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The Markets

Michael Schwartz | Tuesday, April 20th, 2010

Lloyd Blankfein, the chief executive of Goldman Sachs, described himself as “doing God’s work,” in a profile last year in London’s Sunday Times. Last Friday, the SEC charged Blankfein’s firm with defrauding investors in connection with securities linked to subprime mortgages. Investor reaction was swift as Goldman’s stock dropped more than 12% on the day and the Dow Jones Industrial Average lost 125 points, according to Associated Press.

A volcano in southern Iceland erupted last week and sent a massive ash plume across Europe, which caused the cancellation of tens of thousands of flights over a several day period and created unexpected hardship for millions of travelers, according to CNN. This floating ash plume is costing the airline industry at least $200 million a day, according to the International Air Transport Association.

So, what’s the connection between the Goldman Sachs fraud case and the Icelandic ash plume? Nothing! Yet, in the world of investing, seemingly random and unpredictable events like these can materially affect financial markets and specific stocks.

The fact that random and unpredictable events can trigger financial disturbances is one reason why it is important to keep an eye on capital preservation and not just focus on capital appreciation.

Data as of 4/16/10 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) -0.2% 6.9% 37.1% -6.7% 0.8% -1.6%
DJ Global ex US (Foreign Stocks) -0.2 3.6 47.2 -7.3 4.9 1.9
10-year Treasury Note (Yield Only) 3.8 N/A 2.8 4.7 4.3 6.0
Gold (per ounce) -0.1 4.3 30.8 18.8 22.0 15.1
DJ-UBS Commodity Index 0.3 -2.9 19.3 -7.8 -2.3 3.5
DJ Equity All REIT TR Index -3.3 11.0 65.2 -10.4 3.9 11.4

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

WHICH IS MORE IMPORTANT–making sure you participate in the market’s 10-best performing days or avoiding the market’s 10-worst performing days over any given period? Based on the 81 years between January 3, 1928 and March 31, 2009, here are some numbers to help us answer this question, according to data from Invesco Aim:

  • The 10-best performing days in the S&P 500 index yielded a daily average return of 11.7%. The 10-worst performing days yielded a daily average return of -10.8%.
  • If you missed the 10-best performing days, $1 would have grown to just $14.99.
  • If you missed the 10-worst performing days, $1 would have multiplied to $143.47.
  • If you missed the 10-best and the 10-worst days, $1 would have grown to $47.59.
  • On a buy and hold basis, one dollar invested at the beginning of this 81-year period would have grown to $45.18 by March 31, 2009.
  • All 10 of the worst performing days occurred during bear markets as did seven of the 10 best-performing days.

Here are a few thoughts on interpreting this data:

  • First, missing the 10-best performing days reduced your growth over the entire 81-year period by about two-thirds compared to staying fully invested during that period. This makes a case for staying fully invested so you don’t miss these big up days.
  • Second, missing the 10-worst performing days more than tripled your results compared to staying fully invested. This suggests that historically, if you had magical powers to foresee the future and were out of the market on the 10-worst performing days, your return would have more than tripled the return of the fully invested buy-and-hold strategy. This makes a case for market timing.
  • Third, missing both the 10-best and 10-worst days in the market had very little impact on your results compared to just staying fully invested during the entire period. Score another one for buy-and-hold.

But, let’s be realistic. The above numbers are based on historical data, you cannot invest directly in an index, and few people have an 81-year investment horizon. And, by the way, nobody we know has the ability to perfectly time the market and pinpoint the 10-best and 10-worst performing days before they happen.

This data helps support two of our beliefs. First, the historical data shows the importance of risk management relative to return maximization. Second, we design your investment plan to meet your financial goals, not simply to capture or avoid the best and worst days in the market. Ultimately, it’s your number that we are trying to achieve.

Weekly Focus – Think About It

“You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

–Warren Buffett

Value vs. Growth Investing

Here are the numbers (4/16/10)

Name 1-Week YTD 4-Week 13-Week 1-Year 3-Year 5-Year
US Market -0.02 8.34 3.16 6.22 42.80 -3.99 3.85
Large Cap -0.16 6.69 2.89 4.65 38.01 -4.47 2.97
Large Core 0.31 7.58 3.25 5.89 38.89 -1.69 4.06
Large Growth -0.17 4.75 2.52 3.78 42.13 -2.21 3.35
Large Value -0.63 7.63 2.86 4.21 33.01 -9.81 1.07
Mid Cap -0.01 11.87 3.53 9.58 54.52 -3.39 5.80
Mid Core -0.04 11.19 3.35 8.56 51.96 -3.57 5.46
Mid Growth 0.53 11.64 3.80 10.30 51.23 -2.35 6.83
Mid Value -0.50 12.86 3.47 10.06 60.74 -4.61 4.82
Small Cap 1.35 15.01 4.73 12.48 60.56 -1.89 6.61
Small Core 1.73 15.58 5.64 12.58 59.98 -2.80 6.56
Small Growth 1.73 13.38 4.28 12.36 51.01 -2.46 5.70
Small Value 0.60 15.97 4.18 12.51 71.10 -0.91 7.22
US Core 0.34 8.94 3.45 6.96 42.97 -1.94 4.62
US Growth 0.12 6.73 2.92 5.68 44.55 -2.23 4.30
US Value -0.51 9.24 3.08 5.94 40.71 -8.11 2.30

Source Morningstar.com

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

Office Notes

Caring For Your Aging Parents (Part 3)

Financial and tax considerations for you

Caring for your aging parents is not only an emotional burden for you but may be a financial one as well, depending upon how well off your parents are and how much caring for them costs. Because many adults today are becoming first-time parents in their thirties, and others are remarrying and rearing second families, increasing numbers of adults are finding themselves in the “sandwich generation.” They face having to pay expenses of growing children (including college expenses), plan for their own retirement, and support their aging parents financially. Thus, it’s important to plan not only your parents finances, but your own as well.

Financial planning for your parents

Making sure that your parents won’t outlive their money is a critical step in ensuring that your own finances will remain sound. In particular, you’ll need to make sure that your parent is receiving all the benefits to which he or she is entitled and that his or her money is invested wisely. You’ll also need to create a financial profile for your parents, a statement that includes income, expenses, and net worth.  If, after considering your parent’s financial condition, it’s clear that they won’t have enough resources to pay for their own care, you’ll need to find ways to supplement their income. You may need to look at Supplemental Security Income (SSI), for instance, or ask other relatives for help. You’ll also have to determine how much financial support you can give your parents (see below).

Financial planning for you

Besides caring for your parents, you have a lot of other financial obligations. Before you can determine the best way to help your parents financially, you’ll have to look at your own financial picture. Not only will you need to consider your current expenses, but you’ll have to look down the road a few years, considering how much you’ll need to save for your own retirement and, perhaps, for your child’s education.

TIP: Due to the complexities inherent in providing adequately for several generations in the same family, consider seeking the advice of a financial professional.

Tax benefits for children supporting aging parents

Federal income tax law provides several tax benefits to you if you are supporting your parents financially. If you have a dependent care account at work, you can put pretax dollars into the account that you can use to pay for some costs associated with caring for your dependent parents. You may be able to claim an exemption for your parents as dependents, and you may be entitled to claim a dependent care credit. In addition, you may be able to file your taxes as head of household and deduct medical expenses you paid for your parents. For more information consult your tax advisor.

Questions & Answers

If you are financially supporting your parent, is he or she entitled to receive Social Security benefits based on your earnings?

If you are providing at least one-half of your parent’s support at the time of your death, and he or she is age 62 or over and is not entitled to a retirement benefit that is equal to or larger than the amount he or she would receive based on your earnings record, then he or she may be entitled to receive a parent’s Social Security benefit equal to 82.5 percent of your primary insurance amount (PIA).

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