Foreign bonds have been in the news a lot recently. Lots of European countries borrowed too much money, and now they are trying to find a way to get out from under that debt without defaulting on it.

The only question at this point is what sort of haircut the owners of European sovereign debt are going to enjoy. One way or another, they are going to take a haircut. And that threatens the solvency of big European [and American] money-center banks, who own a lot of that sort of debt. This in turn threatens the liquidity of the overall financial system. And we know from 2008 how nasty that sort of thing can be.

Is it prudent to set a withdrawal rate of 4% from a portfolio that is intended to support retirement income? For many years, 4% has been the “rule of thumb” in the financial planning community. But the 4% rule is controversial, and there are strong opinions on both sides. After all, there is always a risk that any schedule of regular portfolio withdrawals might interact viciously with adverse markets, causing the portfolio to crash and burn before the retirement is successfully completed.

Our latest Investment Quarterly reviews the discourse on the subject among academic economists and financial planning practitioners. We examine two sets of studies of the question, with two different ways of approaching it: empirical analysis, or modeling. Each has its strengths and weaknesses; their findings disagree.

The main article of the first Investment Quarterly of 2011 compares the 2000 and 2010 editions of an SCLC diagnostic instrument, the Risk/Return Continuum. Since our firm’s founding in 1995, we have been using the Continuum to help clients understand investment risk, so that they can decide how much of it they want to tolerate. Updated annually, the Continuum looks back at investment history over the last 50+ years, and shows how it would have treated six different portfolios of differing degrees of risk.

In this issue of IQ, we compare the Continuum of 2000 to its counterpart of 2010, to see how a decade of turmoil, war, political controversy, and market crashes might have affected risks and returns of different portfolios and their elements.

In its February and March issues, the Banking Law Journal, one of the pre-eminent trade journals for lawyers and bankers, has published a two-part article written by Patrick Collins. The title: Trustee Asset Management Elections: Portfolio Performance Evaluation and Preferencing Criteria. It is available here

Investment Quarterly this period examines the fund choices Morningstar, Inc. has made for its own 401(k) Plan fund menu. Morningstar is one of the largest purveyors of financial information on the planet, and their core business from the very beginning was rating mutual funds. Arguably, Morningstar as an organization knows more about American mutual funds than any other entity on Earth. Presumably, the history of their fund choices can tell us something about what Morningstar thinks is important in a fund that is going to be playing a role in a diversified portfolio intended to accumulate resources to finance retirement income.

Investment Quarterly focuses this issue on the famous Capital Asset Pricing Model (CAPM) that formed the foundation of Modern Portfolio Theory, and that still informs much investment management today. We explain the basic outlines of the theory, and then examine how the CAPM fared in the real world. We look at how a broadly diversified hypothetical portfolio allocated 70% to equities and 30% to fixed income performed over three different periods, each with wildly different patterns of returns: 1995 through 2009, 2000 through 2009, and 2005 through 2009.

These were some pretty grim periods. The nineties were generally a positive time to own stock, but the ten years that will end this December have already come to be called the “Lost Decade.” It has been an extremely rough ten years:

SCLC is pleased to announce that Mr. Kenneth A. Clift has joined the firm as an Investment Advisor, effective Tuesday, August 3. Ken will work directly with clients, primarily in the private client side of the business.

Ken comes to Schultz Collins with 20 years of financial services experience. For the last 17 years, he worked for Charles Schwab & Company in several capacities. His most notable experience was performing research, analysis, and commentary on the fixed income markets and the real estate investment trust market. Ken also represented Schwab’s Fixed Income Department on the firm’s Investment Strategy Council. The objective of the Council was to analyze global equity and fixed income markets and provide strategic and tactical strategies to Schwab Financial Consultants and clients.

Schultz Collins would like to congratulate Huy Lam and Bashir Nakhuda on passing the second of the three exams needed to earn the most respected professional designation in financial services, the Chartered Financial Analyst (CFA). The second exam is widely considered the most difficult of the three, so both Huy and Bashir may now breathe a little easier.

It is a pleasure to work with both these gentlemen. Their diligence, intelligence, and the quality of their work are all deeply appreciated. If you visit our office, please take the time to congratulate them on this great achievement.

The July 2010 issue of Financial Advisor magazine, an industry trade journal, surveyed Registered Investment Advisors nationwide and ranked them by total assets in client accounts. The survey has SCLC at #53 nationally and #9 in California.

Our Investment Quarterly for the second quarter of 2010 digs into indexes. A common strategy for investing in a fully diversified portfolio is to choose a set of index funds that each provide broad coverage of a whole category of stocks or bonds. The problem is that for many categories of security there exist quite a few indexes to choose from; and any given index may be tracked by numerous funds. The indexes that track a given asset class may be quite different from each other, and the funds that track a given index may likewise differ considerably. What is an investor to do?

In this issue, we try to answer the question by narrowing our purview to a single asset class, US Small Company stocks.