A hot topic in the financial markets concerns the potential creation of asset or market bubbles. The bubble believers suggest central banks around the globe are creating market bubbles by flooding cash into their respective economies via accommodative monetary policies. Just this week European Central Bank President Mario Draghi and Federal Reserve Chairman Ben Bernanke signaled they will continue to provide liquidity to their economies. Japan’s new head of the Bank of Japan said easing can be justified for 2013. Bernanke defended the Fed’s action to Congress saying their actions have helped reduced borrowing cost and promoted economic growth.

As you can see from the chart above, all the major stock market indices have benefitted from these accommodative policies. As the S&P 500 and the Dow Jones Industrial Average approach their all-time highs, should they be sold? It is important to view markets on a relative value basis versus an absolute basis. The key question is: are the markets over or under valued? In our 2013 stock market forecast, we expect the S&P 500 to earn $111.00 for the year and a return to a 10-year historical price earnings ratio of 14.3 times. This conservative valuation would equate to an S&P 500 index level of 1,587 and it closed February at 1,515. From here, the questions are; will the market move to an overvalued state (which it usually does) or do earnings continue to grow keeping the market at a conservative fair value? Regardless, we believe the equity markets are fairly valued and do not deserve bubble status.

The concept of a “bond bubble” is receiving even more attention in the media. The term implies a pending doom to fixed income investors. Instead of visualizing an end of the world event, let’s think about the market gradually releasing some air from a slightly over inflated balloon. The key drivers to the future interest rates and credit spreads are: inflation, economic growth and Federal Reserve action. Looking ahead for the next twelve months these key factors appear to be in the bond market’s favor. Low inflation, low to moderate economic growth in the U.S. and a Federal Reserve long-term holding pattern leads to a fairly stable interest rate environment.

For the first two months of this year the 10-year U.S. Treasury Note yielded from 1.75% to 2.05% and finished February near the middle of this range. We expect a narrow trading range in bonds as 2013 unfolds driven by stable moderate economic growth, benign inflation, and an accommodative Federal Reserve. We do not believe the bond market deserves bubble status, but it is prudent to lower your bond return expectations to low single digits, shorten duration and improve the credit quality of your fixed income portfolio.

Remember successful investing occurs over long periods of time. The past four years provided long-term investors the opportunity to rebound from a difficult period. We see the market glass as half full and expect markets to grow as global economies continue to improve. Our recommendation is to stay invested at an appropriate risk level for your situation and reap the rewards of being a long-term investor.

As you can see from the chart above, the major stock market indices enjoyed a great month and an impressive trailing twelve month total return. In the face of the fiscal cliff hype and all the negative headlines, how did we get here? At the end of the day stock prices are driven by fundamentals and valuations. The higher equity prices reflect strong corporate earnings, a more confident consumer, a slowly improving housing market, a strong energy sector in the U.S., and low interest rates. Our 2013 stock market outlook, based on current valuations, was for high single digit returns. Even though we are halfway to that level after only one month, we are still constructive on equities. Our forecast was based on S&P 500 earnings for 2013 of $111.00 and a return to historical price earnings ratios of 14.3 times. The market still has another five percent of upside until it reaches what we believe to be a conservative fair valuation. From there, the questions are; will the market move to an overvalued state (which it usually does) or do earning continue to grow to keep the market at a conservative fair value? Either way, there are still growth opportunities in equities.

We have been warning investors to lower their expectations from the bond market for a year now. The warning light is now flashing as the Barclays Aggregate Index fell 0.70% in January. If you owned the fixed income asset class over the past 3,5,10 or 15 year periods your annual returns should have been in the 5%-6% range. Mathematically, these results cannot continue forever. The current reality is the 10-year U.S. Treasury Note yields 2.00% and credit spreads are at historically tight levels. Price appreciation in bonds can come from either interest rates moving lower or credit spreads tightening. At these levels one cannot bank on price appreciation in bonds. The other component of return in bonds is yield. We know yields range from zero to 4%. With this backdrop, expect the bond portion of your portfolio to return 1-3% this year. If you “earn the coupon” it will be a good year.

There are still eleven months left in this year and many more months left in your long-term financial plan so it is not too late to properly position your portfolio. Talk to your advisor and make sure your portfolio is in line with your investment objectives.

1. I WILL ESTABLISH A REALISTIC MONTHLY BUDGET FOR SAVINGS AND EXPENDITURES. It is important to understand where your money comes and goes. Identify all of your expected sources of income for the New Year and also honestly project your expenses. This includes the regular monthly bills paid, plus those one-time items both planned and unplanned. Remember to pay yourself first as saving is the key component to wealth accumulation.

2. I WILL ESTABLISH A LONG-TERM FINANCIAL PLAN. If you do not have one, today is the best day to start building one. Whether you are 40, 60 or 80 years old you need to look beyond next month and decide where you want to be financially 5, 10 or 20 years from now.

3. I WILL ADOPT A LONG-TERM INVESTMENT APPROACH. If 2012 taught us anything it has to be that market timing is a futile exercise. We all like to think we are smart enough to be in the market when it is going up and out of the market when it is going down. Reality is the vast majority does exactly the opposite. Stay with your plan and stay invested. The markets reward patience.

4. I WILL INVEST AT A RISK LEVEL APPROPRIATE FOR MY SITUATION. Too many people do not have enough risk in their investment portfolios. It is important to understand that long-term wealth accumulation comes from ownership, i.e. investing in the stock market. Money market funds and CDs can provide needed liquidity and bonds can provide some stability to a portfolio, but stocks provide growth. This asset allocation decision is the most important investment decision. Forget 2008 and move forward.

5. I WILL REMAIN CALM AND CONFIDENT. Fear and greed are the emotions that can derail the best of financial plans. The 24/7 barrage of information from television, internet, e-mail, tweets, magazines and the old fashion newspaper can prevent you from investing properly if you let it get inside your head. Turn down the noise and be confident in your long-term financial plan.

6. I WILL FOCUS ON THE THINGS UNDER MY CONTROL. What happens in the stock, bond or commodity markets in 2013 is totally out of your control. The average investor will spend 95% of their time worrying about what the markets are doing or will do. Instead of getting caught in this trap, spend your time monitoring your financial plan, your spending, your savings rate and your asset allocation decision. As time marches on, these things under your control will make all the difference.

As we begin a New Year, think about taking a new approach to your financial future. Become a long-term planner and a long-term investor focused on the things you can control. You will be wealthier and healthier as your portfolio increases and your blood pressure decreases.