First Market Commentary of the New Year…

After a break in our monthly market commentary publishing schedule to allow for the reading of my new book, On the Right Side of the Market, I’m pleased to publish our first market commentary of the new year (and of the new decade)…

The Markets

I continue to believe in the importance of the big picture, if you will, the view from 50,000 feet: The economic recovery which began in March of last year has brought the overall markets back to the mid-point of their decade-long trading range. At the end of December,2009 the Dow Jones Industrial Average stood at 10,428, off of a high of 14,164 (October 9, 2007) and above its low of 6,547 (made on March 9, 2009). Much has been made of the decade-long stagnation of many of the equity markets, including the Dow, the S&P 500 Index and of course the NASDAQ (as have most of the small cap equity indexes). But over the last decade, there occurred advances in real estate, basic materials, emerging economies such as China and India, and surprisingly fixed income investments as well. With the exception of fixed income, each of the advancing markets of the past decade also experienced significant declines along the way, but managed to reward investors despite their sometimes massive volatility.

The last decade has reminded this generation of investors what I believe past generations have always known: markets don’t always cooperate with our plans. Nor do they happen to always reflect our own personal beliefs about where a particular economy is headed. This cuts to the very nature of the markets themselves: they are created by the dynamic decisions of tens of millions of active participants, each expressing their own beliefs about the true nature of the value of itself. Human interaction has always been fraught with passion, fear, hope, and greed. Perhaps the last decade has served to magnify these emotions, but they certainly are no different than they were twenty years ago, nor are they different than they were decades or even centuries ago. The human condition itself is perhaps our most consistent commodity.

Humanity continues to sit on the apex of what our collective creativity, growth, invention and development has spawned. Looking back at how our daily lives have changed even over my short lifetime, I continue to be amazed at how much we have accomplished, and yet how much more work still needs to be done. Taken simply, the markets distribute the fruits of invention and development to those who are co-owners of those inventions and of that development. As investors, we are free to choose to participate or not. History teaches us that those who choose wisely and calmly and diligently tend to be rewarded exponentially more than those who choose with passion and emotion. I firmly believe that the next decade will prove to be no different.

The Appleton Group Composites™

Each of our core portfolios (Appleton Group PLUS, Appleton Group Portfolio, and Appleton Group Tax Managed Growth) were initiated on December 31, 1999 when I was a broker with a previous firm. We now have ten years of portfolio experience in the books that we are eager to share with the investing community, just as we always have. All of our firm’s core model portfolios have been diligently analyzed to produce accurate, third-party verified statistics, including net performance, risk measures, market correlation, value added by the management process, net growth of $100,000 since inception, and much more. We have posted historic ten-year performance data for all of our core portfolios to our firm’s web site, and we will be writing extensively about our ten-year data in the coming few weeks. Suffice it to say, in practically every way measurable the Appleton Group Portfolios performed as expected over the past ten years, producing net returns that were measurably ahead of the U.S. equity markets themselves, but most importantly incurring significantly less risk along the way. Our dependence on the markets was significantly less, the excess return compared to the S&P 500 TR Index was measurably better. In short, the experience of our more flexible core portfolios was significantly better than investing in the markets themselves.

Our experience has been quite good. But our net returns over the past decade have still been a bit below what most investors need in order for their financial plan to run smoothly. While our portfolios have generated ten-year average returns ranging from +4.97% to +6.45% per year, we know from experience that most investors need between +7.00% and +9.00% to stay financially afloat. Over the past decade, practically nothing has produced those kinds of returns, and with interest rates currently at historic lows, the presence of some portfolio risk is a must for nearly every investor.

Our ten-year history of successfully managing investment risk has really been our most successful feature. And so our challenge over the next decade is to take our portfolio management process from good to great. This will mean working diligently to produce an additional excess annual return of approximately 2-3 percentage points without experiencing additional meaningful risk beyond our experience over the past ten years. Look for more information in the coming weeks…

Looking Forward

Over the past decade, I’ve offered my insights on what issues I believe are most likely to impact our managed portfolios, as well as the economic well-being of our clients. Almost everyone likes to hear predictions, and frankly they can be a lot of fun. But the immediate future is quite unclear. The global stimulus package that was enacted last year has certainly stabilized the world-wide economy. But it can only do so much when compared to the enormity of the big issues of the day. The facts are clear: we’ve developed and built and expanded our global economy so much over the past thirty years that much of our modern society’s needs (at least in the developed world) have been met. I believe that no matter how much stimulus is enacted, it cannot change the fact that most of the roads and airports and factories and power plants and strip malls and houses that are needed by our society have already been built. Maintenance is one thing, but further expansion is quite another.

But in no way do I believe that the future will be as bleak as many make it out to be, even without economic growth. The future is what you make of it, and I believe the challenge of this generation of Americans lies in figuring out how each individual and family and institution can work to capture the growth and equity and capital that have been created by past generations and preserve it for our indefinite future use. Capitalism will continue to be as dynamic as ever, but it unfortunately is a system that inherently has winners and losers. I see my firm’s role in a shrinking economy as being twofold: 1) being realistic about the challenges that lay ahead, and 2) implementing real solutions that can help make the transition to a smaller economy easier, more predictable, and in the end more comfortable.

In the meantime, the market reality is also clear: we continue to be in an upward trending market, but one that is not without volatility. This presents us with the opportunity to create and capture additional wealth until such time as the current favorable trend reverses itself. Our models continue to point to an overall supportive market environment, but because that may already be changing we stand ready to adjust our exposure to the markets as needed in the most efficient and timely manner available.

By | 2010-02-05T12:38:47+00:00 February 5th, 2010|Market and Portfolio Commentary|Comments Off on First Market Commentary of the New Year…

About the Author:

Mark’s commitment to objective, independent wealth management led him to establish The Appleton Group LLC in April of 2002. With over 19 years of experience in the financial services industry, Mark serves as portfolio manager for our private client group, and co-manages all assets held in our suite of portfolio offerings. His responsibilities include risk analysis, asset allocation, market research, and institutional client development. Mark also serves as both Principal and CEO of The Appleton Group LLC. He earned his Accredited Investment Fiduciary (AIF) designation in 2016