2nd Quarter Wrap-Up

July 20, 2012

The year is halfway over and it’s time for us to share our reflections of the year so far and what we are looking at going forward.  At the end of each quarter, we send quarterly reports to our clients accompanied by our commentary on the financial world.  Check out today’s show for some highlights from this quarter’s commentary that we wanted to share with our Money-Guy family.

S&P 500 Index -2.8% 2nd QTR and 9.5% YTD

Capital Appreciation vs. Dividends: 
When looking at equity income, investment returns can be broken down into two categories:  capital appreciation and income.  During down periods with low or flat market performance in the financial markets, it is important to focus on the income (dividend) producing assets in your portfolio.  For example, when capital appreciation returns were -5.3% in the 1930’s, dividend returns of 5.4% helped to offset the loss in value of the asset.  Likewise, with low capital appreciation in the 1940’s (3%) and 1970’s (1.6%), dividend rates were at higher levels of 6% and 4.2%, respectively.

Filtering the Noise:
The Eurozone crisis and its impact on the economy has been in the forefront of everyone’s mind.  Everywhere we turn, the media is focusing on one disaster after another that can make any investor feel uneasy.  However, we encourage our clients and listeners to filter through the stories that the media would have us to believe and look at the bigger picture.  While the issues facing Europe certainly should not be taken lightly, the growing middle class in places such as Asia is likely to benefit the entire global economy.

Control What You Can: 
Because there is so much noise to be filtered and so much that is beyond our control, we ask that you focus on what you can control in your portfolio.  Modern Portfolio Theory says that 90% of your return is attributed to asset allocation rather than individual security selection.  So focus on your goals, age, risk tolerance, and risk capacity to arrive at an asset allocation that works for you.  Also recognize that good investment decisions often deal with quality vs. quantity.  It is not always about action .  Making the right call (which could be to do nothing) is what makes you good at managing money.

Cash is a vital part of your portfolio allocation and emergency reserves are crucial.  With that being said, there is such thing as having too much cash, especially when the interest rates are doing nothing for you.  Because people get scared when financial markets are at low points, cash levels become high.  When the markets are doing best, cash levels are at low points because everyone wants to be invested.  Remember that the most important thing with cash is not necessarily keeping a certain number in the bank; it is more about preserving purchasing power over time.

Final thoughts:  We hope our thoughts about the 2nd quarter of 2012 help you see what to focus on in the global economy and the multiple variables to consider.  Look at your goals, where you currently are, and what you are doing to reach your goals.  Feel free to email us, write on our Facebook page, or share your thoughts and questions below.  Also check out Jailhouse Brewery, which we mentioned in the show.

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