Portfolio Construction: The Way We See It – Part 1

In this ever changing world we live in, there are “advisors” everywhere. Flip on the TV, pull up a news app on your mobile device, or even the national paper. I came across a gem a few weeks ago from the NY Times archives.

SUNDAY, June 5, 1994; Picking Stocks by the Stars

Published: June 5, 1994

For those who missed the recent conference on “Astrology and the Stock Market” in Manhattan (about 40 people attended), here are some tips from several of the hot sessions:

The Art of Timing: Combining Astrological Indicators — Graham Bates, London financial astrologer. “I’m worried and confused about the eclipses in November. I don’t know what they’re going to do, but I know they’ll be important.”

Stocks, Planets and Solar Cycles — Richard Mogey, executive director of the Foundation for the Study of Cycles. “There’s a 23 percent gain the fifth year of every decade because of the Jupiter-Saturn cycle. I’d expect the same in 1995.”

The Cosmic ‘Inner Winner!’ — Paul Farrell, author of “Think Astrology and Grow Rich.” “When Uranus and Neptune go into Aquarius, I look toward information and technology.”

Beyond Cycles: Using Interpretive Astrology to Identify Key Turning Points in Markets — Charles Harvey, president of the Astrological Association of Great Britain. “When there is a new moon in the eighth house, Placidus system, in New York, there is always a major change in interest rates. That happens July 8.”

Want something more specific? Henry Weingarten, who heads the Astrologers Fund (the conference sponsor), predicts, “Novell will be at 30 next May.” But, “If it hits 35 before then, I’m out.”

There will always be very smart individuals that develop complex theories of why and how the markets work. This is part of human nature and our innate desire to understand how our world works. This is why we have departments in government and universities dedicated to studying human behavior. Our investment approach at Parsec is incredibly simple. We accept that markets behave irrationally in the short term. We feel that it would be a breach of our fiduciary duty to attempt to predict short term market movements.

Fiduciary duty is extremely important to us. This duty is a very old idea, which was defined here in America with Harvard College v. Amory in 1830. The decision of this case scolded the trustees and instructed them of their duty to manage the trust as they would manage their own affairs. This is known as the “Prudent Person Rule.” Here at Parsec, when evaluating an investment, we ask ourselves first is this in the best interest of our client and secondly would we invest in this particular security.

Be on the lookout for further posts on this topic.

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Are They Made from Real Girl Scouts?

I spotted a headline online recently announcing that a new flavor of Girl Scout cookies would have a secret ingredient.  I laughed out loud.  I immediately thought of that line from the “Addams Family” movie, delivered so well by Christina Ricci, “Are they made from real Girl Scouts?”  (Look it up on You Tube.) 

As it turns out, the secret ingredient is not Girl Scouts; it is a vitamin cocktail.  I looked at the ingredient label on their website.  Yes, you get a small dose of vitamins when you eat 3 cookies…along with 8 grams of fat.  Am I supposed to feel better when I eat more than 3 cookies, because the cookies are “good for me?”

We all know that, no matter how nutritious new forms of cookies, potato chips, and burgers may claim to be, they cannot replace a balanced diet that contains fruits and vegetables.  Fad diets come and go.  You might lose a few pounds, only to regain them because who can eat mango smoothies all the time? 

You can apply the same principle to your investments.  Chasing the latest fad in investment strategy can be costly.  It is important to be very thoughtful about your asset allocation.  As we have said many times, it is easy to have an allocation of 100 percent equities in an up market.  It is extremely difficult to stick with that strategy when the market drops 500 points in one day. 

Your investment advisor is here to help you.  If you have not taken a look at your asset allocation in awhile, now is a good time to begin the conversation.  Have your goals changed?  Has your family expanded?  Have you started a new business?  All of these events, as well as many others, can prompt a change.  We are here to help, so put down the Girl Scout cookies and give us a call.

Cristy Freeman, AAMS
Senior Operations Associate

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Keep Calm and Carry On

While reading an article about the Nobel Prize award to two American economists, I spotted a headline to the right.  It featured a link to a story CNN wrote in honor of International Day of the Girl.  Titled “To my 15-Year Old Self:  Things I Wish I’d Known,” the writer posed that question to notable women in a variety of fields.  The link showed a picture of Oprah, because you always have to ask her those sorts of questions.

I find her rather annoying, so, naturally, I clicked the link.  The problem I have with her is she seems out of touch.  It is easy to talk about “living your truth” and “risking everything to pursue your passion” when you are a multi-billionaire for whom the risks brought great reward.  Do you think the person who just lost everything when his/her business collapsed feels happy and fulfilled because they “followed their dream?”  Doubtful.

Anyway, as I read the quotes from these highly successful ladies, it occurred to me that living in the past can be a dangerous thing.  Sure, it is good to look back and say, “Oh, I really wish I had not done that.”  On the other hand, you can become so paralyzed by fear of making the same mistake that you take no action at all.  The key is to learn from the mistake and get on with your life.

We can do that in our portfolios too.  There was a time when I was reluctant to invest excess cash in my portfolio because of current market conditions.  As a result, I missed out on some of the upticks in the market.  The lesson I learned is emotion has no place in investing. 

You may have similar feelings now with the upcoming election.  What happens if Obama is re-elected?  What would Romney do if he becomes President?  Will this country fall into a Great Depression or have a huge economic boom?  No one knows.  However, I would bet that, if you looked at previous elections, similar comments were said about the president and candidate then.  It happens with every election.  Work the crowd into a frenzy so they will watch the news.

We cannot change the past.  We cannot predict the future.  Let’s focus on what we can control (our behavior), keep calm, and carry on.

Cristy Freeman, AAMS
Senior Operations Associate

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A Little Contrarianism Can Be a Good Thing

In our most recent quarterly letter, we reiterated our belief that you should allocate 15-25 percent of your equities portfolio to international stocks. Some of our clients still question the logic of this position in light of the ongoing EU crisis. However, let me make a case for contrarianism.

While the pall hanging over Europe has worsened in the last few years, things have not been rosy for a long time. According to June 2, 2012 article published by The Economist (http://www.economist.com/node/21556299 ):

Robert Buckland, an equity strategist at Citigroup, points out that about 44% of pan-European corporate profits are generated outside Europe (British companies earn 52% of their profits outside the continent). Around 24% of European profits come from emerging markets, roughly double the exposure of American companies to the developing world.

This diversification is not a coincidence. European companies have already endured a decade of sluggish growth and have sought out markets elsewhere (for production as well as sales).”

This indicates that worsening conditions in Europe will compel European companies to expand even further into the global economy. And, our dividend yield loving clients have another good reason not to flee European investments. While the average dividend yield for American markets is 2.2%, European markets are yielding 4.1%.

Beyond Europe, emerging markets continue to provide opportunities for investment. Mongolia is enjoying a rapidly expanding economy thanks to a boom in coal and copper mining. The Arab spring has led some analysts to predict major growth in Libya. A return to oil production and distribution is giving Iraq’s economy a much needed shot in the arm. Additionally, economists see much opportunity for growth in Africa, with several countries expected to post growth rates in excess of 7.5%.

I am not suggesting that European markets have hit bottom or that you should put all of your international investment dollars in emerging markets. What I do espouse is that a well diversified portfolio for the long-term investor has some exposure to international equities, even when the headlines indicate otherwise.

Tracy H. Allen, CFP®

Financial Advisor

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Scared Money Don’t Make Money

Recently, I heard the above phrase in a rap song by Pitbull.  I was surprised to hear mention of investment risk/reward in a popular song.  He did not go on to discuss European economic instability or currency valuation.  That would have been truly shocking.

The statement provokes thought, though.  People who are willing to take the most risk have the potential for greater reward – and greater loss.  It is easy to have an asset allocation of 100 percent equities in an up market.  Can you keep that allocation when the market is significantly down?  Will you still sleep at night?

On the other hand, holding money in a money market fund earning near-zero interest is also a risky proposition.  You must find some vehicle in which to invest because you cannot afford to earn nothing for your money.  Inflation continues to rise, even when interest rates are not.  The dollar you stash in a mattress will not be worth the same 10 years from now as it is today.

Finding the right allocation is very tricky.  It requires a great deal of evaluation on your part.  What is your current age?  Do you have enough time to recover from a short-term loss?  What are your investment goals for the next 5, 10, 15 years?  When do you want to retire? 

This is just a sample of some of the questions you should ask yourself.  A thoughtful review of your situation with your investment advisor will help the two of you to determine the best asset allocation.  Being brutally honest with yourself and communicating your goals, thoughts, and concerns with your investment advisor will allow you to work as a team.  The two of you will be able to find the right allocation that can help you sleep a little better at night.

Cristy Freeman, AAMS
Senior Operations Associate

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