Richard C. Young & Co., Ltd. is a Naples, FL and Newport, RI based financial advisory firm. We have been ranked by Barron’s as one of the top independent financial advisors in the nation for the last eight consecutive years. We manage portfolios for individuals, families, and small businesses throughout the United States.
I sure would feel more comfortable if an attractive interest-rate environment accompanied today’s stock-market gains. While the Dow is up over 7% YTD, the yield on a five-year Treasury note is a lowly 1.7%. But a competitive interest-rate environment has not been a priority of the Federal Reserve. Instead, the Fed has kept its core short-term interest rate near zero while spending heavily on bonds to keep longer rates low.
In March, I met at our Naples office with Cato Institute chairman Bob Levy and cofounder and president Ed Crane. The goal was to increase my awareness of Cato’s research efforts and to review federal budget policies of the U.S. government. The Cato Institute is a public policy research organization dedicated to the principles of individual liberty, limited government, free markets, and peace. Cato has 13 primary research areas, including finance, banking and monetary policy, government and politics, and international economics and development.
The value of the U.S. stock market has doubled from its March 2009 lows and has vaulted almost 30% since this past August. Fueling the bull stampede is the Fed’s continued ultra-accommodative monetary policy, improved economic momentum, a pre–presidential election year (the average stock-market return in year three of a presidential cycle is 17.5%), and investors’ rising risk appetite (flows into stock funds are on the rise). Wall Street strategists seem optimistic: recent average price targets for 2011 project that the S&P 500 will reach 1,400, an 11% gain.
With momentum appearing to be behind the stock market, now may be a good time to review one of the most important considerations of investing: risk. Risk tolerance varies among individuals and even varies for the same individual during different market environments and time periods. Because an investor’s tolerance for volatility is subjective, risk tolerance can be difficult to measure precisely.
In the early 1980s, the stock market’s tank was fueled up and ready to roll. Short-term interest rates had topped 19% by January 1981. In October 1981, 30-year mortgages were 18%. As interest rates began a two-decade secular decline, the stock market exploded. From August 1982 through March 2000, the S&P 500 returned an amazing 19% a year, nearly double what it had returned the previous five decades. A whole generation of investors grew accustomed to a seemingly endless run of asset growth.
NAPLES, FL
5150 Tamiami Trail North, Suite 400
Naples, FL 34103
Phone: (888) 456-5444 Fax: (239) 213-0770
NEWPORT, RI
98 William Street
Newport, RI 02840
Phone: (800) 843-7273 Fax: (401) 849-0002
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