February 2012 Client Letter

Where we are:

• During 2011 professional investors looked gloomy. Bad news seemed to pile upon bad news and many investors looked at 2012 with real trepidation. The psychology of the market seemed ominous.
• When everyone returned to Wall Street from the holidays, look at what happened. Alpha Financial clients will be pleasantly surprised by strong market performance this past month. January 2012 goes on record as one of the strongest Januarys of all time on a percentage basis and easily the best in terms of points gained on the Dow Jones Industrial Average.  It was the best January since 1997.
• How come? While most market prognosticators were calling for even more tepid returns, better than expected economic data fueled a rebound in stocks. Even news out of Europe about a potential debt compromise in Greece pushed global markets higher.
• The Federal Reserve announced last week that they will maintain low interest through 2014.  While low interest rates would normally be stimulative, there is no guarantee that low rates will spur growth.  Japan has been maintaining low rates for the past 15 years and it has not translated into economic growth.  Inflation is the main risk of keeping interest rates artificially low, but  Japan experienced deflation. We believe the Federal Reserve would welcome mild inflation if it stimulates economic growth. There are also people who believe the Fed wants to inflate their way out of the fiscal debt bubble that Washington has created (in other words, use inflation so less valuable dollars pay off debt). How this will ultimately affect the markets remains to be seen.

How we see it:

• Months like this January help make up for equity losses in much of 2011. This helps us reach our long term objectives. It a testament to the reason we don't try to time the markets.  
• We have been saying for some time that stocks are cheap and January's improved economic news makes stocks even more attractive, in our opinion. 
• Companies are sitting on cash, corporate balance sheets appear healthy, earnings data continues to come in above expectations, and improving jobs data suggests that consumers are still spending.  When compared to bonds, real estate or gold, stocks appear to be the most attractive option.

What we are doing:

• We have enjoyed this run and do not see a breakdown in the fundamentals.
• The old adage is to 'buy low and sell high.' The counterintuitive thinking of 'sell high and buy low' is another formula for successful long term investing. As the market goes up we want to be sure we take profits at reasonable levels based on good analysis of the equities we hold for our clients.

What's happening at Alpha:

• Money-saving funds: In our November newsletter we discussed our decision to incorporate funds with lower operating expenses as a way to improve client returns. That tactic appears to be paying off. The S&P Indices Versus Active Funds Scorecard as of June 2011 indicated that on average in most classes, nearly 2/3 of active fund managers did not beat their index; they trailed passively managed index funds over the past 5 years. What does that mean? The "value-add" of the majority of managers did not justify the cost in actively managed funds. While we still use some actively managed funds, we blend passive funds with active funds for a cost-effective diversity of holdings.
• Retirement Plan Interface: We implemented Advisor Exchange, a data aggregation software that allows us to fully manage our clients' company retirement plans.  We can pull data on a daily basis from more than 7,500 different 401(k), 403(b) and 457 plans into our portfolio modeling system.  We can review your plan on a real-time basis and change retirement positions matched against the investment choices we already manage at Schwab we can assess your entire portfolio allocation versus just a piece of it. This is a fantastic way to see the big picture, building the ideal portfolio even with investment limitations inherit inside retirement plans.
• Federal paperwork: As part of the Dodd-Frank legislation that was recently introduced, by mid-year 2012, Alpha Financial is required to transition from being regulated by the Securities and Exchange Commission to the North Carolina State Securities Department. As part of our compliance review procedures, in preparation for the transition, we are incorporating some "best practices" with respect to our compliance and regulatory documentation. As a result, in the near term all of our clients will need to sign updated client service agreements and investment objective understanding/memorandums. You should be seeing those shortly.
• We are planning a "Lunch- & Learn" session this spring! Tell us topics you want to hear about. We have a few of our own ideas.
   

Sincerely, 

Ann Gugle, CFP®, CPA & John Gugle, CFP®, CRPC
Co-Owners and Principals
NAPFA-Registered Financial Advisors

Alpha Financial Advisors, LLC
13925 Ballantyne Corporate Place, Suite 280
Charlotte, North Carolina 28277-2704