February 2012

In 2012, Focus Long-Term

As we head into another year, allow me to extend our appreciation to all clients for your continued support and patronage. While the past 12 months in the markets were volatile, PWL’s steadfast approach to risk management, portfolio rebalancing and diversification has once again proven its worth.

At this time of year, many people re-evaluate their personal and financial course. With all the headlines about turmoil in Europe, political instability in numerous countries around the world, and financial news suggesting a still-stuttering or stagnant U.S. economy, you may be concerned about the short-term risks in the marketplace.

Most are keen to avoid this short-term market volatility. You may even be tempted to move money to “safe” havens, such as low interest government bonds and treasury bills. That can be a mistake.

Short-term risks are often driven by what we don’t know and can’t predict. We can, however, take steps in structuring your investment portfolios to mitigate them. For instance, these short-term risks will only incur capital loss if your portfolio is insufficiently diversified.

The table below lays out our vision of the risks investors face. As it shows, the biggest risks to avoid in investing are not the short or even medium-term ones, which can all be managed through effective diversification. Rather, it is the risk of not meeting objectives in the long run that should concern investors most.
The safety of cash and bonds is comforting, but it will be very detrimental if interest rates and inflation continue on their present course. For example, yields from cash and Government bonds range from 1% to 3% these days. Inflation, however, currently exceeds 3%. This is why bonds, government bills and even cash are not the safest choices.

This slow and quiet erosion of buying power, or “Financial Repression” as coined by economists Edward Shaw and Ronald McKinnon in the early 1970’s will severely impact retirement plans if left unchecked.

While I am not suggesting you avoid bonds and T-bills - they do stabilize the portfolio when markets are rough - I would suggest not sitting on the sidelines in the coming year. There will be plenty of good opportunities ahead.
At PWL, we take care to keep a long-term view of your portfolio by rebalancing as needed, avoiding concentration risk and diversifying your holdings. With these thoughts, we look forward to a prosperous New Year for all.

Short-Term Risks Medium-Term Risks Long-Term Risks
Market (swings in stock prices) Political (failure of the rule of law) Financial Repression (erosion of buying power)
Credit (Country/Corp ability to pay debts) Concentration (focus on single stocks) Longevity (outliving your assets)
Result: Result: Result:
Volatility Capital Loss Poverty