The quarterly commentary provides an overview of market performance in the 1st quarter of 2013 and considerations for investment strategies going forward. Major stock indexes saw gains of 9-11% year-to-date while bond returns were slightly negative. The commentary discusses uncertainties around whether the strong stock market is a positive sign or harbinger of a downturn. It recommends that investors evaluate their strategies in light of goals and risk tolerance, ensure sufficient short-term reserves for retirees, and maintain diversification across asset classes and globally to dampen interest rate risk for bond holdings.

1. McClain Lovejoy Financial Planning, LLC
4220 Cahaba Heights Court
Suite 100, Office 106
Vestavia, AL 35243
(205) 623-4697
Quarterly Commentary
1st Quarter, 2013
We hope you enjoy this investment commentary. Shortly, we'll be sending a more extensive look
at the bond market along with considerations about the current economy and its potential
effect on portfolios
.
The numbers
As of this writing, the Dow Jones Industrial Average (DJIA) is up 11.03% or 1500 points. The S&P
500 is up 9.55% year-to-date. The international MSCI EAFE index eked out a 3.54% return.
Ticker: BND, a proxy for the aggregate bond market, has posted slightly negative returns year-
to-date as capital is starting to shift from low yielding fixed income investments to a robust
looking stock market. Is this a positive development for equity investors or a harbinger of the
next bear market?
What it means
In the first episode of The West Wing, President Bartlett meets with his economic advisory
council. He asks for their opinions for the economy for the next year. One economist says next
year will be wonderful, with the DJIA up 1,000 points; another comments that next year will be
terrible, with the DJIA down 1,000 points. It's a funny segment which highlights exactly what
you hear on the news. Some say the end is near, others say the good times are just starting,
while a handful of us remind you to focus on what you can control . . . asset allocation and
expenses. We don't know if the U.S. economy will continue to improve with the Dow gaining
another 1,000 points this year or shedding 1,000 or more between now and December 31st.
But, based on our understanding of the markets we feel confident that:

2. McClain Lovejoy Financial Planning, LLC
4220 Cahaba Heights Court
Suite 100, Office 106
Vestavia, AL 35243
(205) 623-4697
Markets will suffer a pullback and/or another recession will happen again at some point
A bull market will happen again after that
Cash and fixed income are less risky for short-term goals and needs
Stocks are less risky for meeting long-term needs
Never in human history have so many had it so well
Taxes and inflation are significant risks to retirees
Still, the markets have had a good run lately so it may be a good time to evaluate your
investment strategy in the context of your financial plan and objectives. If you've been
aggressive in the past--particularly through the last bear market--perhaps a more balanced
approach is in order. If you are in retirement do you have sufficient cash and short-term
investments to meet withdrawals for the next 2 or more years?
Is the future bright for bonds?
Probably not. You can see on the right side of the chart below that the last 30 years have been
nothing short of spectacular for bonds (however, stocks did better) while the 30 year
period before that produced much lower bond returns (with stocks doing significantly
better than bonds but having roughly the same absolute return in each 30 year period).
(note: remember that bond yields and bond prices move inversely)

3. McClain Lovejoy Financial Planning, LLC
4220 Cahaba Heights Court
Suite 100, Office 106
Vestavia, AL 35243
(205) 623-4697
Bond yields should eventually rise to more normal levels. As this happens, intermediate and
longer term bonds may post moderate losses like those in 1968 and again in 2000. While
bonds may decline in price in the short run, the higher ensuing yields will be positive for
portfolios in the long run . Shorter duration and higher quality issues should bounce back much
more quickly. If you have bonds in your portfolio they are there as a diversifier to the equity
portion of your portfolio. Global fixed income diversification (developed international and
emerging market bonds) is also appropriate and may help to dampen interest rate risk.
We welcome any questions you may have and ask that you keep us up to date on any changes
in your financial situation and investment objectives.
Sincerely,
McClain Lovejoy