October 2014 Financial Markets Summary

It is very easy to allow our life biases to influence decision making.  Everyone has biases.  We make judgments about people, opportunities, Washington policies, and investing just to name a few. It is impossible to be unbiased in most decision making.  This especially holds true for investing.  Biases can have big impacts, sometimes very negative impacts. Have you noticed that you put more weight on the opinions of those who agree with your political, social, or religious views?  There is no way to eliminate bias.  It is who we are, and those biases are not always liabilities.  Successful investing requires us to listen thoughtfully to other views, to think twice before doing something a commentator we like recommends, and certainly to avoid falling in love with a particular investment or strategy.

At PDS, we try to make unbiased observations about individual stocks, mutual funds and ETFs.  These observations can run against some deeply-emotional biases of our clients.  Long-held investments, especially inherited ones, can cause individuals to ignore valid reasons to reduce the number of shares or sell the entire position.  The result can be large losses, missed tax opportunities, and portfolios that carry much more risk than they should.  Our philosophy is that it is typically never a bad time to consider capturing large gains.

September markets ended on a whimper, with the S&P 500 down 1.5% for the month and the tech-heavy NASDAQ losing almost 2%.  We wondered if the short-term swoon in July was the start of a long-anticipated correction, but that was just a tease.  In looking at the various category returns below, it appears that several sectors of the world markets may already be going through a correction of sorts.  Investor euphoria can change to fear and back to euphoria quickly. Our observation is that while the S&P 500 has managed to stay above the fray, investors should accept that large cap stocks will eventually see a pullback, if not a real correction of 10% or more.  These things just happen as a natural course of the markets.

Evidence of an improving economy and the Fed’s accommodative monetary policy have helped boost the stock market’s allure.  While the Fed is ending its bond-buying program this month, low inflation here in the U.S. (helped by the domestic energy boom’s lower energy prices) could give them room to keep short-term interest rates near zero for longer than anticipated.  A recent wealth manager meeting with J.P. Morgan Asset Management offered observations that low inflation and low wage pressure could stave off the beginning of higher rates until the third or fourth quarter of 2015.

Remember that today’s headlines and tomorrow’s reality are seldom the same.  Protect the money you might need to take from your portfolio over the next 3-5 years by keeping it in cash, CDs, or short-maturity bonds, despite their still-unattractive yields.  The rest of your portfolio should be invested in a truly diversified mix that matches your risk tolerance and long-term goals.

Asset Index Category Three Month 2014 YTD 2013 10-Year
S&P 500 Index – Large Companies 0.6% 6.7% 29.6% 5.8%
S&P 400 Index – Mid-Size Companies -4.3% 2.1% 31.5% 8.7%
Russell 2000 Index – Small Companies -7.7% -5.3% 37.0% 6.7%
MSCI EAFE Index – Developed Intl -6.3% -3.6% 19.4% 3.4%
MSCI EM Index – Emerging Markets -4.3% 0.3% -4.9% 8.0%
S&P Global Natural Resources Index -7.8% -1.4% 1.5% 7.8%
London Fix Gold Price Index -7.5% 1.0% -27.3% 11.3%
Total  U.S. Bond Index 0.1% 4.1% -2.2% 3.7%
Municipal Bond Index 1.0% 5.6% -2.3% 3.7%
Emerging Market Bond Index -2.9% 3.3% -7.2% 7.8%
Long-Short Equity Index -1.5% 1.5% 14.6% 5.8%
U.S. Commodities Index -11.3% -3.6% -27.7% 10.3%

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment, strategy, or product or any non-investment related content, made reference to directly or indirectly in this newsletter, will be suitable for your individual situation, or prove successful. This material is distributed by PDS Planning, Inc. and is for information purposes only.  Although information has been obtained from and is based upon sources PDS Planning believes to be reliable, we do not guarantee its accuracy.  It is provided with the understanding that no fiduciary relationship exists because of this report.  Opinions expressed in this report are not necessarily the opinions of PDS Planning and are subject to change without notice.  PDS Planning assumes no liability for the interpretation or use of this report. Consultation with a qualified investment advisor is recommended prior to executing any investment strategy. No portion of this publication should be construed as legal or accounting advice.  If you are a client of PDS Planning, please remember to contact PDS Planning, Inc., in writing, if there are any changes in your personal/financial situation or investment objectives.  All rights reserved.