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2013 Q2 Newsletter

Happy Anniversary to DEM!

Fifteen years ago this month I officially began managing the financial affairs of some of my NFL teammates. From the very beginning, I have promised every client that I would always act in their best interests, utilize a sound investment approach, and provide the discipline necessary to deliver a successful investment experience. Fifteen years later, those same founding principles still govern everything we do at DEM. As I take some time to reflect on my career as an investment advisor, here are a few of the lessons that stand out the most:

  (1)   Most investors need a healthy dose of equities in their portfolios to grow their purchasing power net of taxes and inflation throughout their lifetime. Unfortunately, most investors want to cling to cash, CDs, annuities, and other forms of fixed income. Much like a physician, our job is to provide our clients with what they need, not what they want.

  (2)   Great companies around the world are remarkably innovative. Products like Smartphones, Ipads, and portable GPS systems did not exist when I began my career as an advisor, yet now they generate billions profits for shareholders in companies like Samsung, Apple, and Garmin.

  (3)   Capitalism is spreading across the globe at a remarkable rate, bringing more wealth to more people, and creating a whole new class of consumers. After opening its first plant in Shanghai in 1998, General Motors’ shareholders will receive just as much revenue from cars sold in China this year as those sold in the US.

  (4)   Unprecedented events such as The Asian Contagion, The Dot-Com Bubble Bursting, The Gulf Wars, September 11th, and The Great Recession have all played havoc with the global equity markets at various times over the past fifteen years. Nonetheless, we patient and disciplined optimists always seem to triumph.

  (5)   During a crisis, the best thing to is to confidently add to one’s equity positions. The next best thing to do is to do nothing. The absolute worst thing to do is to panic and sell.

  (6)   It is mathematically impossible for a retired investor to meet perpetually rising expenses using fixed income.

We would be remiss if we did not quickly address Ben Bernanke’s recent comments regarding the possible winding down of the Federal Reserve’s quantitative easing program. Most investors have been operating under the assumption that the Federal Reserve will continue to hold interest rates at or near record lows through the end of 2014. Although the government has influence, ultimately it is the market that determines the appropriate levels of interest rates. And with the economy gaining momentum, the market has determined that the yield on the ten year Treasury needs to be closer to 2.60% as opposed to the record low 1.39% of just a year ago. We all know that rising interest rates are toxic to bond prices, especially to the long term, low quality bonds that many investors flocked to in advance of the year-end Fiscal Cliff. These pour misguided souls have not only missed the tremendous run up in equity prices over the past year, but seen the value of their bond holdings tumble.

Whether the Federal Reserve continues its bond buying program or not, our stance with regards to fixed income has not and will not change. Namely, we use fixed income only where it is desirable to dampen the volatility of the overall portfolio in exchange for lowering the expected return. As such, we only utilize high quality, short term government bonds. Despite the carnage in the overall bond market this year, our DFA fixed income mutual funds have served their intended purpose well.

Many thanks to all of you on our anniversary, especially those who have been with us since our humble beginnings fifteen years ago. We look forward to continuing to intelligently guiding you and your family through whatever the next fifteen years brings us.

Don Davey
Senior Portfolio Manager
Disciplined Equity Management

Plan Wisely, Invest Intelligently, Diversify Broadly, Ignore the Noise

2013 Q2 Market Index Returns

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