The analysis assumes that the hypothetical worker is saving 8% of their wages and earning a 6.5% nominal rate of return on their accumulated savings.  Another factor contributing to the big impact of delaying retirement is that social security benefits are increasing each year you wait to begin collecting through age 70.  Naturally, the actual impact for a specific retiree in specific year could be more or less depending on a variety of factors such as age, initial withdrawal rate and actual investment returns.

A chorus of big-name investors has taken to the media to vilify the “loose money” policies of Federal Reserve Chairman, Ben Bernake. These investors insist that Bernanke is ruining the country, debasing the currency, creating class warfare and creating a situation which is going to lead to runaway inflation. He is also supposedly responsible for creating a “fake” stock-market rally.

To listen to these critics, you’d think that some of the bad things that they have been predicting were actually happening. But they aren’t.

For now, anyway, inflation remains relatively low, the dollar remains relatively strong, the stock market is rising, American companies have record-high profits and profit margins, and society is hanging together.

So, what’s the real cause of the Bernanke hate? According to Berkeley professor Brad DeLong; “these big shot investors have bet against Bernanke. They are losing money on their bets, and they are so frustrated about this that they have taken to the media to try to increase the pressure on Bernanke to do something different and stop costing them money.  Instead of just admitting that they have been wrong, and taking their losses, they’re using their reputations and influence to try to increase the pressure on Bernanke in order to convert their losing trades into winners.”

This is all very interesting but there are several lessons here: 1) Rule #1 is take your emotion out of your investment decisions, 2) Don’t make big bets based on speculation of what you think might happen instead invest based on valuations, 3) Don’t fight the Fed, 4) Don’t bet against the resiliency of the U.S. economy.

On a completely different topic…this month’s issue of Financial Planning magazine had an article on the top issues that financial advisors worry about.  One issue that I thought was interesting was “Eroding Confidence”.  Here is an excerpt:

“Investor confidence in the fairness of the investment system and in the stability of the global economy has been eroding steadily, scorched by the global economic meltdown, the Madoff and Stanford Ponzi scandals – and, more recently, billions of dollars of political commercials telling everyone how bad things are in America. 

Add to that the blogs from professional doomsayers, news reports leading up to the fiscal cliff and all the rest: Clients are being driven toward a belief that investing (and indeed, the entire economy) is rigged, the future is dark and the smartest move to make is to dig a hole and hide from whatever is coming next. 

Advisors know the opposite to be true: that the markets are driven by the daily efforts of millions of business owners and workers, and by the billions of great choices, creative ideas and hard work contributed to business enterprises and the economy as a whole.  But that message is apparently much harder to convey now than it was a decade ago.”

Naturally, this erosion of confidence is one of the reasons that stocks are still relatively attractive and bonds (and other traditionally safe assets) are clearly overvalued.  This position, which we have been espousing for some time, is shared by the world’s most successful investor, Warren Buffet.  If you have 3 minutes watch this clip of Buffet on CNBC.  Have a great week.

I’ll admit, a bubble is one thing that most people don’t recognize when they’re in it. You only see it after it occurs.  That being said, here at SureVest we definitely do not think that the market is forming a bubble.  Some sectors and individual stocks are overvalued, but the market in general is much stronger and more stable than 4 years ago.

With all this talk about investment bubbles, I thought you might be interested to see Robert Luna talking about 5 signs of an investment bubble on Yahoo TV (click here to see clip).  Coincidentally, this is the most watched piece of publicity that SureVest has had to date.  Have a great week.

In financial news, last week we saw the stock market give back some of the year’s gains.  We have been predicting a 3-5% pullback for a couple months but every time the market has a minor decline it comes right back.  The surprising thing is not that the market had a down week.  We are surprised by how resilient the market has been.  For example, 10 years ago, the market would have sold off 5-10% in the wake of a terrorist attack like we witnessed in Boston.  However, the market held up quite well.

There is always a reason for a market correction.  The problem is that many people in the media will then extrapolate any piece of bad news to explain why this is the beginning of the next recession. The “piece of bad news” this time was that the jobs report for March came in at a disappointing 88,000 new jobs.  It seems a bit premature to freak out about that given that the statistical margin of error in the jobs report is 90,000. If the trend from previous months plays out, the March figure will be revised upward to around 120,000 which is weak, but not terrible.

The truth of the matter is economic data usually paints a mixed picture.  It is not until we have the benefit of hindsight that we see any definite economic trends.  Counteracting the bad news of March’s weak jobs number is the fact that consumers have not significantly reduced spending in the wake of the payroll tax increase and the sequestor.  We have seen gains in housing, autos, trade, employment and despite Washington’s new austerity, many states are now projecting surpluses.  The bottom line is that valuations on stocks are still good (especially relative to bonds), company balance sheets are strong, inflation is tame and the financial system is stable.

What led to gold’s historic run up (+116% just since 2007) and then steep decline?  Buyers of gold typically believe that the Fed’s printing of money will lead to a devaluation of the US Dollar and high inflation.  However, inflation has not accelerated (yet) as many had predicted.  Now, most of the world’s largest economies are seeing slower growth which makes an uptick in inflation less likely.  The trigger the past couple days seems to be that China reported slower growth than expected (7.7% actual vs. 8.0% forecast) and Goldman Sachs (among others) have downgraded gold with a “sell” recommendation.  Precious metals, energy and commodities are extremely sensitive to changes in global demand.

There is also a growing view that stocks represent a better investment in this environment (low inflation, low interest rates).  Gold does not pay a dividend and it is not used for much, other than jewelry and speculation about its future value.  As the price broke through $1,500 and then $1,400 per oz many investors who had borrowed to buy gold were hit with margin calls forcing them to sell.  Gold is historically a very volatile asset class prone to booms and busts.  Typically, it is not a very good investment for conservative retirees who need income from their portfolios.

We are very happy with all of our portfolios, which on a risk adjusted basis, performed above our projections this quarter. The biggest surprise was the double digit returns we saw from our holdings in consumer staples such as Pepsi, Coca-Cola, General Mills, and P&G. These investments, along with some very strong performing small cap stocks, more than made up for a drag from our foreign holdings this quarter. Individually, our biggest winner for the quarter was Deckers Outdoors up 38.2% and the biggest loser was Apple down 16.7%.

Let us not forget corrections of 5% to 10% do occur frequently even in bull markets. Just last year after the strong 12% rally through March, the S&P 500 corrected over 10% in the second quarter. This nearly wiped out all of the first quarter gains before recovering nicely by year end. Volatility doesn’t dampen our optimistic outlook for stocks which began in Q3 of 2011. However, we feel it is time to become more selective. Investing in stock market indexes tends to work well early in a bull market, but as the rally matures, stock selection and prudent risk management become more important. We see this already playing out early in Q2 with many individual stocks already diverging significantly from the major averages. This includes the companies that have not performed as well as the overall market and, therefore, still remain attractively valued.

I (Robert) was on CNBC last week discussing our thoughts on the market and where we see value. I believe that many people have been sitting on the sidelines (in cash) since 2009 as is evident by the over $1 trillion in money market accounts. Most people have been negatively impacted by the bear markets of 2000-2002 and 2007-2009. Many of these investors made the mistake of selling out at or near market lows. These people are now looking to find a way back into the market, but they are afraid to buy anything other than household names like Procter & Gamble or General Mills, another mistake in my opinion. Both of those stocks we bought a few years ago when they were out of style, but we have recently sold them into this rally because they are no longer undervalued.

As professional investors, we employ both a buy and sell discipline. We all know intuitively that you want to buy low and sell high, but that is easier said than done. Behavioral finance tells us that we like to run with the herd and buy when and where people are buying and sell when and what they are selling. People like their decisions to be confirmed by the “wisdom” of the crowds. Unfortunately, that usually does not work well. Three years back when we were buying consumer staples, nobody wanted them yet; that was what was on sale and had the lowest degree of risk. Today, this is the area everyone is piling into. The recent run up has caused this sector to become overvalued and our sell discipline has dictated we trim these positions and lock in gains. Today, we are finding better opportunities in areas that many perceive as riskier or more cyclical sectors of the market (and the globe).

“Risk” is one of the most misunderstood words in investing. Today is a unique point in time where there is risk in areas like precious metals, bonds, stocks, and just about anywhere else you think about placing your money. Riskiest of all in our opinion may be what is perceived as the traditionally “safe” asset classes such as cash and bonds because nobody is expecting to find risk there. Let me explain. Many people, as I mentioned, are afraid to invest in the stock market. They are sitting in low yielding banking accounts waiting for the right time to invest. Here is the problem with that; most retirees need a distribution of 3.5 to 5% from their portfolios, adjusted annually for inflation. (Example: At a 4.5% distribution rate from a $1,000,000 portfolio, they are taking $45,000 per year which they would increase by 3% each year for inflation). Based on the national money market rate according to bankrate.com, a sixty-year-old retiree who invests money in this “risk free” way would be broke by age seventy-seven. In our practice, we are seeing more and more people living into their nineties and beyond. This is why we tend to design retirement income plans that are likely to work through age 100. We feel this is prudent, considering the job market for seventy-seven year olds who need to work for the next twenty-two years will remain challenging. Last week’s jobs numbers were a strong confirmation of that fact.

Seriously though, the fact of the matter is that today you have to take some risk. Cash will guarantee failure as will a high concentration of bonds, which are at record high prices and record low yields. We firmly subscribe to the wisdom of Benjamin Graham, the father of value investing, who said, “The essence of investment management is the management of risk, not the management of returns.”

Looking into the next quarter, we would love to tell you what is going to happen. However, since we do not have a crystal ball, instead we will tell you what we are doing to protect your portfolio in case of a correction and also where we are finding value and believe we will be well rewarded over the next 12 to 18 months, if not in the next 90 days.

The traditionally “risky” assets look cheap today. Industrials, technology, and energy are the sectors where we are finding the best opportunities. We also see individual stocks in sectors such as retail which look very attractive. We also like emerging markets, in particular smaller frontier markets like Thailand and Vietnam. Growth there is three to four times the expected growth rate of the U.S. yet stocks there are trading much cheaper.

We are minimizing risk with hedges on the broad market indexes directly through put options and through our alternative asset classes that we expect to hold up well if/when markets pull back. We are avoiding new purchases (and selling positions) in areas that we believe are overvalued such as consumer staples which we expect are vulnerable to a deeper correction. We have increased our cash position slightly based on the magnitude of the recent run, and to have some dry power should we get a short-term correction of 5% to 10%. We have done this because we have a shopping list of names we are anxious to buy should we get this pullback. Our 12 month projections lead us to believe that all declines of that magnitude represent great buying opportunities and we will be ready to act. We also expect any pullbacks will be accompanied by the scary story du jour. They always do.

We thank you for your business and will continue to work hard this and every quarter to grow and protect your nest eggs.

There’s no doubt that housing is recovering.  This news is no surprise to our clients in Las Vegas, Phoenix and Southern California all of whom are seeing and hearing about bidding wars again.  I personally know of multiple people who have decided to rent because they cannot find a house to buy.  Nationally, existing home sales, which account for the bulk of the market, have topped year-ago levels for 20 months in a row and existing home prices have topped year-ago levels for 12 consecutive months. In addition, the national inventory of homes for sale has dropped to a 4.7 month supply – far below the normal 6 month supply. But unlike past housing recoveries, this one is heavily supported by investors – big and small. They currently account for about a third of home purchases, according to the National Association of Realtors.

Among those big investors are the Blackstone Group, which has been buying $100 million worth of single family homes a week since early last year, spending a total $3.5 billion to date, according to the Wall Street Journal.  This has expedited the national housing (and economic) recovery and made us all feel a bit wealthier (or less poor). However, if these big investors decide to get out of the landlord business it could lead to a big supply of houses on the market again.  Let’s hope that doesn’t happen any time soon.

Robert Luna was talking this on CNBC this past week. Click HERE to view the clip. Have a great week and reply to this email with any thoughts or questions.