BWA Publications HOW THINGS HAVE CHANGED IN A MONTH All through 2013, the Denver Broncos cut through most opponents at will, piling up the most touchdowns and points in NFL history for one regular season. During the 2013 regular season, they were 13-3 and seemingly no one could beat them, however they tried. They even earned home field for the first two playoff games and neither of those opponents could win. Something was brewing though. Point totals were down, margin of victory was down and things were beginning to feel shaky; at least to the more analytical fan.So it has been with the equity markets. All throughout 2013, no single opponent could stop the run up. Neither the threat to the end of the $85 Billion monthly bond purchase (the famous taper debate), a jump in interest rates in late spring-early summer, some weak corporate earnings, the Boston Marathon bombing, etc. You get my point. None of these “opponents” to the rise in equities was enough to slow the rise to about 16,500 on the Dow and 1,850 in the S&P, not to mention crossing the 4,000 threshold in the NASDAQ. However, as we moved through December, there were under currents that things were not as rosy as they seemed.Just like the Broncos absolutely failed to reach their target in the Super Bowl and the game quickly got out of hand, so have the markets gone, basically since early January. Depending on how you measure it, most major US markets are down about 6-7% thus far. Emerging markets are much worse. Some of the corporate earnings have been underwhelming and after such a robust 2013, many folks are somewhat surprised and the market has punished those companies for missing their earnings or for painting a less than rosy picture for the remainder of 2014. After all, the expectations kept growing and growing and when the actual reporting came and the results were less than expected, the companies’ stock prices got hammered; just like the Broncos.For our clients who are adding funds or who have (by design) higher cash balances, that has turned out to be a good thing. I plan to keep those cash balances slightly higher than normal as the current phase of “consolidation” continues. Will it end up being an official correction when we arrive at 10% below the high points in the major indices? Time will tell, but it could be. If so, that would be completely understandable and also quite accepted. Just like the drought in California. It has been so nice to have all of those wonderful sunny days each and every day for the past 4 months, but at some point you desire to have a “correction” in the weather and get some rain. It is what nature intended.So it is with equity markets. It is most fun when they keep going up. And, if we hearken back to the good ole days of 2009, when the Dow hit 6,400, we begin to realize that a 10,000 point run up in the Dow, while exhilarating and profitable, is destined to lead to a pull back. So, if this is it, we should embrace it, not fear it and then look for opportunities. In my comments on the annual performance letter, I obviously didn’t and never did expect 2014 to duplicate 2013 in the equity markets. However, with a now at least 6% hole out of which to crawl, the major indices have some ground to make up.This is a good time to illustrate a point I try to make with clients when discussing risk in equity investing. Let’s say you are a sideline investor, without professional financial advisors to guide you through the maze of the investing world. You see the markets running up and decide you have to get in. However, you do not discern which funds to use and you just take your emergency cash and invest in non-exotic equities. If you waited all the way through 2013 and moved into the markets on January 1, you are basically down 6%. Certainly, this is not the end of the world, but let’s look at the results. If you started with $100,000, you now have $94,000. If the market goes back up 6%, you’re even!!! Almost, but incorrect. You would be at $99,640. So, to break even, you would need to increase your risk and hopefully, your return. Quite possibly the beginning of a slippery slope.One of the fundamentals we always focus on is the allocation, not only of the portfolios we manage, but of other accounts clients have elsewhere. We don’t just manage the money, we manage the risk and make sure clients don’t take on too much and what risk they do undertake has the commensurate reward for that risk.Punxatauny Phil saw his shadow, so legend has it there is 6 more weeks of winter to go for those living in areas outside the Sun Belt. The winter storms that have marched across the country have combined with brutal cold to have a significant negative economic impact. Apparently, a winter storm named Maximus is making its way across the country as I write. Still not sure why we are now naming winter storms. Maybe we will eventually begin naming recessions!!! In any event, I don’t think we are in the winter of investing. I do think it is a good time to re-evaluate your portfolio and more importantly the risk you are taking. One final comment about risk. If you are currently contemplating going 100% to cash or are holding excessive amounts of cash, there is great risk in that as well. This will be addressed in the next edition.Since we have entered tax season, I can report to you that 1099s will be going out shortly. As we have in the past, we can email them directly to your tax preparer. Just let us know.