As I’ve said before, it isn’t the numbers or the definitive declaration of a recession that truly matters, but how it feels to investors like you and me. So what’s fueling the fear-induced rollercoaster? Fodder, fears and frankly, some hard-to-swallow-facts.
Unfortunately, the facts the last few months have provided some fodder for the fearful. Take for example, the Consumer Price Index (CPI), a favored measure for gauging inflation. In the last release, the CPI reported that inflation will inevitably continue to be a growing concern for the Fed, with a 4.3% annualized rate. This is right above their preferred comfort level of around 3%, so needless to say you’ll be hearing a lot about inflation in the news over the next couple weeks until the Fed meets again on March 18th.
While financial companies are reporting losses left and right, estimates are that the rest of the S&P 500 companies saw earnings move higher by about 11% year-over-year. Financials are a huge part of our economy, yes, but it’s nice to know that the rest of our economic engine appears to be in tune. From UPS (symbol: UPS) to Caterpillar (symbol: CAT) to Verizon (symbol: VZ) to United Technologies (symbol: UTX), the word is that once you move away from Wall Street, things don’t look quite so dire. In fact, the recent durable goods report for December actually beat expectations. And look at what else has happened since we all rang in 2008:
Exhibit 1: The 1.25% interest rate cut (year-to-date) which, over the long haul, will spur economic growth and corporate spending.
Exhibit 2: The $150 billion government stimulus package that will put a hefty tax rebate in the hands of consumers to spend as they choose, pumping more money back into the economy.
Exhibit 3: The rapid increase in mortgage refinancings. With lower interest rates, credit-worthy homeowners are finally getting a break!
So why is it that the market value of all the stocks in the S&P 500 index have declined 11.9% from their October highs? One word: emotion. (Or, for those of you who prefer not to mince words, pre-meditated panic.) While pundits are eagerly awaiting total economic Armageddon, the fund managers who oversee my Model Portfolio have been through this before and have yet to break a nervous sweat steering through the turbulent market.
Invest in a Stable of Top Managers to Steer You to Safety
Why am I so optimistic? My Vanguard fund managers are some of the best in the industry. As prices have dropped, the managers running our funds are finding golden buying opportunities that should benefit our portfolios for years to come. As you may, my goal when building the Model Portfolios in my Independent Adviser for Vanguard Investors service is to assemble a diversified team of investment managers, and a set of strategies that I am confident will carry us through fair and foul market winds.
Now, I have never promised (and I will never promise) that we won’t loose money when the markets fall, and I won’t promise we’ll always keep pace when markets are in a bull-rallying mode. My goal is to produce a profitable ride that, over a full-market cycle, generate better risk-adjusted returns than a market index fund like the Total Stock Market (for growthy investors) or Total Bond Market (for those with an income bent).
At The Independent Adviser for Vanguard Investors, we’ve accomplished that over the last 17 years, by sticking to a discipline of solid diversification.
Forget Index Funds
One question I’m often asked is why, as a Vanguard investor, I don’t simply recommend a sole focus on Vanguard’s index funds for my Models. The answer is simple: Vanguard has hired a number of truly exceptional institutional managers who, benefiting from Vanguard’s low costs, have outperformed relevant index benchmarks time and time again. It is also often the case that actively managed funds at other fund families can’t seem to stay ahead of the indexes, but that’s usually because they are beset by high fees. Not so with fund managers at Vanguard. In fact, in the March 2008 issue of The Independent Adviser for Vanguard Investors, I talk about my favorite Vanguard Funds and the top managers behind them. These are the folks you’ll want managing your money–in both bull and bear markets!
Sign up today for your own 6-Month RISK-FREE subscription to The Independent Adviser for Vanguard Investors and put my Model Portfolio to work for you! In the March 2008 issue, I had the chance to speak with Vanguard Selected Value’s Jim Barrow and Mark Giambrone, two titans of the trade who both agree that the current crisis on Wall Street needs time to run its course. Their insights are always valuable. Download the March issue right here!
