History Lessons in the Fourth Quarter

Many investors were ready to say goodbye to the 2011’s third quarter with extreme volatility demanding attention and negative returns for many types of investments.  Indeed, when you review the chart below, the fate of most investors was grim from June 30th to September 30, 2011.

 *Source: JPMorgan Asset Managment

News from the Europe has been dismal.  Questions linger about the growth prospects for US and global markets.  Whether we’re experiencing a new or double-dip recession or just very slow growth, the economic picture does not feel rosy.  

While emphasizing that past performance does not predict future returns, the fourth quarter has historically been the best return environment for stocks.  While the third quarter has been the worst performing quarter for the S&P 500 on average (going back to 1928), the fourth quarter has been the best.  Interestingly, this trend has been even more distinct over the last 20 years. 

 *Source: Bespoke Investment Group

Many people will be watching third quarter earnings as they are announced as an important gauge of trends in our economy.  Greece and the Eurozone’s issues are far from resolved.  Don’t get too distracted by these headlines to lose the lessons of the history of returns.

[1] All indexes are unmanaged.  MSCI EME represents emerging market equities.  Russell 2000 is an index of 2,000 smaller U.S. companies.  MSCI EAFE is an index of large companies in developed countries outside the US.  REITS is composed of the NAREIT Equity REIT index composed of US Real Estate Investment Trust equities.  The S&P 500 is an index of 500 widely held stocks that’s generally considered representative of the U.S. stock market.  DJ UBS Cmdty is compiled by Dow Jones and represents the price of a basket of commodities.  Market Neutral is CS/Tremont Equity Market Neutral index with long and short exposure to stocks.  Barclay’s Agg is an index of US bonds representing a variety of investment grade bond assets and weighted by outstanding composition.  Inclusion of these indexes is for illustrative purposes only.  Individuals cannot invest directly in any index, and individual results will vary.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Any opinions are those of Melissa Joy and not necessarily those of RJFS or Raymond James.  Expressions of opinion are as of October 14, 2011 and are subject to change without notice.

Gold Sparkles, But For How Long?

There has been much interest in the media over the past year regarding gold as the bullion price per ounce has gained nearly 30% this year.  As a result, investor interest in gold has increased as a diversifier to portfolios because many view this as a "safe haven." Gold is a “fear” asset class, and uncertainty in almost every risk asset class has intensified gold’s price increase.  Much of the gains this year can be attributed to growing uncertainty surrounding U.S. Treasuries and European Sovereign debt.  Investor demand has also increased because the asset class has become more accessible through new products such as ETF’s (Exchange Traded Funds). 

In the past gold has shown itself to be a good hedging instrument against inflation and a weakening dollar and tends to have almost no correlation to stock and bonds.  Other investments also serve as a potential hedge against inflation and a weakening US dollar such as TIPS (Treasury Inflation-Protected Security), commodities, and foreign currency bond funds.  Naturally, gold has been part of our research efforts on this front.  The run up in the price of gold over the last few years is a concern to us (see chart below). 

The cost to extract gold from the ground is roughly $740 per ounce.  With gold trading over $1,882 per ounce as of 9/2/11 that is a $1142 premium.  This could indicate a supply and demand imbalance and perhaps, panic or speculative buying.  Gold’s price has often been driven more by speculation or its role as investment portfolio “insurance” than by fundamentals.  As a result, gold is subject to market risk. 

Sources:

No-Load Fund Analyst July 2009

Geoff Considine Ph.D., Advisor Perspectives, Sept. 2010

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and are not necessarily those of RJFS or Raymond James.  Investments mentioned may not be suitable for all investors.  Past performance may not be indicative of future results.  Gold is subject to the special risks associated with investing in precious metals, including but not limited to:  price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.

Investing Against Human Nature

“The loser is the trend-chasing, comfort-seeking investor. The market doesn’t reward comfort. It rewards discomfort.”  Rob Arnott

The above quote brings to mind a book I read recently, The Little Book of Behavioral Investing by James Montier. It attempts to describe in detail why we are our own worst enemies in investing. 

Human evolution has dictated much of our decision making process and emotions.  In modern society we don’t have to play the predator/prey game of survival on a daily basis.  Yet much of our instincts are based on this survivalist mentality developed hundreds even thousands of years ago. 

Contrary to when it was safer to go with the herd, a safety in numbers mentality can be detrimental when applied to modern investing.  Enter the discomfort.  Going against the grain when it comes to investing can be very scary, for example funding your Investment accounts when you’d rather throw a brick through your financial advisor’s window; however, it is generally where the best investment returns come from. 

Having a sound investment process in place to identify opportunities and maybe more importantly to avoid “knee-jerk” reactions is critical in investing.    Process, in an uncertain world, is one of the few things we can control.  Just as important as the process, is the time that must also be taken to reflect on your process when you are most successful and not necessarily when you are making the most mistakes. 

Investing involves risk and you may incur a profit or loss regardless of strategy selected.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.