2011 Winners & Losers

As a volatile financial year comes to a close, I thought it best to reflect on the large impacts to the financial landscape for 2011.  So I will give you my list of winners and losers for the year.  However, I want to take a different spin on this type of commentary by focusing on winners & losers within 4 major topics affecting the financial universe this year. 

News Networks – Those that read my blog, or work with me on their financial planning have more than likely heard me reference the “creation of crisis” that is created by the 24-hour news networks.  Well, 2011 provided no shortage of crisis.  Financial markets down one week had them proclaiming the return of financial armageddon (a la 2008); with a subsequent rebound rally 2 weeks later.  I often urge people to take headline news with a grain of salt when it comes to personal finance.  Financial reporters are unregulated financial pundits—meaning they can say whatever they want and they are not held to any standard.  This is not the case with those folks who hold any investment license, but reporters fall into an exempt category.  No wonder every week is a new crisis.  Compound that with every other commercial on these networks focused on selling gold to the viewer, and you have networks getting rich on selling fear.

Winners: Network Corporations   Losers: Nervous viewers cashing in their IRAs to buy gold 

Europe – When continental Europe entered into the single currency in 1999, it seemed like a fantastic idea. The prolonged issues in Europe over the last two years continue to revolve around no central decision making body to set fiscal policy for the Union, while the European Central Banks sets monetary policy. The debt crisis in Greece was like a virus that infected the world including Italy, Spain and France, scaring the global economy. On Dec. 5, French President Nicolas Sarkozy and German Chancellor Angela Merkel called for a new European Union treaty to help curb spending in an effort to end Europe's debt crisis and save the continent's euro currency.  As Europe turns (pretty much every week), US financial markets react with polarity.

Winners: Europe (if they can come up with a central policy/treaty)    Losers: US Banks 

Occupiers – Life isn’t fair…let’s put that out there straight away.  But when someone comes through a college graduation to spend the next few years of their life unemployed, it starts to take a toll.  Protracted unemployment has sapped the morale of the working American—and I believe that is what we are seeing in the Occupy protests.  Meanwhile corporate profits have continued to rise. One thing is for sure, companies will not invest in hiring until they have a clearer picture of their expenses to hire for the foreseeable future—and that remains difficult with health care legislation still in question and no long-term agenda for taxes. 

Winners: Are there any?                                  Losers: Everyone (Closing of West Coast ports as the ultimate example)

Polarized Washington – The failure of Congress to come to any swift conclusion on raising the debt ceiling resulted in S&P cutting the US credit rating from AAA.  But with the refusal of policy makers to address a number of issues, it was only a matter of time.  Entitlement reform, out of control deficits, tax reform—“compromise” is not in the vocabulary of any of these politicians.  The recent failure of the “Super-Committee” is just one more example of a year of political brinksmanship.  The leadership vacuum in Washington is quickly becoming a black hole.

Winners: Career politicians                            Losers: The next generation of Americans

It is difficult to isolate the “most important issues” of the year when you write one of these kinds of pieces, but I believe these will have the most lasting effects on us all.  The bright news for the start of 2012 is that the underpinnings of the US economy continue to foreshadow strength.  Cheers to a happy and healthy new year to all.

Asset Location is As Important as Asset Allocation

After a year in which the Euro vacillated between survival & collapse, democracy reached the shores of North Africa, and Wall Street got “occupied”, one thing remained sure & true: VOLATILITY.  As I meet with people every day, it is the ubiquitous item that is keeping people up at night as they prepare to transition to & through retirement.  

A 1991 study conducted by Brinson, Singer & Beebower showed that 91% of an investment portfolio's performance is determined by the allocation of its assets—meaning diversifying (& re-diversifying) your investments between different types of companies is the best way to assure long term performance gains & reduce risk.  More recently though, the increasing complexity of economic forces and the interdependence of global markets have contributed to significantly alter the investment landscape. The current market environment poses new hurdles: unprecedented volatility, economic forces putting pressure on equity markets, the prospect of a resurgence in inflation, & rising interest rates, all compounded by unfavorable demographic trends for most of the developed world. In short, to paraphrase an old saying, in today’s investment landscape, the only certainty is that nothing is certain.

Investors can no longer necessarily rely on traditional strategies to reach their financial goals. As a result, traditional diversification (or Asset Allocation, as it is called) may not be as effective as it once was in serving investors’ needs.  However, the concept of choosing investments based on how they correlate with one another—how their prices change in relation to each other—is still an integral part of investment planning. But asset class diversification alone may not get the job done.

What I call “Asset Location” has become just as (if not more) important as asset allocation.  Asset location is about diversifying across different investment vehicles to take advantage of possible tax advantages, income focus, or non-traditional investment classes.  While traditional asset allocation remains important for a significant portion of your portfolio, asset location can help you to build an infrastructure around your investment plan to help weather times of protracted volatility.

This is how financial planning benefits the investor—more specifically, it structures portfolios by combining different asset classes and investment vehicles in an attempt to provide more effective diversification in order to combat volatility, mitigate risk, overcome inflation and provide income in your retirement years.

Please remember that diversification, asset location and asset allocation do not guarantee profit nor protect against loss in a declining market.  They are methods used to help manage risk.