| An eNews Update to our Quarterly Newsletter |
May 2007
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One of the most formidable tasks that investors face today is arguably digesting the dizzying amount of information available. The threats to our financial retirement security seem endless: The solvency of Social Security ~ the solvency of Medicare ~ the budget deficit ~ the war in Iraq ~ the aging of population ~ the trade deficit ~ the cost of education ~ the cost of healthcare ~ the cost of energy ~ the outsourcing of jobs ~ the sub-prime lending crisis ~ global terrorism ~ global warming How are we supposed to assimilate and make sense of all of the ways the changing dynamics of the world can affect our nest eggs? What should we invest in? What should we avoid? Benjamin Franklin provided us with solid guidance when he wrote: “An investment in knowledge always pays the best interest”. We believe it is useful to differentiate between what we know for sure, what we may have a hint about and what we can’t even begin to guess. Among the things we know for sure is the world is constantly changing. Constant change may create lots of confusion and dislocations, but we know such dislocations are best viewed as opportunities. We also know that the fundamentals of what makes the economy click and our investments grow do not change. Conversely, the fundamental threats to the economy and our investments also remain the same. As financial planners, we continuously encourage our clients to save in order to enjoy a financially secure retirement. Money, in all of its forms (currency, stocks, bonds, etc), represents a claim on the economy. Saving money increases our share of the total economic pie. The value of our retirement savings obviously depends not only on the share of our slice, but on the size of the overall pie as well. The three main fundamental forces affecting the overall size of the economic pie and ultimately the size of our nest egg are:
The relative level of economic freedom - People need incentives to work, produce, and create. For as long as human nature does not change, the profit motive will remain one of the most powerful incentives there is. Economic freedom can be defined as a combination of business, trade, investment and labor freedom operating in a corruption free environment with well-defined property rights and without being subject to overly burdensome taxation, regulation or high inflation. Nations enjoying the most economic freedoms have developed the most and the fastest. Nations that have curbed economic freedoms have stagnated economically. Demographics – The group of 78 million Americans born from 1946 to 1964 also known as the baby boomers, have practically shaped the modern US economy. The boomers strained the school system as children. As young adults, they have built suburbia and developed the automobile and fast food industries. During the decades of their highest earnings and spending years, boomers produced the largest and longest economic expansion in US history. Europe, Japan and even China have similar demographics. Other populous countries such as India have a much younger population. Immigration policies, as well as the allocation of work based on competitive advantage may smooth out the demographic challenges of the world. Productivity – It is clear that 78 million Americans gradually moving from their highest earning and spending years into retirement, may have a slowing effect on the economy. Some of the slack may be picked up by the increasing productivity of the American worker. Continuously increasing productivity requires continuous innovation. Continuous innovation requires an education system able to instill the required skills that empower people to innovate. A competitive school system is therefore one of the main pillars of future economic fortunes. Understanding what makes the economy click and our investments grow allows us to devise consistent and disciplined strategies to increase the probability of long-term success. Economic freedom may make our investments grow faster. Decreasing freedoms tend to have the opposite effect. Our investment strategy therefore tends to emphasize regions with relatively high economic freedoms. We particular focus in areas in which those freedoms are increasing. The boomer generation will continue to shape the US and other economies as it moves into the retirement years. Other nations may have offsetting demographics. Our investment strategy tends to emphasize industries and trends that may benefit from demographic changes. Economies with educated and adaptable labor forces that are continuously able to increase productivity tend to provide superior investment results. We therefore focus our strategy on areas that increases in productivity are both possible and likely. The increased inter-connectivity of the world provides us with an opportunity to seek out, on a worldwide basis, investments that stand to benefit from the three major forces discussed. It also allows us to protect against major fundamental weakness that stands out in any one area. At Fragasso Financial Advisors, we deeply appreciate the confidence you place in us. We are prepared to continue to deliver an investment strategy that is consistent with ever-changing economic realities within the unique framework of your financial goals. This article is for informational purposes
only and not intended as financial advice. Consult your financial
advisor to determine what is appropriate for your situation. If you have any comments, questions or suggestions concerning this
electronic newsletter, please email us at fgi@fragassogroup.com.
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