January 3, 2013

I hope you and your family had a great Holiday Season and I wish you good health and prosperity for the New Year. Being American and living in this country is a blessing and I am grateful for all the opportunities we have. On the investment front it has been a great year for equities. As usual the stock market has been seen as a dangerous place to invest, and everyone (myself included) has been worried sick that we have too much exposure and we need to pull back. Sitting tight was the smart thing to do. The long term record of stocks; for inflation protection and asset appreciation is hard to beat. This year the S&P ended up 15.92% if you add 2.08% in 2011 the 15.05 % in 2010 and the 26.62% in 2009 you understand why the pensions, endowments and foundations have the stock positions they do. Looking at the numbers from an average annual return basis you have 10.87% for 3 years 1.66% for 5 years and 7.10% for ten years. While the 3 year numbers are very weak they are as good as an average CD.  It is important to remember that volatility and risk are different things and we are investing for your lifetime not a few years. If we have inflation that an improving economy may bring, the “safe harbor” of bonds may turn out to be not so safe. When interest rates go up bonds go down.  So with the Fed punishing savers the same question comes up. In a possibly inflationary, maybe deflationary, high unemployment, low interest rate, slow growth environment where should I/we invest our money? The answer is to have some in equities some in bonds and some in guaranteed accounts.

As we start the New Year, Obama is our president. Enjoy not hearing your phone ring off the hook from election calls. The “fiscal cliff” is just about the only thing you hear on the news. I stated in my last letter “I will not discuss the fiscal cliff.” I’m glad I didn’t because I’m sure you are getting as tired of hearing about it as I am. Regardless I have some insights on the cliff and the news we receive. First it is not a cliff but a slope, the spending cuts in 2013 are in the 100 billion range.

Second, I’m confident you have noticed as well, but just in case you have not, I am amazed to hear the description of the expiration of the Bush tax cuts NOW being an enormous blow to the middle class. We were told again and again it was a tax cut for the wealthy only. It turns out that in fact, it benefited everyone. Third we are being told (I mentioned this last quarter) if we just raise taxes by 1.6 trillion (over ten years) our federal deficit will be solved, yet we are now spending a trillion PER YEAR more than our income and our current total debt is 16.4 Trillion. We need to stop talking about the revenue side and discuss the spending side. We are on a path to bankrupt our children and grandchildren. They will look back on our generation with distain. Look at what is going on in California and Illinois. It will not surprise me to see a proposal for the rest of the country to bail out these spendthrift states. The “agreement” to solve the Fiscal Cliff is nothing more than kicking the can down the road. The amount of money raised is not enough and the discussions of cutting spending are non-existent. EVERYONE will be paying more in taxes even if we pass something close to the provisions of Simpson Bowles. We will be bombarded in the next two months with discussions on entitlements spending and new taxes, but without the cuts we will hit debt ceiling after debt ceiling.

In closing, and on the lighter side, a song which has gone “Viral” is “Gangnam Style”, you might want to Google and watch it. It will make you laugh and scratch your head. I look forward to seeing you and as usual if you have any questions please contact us. I want to thank Kathy, Bill, Keith, and especially you!

Yours truly,

Willis

Willis Ashby, CFP®

Footnotes:
Morningstar Advisor 12-31-12
Wall Street Journal various dates
TD Economics

 

Categorized under: Our Articles