The Fiscal Cliff

Posted on: October 10, 2012| Posted by: FJ Wealth Management |


Topics in this report include:

The new report format.

The Fiscal Cliff?

The S&P Indices versus those active stock picking fund managers.

Investor mistakes and regrets.

Sucker punch?


The quarterly report format has changed!

We hope you like the expanded, revealing, and colorful quarterly report. The top line has the account ownership name in the middle and the type of account it is just to the right (IRA, Roth, etc.). Each type of account you have has its own individual report, just as in the past.

The first page has several graphs starting with the large circle on the top left. This visual displays the allocation of your holdings which are shown just to the right of the circle. If, for example, your US Stock holdings (in green) are shown on the right as 50%, the graph would be half green. Of note is that the cash percentage reflects both actual cash held in your account plus any cash that may be held temporarily by the mutual fund companies. We know you can figure this one out.

The middle section of the page may need a tad more explaining. This shows your portfolio’s return for several periods. The line chart on the left indicates the daily value changes which, in this chart, is the quarter 7/1/12 to 9/30/12. You can see from the normal gyrations that anyone following and worrying about their portfolio on a daily basis might need psychiatric help or at least an occasional sedative.

The Returns bar chart on the middle right reveals this portfolio’s annualized return for up to five periods. These are: 1 month, 3 months, year-to-date (in this report 1/1/12 to 9/30/12) and the 1 year return (which in this bar chart is month end September 2011 to month end September 2012). We will eventually have a 5 year returns bar. We hope you find this is a soothing graph.

The Performance by Account (at the bottom of the page) Is fairly self-explanatory. The data shows the beginning quarter account value, additions, withdrawals, income, ending value and return for the period. This return is calculated in accordance with SEC guidelines.

The follow page(s) is the detailed account evaluation. This is a different and slightly expanded format that now includes the symbol and the gain/loss for that security since it was purchased.

These report enhancements were due, in part, to the feedback we received from you via the recent independent survey. We appreciated your comments and suggestions.

The Fiscal Cliff

Between now and year end you will be inundated with news about the fiscal cliff. The date is January 1, 2013 when the Bush tax cuts, the payroll tax cut and cuts from the 2009 stimulus bill are set to expire. These items that are set to end are not and have not been part of our taxation landscape for decades; they are relatively new policies that were designed to stimulate our then slowing economy.

How bad is the fiscal cliff? No one knows. The Heritage Foundation believes that Congress’ inaction has created uncertainty that is already affecting the economy. The Center on Budget and Policy Priorities deflates the doomsday forecasts and believes failure to resolve the expiring tax policies will not plunge the economy into recession.

Congress has a very low approval rating among voters except that generally we believe our elected officials are doing a decent job. When I think of Congress I don’t visualize a faceless mass or the face of Nancy Pelosi or Mitch McConnell. Personally I see the face of Alfred E. Neuman. Remember Alfred? The fictional cover boy of Mad magazine!

At the moment I don’t know where to rank the Fiscal Cliff. Do we put it ahead or behind the forecast that revealed:

The March 9, 2012 “Greece default is official triggering insurance payout.”

December 9, 2011 “US Government to shut down if Congress fails to approve stop-gap spending measure’”

Y2K. On January 1, 2000 “all of the computer systems around the world will cease to function.”

“Go…….you sure……yea! Thelma and Louise just before the cliff.

Bad news sells, it does so because fear is a more powerful emotion than greed. News headlines and feature stories play on the fear factor. We don’t know how the cliff will play out. We will monitor the action of Congress as it pertains to fiscal policy and act in a prudent manner regarding your assets. In general we expect to remain diversified and follow our mutually agreed upon investment policy.

S&P Indices versus active stock picking

As you know, the majority of your portfolio is in passive-index type funds. We are not beholden to this type of asset management and would switch our investments to a better style provided that it also had fifty years of data to support its “better” approach.

Originally the investment world centered on the stock brokerage business. John Ferguson was a broker in Chicago and St. Louis before there were S& P Indices, financial planning, asset allocation, international investment classes, and prudent diversification. Many brokerage firms still market portfolio management that focuses only on domestic large cap stocks. That means they’re excluding 18-20 other asset classes. Sort of like “dark ages” investing!

Some pundits and old style brokers claim that passive investing has had its day and that since 2007, when the market peaked, active has beaten passive. But, they are incorrect.

With the exception of large-cap value stocks, active stock picking fund managers in all categories did not outperform their corresponding benchmarks. Sixty five percent of large cap fund managers and eighty one percent of mid-cap managers fell behind their target index. The small cap funds were just as bad with over three quarters of them falling behind the indices that we employ.

This is only part of the story. We all know that diversification among numerous asset classes (large, mid, small, micro, emerging, etc.)provides the greatest return with a lower degree of risk than that of just one asset class. But active fund managers are notorious for what is known as style shift. For example, the small cap fund of five years ago may now be micro or large cap. This style shift does not happen with our Dimensional, Vanguard or Russell index funds.

Investor Mistakes and Regrets

Academic and on-line polls both indicate that the number one investor regret is being too cautious.

We attribute this to many factors. Most of us do not have even the slightest bit of formal education regarding investments, savings, planning or historical financial events.

The following two graphs are designed to give you a better perspective as to market reactions and crisis response. The world hasn’t come to an end yet and I do not foresee the Mayan forecast of the world ending this December 2012 as having much merit.

2012 Q3 quarterly reportOctober 2012-page-003



2012 Q3 quarterly reportOctober 2012-page-004


Sucker punch?

This year-to-date has been a year for large cap, blue-chip type stocks. They have outperformed most asset classes except for international real estate. The small, micro, and emerging markets have lagged behind. Now for the sucker punch!

The average investor has a tendency to look at what is currently performing the best and then make a shift in their portfolio allocations; dumping the underperformers and buying the current winner(s). This is contrary to a sound asset allocation strategy; rebalance by adding to the laggards. The following Randomness of Returns graph which we have shown before reveals the dynamic changes from year to year in the ranking or return of twelve different asset classes. If you go to 1998 you see that US Large Cap stocks returned over 28% for the year. They didn’t lead the pack for another thirteen years and for the next four years were below average performers.

The diminishing stock brokers’ model is pushing their large cap investments. They have to since they have underperformed in most other asset classes. Large is all they have left to promote. It’s a sucker punch.


2012 Q3 quarterly reportOctober 2012-page-005



During the remaining three months of 2012 we will be busy reviewing each account to make certain that the minimum required distributions have been made and that you have made your IRA contributions for the year. We will also be looking at ways to minimize taxes from your accounts. One consideration that may keep us on the edge of our seats, until perhaps late December, is looking at the actions or inactions of Congress. It may be advantageous for some of you to take any available tax gains this year and, for others of you, next year might be best. We also may choose to defer losses to benefit you in 2013. This will depend on many criteria that we will consider on an individual basis.

Warm regards to you from John, Derek, Dawn, and Sue

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