Following Charles de Vaulx for 25 Years

The Center investment committee meets with and interviews dozens of management teams each year. We have face-to-face sessions, conference calls, and trips to company home offices. We recently had a chance to meet with a portfolio manager that we worked with for most of the last quarter century ... Charles de Vaulx. Warren Buffet once said:

A portfolio is much like a bar of soap, the more you touch it the smaller it gets.”

In order to keep portfolio changes to a minimum we spend a lot of time on the front end finding the right minds with an investment philosophy that matches ours.

Charles has represented part of three different teams over the 25-year period, including IVA Funds, but we have followed him. His approach to investing resides in the contrarian, absolute return, low risk, global, alternative asset class emphasis with experience in global value investing.

“The Perennial Bear”

Charles is usually looking at the world with a glass half empty viewpoint. His team was labeled “The Perennial Bear” during the market run up in the 1990’s as the greatest bubble in stocks was building and just before a 12 year bear market in stocks occurred. This was one of the longest bear markets in history. And just before the worst decade of stock returns in U.S. history (not many people realize that Dec 31st 1999 – Dec 31st 2009 produced a lower return in the S&P 500 than the depression period of the 1930s).

According to Charles, it had everything to do with price. People need to pay more attention to the price that is paid for the potential return that can be achieved going forward. That is where the work is done. The rest is patience and time. 

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any opinions are those of Matt Chope and not necessarily those of RJFS or Raymond James.

View from the Morningstar Conference

Nearly 2,000 people gathered at McCormack Place in Chicago this June.  The views of the Chicago skyline, while beautiful, were not the views I flew to Chicago to see.  Advisors, asset managers and press gather once a year at this conference to listen to some of the greatest minds in investing share their views of the markets and economies around the world.  This is one of my favorite conferences of the year. 

We heard from legendary investors including Michael Hasenstab, PIMCO's Bill Gross a.k.a. The Bond King, and AQR's Cliff Asness a.k.a. The Father of Momentum Investing.

Bill Gross: The New Neutral

Keynote speaker, 70-year-old Bill Gross did not disappoint.   Very aware that his image has been dinged in recent months with the departure of his heir apparent Mohammed El Erian, and subsequent departure of $50 billion of money flowing out of his flagship product, he took the stage wearing sunglasses and spent the first 10 minutes of his speech poking fun at himself while jokingly trying to brainwash the crowd and press Manchurian Candidate style.  All fun aside, he came to the conference to coin a new phrase the “New Neutral".  He is encouraging investors to look at interest rates from a different, more muted perspective.  What does this mean for investors?  Overall lower return expectations going forward for stocks and bonds.  This is an extension of PIMCO’s 2009 “New Normal” which stated that economic growth will be sluggish as it has been.

Employment Outlook: Labor Shortages?

Bob Johnson, Morningstar's very own economist, predicted that next summer at this conference the hot topic of discussion will be labor shortages.  He explained that the unemployment rate remains high despite the extremely large amount of open requisitions for new job postings.  He argues that there is a mismatch in job skills causing the unemployment rate to stagnate despite companies needing to hire so many.  He goes on to explain that the Federal Reserve cannot fix this skill mismatch, only the private sector, corporations and individuals, can acquire the necessary skills needed to match people to the needed job openings.

International Opportunities

Emerging markets and Japan were hot topics of discussion.  "Go anywhere" Investment managers, with the world as their oyster, prefer to access emerging markets through companies domiciled in developed markets that derive most of their revenues by selling to emerging market consumers.  Japan was a hotly debated topic, with about half of the experts loving it and half not wanting to touch it with a 10-foot pole.

In addition to these larger investing and macro-economic themes, I also find value in speaking directly with portfolio managers about their investing processes and trying to discover new strategies that may be beneficial to our clients’ portfolios.  There is never a shortage of ideas after a few days spent at Morningstar listening and learning!

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

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Please note that international investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss. Bob Johnson, Michael Hasenstab, Bill Gross, Cliff Asness are independent of Raymond James. Any opinions are those named herein and not necessarily those of RJFS or Raymond James.

The Investment Pulse: What we've heard in the Second Quarter

We’re always very busy with research, but this quarter has been full of broad and diverse perspectives.  In addition to off-site conference attendance, we have also met locally with many experts.

Vanguard: Active and Passive management discussion

Melissa Joy met with Joseph Brennan and Lee Norton from Vanguard Group in May at our offices. Mr. Brennan runs the Index Equity department. He is responsible for managing index portfolios with the firm. Mr. Norton monitors and reviews management teams on both active and passive strategies at Vanguard. Highlights from the conversation included: 

• With more than $1.5 trillion in index investments, they are one of a very small group of dominant players in the index investing world. We discussed what indexes they decide to make available for investment and how the portfolio review team monitors their internal index teams.
• Vanguard was featured in Michael Lewis’ recent book, Flash Boys. Having read the book, Melissa was curious about their take since they were prominently mentioned. They both acknowledged the real problems uncovered by IEX (a fast growing alternative trading system that avoids dark pools and high frequency trading) which was featured in the book.  They also believed that the desire for an entertaining and appealing financial book may have resulted in some additional hype that might not be warranted.
• We talked about Vanguard’s process for identifying active managers for their funds. Not surprisingly, cost was an important factor in hiring managers. Other factors that were favored included enduring teams, teams from employee-owned firms, and teams with ability to hand off succession from one generation to the next.

JP Morgan: A fixed income discussion

Priscilla Hancock from JP Morgan Asset Management sat down for a conversation about bonds, especially municipal bonds with Melissa Joy and Angela Palacios. We’ve known Priscilla for a while and have heard her speak in 2012. We’ve caught up with her three times since then. She has a great conversational way to talk about bonds and how they typically behave in rising rate environments. With many of the investors we like to speak with, it’s not always the first conversation that brings us the most value – getting to know each other over time provides robust information and is a critical part of our research and monitoring process.  Priscilla shared these perspectives:

• The aging US population is helping to keep bond yields lower. As boomers retire and age, they want more bonds, keeping demand high. Likewise, pensions are working to lock in stock market gains and are snapping up bonds any time rates creep up. It’s an interesting dynamic working against rising rates even though it doesn’t completely compensate for the push to higher rates that will probably occur at some point.
• Municipal bonds were last year’s trash with rising rates and headlines about Puerto Rico and Detroit taking the wind out of the municipal market. We discussed the situation in Detroit and why shifting rules on bankruptcy alarm municipal bond investors. That said attractive tax equivalent yields have increased interest in the municipal bond market and rewarded municipal investors this year.
• Proceed with caution when using passive indexes for bond exposure.  Issuers you want to avoid are the ones issuing the most debt.

Columbia: “Lose less in down markets”

This is not the first time that Scott Davis, Director at Columbia Dividend Income has checked in with us and we find that with time we are able to have more nuanced conversations with the portfolio managers. He noted that although stock prices have been headed north, he’s always reticent. In his words, “I don’t want to party like it is 1999 because it was a hell of a hangover.” He then elaborated saying the time-tested secret of investing is to lose less in down markets. Of concern is increasing merger and acquisition activity. On the more optimistic side of things, Scott says that companies are being run in a manner that’s better than he has seen in his almost 30 year career investing at Columbia. As a dividend-focused investor, Scott reminded us that buying dividends alone without understanding the source of dividends can be a dangerous proposition. He compared it to “picking up nickels in front of a steamroller.”

Water Island Capital: Event-Driven Strategy

Angela sat down with Ted Chen, Portfolio Manager of Water Island Capital’sArbitrage Event Driven Strategy, to discuss equity special situations.  Opportunity can abound here because most money managers don’t understand how to evaluate these situations.  The companies take on a negative stigma creating a potential buying opportunity for someone who specializes in understanding special situations.  We also discussed the volatility in the stock market and how it has become so minimal that the cost of hedging a portfolio is very low right now.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Angela Palacios and not necessarily those of RJFS or Raymond James. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. Income from taxable municipal bonds is subject to federal income taxation; and it may be subject to state and local taxes. Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.

Investment Commentary - 1st Quarter 2014

Dear clients and friends,

We’re four months into 2014 and so far there is not much to show for when it comes to year-to-date investment returns. Markets have treaded water in 2014 so far. Looking further out to the last 12 months, 3 years or 5 years and most investors in stocks or a diversified portfolio of stocks and bonds have been rewarded for their commitment to investing.

I mention this as we have just passed the five year anniversary of market lows in March 2009. I think it’s a healthy exercise to remember today your state of mind five years ago as an investor. Did you feel it was appropriate to put your faith in investment markets at the time? How do you contrast the stress that you may have felt along with most investors to the feelings related to quite positive stock market returns over the last several years?

The past few weeks marked another milestone as you likely filed taxes. High earners saw the bill from new taxes and rates. While tax burdens have become larger for many, the opportunities to manage taxes are coming to the forefront in the wealth management field. Strategies including asset location, cost basis election, and tax-loss harvesting are employed where appropriate.

If you’re a client of The Center, make sure you send a copy of your 2013 tax return. Information from this is used to evaluate your current tax circumstances and helps us to make more informed decisions on your investments and general financial planning strategies both on a before and after-tax basis.

We’ve done some sprucing up on our investment commentary website. Here are some things to look for this quarter:

• A tactical asset allocation dashboard is available with our investment committee’s latest weightings. Today we have bonds slightly underweight due to the low interest rate environment and stocks slightly overweight. We’re concerned about valuations for small company stocks in the US and have underweighted these positions. We are finding international equities more attractive due to valuations and have increased our allocations from underweight to neutral in the last six months.

• We have launched a quarterly investment pulse which gives you some insight to research and conversations with other investment professionals. Angie Palacios’ first edition of this update highlights our thoughts on municipal bonds, stock market valuations, and a manager departure at PIMCO.

• Investment returns as of the end of the first quarter are available along with Raymond James capital markets review summarizing current economic and investment data.

Whether markets are recently up or down, your commitment to a diligent investment process and focus on overall financial goals is to be commended. Please don’t hesitate to let us know if you have any questions regarding general investment strategies as well as your specific portfolio. Thanks as always for your trust and commitment to the financial planning process.

On behalf of everyone at The Center,

Melissa Joy, CFP®
Partner, Director of Investments
CERTIFIED FINANCIAL PLANNER™

Melissa Joy, CFP®is Partner and Director of Investments at Center for Financial Planning, Inc. In 2013, Melissa was honored by Financial Advisor magazine in the Research All Star List for the third consecutive year. In addition to her contributions to Money Centered blogs, she writes investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.

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Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Melissa Joy and not necessarily those of RJFS or Raymond James. Past performance may not be indicative of future results. You should discuss any tax or legal matters with the appropriate professional. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

The Investment Pulse: What we’ve heard in the First Quarter

At The Center each of us spends a substantial amount of time reading, listening to speakers and attending conferences. The goal is to provide our clients with the best possible advice. Here’s a brief summary of the high points the Investment Department has heard this year so far.

Municipal Bonds

In January, Melissa Joy and Angela Palacios spoke with a Municipal bond specialist from T. Rowe Price. We discussed the current environment and what may affect municipal bonds looking ahead.

• Distressing news from Detroit and Puerto Rico last year caused retail investors to flee from municipal bonds in general, creating what many believed to be an excellent investment opportunity.

• This caused unusual cross-over buying which means that investors that typically only invest in taxable bonds were compelled by valuations and yield to purchase tax free bonds for portions of their portfolios. Banks are even utilizing municipal bonds as part of their liquid investment buckets. These are rare events.

• Tax filing time creates buying opportunities for municipal bond investors as taxes are top of mind in the March/April time frame when checks are being written to pay for taxes due.

Stock Market Valuations

There has been much heated debate as to whether the stock market is over or under valued on the fifth anniversary of the bull market. We attempt to review varying arguments in order to make educated decisions on the allocation of our portfolios. One extreme yet interesting view-point comes from Eric Cinnamond, Portfolio Manager for an Aston/River Road fund. Eric has strict valuation guidelines as to what he will and will not pay for small companies and is willing to hold cash in absence of opportunities.

• He has more cash than he ever thought he would have, currently 70% of his allocation. He feels valuations are very bloated and that for valuations to continue to expand, the U.S. economy will have to continue running at peak profits with no recession indefinitely (he did state that these valuations can continue for quite some time before correcting).

• When we get to these points in the market cycle, you start to hear the question, “Is it different this time?” Cinnamond says he is getting this question a lot lately because of his contrarian viewpoint.

• He will continue to hold cash as dry powder to deploy in the event of a market pull back and stands by his process.

Bond Giant Woes

In mid-January, PIMCO announced that Mohamed El-Erian resigned his role as co-Chief Investment Officer and Chief Executive Officer for PIMCO funds. While he had only an indirect impact on our PIMCO holdings we are continuing to watch further developments at PIMCO. Bill Gross & Rob Arnott remain the key managers to the PIMCO strategies we utilized for clients. While it currently appears Bill Gross is a difficult personality to work with he continues to provide excellent returns compared to the bond market in general.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Angela Palacios and not necessarily those of RJFS or Raymond James. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. Income from taxable municipal bonds is subject to federal income taxation; and it may be subject to state and local taxes. Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.

Tactical Asset Allocation Dashboard

The below chart reflects the Center for Financial Planning’s Investment Committee current positioning relative to our longer-term strategic models.

• Maintain a modest equity overweight as Leading indicators suggest better global growth ahead

• Expect equities to outperform bonds and cash and fixed income to underperform

• Continue to favor tactical allocation strategies

• Underweight U.S. equity allocations given relative valuations and we see potentially better opportunities in select international equities.

Asset Class Definitions

Core Bonds: Securities with primary exposure to bonds with historically low default risk and high correlation to Barclay’s U.S. Aggregate Bond Index.  This includes Investment Grade bonds with Intermediate Maturities.  This index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.  These major sectors are subdivided into more specific indexes that are calculated and reported on a regular basis.  Municipal Bonds are also included.

Strategic Income: Securities with primary exposure to bonds with less interest rate risk and types of bonds that are less correlated to the Barclay’s U.S. Aggregate Bond Index.  This covers the universe of fixed-rate, non-investment grade debt (High Yield).  Canadian and global bonds (SEC-registered) of issuers in non-EMG countries are included.

U.S. Large Cap Equity: Securities correlated to the Russell 1000 Index: Based on a combination of their market cap and current index membership, this index consists of approximately 1,000 of the largest securities from the Russell 3000. Representing approximately 92% of the Russell 3000, the index is created to provide a full and unbiased indicator of the large cap segment.

U.S. Small/Mid Cap Equity: Securities correlated to Russell Midcap Index: A subset of the Russell 1000 index, the Russell Midcap index measures the performance of the mid-cap segment of the U.S. equity universe. Based on a combination of their market cap and current index membership, includes approximately 800 of the smallest securities which represents approximately 27% of the total market capitalization of the Russell 1000 companies. The index is created to provide a full and unbiased indicator of the mid-cap segment.  Securities also correlated to the Russell 2000 Index.   The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 Index is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.

International Large Cap:  Securities are correlated to the MSCI EAFE.  This index is a free float-adjusted market capitalization index that measures the performance of developed market equities, excluding the U.S. and Canada. It consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

International Small/Mid Cap:  Securities are correlated to the MSCI EAFE Small-Cap Index.  This index is an unmanaged, market-weighted index of small companies in developed markets, excluding the U.S. and Canada.

Strategic Equity:  Securities with exposure to alternative investments that are less correlated to stocks and bonds with expectations and investments that can span across asset classes.  Also includes investments in managed futures.

*This material is for informational purposes only and should not be used or construed as a recommendation regarding any security outside of a managed account. Any opinions are those of The Center for Financial Planning and not necessarily those of Raymond James. Expressions of opinion are as of 03/31/2014 and are subject to change. Diversification and asset allocation do not assure a profit or protect against loss. The prices of small company stocks may be subject to more volatility than those of large company stocks. International investing involves additional risks such as currency fluctuations, differing financial and accounting standards, and possible political and economic instability. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer's credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of a portfolio. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. Global bonds tend to be denominated in the currency of the country in which they are issued. Most global bonds have higher default and currency risks than U.S. bond issues. Also, in some cases foreign governments don't allow the purchase of government bonds by non-residents. Managed futures involve specific risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. You should consider the special risks with alternative investments including limited liquidity, tax considerations, incentive fee structures, potentially speculative investment strategies, and different regulatory and reporting requirements. You should only invest in hedge funds, managed futures or other similar strategies if you do not require a liquid investment and can bear the risk of substantial losses. There can be no assurance that any investment will meet its performance objectives or that substantial losses will be avoided. Individuals cannot invest directly in any index. Past performance does not guarantee future results.

Investment Performance - 1st Quarter 2014

Source: Morningstar

US Bonds represented by Barclay's US Aggregate Bond Index a market-weighted index of US bonds. US stocks per S&P 500 Index a market-cap weighted index of large company stocks. Barclay’s Capital Global Bond index is a market-cap weighted index of global bonds. US Small Companies per Russell 2000 Index a market-cap weighted index of smaller company stocks. International stocks measured by MSCI EAFE is a stock market index designed to measure the equity market performance of developed markets outside of the US and Canada. Commodities per Morgan Stanley Commodity Index a broadly diversified index designed to track commodity futures contracts on physical commodities. Barclays Capital US Corporate High Yield Index is an unmanaged index that covers the universe of fixed-rate, noninvestment-grade debt. Barclays Capital US Corporate High Yield Index is an unmanaged indexthat covers the universe of fixed-rate, noninvestment-grade debt.

Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.

Investment Commentary - 4th Quarter 2013

What goes up... 2013 has been a year of extremes. The stock market[i] has produced dramatically positive total returns. Meanwhile bonds[ii] are suffering their worst losses in almost 15 years. Whether rate rise result in the advent of a new “rising rate regime” where returns have more and more headwind over time is yet to be determined. Meanwhile, stock returns have been so strong (north than 25% as of November 19th) that market watchers are increasingly debating the sustainability of continued positive returns.

Here are full asset class returns through the 3rd quarter. Of note: we have marked the five-year anniversary of Lehman Brother’s collapse – an infamous period in American market history and also a reminder of how far portfolios and personal balance sheets have come since that time.

Economic Update

The extremity of returns is being accompanied by more unexceptional economic growth. While a desirable recovery growth rate might be 4%, the real gross domestic product was most recently measured at 2.8%[iii]. What growth there is has come without a hiring bonanza that Main Street and the Fed are craving; unemployment continues to get better but at an unimpressive pace. There are, however, quite a few bright spots in the economy.

What are the bright spots?

• Always a critical factor to economic growth, housing prices are coming off a strong year of recovery with a tight supply and rising demand. Affordability of home ownership still seems to be reasonable due to low borrowing rates for those who can qualify and rising rents. While we don’t think the high pace of recovery can be sustained, we do think the housing picture will continue to look more positive.
• Corporate profitability continues to be near historic highs. Companies, like households, did a lot of belt-tightening over the last five years. The question today is when will companies start to spend some of their cash war chest they’ve accumulated on capital expenditures or hiring?
• Surprises have come to the economy through an energy renaissance that is welcomed by US capital markets but reviled by those concerned with environmental impact of shale drilling. An underreported note is that new energy production is accompanied by continued muted demand which may be the result of slower recovery but also changes in behavior through more efficient energy usage. We will continue to keep our eyes on this development for potential positive feedback to housing and US manufacturing.
• Foreign markets have been less cheers and more jeers for much of the past few years. A recurrence of growth in Europe and introduction of new stimulus in Japan has meant that investors saw better returns[iv] in 2013. We still see attractive valuations relative to US stocks and bonds in some instances.

Valuations Today

Rather than taking a victory lap, investors are asking what’s around the corner and whether the strong returns of 2013 might be leading into a new bubble. Stock market valuations (measures of whether stocks are more or less expensive) seem to be in the fair value range – trading around a price-earnings ratio between fifteen and sixteen times[v]. We agree that what goes up may at some point come down – there has been very little pull-back in the US market this year and at some point, bigger drawdowns are probably likely.

On the plus side, much of the 2013 sequestration may be behind us, depending on the results of Washington DC negotiations on the budget and debt ceiling. Also, many have kept cash on the sidelines waiting for drawbacks to occur so they can buy at lower prices. We think this “cash on the sideline” may be part of the reason drawbacks have been so shallow this year and there is more cash where that came from. When you couple that cash with the huge pile of bonds people have purchased in the past five years with very low prospects for future return, there may be more fuel for the stock market fire.

Portfolio Construction Today

We have continued to underweight core bonds in investment portfolios, overweighting multi-sector bond diversifiers and equities in their stead. While reduced in our allocations, we feel there is an enduring role for bonds in many personal investment portfolios. We maintain a neutral weighting to US stocks, have increased our underweight in international stocks to neutral, and maintained an overweight to flexible-tactical managers who can choose between asset classes based upon the changing dynamics of markets. At all times, we recommend that you maintain a rebalancing process and invest with attention to anticipated liquidity needs, tax situations, etc.

We continue to ask you to stick with the discipline of diversified, balanced investing. In some years, you may ask us why we didn’t hunker down in cash because markets declined. At other times, you might be kicking yourself because a pure stock portfolio is up north of 25% and your diversified returns seem less impressive. Our experience leads us to recommend a broadly diversified portfolio to meet your financial goals and objectives. Thank you for your trust in letting us work with you to meet those goals.

On behalf of everyone at The Center,

Melissa Joy, CFP®

Partner, Director of Investments

Melissa Joy, CFP®is Partner and Director of Investments at Center for Financial Planning, Inc. In 2011 and 2012, Melissa was honored by Financial Advisor magazine in the inaugural Research All Star List. In addition to her frequent contributions to Money Centered blogs, she writes frequent investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.

Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Melissa Joy, CFP® and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any investment referred to herein. Investments mentioned may not be suitable for all investors. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

[i] As measured by the S&P 500 index

[ii] As measured by the BarCap Aggregate Bond Index

[iii] US Department of Commerce Bureau of Economic Analysis

[iv] As measured by MSCI EAFE NR USD

[v] Source: JPMorgan Weekly Market Recap 11/18/13

2014 Investment Insights

Click on the image below to download the 2014 Investment Insights presentation given by Center partners Matthew Chope, CFP® and Melissa Joy, CFP®.

Investment Performance - 3rd Quarter 2013

Source: Morningstar

US Bonds represented by Barclay's US Aggregate Bond Index a market-weighted index of US bonds. US stocks per S&P 500 Index a market-cap weighted index of large company stocks. Barclay’s Capital Global Bond index is a market-cap weighted index of global bonds. US Small Companies per Russell 2000 Index a market-cap weighted index of smaller company stocks. International stocks measured by MSCI EAFE is a stock market index designed to measure the equity market performance of developed markets outside of the US and Canada. Commodities per Morgan Stanley Commodity Index a broadly diversified index designed to track commodity futures contracts on physical commodities. Barclays Capital US Corporate High Yield Index is an unmanaged index that covers the universe of fixed-rate, noninvestment-grade debt. Barclays Capital US Corporate High Yield Index is an unmanaged indexthat covers the universe of fixed-rate, noninvestment-grade debt.

Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.