Asset Class Winners By Year

Below is a table showing the typical market asset classes and their performance over the previous ten years. As you can see, different asset classes perform differently from year to year. Many times one year’s winner is the next year’s loser. By diversifying among these asset classes in such a way that meets your individual risk tolerance, you can obtain market returns with an appropriate amount of risk. This can be done by purchasing index funds and exchange funds that mirror the asset classes. Now, if we simply select the asset mix that meets risk and return profiles, we can earn the market return and go play golf!

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2007 Year End Market Summary

2007 will be remembered as a cyclical transition period for the stock market. This year, many long established trends have been upended. It’s the first year since 2002, the end of the last recession, that bonds out performed equities as measured by the Lehman Brother Aggregate Bond index and the S & P 500 Stock index. It also is the first year since 1999 that growth oriented mutual funds, up 15% in 2007, outperformed value oriented mutual funds, up only 0.4%. Finally, it is the first year since 1999 that large cap funds outperformed small cap funds. These trend reversals are typical cyclical changes that result near the end of a bull market and possibly the start of a recession or at least a significant slow down. This reminds us as to why it is critically important to keep a well–diversified, global portfolio and not to chase previous years’ winners.

The S&P 500 finished the year with a return of 5.5% including reinvested dividends, while the bond market, as measured by the Lehman Brothers Aggregate was up 7%. Non US markets out performed US markets again in 2007. International developed funds, buoyed by a falling dollar, had another big year up over 12% and emerging market funds posted a 36% return.

2008 Predictions: The Recession May Already Be Here

I expect 2008 to be a tough year for the equities market as the US economy navigates through the landmines left by the real estate bubble and the resulting credit crunch. I expect the US markets to perform better than the international markets this year and the large cap and growth oriented funds to exceed their small, value oriented brethren.

As for our beloved economy, I believe we already may have entered a recession. The current US housing bubble, the resulting credit crunch and the rapid increase in the price of oil to $100 per barrel may have put us into recession or at least will push us there very soon. The difficulty is that we will not know this for at least another year because that’s how long it takes for the government’s official recession counter, the National Bureau of Economic Research, to give us an answer. The most common definition of a recession is two consecutive quarters in which real gross domestic product, GDP adjusted for inflation, declines. This official definition means it is not possible to determine a recession is occurring until long after it has started. The government releases its quarterly GDP data two months after quarter end and these numbers are revised two more times. Thus, we will not know a recession has occurred until nearly a year after it has started!

Since World War II, there have been ten recessions averaging about ten months in length. Recessions are generally thought of as horrible events where unemployment rises, production falls, profits weaken and stocks crater. However, there are many positive aspects of recessions that are good for the economy and for investors. Recessions punish excessive risk taking, such as in the real estate speculation and credit risks taken in 2005 and 2006 and the tech bubble of 2000. They also reduce inflation and may even correct the balance of trade. Downturns also create tremendous buying opportunities for shrewd investors. The question we should be asking is not if we are going to be in a recession, but rather, when we will come out.

Book Review: The Ultimate Gift, The Prize

The Ultimate Gift, by Jim Stovall is a must read for children and adults age 12 and up.

Red Stevens was a self-made man who gave his family everything -- and ruined them in the process. Now, as his estate of oil companies and cattle ranches is divided among greedy and self-serving relatives, one member is singled out for something special: Red's great-nephew, Jason.
In a darkened room, isolated from the rest of his family, Jason is confronted by the image of his deceased great uncle on a video monitor... and so begins a 12 month quest for purpose and meaning in an empty life, as Jason attempts to complete the tasks required to receive Red Stevens' greatest bequest....The Ultimate Gift. If your kids won’t read it, you can always see the movie



The Prize : The Epic Quest for Oil, Money & Power by Daniel Yergin
Although written in the early 90’s about the history of oil as an industrial product, it provides us a terrific understanding of the dynamics that shape the oil industry. A winner of the 1992 Pulitzer Prize for nonfiction, it is a comprehensive history of one of the commodities that powers the world--oil. Founded in the 19th century, the oil industry began producing kerosene for lamps and progressed to gasoline. Huge personal fortunes arose from it, and whole nations sprung out of the power politics of the oil wells. Yergin's fascinating account sweeps from early robber barons like John D. Rockefeller, to the oil crisis of the 1970s, through to the Gulf War.

Oil Over $100! This May Be Just What the Doctor Ordered

The oil industry began in the 1850’s in an area known as Oil Creek in Northwestern Pennsylvania. Oil was cheaper and easier to bring to the market than coal or whale fat and quickly replaced both as the primary fuel for lighting and running machinery. Nearly one hundred and fifty years later, in the first trading day of 2008, the price of oil crossed over $100 per barrel, just shy of the inflation adjusted price of $102.81 hit in the late 1970s.

Since President Bush came to office, the price of oil has increased nearly 4 times. An enormous transfer of wealth has occurred during this period. The value of hydrocarbon exports from the Middle East and Asia is expected to be $750 billion in 2008. The Abu Dhabi Investment Authority, the government investment company for the United Arab Emirates, now has over $900 billion in assets and recently lent Citibank $7.5 billion with the right to purchase just under 5% of the equity shares. Other state owned Arab Emirates now own large stakes in the NASDAQ and the London stock exchange as well as other prized assets around the globe.

So how does the price of oil going over $100 help the US? It will increase the innovation in our country to find alternative sources of fuel. It will also increase our desire to purchase more fuel efficient products and ultimately it will reduce the US emissions of CO2 gas. Hopefully, future generations will look back at the “oil age” as just a short 200 year blip of time.

Children and Money: Instill the Value of a Dollar at an Early Age

I last wrote about this subject in my 3rd quarter 2006 Financial Forum and received some very favorable feedback. In that article, I listed 10 ways to help teach children about money. Over the past two years, I have tried very hard to implement these steps and now feel it appropriate to write a condensed version in case some of you are struggling to teach your children ten steps about something as abstract as money and would prefer to start with just two. By the way, if you do not have children or if they have already moved out of the house, you can still apply these to yourself or your grown children. Like everything else with kids and adults, if you stick with it long enough, it will stick. If you did not get a chance to read the original article, just send me an email and I will forward it to you.

1. Form a Habit of Savings

When my son was about eight, we broke open his piggy bank, drove down to our bank and opened a savings account with the money he had saved. The process was a lot of fun and a great learning experience. He learned about interest, savings and balancing his account on a monthly basis. Each month he added a little of his working allowance and his gift money to the account. The account has grown to about $2,000, which is a lot of money for an eleven year old.

Recently, he started complaining about the amount of interest he is earning on the account. I suggested he take the money out of the bank and buy a stock or mutual fund with the possibility of earning more on his investment. We have had many discussions on the merits of Starbucks, Quicksilver and other public companies he was familiar with. He was not too happy to learn that stocks can go up and down sometimes rather drastically. However, it gave us the opportunity to talk about investing in general and about risk. Because he had saved the money himself, it really mattered to him that he not lose it on a speculative investment. I was willing to let him invest in whatever he wanted as long as he understood the risks relating to the investment.

After discussing the options, he finally said that I had a very boring job and that since I did this for a living, I should decide. I was happy to see that my brilliant son had the presence of mind to outsource his investment selection process. We decided to close the account and move the $2,000 he accumulated to two ETF funds (SPY and EMM). While this may seem very basic, it has been a very powerful experience for both of us. My son learned several important facets about money. He learned the value of saving, working for money, compounded interest, investing, and risk.

My daughter will be a new challenge. She is not as materially oriented as my son and as of yet, sees no real use for money. I will update you on our progress in a few years!

2. Create an Abundance Mentality with Regards to Money

Most people grow up with the perception that money is a limited resource that is only readily available to a few lucky people. They spend their lives chained to this concept, which keeps them forever a victim of money. Having an abundance mentality about money is a self fulfilling prophecy. It comes from these two principals:

Money flows to the greatest perceived value.
The less you need, the more you have.

Money flows to the greatest perceived value

Let’s review the first one from an adult perspective and then break down to the kid level. Take two attorneys, for example, that both focus on small business owners. One makes about $150,000 per year and one makes about $3 million per year. Why does one get 20 times the income of the other? The one who gets 20 times the income creates 20 times the value for her clients. One is focused on hourly billing, while the other is focused on the success of her client. This concept is focused on in Nassim Nicholas Taleb’s book, The Black Swan: The Impact of the Highly Improbable

Now, let’s look at it from your child’s perspective. Apprehension about college and job selection begins as early as age 16. As I have already said, my children find my job boring and thus will most likely pursue some other career. The teaching opportunity is not to focus your child on the jobs that pay the most, but on creating the greatest value in a job they will love. “Talk about what is of interest to them and how important it is to be happy with what you do,” says Dr. Jaye Roseborough, a director of career services for a small university in Vermont. In order to create extraordinary value in your career, you must be truly passionate about what you are doing. You cannot do this if you are pushed by your parents into a career you do not love. Examples of creating incredible abundance through creating tremendous value include Oprah Winfrey, Bill Gates, Chef Michel Richard, Lance Armstrong and thousands more.

The Less You Need the More You Have

Separating your needs from your wants is a powerful distinction I learned from my father at a very young age. Most children and adults have a never ending list of “needs” that drives them to immediate gratification with an endless supply of junk. In reality, 99% of these “needs” are really “wants”! “Needs” are things like food, shelter and medical care. “Wants” are everything else. Once we make this distinction, we can choose whether or not to make the purchase. If we can make this shift, the new “need” becomes the savings or investment account rather than the latest electronic gadget. One of the quickest ways to implement this distinction with your children is to ask them to pay for what they “want” with their own money. It is absolutely amazing to me how quickly the drop in desire is for this particular “want”. When they really want something, they will work hard to get it. This also instills the concept of delayed gratification which is an extremely healthy way of life. If you are having trouble with this concept, read the Dalai Lama’s The Art of Happiness.

Book Review: JFK

Let Every Nation Know: John F. Kennedy in His Own Words
by Robert Dallek, Terry Golway

I really enjoyed listening to Kennedy’s great speeches and then reading the analysis and history behind them. This is a quick read that will provide you with some history review and inspiration. Here is a review from Publishers Weekly:

After Lincoln, John F. Kennedy is generally acknowledged as our most eloquent president. The words of such major speeches as his inaugural and his remarks at the Berlin Wall resonate still in the minds of Americans. But as this book and CD illustrate, Kennedy was equally articulate on a host of other occasions, including campaign debates with Richard Nixon, White House press conferences, commencement addresses and comments on such topics as the integration of the University of Mississippi and the Cuban missile crisis.

Of course, a large part of JFK's communicative excellence lay in his smart, confident delivery. Thus bestselling Kennedy biographer Dallek and Golway (The Irish in America) present the speeches on a CD featuring Kennedy's own voice, while their book sets each of the CD's 32 tracks in historical context. The speeches and commentary trace JFK's presidential career from the 1960 campaign through his death. Painstakingly, the authors lay out the parameters of real politics that lay behind particular phrases and positions. In the end, the reader/listener is even more impressed with JFK after learning the backgrounds and contexts and then hearing Kennedy so lucidly express the words. (Apr.)

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