Quarterly Market Updates

MARKET UPDATE AND OUTLOOK : Janaury 2010

What’s new at J.P. King & Associates, Inc.?

Thank you for an amazing year of referring friends and family. We were thrilled to add 20 new clients this year. We are grateful for your referrals as this is our primary source of new client relationships and we welcome future referrals as we continue to work towards our goal of being one of the preeminent financial advisory firms in the East Bay and beyond. To accomplish this goal we will continue to focus on delivering our two most valuable strengths to you: personal attention and institutional quality.

Looking Back: 2009

What an incredible year! This simply was one of the most extraordinary years in memory. After the meltdown in financial markets in the fall of 2008, the consensus in January was that the worst was behind us. We were then painfully reminded of the unpredictability of markets by early March, when the U.S. stock market was down another 24%. At this point, there was genuine fear that we might possibly be headed for another depression. It was then that the coordinated stimulus spending by governments around the world started showing an impact and we began seeing hints, or “green shoots”, of an economic recovery. The U.S. stock market took off, up approximately 65% from that point through the end of the year. After including the decline leading into March, the full year 2009 return for U.S. stocks was 28.70%, as represented by the Vanguard Total Stock Market Index. All in all it was a great year. However, just to get back to the peak in late 2007, the market would still need to go up approximately another 40%.

Some of the best lessons learned from this past year were:

• A reminder of just how volatile stocks can be
• The importance of true diversification
• Many investors discovered that they’re less comfortable with risk and volatility in their portfolio than they had believed
• In today’s world we need to expect the unexpected

Looking back beyond 2009, it’s been a disappointing decade for stock returns. The cumulative return for the S&P 500 Index over the past 10 years was approximately -9%. If you had invested $100k in the S&P 500 index on 1/1/2000, today, 10 years later, you would only have around $91k. If, however, you had split your $100k between stocks and bonds evenly, today you would have approximately $131k. Not a great return, but much better than losing money. This reminds us that diversification is a critical ingredient to successful investing. 2009 by itself was a great illustration of the power of diversification. For the full year, our models achieved significantly high percentages of the return of the stock market, but they did so with much less volatility. Achieving true diversification is not a simple task however. One of the challenges we faced at the end of last year was that during the crisis some investments did not behave as they have historically. When the markets melted down, many investments that had been uncorrelated in the past went down in value together. This is not supposed to happen. This new challenge caused us to adapt and make some changes within our models that have resulted in better risk-adjusted performance. In today’s inter-connected world it is more difficult than ever to create and maintain true diversification. This is one of the most challenging parts of our work, and one that keeps us constantly engaged.

Looking forward: 2010 and beyond

At this moment we can best summarize our current outlook as cautiously neutral. Last April we said in our update we were confident that we were a lot closer then to a bottom than a top. Even though it was somewhat uncomfortable at the time to say that, those words couldn’t have been more true. Now that stocks are 65% higher, things are different. It’s ironic because as things now feel more comfortable it has become increasingly difficult to assess markets as under- or over-valued. Realize that we are still coming out of the worst recession since the 1930’s. Have no doubt there are many risks and more turbulent times ahead. The greatest likely risks in the near term include: rising energy costs, tight credit and the possible rise of asset bubbles. On the flip side there may be potential upside surprises. There is a possibility that we could see a much stronger recovery than a lot of people are anticipating.

Our strategy is to remain disciplined, diligent and relatively nimble. We will closely monitor developments in the economy (the big picture), and continue to evaluate each of the holdings in your accounts (the finer details). Based on economic developments and our ongoing research we will proactively make the proper adjustments within portfolios, and rebalance as necessary. Systematic rebalancing effectively maintains the appropriate risk level for your account. We seek to buy low and sell high. How often we need to rebalance will be determined by the volatility of the markets. If markets were to remain relatively calm all year, we might not rebalance at all. If volatility returns, we might rebalance more often. Right now our current positioning of portfolios is effective. These portfolios truly reflect our philosophy of simplicity, diversity, liquidity, transparency and low costs.

We leave you with a true story that carries an important message. The top performing mutual fund for the past decade was CGM Focus fund. It provided an average return of 18% per year over the last ten years. Amazing, right? Not so fast. Paradoxically the average investor in CGM Focus had a return of   -11% per year! Wait; how is that possible? It’s because the majority of investors bought the fund after its biggest up year, when it was up 80%, and then sold it after it went down 48% the next year. The average investor in the fund made the classic mistake of buying high and selling low. What a great illustration that successful investing is more difficult than simply picking last year’s top performing funds. Successful investing requires strategy, discipline and independent thinking.

We greatly look forward to continuing to work with you in 2010 and beyond to ensure that you continually have the portfolio that is right for you. We encourage you to call and discuss any questions you may have or schedule a time for a more in-depth review of your situation.

Scott Horton, CFP^®, James P. King, CFP^®
January 12, 2010