August 2002 Newsletter

Personal Volatility

Whew! You try to take a little vacation and the Market Gods go crazy! It's down, it's up, it's down a lot, it's up more than any week since 1933...etc., etc., etc.

How is your stomach holding up? We haven't gotten too many worried phone calls here at Silver Oak, and I hope that's a good sign (and not just a shocked silence!). On the quarterly reports we've done this month, we have definitely seen the benefits of diversification in client portfolios, cushioning the downside to single digit losses.

These last 2+ years have been a real test for many investors, experiencing negative market returns for the first time. Even people who intellectually thought they could tolerate significant market volatility are only now truly discovering their personal risk tolerance.

Personal volatility is not what kind of temper you have, but what is your personal tolerance for investment volatility. Many writers and advisors link the risk tolerance issue solely to an investor's age: when you're young, you can take more risk than when you're old. But we find it is not that simple.

Factors that affect risk tolerance include: marital or relationship stability; job stability; health; history of losses; being in transition (retiring, divorcing, becoming an empty nester, moving); prior experiences with investing; family attitudes toward money; frame of reference (media or friends), and more. So just because you made it through the market drop of October 1987 without a whimper doesn't mean that you won't be bothered by the bear market of 2002.

Prepare yourself -- the July investment statements are going to look pretty ugly, I suspect. Some of my clients have said they are planning not to open those envelopes! That's okay, because we'll be opening our copy, and are on standby here to hold your hand and review portfolio plans and allocations with anyone that needs it.

Keep Breathing!

Investment Boot Camp

The next workshops have been scheduled as follows:

Friday, Sept. 13, 2002 11:30 am - 1:30 pm (lunch)
Saturday, Nov. 2, 2002 9:30 am - 11:30 am
Wednesday, Jan. 8, 2003 3:30 pm-5:30 pm

Please contact Mary Barr to reserve your space(s).

Implications & Planning

Several noted scholars recently have concluded that long-run real stock returns will likely fall below historic levels. What are the implications of this, if it comes true? A recent article in the Journal of Financial Planning had this excellent summary:

  1. We must change our expectations of returns. "We must adjust to market prospects; market returns do not adjust to our needs."
  2. We need to save more to reach our retirement goals. For a 50-year-old investor, earning a real portfolio return of 3.5% rather than 5.0% (over inflation) requires an additional $11,600 annual savings.
  3. It becomes even more critical to minimize investment expenses. This includes both the actual trading and mutual fund costs as well as income taxes; tax efficiency becomes vital.
  4. Do not try to make up for lower market returns by concentrating a portfolio in a single stock or sector. Remember the lesson of the technology bubble: underdiversification can be deadly to a portfolio.
  5. Consider lowering the portfolio's allocation to stocks by 10 to 15 percent. [We would add: keep at least two years' of required portfolio withdrawals in cash or short term bonds, for those living off the portfolio.]
  6. Consider expanding the asset classes beyond traditional stocks and bonds to include inflation-linked bonds and equity real estate.

Others have suggested the best way to survive bear markets is to keep investing — making regular contributions to your investment accounts, especially 401(k)s, 403(b) plans and IRAs. Putting money in during the depressed periods is very important, because even if you can't "call the bottom," you can invest at cheaper prices than it was going in before.

Another planning idea is the use of fixed annuities during retirement. Many clients have the option to take a company pension plan in the form of a lump sum payment or a lifetime annuity. We have often been the only advisor recommending the annuity choice; when stock market returns were double digit, others were convinced they could invest the lump sum payment for a better result. Don't forget that diversification is a powerful friend in income planning as well as portfolio allocation.

Honor Roll

Deborah was honored to be included in Mutual Funds' list of "100 Top Advisors Coast to Coast" found in the September 2002 issue. We can all be proud that 6 out of the 20 planners featured for the West Region are from Oregon.

Steve was featured as "Planner of the Month" by Mutual Funds last August (sorry, Steve, but 9/11 bumped your announcement from our newsletter last fall).

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