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Client
Communication Briefing We have received a number of
inquiries from clients regarding the recent turmoil in the stock market and
the impact it is having on their investment portfolios. Our objective is to
calm concerns and provide an objective look at what is happening. While we do
not have a crystal ball and cannot predict where the stock market will go, we
are able to look at history for some guidance as well as the investment
strategy we have developed through years of experience. Before I discuss the current
market, I would like to review the fundamental concept of volatility as it
relates to investing in the stock market. As we all know there is risk
inherent with investing in stocks. Certainly, the last four years have
demonstrated the risk of volatility and unpredictability of returns in the
short-term. During a protracted bear
market, such as the one we just experienced, declines of up to 50% are
common. Protracted bear markets themselves are uncommon, typically occurring
only once in every 30 to 40 years. However, even in a bull market
fluctuations are common. Over the last 70 years, the
S&P 500 Index, which is a good indicator for large company stocks, has
had an annual standard deviation of 20.21% with an average return of
10.4%. In a typical year, we can
expect returns to range by a high of 30% to a low of -10%. We accept this fluctuation in
exchange for the reward of higher average returns over the long run compared to other types of
investments. We use diversification among different investments, such as
bonds and cash to reduce risk. Even
with a balanced portfolio of 40% bonds and 60% stocks, the standard deviation
is 8.9%, which shows the added benefit of diversification but also the
likelihood of returns varying each year. Our belief is that the current
volatility in the market is part of the normal investing cycle and not the
beginning of another major stock market downturn. Our reasoning is based on
an objective comparison of today’s market environment compared with the
environment of the last four years: Ø Today we have strong economic
growth as evidenced by the increases in GDP compared to the declines we
experienced in 2001; Ø The corporate scandals of 2002 are
mostly behind us as no rational CEO would contemplate “cooking the books”
after seeing what has and continues to happen to the offending executives; Ø New legislation and regulations,
such as Sarbanes-Oxley, further reduce the potential for corporate
malfeasance; Ø While we are engaged in the
on-going war against terrorism, no terrorist attacks have occurred on Many of the pundits on Wall Street
attribute the current market volatility to uncertainty as to the amount of an
interest rate increase to be expected from the Federal Reserve when they meet
at the end of June. Add to this the
geopolitical risk in the While we do expect volatility and
do not know what direction the market will head in the next few months, our
investment philosophy is designed so we do not have to rely on guesswork and
conjecture. For our income-oriented clients, investment portfolios are built
around providing a safety cushion with fixed income investments providing six
to ten years of distributions. This is
designed so we are not forced to sell stocks when the market is down. For growth-oriented
clients we are using dollar cost averaging and rebalancing to take advantage
of the current market volatility. By relying on an established plan and
maintaining a diversified investment portfolio we have been successful in
helping our clients navigate the tumultuous environment of the stock market
for the last 20 years. If you have questions or would
like to discuss how your portfolio is designed to weather the volatility in
the stock market, please contact my office at (262) 554-4500. Sincerely, Michael P. Haubrich,
CFP President Financial Service Group, Inc. |