|
Page 4 of 7
The second choice was to try to cover up the mistake and continue on the same path as before and I genuinely think that is more realistic than the first option, but not the best choice. There are clear distortions in the pricing of assets at this moment. That is clear as we watch prices move in multiple percentages on any given day and in multiple directions. The credit crisis last year also changed some long held rules or practices in the banking world which created changes in the economic landscape. The "frame" of how we view the past has to be adjusted to make room for some of the changes of the current landscape, which includes but is certainly not limited to the three legs of economic change (think of a stool if you will) globalization, demographic shifts and technological innovation. Simply moving forward with no adjustments is most likely a mistake, but the adjustments should be made based on changing conditions not market pricing in our opinion.
The other choice is to modify the original art work to fit the "frame" we have today. The first decision has to be the intended result and which are most important to you: Principal, Income, Growth or market neutral with some income opportunities which we refer to as an endowment allocation. Is it that simple? On paper, yes. In reality, no.
We watched fixed income portfolios last year fall as much as 30 percent ‐ equal to and sometimes exceeding the loss in the equity market - and for the most part the income produced did not change. How can this be? The secrets of asset pricing can be haunting. If you chose principal protection then you were clearly distraught over what happened last year, just as you were if the goal was growth. On the other hand, if income was the objective, little appears to have changed. Which one are you? Can you have both? We don't think so in this economic condition driven by changes occurring in the three legged economic stool mentioned before.
Our suggestion is to choose an endowment model if you have the desire for some income now or in the future, but not a specific requirement today. This model means you cannot compare your returns to that of the broad equity market. We would suggest the growth portfolios if you believe your need for income is years off or you are searching for opportunities. If you require income, then the portfolio needs to be aimed in that direction and the day‐to‐day value of the portfolio ‐ even the year‐to‐year value ‐ must take a back seat. Each is right for different reasons and for different portfolios. Notice I said different portfolios, not different people. We feel strongly that we are entering a period of time where one family may have very different needs within multiple portfolios.
The Economy
When my girlfriend and eventual wife (over 20 years ago) and I were on the way for her to meet my parents for the first time, I couldn't have experienced more emotions. The fears of "what if they don't like her" to the pure joy of sitting next to her were racing through my heart and head. I even remember the music that was on - Alabama if you care - and suddenly I hit black ice. My little red pickup swerved out of control into oncoming traffic. I still believe God righted the truck and put me in the ditch with mere inches between me and the oncoming vehicle. By inches we avoided a near certain fatality. The memory still makes the hairs on the back of my neck stand up 21 years later almost to the day. The event was so scary that Barb and I never mention the event to one another - not then, not now.
My contention is that many of you, if not all of you, have a similar experience to share, and even those of you who haven't, can reach a decided visual. Without there even being a wreck, we all understand the severity of the potential outcome. None of us waves off the encounter without thanking Jesus for our safety, because we knew what could have happened if those few inches of safety ad been removed.
|
RSS
