Financial Planning Newsletter• May 15th 2009 

Investment strategy in an uncertain world

This month: A review of Jeremy Grantham's quarterly report, a recap on the basics of stock / bond funds and parting investment thoughts.

Jeremy Grantham, the famed money manager with GMO has come out with his quarterly report which is a good read for those inclined. It's a bit lengthy but he makes some very good points for the next couple of years. For those not familiar Mr. Grantham became very bearish in 2000 predicting a difficult road for the decade. He was ridiculed, but most of his predictions ultimately played out. What caught my attention was his recent shift from a bear to a bull earlier this year. His recent report backs up some thoughts that I have been sharing with investment clients regarding where this market may be headed in the intermediate term.

click here for: GMO Quarterly Report

Let's recap the basics of stock/bond funds:

Like anything if you don't review it very often you will forget, so for those that have forgotten the basics of stock / bond funds here is a recap:

How does a Mutual Fund work?

When you mention the word "mutual fund" most folks immediately understand this as an investment tool in their 401k, IRA or Brokerage account. A mutual fund is an investment company set up to buy an underlying basket of stocks. This allows you to get instant exposure to a select asset class in the market. Mutual funds can be passive and track indexes (think Vanguard index funds) or actively managed by a fund manager who tries to beat the benchmark index (normally the S&P 500).

What's the difference in a stock and bond fund?

A stock mutual fund owns shares in many different companies for diversification. It can be a Large Cap fund owning stocks in the largest publicly traded companies, a Mid Cap fund investing in companies with valuations of 2 to 10 billion in market cap, or a Small Cap fund investing in companies less than 2 billion in market capital.

A Bond is the equivalent of loaning money to a company. Most corporations are capitalized by selling stock as well as issuing bonds (or debt). A bond or bond fund is generally thought to be more secure than stocks as the company guarantees to pay a set interest rate on the debt for a period of years and then redeem the bond at the end of that period. Bond Funds offer diversification and come in many different forms: corporate, government, international and high yield.

The important part to note in the paragraph above is that bonds pay interest. You generally don't expect much principal growth (that is what stocks are for) but you do collect an income for investing in the bonds.

Parting Investment thoughts:

A lot changed in the investing world over the past 18 months. Many theories and strategies that were taken for granted got thrown out the window. For most investors it now means rethinking strategies, including those of us that do this for a living. Below are some general ideas I will be incorporating over the next few years with clients, at least until the next great bull market starts, at that point we can sit back and let the buy & hold strategy play out:

(this is not investment advice, just my general thoughts)

  • If the S&P can reach the 1000 to 1100 mark reduce exposure to stocks and increase bond exposure.
  • Be ready to adjust strategies at any time over the next 5 years as inflation / deflation forces battle.
  • With the global stimulus likely to cause intermediate inflation be ready to add commodities such as gold, oils and agriculture.
  • Be tactical and if able to catch a decent run in the market be ready to sell.
  • Buy when it looks the worst and sell when the financial media begins talking about a bull market.

My best guess is that we will be in a choppy range for the next several years, much like what Mr. Grantham states in his report above. However, there will be plenty of opportunities to get a return on your investments just as there were from 2000 to 2007, it will just require a bit more diligence.



James A. Daniel,

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation for financial services. Consult with your financial professional if you have any questions.

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