Is the Diversified Portfolio Back?

Contributed by: Robert Ingram

(Repurpose of the 2014 blog: ‘Why I Didn’t Like My Diversified Portfolio’)

As our team finished 2018 and began reviewing the 2019 investment landscape, I couldn’t help but to think of a Money Centered blog written by our Managing Partner, Tim Wyman. As Tim shared:

“I was reminded of the power of headlines recently as I was reviewing my personal financial planning; reflecting on the progress I have made toward goals such as retirement, estate, tax, life insurance, and investments. And, after reviewing my personal 401k plan, and witnessing single digit growth, my immediate reaction was probably similar to many other investors that utilize a prudent asset allocation strategy (40% fixed income and 60% equities). I’d be less than candid if I didn’t share that my immediate thought was, “I dislike my diversified portfolio”.

The headlines suggest it should have been a better year. However, knowing that the substance is below the headlines, and 140 characters can’t convey the whole story, my diversified portfolio performed just as it is supposed to in 20xx.”

This may have been a familiar thought throughout 2018. Interestingly though, Tim’s blog post was actually from 2015. He was describing 2014.

THE FINANCIAL HEADLINES – Same Old, Same Old?

The financial news about investment markets today still focuses primarily on three major market indices: the DJIA, the S&P 500, and the NASDAQ. All three are measures for large company stocks in the United States; they provide no relevance for other assets in a diversified portfolio, such as international stocks, small and medium size stocks, and bonds of all types. As in 2014, the large U.S. stock indices were at or near all-time highs throughout much of 2018. Also in that year, many other major asset classes gained no ground or were even negative for the year. These included core intermediate bonds, high yield junk bonds, small cap stocks, commodities, international stocks, and emerging markets.

Looking Beyond the Headlines

Here at The Center, our team continues to apply a variety of resources in developing our economic outlook and asset allocation strategies. We take into account research from well-respected firms such as Russell Investments, J.P.Morgan Asset Management, and Raymond James. Review the “Asset Class Returns” graphic below, which shows how a variety of asset classes have performed since 2003.

This chart shows the historical performance of different asset classes through November of 2018, as well as an asset allocation portfolio (35% fixed and 65% diversified equities). The asset allocation portfolio incorporates the various asset classes shown in the chart.

If you “see” a pattern in asset class returns over time, please look again. There is no determinable pattern. Because asset class returns are cyclical, it’s difficult to predict which asset class will outperform in any given year. A portfolio with a mix of asset classes, on average, should smooth the ride by lowering risks that any one asset class presents over a full market and cycle. If there is any pattern to see, it would be that a diversified portfolio should provide a less volatile investment experience than any single asset class. A diversified portfolio is unlikely to be worse than the lowest performing asset class in any given year. And on the flip side, it is unlikely to be better than the best performing asset class. Just what you would expect!

STAYING FOCUSED & DISCIPLINED

As during other times when we have experienced strong U.S. stock markets and periods of accelerated market volatility, some folks may be willing to abandon discipline because of increased greed or increased fear. As important as it is to not panic out of an asset class after a large decline, it remains equally important to not panic into an asset class. In the case of the S&P 500’s outperformance of many other asset classes, for example, many have wondered why they should invest in anything else. That’s an understandable question. If you find yourself in that position, you might consider the following:

• As in the five years leading up to 2015, the S&P 500 Index (even with the recent pullback in stock prices) has had tremendous performance over the last five years. However, it’s difficult to predict which asset class will outperform from year to year. A portfolio with a mix of asset classes, on average, should smooth the ride by lowering risk over a full market cycle.

• Fundamentally, prices of U.S. companies relative to their expected earnings are hovering around the long-term average. International equities, particularly the emerging markets, are still well below their normal estimates and may have con­siderable room for improvement. This point was particularly relevant in 2018 and continues to be as we begin 2019.

• Through 2018, U.S. large caps, as defined by the S&P 500 Index, have outperformed international equities (MSCI EAFE) in six of the last eight years. The last time the S&P outperformed for a significant time, 1996-2001, the MSCI outperformed in the subsequent six years.

• What’s the potential impact on a portfolio concentrated in a particular asset class, if that asset class experiences a period of loss? Remember, an investment that experienced a loss requires an even greater percentage return to get back to its original value. For example, an investment worth $100,000 that loses 50% (down to $50,000) would actually require a 100% return from $50,000 to get back to $100,000.

MANAGING RISK

Benjamin Graham, known as the “father of value investing,” dedicated much of his book, The Intelligent Investor, to risk. In one of his many timeless quotes, he says, “The essence of investment management is the management of risks, not the management of returns.” This statement may seem counterintuitive to many investors. Rather than raising an alarm, risk may provide a healthy dose of reality in all investment environments. That’s important in how we meet financial goals. Diversification is about avoiding the big setbacks along the way. It doesn’t protect against losses – it helps manage risk.

Often, during times of more volatile financial markets like those we have experienced during the last couple of months, the benefits of diversification become apparent. If you have felt the way Tim did back in 2015 about your portfolio, we hope that after review and reflection, you might also change your perspective from “I dislike my diversified portfolio” to “My diversified portfolio – just what I would expect.”

As always, if you’d like to schedule some time to review anything contained in this writing, or your personal circumstances, please let me know. Lastly, our investment committee has been hard at work for several weeks and will be sharing 2019 comments in the near future. Make it a great 2019!

Robert Ingram is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.®

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Any opinions are those of Bob Ingram, CFP® and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. 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 MSCI is an index of stocks compiled by Morgan Stanley Capital International. The index consists of more than 1,000 companies in 22 developed markets. Investments can not be made directly in an index.

2018 Fourth Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

The 2018 wild ride!

We’d love to see you at our investment outlook event on Wednesday, February 27th from 11:30am-1pm for lunch and a full update on 2018 and the year ahead.  You can register here. 

How times have changed! As I write this, I often like to look back and see what I was thinking about last year at the same time.  In the fourth quarter of 2017, we were talking about how low volatility had been for an extended period and that it was unlikely to continue.  Unfortunately, we were right.  In 2017, we had only eight sessions where the S&P 500 moved up or down more than 1% (versus the average which is 53 days in a given year since 1958)!  In 2018 the number of days up or down more than 1% numbered closer to 60.  While more than average, this is closer to average volatility than we had grown accustomed to.  December is usually the least volatile month on record but this time registered more than it’s share of wild swing days for the year. 

Volatility

While we tend to love unlimited volatility on the upside, we greatly dislike downside volatility. According to behavioral finance experts Daniel Kahneman and Amos Tversky we hate the downside about twice as much as we love the upside or loss aversion.This is a concept that is embedded deeply within our investment strategy. We work to design portfolios that prevent you from making short-term decisions that contradict your long-term goals. Diversification is a key part of this process. Up until the last quarter of 2018, this was a strategy that had long been out of favor in this bull market for US Large companies. However, we started to see the benefits return. Below is a chart showing returns for 2018 broken down a few different ways and for several different benchmarks. The first section is Year-to-date (2018 full year) returns. For the year, the Barclays Aggregate was the clear winner as it was up slightly (blue bar). However, for the first three quarters of the year, it was the clear loser except for emerging markets (EM had been 2017’s, clear winner). It wasn’t until the last quarter, when volatility struck, that bonds were able to shine. The S&P 500 (US large companies) and Russell 2000 (US small companies) indexes were the exact opposite story. For the first three quarters of the year, the rally continued in a strong way with these markets up well over 10%. Once volatility struck, this meant these markets also had the farthest to fall and experienced the most downside in the last quarter of the year giving back all of their prior returns and then some for the year. It is an excellent reminder of the importance of diversification.

Source: Morningstar Direct

So what has this market so spooked?

Interest rates

The Federal Reserve raised rates for the fourth and final time of the year in December but also lowered its expectations for rates moving forward. Economic data is little changed, but The Fed’s reaction to the data shifted more dovish. The Fed is concerned that by raising too far, too fast they will invert the yield curve.  They recognize it may be necessary to slow down.   The yield curve hasn’t inverted quite yet (this is defined by the two-year being higher than the ten-year yield) but it has gotten much closer to this scenario.  This is generally a good indicator that a recession is on the horizon but has not given this signal yet.

Shutdown Showdown

Democrats took control of the House on January 3rd as the government shutdown continued.  President Trump and the Senate don’t seem to be willing to bend on their request for money for the border wall while Democrats just as strongly oppose.  Ultimately, one side will have to bend to get the government fully back up and running and neither seem to have any incentive to make this happen yet.  Markets generally aren’t rattled by government shutdowns unless they are prolonged. However, right now, everything seems to be rattling the markets.  I don’t think you can specifically point to the government shut down as being a leading market concern but it is definitely on the scorecard.  The longer it extends, the more it will erode consumer and investor confidence too.

China Trade Negotiations

Trade negotiations seem to be moving along, but this is a slow process.  U.S. based companies are starting to report reduced sales into China, so we are beginning to see a direct effect to stock prices of domestic companies.  There is talk of a hard deadline in these discussions of March 1st because if some negotiations have not come to a close by then, the U.S. will impose another round of tariffs on Chinese imports. 

Global concerns

Brexit negotiations continue to stir up markets as it is not going as well as planned.Article 50 of the Lisbon Treaty was invoked on March 29, 2017.The UK has two years from this point to leave the European Union.So the deadline is fast approaching on March 29, 2019.Here is a helpful timeline of what is to come. Brexit is sure to cause some waves in the next few months.

To top off the global concerns, the Italians are making headlines again with debt concerns.  And just as interest rates are rising here at home, they are starting to rise overseas.  Finally yet importantly, the result of the Mueller investigations will come out soon.  This could cause a temporary shakeup in markets depending on what their findings are.

It is interesting to note that these headlines have existed for much of the year.  Up until early October, the US stock market seemed to brush them off in the wake of lower taxes.  However, lower taxes could only distract for so long until these headlines started to spill over into investor sentiment, which became clear in October.  It is important to remember to stay invested even through volatile events.  Missing the biggest up days can be devastating on your long-term returns and, true-to-form, we experienced many of those for 2018 when the markets appeared at their bleakest moments in the fourth quarter.  It is quite common that the largest up days occur during periods of downside volatility. 

We are happy to discuss your portfolio with you at any time you may feel uncomfortable with market swings.  We are monitoring your investments, making periodic changes when warranted and pro-actively rebalancing to take advantage of swings in the markets, both up and down.

We thank you for your continued trust.  Have a wonderful 2019!

Angela Palacios, CFP®, AIF®

Director of Investments

Financial Advisor, RJFS

Angela Palacios, CFP®, AIF® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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https://www.zerohedge.com/news/2018-12-04/neutoric-market-sp-has-risen-or-fallen-1-or-more-20-days-quarter https://www.bbc.com/news/uk-politics-32810887 Freedom Presentation by Nick Lacy, CFA, Chief Portfolio strategist.
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 Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations.
The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. The Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice.
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.

New Year Financial To-Dos Help Keep You on Track

Contributed by: Kali Hassinger, CFP®

As we settle into 2019, the fresh calendar year provides an ideal opportunity to make plans and adjustments for your future. Instead of setting lofty resolutions without a game plan in mind, might I suggest that you consider our New Year Financial Checklist? Completing this list of actionable, attainable goals will help you avoid the disappointment of forgotten resolutions in February, and you’ll feel the satisfaction of actually accomplishing something really important!

New Year Financial Checklist

• Measure your progress by reviewing your net worth as compared to one year ago. Even when markets are down, it's important to evaluate your net worth annually. Did your savings still move you forward? If you're slightly down from last year, was spending a factor? There is no better way to evaluate than by taking a look at the numbers!

• Speaking of spending and numbers, review your cash flow! How much came in last year and how much went out? Ideally, we want more income than spending.

• Now, let's focus on the dreaded budget. Sure, budgeting can be a grind, so call it a “spending plan”. Do you have any significant expenses coming up this year? Make sure you're prepared and have enough saved.

• Be sure you review and update beneficiaries on IRAs, 401(k)s, 403(b)s, life insurance, etc. You'd be surprised at how many people don't have beneficiaries listed on retirement accounts (or have forgotten to remove their ex-spouse)!

• Revisit your portfolio's asset allocation. Make sure your investments and risk are still aligned with your stage in life, your goals, and your comfort level. I'm not at all suggesting that you make changes based on market headlines. Just be sure that the retirement or investment account you opened 20 years ago is still working for you.

• Review your Social Security Statement. If you're not yet retired, you will need to go online to review your estimated benefit. Social Security is one of the most critical pieces of your retirement, so make sure your income record is accurate.

Of course, this list isn't exhaustive. The final step to ensure your financial wellbeing is a review with your advisor. Even if you don't work with a financial planner, at a minimum set aside time on your own, with your spouse or a trusted friend, to plan on improving your financial health. Do it even if you only get to the gym the first few weeks of January!

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

Are You Retirement Ready?

Contributed by: Sandra Adams, CFP®

In our work with clients, one of the most common questions we get is, “How will we know when we are ready (and able) to retire?”  That can be a tricky question, because there are two sides to being ready for the next phase of your life – the technical side and the personal side.  While certainly you need to be financially secure for the next decades of your life, you also need to be comfortable with the transition from your life as a career individual to what you now wish to become in your next phase – and that is not as easy as it sounds.

From a financial-readiness perspective, many clients target age, monetary or benefit milestones to help them determine when they will be ready to retire:

• “When I have $1 million in assets saved, I will be ready to retire.”

• “When I am eligible to collect Social Security, I will be ready to retire.”

• “When I am eligible to collect my company pension OR I have reached my XX anniversary with my company, I will be ready to retire.”

• “When I am eligible to receive Medicare, I will be ready to retire.”

The real answer is, some or all of these may be true for you, and some or all of these may be false.Every client situation is different and no general guideline can determine whether or not you are financially ready to retire. Unfortunately, it is far more complicated than that. There are numerous financial factors that go into determining financial readiness.Let’s take a deeper look into the issues.

Financial Readiness Issues:

Retirement Savings:

Do you have enough saved?

• What might your other retirement income sources be (Social Security, Pensions, etc.)

• How much income will you need (what are your fixed costs versus lifestyle wants in retirement), and

• What are your longevity expectations (how long might you expect to live based on health, family history, etc.—expect it will be longer than you think!).

Where are your savings?

• Do you have retirement savings outside of retirement plans?

• Do you have some after-tax and reserve cash/emergency reserve savings?

• Do you have different types of accounts to provide tax diversification going into retirement (i.e. IRAs/401(k)s, ROTH IRAs, after tax investment accounts)?

Debt:

Have you paid down your debt or do you have a plan to be as debt free as possible by the time you retire?  This will allow you to control your retirement income for other fixed expenses and wants; it is desirable to have as little debt/fixed expenses as possible going into retirement as possible.

Retirement Income:

A large part to being retirement ready is understanding your retirement income sources, options and strategies and using them to your best advantage.  Take the time to consult with your planner to choose the option that works best for you and your family circumstance.

• Pensions: Do you understand all your options, including the income options available to your spouse as a survivor upon your death.  We find that in many cases it makes sense to choose an option that includes a lifetime income option for you with at least a 65% survivor income benefit for your spouse if you were to die first.

• Social Security: While many are under the false impression that because you are allowed to take Social Security benefits as early as age 62, they should, we might recommend otherwise.  For most individuals now approaching Social Security claiming age, Full Retirement Age for claiming Social Security is now age 66 and delaying benefits until age 70 results in an 8% per year increase in benefits.  Knowing and understanding the Social Security benefits, rules and strategies that can be employed, especially for married couples, to ensure the largest lifetime benefit can be an added supplement to long-term retirement income. We find that our most successful married couples in retirement employ a strategy where the lower Social Security earner draws at Full Retirement age while the higher Social Security earner waits to draw at age 70, insuring the highest possible Social Security benefit for the spouse that lives the longest.

Investments:

Preparing for retirement involves making appropriate adjustments to your investment strategy.  You should work with your financial planner to adjust your asset allocation to one that is appropriate for your new goals and time horizon. We find that our most successful retirees tend to have asset allocations ranging from 40% Bond/60% Stock to 50% Bond/50% Stock.

Insurance:

• For those retiring before age 65 (Medicare eligibility) and without retiree healthcare, finding health insurance to bridge them to Medicare is a must. 

• Retirement readiness does require addressing the issue of Long Term Care funding Having a plan, no matter what your choice, is something that must be done before retirement.

Estate Planning:

While not exactly monetary, having your estate planning documents (Durable Powers of Attorney, Wills and possibly Trust or Trusts in place) updated prior to retirement is a good idea.Part of this is making sure accounts are titled properly, beneficiaries are updated, and account holdings/locations and management are as simplified as possible going into your last phase of life.

Once you have determined your financial retirement readiness, you need to determine your personal retirement readiness, which may be even more difficult for many folks.  Why?  Many have spent the majority of their lifetimes to this point building careers that established them with titles, credentials and stature. They built reputations, networks, social and business circles and were well respected because of the work that they have done.  And now they are moving from that phase of their lives to another and that means starting over.  What will they be now?  What will their lives mean?  And to whom?

Until you are ready to start the next phase of your life knowing your purpose – what you want to wake up for every day – you are likely not ready for retirement.  Those that have not given the thought to their mission, values, and their “why” for their next phase will be left feeling lost and will likely fail at retirement and find themselves wanting to go back to their former lives.

How can you find your purpose?

• Ask yourself what is most important to you? (family, friends, spirituality, charity,etc)

• Ask yourself what are your life priorities? (family, health, knowledge, etc.)

• Ask yourself what you want to let go of and what you want to give yourself to.

• Realize that the rest of your life can be the best of your life if you embrace it with an open mind and enthusiasm.

• Consider reading the book “Purposeful Retirement” by Hyrum Smith if you need more help!

“Am I ready to retire?”  It is not a simple question and there is no simple answer.  It may take months or years to answer all of the questions and make all of the preparations.  If you think that retirement is in your not too distant future, the time is NOW to start planning.  Don’t let retirement sneak up on you…work with your financial planner and be Retirement Ready!

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

Mid-term Elections and the Market: 2018 Outcome

Contributed by: Center Investment Department

Voting day came and went much as the markets had anticipated.  Democrats flipped the House of Representatives over to their control while the Senate maintained and even strengthened their republican majority.  From a legislative policy perspective, we expect the republican agenda to slow.  Mid-term election implications may include:

• The President can continue to act alone regarding trade policies but had bi-partisan support for cracking down on China’s trade and intellectual property practices anyway

• Democrats are going to scrutinize and investigate President Trump, his cabinet officials and executive actions…yes, even more!

• Any further tax cuts are unlikely

• Democrats will likely get to work on some infrastructure spending

• Affordable Care act will be strongly defended

While markets care about legislation and the far-reaching impact those decisions make, long-term markets are agnostic to election results. Information and how markets digest the information affect investment outcomes more than politics.  Frankly, markets do not really care which side is in control.  In fact, the new balance of power sets a similar stage for the strongest historical performance in the S&P 500 for a republican president.  Want to learn more, check out this blog, “Mid-Term Elections and the Market.”

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Any opinions are those of the author and not necessarily those of RJFS. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Investing involves risk and investors may incur a profit or a loss. 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.

I’m a Millennial and I Inherited a Million Dollars – Now What?

Contributed by: Nick Defenthaler, CFP®

More than 75 million millennials born between 1981 and 1997 are set to take over an estimated $30 trillion in wealth from baby boomers (source – AARP).  No, that is not a typo - $30 TRILLION dollars.  Personally, I’ve had several circumstances arise in the past several years where friends in their mid 30s have lost parents.  For someone in a similar age group as the folks that have experienced this loss, it scares the heck out of me.  I’m getting to that stage in life where it’s not beyond uncommon for a child to lose a parent.  That’s a pretty big reality check to digest. 

Although it can be tough to even think about, it’s a reality.  More and more people who are in their 30s who are busy building a family, career and overall great life, will inherit a level of wealth that previously seemed unfathomable.  Recently, a friend reached out to me after his father passed and left him $1,000,000 in retirement assets and life insurance proceeds.  He was overwhelmed and had no idea what to do next (thus the title of this blog!).  He was a teacher and his wife was in IT.  Needless to say, navigating the investments, required distributions and tax rules (just to name a few) associated with his inheritance was extremely stressful.  The stress caused a state of paralysis in making any decisions with the dollars out of fear of stepping on any unintended land mines or making the wrong move with the dollars.  The more we talked, it was clear that now was time for them to have a professional partner in their life who they knew was qualified but more importantly, fully trusted to provide recommendations that made the most sense for their own personal situation and goals.

My friends decided to hire me as their planner and we were able to provide advice and value not only on the planning items directly associated with their inheritance, but also in the areas that were more near term and important to them (student loan payoff strategies, discussing how to pay for child care expenses tax efficiently, helping them through the process of purchasing their first home and drafting their estate plan – just to name a few).  After 6 short months of working together, we got to place where the most time sensitive issues were addressed and we had developed a financial action plan to review annually and keep them moving in the right direction.  Of course, we plan to meet at least once a year to address other life events that come up and work towards the goals they’ve set as a family. 

Financial planning doesn’t always have to be associated with retirement. Helping clients through significant life events and providing advice beyond the dollars and cents is an environment in which our team thrives. Don’t feel paralyzed. Please feel to reach out if you’re in a similar position and need a professional to help guide you through these tough conversations and complicated matters.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

2018 Third Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

Diversified portfolios continue their uphill battle as the U.S. Stock market continues to be one of the few sources of positive returns this year.  In August, the current bull market became the longest on record since World War II by avoiding a 20% drawdown during that time.  Recently, the equity markets fell sharply even though the near-term prospects for the economy remain strong, but there are concerns about the November election, trade policy disruptions, FED policy and labor market constraints. Increased volatility and see-sawing markets are likely to continue in the near term.

*annualized

Bonds have continued to be under the pressure of gradually rising interest rates.  Since December 2016, the Fed has raised short-term rates by .25% during 8 of the last 15 meetings.  The last time we experienced rising interest rates was 2004-2006.  During this period, the Fed raised short-term rates by .25% in 17 consecutive meetings in contrast!  This time, they are taking a far more measured pace trying to increase borrowing costs for businesses and consumers to keep the economy from overheating.

International and especially emerging markets are struggling the most this year due to trade war concerns and a strong U.S. dollar even though they were the darlings of 2017.

Trade War Tracking

Since the trade war is at the top of the headlines each day, I thought it would be interesting to share a scorecard.  The below chart shows the tariffs that are still only in the proposal state (diagonal lines) and tariffs that have been put into place. You can see that only a small amount had been implemented before September. On September 21st, the next $200 Billion of tariffs were put into place (China 301 Part 1).  These are tariffs on an extensive list of goods and will start at a 10% tariff, escalating to a 25% tariff in January 2019.  China retaliated by placing tariffs on another $60 Billion in U.S. goods.  This list was smaller and the amount of tariffs placed on them was lower than the market anticipated which is why we didn’t see any negative reactions from the stock market during this round.

While we are also actively negotiating trade policies with many countries, the focus and largest amount of potential tariffs are against Chinese imports.   According to the office of the U.S. Trade Representative “The United States will impose tariffs on…Chinese imports and take other actions in response to China’s policies that coerce American companies into transferring their technology and intellectual property to domestic Chinese Enterprises.  These policies bolster China’s stated intention of seizing economic leadership in advance technology as set forth in its industrial plans, such as ‘Made in China 2025.’”

While markets are more volatile this year seeming to be swayed by the latest tariff headline daily, local markets are still boasting 10.56%  returns on the S&P500 for the year through the end of September. This says to us that markets think this trade war is survivable and possibly even beneficial to the U.S.  While tariffs are generally a negative for an economy over the long-term, investors often, only see the short-term benefits these types of strong-arm policies can bring. 

The point of free trade is that each group of producers focus on what they are best at and can produce the most efficiently (also at the lowest price/best quality).They can then sell their products and use the money to purchase what they need from the most efficient producer.This process usually stretches your dollar the farthest when it comes to purchasing power.Tariffs place an additional tax on the consumer as they usually result in higher prices for us or reduced margins for companies (or a combination of the two).We don’t share the markets rosy outlook, as we believe this trade war will result, eventually, in inflation and supply chain disruptions.It takes time to ramp up production domestically of products that become too expensive to import.When companies face the uncertainty of what retaliatory actions are coming next, they are apprehensive to make the investments required to ramp up local production in the first place. 

Unemployment

We also have to consider that the unemployment rate is back to very low levels (blue line shows below 4% unemployment) and participations rates (gray bar) remain steady.  Where are we going to get all of the new workers required to start producing items locally rather than importing? 

We don’t think this is how Trump foresees the end game.  He hopes to force China to remove the tariffs they have historically imposed on our goods to put us on a level playing field of no tariffs, no subsidies and preventing intellectual property drain.  Whether he is right and China will be forced to come to the negotiation table remains to be seen.  Volatility should continue at slightly higher levels if this trade war continues to ramp up.

Politics

Mid-term elections are coming up, and that always puts politics at the top of everyone’s minds.  There is also fear of impeachment that we often hear from clients and how that could affect portfolios.  Impeachment is the process where the House of Representatives through a simple majority brings charges against a government official.  After the government official is impeached, the process then moves to the Senate to try the accused.  This must pass the Senate by a 2/3’s majority vote.  If this happened, President Trump would be removed from the office, and the Vice President would take his place. 

There is little to refer to in recent history to understand how markets would react here in the U.S. if this were to happen.  Bill Clinton was impeached in 1998, and Richard Nixon resigned during the Impeachment proceedings but was never actually impeached.  There have been recent unsuccessful attempts to impeach Donald Trump, George W. Bush, and, yes, even Barack Obama.  When Bill Clinton was impeached markets were down in bear market territory (over 20% peak to trough on the S&P 500) for a short time before it rallied back.  The Russian Ruble Crisis also occurred at the same time, so it is hard to say that the impact to markets was solely due to the impeachment process. So while President Trump likes to boast that the “Markets will crash and that everyone will be poor” if he were impeached that is likely not the case. 

While we don’t think this has a high likelihood of happening, if it did, short-term volatility would probably occur while there is uncertainty and this is one of the many reasons why we maintain a diversified portfolio.  If stocks retreated, it is likely that our bond portfolios would perform well and even a possibility that international investments would strengthen in the face of a weaker dollar.  We believe a diversified portfolio with short-term needs set aside in cash or cash equivalents is one of the most effective solutions to an extremely rare event like this.

While this bull market may be getting old, it is important to remember they do not simply die of old age; rather they are killed by recessions.The yield curve is getting dangerously close to inverting but has not, thus not signaling a recession…yet.We are keeping a close eye on the yield curve and trade war as these items could quickly spill us over into a risk of recession. Markets can breeze along seemingly unconcerned by these types of risk until they aren’t.When sentiment swings from optimistic to pessimistic, it can happen almost overnight.As a result, we continue to maintain that having a diversified portfolio is extremely important.We are actively taking advantage of rebalancing opportunities to make sure your portfolios are prepared.If you have any questions or would like to speak with us more on these topics, please don’t hesitate to reach out to us!

Thank you for your continued trust!

On behalf of everyone here at The Center,

Angela Palacios, CFP®, AIF®
Director of Investments
Financial Advisor, RJFS

Angela Palacios, CFP®, AIF® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. 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, including diversification and asset allocation. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.

Implementing Your Asset Allocation

Contributed by: Center Investment Department

At Center for Financial Planning, Inc.®, one of our core investment beliefs revolves around utilizing a strategic asset allocation. We believe there is an appropriate mix of assets that can help investors meet their goals based on well-established and enduring asset classes. This can vary over time depending on your objectives and evolving markets. Finding the right combination of these asset classes and allocation to each plays a pivotal role in managing risk and aiding in ensuring stabilizing returns. In previous blog posts, we’ve discussed the purpose of asset allocation and how to determine the proper asset allocation.  Now let us wrap up this subject with a hypothetical example of the implementation.

Below is a chart of a financial plan overhaul.  You can see there is quite a difference between the current allocation and a recommended allocation.  The current allocation (in blue) is overweight US Large Cap stocks and International Large Cap stocks while underweight the bond asset categories that we define as Core Fixed Income and Strategic Income.  The financial plan takes into consideration any outside accounts like 401k’s, insurance, and/or annuity products to truly understand an entire investment portfolio and determine a suitable asset mix. This helps keep a client within their volatility comfort range as well as on track to reach their return expectations over the long haul.

Source: Morningstar

The recommendation involves selling some of the positions that fall within the overweight asset classes while adding to the underweight bond asset classes.  The end result should be a portfolio with less risk which can be important leading into those early years of retirement if returns had been excellent in recent years it would be important to have a careful eye toward taxes and work with a CPA to construct a tax efficient strategy to divest some of the risk. 

If you are unsure how your asset allocation stacks up, seek out a financial planner so they can assist you in developing an appropriate strategy tailored to your unique needs.

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These asset allocations are presented only as examples and are not intended as investment advice. Actual investor results will vary. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Although derived from information which we believe to be reliable, we cannot guarantee the completeness or accuracy of the information above. 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. Investments mentioned may not be suitable for all investors. Any opinions are those of Angela Palacios and not necessarily those of RJFS or Raymond James. Investing involves risk and asset allocation and diversification does not ensure a profit or protect against a loss. 1. Core Fixed Income includes: U.S. Government bonds and high quality corporates 2. Strategic Income includes: Non U.S. bonds, TIPS, high yield corporates and other bonds not in core fixed. 3. Strategic Equity includes: REITS, hedging strategies, commodities, managed futures etc. Large cap (sometimes "big cap") refers to a company with a market capitalization value of more than $10 billion. Large cap is a shortened version of the term "large market capitalization. Smaller mid caps, which are defined as those that fall below a certain market-cap breakpoint, and "small plus smaller mid caps", which include both companies considered small-cap and the smaller mid-cap companies. Mid caps are typically defined as companies with market caps that are between $2 billion and $10 billion. Mid-cap stocks tend to be riskier than large-cap stocks but less risky than small-cap stocks. Small caps are typically defined as companies with market caps that are less than $2 billion. Many small caps are young companies with significant growth potential. However, the risk of failure is greater with small-cap stocks than with large-cap and mid-cap stocks.

Is there a loss when a municipal bond purchased at a premium matures at par value?

Contributed by: Center Investment Department

Investors often erroneously believe that they will lose money when purchasing a bond at a premium and allow it to mature at a lower par value.  In order to understand why this is not the case we should step back and explain some bond basics.

Coupon and Par Value explained

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.  The price you pay is often expressed as a percent of par value.  So if it is selling at $103 you are paying 103% of the par value, or $1,030. (1,000*1.03).

Why would you pay a premium?

When you buy a municipal bond at a premium price (or more than the $1,000 par value), you may be doing so because you are getting a higher coupon rate.  For example, let’s say the going market interest rate for a par value bond you are looking at is 3%.  If you found a bond that is paying a coupon of 4% with the same maturity you may think, “Jackpot!”  However, in order to buy this bond you are going to have to pay more than the $1,000 par value for the 3% bond. To better understand this we use the measure of yield to maturity (the rate at which the sum of all future cash flows from the bond is equal to the current price of the bond).  Ultimately, the yield to maturity should be very similar between the two bonds, you will just get more current income from the premium bond as it has a higher coupon, but you pay a higher price to get it.  Unfortunately, you don’t get to write off this “loss” when the bond matures and only pays you back the $1,000 par value.  The premium of this bond is amortized down each year and is being returned to you in the form of the higher coupon rate.  See the example below.

Once the bond finally matures, you have amortized out all of the premium over the life of owning the bond and your cost basis would ultimately be the par value now.  Fortunately, you don’t have to worry about calculating this yourself.  IRS guidelines require your custodian to calculate and report this on your yearly 1099 Form.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Tim Wyman and not necessarily those of Raymond James. 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. Investments mentioned may not be suitable for all investors. Investing involves risk and investors may incur a profit or a loss. Please include if clients are able to click on the link: 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.

Volatility Isn’t Always a Bad Thing

Contributed by: Kali Hassinger, CFP®

If you’ve been paying attention to the markets this year, you’ve certainly noticed that the days of 2017’s slow and steady positive returns have disappeared.  Instead, 2018 has been full of daily market ups and downs, which, it turns out, is actually normal! 

With the calm and comfortable markets of 2017, it’s easy to let our short term memory overshadow previous years.  2018, on the other hand, has created feelings of investor anxiety as the markets switch between red and green on a daily basis.  The word volatility alone often has a negative connotation.  However, in relation to your portfolio, volatility also includes positive returns! 

Post 2008, overall portfolio and market returns have been positive. However, as presented in the chart below, each year since then has been filled with daily market movements of 1% - both up and down!  2017 is by far the greatest outlier within the most recent 10 year average.

Investors have to be willing to endure the occasional market rollercoaster in order to reach long-term goals.  Even though we work to minimize volatility over time, avoiding it altogether isn’t realistic.  Try to remember that we never base your plan on market returns of a single day or calendar year.  Staying disciplined and committed to your financial plan can help you filter out the noise and focus on your long-term goals. 

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

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The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. As of June 2007 the MSCI World Index consisted of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. 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. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James.