Letter to Our Clients - June 2005

June 2005


To My Friends and Clients:

  1. The Economy: Is the Economy growing, slowing, or basically flat? Really, it depends upon who you ask, what industry you are talking about, what region of the country is being discussed. Lots of people have opinions, but there is no consensus. If there is little agreement about the true state of the economy now, imagine how divided are opinions about what is going to happen!

  2. Interest Rates: The Fed has raised interest rates 8 times in the last year while long-term rates have barely moved. In fact, on occasion they have dropped to levels lower than they were a year ago. Alan Greenspan and most professional bond managers are befuddled. Yet now there is conjecture that the Fed is done, or almost done, raising rates. This belief is based upon the perceptions that inflation is still tame (anyone looked at gasoline prices?) and that the economy is cooling, so care must be taken not to choke business expansion. But there is inflation, and it is possible long-term rates are low because foreign entities have been buying our bonds. The latest estimate I saw was that 50% of US Treasury bonds were held by investors or governments of Japan, Korea and China. This reminds me of what I'm told it is like to dance with a bear - it is OK, as long as the music doesn't stop!

  3. The Stock Market: As I write this, pretty much all the markets are down year-to-date. I suspect some of you are getting impatient. Studies consistently show that the return the average investor receives year by year is anywhere from 50% to 70% lower than the market averages for the same periods. The reason is that investor behavior tends to result in decisions and actions that end up different from market behavior. Along the same line, the last study I saw indicated that approximately 45% of the stock market gains for the 10 years ending December 31, 2003 were the result of only 10 trading days. More specifically, the average annual return would have been 11.06% for someone fully invested in the *S&P 500 for the entire 10 years. For someone who missed the 10 b est trading days, the average annual return would have been 5.98%. You can see that without a crystal ball it is foolish to move in and out of the market based upon assumptions about what the financial markets will do. All Indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S & P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor's.

  4. Investment and Market Performance: Another set of studies shows that investors with a majority of their assets in only one, two or three investments tend to make the most money - and lose the most money. This most often occurs with real estate, business interests and concentrated stock holdings. The winning or losing usually depends upon what I call the "prosperity cycle," which also tends to change too rapidly to anticipate.

  5. What does all this mean?
    1. One increases the likelihood of success when decisions are made according to a plan, not because of events or temptations which suddenly materialize.

    2. Balance and diversification limit huge gains but reduce the risk of unrecoverable loss.

    3. The stock and bond markets do not work in straight lines. Imagine an investment that has a zero percent return in Year 1, a zero percent return in Year 2, and a 45% return in Year 3. Its average annual return for the 3-year period will be 15%. When we talk about the market averaging 8% to 12% a year, that is the result of dramatic up and dramatic down years. Only rarely does it occur that the S&P return for a given year actually equals this "average" return. In fact, 2004 is the only year in the last 10 that the S&P even came close to this 8% to 12% range.

    4. The most common benchmark for portfolio performance is the S&P 500. However, it is not necessarily a sign of success or failure if we surpass or fall short of that benchmark - or any other benchmark. Your accounts have been structured, as best as we know how to do it, to give you long-term growth that hopefully will outpace inflation and taxes and yet is aligned with your ability to cope with down markets. We have no way of guaranteeing that we can do this - but it is what we strive for. The result will often be less downturn in poor markets and less growth in up markets. If this is not consistent with your expectations, we should be discussing your goals and your expectations immediately.


Normally I travel about once every six weeks to a conference, seminar, or on what is known as a "due diligence" trip to determine if an investment program might be appropriate for you. In addition, I usually travel about once a quarter to visit clients who live outside the Portland area. This year my travel has been quite limited. However, my entire family and I will be gone from June 12th through June 19th to a Commonwealth Conference for me and a vacation for everyone else. Fortunately for me this conference will have significant free time, so that I can also relax, enjoy time with my family, and refresh. Joan and Linda will remain behind to help with service issues that might arise, and they know how to reach me if you need to talk with me because of a significant financial issue. In fact, feel free to call them so they do not get lonely in my absence!


I am one of the most fortunate professionals alive to work with such a wonderful group of people. As always, please call whenever we can be of assistance or if there are matters you would like to discuss. And, again, thank you for the opportunity to work with you.

Best wishes,

Robert K. Haley, JD, CFP®, CLTC