It was exactly 12 months ago that most global stock market indexes plunged in excess of 20% from their highs of a few months earlier. Stock prices had significant downward momentum at that time, coupled with terrible economic news here in the US and abroad – the US credit quality reduction from AAA to AA and the Euro Zone credit crisis were a couple of last September’s headlines. Last September had all the ingredients to turn into something much worse for financial markets and many astute investors believed that a return to the 2009 lows was a possibility – a further decline of 30%!

As you know, our Active Risk Management process “kicked in” during early August last year, mitigating the bulk of this decline and preparing us for the possibility of something worse. Fortunately, the market reached its lowest point almost exactly one year from this writing. Though the fourth quarter was extremely volatile – with indexes gyrating up and down between 10 and 20% – stock prices never returned to those September lows.

In hindsight, the market bottomed and turned up very quickly towards the end of the year, driven by the fact that the US economy was showing signs of resilience and the Euro Zone crisis was better understood. It was at that point that our team began investing your rather large money market holdings in order to participate in what we viewed as a potentially better environment for global stock prices. In the end, it was almost impossible to invest the funds fast enough as the market catapulted upward in the first quarter, leaving us not quite as invested as we would have liked. However, during the May market decline, we were able to become more fully invested. Since the markets began to rally in early June, most of your stocks have performed very well.

The past year provides a great example of the benefits and costs of our firm’s investment style in regard to risk management and our strategy to increase your wealth in rising markets. During times of crisis, we benefit from mitigating the risk of catastrophic loss and in times of rising markets we participate very nicely. Ultimately, our investment style and process is intended to temper significant downside volatility, while providing attractive long term returns, to assist you in reaching your planning goals.

As you may recall from our last writing, we believe that we have entered, or will soon enter, a period of less volatile, upward rising global stock markets. We base this forecast on long term stock valuations which are attractive, a global recovery in real estate and a potential sea change in the management of the US deficit. If our forecast is correct, global stock investors should be handsomely rewarded. Whether or not our forecast comes to fruition (let’s hope it does) we will continue to mitigate the risk of catastrophic loss through our Active Risk Management process.

We hope this update finds you well. If you would like to schedule a time to review your portfolio or if your financial circumstance has changed, please let us know.

Sincerely,

James E. Demmert
Managing Partner