More on Investing Peace

With the global news reeling around the planet in 2011, creating endless sources of fear—Egypt, Greece, Italy, etc– we continue to seek grounding to allay those fears. Lets start by revisiting things that we have said before:

Fall 2002—”Most of us like to see our lives progress in some orderly fashion….too slow can cause ennui and too fast can cause stress. We would like our investments to understand our nature and act similarly. Unfortunately, the stock market does not! Much of the time, it lurches in fits and starts, up and down, usually over-shooting the enthusiastic times upward as well as the pessimistic times downward…. Never getting it “just right”

Foresight

Fall 2005—”Investment management is not art, not science, it’s engineering”

Pension Fund Manager Charles Tschampion

Fall 2008—”I would say that it is from time-to-time the duty of the serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself”

Economist John Maynard Keynes

Fall 2009—”and the world situation was desperate…as usual”

Author Tom Robbins

We can add a new reflective quote to our wisdom:

Fall 2011—”Progress is cumulative in science and engineering and cyclical in finance”

Historian James Grant

All the news in the world, and more importantly the reaction of human beings to it, manifests in stock market valuations, inflation levels, interest rates, foreign currency exchanges, employment, real estate prices, etc, and results in cycles of euphoria, mania and fear. Let us review what is going on, in order to seek that wise state of groundedness, and avoid the never-ending cycle of Grant’s “un-progress” in finance.

Fixed Income

We have declared before that when an economic tsunami hits, the safe, fixed income proportion of your portfolio likely will provide some degree of safe harbor. There are numerous articles called “Bond Talk” on our website to help you understand the myriad of issues in this component of your portfolio. The bad news is that yields on newly purchased bonds are low, ranging for example from 2-3% for maturities of 5 and 10 years. That doesn’t sound very good. However, the portfolio engineering aspect of historically building a laddered bond portfolio means that you likely come into this low interest rate environment with some old, higher yielding bonds. The “averaging out” of such a portfolio is that you never have much money exposed into a current interest rate environment. That is good when rates are low, and conversely bad when rates are high. The average yield to maturity of your laddered portfolio is presently likely higher than what current rates are paying for new bond purchases. Also, the impact of present-day forces affects the current one-year yield on bonds differently, depending upon their remaining terms to maturity. A sample of a recent established laddered bond portfolio showed a long term average yield of 4.36% with a one year yield of 6.59% to September 30, 2011. That 6.59% derived from a collection of bonds maturing variously and sequentially from 2012 to 2019, as depicted in the first graph titled 2011 yield, which shows the 2011 one-year yields by bond maturity date.

Compound Portfolio Returns

For several years we have been reporting on your Annual Report what the average compound return per year has been from inception with Trivest. This is a very important number, and the longer your history with us, the more valuable and valid it is. This year, we have begun to add 3, 5 and 10 year shorter compounding stats as well—the story within the story. The graph titled Compound returns tracks a sample history of compound returns under the four different time lines. The shorter the period, of course, the more impactful volatility can be, and investors can be spooked by that shorter term “news-factor” in the investing markets. If you follow the long “inception” line and the other lines from 2002-2011, for instance, you will see that the long-term running compound has stayed relatively stable despite the shorter term returns being less.

The graph titled Historical Returns simply overlays the annual simple returns onto the compound ones from the middle graph. Making sense of that volatility is tough and invokes fear of the markets!

We hope that this new information on your Report will allow you to see the longer term impacts of shorter term events.