October 2010 Investment Outlook — Storing Our Wealth
2010 has been a year of pronounced ups and downs in the stock market, with the whole investment world seemingly putting “risk on” or taking “risk off” simultaneously, leading to most stocks moving in tandem with one another. This can be frustrating to investors when all stock prices suddenly fall. For investors with a longer term time horizon, however, this year’s market sell-offs in the spring and late summer provided opportunities to buy high quality companies at very cheap prices as measured by metrics such as price to earnings and sales ratios, and price to the cash flow an investment is likely to generate in the next few years.

Arrival Capital chose these times to put client cash to work and grab high quality invest-ments to build out client portfolios that can both withstand the turbulent times we may see ahead yet be in a position to meaningfully appreciate in months such as September, which saw stock averages climb more than 8%.

It is tempting to use a sports metaphor and say that a diversified portfolio of high quality stocks, many with steady dividends and low levels of debt, allows us to play offense and defense. But let’s go a little deeper and consider why we invest.

Obviously, we want to earn a re-turn on our savings that can grow over time. Further, we would like the growth of our savings to exceed levels of inflation in the economy, so that we can maintain the purchasing power of our saved dollars. It used to be that the interest rate on savings accounts was one key number we kept in mind, while another was what the expected return was on other potential places for our savings such as investing in the bond and stock markets. But this relatively simple task has grown much more complicated in the last few years.

For one thing, more than ever be-fore in our lifetimes, we need to be concerned with the return of our savings when we need them not just the return on our savings. We now question the safety of the institutions we trust with our funds. As bond investors, we need to be cognizant of the financial health of those to which we lend money, even the state or cities from which we buy municipal bonds. Apart from safety, the re-cent global economic upheavals have made the old reliable savings account a virtual non-starter as an acceptable savings vehicle given minimal yields of 0.5% or less.

We also need to be concerned even with the future value of the currency we hold (dollars for most of us) in a time of money printing (quantitative easing) and competitive currency debasement. Hence the importance of gold and other precious metals (and the companies that mine them) to creating a safer portfolio.

With all these different variables, saving and investing has become a game of chess and not checkers. Like it or not, as savers and investors, we make decisions constantly as to the types of risk we are taking with our savings — stock market moves, interest rate levels, currency values, inflation rates, commodity costs. More than ever, Arrival Capital is focused on helping you answer these questions about risk, reward and the future of our savings. We continue to believe that the right mix of stocks can be a good store of your personal wealth and a cornerstone of an effective investment plan. The devil will always be in the details, but our goal remains to put your savings in the best possible places in an ever changing and complex world.
- posted by Jay @ 2:39 PM