Letter to Our Clients - May 2004

May 2004


To My Friends and Clients:

I ended my last letter, dated April 2004, with the following paragraph. I am restating it verbatim because it is the best way to express my feelings, then and now. Here it is.

2004 is my 22nd year in this industry. I think it is the most challenging investment environment I have faced, even more so than 2000 through 2003. The last 10 years have illustrated better than any textbook how critical—and difficult – it is to balance the desire for growth against the need to protect principal. There is also no way to guarantee the outcome of any strategy. This is frustrating for those of us who want certainty in our lives, but it is reality. Financial success requires patience and discipline, and an ability to adjust to changes in our lives and the world around us.

A client recently asked, “What did we learn from the last downturn?” Well, we learned that we cannot trust the experts, nor can we trust that corporate America will play fair with us. We relearned that stock market prices go down as well as up, a theory sometimes known as “regression to the mean.”

I also believe there are lessons not to be learned from 2000 to 2003: a) market timing is a good idea, and b) the market is logical and its behavior can be predicted based upon mathematical formulas or charts. It is also important to remember that the past never completely repeats itself. The lessons we think we learned from an earlier time will have limited usefulness the next time because the next time is not the same.

In spite of all this, for the first time I am going public with a market timing call. I believe the stock and bond markets* will lose market value between now and the elections in November. (This has nothing to do with the economy—it is doing fine, and stock values are quite reasonable, in my opinion. My concern is based upon what we now call geo-political events and risks – the war in Iraq, terrorism, the price and availability of oil, etc.)

What should you do with this prediction? It depends upon your situation.

1. If you recognize that it is the nature of investing to have values go down, and up, and down and up, then I think you are best served to continue your current investment strategy. Why? Because I do not know for certain that the markets will go down, and even if they do, I cannot tell you the best time to come back in. Generally there is more risk being out of the market than there is being in it.

2. If you are like the clients who looked at their quarterly return, saw that it was down 1.5%, and commented that they would have been better off in a money market account, then perhaps you should move everything to money-market or ultra-short bond funds. Saying it another way, if you are disturbed when your month-end statement shows that your accounts have gone down, now is a good time to decide whether it is worth it to be invested where the outcome is uncertain. (Don't forget, real estate goes down in value also!)
*This does not include “ultra-short” bonds or bond funds.

3. If you find you might be somewhere in the middle—that is, you want to remain invested but would like to reduce your exposure to fluctuation—then call me so we can decide whether now is a good time to be 100% in the stock market, 60%, 40%, or some other percentage.

4. Regardless of what you decide, it is important that you have no regrets. Make the best decision you can, at this moment, and be willing to accept the consequences. If you make no changes, do not think later you made a bad decision. If you do make changes and the markets immediately move the other way, it does not mean you made a bad decision. It will be an example of not being able to control the outcome. All we can do, any of us, is make decisions as best we can with the information available to us.

(The challenge for someone in my position is that often the people who are most upset when their accounts go down are also those most upset when their accounts did not rise as much as the S&P when the markets go the other way.)


Going back to the beginning of this letter, one of the things I learned from the 2000–2003 experience was that I should share with you my concerns in a different way. Let me explain. Beginning in the summer of 2000, I was concerned that the market kept dropping, despite the fact there was no real bad news about the economy and nothing particularly disturbing about politics or world events. I was unwilling to say “Sell!” because a) it is not good investment management, and b) I was concerned that I was reading too much or the wrong things into the political climate. By 2001, the market had dropped so much that I clearly felt it more prudent to remain invested than it would have been to lock in a loss and guess at when might be the best time to come back into the market.

At this time I am very pessimistic about the short-term investment climate. This pessimism is based solely on my reading of the emotional fears of the investing public regarding the situation in the Middle East, the impact of oil prices, and the divisiveness of this election year. I do not worry about the economy. Everyone has known interest rates would rise and that some degree of inflation would return. The fundamentals, in my opinion, remain sound. The risks are that uncertainty—and fear—will feed upon themselves and drive the stock and bond markets lower. I am telling you this so that you can make your own decision about the extent to which you remain committed to a long-term strategy, or whether you prefer to react to current events and limit (or eliminate) fluctuation in your accounts. Either way, do not think you are avoiding risk. Instead, you will merely be exchanging one kind of risk for another.

I hope this is helpful. Call me if there is anything here you would like to discuss. Thank you again for the opportunity to work with you.

Best wishes,

Robert K. Haley, JD, CFP®


P.S. My timing here may be a little unfortunate. For some time I have been scheduled for a conference in Florida, from May 20 through 23, and a week-long workshop in Boston the first week of June.If you call, please be sure to leave numbers and times for me to reach you.