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    • 2021 News Articles >
      • What is it about September?
      • Will Tax Law Changes Increase Your Taxes?
      • Tax Watch: SECURE Act 2.0?
      • The unstoppable bull market?
      • Stocks Cruise at a High Altitude
      • Tax law changes on the horizon – 5 things to consider
      • Not Your Fathers Economic Recovery
      • Are HSAs the New IRAs?
      • REVENGE OF THE NERDS - Internet forums vs. the professionals
      • Protect Your Financial Information
      • 2021 January Market update - A rollercoaster year ends on a high note
      • Avoiding 7 Retirement Traps
    • 2020 News Articles >
      • December Client Letter - Cruising at 30,000 Feet
      • 9 Tax Facts & Tips to Save You Money
      • 9 Smart Planning Moves to Consider
      • November Client Letter - Election 2020
      • 7 Financial Planning Steps for Year End 2020
      • 6 Tips on Filing the FAFSA
      • Circling Back to the SECURE Act!
      • A September Pothole
      • 6 Steps That Put You on the Path to a Successful Retirement
      • Consumer Scams Part 2
      • September 2020 Client Letter
      • Consumer Scams
      • May Client Letter-- Worst-Ever Economy Yet Stocks Show Best Monthly Gain Since '87
      • Why Waiting For A Market Rebound Could Cost You
      • How The Greatest Generation Approached September 11th
      • Laid Off And Near Retirement - What Now?
      • The SECURE Act
      • Market update: When favorable fundamentals collide with uncertainty
    • News - Archives >
      • 2015 - To be happy, be grateful. - It's science!!
      • 2015 - Market Volatility - So Now What?
      • 2015 - Retirement planning: Start early or start late – just start
      • 2015 - Financial Planning Checklist
      • 2014 In Review - A bullish mood and risks that dot the landscape.
      • 2015 - A sneak peek at 2015 – What to keep an eye on
      • 2015 - Getting The Most Out of Financial Aid for College
      • 2014 - Cheaper by the Dozen: 12 smart year end planning moves
      • 2014 - How safe is your personal information?
      • 2014 - Hey, what’s your number?
      • 2014 - What did we do before GPS?
      • 2014 - Changing Jobs Checklist
      • 2013 - US Government Shutdown - What it means
      • 2013 - Investing in College
      • 2012 - Getting (back) on track - The best part of my job…
      • 2011 - The Henny Penny School of Investment Wisdom
      • 2011 - 8 Ways to Help Couples Overcome Money Conflicts
      • 2011 - Intelligent Computer Shopping
      • 2011 - 7 things you and your student should discuss before they head off to college
      • 2011 - 7 mistakes to avoid when exiting your business
      • 2011 - Why you need an Estate Plan even if you don’t live in a mansion
      • 2011 - Celebrating Irish Heritage
      • 2010 - Priorities: Retirement Planning Vs College Savings for Children
      • 2010 - in review, and a look toward 2011
      • 2010 - New Years Resolutions - 2011
      • 2010 - Business Owners – a special case for diversification
      • 2010 - Year End Planning 2010
      • 2010 - Paying for college - Applying for student aid, determining your Expected Family Contribution
      • 2010 - Paying Taxes
      • 2010 - Job-Loss
      • 2010 - Habits
      • 2009 - Shopping
      • 2009 - Gift-Idea
      • 2009 - Thanksgiving
      • 2009 - Q3
      • 2009 - Recovery
      • 2009 - Results
      • 2009 - Digging
      • 2009 - Time
      • 2009 - Considering
      • 2008 - Planning
      • 2008 - Resolutions
    • Life Transitions >
      • Get A Job/Leave Job >
        • 9 Questions to ask your CPA at tax time
        • Getting (back) on track - the best part of my job
        • Changing Jobs Checklist
        • Job Loss
        • Taxes - 7 ideas to ease the burden - 2018
        • Year End Planning Checklist: 12 smart planning moves to consider
      • Marriage/Divorce/Re-Married >
        • 8 Ways to Help Couples Overcome Cash Conflicts
      • Kids (Birth/College/Marriage) >
        • 7 Things you and your student should discuss before they head off the college
        • Getting The Most Out of Financial Aid For College
        • Investing In College
        • Budgeting For Students
        • Save on Textbooks
        • Subsidized vs unsubsidized loans – what’s the difference?
        • 7 Tips for Your College Bound Student
        • “What I did on my Summer Vacation – 2019”
        • Budgeting for College Students - 2018
        • Most Significant FAFSA Changes in over 20 Years!!
        • Direct 529 Plan Changes To Be Implemented
      • Birth/Death >
        • Is a cash windfall in your future?
        • Planning for People with Special Needs
    • Client Letters >
      • 2019 - July Client Letter: Records Are Made To Be Broken
      • 2018 - Summer's Hot Issues
      • 2018 - November Market Update:
      • 2016 - January Client Letter - A volatile year ends with a whimper
      • 2016 - September Letter to Clients: The Ides of September?
      • 2016 - November Letter to Clients: The Final Countdown?
      • 2016 - December Letter to Clients: Near Term Impact of Trump's Victory
      • 2015 - September Client-letter: Looking past scary headlines
      • 2015 - November Client Letter: The Clouds Part
      • 2015 - December Client Letter, A Baker's Dozen: 13 Smart Planning Moves

2010 in review, and a look toward 2011

“The pessimist sees difficulty in every opportunity. The optimist sees opportunity in every difficulty.”
        ~Sir Winston Churchill

As we approach the end of the year, I’m writing to share some thoughts on today’s economic outlook and the current psychology among many investors, reflected in the above quote from Winston Churchill.

First a summary of stock market performance in 2010.

It’s a cliché to describe the stock market as a roller coaster ... but sometimes clichés are rooted in reality. Stock markets over the past couple of years haveseen extreme swings, something that continued this year.

Here’s how markets have performed in 2010. Note the strong recovery after a first half that was challenged by the Greek debt crisis and BP oil spill.

Picture
Today’s pessimistic mood

Today we’re seeing a mood of widespread fear and intense pessimism, as many investors feel overwhelmed by problems in the US, led by high unemployment, Government deficits, depressed housing prices and gridlock in Washington.

Look to Europe and you’ve got many of the same challenges, as well as banking problems in Greece and Ireland, with Spain and Italy rumored to follow.  Clearly there are substantial issues that have to be worked through.  That said, a key concern is that the positive, optimistic can-do mindset that has fueled so much of the growth and success of the US is being mired down in pessimism.

Throughout history people have regularly overcome problems of similar and bigger magnitude. This is one of the themes of a thought-provoking new book by leading science writer Matt Ridley - The rational optimist: How prosperity evolves. 

In it, Ridley makes the case for optimism about the future. In a review of this book by Bill Gates that ran in the Wall Street Journal, Gates points out that Ridley documents constant predictions of a bleak future throughout human history.

Reverend Thomas Malthus, a contemporary of Adam Smith in the late 1700s wrote that increasing population would arrest advances in the quality of life. In the 1960s you had Paul Erlich’s bestselling book, The Population Bomb, and in 1972 The Limits to Growth was published by the Club of Rome; these both posited that increasing population and finite resources would cap our ability to grow.

And more recently still many will remember the end of the world scenarios around Y2K computer shutdowns.

It’s not that these weren’t real issues – but they were blown out of proportion. As Bill Gates writes:  “Despite these problems, our lives have improved dramatically in terms of lifespan, nutrition, literacy, wealth and almost any other measure you’d care to name. “


The role of innovation

There are at least two reasons to be optimistic for the mid term–  the role of innovation and some of the incredibly positive things that are happening in emerging economies in Asia, Latin America, Eastern Europe and even Africa.

With regard to innovation, in his review of Ridley’s book, Bill Gates wrote:

“Pessimism is so often wrong because people assume a world where there is no change or innovation. They simply extrapolate from what is going on today, failing to recognize the new developments and insights that might alter current trends.”

Today, we’re continuing to see record spending on innovation around the world. Countries like China and India are making massive investments in research and development. In fact, next year China is expected to trail only the U.S. in the number of patents filed, truly remarkable when you consider that 20 years ago it had no history of protection of intellectual property

The second factor driving innovation is the impact of the internet in disseminating information about new developments. By allowing people around the world to share new information and discoveries in real time, we have dramatically increased the productivity of investments in innovation.


Good news from emerging markets

The other big positive is what’s happening in emerging economies.  People who return from China and India talk about being blown away by the drive, energy and ambition they see there. You’ve got a new middle class that wants a better life and you’ve got a whole new generation of incredibly talented young people who are getting educated, applying a strong work ethic and making a huge impact as a result.

China and India are forecast to continue growing by 8 to 10%; you’re also seeing strong growth from other countries like Brazil, Turkey and Indonesia.  This is not to say that these countries aren’t facing challenges of their own – there’s a big difference between being a rational optimist and a blind optimist. Emerging economies have huge infrastructure issues to address. They’ve got big disparities between incomes in cities and in rural areas that are causing tensions. In some cases, they’ve got mini real estate and housing bubbles. But they key is that there’s no reason to believe they won’t work through these.


What this means for the West

Thinking back to Winston Churchill’s comment, pessimists read about China, India and other developing countries and conclude that they’re going to achieve growth at the expense of Western countries, and all those super-bright, super-ambitious young kids are going to eat our lunch.

And while this could in theory take place, it doesn’t have to happen. Many western companies are well positioned to capitalize on the growing middle class in developing economies. A rising percentage of revenue and profits from top consumer goods firms like BMW, Procter and Gamble, Nike, Apple, Nestle and McDonalds are coming from these emerging countries – more and more the key to success for western companies is operating globally.

And the good news is that these multinationals not only have strong brands but also strong balance sheets. Western consumers and governments may be stretched financially but companies have record levels of cash and are in good shape financially.

As for the argument that these emerging economies are going to win at our expense, this assumes that the size of the wealth pie we’re dividing up is fixed. It’s not – through trade and globalization, those emerging markets are going to dramatically increase the amount of wealth in the world.

It also assumes that western economies and companies won’t adapt. The economist Joseph Shumpeter wrote about something called creative destruction – how the process of innovation in open markets transforms economies, destroying old business models and jobs, replacing them with new ones.

This is the essence of how open markets work. It’s messy and very painful if you’re caught in the middle of this transition, but in spite of that, it’s still far and away the best model for running an economy. If you don’t believe this, ask yourself if we’d be better off if China and India were closed economies, like they were in the 1980s. It’s simply impossible to make that case.


Implications for investors

First, understand how much volatility you can tolerate. There’s no reason to believe that markets won’t continue to gyrate – with every client, we work through how much short term volatility and risk they can withstand. For retired clients, I advise setting aside three years of cash needs from savings in safe liquid investments, something that can reduce stress in volatile markets.

Second, when deciding on the managers to run client portfolios, we emphasize experienced managers with a conservative approach to buying quality companies at attractive prices. Of note, the market rally of the last 18 months has seen higher-quality companies underperform lower-quality companies – we don’t think that will continue.

Finally, we need to take a “rationally optimistic” view of the future, walking the fine line between succumbing to dire pessimism on the one hand and blind optimism on the other. This will not necessarily pay off in the next six or even 12 months – but history tells us that we’ll ultimately be very well rewarded for investing in the companies best positioned for the future.

Thank you for the opportunity to work together over the past year. Should you have any questions on anything in this note, please give me a call. Meanwhile, best wishes for a relaxing holiday season – I look forward to talking in 2011.


John A. Davidson, CPA, CFP®

KylesHill Financial Planning

Your comments and questions are always welcome.
We look forward to hearing from you.  mail@kyleshill.com


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The information being provided is strictly as a courtesy.  When you link to any of the web sites provided here you are leaving this web site.  We make no representation as to the completeness or accuracy of information provided at these web sites.  Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site.  When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.  

- John Davidson, CFP
  • Home
  • Background
    • About Us
    • Q&A
    • Disclosures
    • Privacy Policy
  • Services
    • Planning Process
  • Clients
    • Business Owners
    • Individual Professionals, Families, Retirees
  • Contact Us
    • Newsletter Sign-Up
    • Useful Websites & Quick Hits
  • Account Access
  • News
    • 2021 News Articles >
      • What is it about September?
      • Will Tax Law Changes Increase Your Taxes?
      • Tax Watch: SECURE Act 2.0?
      • The unstoppable bull market?
      • Stocks Cruise at a High Altitude
      • Tax law changes on the horizon – 5 things to consider
      • Not Your Fathers Economic Recovery
      • Are HSAs the New IRAs?
      • REVENGE OF THE NERDS - Internet forums vs. the professionals
      • Protect Your Financial Information
      • 2021 January Market update - A rollercoaster year ends on a high note
      • Avoiding 7 Retirement Traps
    • 2020 News Articles >
      • December Client Letter - Cruising at 30,000 Feet
      • 9 Tax Facts & Tips to Save You Money
      • 9 Smart Planning Moves to Consider
      • November Client Letter - Election 2020
      • 7 Financial Planning Steps for Year End 2020
      • 6 Tips on Filing the FAFSA
      • Circling Back to the SECURE Act!
      • A September Pothole
      • 6 Steps That Put You on the Path to a Successful Retirement
      • Consumer Scams Part 2
      • September 2020 Client Letter
      • Consumer Scams
      • May Client Letter-- Worst-Ever Economy Yet Stocks Show Best Monthly Gain Since '87
      • Why Waiting For A Market Rebound Could Cost You
      • How The Greatest Generation Approached September 11th
      • Laid Off And Near Retirement - What Now?
      • The SECURE Act
      • Market update: When favorable fundamentals collide with uncertainty
    • News - Archives >
      • 2015 - To be happy, be grateful. - It's science!!
      • 2015 - Market Volatility - So Now What?
      • 2015 - Retirement planning: Start early or start late – just start
      • 2015 - Financial Planning Checklist
      • 2014 In Review - A bullish mood and risks that dot the landscape.
      • 2015 - A sneak peek at 2015 – What to keep an eye on
      • 2015 - Getting The Most Out of Financial Aid for College
      • 2014 - Cheaper by the Dozen: 12 smart year end planning moves
      • 2014 - How safe is your personal information?
      • 2014 - Hey, what’s your number?
      • 2014 - What did we do before GPS?
      • 2014 - Changing Jobs Checklist
      • 2013 - US Government Shutdown - What it means
      • 2013 - Investing in College
      • 2012 - Getting (back) on track - The best part of my job…
      • 2011 - The Henny Penny School of Investment Wisdom
      • 2011 - 8 Ways to Help Couples Overcome Money Conflicts
      • 2011 - Intelligent Computer Shopping
      • 2011 - 7 things you and your student should discuss before they head off to college
      • 2011 - 7 mistakes to avoid when exiting your business
      • 2011 - Why you need an Estate Plan even if you don’t live in a mansion
      • 2011 - Celebrating Irish Heritage
      • 2010 - Priorities: Retirement Planning Vs College Savings for Children
      • 2010 - in review, and a look toward 2011
      • 2010 - New Years Resolutions - 2011
      • 2010 - Business Owners – a special case for diversification
      • 2010 - Year End Planning 2010
      • 2010 - Paying for college - Applying for student aid, determining your Expected Family Contribution
      • 2010 - Paying Taxes
      • 2010 - Job-Loss
      • 2010 - Habits
      • 2009 - Shopping
      • 2009 - Gift-Idea
      • 2009 - Thanksgiving
      • 2009 - Q3
      • 2009 - Recovery
      • 2009 - Results
      • 2009 - Digging
      • 2009 - Time
      • 2009 - Considering
      • 2008 - Planning
      • 2008 - Resolutions
    • Life Transitions >
      • Get A Job/Leave Job >
        • 9 Questions to ask your CPA at tax time
        • Getting (back) on track - the best part of my job
        • Changing Jobs Checklist
        • Job Loss
        • Taxes - 7 ideas to ease the burden - 2018
        • Year End Planning Checklist: 12 smart planning moves to consider
      • Marriage/Divorce/Re-Married >
        • 8 Ways to Help Couples Overcome Cash Conflicts
      • Kids (Birth/College/Marriage) >
        • 7 Things you and your student should discuss before they head off the college
        • Getting The Most Out of Financial Aid For College
        • Investing In College
        • Budgeting For Students
        • Save on Textbooks
        • Subsidized vs unsubsidized loans – what’s the difference?
        • 7 Tips for Your College Bound Student
        • “What I did on my Summer Vacation – 2019”
        • Budgeting for College Students - 2018
        • Most Significant FAFSA Changes in over 20 Years!!
        • Direct 529 Plan Changes To Be Implemented
      • Birth/Death >
        • Is a cash windfall in your future?
        • Planning for People with Special Needs
    • Client Letters >
      • 2019 - July Client Letter: Records Are Made To Be Broken
      • 2018 - Summer's Hot Issues
      • 2018 - November Market Update:
      • 2016 - January Client Letter - A volatile year ends with a whimper
      • 2016 - September Letter to Clients: The Ides of September?
      • 2016 - November Letter to Clients: The Final Countdown?
      • 2016 - December Letter to Clients: Near Term Impact of Trump's Victory
      • 2015 - September Client-letter: Looking past scary headlines
      • 2015 - November Client Letter: The Clouds Part
      • 2015 - December Client Letter, A Baker's Dozen: 13 Smart Planning Moves