Quarterly Newsletter: January 2010

Click here to view the Index Returns for 4th Quarter 2009

A Relief Bounce
After the financial collapse of 2008, the stock market rebounded significantly in 2009, with the S&P 500 index up 26.5% for the year. While not back to historic levels, the market did recoup some losses from one of the worst bear markets in history. Many observers felt the primary driver of this come-back was relief – investors expressing their relief that markets might have overreacted to the threat of a global financial collapse.

Looking Back, Looking Ahead
The end of the decade is a convenient and appropriate time to get our financial bearings. After a rebound in the capital markets in 2009, it's helpful to survey the investment landscape in order to gain some perspective and see just how bad the Bear Market of 2007-2008 was in historical terms.

A Flat Decade for Stocks
S&P 500 returns were barely negative for the ten years ending December 31, 2009 (-1.0%). This was only the second time in the last century which produced negative stock returns over ten years (see Chart 1).

Stocks basically went through four phases during the decade (see Chart 2). Coming off the tech boom bull market of the 90's Phase 1 saw the market give up 41% of its value. Then Phase 2 was an extended Bull market recovery of 75% lasting five years. The breathtaking market drop associated with the financial collapse of 2008 constituted Phase 3 – from October 2007 to March 2009 – with the market losing almost half of its value. And the recovery in 2009 in Phase 4 saw positive returns of 40%.

Other capital markets fared better for the decade (see Chart 3). Real Estate (10.6%) and Emerging Markets (9.8%) saw double-digit returns. Intermediate bonds (6.3%) posted reasonable results during a period of falling interest rates. Other indices were generally positive, if low.

Although everything fell in 2008, diversification did its job over the ten-year period. An unmanaged hypothetical 60/40 mix of diversified asset classes gained 4.3% per year over this challenging period-including a fall of (-21.4%) in 2008 when almost all assets fell in value (see Chart 4). Importantly, the overall volatility was lower than the individual asset classes.

What Now?
Going forward, we know there are numerous potential pitfalls in the Global Markets which add up to probable low growth for awhile. In addition to the normal market risk investors must always confront, we now have several significant economic, political and event threats coming together. These include: probable inflation over the long-term, dollar weakness, credit restraint, limited consumer spending, increased governmental regulation, and ever-present terrorist threats.

The future is never clear; however all this adds up to a particularly difficult investment environment. While we are optimists by nature, we believe it is important to be investment realists. For planning purposes, we caution clients to keep return expectations lower than historical norms.

Ten-year annualized equity returns of 6% to 7% would seem reasonable. Fixed income may well have a more difficult path as inflation heats up, and interest rates rise, so that lower single digit returns in the 3% to 4% might be the norm.

Therefore balanced returns in the range of 5% to 6% might realistic in the intermediate term. (Of course, these may vary widely, depending on unforeseen events.)

Proper investment strategy in this kind of environment is more important than ever. Diversification is still the key; however, we strongly urge clients to further diversify the assets in their portfolio to reflect this new, broader range of risks.

Since portfolio design is a risk-management effort, we suggest a variety of investment segments: equities for growth: fixed income for diversification and income; international and emerging markets equities for global coverage. In this environment it's also important to use non-dollar bonds for potential dollar risk plus TIPS, commodities and floating rate securities for inflation risk.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Arbor Investment Advisors, LLC. Please remember to contact Arbor Investment Advisors, LLC if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Please also advise us if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. A copy of our current written disclosure statement discussing our advisory services and fees remains available for your review upon request.

Previous Newsletters:
Quarterly Newsletter: October 2009
Quarterly Newsletter: July 2009
Quarterly Newsletter: April 2009
Quarterly Newsletter: December 2008
Quarterly Newsletter: October 2008
Quarterly Newsletter: July 2008
Quarterly Newsletter: April 2008
Quarterly Newsletter: December 2007
Quarterly Newsletter: October 2007
Quarterly Newsletter: July 2007
Quarterly Newsletter: March 2007
Quarterly Newsletter: December 2006
Quarterly Newsletter: October 2006
Quarterly Newsletter: June 2006
Quarterly Newsletter: March 2006