Thursday, August 18, 2011

The Washington Street Informer

Market Weather Conditions

Recent economic numbers indicate that perhaps the slowdown in growth was only a soft patch. Second quarter earnings season is about to begin and we expect companies to report strong results. Our only concern is that positive earnings results are not overshadowed by the news coming out of Europe. Investors have little confidence in European leadership to come up with a viable long term solution for Greece, and that is leading to pressure on more stable peripheral European countries such as Spain and Italy. While the market will likely continue to trade sideways over the summer, we still believe that stronger numbers in the second half of the year will warrant a rally in the stock market.

Wealth Management Strategy Corner

While we have become more cautious on the market, we have not made any major changes to our strategy. Our US stock sector bias favors Technology and Industrials and we are underweight Telecom and Utilities. We remain focused on high-quality dividend paying companies and hedge strategies to lower volatility. Our relative bias among asset categories favors equity. We continue to favor emerging market stocks over developed markets. In our fixed income portfolios, we continue our defensive
positioning. The yield curve has flattened over the last few weeks due to a pullback in the equitymarkets and continued concern regarding Europe. Over the course of the year we expect greater volatility with rates gradually rising.

Building Blocks

We continue our discussion of Behavioral Economics by focusing on our tendency to use our most recent past experience when evaluating investment decisions. In short, we are willing to take more risk after gains and less risk after losses. Listed below are several less than optimal decisions we tend to make when using recent past experience tofilter our investment decisions:

House Money Effect: After having experienced a gain or profit, investors are more willing to take risks. We tend not to integrate the gain into our overall investment portfolio and will buy riskier stocks, after closing out a profitable position.

Snake Bite:
After experiencing a loss,
investors are less willing to take a risk. We often see this with new investors or those who may buy equities for the first time. After a price decline, there is a tendency to avoid individual equities or the equity markets, even though owning equities may decrease the overall risk of the portfolio.

Breaking Even: Is the opposite of risk avoidance, whereby the need to break even is greater than risk avoidance. Breaking Even is fairly common and we often hear; “I just need to get back to where I was.” Therefore, investors tend to hold “losers” too long, waiting for them to come back. All of these tendencies lead to less than optimal decisions which ultimately leads to less wealth!

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