Spring 2011

in
Context
Wealth Strategy From A Different Perspective

All Around the World

The relationship between markets and world events is different than many would
expect. The following article addresses some of the questions investors have been
asking.

1-When will things return to normal?

Although it can be difficult to accept, what we experienced these past few months
may be what normal looks and feels like. Many people may look back at 2010 as
normal, but memories of that time may be altered because of what we experienced
in late 2008 and early 2009. Investing Internationally
Even though the S&P 500 Index returned 15.1 percent for the year in 2010, bad
news in the way of high unemployment, numerous bank closures and a struggling Recent events such as the crisis in Japan and
housing market were just a few of the hurdles we faced last year. political unrest in the Middle East and
northern Africa have left many investors
It’s common to hear people say, “Just when things were getting back to normal.” wondering if investing internationally is a good
This suggests they were on the verge of normal, but not quite there yet. More idea. Rather than interpret these events as a
often, we find ourselves looking back, identifying normal only after it has passed reason to abandon international
but rarely talking about things being normal in the moment. diversification, we should take them as a
reminder of why we own a diversified portfolio
in the first place.
2-What is the market’s relationship to crisis events in the United States and
overseas? Investing in non-U.S. stocks delivers expected
returns similar to U.S. stocks, but provides the
Since 1973, there have been at least 16 significant financial crises in the United benefit of diversifying the economic and
States or overseas. We have watched some crises turn from isolated situations to political risks of investing solely in U.S. stocks.
global events. The market has had a history of rebounding from crisis events. There have been long periods when U.S. stocks
have performed poorly when compared with
Consider the past five financial crises and the S&P 500 total return for the following non-U.S. stocks, and vice versa. This
24 months: diversification benefit is especially important
September 2008 (Lehman Brothers fails): 2.55 percent for those employed in the United States,
March 2000 (Internet stocks drop): –21.49 percent (This period includes September because their future earnings may be affected
11.) by events in the United States.
August 1998 (Russian stock market crashes): 62.64 percent
July 1997 (Asian contagion begins with Thai baht devaluation): 43.38 percent Japanese equities play a role in the portfolios
December 1994 (Mexican peso experiences devaluation): 69.17 percent we recommend, although the amount of
exposure to Japan varies from client to client.
To get a rough idea, Japan represents less than
3-What about gold?
8 percent of the world’s market capitalization.
Until gold hit $900 an ounce at the beginning of 2009, not many people were Any country or region can experience a
thinking about it, much less as an inflation hedge. Gold has had good returns in financial or economic crisis, and any country or
recent years. However, from 1980 to 2008, the annualized real return (the return region can suffer a natural disaster. Investors
adjusted for inflation) of gold was –0.54 percent per year. Over this time period, would be wise to have an investment plan that
gold would have been an insufficient inflation hedge. takes these possibilities into account by
diversifying across countries and asset classes.
Those who seek protection against future inflation should consider owning
Treasury inflation-protected securities. Investors can also consider an allocation to
commodities through fully collateralized commodity futures to provide some
protection from inflation. Commodities tend to have their best performance during
periods of rising inflation.

4-In light of recent events, what is a prudent annual withdrawal rate?

In 1998, Trinity University in San Antonio published a paper regarding a prudent

withdrawal rate from a retirement portfolio. This paper became known as the
“Trinity study,” and its conclusions still are widely referenced in financial planning.
 …”All Around The World” continued

Based on historical data, the Trinity study calculated safe withdrawal rates for
In The Face of Adversity various portfolio allocations. It found that a retiree with a 25-year distribution time
By Vladimir Masek frame could safely withdraw 4 percent of his or her initial portfolio value each year,
adjusted for inflation. At a rate of 4 percent for a portfolio with an allocation to
both stocks and bonds, there would be no chance of running out of money.
On March 11, eastern Japan was devastated by
the most powerful earthquake in the country’s The Trinity study was updated in 2011 to include data through 2009, and the
recorded history, followed by exceptionally authors found that 4 percent is still a safe withdrawal rate. The authors noted that
destructive tsunami waves. The magnitude of the adaptive withdrawal plans can also be implemented when markets make significant
humanitarian impact (more than 13,000 deaths, moves. Bull markets might allow for a higher withdrawal rate, and bear markets
more than 14,000 people missing, more than might force a reduced withdrawal rate. Alternatively, if time horizons are
300,000 refugees at the time of this writing) and significantly reduced, a retiree may be able to increase the withdrawal rate.
the economic loss (estimated at more than $120
billion) are hard to fathom. The impact of the
nuclear breaches is still unfolding. However, there
is hope. The Japanese society has a well-deserved Understanding Transition
reputation for resilience in the face of adversity, By Marilyn Wechter, MSW, BCD
and it may yet emerge from this calamity stronger
than before.
Our lives are constantly in transition. Transition can be defined as going from one
The aftermath of the disaster raised a number of state to another. We may think of big events, such as marriage, birth of a child,
interesting questions for economists, investors moving or a taking a new job. In reality, we go through multiple transitions every
and other observers. There is no doubt that the day, such as going from waking to sleeping or from home to the office.
devastation will create significant hurdles in the
short run. After the very serious problems at the Large transitions tend to throw us off balance because they upset our routines,
Fukushima I nuclear power plant, power shortages even if it is a transition to something that we desire. But there are actions an
are possible. This will affect industrial production individual can take to move forward with less disruption.
in general. Damage to the infrastructure is
enormous. One can only imagine the losses to Recognize that a change is happening. Sometimes, those around us do not
insurance companies. What will all of this mean
understand why we are off balance, especially if we wanted or previously
for the Japanese and global economy, stock
welcomed the change. When we find it difficult to adjust to what is new, it can be
markets and the yen?
helpful to acknowledge what we are experiencing to ourselves as well as to others.
According to classic Keynesian theory, despite the
human tragedy, the earthquake may actually help Consider what elements you can control. Quality of life can improve when we
the economy. Facing a severe economic crisis focus on the parts of life we have influence over, while at the same time being
caused by a significant drop in aggregate demand, gracious about the parts we cannot control.
Keynes argued that “pyramid-building,
earthquakes, even wars may serve to increase Engage in behaviors and rituals that provide comfort. When we take part in
wealth.” The economic profession is deeply familiar activities that are pleasing to us, such as taking a long walk or visiting a
divided over the applicability of Keynes’s favorite restaurant, we re-establish balance to our routine. It reassures us that
observation. For the benefit of the Japanese everything is not new and unfamiliar.
people, we should hope that Keynes was at least
partly right. Reach out and connect. When transition is difficult, we tend to feel isolated.
Sometimes, it is helpful to connect with those who remind us we are not out there
Many investors expected the Japanese yen to lose alone.
value, in view of the calamity’s impact on the
Japanese economy and finances. They were
Very often, our connections with others are what get us through large transitions. It
shocked to instead see the yen reach a post-World
War II high against the U.S. dollar. As an export
is natural to strive to control our environment. But we struggle when we try to
economy, Japan holds huge amounts of foreign- exert control over things we cannot affect. When we allow for the possibility for
denominated assets. To assist in rebuilding, something good to happen, we find the confidence to face whatever comes our
Japanese investors (including the Japanese way next.
government) are expected to repatriate assets,
creating significant demand for the yen and supply
of foreign currencies.

In the immediate aftermath of the disaster, the

Nikkei 225 Index dropped 18 percent, from 10,500
to 8,600 — although it has since recovered, up to 2710 Loker Ave West, Suite 370 | Carlsbad, CA 92010
9,700 a month after the earthquake. This doesn’t Ph: 866.981.1500 | Fax: 866.810.4866
mean, however, that we know what the effect has This material is derived from sources believed to be reliable, but its accuracy and the opinions
been, or will be, on the Japanese stock market or based there on are not guaranteed. The articles and opinions in this publication are for general
economy. There is no way to know where the information only and are not intended to serve as specific financial, accounting or tax advice.
index — or the economy — would have been The opinions expressed by the featured guest authors in this newsletter are their own and may
without it. not accurately reflect those of The Buckingham Family of Financial Services. Indices are not
available for direct investment. Their performance does not reflect the expenses associated with
the management of an actual portfolio nor do indices represent results of actual trading.
Copyright ©2011, Buckingham Family of Financial Services.