Out of the Box Investing

Contributed by: Angela Palacios, CFP®

With volatility creeping back into stock and bond markets after a long reprieve since 2008, investors are wondering where they can find returns again that aren’t tied to traditional markets, or have very low correlations.  While there are even more investment options out there than there are stuffed animals on my daughter’s bed, not all are worth your time. Here at the Center we sift through thousands of different investment options and distill them down into options that are potentially worth your time.

Alternative investments, investments other than traditional, long-only assets like stocks, bonds or cash, take many different shapes and sizes for us.  Over the past 5 or 6 years most alternatives have been a difficult place to make money as any diversification away from the largest companies in the U.S. have produced challenging comparative returns. However, over longer periods of time diversification can pay off. 

Global Macro Tactical Managers

These types of managers can “go anywhere” in the world and buy whatever and wherever they find value.  They can go up and down the capital spectrum of a company buying the debt they issue or use their common stock. These managers can also hold other assets such as cash or gold when they see trouble on the horizon. 

Long/Short Strategies

These types of strategies are similar to “hedge funds” that garner a lot of headlines. They seek to purchase some company stock and own them for their potential upside return but then they can also sell another company’s stock short; selling stock you don’t own, to potentially make money if that stock price goes down. These types of strategies can do well (or poorly) in both up and down markets. Some managers are more aggressive and try to make bets on overall market directions while others try to take a market neutral strategy and provide more bond-like returns and risk.

Real Assets

Physical or tangible assets like commodities, metals, real estate, wine, art, coins, or baseball cards can fall in this category.  Be careful as to not confuse a hobby with investments.  The two can merge but specific knowledge and a lack of emotional attachment must be had by the investor.

Private Equity

Investing in promising private companies can be a source of excellent investor returns. An investor commits a certain amount of money (usually at least $250,000) to a manager for investing in private companies. The money is generally tied up, or illiquid, for 5-8 years. In the end the invested capital and returns are usually paid out after those private companies invested in are taken public or sold off to other private equity investors.  Private equity is generally only available to accredited investors, which the SEC defines as earned income that exceeds $200,000 per year ($300,000 for married couples) for the past 2 years; accredited investors are also expected to earn that same amount of money for the current year or have at least $1,000,000 net worth, exclusive of primary residence. Often private equity firms place even more stringent guidelines on their accredited investors requiring a net worth of $5,000,000 in order to buy in to a strategy.

There are many concerns in the alternative space that must be addressed.  So what makes an alternative investment viable to us and our clients?

Affordability

First and foremost an investment option must be affordable.  Costs can erode much of an investment return especially once inflation is factored in so affordability is of utmost importance. Leverage, using borrowed money to advance returns, can lead to higher costs. For example, coin collecting; a hobby many often try to pass off as investing, is actually very difficult to make money for the masses.  There is a large markup when purchasing coins from a dealer that it is rare to be able to turn around and sell these coins for a profit within reasonable amount of time. 

Liquidity

If you can’t get to your money when you need it, what’s the point?  Think about owning hard assets like real estate.  There can be many complications when trying to sell real estate, ranging from a lack of qualified buyers in an area or a property not meeting inspection requirements etc.  If you are trying to close up a deceased loved one’s estate and most of the assets are tied up in illiquid real estate but the government wants their estate tax payment, this can be a real concern!

Understandable

Often alternative strategies we run into are so difficult to understand how the manager is actually making money or applying an investment concept that it is un-investible to us.  Lack of transparency can also lead to a lack of understanding. Often these managers won’t want to give away their intellectual capital by disclosing what they own. If we cannot understand an investment, when it will do well and when it could underperform, we may risk losing conviction and selling at the wrong time.

Alternative investments should not take the place of all of your traditional investments but rather should be used to diversify your portfolio if appropriate. It’s important to keep in mind that many of these alternative investment strategies are quite young and have bloomed during a market environment that has not been kind to them. To determine which strategies are right for you please speak to your Financial Planner!

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 as investment updates at The Center.

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http://www.sec.gov/investor/alerts/ib_accreditedinvestors.pdf This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investments mentioned may not be suitable for all investors. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Past performance is not a guarantee of future results. Diversification and asset allocation do not ensure a profit or protect against a loss.

How to use your Year End Bonus

Contributed by: Matt Trujillo, CFP®

It’s that time of year. The weather is getting cooler, family is in for the holidays, and yearend bonuses are about to be paid! For some the bonus might already be spent before it is paid, but for those of you that are still looking for something to do with that money consider the following:

Here are 5 things to consider in allocating your year-end bonus:

1. Review your financial plan. Are there any changes since you last updated your financial goals? 

2. Have you accumulated any additional revolving debt throughout the year? If so consider paying off some or all of it with your bonus.

3. Are your emergency cash reserves at the appropriate level to provide for your comfort?  If not consider beefing them back up.

4. Are your insurance coverages where they need to be to cover anything unexpected?  If not, consider re-evaluating these plans.

5. Review your tax situation for the year.  Make an additional deposit to the IRS if you have income that has not yet been taxed so you don’t have to make that payment and potential penalties next April.   

If you can go through the list and don’t need to put your bonus to any of those purposes, here are some other ideas:

• If you’re lucky enough to save your bonus consider maximizing your retirement plan at work ($18,000 for 2015), including the catch-up provision if you’re over 50 ($6,000 for 2015). 

• Also, consider maximizing a ROTH IRA ($5,500 for 2015) if eligible or investing in a stock purchase program at work if one is offered. 

• Another idea is a creating/or adding to an existing 529 plan, which is a good vehicle for savings for educational goals. 

• If all of these are maximized, then consider saving in your after tax (non-retirement accounts) with diversified investments.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. 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 opinions are those of Matt Trujillo and not necessarily those of Raymond James.

The Ladder to Adulthood—What Millennials Need to Know

Contributed by: Clare Lilek

I graduated from college in 2014, and this year started the first salaried job of my professional career. These are big steps in what I call my “ladder to adulthood.” What is this ladder, you may ask? Well twenty-somethings (and thirty-somethings too) each have their own ladder to adulthood: the stepping blocks we accomplish little by little to become full adults. These steps can include becoming participating civil citizens, being financially independent, and having a sense of life and economic stability. Yeah, it’s a pretty important ladder.

When you turn eighteen, your ladder begins as you choose your next steps after graduating high school. Depending on how knowledgeable you are about the adult decisions that lie ahead and how ready you are to make said decisions, you could have a step ladder, or something reminiscent of a skyscraper.

Personally, I didn’t realize exactly how long my own ladder to adulthood was until I arrived at The Center. This is my first time working in the financial industry and my previous exposure to these topics were hushed whispers of the mysterious 401ks and the disappearance of pensions—what did that even mean?! After working here for a couple of months, not only did I figure out what a 401k is, but in general, my knowledge about financial topics has grown exponentially. But that got me thinking, if I didn’t work at The Center, when would I have learned all this? Would it have been too late? Well, not to worry, I have compiled a very basic list of what millennials entering the workforce fulltime should be (but aren’t necessarily) doing:

1. Think about your future. 401ks and IRAs are fancy terms for savings – savings that are dedicated to your retirement. The earlier you open one of these accounts, the more money you can accumulate and the more stable you’ll be when your retirement comes.

2. Understand the importance of the market. Investments are the way of the world and just saving money in a bank account is not going to accrue as much interest as investing does. 401ks and IRAs take your savings and invests it in the market which, in theory, will allow you to have more money than just by keeping your money in the bank.

3. Know the lingo. Stocks vs bonds, and the pros and cons of each. Understand diversified portfolios and what that means for stability.

4. Save, save, and save some more! Have a budget that includes savings, and stick to it. Don’t live beyond your means, an important life lesson! And when budgeting, save a portion of each monthly salary.

5. Have a plan. If investments and 401ks are mysteries to you, there is no shame in having a Certified Financial Planner™ help create a plan with you—actually, it’s a very “adult” thing to do. They can set up accounts, plan for your future, and make sure you’re in the know.

Hey Millennial, if you were to win the lottery today, would your first thought be, “I should probably invest that money and save for my future?” What about your second or third thought? I’m going to take a guess that, no, that’s probably not in your initial thought process. But shouldn’t it be? That’s my point. We’re not talking about these topics and no one is talking to us about them, yet they are crucial in securing our future.

We learn as preschoolers that the early bird gets the worm, and in this case, the early bird gets a more comfortable retirement and financial life. Just by learning about financial planning, investments and the like, you are stepping up that ladder to adulthood and ensuring that when you step off that ladder, you’re stepping onto a stable platform.

Clare Lilek is a Challenge Detroit Fellow / Client Service Associate at Center for Financial Planning, Inc.

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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 Clare Lilek and not necessarily those of Raymond James. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Year-End Financial Checklist: 7 Tips to End on High Note

Contributed by: Jaclyn Jackson

And just like that, we are already in the fourth quarter; the year has gone by quickly! Before it completely slips away...

Try these top tips to strengthen your finances and get things in order for the year ahead:  

1. Harvest your losses – Tax-loss harvesting generates losses that can be used to reduce current taxes while maintaining your asset allocation. Take advantage of this method by selling the investments that are trading at a significant loss and replacing them with a similar investment. 

2. Max out contributions – While you can wait until you file your tax return, it may be easier to take some of your end-of-year bonus to max out your annual retirement contribution.  Traditional and Roth IRAs allow you to contribute $5,500 each year (with an additional $1,000 if you’re over age 50).  You can contribute up to $18,000 for 401(k)s, 403(b)s, and 457 plans.

3. Take RMDs – Don’t forget to take the required minimum distribution (RMD) from your IRA.  The penalty for not taking your RMD on time is a 50% tax on what should have been distributed.  RMDs should be taken annually starting by April 1st of the year following the calendar year you reach 70 ½ years of age.

4. Rebalance your portfolio – It is important to rebalance your portfolio periodically to make sure you are not overweight in an asset class that has outperformed over the course of the year.  This helps maintain the investment allocation best suited for you.

5. Use up FSA money – If you haven’t depleted the money in your flexible spending account (FSA) for healthcare expenses, now is the time to squeeze in those annual check-ups.  Some plan sponsors allow employees to roll over up to $500 of unused amounts, but that is not always the case (check with your employer to see if that option is available to you). 

6. Donate to a charity – Instead of cash, consider donating highly appreciated securities to avoid paying capital gains tax.  Typically, there is no tax to you once the security is transferred and there is no tax to the charity once they sell the security.  If you’re not sure where you want to donate, a Donor Advised Fund is a great option.  By gifting to a Donor Advised Fund, you could get a tax deduction this year and distribute the funds to a charity later. 

7. Review your credit score – With all of the money transactions done during the holiday season, it makes sense to review your credit score at the end of the year.  You can go to annualcreditreport.com to request a free credit report from the three nationwide credit reporting agencies: Equifax, Experian, and TransUnion.  Requesting one of the reports every four months will help you keep a pulse on your credit status throughout the year.

Bonus: 

If there have been changes to your family (new baby, marriage, divorce, or death), consider these bonus tips:

• Adjust your tax withholdings

• Review insurance coverage

• Update financial goals, emergency funds, and budget

• Review beneficiaries on estate planning documents, retirement accounts, and insurance policies

• Start a 529 plan

Jaclyn Jackson is a Research Associate at Center for Financial Planning, Inc.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. 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 opinions are those of Jaclyn Jackson and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. RMD's are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

October Investment Commentary

Contributed by: Angela Palacios, CFP®

As we find ourselves coming into the last quarter of 2015, already we have much to reflect upon from headlines throughout the year.  The GOP candidate race is heating up and the election battle will be in full swing over the next 12 months.  Negative global news is spilling over into market performance, leaving investors wondering what to do.

All Fed all the time

In September, the Federal Reserve Board (Fed) held off raising interest rates, contrary to what many experts anticipated.  This was likely due to reservations about confirming investor fears regarding the strength of the overall global economy in the wake of China’s slowdown.  Markets sold off after this with the spillover of these concerns.  Later in September Janet Yellen spoke and confirmed The Fed does intend to raise rates before the end of the year but the recent softening in nonfarm payrolls puts that in doubt.  They will be watching the labor market, inflation and financial stability factors very closely.

Risk from abroad

China’s decelerating growth continues to throw a wrench in the strength of the overall global economy.  As China’s economy worsens, the Chinese stock market is taking one on the chin this year.  Commodities continue their sell off along with emerging markets that depend upon commodities for their livelihoods as a result of China’s slowdown.  Softening of global growth could potentially negatively impact returns overseas even as accommodative monetary policy and low oil prices have a positive impact.

Back here at home 

Above average equity valuations remain a strong headwind for equity market performance domestically.  Shrinking earnings over the past couple of quarters have led price-to-earnings ratios of companies to expand even while prices fall.  The strong dollar is having an impact on this, making our exports more expensive to consumers outside of the United States.  This is causing a hit to business investment as the strong dollar is directly affecting corporate profits of large multinationals.

A bright spot in the economy

Heightened volatility will likely continue in markets over the coming months.  However, strength in our GDP growth has drastically recovered after a slow first quarter of the year due to weather disruptions.  Consumer spending is finally picking up, spurred by low gas prices and the strength of the housing and new construction market through the summer.  Job growth remains strong, led by small and medium-sized firms, and initial unemployment claims are near lows.

Here is some additional information we want to share with you this quarter:

• Checkout my quarterly Investment Pulse, summarizing some of the research done over the past quarter by our Investment Department.

• We are launching a new quarterly series of investor education!

  • First you will hear from Nick Boguth, Client Service Associate, giving some Investor Basics on rising rates and bond prices.

  • Next you will find our Investor Ph.D. series from me diving into the nuances of roll yield you may have heard about lately. 

• Lastly checkout our Year-end checklist from Jaclyn Jackson, Research Associate, giving you tips on how to make the most of the few months left in this year!

While all of this noise can create market volatility, it is more important than ever to keep your long-term goals in mind.  We do not generate future forecasts, rather we trust in the journey of financial planning and a disciplined investment strategy to get us through the tougher times and stay the course.  We appreciate the continued trust you place in us and look forward to serving your needs in the future.

Please don’t hesitate to reach out to us for any questions or conversations!

On behalf of everyone here at The Center,

Angela Palacios, CFP®
Portfolio Manager

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 as investment updates at The Center.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. 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 opinions are those of Angela Palacios and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. 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. Investing involves risk and investors may incur a profit or a loss. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Investment Basics: Bonds 101

Contributed by: Nicholas Boguth

Bonds are a hot topic in the investment community today while we patiently await a rise in interest rates from the Fed. We know that interest rates affect the bond market, but how? In order to truly gain a better understanding of how the bond market works, we’re going back to the basics to address some important fundamental questions that all investors should understand.

First off, what is a bond?

A bond is a debt instrument that a company or government uses to borrow money. A corporation may need cash in order to build new factories; a government may need cash to build a bridge, etc. In order to borrow money, they sell you (the investor) a bond that basically says, “We owe you.” By selling these bonds, they are able raise a large amount of cash, and pay it back over time.

It is important to note that the major difference between bonds and stocks is that bonds are debt, and stocks are equity. If you own a bond, you own a portion of the issuer’s debt. If you own a stock, you own a portion of the company. The upside of owning a bond is that you receive back principal plus interest; you have higher priority for getting paid if the issuer goes bankrupt, and you don’t lose money because the stock price declines. The downside is that you don’t share the issuer’s future profits or participate in rising stock prices. These factors are why bonds are typically considered “less volatile” investments.

What is a coupon?

Bonds pay interest to you, the investor. A coupon is simply the amount of money that you receive at each interest payment (typically every six months). Par value, or the issuer’s price of a bond, is typically $1000. If a bond has a 5% coupon, then you receive 5% of $1000 every year; or $25 every 6 months.

What is yield?

A bond’s yield is a measure of its return. Current yield is calculated by taking the coupon payment and dividing by the current price of the bond. When a bond is trading at par, rather than at a discount or premium, the yield is equal to the coupon payment: $50 coupon payment/$1000 bond price = 5% yield. If the price of that same bond rose to $2000, then the current yield would be $50/$2000 = 2.5%. The yield is lower because you had to pay more money for the bond. The opposite would be true if you bought the bond at a discount. The Yield to maturity is another measure of return. It reflects the return you would get if you held the bond all the way to maturity. For you investors, it is important to understand what coupons and yields are in order to understand their relationship to pricing and interest rate changes.

Why do bond prices go down when interest rates go up?

When interest rates rise, new bonds that are being issued will have higher coupon payments than the old bonds that were issued in the lower interest rate environment. Why would anyone ever buy one of those old bonds that have smaller coupons? If they were the same price, they wouldn’t! This is why bond prices fall when interest rates rise. In order for the yield to be equal between the bond with the higher coupon and the bond with the smaller coupon, the bond with the smaller coupon would have to be cheaper.

Nicholas Boguth is a Client Service Associate at Center for Financial Planning, Inc.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. 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 opinions are those of Nick Boguth and not necessarily those of Raymond James. Investments mentioned may not be suitable for all investors. Investing involves risk and investors may incur a profit or a loss. The hypothetical examples are for illustration purpose only and do not represent an actual investment.

There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. To learn more about these risks and the suitability of these bonds for you, please contact our office.

Investor Education Ph.D. series: What is Roll Yield?

Contributed by: Angela Palacios, CFP®

Roll yield is a term that you may have heard lately in the financial news.  No, I am not talking about Cubans and cigars.  I am referring to a potentially profitable bond trading strategy that can be employed to enhance returns of a bond portfolio during a rising interest rate environment.

The Traditional Buy and Hold Bond Strategy

With interest rate increases supposedly just around the corner, investors fear negative or very low returns out of their bond positions.  Furthermore, there are many proponents of buying individual bonds only during a rising interest rate environment.  This strategy offers certainty of getting your principal back upon maturity if the creditor doesn’t default. However, when the bond yield curve is sloping upward there is another strategy that could be employed successfully and potentially create better long term returns than the buy and hold strategy.

How the Roll Yield Bond Strategy is Different

Roll yield is often thought of hand-in-hand with the futures market. In the futures market when you are buying a contract on the price of coffee for example, you are always paying either more or less then coffee is actually trading at in that moment (this is referred to as the spot price).  If you are paying less for the contract than the current spot price, you can then achieve a positive roll yield or price increase as that contract gets closer and closer to maturing at the spot price (assuming the spot price doesn’t change) as shown by the green line in the chart below.

In the bond market this concept is similar but works a bit differently.  When you buy a bond, for example a 5 year treasury bond, you pay $1,000 for this bond and in return get a set rate of interest, I will use1.75% for example.  If the yield curve is upward sloping that means that bonds maturing in less than 5 years should pay some interest rate less than 1.75% as you aren’t tying your money up for as long.  For example, a 4-year bond could yield 1.5%.  See the chart below for an example of an upward sloping yield curve.

As you hold your 5-year treasury it grows closer to maturity every day and eventually your 5 year bond turns into a 4 year bond, 3 year bond and so on until it matures.  If rates don’t change over the first year, you now possess a 4 year bond that yields 1.75% when all other 4-year treasury bonds that are issued are only paying 1.5%.  The interest rate premium means people want your bond more and are willing to pay more money for it.  This results in price appreciation or a capital gain on the bond.  At that time, you could sell the bond and collect the price appreciation in addition to the 1.75% in interest that you collected over the past year. 

The chart below shows a hypothetical example of owning 100 of these bonds.  The blue area is the 1.75% interest that you receive each year.  You can see that it stays level each year until maturity.  However, in the first year you see that there is a red area, or addition to your return, from capital gains of the price going up due to the nature of the process explained above.  You could sell your 100 bonds that in 4 years will mature again at $100,000 or sell it for $101,000 and over the first year collect a total of $1,750 in interest plus $1,000 in capital gains making your return on the $100,000 investment.

Then you could re-invest in a new 5 year bond still paying 1.75% interest again.  The reason you may want to make this transaction is when you get closer to the bond maturing you will have to lose that increase in price because you will only receive your $1,000 back from the US Treasury that you paid originally for the bond and therefore, the bond price will come back down as investors know this will happen and will be unwilling to pay more for the bond.  This is shown in the chart above as the annual loss (red area) in years 4 and 5 on the bond.

Large Bond Managers vs. the Individual Investor

A buy-and-hold investor would give up this potential increase in returns in the early years of holding the bond by not selling and locking in the price appreciation.  However, this strategy can be difficult to pay off for an individual investor because you are dealing in smaller lots of individual bonds and thus you pay commissions and are subject to bid/ask spreads that could make it too costly to trade and take advantage of roll yield.  Large bond managers can often successfully pull this off because they have pricing power due to the sizes of the bond lots they trade.

If rates rise too quickly or only certain parts of the yield curve increase, this type of strategy may not pay off over a buy-and-hold investor.  An investor needs to weigh whether or not they would prefer the certainty of the individual bond or if they would prefer to outsource to a manager to implement potential strategies such as roll yield to enhance returns over time.

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 as investment updates at The Center.

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Sources: http://www.futurestradingpedia.com/futures_roll_yield.htm https://www.kitces.com/blog/how-bond-funds-rolling-down-the-yield-curve-help-defend-against-rising-interest-rates/

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation.The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. 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 opinions are those of Angela Palacios and not necessarily those of Raymond James. Investing always involves risk, including the loss of principal, and futures trading could present additional risk based on underlying commodities investments. There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. To learn more about these risks and the suitability of these bonds for you, please contact our office.

Third Quarter Investment Pulse

Contributed by: Angela Palacios, CFP®

After a volatile end to summer and beginning of fall, we’ve been busy reading, listening and digesting other perspectives on the markets … both of the past and looking ahead.

Eric Cinnamond on Taking the Unpopular Road

On September 22nd we had the pleasure to speak with Eric Cinnamond, Portfolio Manager at Aston/River Road.  Mr. Cinnamond offers his perspective on markets while managing a small cap value stock portfolio.  Today, as has often been the case at market inflection points in the past, his portfolio looks quite different than many others.  He currently maintains 85% of his assets in cash and the other 15% are comprised of mining and commodity companies, along with select energy and financial positions.  He stated that this has been his most uncomfortable portfolio in his career of managing money.  His portfolio has suffered major withdrawals in the past couple of years with his underperformance compared to peers.  According to Eric though,

“I’d rather lose half of my clients than half their capital.”

He stated that right now, investors are crowded into safety and high quality positions like healthcare.  As a result these areas are very expensive.  The valuations on the stocks he follows are at the highest of his career.  His possible buy list currently has a Price to Earnings ratio (P/E) of 45 and this has continued to climb this year, not because of price expansion, but due to Earnings contraction.  As a result, he is patiently waiting for the next opportunity to put risk back in his portfolio.  With his absolute return objective, he stresses the importance of avoiding mistakes and only taking risk when investors are compensated for it.  We applaud managers like this who stick to their investment disciplines that have added value over benchmarks over many years and market cycles, even if they are unpopular for a short period of time!

First Eagle pays $40 Million in SEC case Over Distribution Fees

This is a shocking headline coming out of a company that has had little regulatory headline issues in the past.  In 2013 the Securities and Exchange Commission (SEC) started an industry-wide sweep to evaluate the fees paid by Asset managers to its distributors.  After speaking directly to a representative of First Eagle we learned of 40 agreements First Eagle has with distributors the SEC found one to be in violation because the fee was paid by the mutual fund shareholders pool of money rather than from First Eagle’s general fund.  First Eagle, upon doing their own internal review, then found one other agreement that was also in violation and immediately reported this to the SEC.  As a result they are paying about a $12.5 million penalty to the SEC and then paying $25 million back to fund shareholders along with interest.  These fees are separate from a 12b-1 fee in that they are meant to pay to outsource record keeping and accounting services on the shares owned by investors from First Eagle to the distributing company.  This likely will not be the last we hear of this issue as many other companies are also under scrutiny.  First Eagle was the first to settle.

Dan Fuss Portfolio Manager for Loomis Sayles Fixed Income Team

Dan Fuss recently shared his views on the hot topic of liquidity in the bond markets.  Liquidity is the ability to easily purchase or sell a security at a reasonable price in a reasonable amount of time.  Often though, when the most liquidity is needed during market events, it is the scarcest.  This provides opportunities for bond managers to buy fundamentally strong credits at significant discounts.  Structural and regulatory changes have played a big role in this reducing liquidity as dealer inventories are very low (dark blue line below), while the number of bonds outstanding (light blue line) is steadily increasing in this low interest rate environment.  

In the wake of the global financial crisis in 2008, much regulation was passed that made principal trading (where the bank itself took one side of a bond trade either to buy or sell) much more risky and less profitable.  This, in essence, dried up that part of the market liquidity.  Now banks only act as agents, matching up buyers and sellers rather than being a buyer or a seller.  Mr. Fuss noted that this affects liquidity for large blocks of bonds but that for smaller lots of bonds he finds liquidity is still quite healthy.

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 as investment updates at The Center.

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http://www.reuters.com/article/2015/09/21/us-sec-firsteagle-idUSKCN0RL1S320150921

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. 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. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. To learn more about these risks and the suitability of these bonds for you, please contact our office. Raymond James is not affiliated with and does not endorse the opinions or services of Eric Cinnamond, Aston Asset Management, Dan Fuss and Loomis Sayles.

Making Sense of Market Volatility

Contributed by: Timothy Wyman, CFP®, JD

Dear Clients & Friends:

At the risk of stating the obvious, the equity markets experienced some wild swings toward the end of August.  When I was interviewed by Channel 4’s Rod Meloni on August 25th – the 2nd consecutive day of the stock slide – I talked about opportunities I see.  But Rod described it best when he said Cedar Point had nothing on the US Stock market – quite a rollercoaster. 

I’d like to walk you through where the equity markets stand as of September 1, 2015, share some insights as to some of the factors that may have led to such volatility, discuss what may occur in the near future, and importantly what you might do.

Where do equity markets stand on September 1, 2015?

The three major domestic indexes plunged and rallied in quick succession, but ended the month down more than 6%, with the broad-market Standard & Poor’s 500 marking its worst month in three years. International stocks, as measured by the MSCI EAFE index fared a bit worse than their US counterparts.

What combination of factors got us here?

It is natural to seek “causes” or an explanation when stocks go on a wild ride (which is more often than we think). Though there’s no easy answer, here are 4 contributors:

1. China: As my colleague Angela Palacios shared in our August 25th Investment Commentary, weak or at least slowing growth in China is the most widely cited cause of the stock market pullback. After decades of rapid economic growth, recent evidence has shown that China’s growth is slowing. The central bank of the world’s second-largest economy devalued its currency in an attempt to stimulate growth and thwart a stock-market bubble. After those efforts proved futile, Chinese stocks dropped and concerns about growth in China and across the globe sent stocks around the world plunging soon after. The primary Chinese stock exchange, the Shanghai Composite Index, has dropped roughly 40 percent since its June peak.

2. Falling oil, commodity prices: Oil prices are hitting lows not seen in years due to falling demand, oversupply and concerns over global economic growth. Other commodity prices have also declined due to economic growth fears.

3. Interest rate uncertainty: Short-term interest rates have hovered near zero since the 2008 financial crisis. The U.S. economy has recovered enough that the Federal Reserve has indicated it will raise interest rates and return to more normalized monetary policy in the months ahead. Uncertainty over the timing has weighed on investor sentiment, further muddying the timeline for a hike. Falling values in U.S. and world equities complicate the Fed’s decision.

4. Natural market cycles: Markets are cyclical in nature. Declines, though unsettling, are normal and necessary when asset prices climb too high. The S&P 500 index has steadily risen since March 2009, but hadn’t experienced a 10 percent correction since mid-2011. Analysis by Raymond James experts shows the S&P 500, on average, endures three 5-percent pullbacks and one 10-percent correction every year.

Certainly no one knows for sure – but we believe that the four forces above provide a significant part of the explanation or cause.

Will there be a retest of the recent market lows?

After seeing a nearly 10% drop in stocks, stocks rebounded rather quickly by what Jeffrey Saut, Chief Investment Strategist at Raymond James, would term a “throwback rally” – something that is rather normal from a historical standpoint.  Jeff also points out:

“The follow-up from a 2 – 7 session ‘throwback rally,’ from a massively oversold condition, typically leads to a downside retest.”

Moreover, it looks like that retest began Monday 8/31/15. According to Jeff Saut, a key factor will be whether a retest brings about new lows (below 1867); which could mean further losses.

Another market commentator and Wharton finance professor, Jeremy Siegel, opined recently:

“When there’s a sharp decline and then a rally, usually you’ll get another downward leg that will test that decline.”

According to Professor Siegel, the Dow Jones may ultimately drop 15% from recent highs before recovering to around 19,000 by year-end. He doesn’t see a recession in the US or a bear market.  Time will tell – Saut and Siegel are veterans with vast historical perspective.

While some of the more negative news is grabbing the headlines, as you would expect there are a variety of balancing factors at play.

Recent data reports continue to suggest moderately strong growth in the U.S. economy. Consumer spending improved in July, durable goods orders increased, the housing market is strengthening, and household income advanced. The estimate of second quarter GDP growth was revised to a 3.7% annualized rate (from 2.3% in the advance estimate).

Oil prices reached a six-year low in recent weeks, which should be good for the American consumer, but less so for energy companies. Still, as energy prices stabilize, inflation should move somewhat higher and Federal Reserve policymakers will begin to raise short-term interest rates ahead of that.

The Federal Reserve’s annual symposium in Jackson Hole, Wyoming saw central bankers discussing inflation, the global economy and the fallout from China’s economic woes, but officials provided no clear guidance as to the timing of the first increase in the federal funds target rate. The St. Louis and Cleveland Fed Bank presidents reiterated, ahead of the retreat, that U.S. fundamentals remain strong and a September rate hike is still a possibility.

“It shouldn’t really matter whether the Fed begins to raise rates in September, late October, or mid-December,” noted Raymond James Chief Economist Scott Brown on August 31st. “The important thing is the pace of tightening beyond that first move …The economy has made enough progress and is strong enough that it can easily withstand a small increase in rates.”

A retest is certainly possible, but recession is not imminent and many see higher stock prices by year-end.

What to Do?

During volatile times, dispensing the advice of “Do nothing because you’re a long term investor” almost seems pedestrian and stale.  As shared by Angela, a few things to consider include (1) Make sure your long-term allocation is still appropriate, (2) Double check that your time frame is correct for the investments in your portfolio, and(3) Review and consider your risk tolerance for those investments.  Additionally, while all of the news on bonds in general is negative due to expected interest rate increases – US Treasuries and high quality corporate bonds still provide some of the best diversification or negative correlation when stocks slump.  Additionally, this is a good reminder to review expected cash needs and set aside the appropriate amount.

I’m sharing all this with you to keep you informed about global economic movements and market events. I understand that seeing the short-term impact of volatility on your portfolio can be unsettling. During uncertain times, it can be assuring to stick to the investment strategy that we have developed together. For 30 years now, The Center’s focus has remained on disciplined investing and it has served generations of clients. In the meantime, we’ll continue to monitor market developments and update you accordingly.  Should you have any questions about the markets or your long-term financial plan, feel free to contact us. We are here to help.

Sincerely,

Timothy Wyman, CFP™, JD

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a contributor to national media and publications such as Forbes and The Wall Street Journal and has appeared on Good Morning America Weekend Edition and WDIV Channel 4. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), mentored many CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

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The opinions expressed in this update are those of Timothy Wyman and not necessarily those of RJFS or Raymond James, and is subject to change without notice.

Investing involves risk, and investors may incur a profit or a loss. Past performance is not an indication of future results and there is no assurance the trends mentioned will continue or that any forecasted events will occur. Investors cannot invest directly in an index. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. The performance noted does not include fees or charges, which would reduce an investor's returns. The process of rebalancing may result in tax consequences.

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When the experts need financial perspective – who do they call? Center for Financial Planning of course

Contributed by: Center for Financial Planning, Inc.

Rod Meloni of Channel 4 visited with Tim Wyman, CFP®, JD on August 24, 2015 as he breaks down the market turmoil. 

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of speakers and Tim Wyman and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The NASDAQ Composite Index is an unmanaged index of securities traded on the NASDAQ system. 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. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Diversification and asset allocation do not ensure a profit or protect against a loss. Raymond James is not affiliated with and does not endorse the opinions of Rod Meloni. 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. C15-034569