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  • Writer's pictureBill Bullock

2011 Second Quarter

I thought about copying and pasting my letter from the second quarter of 2010 and using that letter for this quarter's report. After all, Greece, with their potential default, was back in the headlines again. However, since we did not have another Flash Crash like we experienced in several short minutes on May 6, 2010, I ruled out using last year's letter. Nevertheless, the second quarter of 2011 was a volatile quarter that basically ended with flat returns.

Due to this volatility in the stock market, the Barcap Aggregate Bond Index performed the best by turning in a +2.29% over the past three months. This basically means that stock investors were nervous and fled to "safer" bonds. Small-cap stocks turned in a losing quarter with the Russell 2000 falling 1.61% and large-cap stocks, as measured by the S&P 500 and the Dow Industrials, eked out a gain. The MSCI EAFE, a foreign stock index, was up 1.56%.

At present, I am slightly overweighting the short-term side of our fixed income portfolios. I define short-term fixed income as money market, certificates of deposit and short-term bonds with average maturities of three years or less. Our short-term bonds are up one to two percent year-to-date, which is higher than what we would have received in a money market or CD. The other portion of our fixed income is in intermediate bonds, which have average maturities of four to seven years. Unless one of our mutual funds has a couple of long-term bonds, we do not hold any at this time. The intermediate bonds have had good returns so far this year. We should be up about four to six percent in this category with the inflation protected bonds performing the best.

As for the equity side of things, I would like to have you review the enclosed chart: U.S. Stocks: Past Decade No Longer Completely "Lost". This is a rolling 10-year graph indicating that for the 10 year period ending March 31st, the S&P 500 rose an annualized 3.3% (see far right-hand side of chart). There are two observations I would like you to take from this chart: First, it seems we have just turned the corner and there would appear to be significantly more upside than downside over the next couple of decades at this point in time. Second, the last time we were in a trough like this was the late 1970's and early 1980's. There was a lot of uncertainty back then - just like now. Investing or staying invested in the S&P 500 during these harrowing times certainly paid off! Obviously, this is all historical information and only one piece to the investing puzzle; however, I believe it can be a pretty significant piece.

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