In a recent interview for Fortune magazine, John Bogle, the revered founder of the mutual fund company Vanguard, said the best investment advice he ever received was during his college years when he had a summer job with an investment firm. A co-worker summarized everything about the investment business when he told Bogle that “Nobody knows nuthin’.”

After watching the best minds on Wall Street lose unknown billions in the subprime mortgage mess and the economic wizards at the Federal Reserve grope towards a solution to the liquidity and confidence crisis facing the global banking system, you might agree with Bogle.
           
Add to this confusion declining real estate values, rising oil prices, a tired and overextended U.S. consumer, a falling dollar, and hints of inflation returning, and you have the recipe for a slowing economy. While most economists don’t expect a recession in 2008 (see the following story), it certainly creates a challenging environment for investors. Nevertheless, the beginning of a new year is the time to reevaluate your investment portfolio and strategies and set the sail for whatever wind that’s coming, so let’s get started.

Think Global
 Whether investing in stocks or bonds, think globally. Emerging foreign markets are a long-term growth story and while they will experience their ups and downs, having a portion of your portfolio in a diversified emerging market mutual fund is a sensible way to participate in that growth. Don’t limit yourself just to stock funds; you can invest in emerging market bonds also.
           
However, you don’t even have to venture from home to think globally. With the declining U.S. dollar, exports from the U.S. to other countries are increasing. Look for companies that receive a substantial portion of their income from abroad. For example, General Electric provides industrial and infrastructure products needed in emerging markets and over half of its sales come from overseas.

Think Big
I like small companies. They are more focused, easier to understand and historically provide a greater return than big companies, although with more risk. However, small companies have already experienced several years of outstanding performance compared with their big brothers. When an economic cycle matures and begins slowing down, as this cycle appears to be, it is time to shift towards larger companies. Larger companies tend to have more of a global presence and may be able to weather economic storms easier than smaller companies. This doesn’t mean to abandon smaller companies, just to reallocate your investments and lean somewhat more towards the larger ones.

Think Opportunity
The turmoil and fear in the markets in the past several months has also created opportunities, as it always does. There is a red-tag sale taking place on financial stocks that had real or imagined exposure to subprime mortgages. In many cases the reality is not as bad as the fear, resulting in a price drop far exceeding what might be reasonable. Buying a collection of these, or a financial sector fund, could prove a smart move – but only if you have the patience for it.

Think Yield
Yields on quality bonds are pretty pathetic at the moment. A 10-year treasury bond pays less interest than a 6-month CD. Therefore, if you want a conservative and secure yield, I would stick with short-term investments, such as money market funds or CDs. On the other hand, if you are willing to venture into equities, there are some interesting possibilities. In addition to utility stocks, the decline in financial stocks and the ongoing malaise affecting pharmaceutical stocks provides ample choices for yield. For example, BB&T trades at a price/earnings ratio of 11.3 and has a 5.6% dividend yield while Glaxo has a price/earnings ratio of 13.3 and a yield of 4.0%.
           
As you enter a new year, be careful about making too many sweeping changes. Hopefully your existing portfolio reflects well-thought-out decisions and is designed around your long-term goals. Therefore, while you certainly need to consider the current market environment and perhaps tweak your investments somewhat, restrict yourself to a few prudent changes. Don’t assume that the person with any investment recommendation knows anything for certain, because they don’t. After all, “Nobody knows nuthin’.”

The "R" Word
By Gerald Townsend

The headlines in many financial publications today invoke the dreaded “R” word, which is “recession.” We are either directly warned about it, such as: “Economy is Falling Off the Cliff and Headed Towards Recession;” or perhaps it is posed as a question, such as: “Will We Slide Into a Recession?” Either way, it is a bit unnerving, isn’t it? Granted, a recession doesn’t sound like a good thing, but exactly what is a recession?
           
Well, from an individual perspective, a recession is when your neighbor loses his job. A depression is when you lose your job.
           
From the government’s perspective, one definition of a recession is two consecutive quarters of declining real GDP (Gross Domestic Product). The most recent estimate of GDP for the third quarter of 2007 was 4.9% and the GDP for the second quarter of 2007 was 3.8% (these are expressed as annual rates). The last time we experienced a quarter of declining GDP was the third quarter of 2001.
           
A better definition of a recession comes from the National Bureau of Economic Analysis (NBER), which views a recession as a pronounced, long-lived, broad-based decline in aggregate economic activity. The four most important measures the NBER considers are nonfarm employment, industrial production, manufacturing and trade sales, and real personal income minus transfer payments. None of these factors is currently pointing towards recession.
           
In the last 150 years, the U.S. has experienced 32 business cycles, so we’ve averaged a recession about every 5 years, with the economy expanding for 3+ years and then contracting for about 11/2 years. However, since World War II, the expansion phase of the business cycle has averaged nearly 5 years and the contraction phase only 10 months.
           
More recently, the economy expanded for nearly 8 years between 11/1982 – 7/1990 and was in recession for only 8 months before expanding again for 10 years between 3/1991 – 3/2001. In 3/2001 we entered recession, but again for only 8 months before commencing our current period of expansion in 11/2001.
           
Why are recent expansions longer and recessions shorter than the historical averages? No doubt there are many contributing factors, including: better economic tools and forecasts; more intervention by the government; less reliance on a manufacturing economy; and global economic growth.
           
One of the challenges with recessions is that by the time everyone officially agrees that a recession has started, it is probably close to ending. A month after a quarter ends, the U.S. Commerce Department’s Bureau of Economic Analysis issues its first estimate of the prior quarter’s GDP. A month following this it issues a revised estimate, followed by its final estimate another month later. Therefore, by the time you officially know that the economy has experienced two consecutive quarter’s of declining GDP, you are nine months into the recession – which means you are close to being out of it.
           
Most economists today do not forecast a recession for the U.S. in 2008. Rather, they forecast a period of continued, but slower growth. For the minority of economists who do see a recession coming, don’t forget the old joke that “economists have forecast nine of the last five recessions”.
           
Even if a recession should materialize, take some comfort from the knowledge that recessions are a normal part of any economy and that just as you survive catching a winter-time cold, you also survive a sick economy.

Gerald A. Townsend, CPA/PFS, CFP®, CFA® is president of Townsend Asset Managment Corp., a registered investment advisory firm. Email: Gerald@AssetMgr.com.