2011’s Been Quite a Year

Hello everyone,

It has been an interesting year so far. Here is a spreadsheet with a summary of the performance of each asset class in our full 12 asset models for the Fourth Quarter 2011, and for the Year to Date.

This table is a great example of why people to claim to predict the future are dangerous. Many people, including a local bank’s chief market strategist, predicted a year ago that stock would rise and bonds would fall in value as interest rates rose in 2011. They were right for the next few months, but look what happened…. Gold, bonds, and real estate are up for 2011. Stocks are down, and international stocks were hammered.

In spite of that, most of our client accounts are positive for the year and very near their highs. That is why I’m increasingly confident that our methodology works in bad times and good.

Merry Christmas and Happy Holidays!




9/22/2011 Historical Post

From: Dale Beals <dpbeals@comcast.net>

Subject: Market Update – and encouragement
Date: September 22, 2011 11:15:45 AM CDT
Hello again everyone,
It looks like the equity markets are crashing today, but I am very satisfied with the way we are positioned. The conservative accounts are approximately 70%-75% cash, and the aggressive accounts are approximately 55%-65% cash. I actually added stocks and real assets to most accounts this morning.
After watching the market reaction to the Fed’s announcement yesterday, I closed out the hedge on the US dollar because everyone flees there in a crash. This morning I sold the last of the bonds and will be sticking to equities, real assets (and cash) for awhile.
Right now, the equity markets are down about -10% for the year, and about -20% from the highs this spring while we are roughly flat overall for the year, depending on your risk model. I expect the forced selling to continue through the end of the month, but I will stick to my plan rather than try to predict the future.
Look for the quarterly performance reports to come out in the first 5-10 days of October.
Best Regards,

9/21/2011 Historical Post

From: Dale Beals <dpbeals@comcast.net>
Subject: Client Update … My view of the markets…
Date: September 21, 2011 8:49:28 AM CDT

Hey everyone,

I just wanted you to know I’m making a (hopefully) temporary adjustment to your portfolios…
Based on recent market activity, I now think that bonds, especially U.S. Treasuries, are more “dangerous” … that is, vulnerable to a sudden, big drop in value … than stocks. I’m not actually making a big bet on stocks… they could still drop from here. But we have dodged the big bullet with the recent stock drop, in my opinion. Many of your accounts are at, or near the highs for 2011, so I’m comfortable with our positions in equities and real assets.
So, I’m continuing to use my allocation model to manage portfolio risk, but I’m removing bonds from the asset mix for a time. This means that, until the equity and real asset markets calm down, your accounts will have a lot of cash.
To hedge that cash against a sudden drop in value of the U.S. dollar, I’m going to put part of your cash into an ETF that basically holds other, higher interest currencies around the world.
Please call me with any questions. Thanks for your business and your trust.

8/10/2011 Historical Post

From: Dale Beals <dpbeals@comcast.net>
Subject: Update on Market Behavior and how it Affects Us
Date: August 10, 2011 10:32:57 AM CDT

Hi Everyone,

Remarkably, the equities markets needed only about 10-12 trading days to erase almost all the gains of the last 12 months! I will say that this does NOT look like the crash in 2008-2009 to me. In my view, it seems more like the “flash crash” of 2010 played out over days instead of minutes. Note that people have been buying Gold and bonds as desperately as they have been selling stocks. In the 2008 crash, there came a time when people were selling everything simultaneously.
We, however, are doing very well relative to the markets. My rough estimate is that accounts have dipped from your recent April-May highs by no more than 1.5-3% (vs. the markets 13-18%), depending on how conservative or aggressive your strategy is. Part of that is due to my investment model and part is due to my decision to move you to cash just before the fatal vote by our leaders in Washington. I’ve been re-investing gradually as markets fell and am now just about at the target allocations for your model portfolios.
Though I normally only send out performance reports quarterly, I will be sending my clients an interim performance report after August 15th, so you can see how things are going. I am very pleased with how well the asset allocation model has shifted away from the increasingly volatile stocks toward asset classes like bonds, gold, and cash. I plan to stick close to my tested strategy, rather than try to guess what will happen next.
Looking ahead a few months and years, I believe we will work through many of these problems that seem insurmountable now. In my view, stocks and real assets (commodities, real estate, etc) will be the best performing asset classes.  In the short run, making bets on what will happen tomorrow or next week is a losers game in my opinion.
Please feel free to call me with any questions you may have.
If you know of anyone who is not happy with the communication or service or risk management they are receiving from their current investment advisor, please direct them to me. The character of the markets has changed, perhaps permanently, and I believe the old way of investing is far too risky for the people you care about.
Thanks for your trust,

8/1/2011 Historical Post

From: Dale Beals <dpbeals@comcast.net>
Subject: Update
Date: August 1, 2011 11:26:33 AM CDT

Well, surprise, surprise… the announcement of a “deal” between the President and the leaders of both parties only boosted the markets for about 30 minutes after today’s opening trades in the stock market. By about 10:00 AM Eastern, the stock markets were flat and now they are down more than 1.5%. Equity markets have now fallen approximately 4-5% since we moved almost all positions to cash last week.

So, for the younger, growth-oriented clients, I am investing about half of the cash back into our growth model portfolio. You have plenty of time to ride out an additional dip, and, if there is a sudden upward reversal, you will benefit by being partially invested.
I am waiting for further developments for the older and/or more conservative clients who would normally be invested in the Conservative, Balanced Conservative, or Balanced Model.
As I’ve said before, my primary goal is to avoid big losses in your accounts. Over time, I’m very confident that our methodology will make money so, if we avoid big losses, we’ll hopefully be like the turtle that beat the hare.
Please let me know if you have any questions.

7/27/2011 Historical Post

From: Dale Beals <dpbeals@comcast.net>
Subject: We’re getting out for awhile
Date: July 27, 2011 11:34:54 AM CDT

Hi everyone,

We’ve had some nice gains since the beginning of July, and we’ve done well vs. the S&P500 since the beginning of April.
The U.S. debt ceiling discussion in the news is a situation that I can’t properly assess for risk to your savings. It certainly does not have a precedent that I can go back to, in my judgement. I have watched interviews with some very smart people who I respect and, underneath the fancy words, they don’t seem to know what will happen, or even what would result from different scenarios like an increase in the debt ceiling followed by a downgrade of the US bond rating (AAA) from the rating companies.
I believe most of what we see is political theater which will lead to a last second compromise followed by a relief rally in the equity and bond markets. If that occurs, we’ll miss the initial rally.
However, there is a small probability that there will not be a compromise and that the debt ceiling will not be raised. That small probability entails potentially huge risk, since the United States is at the center of the very complex global financial system. In this case, there could be a really big sell-off of both bonds and stocks around the world as people react to the disappointment and uncertainty this would cause. Diversification would probably not protect you much in that scenario.
I’ve always managed your money with the philosophy of eliminating or mitigating the worst case scenario so, even though the probability of a default or a downgrade seems small, the potential consequences to your life savings are too big to risk, in my professional judgement.
So, I’m moving almost all accounts to cash for a while. Some kids accounts and mutual fund holdings in small accounts will remain as they are. We’ll go back to the normal investment models when I perceive that the dust has settled.
Please feel free to call with any questions or comments.
Thanks for your trust and your business,

6/22/2011 Historical Post

From: Dale Beals <dpbeals@comcast.net>
Subject: Fwd: Your question about bond principal losses
Date: June 22, 2011 11:48:07 AM CDT

Dear clients and friends. Near the end of April, I cautioned everyone that we might be due for a period of sideways movement or even a bear market in stocks. The timing was a little lucky, but I’ll take full credit! Only time will tell if this pullback is minor or major, but I continue to recommend you keep an eye on your overall portfolio risk.

The real reason for this email is that I had a great question from a client about bonds in a rising interest rate environment, so I thought I’d share my answer to him with you.

Best Regards,
Dear C——-,
One of the most difficult things for folks following the conventional wisdom is to get past the fear of bonds in a rising interest rate environment. So, your question is a very good one. I thought a picture might be worth a thousand words, so I plotted the percent changes in price in IEF ( the 7-10 year US Treasuries) versus the change in value of the Balanced Model portfolio over the years from 12/31/2003 – 6/2/2011.
Intuitively, you would think that, since a “big” percentage of the portfolio is in bonds, the portfolio is vulnerable if bonds take a tumble. However, only 4 of the 12 asset classes are in the bond category, and the financial risk is balanced equally across the 12 asset classes (remember risk is measured by volatility). Therefore, the movement of the overall portfolio is not necessarily driven by the movement in the bonds, as the graph below clearly shows.  To my eye, there is no apparent consistent correlation between how the US Treasuries move (up or down) and how the overall portfolio moves. Look closely at periods where Treasuries rapidly dropped or rallied … and see how the overall portfolio performed.
Why does this happen this way? Because the different asset classes are not all correlated… they don’t move together, except in times of great fear or great optimism. During those times, when the overall volatility of the entire portfolio increases, the methodology keeps a lid on risk by raising cash from all asset classes. During “normal” times, when only bonds become very “risky”, the methodology reduces bond exposure and moves the money to other, less “risky” asset classes. In a sense, we don’t care if we suffer losses in bonds (or any other asset class) over a short period, as long as the other asset classes are not all going down at the same time.
I hope this helps with your question.
Just a closing thought… when you actually apply the math and look at the real data, conventional wisdom is wrong a surprising amount of the time.

4/25/2011 Historical Post

From: Dale Beals <dpbeals@comcast.net>
Subject: The Markets
Date: April 25, 2011 10:09:03 AM CDT

Hi Everyone,

I just finished reading an interesting book on the financial markets… “Super Boom” by Jeffrey Hirsch.  As many of you know, I like to read a lot, and like to get the perspectives of people who have very diverse opinions… from wildly optimistic to predicting doomsday. This author, Jeffrey A Hirsch, was slightly on the negative side short-term and very positive long-term. Here are some interesting facts from his book:
The Average Bull Market (Dow Jones Industrial Average going up) since 1900 has lasted 755 days and moved up 85.7%.
Our current Bull Market, which began on March 9, 2009 has moved up approximately 91% (on the Dow) and lasted 774 days or so as of this morning.
The last three Bull Markets ran for 501 days (starting 8/31/98), 179 days (starting 9/21/01) and 1826 days (starting 10/9/02), so there is a lot of variation, especially after big stimulus by the Federal Reserve.
The Average Bear Market (Dow Jones Industrial Average going down) has lasted 410 days and dropped -31.5%. Keep in mind that if you have a -31.5% drop you need a 41.9% gain to break even.
Don’t be surprised if we level out or even have a bear market beginning in the next few weeks. We’ve learned that sometimes stocks don’t need an obvious reason to go up… or to go down at any specific time. We’ve also seen long periods when the U.S. economy did well but stocks did poorly, and vice versa. So, be prepared for more volatility.
Can we make money in a Bear Market? Yes. How? By being diversified among multiple asset classes and managing our risk. However, risk management is key, because there will be periods when investment accounts drop.
Accordingly, I recommend you review your portfolio risk in the light of your financial situation and investment goals, considering how comfortable you would be with your current portfolio if the stock markets take a dip.
Please call if you have any questions. Also, please know that I would really enjoy just getting caught up with you on your life in general. Feel free to call me at 615-414-1942.
Best Regards,

2/7/2011 Historical Post

From: Dale Beals <dpbeals@comcast.net>
Subject: Update
Date: February 7, 2011 10:20:07 AM CST
Several things have changed my view for the better…
1. Egypt seems to be settling down.
2. The stock markets are today trading at new highs, overcoming the resistance of the last couple of weeks.
3. The state financial troubles would seem to primarily affect municipal bonds and, perhaps other bonds, but not the stock markets right now.
4. My models have flipped back toward stocks and real assets and away from bonds.
While some things I perceive as problems still haven’t changed, the market psychology stays positive.
So, today, I am going back to normal allocation for the younger and more aggressive clients. I will wait awhile longer for the retired and more conservative clients.
Thanks again,

2/3/2011 Historical Post

From: Dale Beals <dpbeals@comcast.net>
Subject: Market Thoughts and your portfolio
Date: February 3, 2011 10:21:03 AM CST

I just wanted you to know that I have essentially moved to cash for awhile to see how the markets absorb the global news as well as the potential municipal bond crisis. I believe the risk outweighs the probable profit opportunities for the next few days or even the rest of February. As you know, my view can change, but I wanted you to know what my thoughts are.

Here are my reasons:
1. My portfolio model (see the web site for more info) has been giving me many conflicting signals during the month of January. We have received an overweight (or buy) signal only to have the model immediately reverse itself several times in January.
2. Egypt’s unrest could spread to other Arab countries and eventually disrupt the flow of oil and the normal flow of global business… hurting corporate profits which could then cause stocks to fall.
3. The U.S budget issues combined with our rapid approach to our spending/debt ceiling will probably cause a lot of politicking and possibly change the psychology of the market participants.
4. Several U.S States are in big financial trouble, and there are rumors that Congress may pass legislation allowing states to default on their debts in some fashion, thus affecting business profits and affecting those who bought state and local bonds.
On the other hand, the stock and commodity markets have recently powered higher in spite of all the bad news out there, due to Bernanke and his gang, and that might possibly continue.
So, I’ll begin moving back in when the risks seem balanced by the opportunities… especially for the younger clients who are still working.  It may take a little longer to get back into things for the retired clients…. I’ll be calling you to chat about your individual situation soon.
ALSO, you should have recently received a Quarterly Report from Scottrade and/ or Interactive Brokers. Several people have been confused by those reports, so please call me if you have any questions.  I’ll be happy to sit down with you and review them line by line and show how they reconcile to the Morningstar reports I send you each Quarter.
Thanks again for your relationship.