“Our clients come to us for advice on how to protect their future. We take that level of trust very seriously.”
- Dan Junkin

What Do a Rubik's Cube and Investing Have in Common? - Third Quarter, 2009

Dan Junkin

Both cause frustration - both are difficult to master - both are multi-dimensional.

But, ultimately, the Cube is only a game and investing is not.  We invest today, so that we will benefit in the future.  We invest for some event in the future, such as retirement - for ourselves or for others.  We invest for our heirs and - perhaps - for their heirs.  We invest for an endowment or foundation and for current and future beneficiaries.  In all cases, investing is an extremely serious undertaking.

However, what makes investing so tricky is that it is a present activity aimed at a future need.  And even though we are buying assets now, we are influenced by the past - perhaps too much so.  We tend to project forward what has happened in the most recent past.  So, in a rising market, we may mistakenly pay too much for a stock, because our instincts tell us it will continue to appreciate.  And vice versa in a falling market.

If we have trouble assessing the present, we dont do a whole better with the future?  Again, time is a difficult phenomenon for us.   Who, among us, in the Fall of 2007, foresaw the coming credit crisis?  Or, at the stock market low, on March 9th of this year, expected an approximate 30% jump in the stock market - in three short months?

It is a challenge to accurately value assets today - in light of recent history - and to construct in our minds the coming future.  So, what to do?  

Modern Portfolio Theory (MPT) - essentially - proposes mixing differing assets in a way which reduces risk and enhances return.  In this approach, diversification is a free gift to investors - so the rising track of one asset class offsets another which is stalled or going south.  Despite the apparent downside correlation of most asset classes in 2008, MPT is still valid and should be used by long term investors.  A long term asset allocation and disciplined re-balancing is the best way to deal with the vagaries of time and our own emotions

Despite the caveats above, we do have opinions about the future.  The stock market should end 2009 with a total return of about 25%.  There is likely a US Treasury "bubble" - produced by too many investors pushing up Treasury prices and pushing down yields.  There may be pull-back in reaction.  The recession will likely end in the second half of this year.  Housing is beginning to look less dire.  National unemployment will not exceed 10.5%.

Please don’t hesitate to contact us, if we can be of assistance with your investment questions.

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