This time of year many advisors and market gurus like to write about what they expect the markets will do in the upcoming year. I won’t make that mistake because I admit that I have no idea what the financial markets will do in 2010.

If we knew what would happen, our job as financial advisors would certainly be much easier. We could take a bunch of positions now, based on what is going to occur, and then just sit back and relax for the rest of the year.

The reality is that as money managers our main objective in 2010 will be the same as it was going into 2009 or any other year. Our primary goal is to make certain that we protect our clients from market risk and avoid major downturns. If favorable market conditions develop, then we also hope that we can generate some respectable returns.

After the major market downturn experienced in 2008, I certainly never expected to see stocks rebound like they did in 2009. We did anticipate a bear market rally and when it faltered in June, it appeared that the three-month rise in prices might give way to another significant downturn. Instead, stocks turned up in July and have been drifting upward for most of the rest of 2009.

Below is a chart showing a comparison between the NYSE composite and the Nasdaq. As you can see, over the past year the Nasdaq has been much stronger. I added the green lines to illustrate that since October, the NYSE has generally stayed within a very tight trading range. Over the past two weeks, the Nasdaq appears to have broken out of that range and reached a new high for the year.

This could be an indication that stocks in general are ready to begin a new upward move. Or it could be just end-of-the-year window dressing as Wall Street managers try to end the year with the biggest possible gains. We’ll know for sure in a couple of weeks.

The bottom portion of the chart is a relative strength index (RSI) of the NYSE. Normally when an index or an investment can trend above RSI 50 it means that it has the momentum to continue an advance. I added the red line to show that that the NYSE RSI (and its accompanying momentum) has been declining since the beginning of August. That is usually a negative indicator when the RSI is falling while the price is rising.

As with any year, 2010 will undoubtedly bring both challenges and opportunities in the financial markets. Our objective is to keep the ride as smooth as possible given the individual investment objectives and risk tolerances of our clients.

F.S.

There is little to write about the markets this week. Major indices have generally moved back to the tops of their trading ranges. But at the same time, some of the stronger sectors have shown weakness. For example, this week we sold the small positions we had in gold, Latin America, intermediate bonds, and a couple of foreign currency funds. Until we see which direction the market breaks when it exits this trading range, being invested carries a high risk level.

We hope all of you enjoy your holiday season and have the opportunity to spend time with friends and loved ones.

Merry Christmas to all of you.

F.S.

Dental Dollars is a FREE service. If you find the information interesting and informative, we hope you will ask you friends and acquaintances to subscribe. Welcome to all the new subscribers who signed up at the 2009 AAEP convention.

With just two weeks until the end of the year, it appears that major stock indices are going to end 2009 with some impressive gains. Unfortunately, most investors don’t begin their accounts in January and close them in December.  Investors who are in retirement or saving for retirement are in this for the long haul. In other words, a calendar-year view does not give an accurate picture of whether their investments are on track to meet their retirement objectives.

For many years, Wall Street has advocated the position that the best strategy for ordinary investors is to buy a diversified selection of stocks and then just hang on to them indefinitely.

Those who have followed my commentary for any length of time know that we believe this is the wrong approach for virtually all investors. The major flaw is that the person following a buy-and-hold philosophy never knows whether the market will be in a bull or bear stage when he eventually needs to cash out of those positions.

The chart below helps illustrate why buy-and-hold is not a good strategy. It shows the performance of the Dow Jones Industrials Average and the S&P 500 over the past 10 years. Notice if you had purchased an index fund for either of these 10 years ago, you would have less money in your account today.

Now let’s imagine that at some point during that 10-year period you needed to cash out your investment. Perhaps you needed the money for retirement. Perhaps you got laid off and had to dip into your retirement account prematurely. Or maybe someone got sick or injured and you needed the money for health care.

The green area I highlighted on the chart represents a 10% gain or loss from the original starting point in 1999. As you can see, at no point in the past 10 years does the S&P 500 exceed a 10% gain. The only time the DJIA exceeds that gain is a brief period during 2007 and 2008. On the other hand, there are many extended periods during this 10 years when both indices were well below a 10% loss.

The green area illustrates that if you had been forced to liquidate index fund positions during this 10-year period there is a good likelihood that you would have lost more than 10% and only a very slight possibility that you would have gained more than 10%. In early 2009, the S&P 500 was down more than 50% from December 1999. What if circumstances dictated that you were forced to cash out in March 2009? Your original investment would be worth less than half as much.

Also consider the overall volatility of these indices during this period. If you are trying to save money for retirement or to manage your assets during retirement, do you really want to see these types of swings in your account balance?

It is our view that the most critical factor in retirement planning is avoiding major losses that can devastate account values. And during the past 10 years, there have been many times when an investor following a buy-and-hold approach would have seen dramatic declines in his account.

So as the financial pundits talk about how much the major indices are up for this year, keep in mind that this year’s gain or loss is not where your focus should be. Instead, you need to be most concerned about where the market (and your account value) will be on the day you need your money. That is why it is important to follow an investment strategy that places a high emphasis on avoiding market risk.

F.S.

Every year—usually in December—an event occurs that causes confusion and frustration for many mutual fund investors and their tax advisors.

If you are holding mutual fund positions at some point this month you might be surprised by a sharp drop in the price or NAV of some of those funds. It could show up as a pretty dramatic drop of 10% or more in a single day. But while the price of the fund shows a dramatic drop, the account value will not decline. That is because of a phantom distribution that takes place with most mutual funds during December.

The distribution is calculated into the net asset value (NAV) of the fund and you simply end up owning more shares at a lower price. The account value never changes.

Let’s say you own 10 shares of XYZ Fund and on December 18, those shares were valued at $10 each. During the year, the fund accumulated dividends, yields and distributions equal to 10% of the fund’s total value. In reality, this dividend income has been included in the price of the fund all year long. But on December 19, the fund passes these earnings on to you as a phantom distribution. So while your account value on December 19 is the same total of $100 as it was on December 18, instead of owning 10 shares valued at $10 each you now own 11 shares valued at $9.09 each.

For accounting purposes, this distribution of dividends shows up as investment income paid to you. (And that is how the IRS views it if your mutual funds are not held in a qualified account like an IRA.) That means that if you hold the fund in a taxable account, you will be required to pay taxes on the distribution.

Unfortunately, there is no sure way to know ahead of time how much the distribution will be or even exactly when it will be recorded. As a general rule, funds that have a high turnover ratio have larger distributions. And most funds record that distribution at about the same time each year.

No Santa Claus rally yet

Investors waiting for a December market advance (often referred to as the Santa Claus rally) are disappointed. For the past month, stocks have traded in a fairly tight range and so far there is no indication of a change in that pattern.

Below is a candlestick chart of the New York Stock Exchange composite over the past three months. (For an explanation of this type of chart, check this link: http://en.wikipedia.org/wiki/Candlestick_chart)

I added the light blue box to highlight the tight trading range that has dominated for the past month. For that period, stocks have generally been trendless. Only once in that period have stocks moved in the same direction for three consecutive sessions.

The relative strength index (RSI) on the bottom portion of the chart shows a pattern of failing strength. That is normally not a good sign and it indicates a possibility that when this tight trading pattern is broken, a sharp downturn could occur.

As we have been saying for several months, while stocks currently remain in an intermediate upward trend, risk remains high and investors need to remain cautious.

F.S.

While major stock indices like the Dow and the S&P 500 are showing nice gains for 2009, the going has been harder recently. Since September, most of those indices have had only slight advances. At the same time, a few sectors have posted much better gains.

As an example, look at the chart below. The black line is daily performance of the New York Stock Exchange Composite. Notice that after peaking in the middle part of September, it has since advanced very little.

By comparison, the other two lines are ETFs representing sectors that have been much stronger. The blue line is SPDR Gold Shares (GLD). Gold is at record highs and has been among the strongest of all sectors over the past month.

The gold line is iShares S&P Latin America 40 Index (ILF). Emerging market funds have done well since early March and they have also moved up strongly during the past three months.

Over the past few weeks we have taken small positions in these funds in some of our strategy portfolios. Our overall feeling about the markets is still that risk is high and investors need to carefully monitor long positions and be ready to sell if there are growing indications of weakness.

We will continue to hold these and a few other select advancing positions until technical indicators deteriorate. But as long as they remain in powerful upward trends we will try to take advantage of the gainful opportunity they provide.

F.S.