Letter to Our Clients - April 2005

April 2005


To My Friends and Clients:

1. Good news! The US stock market was down the first quarter!

What? How is that – good news? Well, this is the third year in a row the stock market has closed down the first quarter of the year. Since 2003 proved to be a very strong year for the stock market, and 2004 saw a gain in the S&P 500 of over 10%, then perhaps it means that 2005 can deliver a repeat performance! Of course, the past performance is not a predictor of the future...

As usual, there is no set of indicators which makes it clear which way the stock markets will move. I do think Alan Greenspan has made it very clear that interest rates will be going up. As all of us have heard many times, this means long-term bonds will be “challenged” in the coming months and years. Those investors holding bonds maturing in 2010 and later face two potential negatives. First, the market value of those bonds will likely go down until the bonds approach maturity. Second, the dollars committed to those bonds likely could earn a higher interest rate a year or two from now. Any “fixed” investment, such as fixed annuities or certificates of deposit, will have the same “opportunity risk” of lower income, and while they might not show reduced market value there are penalties for withdrawing early. However, these investments do offer the promise that principal will be returned to the investor at maturity.

Stocks continue to offer the best opportunity to increase wealth at a rate that outpaces inflation and taxes. Unfortunately, “average” annual returns are usually only meaningful in 5-year increments, and that offers little comfort during consecutive quarters and years of declining values. Furthermore, there are no guarantees.

What are the keys to successful investing? Patience, discipline, and a clear understanding about yourself. You should hold the mix of fixed and equity that gives the growth potential you want with a level of fluctuation you can tolerate. We have a software program which can show you – hypothetically – the maximum upward and downward fluctuation a portfolio might experience. The problem with any such program is that it will tend to understate the loss of value that would have occurred during the 2000-2002 bear market, as well as understate the potential 5-year upward returns from 1995 through 1999. Though not perfect, this program is about the best tool available. If we have not discussed this yet, please remind me to cover it the next time we review your portfolio.

2. US investing versus international investing.

Recently a client told me he did not want to invest outside the US – “American companies are good enough for me!” Like Intel, I asked, and Nike and Columbia Sportswear? Yes, that was the kind of company he was talking about. I pointed out that approximately 75% of Intel’s sales are overseas, and that much of Nike’s and Columbia Sportswear’s profitability comes from their international sales. What could be more American than General Electric? Their plan is that within a few years 60% or more of their revenue growth will come from emerging markets – not just international companies, but companies from what we used to call Third World countries.

There are at least two good reasons why investing in foreign stocks makes sense. First, as a nation we import more than we export. That means international companies are making a lot of goods – and the better companies are generating lots of profits. Second, the economies in Eastern Europe, Latin American, and especially SE Asia, including China and India, are clearly growing – and should continue to do so for the next several decades. Much of the attention on international investing is focused on the potential decline of the dollar. I do not want to play that game. If the dollar does decline, foreign stock ownership might get a boost, but my main interest is in the underlying economies and the potential profits of companies there. Obviously American consumers feel strongly about international trade, since we buy so many imported goods. American companies also are enthusiastic about foreign consumers, since US companies are making such a push to sell their products overseas. If everyone else is making money overseas, I think we should also.

The real risk to our economy is foreign ownership of US securities, specifically bonds but also stocks and real estate. As long as China, Japan and Korea continue to use US dollars as a “parking place” for their reserves, our interest rates can remain relatively stable. If they decide to stop purchasing US assets, or worse, if they begin to withdraw significant amounts from our markets, we would likely see a sudden drop in both stock and bond markets. This likely would create hysterical headlines. However, any such dramatic short-term change should not have a meaningful long-term effect if a) we have anticipated its possibility and positioned ourselves for it, and b) we treat it as an opportunity and not a calamity.

Speaking of China, I have enclosed with this letter the Chinese character for the word “crisis.” The Chinese and Japanese languages do not have an alphabet. Instead, each word is represented by a different symbol. (Some believe this is why Chinese and Japanese seem to have better working memories than most Western cultures.) The Chinese writing for “crisis” is actually made up of the stacking of the character representing “danger” on top of the character representing “opportunity.” I find this quite insightful. If you look at successful people (define success any way you want), invariably you find that they have an ability to deal with whatever hardships come to them and convert the problem to a success. I wish that for all of us.


I like even better now than I did last year the motto we created for our firm, “Building for the Future, Enjoying the Present.” Try to be both the grasshopper and the ant! In other words, continue to save and spend prudently, but do not sacrifice so much for the future that you miss the opportunity to enjoy the present!

Best wishes,

Robert K. Haley, JD, CFP®, CLTC