June 13, 2006

MANGO - LESS IN MIAMI—A STOCK MARKET METAPHOR

While Floridians may disagree about many issues, there is no disagreement regarding the quality of our mangoes. We all know that the best mangoes in the world emanate from South Florida. Normally, during the months of June, July and August our homegrown backyard trees produce a succulent, delicious, fruit that tastes something like a cross between a peach, and a pineapple, and is unrivaled by any other regions’ offerings.  Mangoes are used in fruit salads, garden salads, garnishes, fruit drinks and shakes, fish and chicken recipes, etc. During the summer months, South Florida’s top chefs manage to enhance all sorts of recipes with this delectable fruit in creative and surprising ways that make dining out that much more pleasurable.

AND THEN CAME THE HURRICANES

The damage by last year’s Hurricanes Katrina and Wilma has been widely chronicled in terms of the devastating impact on buildings and infrastructure. Less talked about is the damage inflicted on backyard gardens and trees. Many of us with such gardens saw fruit trees that had been lovingly tended for years, suffer substantial damage from the hurricane force winds. I myself was horrified to find my two beautiful, majestic mango trees knocked over during the two storms. Fortunately though, I had neighbors, friends and family who pulled together to help me save my trees. After severely cutting back the trees’ branches to reduce their weights, we worked together in a team effort similar to an  “old-fashioned barn raising”, and raised the trees to their upright positions.

BUT ALAS---NO MANGOES FOR ME THIS YEAR

This spring and early summer, rather than producing mangoes, my pair of salvaged fruit trees are spending their energies on producing new leaves and branches. While I would prefer to see the fruit, I know that it is better for the trees’ health, to pause and re-foliate than to produce fruit before they have the strength to do so. I know that once the trees are re-foliated and revitalized they should produce good fruit again for many years.

WHICH LEADS ME TO OUR CURRENT STOCK MARKET

After three years of relative calm and substantial returns, the stock markets have had a rough time over the last couple of weeks. The Dow has given back most of the gains we earned since the beginning of 2006. The net effect is that portfolio values are close to where they began at the beginning of the year. While most of you have taken this in stride, as a normal occurrence in the marketplace, a few of our clients have become a little nervous. For the benefit of all of us, I would like to review some of the universal rules of investing and making money.

RULES OF INVESTING

RULE #1---Stock Markets are not linear. In other words, they do not rise in a nice straight line. In fact, they usually start and stop, fall and rise. It is over the long run, that equity markets have, historically, provided superior annual rates of return.

Rule #2---- Corrections in the market are commonplace----Stock markets are expected to periodically correct or give back gains. In fact, many feel that a correction in the market is a healthy thing.

Observation---New Fed Chairman Ben Bernanke has roiled world markets by saying that recent inflation trends are unwelcome. Many traders sold stock on these pronouncements, fearing they signaled to the world that the fed plans to continue to raise interest rates. My response is this; I would prefer our fed chairman to fight the fight against inflation rather than cave in to the pressure of those that would like him to stop raising rates. In the long run, I think the economy will be better off and the probability of healthier markets will greatly increase with the current fed position.

SO THE MANGO METAPHOR IS OBVIOUS

The stock markets do not have to bear fruit every year. A consolidation of gains with a fed policy intended to help in the long run, may be the right medicine for the viability of our future economy. A pause in the market and a tight inflation policy should produce tastier fruit in future years.

OUR BALANCED INVESTMENT APPROACH WILL HELP

RULE #3—Don’t try to time the markets—it rarely succeeds. No one can predict when recoveries begin. As such, those who pull out of the market miss out on the large gain days, and never do as well in the long run as those who stay invested.

At Frye Financial Center, our approach to investment management begins with constructing blended, diversified portfolios, positioned to provide increased resilience to market volatility. We know that proper asset allocation and diversification are the foundations of any successful long-term investment strategy. Not all investment categories perform the same way during the same period and we cannot predict the markets. A well-diversified portfolio of low correlated asset classes can better endure fluctuating market cycles. Therefore, we follow Modern Portfolio Theory and develop portfolios with varying risk and return characteristics. To seek true diversity, and to further minimize risk, we include investments with reverse correlation and recommend certain hedging vehicles.

In addition, for clients close to retirement, we recommend the inclusion of variable annuities.  They not only allow investors to capture the upside market potential, they also protect against losses in down markets with principal guarantees and provide income for life.

To learn more about our investment approach, click here.

Austin A. Frye, MBA, JD, CFP®

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