“If we don’t change, we don’t grow. If we don’t grow, we aren’t really living.”
- Gail Sheehy

                2011 represented a year of change in my life. I graduated from college, married the love of my life, moved a thousand miles away, rented my first apartment, and started a full time job. In the course of a few months my life transformed from that of a broke single college student in Arizona, to a slightly less broke married financial advisor in Seattle. Even my diet has changed from discount brand macaroni and cheese and frozen pizzas, to fresh cooked meals with surprising new delicacies, like vegetables. As I look back on the craziness of my last year I realize that change represents the rule rather than the exception.

                The fact is, everything is constantly changing. Nations change as uprisings surge through the Middle East and dictators who have ruled for decades fall in a matter of months. Societies change as protestors take to the streets to protest banks, income inequality, tuition hikes, and everything in between. Technology changes at a neck breaking pace, as social networks like Facebook and Twitter transform the way we communicate. As all of you who have been invested the past 5 years know, the stock market changes, fluctuating wildly on the latest news from Greece and the Fed.

                At Sage Advisors we embrace these changes as investment opportunities. They reinforce our firm belief in diversification, and provide investment opportunities that financial gurus like Warren Buffett call some of the best they have seen in years. The most important changes we see, though, aren’t the ones on the front page of the Wall Street Journal. They are the changes our clients experience as they move through life. Whether it’s getting married, buying your first house, changing jobs, having a child, getting a raise, or retiring, we love to hear about the change in your lives.  

                The question really isn’t “Is life going to change?”, but rather, “How are we going to handle the change as it occurs?”That’s where we come in. Whether you’re considering refinancing, accepting a new job, or pondering retirement, we want to come alongside you and help you as your life changes. Our goal is to continually help you meet your varying financial goals as you move through life. At the end of the day we want to be more than wealth managers, but rather a team that is actively helping you achieve your goals. Thank you for allowing us to serve you and your family through these changing times.

Written by Jordan Cole

Welcome to 2012. I hope each of you have had a good start to the New Year! It wasn’t until I spent some time reflecting back on 2011 that I began to realize how much transpired last year. Considering the last performance report I sent was at the end of the meltdown of the 3^rd quarter, I am pleased to be sending out the 4^th quarter updates. I confess, though, I’m more eager to have you open your January statements.

In this letter I want to take a few moments to teach a brief lesson about “the markets”. I continue to get questions about why our portfolios are down slightly for 2011 when “the market was flat or up”. By “the market”, we usually mean the Dow Jones or the S&P 500. Even the attached performance reports can be somewhat misleading because they include only two indexes for comparison.

The fact is, there are many ways to slice and dice different investments and each segment can be regarded a market of sorts. A way to measure these markets is with the use of an index. Within stocks alone, major categories include domestic and foreign, small, medium, and large company stocks, and growth and value stocks. Within bonds major categories include U.S. treasuries, corporate investment grade, high yield, and municipal or tax-free bonds. In our investment portfolios we try to include all of the above to some extent. And in simple terms, the longer the investment time horizon, the more we weight stocks. For those that might be interested, I’ve included some basic definitions of a few of the most common indexes at the end of my letter.

Note: We use QQQ as our proxy for the Nasdaq index

Each of you has heard me preach about diversification. I often joke, too, that if we diversify properly something will do poorly. Last year that something was clearly international stocks. Although small company stocks were down, it was the foreign stocks that took a beating. At one point I considered writing about some of the events that shaped 2011. A short list included earthquakes and tsunamis in Japan, flooding in Thailand, major political upheaval in the Middle East, leadership change in North Korea, and the ever-present saga of the Euro zone debt crisis. With headlines like these and the uncertainty they create, it is a wonder that we have recovered from the summer meltdown as well as we have.

So what do we do now? Many of us are convinced that much of the economic growth this next decade will happen outside the U.S.  Many of the companies that will grow and thrive as a result are based outside this country – they are foreign investments. Sure, I’m frustrated that our exposure to the international markets last year hurt our performance, but I’m as convinced as ever that going forward we need to continue to hold the best companies in the world, regardless of where they are based.

Let me conclude, as always, by saying thank you. We at Sage genuinely appreciate you allowing us to partner with you to meet your financial goals.

A few basic definitions – (1)

• Dow Jones Industrial Average – the oldest (Charles Dow – 1896) and most watched index. This is perhaps the narrowest index consisting of only 30 stocks traded on the New York Stock Exchange and the Nasdaq.

• Standard & Poor’s 500 – An index of 500 stocks chosen for market size (large), liquidity, and industry grouping, among other factors. These 500 stocks are market value weighted, meaning that the larger stocks have a greater impact on the index than do the smaller company stocks. This is my favorite index to follow with regards to large US stocks.

• Nasdaq Composite Index (measured above by the QQQ) – The Nasdaq is a market-capitalized weighted index of the more than 3,000 stocks listed on the Nasdaq stock exchange. Because the Nasdaq is market-cap weighted and because of some of the large tech companies that are in the index, we often hear it referred as a “tech heavy” index.

• Russell 2000 Index – An index measuring the performance of the 2,000 smallest companies in the Russell 3000 index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 200 serves as a benchmark for small cap stocks in the U.S.

• EAFE (Europe, Australia, Far East) – As the acronym implies, this index is a foreign index representing the most developed areas outside North America. This is often used as good index of foreign companies.

• Barclays Aggregate Bond Index – This bond index is market-cap weighted and is designed to measure investment grade bonds. It excludes municipal bonds and TIPS, but is deep with U.S. Treasury securities, Government agency bonds, Mortgage-backed bonds, and corporate bonds.

(1) Definition help from Wikipedia and Investopedia.

Written by: Russell D Cole, CLU, ChFC

For quite some time now I’ve known that I successfully inherited elevated cholesterol levels. I began to learn the positive ways I could control this with exercise and improved diet (it is amazing the high correlation between my favorite dishes and high cholesterol.) It didn’t take long, honestly, to learn what things I could do to truly improve my health. Funny, though, it took far longer to change my habits and my diet once I learned what I should do.

This came to mind again this week when I was reminded that Monday was the 15^th anniversary of the “Irrational Exuberance” speech by former Fed Chairman Alan Greenspan. It was December 5, 1996 that he warned of the high stock prices relative to earnings. The price people were willing to pay for stocks (Price to Earnings) was, even then, at historically high levels and he was ringing the alarm. He was right. Even so, the S&P rose 105% more over the next 4 years before the bubble popped and the downturn began.

The bottom of the market during this last “great recession” appears to have been in March of 2009. Opposite 1996-2000, stock prices were at historically low levels. Smart investors, of which Warren Buffet was particularly vocal, began to say that prices were wonderful and that it was a great time to be an investor if you had a longer term time frame. Here we are nearly 2 ½ years later and stock prices continue to be particularly low compared to earnings by historical standards. The economy is growing, albeit slowly. Corporate health, balance sheets, and cash flow – particularly of large US companies – are at excellent levels. Yet pessimism abounds.

In the same way the pendulum continued to swing toward market enthusiasm for 4 years after the warning in 2006, the pendulum is swinging toward pessimism today. Sure, I’ve been accurately accused of being the optimist. Yet there certainly are a lot of smart people arguing good reasons why the pendulum will likely turn and begin swinging the other way again.

Some of our clients have begun to notice changes to the retirement plans offered by their employers. We want to help you understand why these changes are being made.

Here are two things to watch out for. Read about why we think these are positive developments:

1. 1. More useful investment options
2. 2. Fee disclosure on your statements

Changes to Investment Options

Here at Sage, we have received several emails and phone calls from clients informing us that a change was made to their employer-sponsored retirement plan. It has been a welcome sight: 401(k), 403(b), and Public-Employee plans such as PERS and TRS are changing their fund lineups.

Recent volatility in the market, specifically 2010 and thus far in 2011, has caused some employers to change the investment options in their plans. This volatility has been stomach-churning for many investors who often feel powerless during the ups and downs, causing some to make costly mistakes that are detrimental to their ability to retire. Financial scholars worldwide agree the greatest weapon we all have against market volatility is diversification.

Simply put, we are seeing plans recycle some of the “old” options with “new and improved” options designed to complement the funds that remain; increasing your probability of achieving a well-diversified portfolio. To maximize diversification, it might be the perfect time to review whether your allocation is right for your retirement investment strategy. We are ready to take your questions if you are one of those people who noticed a change in your retirement plan or simply want us to take a second look.

A lot of our clients participate in the State of WA retirement plans (DCP, Plan 3 and more). Click Here to find out what changes to expect in these plans in September and October.

Fee Disclosure on Quarterly Retirement Plan Statements

No one I know enjoys paying a fee for regular service and maintenance. We are comfortable paying for some services as long as it doesn’t cost too much. For example, everyone wants their vehicle to last a long time and to hold its value. That goal at least requires us to change the oil in our vehicles every 3,000-5,000 miles. Oil changes are a reasonable and necessary expense and we all know approximately how much it costs each time it gets done.

A recent survey found 71% of participants were not aware that they pay fees to their 401(k) service provider to maintain their account. In the first six months of 2012, approximately 72 million Americans will see something they have never seen before……how much they pay each quarter for their 401(k) plan.

No longer will this information be hidden towards the back of a long legal document. Instead, it will appear directly on your quarterly statement expressed as a percentage of your balance AND the actual dollars and cents deducted from your account during the quarter.

Why is this important? Similar to cars needing regular maintenance in order to last longer, we must pay a certain amount regularly to have access to capital market investments in our retirement plans. Jiffy Lube knows we all need to change the oil every once in a while BUT we at least get an invoice showing us how much the oil change costs. In October 2010, the Department of Labor decided it is a good idea we all know exactly how much it costs to invest in our retirement plans.

Keep in mind, the amount being charged is not changing. Fees have always been hidden in your earnings. Statements historically express the earnings (or loss) you realize each quarter on a “net” basis. In the future, total fees will be an additional line below the investment earnings (or loss) you realize each quarter.

We are hoping this causes 401(k) service providers to streamline their offering to be more competitive. Perhaps the average level of retirement plan fees will decrease over time. In our minds, this can only be a good thing for everyone.

After more than a few hours visiting with clients these past few days I have determined that many of the questions can be whittled down to but an important few.

AAA Ratings: The stock market does not like uncertainty. Most often, during times of high uncertainty, people flee the market to safer havens. Friday after the market closed, Standard & Poors downgraded the U.S. debt from the highest rating of AAA by one notch to AA+. This was not an insignificant event – in fact, it is a first in American History. Yet the initial verdict is good. The real fear was a massive sell-off in U.S. debt securities. And because the U.S. Treasury bond market is so massive, we simply didn’t know what a sell-off of great magnitude might mean. Instead, however, during market hours on Monday people flooded the U.S. treasury market with new money as if it were a rare safe haven. Treasury prices rose and interest rates fell. This was the opposite of what many of us feared. People simply haven’t given up on the U.S. bond as a place to park money during scary and uncertain times. Good news… we’re not in such unfamiliar territory after all.

Economic Slowdown and the Earnings Tug-of-War: There is a tug-of-war going on between the fears of a slowing economy and outstanding corporate profits. These past few weeks there have been some clear signs that the economic recovery is sputtering. Many respected economists have revised downward their forecasts for economic growth both in the U.S. and worldwide. Slower economic growth often translates into slower growth in corporate profits. And slower growing corporate profits should signal some decline in stock prices. Couple this with the fears of the previously mentioned U.S. debt problems AND the fact that the “pendulum” of stock markets often swings significantly past “reasonable” and we have a stock market down nearly 20% over the past few weeks. These past two weeks the fears of the slowing economy have clearly trumped the excellent earnings season we are just now wrapping up. Many people thought earnings expectations were too high to begin with, yet nearly 80% of the S&P 500 companies have exceeded expectations this past quarter. There is no question that there are many corporations that are healthy, profitable, and growing stronger. And, as I’ve explained to many of you, they are getting much of their growth from outside the United States. Even with declining expectations in the U.S. economy, there is reason to believe that growth in other countries can continue to fuel growth in some well-positioned and well-managed companies in the years ahead.

What to Do: Without doubt the greatest question people are asking is, “What should I do? Should I make changes?” Great question! I will answer this in two parts:

Correct Allocation – The question everyone should be asking me regularly is, “Given my risk profile and my goals, am I appropriately allocated among stocks, bonds, and cash?” The answer to this is not a function of the market ups and downs, or headlines and uncertainty. It is primarily a function of your investment goals and your risk tolerance. Are your goals the same as they were when we last visited? Do you need income or are you primarily concerned about growing your money for future objectives? If the goals are the same and your current allocation is appropriate for your goals, then this is not a time to make changes.

Opportunities – It is actually times of turbulence that present some of the greatest opportunities. Once we confirm that you have the right model or allocation, we can then work within that model to make the most of these opportunities. We don’t plan to let these openings slip us by. We are already in the process of rebalance work to take advantage of the opportunities being made available.

Summary: We have been here before. Many of you have been through this with me more than a few times. For those willing to stay the course with using a diversified portfolio of well-managed funds we have learned that we not only survive these difficult markets, but often benefit from the opportunities created in the chaos. The scenario may be somewhat different each time but the same rules apply. Thank you for allowing us the opportunity to partner with you during these times in order to not only ride out these storms, but genuinely make the most of them. Please keep writing or calling with your questions.

“There is broke, and then there is ‘college broke’.” Ken Hutcherson

Because it was so few years since I had finished college, Ken’s insights quoted above on “being broke” certainly resonated with me. I honestly remember searching couches for change to do laundry.

I can’t help but consider the different variations of broke when I think about the many ongoing discussions about cities, states, and governments being broke. We hear about defaults and “technical defaults”. Greece has dominated headlines but the US Government is not doing a great job avoiding bad press either. Clearly the budgets of our local, state, and federal governments and more than a few of their peers overseas are in need of repair. But how broke are they and what does it mean.

Recently I saw some statistics from the trustees of the social security trust fund. On May 13^th the trust fund backing the payment of Social Security Benefits announced the fund balance would be zero in 2036. Yet they explained that a zero trust fund “does not mean” that payment of social security benefits would also go to zero. Rather, benefits would need to be reduced to 77% of their originally promised levels through the year 2085. In terms of the magnitude of a possible fix, they explained further that a 1% increase in both employer and employee contributions via payroll tax would eliminate the problem and restore to 100% the promised benefits. 

I confess I count myself among the many that assumed significant numbers of us may simply never see social security retirement income. I’m quite encouraged to learn that our “broke” Social Security may yet pay out over 75% of promised benefits even if no fixes are made. State and Federal budgets aside, I’d have to argue that perhaps social security, anyway, may not fit the definition of “college broke”.

Welcome to the new Sage Advisors, LLC website! Hopefully you can begin today by poking around and seeing what we offer here. Let me introduce you to a few key components.

Blogs

            You are currently viewing the section of our site where we will post periodic blogs and updates. A goal of ours is to regularly add to our content here, addressing everything from financial planning tips and strategies to potential tax law changes, market updates and commentaries. I am going to ask for your help – if you have questions or topics about which you would like me to comment and think perhaps it might make a good blog topic, please email me. If you are curious or wondering about something, there are likely many others wondering the same thing. Help me learn to use this tool to keep you informed.

The Team

            Yes, it is true – Dave and Michelle are real people and have now actually been photographed. For those of you that didn’t yet know, Joe completed his CFP® (Certified Financial Planner) designation last year and is working hard not only helping us but building his own planning practice. Not yet pictured is Jordan Cole, my oldest son. Jordan will graduate from the University of Arizona in just a few weeks, and will be full time with us likely by the end of June.

Contact Us

            I know many of you have requested this. What is the phone number and email to reach each of us? If you don’t have a great system for keeping track of contact information simply return here when needed.

Market Summary

            As you have surmised if you’ve already viewed your performance summary and from the data in the table below,

the bull market continued through the first quarter of 2011. In fact, it proved the best first quarter in quite a few years. Bottom line, more and more indicators tell us that the economic recovery continues to take hold and corporate profits and balance sheets continue to improve. Employment is improving. The private sector is truly beginning to add more jobs. Unemployment is edging ever so slowly down. The consumer is returning as confidence is up and retail sales are improving.

            Like always, there are clearly concerns as well. The real estate market is bumping along the bottom at best. Oil and energy prices have risen quickly in part due to an improving economy and in part due to the turmoil in the Middle East. Food and commodity prices have risen quickly. Japan has suffered a terrible tragedy. We know any and all of these will be headwinds to a recovery and their ultimate impact is unknown. Despite my long term optimism I’ll say again what I write in most of my summaries – the economy and financial markets won’t continue up in a straight line. The concerns I mention and those we’ve yet to learn will certainly cause bumps along our path.  We therefore seek to use the best money managers, stay diversified, carefully align goals and asset allocation, and keep a long term perspective through the ups and the downs.

Thank You

            Our sincere thanks to each one of you. Certainly we would not be in business without you. This business isn’t just work, though. It is work we absolutely love to do. I know without a doubt that I am fortunate to enjoy my work and profession as much as I do. I know, too, that this wouldn’t be the case without such wonderful clients to work with. Thank you for allowing us to come alongside and serve.

Sincerely,

Russ

Russell D. Cole, CLU, ChFC

Two things have been obvious these past few months  1) the press has succeeded in making clear the mess of state and local government budgets, and 2) prices of municipal bonds (the notes behind state & local government loans) have really stumbled.  A trusted friend and industry insider recently told me that although these municipal bonds are priced reasonably well right now, headline news could make things tough for a while yet. This combination leads me to ponder some questions about the real state of affairs.

Just how close are we to muni defaults? (more…)