulation to the economy. Many investors and economists questioned whether the Fed’s action would work, and in fact, expected it to create an environment of a falling dollar and rising inflation. Lowe Wealth Advisors responded immediately and reduced/reconfigured the bond exposure in our actively managed portfolios.
Toward the close of the year, we did begin to see a reduction in the level of risk in the capital markets in the short-term time frame. The extension of the current tax laws became the final factor resulting in Lowe Wealth Advisors’ shift away from the conservative allocations. We moved our actively managed allocations toward their full target equity allocation as we moved into December.
In summary, it was the perceived risks of 2010 that drove our conservative approach and caused us to lag the benchmarks in the short term. Investing, as we have often stated, is a marathon –not a sprint — and we are confident that in the long term we will achieve our goals. In times of elevated risk, we would rather be wrong by being too conservative than wrong by taking too much risk.
Note: the below commentary should not be considered a recommendation for any investment strategy nor should it be acted upon or used to purchase or sell securities without professional guidance specific to your situation.
Looking forward into 2011, we currently believe the first half of 2011 has the potential to see a rising equity market, relatively low inflation, and a strengthening dollar. We expect this will be followed by possible economic and stock market weakness for much of the second half of 2011.
We anticipate being fully funded in our equity allocations, and possibly slightly overweight in certain actively managed allocations, through the first half of 2011. We plan to continue using strategies around the themes of dividend focus; merger and acquisition; infrastructure; materials, and where appropriate, financials and technology.
Bonds may remain challenging and the allocations will be dependent upon interest rates and inflation levels. High yield bonds (bonds which are of lesser credit quality and potentially greater default risk) could play a part in our bond allocations early in the year.
We anticipate continuing to hold our allocation in gold (where appropriate) as we start the new year. It is reasonable to expect that gold could potentially stall in the first half, but then continue moderate growth if the equity markets weaken in the second half of the year.
One major risk factor that we see for 2011 in the commodity asset class is around China. They have been in our opinion, one of the major drivers of commodity prices — particularly oil — during the past year. A slowing of the Chinese economy could manifest in a significant correction in commodity prices. Should this scenario develop, Lowe Wealth Advisors would consider utilizing it as a buying opportunity by adding exposure to energy stocks and possibly in the Chinese markets where appropriate.
Despite the current favorable outlook for equities there are still some longer term risks to the economy as capital markets. We still need to see improving unemployment, continued consumer spending and rising corporate profits over the long term in order to have sustainable growth. Pressures on municipal government budgets, inflationary pressures and interest rates all remain real risks to the recovery in the coming years.
Finally, conflict on the Korean peninsula could pose an additional risk, which would prompt Lowe Wealth Advisors to adopt strategic shifts in our actively managed portfolio allocations.
Announcements for 2011:
In conjunction with our consultative resources in Morris Segall and Anirban Basu, Lowe Wealth Advisors is pleased to announce that we are hiring Ned Davis Research, Inc. to enhance our current process and team resources by providing us with an additional resource of independent research. It is clear to us that the complexity of the economic and capital market environment for 2011 will become more complex and challenging.
Ned Davis Research is an independent financial research firm providing investment research since 1980. NDR brings the resources, ideas and insight of numerous market and economic strategists to Lowe Wealth Advisors. According to NDR, their team utilizes data from over 200 sources as they prepare the resources for their clients, such as Lowe Wealth Advisors.
We are looking forward to this addition to our team of consultants.
Tax Data Available mid-January
For clients who have a taxable account with Lowe Wealth Advisors we will provide a realized gain and loss report, as well as cost basis data to share with client accountants. This information is to be used in conjunction with the Fidelity statements and tax reports.
We hope to have the reports available to clients by mid-January.
The tax reports from account custodians, such as Fidelity, are typically mailed by January 31. However, in recent years the IRS has extended this deadline to ensure the accuracy of the data and reduce the need for amended statements that have often been sent after January 31.
Please remember that advisory fees paid through IRA accounts are not tax deductible. A portion of advisory fees paid through taxable accounts or directly to Lowe Wealth Advisors may be deductible. Individual client CPAs should be consulted for specific advice regarding the deductibility of advisory fees.
New Client Service Agreement
During 2010 Lowe Wealth Advisors retained a new regulatory and compliance management firm called Market Counsel. Market Counsel reviewed our current client service agreements to confirm they were up-to-date and consistent with the current regulatory environment.
While the current agreements received favorable comments from Market Counsel, they noted several minor items which required updating.
In early 2011, you will receive an updated Client Service Agreement from Lowe Wealth Advisors along with a letter explaining the updates.
We thank you in advance for promptly signing and returning the updated document to Lowe Wealth Advisors.
Upcoming Educational Programs and Opportunities*
- January 11, 2011, 4 P.M.: The 2011 Outlook Conference Call with Morris Segall
- Late Winter/Early Spring 2011: An Economic Update Lunch with Anirban Basu
- November 5, 2011, 8 A.M. – 12 Noon: The Lowe Wealth Advisors Annual Breakfast Meeting at the Harbor Court Hotel, Baltimore
*Additional information regarding the above and future programs will be forthcoming.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Not all portfolios are actively managed. If you have a question about how your account is being managed please contact us. Generally accounts less than $150,000 are not actively managed. An Index is a portfolio of specific securities (common examples are S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance is not indicative of future results.
- Not all portfolios are actively managed. If you have a question about how your account is being managed please contact us.
- No diversification can completely protect against market risk or other risk factors with investing. A diversified portfolio could still lose money.
- An Index is a portfolio of specific securities (common examples are S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance is not indicative of future results.
Foreign investing carries additional risk such as currency risk, political risk and different accounting standards.
*Lowe Wealth Advisors is a registered investment advisor.