Q4/2007 Market Review ~ Future Retiree ISO Educ Finl Prof for LTR
January 14, 2008
Welcome to the Kalorama Wealth Strategies Quarterly Market Review. These
quarterly briefs update the performance of the financial markets and provide
commentary on topics affecting investments.
Stocks were battered in the fourth quarter by a litany of economic
cross-currents including concerns about corporate profits, a weak housing
market, higher energy prices, and continued havoc in credit markets. Indexes
posted nearly across-the-board losses, with Real Estate at the bottom of the
heap, sinking 13.5%. This was followed by Domestic Value, with Small and Large
Caps dropping 7.3% and 5.8%, respectively. The only bright spot was
International Emerging Markets, advancing 3.7%.
The turbulence in the stock market sent investors to seek a safe haven in bonds,
with all broad sectors improving. Reflecting a weaker dollar and lower interest
rates, Global Aggregate gained 3.3%, U.S. Aggregate rose 3.0%, and International
Emerging Markets added 2.1%. Consistent with the credit-market mayhem, U.S.
Corporate High Yield was the only loser, shedding 1.3%.
The Federal Reserve continued to address the credit-market distress by lowering
the Fed Funds rate twice during the quarter, each time by a ¼%, to 4.25%.
Despite the Fed's cuts, institution-to-institution borrowing remained somewhat
frozen as financial companies sought to avoid the appearance of desperation. In
attempt to stimulate liquidity, in a coordinated effort with other nation's
central banks, the Fed for the first time offered financing through a "term
auction facility." Meanwhile, the gale-force flight-to-safety sent the yield on
the 10-year Treasury Note below 4.00%. At quarter-end the 10-year Note was down
60 basis points to close at 4.02% (the yield as of January 11th was 3.79%).
Volatility was the catch phrase associated with market activity in 2007. Mergers
and acquisitions mania continued to propel stock prices higher during the first
half. But by summer, after both the Standard & Poor's 500 Stock Index and the
Dow Jones Industrial Average set all-time highs, worries about a poor housing
market and tight corporate credit put the kibosh on leveraged-buyout deals and
led stocks to lower levels. August marked the end of the Federal Reserve's more
than year-long, on-hold stance when it added liquidity to the financial system
by engaging in open-market operations and, in an unusual move, cutting only the
Discount rate by ½%. The Fed followed up by dropping both the Fed Funds and
Discount rates by ½% in September and another ¼% at each of its next two
meetings in October and December.
Wide swings in stock prices were in play for the second half of the year, as
nearly every day brought news about another company's woes in the credit
markets. Although most broad stock-barometers managed to advance for the year,
the returns for underlying asset classes were mixed. With the dollar sustaining
its decline against other currencies, international-stock investors continued to
be well rewarded. Leading the foreign pack in 2007 was International Emerging
Markets, soaring 39.8%, followed by International Developed Large Cap jumping
11.6%, and International Developed Small Cap edging ahead 1.8%. International
Emerging Markets and International Developed Large Cap extended their string of
double-digit upside moves to five years.
Performance was wide-ranging and atypical on the domestic front as Large Caps
outperformed Small Caps and Growth succeeded Value. The performance of Large
Caps ranged from up 11.8% for Growth to down 0.2% for Value, and Small Caps
varied from 7.1% higher for Growth to 9.8% lower for Value. Notably, Real Estate
Stocks (as measured by the Dow Jones Wilshire REIT Index) backtracked for the
first time since 1999, unloading 17.6%, as a result of the credit-market morass
and fears about a slowing economy.
The chaos in credit markets initially led to a massive re-pricing of risk in the
residential mortgage and corporate credit markets, widening bond spreads and
lowering fixed-income prices. But the shift to less-risky assets and a weakening
dollar left U.S. bond investors in good stead. Global Aggregate rallied 9.5%,
U.S. Aggregate expanded 7.0%, and International Emerging Markets tacked on 5.2%.
Things were weaker in more narrow domestic sectors, with Municipals inching up
3.4% and U.S. Corporate High Yield eking out 1.9%. Meanwhile, U.S. Treasury Bond
investors benefited as the yield on the 10-year Note sank 68 basis points for
the year from 4.70% to 4.02%. Below are rates of return for selected market
indices for the fourth quarter of 2007, full-year 2007, and the three, five, and
10-year averages as of December 31, 2007.
Future Retiree ISO Educ Finl Prof for LTR
If you were to place an ad to find a financial advisor, it may appear something
similar to the above (translation for those who have not perused the personals:
Future Retiree In Search of Educated Financial Professional for Long-Term
Relationship). Whether you are interviewing for employment or seeking
professional services, it's been said that the process is essentially a vetting
comparable to dating. I once called a doctor to learn more about him and his
services. I began by asking his age and where he obtained his education.
Although he answered all of my questions, he was clearly surprised and also
added that he hadn't been asked these types of questions since his dating days!
Regardless of the type of professional advice sought, the process should be the
same. The parties involved should seek relevant information and a comfort level
about whether to proceed to the next step. Any apprehension on the part of an
interviewee/advisor to freely answer questions certainly would be very telling.
Over the past year, these articles (all available at
www.kaloramawealth.com/news.html) have covered the "what," "how," and
"why" of Portfolio Spring-Cleaning. In April, we initiated this series with
Portfolio Spring-Cleaning Revisited to provide a framework for "what" should be
done to organize and optimize the performance of your portfolio to achieve your
goals. We followed up in July with the "how" by providing the steps in the
Investment Management Process (Commencing Countdown, Engines On! ) and in
October with the "why" by outlining an investment philosophy (Who am I? Why am I
here? (Do you have an Investment Philosophy?)). As a final article for this
series, below we discuss the "who" of portfolio management by suggesting
criteria you should use to select a financial or investment advisor.
As an investor, one of your biggest risks is not the volatility in the
securities markets; it's choosing the wrong financial advisor. With bad advice,
the performance of your portfolio may suffer as a result of earning less in
rising markets, losing more in falling markets, or not achieving your long-term
financial goals. The last item is the most important. After all, your primary
reason to work with an advisor is to achieve greater financial security and
independence, and assist you with the attainment of your financial goals, such
as retirement, education, or the purchase of a home.
Let's assume that by talking to people you know or through online sources you
have narrowed your search to two or three advisors. The next step is to obtain
the objective information you need with which to make a selection decision. Some
of the pertinent criteria you should consider include:
What credentials does the advisor have and do they maintain memberships in
professional organizations? The Financial Industry Regulatory Authority (FINRA)
lists 80 "professional" designations on their web site (http://apps.finra.org/datadirectory/1/prodesignations.a
spx) and summarizes the experience, education, and examination requirements
required, if any, for each. How much time does the advisor you are interviewing
dedicate to continuing education on financial planning and wealth management
strategies?
What is the advisor's experience? How many years have they been providing
financial advice? In which areas do they specialize? Can they provide client
references?
What is the advisor's form of compensation? Is the advisor compensated solely by
fees paid by you, or are they paid commissions or compensation from a third
party from the sale of financial products?
What is the advisor's planning process and investment philosophy? Does the
advisor follow a planning process? Can the advisor explain his/her investment
philosophy? What type of clients and situations do they typically work with?
What services does the advisor provide and what products are available? If they
provide investment advisory services, what amount of assets do they manage? Do
they have a minimum account size? How many clients do they have?
There are several online resources available (all free of charge without any web
site registration requirements) to assist you with obtaining and evaluating
information about financial advisors. A great place to start is the Certified
Financial Planner Board of Standards web site (www.cfp.net) which offers much
information about financial planning, including a Checklist for Interviewing a
Financial Planner (www.cfp.net/learn/knowledgebase.asp? id=8) and a brochure
providing 10 Questions to ask When Choosing a Financial Planner (www.cfp.net/Upload/Publications/185.pdf).
If the advisor is a CFP® professional, you can also check their disciplinary
history (http://www.cfp.net/learn/knowledgebase.asp?id=7).
The Paladin Registry (www.paladinregistry.com)
provides tools and information to help you make an informed decision in your
selection of a high-quality financial advisor. In addition to numerous articles
and presentations, the Registry has a questionnaire (available via download or
email) you can use to interview your current or prospective advisor. A rating
system is provided to evaluate the responses.
All financial professionals are required to be registered or licensed with
federal and/or state securities regulators. However, to truly be considered an
"advisor," a financial professional has a legal obligation to be a "fiduciary"
by always putting a client's interests first, whereas a "broker" is not held to
this same stringent standard.
A good starting point to research advisors and brokers is the Securities and
Exchange Commission (SEC) web site (www.sec.gov/investor/brokers.htm).
Investment advisors are required to file a Form ADV, which should be available
directly from the advisor, as well as from the SEC (www.adviserinfo.sec.gov/IAPD/Content/IapdMain/iapd
_SiteMap.aspx). The ADV has information about the advisor's business and whether
they have had problems with regulators or clients. It also outlines the
advisor's services, fees, and investment strategies. If you are considering a
broker, FINRA has a BrokerCheck program to learn about brokerage firms and
individual brokers (www.finra.org/InvestorInformation/InvestorProtection /ChecktheBackgroundofYourInvestmentProfessional/
index.htm). Both the SEC and FINRA web sites offer much educational information
about investing and working with financial professionals.
Your relationship with a financial professional may not be a formal marriage,
but it is a partnership which should be based upon trust. You need to choose
someone who has the credentials, experience, and process to help you achieve
your goals. Investing the time at the outset to find the right person should
ensure that the partnership becomes the long-term relationship you are searching
for.
Thank you for your business, trust, and referrals. Please feel free to forward
this email to friends and colleagues who can benefit from information about
investing and financial planning. If I can be of any assistance to you or anyone
you know, please do not hesitate to contact me.
Sincerely,
David
P.S. - Please visit our web site at
www.kaloramawealth.com.
_____________________________________
David M. Taube, CPA, CFA, CFP®, CRI
Founder and President
Kalorama Wealth Strategies
202-550-7262
_____________________________________
Investment advice offered through Medallion Advisory Services, LLC*, Registered
Investment Adviser. *Wholly owned subsidiary of TMG Holding Company, Inc. T/A
The Medallion Group. Kalorama Wealth Strategies and TMG Holding Company are not
affiliated companies.
Email: dtaube@kaloramawealth.com
Logo: Kalorama in Greek means "beautiful view." Through our planning process,
our goal is to provide you "A Beautiful View To Your Financial Future."
