From: Dale Beals <firstname.lastname@example.org>Subject: Fwd: Your question about bond principal lossesDate: 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,DaleDear 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.Thanks,Dale
From: Dale Beals <email@example.com>Subject: The MarketsDate: 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,Dale
From: Dale Beals <firstname.lastname@example.org>Subject: UpdateDate: February 7, 2011 10:20:07 AM CSTSeveral 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,Dale
From: Dale Beals <email@example.com>Subject: Market Thoughts and your portfolioDate: 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.Dale
From: Dale Beals <firstname.lastname@example.org>Subject: Hedges coming offDate: November 4, 2010 3:53:14 PM CDT
Hey everyone… yesterday’s move by the Fed started a tidal wave today that may run for awhile… good for stock holders… so this morning, when it was clear the market would be strong, I removed most of the hedges, which reduce both up and down movement in portfolios. Unless there’s a big reversal, I plan to remove the rest of the hedges by the end of next week.Then we’ll be back to your normal portfolio allocation. Those of you who watch the markets closely may realize how close we came to another “flash crash” yesterday. Initially, just after the Fed announcement, the market went up, then plunged nearly 1.5% in 5-10 minutes before reversing in the next 30 minutes or so to eventually show a modest gain for the day. I was very happy the hedged were in place.Folks who don’t watch the markets closely may wonder why I’m so cautious around big events like the elections or this particular Fed announcement. The reason is that we are in uncharted skies as far as the financial markets are concerned. Autopilot is fine for flying in clear weather, but you want a pilot at the controls when the air gets turbulent. In a week, you may (hopefully) unbuckle your seat-belts and feel free to move about the cabin.Thanks for letting me serve you,Dale
From: Dale Beals <email@example.com>Subject: My thoughts on the markets…Date: October 9, 2010 10:07:23 AM CDT
To help you stay well-informed, I thought I’d send along a recap of the key events that influenced U.S. and global financial markets during this past week.
Feel free to e-mail or call me after you’ve had a chance to review it.http://www.mfs.com/wirMy Own Thoughts…A few months ago, I suggested that the doomsayers and the wild optimists might both be frustrated for awhile and the market might just bounce up and down in a sideways range for several months. That scenario played out exactly. Just a short time ago, we were told that September was historically the worst month for the market, and we were in for big trouble. Everyone who believed that history would repeat sold in August and Sep 2010 turned out to be very good for those with a disciplined approach (or those who were lucky).In fact, the US stock markets broke upward out of the range they traded in over the last few months during September, although we still haven’t matched the highs of earlier this year. Now what?I expect more sideways, up and down trading ahead, with some big moves related to the upcoming elections. I could be wrong, but I’ll be surprised if stock go straight up from here. Short term equity market moves seem to be dominated by investor emotion, while the longer trends seem to relate to expected profits over time. The elections will affect how investors feel short-term and their perception of future market opportunities long term. Look out for a bumpy ride.Cautions:1. Don’t chase gold by over-allocating to the precious metal because of how it has done over the last 10 years.2. Don’t give up on equities and load up on bonds because bonds have done so well over the last 5 years. Remember the last 3 quarters of 2009. Very few (including me) predicted that rebound in stocks.3. Don’t stay trapped in a “strategic” asset allocation that someone recommended at some time in the past. Markets change. Rebalancing to a specific allocation without looking at how markets (and risks) have changed can be dangerous. Just look at 2008. A “safe” 50% stock/ 50% bond allocation got hammered when markets changed.4. Don’t fall for those who say that because they have smart people, they can predict the future and therefore make you a lot of money (either by picking stocks or by picking asset classes). Many brilliant hedge fund managers have suffered this year in 2010 making those types of bets. I had a subpar first quarter this year because I bet against big US banks.5. Don’t fall for sales pitches that would have you buy some fund or manger based on a stunning track record. Often that record is too good for anyone to achieve consistently over time. There aren’t many Warren Buffetts, and he has some pretty big advantages.Recommendation:Stay disciplined. Stay diversified. Stay flexible. Stay with an advisor or asset manager who is in constant communication with you and who spends more time thinking about your account risk-adjusted performance, as it relates to your life, than about getting their next client.Please call me at 615-414-1942 with any questions or comments.Best Regards,
From: Dale Beals <firstname.lastname@example.org>Subject: Dale’s Market Commentary 🙂Date: July 27, 2010 6:59:45 PM CDT
Hi everyone,As you know, I don’t write many market commentaries, since there are many good ones out there, but I thought it would be useful to step back from the last month or two and take a look at the big picture.Back in April, 2010, all was well and any stock market pessimist was booed offstage, or off CNBC, or anywhere else for that matter. Then, after a nasty market drop in May and June, the New York Times featured an interview with Robert Prechter, a man who has been foretelling doom since the late ’90s. “Everyone” wondered if he could finally be right. Now, at the end of July, the Dow Jones and the S&P500 have come all the way back to break-even for the year, and everyone is congratulating themselves on how well the European banks passed their easy “stress” tests.There is a lesson in here for all of us… actually several lessons.1. Permanent Bulls and Permanent Bears are both right, eventually… just like a stopped clock is right twice a day.2. Public sentiment about the market is usually greatly influenced by the media reporting of the recent past, and therefore is often wrong… especially when everyone seems to agree.3. There is plenty of bad news still out there waiting to be blamed for the next market pullback; and there is plenty of positive news still out there to be credited with the next market rally, but you should not believe the causative links market commentators propose. (stocks rose because of good earnings, or stocks fell because of credit woes)4. There will be many industry experts who will have amnesia and claim they called the recent tops and bottoms, even when you can google what they actually said for yourself.When times appear uncertain, people look to those who claim to have the answers, even if they don’t have a great track record. Even now, some boldly predict a big rally up from here. Others equally boldly predict that the bottom will fall out of the market any day.I will not claim to know the future myself, but I will ask the question: “What if the market just meanders up and down in an 8-10% range for awhile and frustrates all the market timers and buy-and-holders? Or, what if the market does go to the moon from here?Either way, we’ll be OK. Our methodology for asset allocation and risk management (finally completed in January 2010) handled the 2nd quarter roller-coaster quite well (up, down, and sideways), and if we stick to a disciplined approach,we will continue to be OK.For those of you who are not my clients today, I would appreciate the chance to provide you a portfolio analysis and review. I believe my investment methodology is better and less costly than any you may be using today. I recently contracted with Morningstar to provide portfolio performance reporting and research services. You might be surprised at how my portfolios compare to yours when looking at advanced portfolio metrics like Sharpe ratios. You might even be more surprised at how much less expensive our portfolios are for the same general portfolio profile.Finally, let me express my deepest gratitude to my existing clients for the fact that Dale Beals Financial Wisdom LLC just celebrated its first anniversary in June, and we are doing well.Please call with any questions or comments.Best Regards,Dale
From: Dale Beals <email@example.com>
Date: May 9, 2010 8:39:45 PM CDT
Just wanted you to know that I bought some (but not all) of the stock funds back on Friday that I sold on Thursday. My recollection is that all purchases were below the closing prices of Thursday (good for us), although some were still above the sale prices of Thursday. Why?
1. Methodology – the asset allocation discipline we follow is superior over the long run to anyone’s attempt (even mine… especially mine?) to outguess the market direction from week to week. Once I knew the immediate “crash” would not continue, there was no reason to continue overriding the methodology. I’m confident the methodology (and we) will handle a decline just fine, and make good money over the long run.
2. Stock Market/ Investor Behavior – Stocks rarely go in the same direction every day for very long. Since last week was so brutal, the probability is high for a bounce sometime early this week, especially if the Financial Leaders in Europe come up with a “solution” for the Greek debt crisis over the weekend. (Remember when the US Government announced the 1st and the 2nd bailout packages? There were always bounces, even if they were temporary.)
I want to emphasize my belief that we will make money over time by following a discipline, not by trading in and out of the markets. Thursday’s market behavior involved the biggest one day point drop in the history of the Dow Jones industrial average, so, it made sense to play it safer with your money until things stabilized somewhat. Volatility will probably continue… up as well as down… for a while, but our methodology compensates for that, and manages risk accordingly.
Thanks for your trust. I fully intend to profit from the expected market rushes of greed and fear by following our discipline.
From: Dale Beals <firstname.lastname@example.org>Subject: Today’s market insanity … what I did and why…Date: May 6, 2010 4:20:24 PM CDT
Dear clients and friends. After returning from a client lunch appointment today, I saw that the US stock markets had gone from -1% (before lunch) to -4% in just an hour or two. Then the market went into free fall and I decided to begin selling most of your stocks in case this was a 1987-style one day crash (that day was -25%). There was a point when many equity or commodity markets were down 7% or more before we found a bottom for today.The good news is that because we were well diversified, the Gold, IEF and TLT, and the TIPS (US Treasuries) were all sharply higher as people fled from stocks, so your accounts did not suffer anywhere near the market losses. I’ll get you interim balances over the next few days, but just wanted you not to worry. Our proprietary asset allocation methodology worked very well today against the unexpected.The bad news is that the US stock markets finished “only” down -3.2% or so, so some of the securities we sold finished today at higher prices than where we sold (of course nobody knows where they will open tomorrow morning). One promise I made you when you became my clients, is that I would not let you take big losses if I could possibly help it, so I made a “safety first” decision today. If the market goes straight up from here, we will have missed an opportunity, but I prefer to play it safe when dealing with your money. Hey, just think about those who never heard from their traditional brokers or advisors today. Even if those brokers wanted to act for their clients, they would have been restrained by regulations because they don’t have discretionary authority to act quickly on your behalf. Also, those brokers do not have the same fiduciary responsibility to their clients that I have to mine.Now for the future. I’ve never seen a day like the last few followed immediately by a happy return to normal. A spike in volatility usually produces more volatility. While the press may blame a “trader error” or a “technical pullback” for the selloff today, they can’t explain the last week’s decline like that, nor can they explain why so many people were sitting with their “hand on the button” to sell. People are getting scared, and I expect more volatility.Many of these scared people are professional mutual fund and hedge fund money managers. Even though many professionals have been uneasy, they felt like they “had to” stay invested as long as the markets were going up, or risk losing clients who feared “falling behind” or “missing an opportunity”. We could even see another big down day in the next 2-3 days.Whatever happens, I’m going to take the increased market volatility into consideration when rebalancing your accounts after I have a day or two to reflect on the markets.Safety first.Thanks for your trust,Dale
From: Dale Beals <email@example.com>Subject: Just a quick update on my thinking … please call with any questionsDate: February 3, 2010 7:16:09 PM CST
Dear Clients,First, thanks for hanging in there with me when I was so timid from September on. The dip I was concerned about finally arrived, and I was able to dollar-cost average some money into the market this Monday morning, Feb 1 at a good time. Last Friday and Monday, the S&P 500 was back down around the levels from last September and October…. Amazing how the market can give back several months of gains in less than 2 weeks.I don’t know if there is more downside after the bounce of Monday and Tuesday. If the market goes lower after today, I’ll plan on more downside and may hedge a little. Either way, the plan remains the same…. dollar-cost-average into the market, based on our models, at the rate of 10-20% more each month.For those of you who are watching your holdings and comparing to the Asset Allocation Sheets from Appendix A of your Investment Strategy documents,I’m going to use EWJ – the ETF for Japan’s Nikkei index instead of EFA – the ETF for Europe’s developed markets, for the non-US developed markets.I’m going to use GAZ – the ETF for US Natural Gas instead of USO – the ETF for US Oil as part of the allocation in the Satellite portfolio.You may also notice the symbol UUP – the ETF that tracks the movement of the US Dollar against a basket of other currencies. Right now, believe it or not, the US $ has begun an uptrend which we will opportunistically follow until it ends.Don’t put too much stock in what they say on CNBC every day about why the market went up (or down). What years of study have shown me is that every day there is plenty of bad news and there is plenty of good news about the markets or the economy. If the markets go down, then the pundits link that to fear of unemployment, or fear the stimulus will stop… or any of the bad news of the day. Their reasons may have nothing to do with what actually tipped the scales.Similarly, when the market is up, the pundits will say “Intel had great earnings” or “Manufacturing index rose over 50.0”. They don’t know what really tipped the scales any more than you and I. They are like sportscasters who have to keep talking about the action, so folks will stay interested and keep watching their commercials. Making investment decisions on what pundits say is extremely hazardous to your savings.What does matter, and what can be used, is an understanding of the emotion or sentiment of the “Big” investors and the “Little” investors. Like you and me, our overall view causes us to filter the news and focus more on the good news or the bad news, depending on how we feel. The “Big” investors are not immune to this, but they are aware of it and try to compensate. The “Little” investors are usually wrong when they all agree.That is why asset diversification is so critical. That is why allocation of your money to each asset class, based on its volatility and direction is so key to managing risks. That’s why a steady discipline has kept us from big losses during the 2008 crash.Let’s look at our scenarios again:1. Inflation, leading to higher interest rates and devaluation of the dollar.2. Recovery, where we keep reasonable interest rates and gradually return to prosperity.3. Recession / Depression, where economies turn down and stock markets drop.A month ago the inflation and recovery scenarios were about even, and the recession/depression scenario was in 3rd place.Now, in my view Inflation and Recession are tied in 1st, with Recovery in third.I’ll keep watching and positioning with an eye to 1. Risk Management, 2. Disciplined asset allocation, 3. Averaging back into the market, and 4. Opportunistic trades when I think reward outweighs risk.I appreciate each of you so much.Thanks for everything.Dale