Investment Commentary - 3rd Quarter 2012

Stock returns as measured by the S&P 500 were in the hole for the quarter coming into June. They rallied somewhat for the month so that those invested accordingly had the potential to recover some.  This time of year also marks some of our most intense research activities including the Morningstar Investment Conference. I summed up our thoughts on portfolio positioning and the Eurozone in a special June update so I'd like to discuss some new trends and themes today.

A laundry list of news items are catching our attention today. They converge to create a growing tally of changes at the margin which may have investment implications for you.

• We've sent you several communications about the changes to General Motors and Ford pensions. Even if you are not directly impacted, there may see similar changes if you have a defined benefit plan. Analysts believe that this is the start of a new wave of offloading pension obligations and that more announcements from other companies may follow. Our experiences show that the decisions to take a pension or lump-sum buyouts is largely personal and complex based upon your overall financial situation.

• Around the world, interest rates have been falling as slowing growth in China and EuroCrisis have been answered by government intervention. This may be one of the reasons that the MSCI EAFE is flat on the year in spite of dire headlines overseas. While interest rates would be challenged to go lower in the US, there is some room for government intervention around the world, especially in emerging markets -- think of Brazil as an example.

• A surprising slowdown in overall US debt growth has been occurring under our nose. No, the US federal debt load keeps growing, but there has been measurable deleveraging on the state and household levels. Some of this has come through the painful process of personal bankruptcy and foreclosures. States and municipalities have been practicing their own austerity with layoffs and less borrowing.

• The Affordable Care Act was largely upheld by the Supreme Court last month. This will have implications for Americans of all walks of life. For some of you some of the implications will be investment-related due to the 3.8% surtax on investment income in higher earnings brackets. This increase on investment income may not be the end given the pending expiration of "Bush" tax cuts. The coordination between tax strategy and investment management will become more and more critical in coming years.

• Scandalous headlines resurfaced at big banks, most recently JP Morgan and Barclays. JPM disclosed that it had major losses due to poor risk controls in exotic trades. The Barclay's LIBOR scandal is in its early days and may be much larger than it appears on the surface. Essentially, Barclay's has admitted that it fudged reports of borrowing costs over the last five years. Many Americans may have been negatively impacted since adjustable loans linked to LIBOR are widespread for mortgages, student loans, and car loans.

  We live in a heavily regulated financial world. I know this as much as anyone as each of these messages to you is reviewed in-depth by a compliance department prior to publishing. If I had my druthers, my day would involve less red tape and easier direct communication with you. The continued misbehavior of corporations and individuals alike seems to justify at least some of this burdensome regulation.

As the election season heats up, Angie Palacios, CFP®, Portfolio Coordinator, has focused her MoneyCentered blog posts on politics and investing. Click here to read the series.

Speaking of politics, I recently heard Columbia University Professor of History Eric Foner in an interview discussing Abraham Lincoln's presidency and leadership strengths. He mentioned that one of Lincoln’s strongest character traits was the ability to change his mind on critical issues. “Lincoln was a flip-flopper, if you want to use the terminology of modern politics.” While a politician today is accused of something close to political treason each time they tweak or change their mind, I value the ability to keep an open mind as an investor.

We think long and hard about what would be best for you as our clients and what worked yesterday may not always work tomorrow. We take the changing investment landscape into consideration as we make investment decisions while we will stick with our process which encourages us to analyze and evaluate risks and opportunities for you. Perhaps if our elected officials were afforded the same flexibility there would be more compromise and less frustration with our nation’s capital. 

I always enjoy hearing from those of you who are reading these investment updates. Don't hesitate to let me know if you have any questions, comments, or suggestions for future topics.

On behalf of everyone here at The Center,

Melissa Joy, CFP®
Partner, Director of Investments
Investment Advisor Representative, RJFS

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Melissa Joy, CFP® and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users.

June 2012 Investment Performance - 2nd Quarter 2012

Source: Morningstar

Bonds represented by Barclay's Aggregate Bond Index a market-weighted index of US bonds. US Large Companies per S&P 500 Index a market-cap weighted index of large company stocks. Barclay’s Global Bond index is a market-cap weighted index of global bonds. US Small Companies per Russell 2000 Index a market-cap weighted index of smaller company stocks. International stocks measured by MSCI EAFE is a stock market index designed to measure the equity market performance of developed markets outside of the US and Canada. Commodities per Morgan Stanley Commodity Index a broadly diversified index designed to track commodity futures contracts on physical commodities. 

Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.

A Debt Surprise - 3rd Quarter 2012

It seems as though we American’s should be giving ourselves a pat on the back.  Ever since the financial crisis we have shown a noticeable improvement in our debt levels as a percent of gross disposable income.  About half of the excess debt (amount above the trend line or average growth in ratio of debt to disposable income) built up since the year 2000 has been eliminated.  The growth in debt over the past ten years sprang from the availability of home equity loans and most of this availability has dried up since the decrease in property values. 

Unfortunately our government can’t say the same yet.  While government debt is leveling off and slowly drifting downward looking at forward estimates, our politicians have a lot of work to do over the next decade or so tightening their belts.

It is quite common for households and corporations to lead the way in debt reduction during an economic recovery.  After all, it is far easier for us to reduce our spending (even though it may not feel like it!) since we don’t have to worry about winning the next election.  Also, governments delay their debt reduction in order to attempt to stimulate the economy by spending more so individuals and households can have healthier balance sheets.  Later the government can work to reduce their own debt. 

When looking under the hood we may not have as much to be proud of as we thought.  Sadly, much of the consumer debt reduction has come in the form of foreclosure and defaults.  Coming out the other side of this, consumers will have either less or more expensive credit available to them (partially due to lower credit scores and also due to no home equity to borrow upon) and thus won’t be able to fuel the economy quite so much as the government has come to expect in the last decade. 

Reduced consumer spending could make the government’s job much more difficult reducing their own debt.  The U.S. government is highly unlikely to default on their debt like consumers did so they would need to depend on GDP growth (among other factors like Inflation) to shrink overall debt levels.  And with consumers not spending as much it is unclear where this rebound in GDP will come from.

It seems logical to say “Enough is enough!” and make the hard cuts necessary to win this battle over debt in the coming years.  However, nothing is ever that simple when it comes to deciding what programs to actually cut and how that may affect other aspects of the meager economic recovery.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios, CFP® and not necessarily those of RJFS or Raymond James.

Barclay's, LIBOR, and What it Means for You - 3rd Quarter 2012

Just what the world needs today: another financial scandal involving banks and your money! An investigation initiated in 2007 has culminated in a nearly half billion dollar fine from Barclay’s and the possibility of an ever-expanding scandal.

The London Interbank Offered Rate (also known as LIBOR) is a common benchmark for financial instruments based upon the cost of borrowing between large banks around the world. If you read financial headlines, the last time you may have been thinking about LIBOR rate was in 2008 when the cost for borrowing between banks went through the roof. But, whether or not you’re following LIBOR, it’s not obscure. In fact, LIBOR is linked to more than $700 trillion in financial instruments around the world including adjustable mortgages, student loans, and car loans.

It turns out that Barclay’s (and quite probably other banks) were padding their own wallets leading up to the financial crisis by boosting LIBOR rates. This meant that derivatives on their books were paying off for the banks. They could also collect more on the loans they issued linked to LIBOR. It made their operations more profitable, possibly at the expense of your loan costs if you had adjustable rate loans. Another big victim may have been your local government as many municipalities have contracts tied to LIBOR.

That’s not all! Just as it helped to boost the LIBOR in 2007, it was very useful to report lower LIBOR rates amidst the global meltdown. Why? Well, lower borrowing meant you might be a stronger financial institution. This is a good thing if you’re trying to stay in business and prevent a bank run. Again, this goes back to the bank’s profitability with little regard for the victims of such a scam. And fudge those numbers they did!

How, you may ask, could they get away with this? LIBOR is managed based upon a glorified honor system. Banks are expected to look in the mirror each day and report their inter-bank borrowing costs. This self-reporting system seems to have lots of cracks, and many are saying that Barclay’s getting caught is just the tip of the iceberg.

Want to learn more? Here are some resources that further explore this unfolding topic:

• LIBOR for Mortals Marketplace Radio

• The Rotten Heart of Finance The Economist

• Infographic: The LIBOR Scandal Explained AccountingDegree.net via BusinessInsider.com 

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Melissa Joy, CFP® and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users.

June 2012 Investment Update

The year opened with a quarter of exceptional returns for markets such as the S&P 500. This rising tide was quickly curtailed in April and May. The ongoing European troubles have reached a new crescendo. Withering employment and housing numbers in the US added fuel to the fire in May.

The situation in Europe is complicated and includes both real economic challenges and unresolved political questions. The combination has led to a slow-moving crisis without the sign of an end. The primary issues we're watching today:

• Greece Unraveling. We do not know of any credible experts who think that Greece is solvent today. The insolvency is a foregone conclusion but related political upheaval has escalated the crisis. We now look to June 17 elections to determine remaining support for continued membership in the EU. A so-called "Grexit" would be unprecedented and would bring even more challenges to Greek recovery.
• Contagion in Spain & Italy. While Greeks have been wreaking havoc on their banks by hoarding Euros, Spain and Italy seem to be experiencing their own quiet bank run. Unemployment rates are very high in Spain and Italy and borrowing costs continue to rise for the governments. Earlier in the year, the ECB fiscal relief program infused money into banks, but did little to fix their exposure to bad sovereign debt along with other bad loans. Finding a way to secure investor sentiment in these economies remains critical.
• Slowing Growth. The odds of a European recession are high and growing. Meanwhile, signs of slowing growth are cropping up in places like China and here in the US.
• End of US Stimulus. "Operation Twist" is scheduled to wind down this spring and summer. We have long seen 2013 as challenging regardless of the presidential victor because of agreed-upon fiscal cuts plus tax breaks which are scheduled to expire. Add to that the need to rehash the debt ceiling discussion, and we know the US Government and Economy will be in headlines that rival Europe in the coming months. With US interest rates at record lows (going back to WWII), a new Fed program to buy even more treasuries would seem to offer very little in the form of help for investors.

What actions should investors take? We can share some strategies that we’re using with our clients from a financial planning and wealth management perspective.

• Work with a professional who is looking forward with today’s situation in mind. The challenges listed above have been on our minds and on the minds of our portfolio managers regardless of market returns. We discuss these issues on a daily and weekly basis within the firm as well as with money managers and peers. For many managers, a European outcome may be a "United States of Europe" approach with more centralized EU power. This, they say, will not happen without considerable effort and time.
• Look at your risk orientation. In 2011, we considered significant changes to positions for our clients in anticipation of sustained volatility (which we saw last summer and seems to be popping up again). From our point of view we may continue to see more uncertainty this summer and through the presidential election cycle in November. We have been underweight dedicated international positions and our managers have tilted portfolios toward Asia and away from Europe. We have incorporated alternative strategies which have historically had a less direct relationship to the whims of stocks and bonds. This is not a blanket prescription but our point of view. You should know your own posture in terms of investment mix.
• Stick with your plan. Because of the changes last year, we continue to be comfortable with portfolio positions today and do not anticipate a significant overhaul to portfolios. That said, our focus on monitoring investment mix in light of current scenarios is as vigilant as ever. If you have started a plan, you need too much change or doubt may result in a drag on your portfolio’s returns.
• Rebalance when appropriate. If markets continue to decline, we may rebalance portfolios into the assets that have declined. This is by design and meant to position investments through a forward-looking lens rather than the natural human tendency of focusing on the rear-view mirror. Ultimately, we believe that volatility will lead to buying opportunities.
• Talk to someone when you have concerns. Working with a CERTIFIED FINANCIAL PLANNER™ is a partnership. A financial planner can help uncover your concerns and find answers for your fears! Most importantly, when your financial situation is changing, make sure to update your overall financial plan and analyze your investment mix based upon the new information.

As the summer gets going, you should be able to enjoy barbecues with family and friends rather than worry about the ups and downs of stocks and bonds. Ultimately, you are investing so that you can achieve your financial goals. If you ever have questions about investing or comprehensive financial planning, don’t hesitate to contact us.

Sincerely,

Melissa Joy, CFP®
Partner, Director of Investments
Investment Advisor Representative, RJFS

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Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Melissa Joy and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Past performance may not be indicative of future results. Please note that international investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Alternative investments are available only to those who meet specific suitability requirements, including minimum net worth tests. There are special risks involved with alternative investments, including investment strategies, and different regulatory and reporting requirements. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Investment Commentary - 2nd Quarter 2012

Stock investments roared into 2012 with the S&P 500 closing the first quarter up 12.59%. International markets also posted strong quarterly returns as investors seemed to feel that Greece compromises helped to avoid a chaotic default and seemed to buy some breathing room. The quarter was also notable formuted volatilityin equities. While stocks zoomed, bonds stalled and their returns were relatively unchanged.

Source: Morningstar Direct

Economic data seems to be disappointing bulls and bears alike. Pessimists are predicting recession, but leading indicators continue to suggest that things are getting better. Those more naturally optimistic are looking for better employment numbers and decisive growth. We break down unemployment trends here.For now, we think it’s best to be constructive and cautiously optimistic.

The exceptionally strong market returns of the last six months may mean that it’s time for a breather, or (in market speak) consolidation. Longer term, balance sheets and stock earnings continue to indicate corporate health. Another indicator, University of Michigan Consumer Sentiment, shows recovery off of depressed lows over the summer, but is below the 30-year average. Keep in mind that stock dividends are rivaling Treasury bond yields and we are comfortable maintaining neutral allocations to stocks.

As the saying goes, “Don’t fight the Fed” and Operation Twist coupled with European Central Bank liquidity injections seem to be helping to support modest growth. On April 11th, Vice Chairman of the Fed, Janet Yellen, indicated that low rates could extend beyond 2014if the pace of growth fails to accelerate. For more on the impact of recent Quantitative Easing on stocks, click here.

The lackadaisical recovery and Fed accommodation may be buying time for bondholders as the Fed works to keep interest rates low. Data shows that investors have continued throwing money into bonds in spite of the threat of rising interest rates. This may be good news for stocks as strong returns were not driven by investors “crowding in”. Conversely, the nearly insatiable public demand for bonds gives us pause. Those relishing the relative comfort that bond investments have offered in the past thirty years may want to reconsider future assumptions. Learn more about our concerns in bond markets and how we’re investing here.

We’ve just completed a blog series that discusses components of our investment process that you might find helpful.

Introduction: The Investor’s Chief Problem

Strategic Allocation: Building Your Foundation

Tactical Allocation: Deck the Halls with Tactical Allocation

Types of Investments: Time to Declutter

Buy Process: Salad Surprise

Sell Discipline: The Gambler

Rebalancing: Game Plan

If you have topics you would like us to cover in the future, please let us know! As always, we appreciate the opportunity to meet your financial planning and investment needs. Thank you!

Sincerely,

Melissa Joy, CFS

Partner & Director of Investments

Financial Associate, RJFS

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Melissa Joy and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Please note that international investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. Dividends are not guaranteed and must be authorized by the company’s board of directors.

US Stocks & the Federal Reserve - 2nd Quarter 2012

As the saying goes, “Don’t fight the Fed!” Many investment experts have noted the strong relationship between the market’s ups and downs and Federal Reserve policy. This chart, compiled by Doug Short at dshort.com beautifully illustrates the relationship between Fed intervention programs and the S&P 500. 

While Operation Twist is scheduled to end in June 2012, Federal Reserve board members have also started to use stated future targets for interest rates as a means to encourage market participants to invest in stocks. As recently as April 11th, Fed Vice Chair Janet Yellen indicated that the Fed’s “Zero Interest Rate Policy” could remain even past the initial 2014 target date. If markets stumble, some think that a third round of Quantitative Easing may also be possible.

There will come a time when markets need to stand on their own two feet. Based upon the words and deeds of the Fed, those days may be several years away.

Hat Tip: The Big Picture, Barry Ritholtz.

Heeding Warnings on Bonds - 2nd Quarter 2012

As an Investment Committee and firm, we have had concerns about the threat of rising interest rates for some time. The growing chorus of concern for future bond returns rose during the quarter including notable discussion from Warren Buffett in his annual Berkshire shareholder letter. 

Over the past 30 years, bonds have been a significant contributor to investor returns. It takes a veteran investor with a long memory to recall the last time that there were sustained negative real returns for bonds. Coming out of the 1970s, inflation was the chief enemy of the Fed and interest rates remained higher than inflation rates. This meant that even those investing in cash alternatives could preserve the purchasing power of their investments.

We all know what’s happened to the rate of return for cash alternatives since 2008. It has been brutal to pay your bank more in fees to hold your money than receiving back as savings interest rates which have been negligible or nonexistent. Since inflation has hovered between two and three percent, your cash alternative has had a negative real rate of return, that is the return of the investment minus inflation.

Our concern today is that this negative real rate will spread from cash alternatives to other bond categories, most notably US government bonds. There are several ways that bond results can hurt investors:

• Rates rise: As interest rates rise, the price of bonds may go lower. This might result in reduced portfolio values on statements.
• Rates stay flat, inflation rises: Interest rates don’t have to rise to experience disappointing bond returns. A hidden threat is that interest rates remain extremely low while inflation rises. If you subtract the high inflation from low returns in bonds, you may end up with a negative real rate of return as mentioned below.
• Economic deterioration: Investors who move away from bonds that are more sensitive to interest rates in favor of credit risk sensitive bonds may be disappointed if slowing economic factors result in lower bond prices for bond diversifiers.

With baby boomers retiring, the bond conundrum really hits home. A historically tried and true source of retirement income may now be a source of risk. As one investor noted, this means portfolios may need to be much more carefully constructed and complex than they were in the past.

Some specific recommendations:

• Asset allocation: Carefully review allocation decisions with your financial planner and make sure that you are invested for the next 30 years and not the last 30 years. This is especially important if you’ve significantly altered your overall allocation in the wake of the market meltdown of 2008.
• Diversification: Not all bonds behave the same. Many types of bonds that did not exist in the last great rising rate environment of the 1970s may offer some aid to investors, or be the best option in a lousy lot. Bonds outside of the US should also be considered. Lower volatility alternative asset classes might also be included in the potentially “better than bond category”, although they take careful consideration and analysis. With diversification comes risk and complication, professional advice is recommended.
• Rethink income strategy: Bond coupons are not the only source of income for an investor portfolio. Stocks which pay dividends are one alternate source. Beyond that, we generally prefer a total return view where both appreciation and income can be used for portfolio withdrawals depending on which assets are overweight. This reinforces the buy low and sell high concept.

We have been discussing the threat of rising rates so much, that I feel like a broken record. Someday I will talk about a time when you could get a mortgage at 3.5%. It might sound as crazy to a younger audience as double-digit Certificates of Deposit rates sound today – something that is very difficult, if not impossible, to wrap my head around. Preparing for the shifting reality of bond returns is the highest priority of our investment committee today!

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Melissa Joy and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Diversification and asset allocation do not ensure a profit or protect against a loss. Please note that international investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Dividends are not guaranteed and must be authorized by the company’s board of directors. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Unemployment Trends - 2nd Quarter 2012

Unemployment has been slowly falling over the past year, despite what you might be hearing from naysayers, and currently stands at 8.3% nationally according to the U.S Bureau of Labor Statistics.  Because of the severity of the recession we suffered in 2008 and 2009 unemployment has recovered much slower than in past recessions.  This has been despite the large amount of liquidity that the Federal Reserve Bank, or the Fed, has pushed into the system.  At this point the Fed has gone about as far as it can go to stimulate job growth.  So what needs to happen next to keep the unemployment trend heading downward?

Part of the problem is the private sector has simply been unwilling to hire so far during the recovery.  They have enjoyed nice productivity gains from their current employees and have not seen the need to hire until recently.  Now, however, productivity growth is slowing and they are realizing that they cannot squeeze anymore blood out of the stone.  But even with all of these job openings, the unemployment rate is not dropping as quickly as it should. 

There has been a “structural” change in the job market meaning that there aren’t enough qualified people available and in the right places to fill specific job openings.  Pairing a worker with a job opening is much the same in principle as a couple’s matchmaking.  You aren’t simply going to marry the first person you date.  Sometimes it can take a very long time to find the “right” person. 

Only a decade ago one could get a good job in the manufacturing industry with little or no higher education required.  Now you can see in the chart below, there has been a large spike in unemployment the less education that you have.

The economy is undergoing a structural change emphasizing the need for retraining in order to go into fields with employment opportunities.

According to the above chart manufacturing jobs are scarcer, employing 40% fewer workers than 12 years ago.  During that same decade, jobs in education and health services, which generally require more education, have grown nearly 20%. 

Retraining our work force and getting them to where the jobs are is what needs to happen over the next few years.  This takes a substantial amount of time and money to complete and is one of the root causes for the slow decline in unemployment.  Many workers leaving the workforce for retraining fall into a nonparticipation category that is not counted as unemployed because they are not actively seeking employment.  Once these people complete their retraining and find a job they are not considered as coming out of the pool of unemployed.  Over time this nonparticipation pool will become smaller but will not contribute to the declining unemployment numbers.

Ultimately, it could take years more before the unemployment rate falls back to its’ pre-recession levels but when it does our workers should be much better positioned for the fields with growing employment opportunities.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of Angela Palacios and not necessarily those of RJFS or Raymond James.

Hello 2012!

If you extrapolate last year's lessons, diversification could be seen as the biggest threat to a portfolio. Traditional US Large Company Stocks and US Government Bonds sprinted past limping "diversifiers" such as international stocks, non-traditional bonds, and alternative investments. Over history, clients have generally benefited from diversification. But this pillar of investment discipline turned into a headwind last year.

For equity investors, flat domestic returns did not tell the whole story. Consider that the return of the S&P 500 index last year was 2.1% including dividends. US Companies took a roller coaster ride to get back to their starting point - disappointing summer news was eventually overcome by maintained slow growth and exceptional corporate profits.

Source: Morningstar, Inc.

For investors,

staying the course was a challenging proposition last year. The return landscape was even more challenging for portfolios with exposure to international markets. A natural disaster and nuclear situation in Japan first set things on edge followed by enduring concerns about debt which continues to engulf the Eurozone.

Bonds were king in 2011

with long bonds issued by the US government ruling the roost. Key interest rates found new lows (insert hyperlink to interest rate chart from RJ). This was helpful if you were in the position to refinance your mortgage and was also helpful from a portfolio perspective. However, those investors who anticipate a rate rise in the future and have positioned portfolios to attempt to minimize the risks did not fully participate in the boom for fixed income investments.

Our resident economist,

Angela Palacios, CFP ®, notes that unemployment has continued its downward trend since August and is currently at 8.5% nationally which is the lowest level in more than three years according to the United States Department of Labor, Bureau of labor Statistics. Retail, manufacturing, transportation and health care are a few of the sectors enjoying job growth. Based on initial claims so far this month it also looks like we will see another decline in the rate even though it is normally high in the first two months of the year with temporary holiday workers being laid off. This reduction in unemployment is a lagging indicator of the economy showing the pickup in economic growth even though it may be slow.

Short-term lessons don't always help investors focused on the long-term results. We still believe there are critical benefits to diversification and maintain portfolios with a variety of distinctive asset categories and strategies. Our process-driven investment strategy is also designed to avoid performance-chasing sirens in favor of disciplined investing.

Sincerely,

Melissa Joy, CFS

Partner, Director of Investments

Financial Advisor, RJFS

Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. The Barclays Capital Aggregate Index measures changes in the fixed-rate debt issues rated investment grade or higher by Moody's Investors Service, Standard & Poor's, or Fitch Investor's Service, in that order. The Aggregate Index is comprised of the Government/Corporate, the Mortgage-Backed Securities and the Asset-Backed Securities indices. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Russell 1000: Measures the performance of the 1,000 largest companies in the Russell 3000 Index. MSCI EAFE (Europe, Australasia, Far East): A free-float adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada. The EAFE consists of the country indices of 21 developed nations. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Diversification does not assure a profit or protect against loss. Investments related to a specific sector, where companies engage in business related to a particular industry, are subject to fierce competition, the possibility of products and services being subject to rapid obsolescence, and limited diversification. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss, including the loss of all principal.