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Client Communication Briefings I just returned from Financial
Planning Association’s Retreat 2002, held at The Woodlands Resort just
outside of As we’re all painfully aware,
September 11 recreated the world, as we once knew it. The setback that
followed has and continues to impact many industries – trade, travel, our
military, entertainment, communications—to name only
a few that have been inexorably changed. Now we find ourselves embroiled in
the War on Terrorism, which President Bush has warned us will not be like any
other war we’ve experienced. Not only are we fighting a battle with armies
but also a battle of ideas and systems – free, open society versus closed,
controlled dictatorial regimes. Eventually freedom will win and with freedom
comes the greatest creation of wealth, both economic and "quality of
life" which every human desires. After the fall of Communism in the The technology bubble that burst
this past year was another wake up call. This one impacted all investors –
even those not directly invested in technology stocks. We investors took for
granted that we could rely on not only the companies’ financial statements,
but that the analysts’ published opinions were their truthful beliefs. As we
have found out with Enron, that was not the case with far too many companies.
Global Crossings, Lucent, and many telecom stocks had distorted their
performance and misled investors. In the post-9/11 world, that will change as
well. Any attempt by companies to be less than complete and accurate in their
financial reporting will be punished by investors dumping those stocks--and
doing so without asking questions. It is now over six months since
9/11, and four months since the debacle of Enron’s collapse. What can we
expect going forward? The high investment returns we
enjoyed in the decade of the 90s are a thing of the past. According to one
study surveying the opinions of economists, academics, and financial
analysts, future long-term stock market returns adjusted for inflation (real
return) will range from 3 to 5 percent. This is in contrast to the 8 percent
real return that investors enjoyed over the past 50 years. Returns on cash
(money market funds) and bonds will also trend lower as have been
experiencing right now. In response to this changing environment, we need to
lower the rate of return assumptions in our financial plans. Increased market volatility is
something we will have to live with – not only in stocks but also in bonds
and interest rates. A change in the Dow of 200 points -- up and down is no
longer news worthy. Weekly changes of 3 to 5 percent are also becoming a
frequent event. Interest rates and bond prices have become more volatile and
will continue to be so in the future. None of these asset classes offer
relief from volatility by themselves. Our approach will be to maintain
diversification consistent with your objectives, time horizon, and risk
tolerance. One way to cope with the increased market volatility is to raise
cash reserves and maintain higher balances. Those cash balances become a
buffer or a safety net allowing us the flexibility to not be forced to sell
long-term investments at an inappropriate time. Adjusting asset allocations right
after 9/11 would not have been wise since stock prices were unrealistically
depressed. That event’s impact on stock prices has subsided and now is the
appropriate time to look at rebalancing. I am in the process of reviewing
your allocations in light of your objectives as stated in the Investment
Policy Statement we created. I will be contacting you to discuss any
recommended changes to your allocations based on the emerging trends to which
investors and advisors are wise to pay heed. We will discuss this further
during our next review and, as always, feel free to contact me at any time. Sincerely, Michael Haubrich |