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Normal Year?

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Jan 3, 2011 6:09 pm

Woke up this morning and saw the market is happy, went back to sleep. Saving my energy for the coming growing season.

It is funny to watch folks begin to get nervous about which side of the market they should be on - fear and greed now waning and waxing yet again. Focus on the wrong things.

It's fun to imagine, on the first days of the year, how much drama will be packed into "normal" stock returns, if that happens.

I wonder if hibernating bears dream about berries and salmon.

I hope we have an average year.

Jan 3, 2011 6:33 pm

"I wonder if hibernating bears dream about berries and salmon."

Dang, you should be a writer.

Last year may have had "normal" returns, but we had both a big stock and bond correction in that year. Nothing's ever normal, until it's too late.

Jan 4, 2011 5:22 pm

Yeah I like that, nothing's ever normal until it's too late.

For example, God forbid, we should have another big terrorist incident like 9/11. And that resides back of the mind for everyone who 'works on Wall Street', you turn on the TV one day and you see the world changing forever. All those nice averages are a thing of the past.

And yet, we get tougher, must be more like the Israelis mentality. Life goes on, and you compound those new averages and are even a little more careful about what you spend energy worrying about.

I am sitting here looking at a  portfolio return for a "moderate" client allocation over seven full years (what my particular reporting software and history covers) 6.29% vs. 2.08 ( AArtn, compounded)  for the S & P.

Averages are important, obviously dividends, interest - bonds were important during that particular period, and perhaps we are entering a period where ownership (stocks) will shine as the world population competes for scarce resources in growth (mainly  outside the U.S.).

For a lot of clients, the "new normal" will include the importance of staying invested which likely means less volatility with a slightly lower expected average rate of total return. Basically, dealing with inflation and preserving principal instead of making a lot of money in the market.

As you point out, these stock and bond corrections don't usually happen at the same time, but the smoothing of volatility is more illusion than fact, one of our little advisor secrets. Since the compounded annual average return is what matters, we can still focus on selling that idea and simplifying its delivery and service.

I guess up to a point, with a little more stock in the mix, you can charge more. I was reading BGs comment about charging less for bonds. Kind of like, none of the magic of VUL and annuities works without equities and their higher assumed potential return. But with the proper time frames and allocations, the internal rates of return can be very high, and even lower internal rates of return can be assured with the potential for high.

But I do like the simplicity and compounded returns of the moderate ETF portfolios, along with a decent wrap fee - for myself, and the feeding of our professional advisor comrades generally and the bringing up of the next generation.

Of course, now is more like the time for day traders to haul out of the pond, climb up on the rocks and sun themselves.