MAY 2011 NEWSLETTER
Risk management is all about looking at the path ahead, and trying to navigate it effectively. There is a common disclaimer within our industry that says “Past Performance is no guarantee of future results.” In fact, you’ll see that phrase in our disclaimer at the bottom of this letter. An equally important phrase should be “Past results should not impact future performance.”
As portfolio managers, we acknowledge that we exited stocks in general too early throughout late 2009 and early 2010. We felt strongly, and a good deal of our research supported, the fact that there were still a litany of risks underlying the run-up, and that caution was merited. In our newsletters, we continue to point out the numerous points of weakness we see in our current global economic system. The important points to keep in mind are – 1) We will continue to monitor market risks and let avoiding them guide our decisions, and 2) We are keenly aware of the potential for additional buying opportunities in the future.
With regards to point 2, here are just a few of the litany of risks we see, and portfolio management responses that could result in gains –
- If there is continued concern about the United States credit rating (or even a credit scare), then we could see rates rise. Our action would be to buy longer term bonds at the higher rates.
- If we see inflation run wild as the Fed’s second round of Quantitative Easing expires, then interest rates could also rise. Our action would be to buy longer term bonds at the higher rates.
- If we see a general business slowdown, and corporate profits fall in line with continually lower analyst estimates, then we could see depressed stock prices. Our action would be to buy quality stocks at (hopefully) significant discounts. We are just now beginning to leave the era of “Best Ever” year-over-year earnings data. Recall that stocks have seen tremendous gains simply because companies improved their profits compared to those seen one year prior during the Great Recession.
- If we see a double dip in the housing markets, and banks are forced to acknowledge losses in their mortgage portfolios, then we could see stock prices fall. Our action would be to buy quality stocks that have historically paid good dividends at (hopefully) significant discounts.
- If we see US economic growth (GDP) numbers coming in below the annualized 4% estimated necessary to correct unemployment, then we could see stock prices fall. Our action would be to buy quality stocks…
*Keep in mind, the First Quarter 2011 GDP figure was 1.8%
- If we see deflation, then we may see stocks and commodity prices come down. Our action would be to look for potential bargains.
- If we see deleveraging (debt reduction) of both the U.S. consumer (you) and the Federal Government, then companies will report lower earnings and stock prices may fall. Again, this would present a potential buying opportunity for stocks.
- If we see additional overstimulation, or manipulation, of the money supply by the Federal Reserve Board, then we may see a higher degree of volatility in the markets. Our action would be to buy stocks at potentially lower prices.
Risk is not managed in a vacuum. Our complex global economy has many moving pieces that can affect our investment markets and pull things in a variety of directions. Above all it is important to have a plan, and to be able to take advantage of opportunities as they present themselves. We are positioned to do so.
We look forward to discussing with you soon.
Until Next Month,
Your Advisors at Dominion Wealth