Last Wednesday evening, Maurine Patten, Certified Retirement / Life Coach with Patten Coaching & Consulting, presented to a full house of TCI clients and guests. She addressed the opportunities and challenges surrounding retirement and shared many ideas and strategies people can use to make the most of what she likes to call the “encore years.”

As a financial planner, I have the opportunity to see firsthand how individuals and couples talk about and deal with their approaching retirement. I have been in meetings where retirement was talked about with great excitement. I have also sat with couples who came to tears (for reasons not related to money) as they considered ending their career. Retirement takes many forms, but it almost always involves significant changes.

Maurine pointed out how retirement used to mean ending work and immediately entering “old age.” However, with better health, longer life expectancies, and medical advances, it is becoming common for individuals to be able to enjoy multiple decades of healthy, energetic life beyond when they ‘retire.’ For this and many other reasons, retiring today looks much different than it used to.

If you are approaching ‘retirement’ or if you are ‘retired,’ I invite you to take some time to ask yourself the following questions:

1. How excited am I about retirement?
2. What does a meaningful and fulfilling life in retirement look like for me?
3. How can I make this vision of retirement a reality?
4. What actions can I take today to move closure to this ideal reality?

Be sure not to miss our second seminar with Maurine– especially if you are already retired. “Creating an Extraordinary Retirement Without Compromise” will take place on the afternoon of Wednesday, June 13, 2012. You can find additional information about this event including RSVP instructions on our homepage.

Apple has surpassed Exxon as the most valuable company in the world representing 3.4% of the value of the Standard and Poor’s 500 Index and 1.2% of the worldwide value of all publicly traded stocks.  Apple stock has appreciated 50% so far in 2012 and now has a total market capitalization of $560 billion.

Apple recently traded at over $600 per share.   According to Morningstar the current value of an Apple share is $560.  Morningstar believes you only purchase a stock when you can do so with a ‘margin of safety’.    The result is Morningstar would currently recommend purchase of Apple stock at a price of $336 or less. 

TCI owns two different large capitalization growth funds—Fidelity Advisor New Insights (FINSX) in certain accounts and Vanguard Primecap (VPMAX) in others.  New Insights currently has an 8% position in Apple and Primecap does not own Apple.  New Insights is up 14% so far in 2012 and Primecap is up 10%.   Most of the difference is Apple. 

So is it time to sell Primecap and put everything in New Insights?  We think not.  The managers of Primecap buy out-of-favor growth stocks priced with a ‘margin of safety’ while New Insights tends to own companies with improving fundamentals.    Both managers are doing what they do best and that is exactly what we want them to do.  Both managers have excellent long-term performance that we believe is the result of sticking to two very different disciplined investment approaches.

Developing capital market expectations – that is to say, estimating the expected future returns of an array of asset classes - is an important part of the investment process.  From our perspective – as that of a financial planning firm as much as an investment advisory firm – these forecasts are essential.  Not only do capital market expectations aid us in allocating assets, they serve as the assumed return for our clients’ financial plans.

Rob Arnott of Research Affiliates was interviewed about expectations in the Wall Street Journal; you can read it here.  We are typically quite interested in what Rob has to say.  He manages the Pimco All Asset All Authority Fund, a moderate allocation fund in which we have placed more than $100 million of client assets.

Rob’s main point is that investors should form more modest expectations than they have in the past.  A balanced investor should expect long-term returns of closer to 5.5% or 6% than past assumptions of 8-10%.  Though we might quibble with some of his rationale, particularly where it involves declining demand for stocks by retiring baby boomers, we do agree that investors should use conservative assumed returns.

Our methodology involves weighting a valuation-based 7-year forecast for our covered asset classes with longer-term historical returns.  Cheap valuations will shade the forecast upward; expensive valuations will push the forecast down.  The longer-term returns act to smooth the forecasts so that we don’t see wild swings in our expectations from period to period.  Our current set of expectations has our balanced strategy returning just north of 7%, though with the market’s recent recovery, we would expect to see that number decline when we update our forecast at the end of the first quarter.

If you have questions about our capital market expectations, please contact your relationship manager. 

I am always eager to read the latest letter from Jeremy Grantham of GMO.  This time the letter includes this list of practical investment thoughts.  Read the whole letter by using the link on www.trustcoil.com.

1. Believe in history
“All bubbles break; all investment frenzies pass. The market is gloriously inefficient and wanders far from fair price, but eventually, after breaking your heart and your patience … it will go back to fair value. Your task is to survive until that happens.”

2. ‘Neither a lender nor a borrower be’
“Leverage reduces the investor’s critical asset: patience. It encourages financial aggressiveness, recklessness and greed.”

3. Don’t put all of your treasure in one boat
“The more investments you have and the more different they are, the more likely you are to survive those critical periods when your big bets move against you.”

4. Be patient and focus on the long term
“Wait for the good cards this will be your margin of safety.”

5. Recognize your advantages over the professionals
“The individual is far better positioned to wait patiently for the right pitch while paying no regard to what others are doing.”

6. Try to contain natural optimism
“Optimism is a lousy investment strategy”

7. On rare occasions, try hard to be brave
“If the numbers tell you it’s a real outlier of a mispriced market, grit your teeth and go for it.”

8. Resist the crowd; cherish numbers only
“Ignore especially the short-term news. The ebb and flow of economic and political news is irrelevant. Do your own simple measurements of value or find a reliable source.”

9. In the end it’s quite simple. really
“[GMO] estimates are not about nuances or Ph.D.s. They are about ignoring the crowd, working out simple ratios and being patient.”

10. ‘This above all: To thine own self be true’
“It is utterly imperative that you know your limitations as well as your strengths and weaknesses. You must know your pain and patience thresholds accurately and not play over your head. If you cannot resist temptation, you absolutely must not manage your own money.

How many times have you told yourself, “I’ll get to THAT later… when things slow down”? I must admit, this notion of arriving at this magical mile marker when life slows down to just the right speed is one fantasy I have been reluctant to give up. In reality, while I have been waiting for life to slow down just a little, my “to do” list has only gotten longer.

Like many of our “to dos” in life, meeting one’s financial goals- creating, building, and managing wealth- is not an easy task. While I noted in my last blog entry that there are just a few simple principals to follow to achieve your financial goals, this does not make the actual process easy. Nor is this a project that can be completed once and then forgotten. Meeting one’s goals, financial and otherwise, is a lifelong journey that, along with the good times, likely represents days filled with blood, sweat, and tears.

We will be talking in detail about the ongoing financial planning process and what it means for you at our Spring Conference in May. I hope you can join us for this event. In the meantime, for those of you fighting the good fight with a goal or challenge in front of you, financial or otherwise, I offer 10 of my favorite quotes in hopes that one of them will give you a little inspiration for the day. Best wishes.

1. “I will prepare and some day my chance will come.” – Abraham Lincoln 

2. “Success is nothing more than a few simple disciplines, practiced every day; while failure is simply a few errors in judgment, repeated every day.” — Jim Rohn

3. “Simplicity is the ultimate sophistication.” – Leonardo da Vinci

4. “You always want to act from a position of strength.” – our very own Doug Eyles

5. “Do what’s right all of the time.” – Vince Lombardi

6. “…The brick walls are there to stop the people who don’t want it badly enough.” – Randy Pausch

7. “It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.” – Theodore Roosevelt

8. “…the last of the human freedoms—to choose one’s attitude in any given set of circumstances…” – Viktor Frankl

9. “The maintenance of life and the pursuit of happiness are not two separate issues.” – Ayn Rand

10. “People with clear, written goals, accomplish far more in a shorter period of time than people without them could ever imagine.” – Brian Tracy

P.S. I would love to hear your favorite quotes. Please share them in the comments.

While growing up in the 1970’s, we heard (what we thought at the time  were apocryphal) stories of Chicagoans visiting Europe and revealing the name of their hometown. “Oh,” the story had a suddenly interested European saying, “Chicago! Bang Bang!”

After reading this article in the Economist, we don’t expect Chicago’s reputation overseas is on the rise.  As the late pol Paddy Bauler is purported to have said, “Chicago ain’t ready for reform.”

TCI continues to focus its equity portfolio on quality stocks both in the U.S. and around the globe.  There are two reasons.  First, value is better in these securities assuming the economic situation in the world will revert to something like normal over the next 7 years.  Second, quality is the best place to be based on the uncertain economic and political environment present in Europe and the U.S. 

The managers of the Morgan Stanley Global Franchise Fund (MSFAX) point out that the equity markets had good cause for celebration based on the European Central Bank (ECB) providing more than $750 billion in funding to the European financial system in December.  This funding lessened the risk of a severe liquidity crisis during 2012.  The ECB will offer another round of funding on February 29th and the demand is expected to be even greater. 

The managers point that it would be a mistake to relax because the long term structural and political issues within the Euro-zone are yet to be resolved comprehensively.   Clearly the same thing could be said about the U.S.

When stock prices slid last summer and early fall, we found ourselves to be, strangely enough, happy.  Value investors – which we are – appreciate an opportunity to buy assets on the cheap.  The slide afforded us the chance to do so, albeit in small increments as prices fell only moderately below fair value.

A strong October 2011 and January 2012 have ended the discount sale.  Equities across the board range from fairly priced to somewhat expensive.  This is a less enviable position for investors, because it means lower expected returns.  It also means a smaller margin of safety – the prices of  expensive assets have further to fall than those of cheap assets.

This puts us in an uncomfortable, itchy place.  We would love to hold an outsized portion of cash, but cash yields approach zero.  Bonds are terribly expensive, so they’re not an option for overweighting.  We hold a fair sized position in alternative investments  precisely because of that. 

Our long-term goal for the average client is to earn 5% plus inflation (as measured by CPI.)  At times like this, we must mind the risk that accompanies expensive markets.  You will find us cautious, concerned investors for the time being.