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Spring 2010, volume 12

The Vantage Point “Edge”Welcome

The Biggest Gains Can Come When Least ExpectedI am not aware of anyone who predicted that a great bull market would begin on March 9, 2009. And yet, begin it did, demonstrating yet again that our markets have often provided the biggest returns when we’re least expecting them. Consider that from July 1932 through June 1933—think, Great Depression—the S&P 500 Index (then the S&P 90) returned 163 percent. Here are some other examples:

After a negative year in 1934, the S&P index provided a total return of 133 •percent from April 1935 through February 1937.

1953 was a down year for the market, but the S&P index provided a total •return of 117 percent from October 1953 through November 1955.

1957 was another down year for the market, but the S&P index provided a •total return of 55 percent from March 1958 through July 1959.

1973 and 1974 were terrible years for the market. Over the next two calendar •years, the S&P index provided a total return of 70 percent.

Thus the S&P 500 Index’s rally of 67.8 percent from March 10 through year-end was certainly not unprecedented. Unfortunate investors who abandoned their investment plan and jumped ship prior to the rally weren’t there to experience it.

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Life Lessons From 2009You probably were relieved to see the markets end 2009 on such a positive note. Emerging markets, for example, experienced their best year on record. Who would have guessed that a year ago?

Speaking of stocks, whether it’s an up or down year in the market, there are always good reasons to take stock of whatever happened, to determine what lessons the markets taught (or re-taught) us. 2009 was again an opportunity to review valuable lessons about our capital markets.

The overarching theme is that PLANNING MATTERS. In all market climates, there are so many ways to be tempted to follow some siren song, instead of your trusty navigational guides. Investors most likely to maintain discipline in the face of an uncharted future are those who:

Have a well-developed plan, one •that anticipates how to stay on course during market volatility

Don’t take on more investment •risk than they should

People who save consistently and rebalance in good times and bad are the ones most likely to weather the storms. Those who don’t have a plan are far more likely to run aground.

Read on for more valuable lessons from 2009.

Barbara Ray, CPA MBA Vantage Point Advisors, LLC

When we take on new clients, it’s typical to see them holding too few bonds, given their investment goals. Maybe you don’t feel like you’re “investing” unless your portfolio is mostly stocks? In reality, being in a position to hold bonds implies that you have accumulated enough wealth to be able to reduce or eliminate your equity risk. Bonds indicate that you have made it, just like your third home, the airplane, the yacht or your ability to pay for your children’s doctoral degrees debt-free.

Now that you know that bonds are an important component within your portfolio, here is a primer on the types of bonds we typically recommend as well-suited for reducing investment risk: municipal bonds.

Municipal bonds are commonly thought to be high-quality,

A Muni Bond Primer

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There Are No Market FlagmenWhen the surf is rough, lifeguards place a red flag on the beach, warning swimmers to stay away. When it quiets down, the green flag goes up, indicating it’s safe to go back in the water. Unfortunately, the same is not true with stocks—there are no flagmen.

Consider an imaginary investor who’d decided he’d had enough toward the end of 2008. He sold his stocks on November 20 when the S&P 500 closed at 752. His “plan” was to wait until the market had been up for more than 30 days. This would be his symbolic green flag to buy back into the market.

With the S&P 500 closing at 903 at the end of the year (and having missed a rally of 20 percent), he bought again, believing that it was now safe to get back into equities. Unfortunately, the market dropped another 25 percent by March 9. Again, he’d had enough and sold … missing another tremendous rally. And this is before even considering transaction costs.

Will this investor ever be able to buy again? One of the problems with market timing is you have to be right with both your exits and your entries, or you can end up pummeled by the waves.

Investors Buy Five-Star Funds, But Own Three-Star Funds A common investment strategy among individual investors is to buy Morningstar’s highly rated mutual. These investors forget that past performance is not a predictor of the future. Consider these figures:

The five-star class of 2004 carried a •five-year rating of slightly more than three stars by 2009.

The 2005 group did slightly worse, •with an average rating of 3.05 stars for three years.

The 2006 group have now had an •average rating of less than three stars for three years.

Why do people ignore the SEC’s warning on past fund performance? It’s like driving ahead by staring through the rearview mirror.

The World Is Not FlatIn his book The World Is Flat, Thomas Friedman makes the case that regional and geographical divisions are becoming increasingly irrelevant. From an investment standpoint, this trend toward globalization supposedly lessens the need for global diversification. If that is true,

international and domestic equities should produce similar returns. Consider the table below:

Bear Markets Turn 30-Year Horizons Into 30-Day HorizonsAfter the S&P 500 Index fell 37 percent in 2008, investor discipline was tested again in early 2009. By March 9, the S&P 500 had fallen about another 25 percent.

Warren Buffett once said, “The most important quality for an investor

is temperament, not intellect.”

The evidence from research on investor returns versus investment returns demonstrates that investors’ worst enemy can be their emotions—greed, envy and overconfidence during bull markets, and fear and panic during bear markets.

When the Going Gets Tough, the Tough RebalanceMost people find it easy to stick to a plan when things are going well. However, it becomes more difficult during bear markets. Stomachs churn, sleep is lost and rash decisions are made.

Life Lessons of 2009 ...

2009 Asset Class ReturnsU.S. Return (%) International Return (%)Large-Cap 26.5 Large-Cap 31.2

Large-Cap Value 19.7 Large-Cap Value 34.2Small-Cap 27.2 Small-Cap 43.2Small-Cap Value 20.6 Small-Cap Value 43.4Real Estate 28.5 Real Estate 38.2

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low-risk investments. Default studies by the three major municipal bond rating agencies imply that municipal bonds are only second to U.S. Treasuries in terms of timely payment of scheduled principal and interest. Historically, the default rate has been less than one-quarter percent for investment-grade municipal bonds. 1

But what if you have concerns about the financial health of a particular municipality? If property values fall, property taxes will likely fall as well. If retail sales slow down, then sales tax revenue must fall. These two revenue sources help fund projects and activities throughout most towns and cities.

Even if this is the situation, study after study suggests that municipalities usually do whatever it takes to make their interest and principal payments. Most will cut services, close offices and/or lay off employees to adjust expenses to match falling revenue.

However, a thorough sector analysis by Fitch suggests that there are significant differences in credit quality among sectors in the municipal market, even if the sectors carry similar ratings.

Defaults by • general obligation and essential purpose municipal bonds are especially unusual.

The majority of defaults happen in •sectors like multifamily housing bonds, nursing home and

retirement facility issues, industrial development bonds and special assessment districts. Investors who avoided these sectors missed most of the default risk in the municipal asset class.

For example, Fitch looked at defaults by sector from January 1980–October 2002 and found that while 575 industrial development bonds had

A Muni Bond Primer ...

The winning strategy is to have the discipline to rebalance in good times and bad. Those who did so during the past couple of years have now recovered a much greater share of the losses inflicted, and are much closer to achieving their financial goals.

Similarly during the late 1990s bull markets, those who regularly rebalanced (selling equities to buy more fixed income) suffered smaller losses than those who simply let their portfolio ride right up into the bear market that began in March 2000. In addition, some investors recognized that the great returns of those years may have allowed them

to lower their equity allocation since they now had a lesser need to take risk. The less risk you need to take, the greater your peace of mind will be when bear markets arrive.

Investment Returns Are Not Earned SmoothlyFrom 1926–2009, the S&P 500 Index returned about 10 percent. However, very few years actually delivered returns that were close to the average, as the table to the right demonstrates.

In fact, there were 32 years when returns were above 20 percent, and there were 23 years when returns exceeded 25 percent. Because the path to the end average is so very volatile, investors need to have the discipline to be present throughout to earn the end returns.

Life Lessons of 2009 ...

S&P 500 Index: 1926–2009Total Return Range Number of

OccurrencesPercentage of

Years9% to 14% 6 7%7% to 16% 9 11%5% to 18% 18 21%

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This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Copyright ©2010 Vantage Point Advisors, LLC.

308 East 4500 South, Suite 285 • SLC, UT 84107 • 801-272-0908www.vp-advisors.com

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They understand the purpose of each asset: real estate, homes, second homes, investments, stock options etc.; how much risk they hold, and the impact a short or long-term decline in value will have on achieving their goals.

When they have questions about selling or buying a business, we have worked out their questions and helped them define their terms. We are on our client’s side of the table when working with investment bankers, buyers and sellers.

They don’t spend nights and weekends analyzing their portfolio returns and rebalancing because we have already prepared their reports with recommended solutions for their decisions.

Foundation Directors are confident that they have successfully performed their fiduciary duties, knowing that foundation assets are designed to meet the short and long-term requirements of the foundation while controlling a suitable level of risk.

They make informed decisions regarding compensation packages, stock options and deferred compensation because we have detailed each element and how it fits into their personal plan.

The Va ntage Point Adva ntage

— A Financial Brain Trust For You And Your Company —

Helping clients manage their

personal financial affairs as professionally as they manage their businesses

Vantage Point Advisors Private CFO Consulting

Vantage Point clients enjoy balance in their lives and ignore the headlines; confident in the decisions we assist them in making.

defaulted during this time, only four general obligation (unlimited tax) bonds had defaulted. 2

When it makes sense to build a bond portfolio for your fixed income allocation, we continue to advise buying municipal bonds backed by either the general obligation of a municipality or by an essential revenue source. We also continue to look beyond credit enhancements/insurance to the actual credit rating of the bond and recommend investing in true AAA/AA-rated bonds.

1 Brian Tournier, Municipal Fixed Income Research Report. A.G. Edwards, June 8, 2007.

2 David Litvack and Mike McDermott, Municipal Default Risk Revisited. Fitch Ratings, June 23, 2003.

“The great investor Benjamin Graham once defined happiness as

‘living well within one’s means.’

Did he mean ‘living well within one’s means’ or

‘living well within one’s means’?

I think his ambiguity was intentional: He meant both.”

— Jason Zweig The Little Book of Safe Money