Taylor&Williams - personal wealth advisor

Dear Taylor & Williams client,

We don't often try and mass communicate to all of our clients between our Quarterly Reports, but with the difficulty of these past few months and the steep decline in investment markets, we felt communicating to be of utmost importance.  

We have been pretty frustrated from July till now as our 2008 allocation changes to reduce the stock allocation in each portfolio and add to a "Market Neutral" category have not helped at all like we thought.  2007 was the 5th consecutive positive year for stock.  Locking in those gains and reducing exposure to stock seemed wise.  For example, in the Conservative portfolio, we typically hold 40% of the portfolio in five stock categories.  We reduced that stock percentage to 22% for 2008 and increased our market neutral percentage to 48%.  We did this proportionally in each of our portfolios (Aggressive, Growth, Moderate, and Conservative).  However, our holdings in that market neutral category did not help us much.  They used gold, gold stocks, foreign bonds, and treasuries to offset stock, and only treasuries are positive for the year.

Here is a note from a trusted resource of ours, Sound Mind Investing.  They are the the folks who developed the process of measuring short term performance and changing funds when one drops out of the top 25% of its category.  (They call this process "Upgrading" as you will see in their note):

No shelter in this storm

"This year's bear market has been much more savage than the 2000-2002 decline. This bear market has dropped roughly the same total distance, but done so in half the time. Another difference is that in 2000-2002, there were pockets of stocks that didn't fare that poorly. Small-value, mid-value, real estate, and a few other groups either broke even or made a little money during that stretch. This bear market, in contrast, has hammered everything. Morningstar reports:

...all categories of diversified domestic-equity funds are down 32% or more for the year to date through Nov. 7, and all types of international-stock funds have declined 39% or more. The best-performing specialty category, health care, has fallen 23% this year. And all categories of bonds funds--except for short-muni and short-, intermediate-, and long-government offerings--are in the red since Jan. 1.

If you're thinking you simply owned the wrong things this year, or that you might have escaped the damage by following a different strategy, chances are that isn't the case. Pretty much anyone who has had money in the market this year has lost significantly. Upgrading hasn't held up nearly as well this year as it did during the last bear market, largely because there hasn't been anything doing well to upgrade into. This will change eventually. And when it does, there's no reason to think Upgrading won't resume its winning ways."

In other words, the extreme difficulty of this investment market has been that there is no place to hide. 

Here are some thoughts, depending on which of the 2 groups you fall in:

1 - Those not retired and at least 5 years from retirement - This is a great opportunity for you.  Investments are much cheaper than they used to be.  Keep contributing to your retirement accounts on a regular basis.  While this could certainly drag on and get even worse, stocks are cheaper then what they were and what they will most likely be in 5+ years from now (no guarantee of course).  Do all within your power to stay employed, evaluate needs versus wants, live within your means, pay off debt, and keep saving.

2 - Those at or in retirement - This has been especially difficult for you and we feel your pain.  Our Moderate and Conservative portfolios are built to not experience these types of declines.  Some of you are taking money from your portfolios each month to meet the expenses associated with God's call on your life after your first career.  Big drops like we have experienced can be very damaging in that case.  While we already have your normal distribution amount through May 2009 in the money market, we know the drop has hurt.  Plans that looked successful are not as successful at today's account levels.  It would be a great time to see if there is any way to reduce expenses and account distributions to keep more of the account intact.  We would encourage you to still remain calm and avoid the panic that too much news and opinion can create.  We would strongly encourage you to hold the investment course.  It is understandable to think stop the bleeding and go into something without risk.  Yet, trillions of stimulus are bound to create high inflation.  A small guaranteed positive rate is still losing if it is less than inflation.

Here is one more note from Fisher Investments that sounds kind of "typical financial advisor" yet true:

"We may sound like a broken record, but the vital importance of this message warrants repeating.  There is a powerful urge in these times, packaged in a number of guises, to throw in the towel for the comfort of a seeming safe haven.  This always happens near market bottoms.  Many will do themselves great harm in this period and succumb to panic.  Now is about discipline and self control-thinking longer term and employing the most appropriate methods to capture future gains-though much of the period ahead will undoubtedly be turbulent and uncomfortable.  But bull markets do follow bear markets, and at each previous low point investors should have been fully equitized relative to their long-term strategic allocations, not selling.  Our advice is to tune out the drone of negative headlines and resist getting caught up in daily turbulence."

In this holiday season, we want to say thank you for your graciousness and trust.  We appreciate each and every one of you as clients and even friends.  While we may not be experts in every market activity, we personally know the author of true wisdom and He promises never to leave those who put their trust in Him.  As so eloquently stated in the Sound Mind Investing article, "God can be trusted to give good counsel to those who will listen, and He is always faithful to keep His promises."  May God bless you this holiday season. 

Brent Williams