This past week we saw a pullback in the stock market.  The Dow Jones Industrial Average1 was down 220 points on Friday, after being down triple digits each of the previous two days.  Part of the reason for the downturn is because of uncertainty about the banking industry after President Obama’s comments about reforming and taxing the big banks.  Lately there has also been concern about an increased security level due to potential terrorist attacks.  And there is uncertainty as to whether the Chairman of the Federal Reserve and the Secretary of the Treasury will remain in their positions.  Whatever the reasons, the stock market gave up almost 5% in a week.

As odd as it may seem, I think there is a way to view this with some optimism.  The stock market has risen pretty much non-stop for the past ten months.  The recovery, at least on Wall Street, has been a V recovery since the bottom.  This market rise needs a bit of a breather.  Some are using it as a time to take some profits off the table.  Others are reallocating their portfolios.  Now might be a good time to review your asset allocation as we begin the new year. 

A good friend of mine sent me a note on investment themes of 2010 and asked me what I thought about them.  In reviewing that, I came up with my own list of important factors for investors in 2010, which I have summarized below.

- Markets move.  Build your portfolio in anticipation of that fact.  Have some stocks, some bonds, some cash, and possibly some alternative investments in your arsenal.  We may see a pull back in 2010.  Unemployment levels are still above 10%.  There is still a large inventory of houses on the market.  Although the economy is showing slight signs of improvement, we are not out of the woods yet. 

- Know your plan.  Invest in your dreams by putting together a financial plan.  With the downturn in the stock market and economy in 2008, your situation may have changed.  See what it means for your ability to retire, and more importantly, what you can do to get back on track.

- Look for value.  While some sectors have rebounded nicely, others have yet to move up as much.  In the fixed income area, this includes municipal and corporate bonds.

- Sector rotation.  Along those same lines, some sectors have seen large increases and now might be a good time to rotate out of those sectors.  Again in the fixed income space, Treasuries, agency, and mortgage-backed securities have all seen big gains since the down turn.  While Treasury bonds are currently yielding greater than short term securities, from a rotation perspective, the cycle may have tipped from accumulate to reduce.

- Diversification, not timing.  In a direct contradiction of the item above, the key to investing is diversification, not timing.  More than one client tried to time the down turn and pulled their money out of the market (after it already went down), and then never went back into the market last year and missed when it went up.  Timing is hard.  Having a well balanced diversified portfolio that is designed for your level of risk and your time horizon is a much better idea2.

- Look overseas.  International stocks and bonds can help to diversify your portfolio3.  While it is a global economy, not all countries do equally well at the same time. 

- Anticipate stimulus reduction.  The Government is cutting back on programs aimed at assisting individuals and companies (what many have called – bailouts), and the Federal Reserve may actually at some point raise interest rates above zero.  This will impact both the stock and bond markets. 

- Tax hike imminent.  While it is politically unpopular to raise taxes, as the White House Chief of Staff has said, “Don’t let a good crisis go to waste.”  With the Administration seeking to keep spending in check (they just announced a budget freeze on several line items), after the mid-term elections in November, we may see a push to raise revenue through income, payroll, or capital gains tax hikes.  2010 might be a good time to perform some tax-harvesting in your portfolio.  We can work with your accountant about how that can be done for your situation.

- It is not what you earn, it is what you keep.  As a way to combat a potential tax hike, use your company’s retirement plan to make pre-tax contributions to your retirement account.  Contribute as much as you can afford, as this can save you between 15-40% in taxes4

- Consolidate.  Now that we have seen a rebound in the market, this might be a good time to bring your orphan 401k accounts, IRAs, online brokerage accounts, insurance policies, and CDs under one roof.  By consolidating, you will have all of your assets in one place.  We can then track all of your investments, review all of your beneficiary information, create a financial plan for you and allocate your resources in a way to best help you accomplish your goals. 

As we watch January come to an end, keep an eye on the Super Bowl.  If the AFC wins, according to some, the Bears will rule Wall Street, while if the NFC wins, the Bulls will dominate the year.  (This has been an accurate predictor 32 out of 40 years.)  If that is indeed the case, I know I’ll be rooting for the Saints!

1 Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. All Indices are unmanaged and are not available for direct investment by the public.  Past performance is not indicative of future results. 

2 Investors should note that diversification does not assure against market loss and that there is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. 

3 International, global and asset allocation products invest in varying degrees in foreign investments, which are subject to certain risks, such as currency fluctuations, economic instability, and political developments, not present with domestic investments. 

4 IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.