About once a week, a client asks me what he or she should do or think due to the impending (fill-in____) disaster.  You fill in the blank.  It could be the dollar collapse, the deficit, Greek default, Portugal, California’s Bond Rating, the collapse of the Euro and/or the European Union.  I haven’t heard it all, but I’ve heard all of the above fears expressed in the last few months.  But the real question I think you need to ask yourself is this:

How do the dramatic events of this year and what the media reports affect the safety and potential returns of your own portfolio investments?

The cheeky answer is: It depends.  But let’s keep it simple.  Most people are invested in a combination of domestic equities (Dow Jones & SP500 stocks) and bonds as well as other investment products of a fixed-income nature.  The Dow, i.e. the Market, is saying that disaster does NOT lie ahead.  The average stocks could have broken to new lows in the last two months; they had every opportunity to do so, but they did not.

I have a lot of thoughts on why they didn’t and on what’s actually happening, but I don’t want my opinions to distract you from the facts that we know.  We know that the stock market averages have looked ahead and decided that stocks do not deserve to be sold down.  We know that economic growth is now expected to not pick up, that deflationary forces still seem to command the upper hand (because job growth is abysmal and labor simply can not demand pay increases in this economic environment).  The consequence of this is that that continued high corporate profits are a virtual certainty.  It also means that we must expect slow growth and low inflation in the developed world, which is why bonds have RALLIED over the last 3 months, and currently German and 10-year bonds only pay 3% annually.  Those bond rates are close to historic bottoms.  Fear about the future is reflected in the low returns of those bonds.  So, should you be worried.  Here’s my check list for you:

“I make my living off the Evening News.

Just give me somethin’, somethin’ I can use

People love it when you lose, they love dirty laundry …http://www.songlyrics.com/don-henley/dirty-laundry-lyrics/

• If you are invested in solid corporate bonds, don’t worry about the dirty laundry
• If you are invested in blue chips stock, don’t worry about the dirty laundry.
• If you are invested in gold, don’t worry about the dirty laundry.

• If you are invested in real estate – you have some real concerns
• If you are invested in running a small business – you have some real concerns.
• If you are subject to the vagaries of politics, elections and government finance — which includes having a government job, you have some real concerns.

Let’s take a look at some more “facts” that we know.

1. Oil is in ever greater demand, due to 2 billion people not driving, but wanting to.  Sooner or later, likely sooner, its price is going to rise quite high.  Driving will become more of a luxury than a right, even in America.
2. Technology is changing our lives, and it will continue to do so.  What’s more, most of the productivity gains from a wirelessly connected world will be breathtaking, once we get through the next 5-10 years.  This means that its going to be hard to predict what the 2020s look like.
3. People will find ways to “make it work.”  Right now, people in the developed world have responded radically to higher unemployment and underemployment by radically abstaining from forming new households.  Despite there being almost 20 million more people in the U.S., there are no more households than there were in 1998. This won’t continue forever, but it will continue for a while, and it’s going to keep housing prices in the dumps for some time to come.

Last week Italian and Spanish bonds collapsed several percentage points.  Italy might even consider leaving the EU.  But if they did, the higher costs for energy, imports, restructuring their currency, taxes and borrowing costs, would really hardly outweigh the benefits that they would accrue from reducing their debt burden (by devaluing the Lira 40%).  It’s not clear what’s going to happen.  But I hear you asking, how does it affect your portfolio?

Equity markets are down hard.  Does it change my mind?  Well, these new facts by themselves don’t.  However, I just read an important reminder that last week’s unemployment report is that we are in the middle of a period of high unemployment that is structural in nature, not cyclical.  That means that even if the economy strengthens into the next year, we shouldn’t expect much job creation.  That’s a real problem for growth.  So I am not excited about high allocations to equities.  For most people, 60%-75% invested in stocks is probably too high.  So if that’s what your portfolios look like, please call my office to schedule a complimentary review of your personal situation.

Barnes Capital LLC is a Registered Investment Advisor.  We manage trusts and retirement income portfolios. Financial planning is an integral part of our process. We protect client capital using municipal bonds, high-quality dividend-increasing companies and precious metals, which have protected wealth in every epoch spanning five millennia of bankruptcies, inflation and other forms of attrition. Call 925-284-3503 and visit www.barnescapital.com.

Barnes Capital is a Registered Investment Advisor located at in downtown Lafayette. With RB Capital Management, Barnes Capital develops custom tailored portfolios for its clients. Specialized in retirement income portfolios, financial planning in an integral part of our process. Call 925-284-3503.

This entry was posted on Saturday, July 16th, 2011 at 9:40 am and is filed under Monthly Column. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.