The Gambler

Contributed by: Angela Palacios, CFP®, AIF®

While I’m not a big country music fan, one of the few country songs I can sing along to is “The Gambler” by Kenny Rogers. While Kenny certainly knew how to make money, he also had a pretty good idea of how to keep it: “You gotta know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.” There’s a valuable lesson for investors in those lyrics. 

Most investors (and professionals, too) spend a lot of time deciding which investments to buy and little time understanding when to sell. It’s crucial to have a security selection process in place, and to understand what you own and why you own it, even if it is just an index mimicking strategy.

Part of your process, even before buying a security, should be to outline reasons you would hold the investment even through downturn periods. This can help you resist the temptation to sell in the wrong moments, for the wrong reasons. It is also important to establish factors that could cause you to sell.

At The Center, some of our reasons to potentially change strategies within a portfolio are: 

Security specific

• Key personnel departure

• Attainment of your price target

• Increased correlation to other investments

• Deviation from intended outcomes

• Expenses

Goal specific

• Change in circumstances (ie. entering retirement)

• Change in risk tolerance

• Change in the outcome needed to achieve long-term financial planning goals

Having these points in mind will make thinking about selling a position or changing your overall investment strategy (strategic allocation) easier and much less emotional. 

While it is usually best to buy and hold over longer periods of time, knowing when to hold ‘em and fold ‘em doesn’t come easily. But with some thought, you can make prudent decisions when you buy and when you sell, because you never want to have to walk away … or worse yet … have to run!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

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Any opinions are those of Angela Palacios 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 a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Can you roll your 401k to an IRA without leaving your job?

Contributed by: Nick Defenthaler, CFP®

Typically, when you hear “rollover,” you think retirement or changing jobs. For the vast majority of clients, these two situations will be the only time they complete a 401k rollover. However, another option for moving funds from your company retirement plan to your IRA — the “in-service” rollover — is an often overlooked planning opportunity. 

Rollover Refresher

A rollover is simply the process of moving your employer retirement account (401k, 403b, 457, etc.) to an IRA over which you have complete control, separate from your ex-employer. If completed properly, rolling over funds from your company retirement plan to your IRA is a tax- and penalty-free transaction, because the tax characteristics of a 401k and an IRA generally are the same.  

What is an “in-service” rollover?

Unlike the “traditional” rollover, an “in-service” rollover is probably something unfamiliar to you, and for good reason. First, not all company retirement plans allow for it, and second, even when it’s available, the details may confuse employees. The bottom line: An in-service rollover allows an employee (often at a specified age, such as 59 ½) to roll a 401k to an IRA while employed with the company. The employee may still contribute to the plan, even after the completed rollover. Most plans allow this type of rollover once per year, but depending on the plan, you potentially could complete the rollover more often for different contribution types at an earlier age (sometimes as early as 55).

Why complete an “in-service” rollover?

While unusual, this rollover option offers some benefits:

More investment options: Any company retirement plan limits your investment options. You can invest IRA funds in almost any mutual fund, ETF, stock, bond, etc. Having options and investing in a way that aligns with your objectives and risk tolerance may improve investment performance, reduce volatility, and make your overall portfolio allocation more efficient.

Coordination with your other assets: Your financial planner can coordinate an IRA with your overall plan with much greater efficiency. How many times has your planner recommended changes in your 401k that simply don’t get completed? When your planner makes those adjustments, they won’t fall off your personal “to do” list.

Additional flexibility: IRAs allow penalty-free withdrawals for certain medical expenses, higher education expenses, first time homebuyer allowance, etc. that aren’t available with a 401k or other company retirement plan. Although this should be a last resort, it’s nice to have the flexibility.

Exploring “in-service” rollovers

So what now? First, always keep your financial planner in the loop when you retire or switch jobs to see whether a rollover makes sense for your situation. Second, let’s work together to see whether your current company retirement plan allows for an in-service rollover. That typically involves a 5-10 minute phone call with us and your company’s Human Resources department.

With your busy life, an in-service rollover may fall close to the bottom of your priority list. That’s why you have us on your financial team. We bring these opportunities to your attention and work with you to see whether they’ll improve your financial position! 

Nick Defenthaler, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

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Rolling over your retirement assets to an IRA can be an excellent solution. It is a non-taxable event when done properly - and gives you access to a wide range of investments and the convenience of having consolidated your savings in a single location. In addition, flexible beneficiary designations may allow for the continued tax-deferred investing of inherited IRA assets. In addition to rolling over your 401(k) to an IRA, there are other options. Here is a brief look at all your options. For additional information and what is suitable for your particular situation, please consult us. 1. Leave money in your former employer's plan, if permitted Pro: May like the investments offered in the plan and may not have a fee for leaving it in the plan. Not a taxable event. 2. Roll over the assets to your new employer's plan, if one is available and it is permitted. Pro: Keeping it all together and larger sum of money working for you, not a taxable event Con: Not all employer plans accept rollovers. 3. Rollover to an IRA Pro: Likely more investment options, not a taxable event, consolidating accounts and locations Con: usually fee involved, potential termination fees 4. Cash out the account Con: A taxable event, loss of investing potential. Costly for young individuals under 59 ½; there is a penalty of 10% in addition to income taxes. Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets. Any opinions are those of Nick Defenthaler 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 a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to re tax or legal matters with the appropriate professional. 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. Roth 401(k) plans are long-term retirement savings vehicles. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 70.5.

Investment risk is real. Here’s how we manage it.

Contributed by: Center Investment Department

Investment risk is real. Every day. Every year. In up and down markets. Even in good times – when, for example, U.S. Equities are performing well – we all can use this friendly reminder:

The management of investment risk is constant in successful investing.

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 states, “The essence of investment management is the management of risks, not the management of returns.” To many investors, this statement may seem counterintuitive. Rather than an alarm, though, risk may serve as a healthy dose of reality in all investment environments.

Our Take on Risk

How do we at The Center attempt to manage risk as we steward approximately $1.1 billion in assets? We:

• Stick to our defined investment process

• Create and monitor individual investment policy statements

• Determine proper strategic asset allocation and make necessary tactical shifts

• Execute extensive research for every security that makes it into your portfolio

• Implement strict rebalancing guidelines

We have been managing client assets for more than 34 years. We fully understand and appreciate the importance of investment returns. We also know that risk is an important element when constructing portfolios intended to fund some of life’s most important goals, such as sending a child or grandchild to college, funding a long and successful retirement, having sufficient funds for long-term health needs, and passing a legacy to loved ones.

While no one can guarantee future investment returns, our experience suggests that those who follow our risk management tactics may better stay on track with their financial plans. 

If you are a client, we welcome the opportunity to talk more about how your portfolio is constructed. Not a client? We’d enjoy the opportunity to share our experience and review your goals and risk.

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Any opinions are those of Center for Financial Planning, Inc.® 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 a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

2019 First Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

I love this time of year. In Michigan, the sun starts shining, and we slowly start to come out of our winter hibernation. It is only this time of year when wearing shorts on a sunny, 45-degree day seems completely logical.

I am always surprised by how different March can be from beginning to end; the old saying I learned in first grade, “March comes in like a lion and goes out like a lamb,” is rarely wrong. It makes me think about how the first quarter of 2019 has come in like a lion and ended like a lamb. 

Much volatility marked the end of 2018. During the last quarter of the year, markets experienced a very sharp correction, pulling back almost 20% from peak to trough for the S&P 500. Then as 2019 ramped up, markets quickly recovered, and the 2018 correction became a distant memory nearly erased from our statements, melting away like the ice from all of those winter storms.

Through the first quarter of the year, the S&P 500 rallied over 13.5%, the MSCI EAFE returned nearly 10%, and the Barclay’s Aggregate US bond index earned a respectable 2.94%.

While the downside in most cases has been nearly recovered for a diversified portfolio, some scars remain and red flags of a weakening economy are popping up (no, they aren’t the kind of flags you see on the golf course).

Yield Curve Inversion?

You may have seen headlines debating the inversion of the yield curve. This is a highly watched recession indicator. Throughout 2018, the yield curve flattened as The Federal Reserve raised interest rates. This year, the flattening has slowly morphed into a potential inversion. In the yield curve chart below, on the left, you can see that very short term rates are higher than even the 10-year treasury rate. However, longer-term rates are still higher, and the two-year yield is not yet more elevated than the 10-year yield, which is the true definition of the inversion. The chart on the right shows how the yield curve looked leading into the 2008-2009 recession. You can see that the long-term rates were no longer upward sloping, but rather flat-to-downward sloping.

Source: https://stockcharts.com/freecharts/yieldcurve.php

The yield curve isn’t a perfect indicator, as it does from time to time give false signals that are not followed by a recession. However, the flattening and inversion of the yield curve do indicate a shaky economy that is more susceptible to outside shocks.

Many argue this is not a true inversion, and only time will tell. But this indicator does cause us to think a recession could be coming. If the inversion increases, caused most likely by long-term rates falling farther, that would increase our certainty. However, a recession generally follows an inversion by nine months to a year.

The delay happens because an inversion causes banks to tighten their lending standards. Banks make money by lending at a higher long-term rate, paying us on our short-term cash at a lower rate, and keeping the difference as profit. Paying us at a higher rate and loaning at a lower rate makes loans far less profitable. With no room for error in making a bad loan, bank standards become very strict. This alone slows the economy in many ways.

Raymond James Chief Economist Scott Brown recently cited the chart below: “In a simple model of recessions, the current spread between the 10-year Treasury note yield and the federal fund’s target rate implies about a 30% chance that the economy will enter a recession in the next 12 months. At this point, a broad-based decline in economic activity does not appear to be the most likely scenario, but the odds are too high for comfort and investors should monitor the situation closely in the months ahead.” (Source: http://beacon1.rjf.com/ResearchPDF/2019-03/a514efab-1484-4425-9c7a-9db0e0689423.pdf)

Auto loans showing signs of concern

Auto loans, which hit us close to home in Michigan, have shown early warning signs of trouble. Despite a low unemployment rate and growth in the economy, many people still struggle to pay their bills. As of February, seven million Americans were at least three months behind in their car payments. While the government shut down may be a contributing factor, that is still a shocking statistic and one million consumers higher than in 2010, the last peak coming out of the great recession. The loans in arrears based on percentage don’t look quite as shocking, but the numbers are creeping higher.

While these and other red flags signal an economic slowdown, we are not yet ready to confirm they signal a recession. Our investment committee is discussing areas of concern within portfolios and where we may want to make adjustments. Areas considered ripe for change include the bond positions.

We have an overweight to what we call “strategic income”, higher yielding positions that carry more credit risk than interest rate risk. While this overweight has worked for many years, we may soon reduce it back to our long-term target and add this into the Core bond portion of the portfolio. Core bonds tend to behave positively in turbulent markets and benefit from the “flight to safety” trade.

Within the core bond space, we have held shorter duration bonds which, during a rising interest rate environment, have less downside pressure as rates rise. Now that the Fed has signaled an end to raising rates for the time being, we have also looked at taking on more duration risk in that portion of the portfolio. When equity markets correct, longer duration bonds tend to perform more positively.

Headline updates:

Brexit receives an extension as Parliament in Britain seized control of the process when the Prime Minister failed, yet again, to put forth a plan lawmakers could support. This resulted in an extension until April 12; in all likelihood, another will be granted.

The Mueller investigation results have come to a close. According to Ed Mills, Raymond James Managing Direct of Washington Policy, “The conclusion of Special Counsel Robert Mueller’s investigation finding no coordination or collusion with the Trump campaign related to Russian election interference, and a Department of Justice verdict seeing no case for obstruction, offers a significant near-term political boost to President Trump, alleviating one of the big unknown DC policy risks on the market. It also has the potential to have a real impact on the President’s remaining first-term agenda, particularly on trade negotiations with China or domestic issues such as the budget or infrastructure.” (Source: http://beacon1.rjf.com/ResearchPDF/2019-03/e0fc4341-4031-486e-a5fa-bcf05d9d7c2b.pdf)

The Federal Reserve officially paused its rate-hiking cycle through 2019. The Fed also has decided to slow, and eventually stop, reducing its balance sheet by selling off the Treasuries it owns. Low rates for longer terms seems to be the theme for the near future. This affects how we will position our bond portfolios. The investment committee will this month discuss the potential of adding more duration to our core bond portfolio. This area also tends to behave positively during market pullbacks and recessions and, usually, the more duration, the better.

Trade talks with China seem to be moving in the right direction, with very slow progress. This will likely continue to hang over the markets for months to come. The next leg up of the equity markets could depend on progress here.

Negative yields around the world again, still? As of the end of February, 17% of the world’s investment-grade debt is trading with negative yields. In Europe, as of the end of March, more than 40% of government debt was trading at a negative yield – making U.S. bonds still the best kid on the block. (Source: Natixis) 

If you are interested in learning more about our process, please don’t hesitate to reach out with a phone call or email or visit the investment management page of our website. We thank you for your continued trust in us!

Angela Palacios, CFP®, AIF®
Partner
Director of Investments

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

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Any opinions are those of Angela Palacios and not necessarily those of Raymond James. 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. There is no assurance any of the trends mentioned will continue or forecasts will occur. 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 case study included herein is for illustrative purposes only. Individual cases will vary. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. 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.

The S&P 500 index is comprised of approximately 500 stocks and is widely seen to be representative of the U.S. market as a whole. The MSCI EAFE index 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 Bloomberg Barclays US Aggregate Bond Index is a broad-based index that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. These indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

What Is Tactical Allocation and Why Would I Use It?

Contributed by: Center Investment Department

You’re probably familiar with strategic investing, picking the amounts of stocks, bonds, and cash that create the foundation of your portfolio. But you may also want to consider another layer of portfolio management.

Investors who overweight or underweight asset classes as perceived market opportunities arise are implementing a tactical allocation.

Typically, a tactical allocation overlays a strategic allocation to help reduce risk, increase returns, or both.

While we believe that the relationship of valuation between markets over long periods will be efficient and will correspond to fundamentals, we also know that over shorter periods, some markets may become overvalued and other asset classes will become undervalued. It makes sense at those times to use a tactical allocation strategy. When executed correctly, a somewhat modified asset allocation may offer better returns and less risk.[1]

A tactical asset allocation strategy can be either flexible or systematic.

With a flexible approach, an investor modifies his or her portfolio based on valuations of different markets or sectors (i.e. stock vs. bond markets). Systemic strategies are less discretionary and more model-based methods of uncovering market anomalies. Examples include trend following or relative strength models.

With a tactical allocation, keep in mind less can be more. Successful execution of these methods requires knowledge, discipline, and dedication. The Center utilizes tactical asset allocation decisions to supplement our strategic allocation when we identify a compelling opportunity. Our Investment Committee arrives at these decisions based on many factors considered during our monthly meetings.

Want to learn more? Reach out to your financial planner or a member of the Investment Department team to learn how The Center uses tactical allocation to manage your portfolio.

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[1] All investing involves risk, and there is no assurance that this or any strategy will be profitable nor protect against loss.

Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. 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. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to

Event in Review: 2019 Investment Outlook

Contributed by: Angela Palacios, CFP®, AIF®

With market volatility back, we came together to discuss what occurred in 2018 (particularly in the last quarter) and what we are thinking about for 2019.  If you weren’t able to attend, don’t sweat it, we have the cliff notes for you!

On February 27th, 2019, Angela Palacios CFP®, AIF®, Director of Investments, CERTIFIED FINANCIAL PLANNER™, Nick Defenthaler CFP®, Senior Financial Planner, CERTIFIED FINANCIAL PLANNER ™, and Nick Boguth, Investment Research Associate teamed up to tackle these pressing questions and more.

Here is a recap of key points from the “2019 Investment Update”:

• What spooked the markets last year:

  • Decelerating global growth lead by China

  • Declining earnings growth expectations

  • Higher short term interest rates in the U.S. and other parts of the world

  • Valuations started 2018 in elevated territory

  • UK BREXIT

  • Italian debt concerns

  • Trade issues

  • Government shutdown

  • Mueller investigation

• What worked last year:

  • High quality fixed income rallied in this market

  • Bond duration – the more the better

  • Defensive & Low volatility stocks held up better than broad markets

  • Dividend paying stocks held up better than non-dividend paying stocks

  • Large cap equities held up better than small cap equities

  • In the last quarter of 2018 emerging and international developed markets held up better

• Is a recession on the horizon: Recessions are mainly caused by four reasons throughout the world (Inflation, Reduction in exports, Financial Imbalance or commodity price crash). Currently inflation is benign here in the U.S., exports are healthy, financial excesses aren’t present (equity valuations and household debt are moderate), and our economy is highly driven by commodities.  So at this point it looks unlikely in the next year.

• Yield curve: Flattened dramatically last year while the 2 and 5 year treasury bond yields did invert.  A traditional inversion is between the 2 and 10 year and is the signal usually watched for to telegraph a coming recession. We are keeping a close eye on this as this is becoming a potential concern.

• Tax reform recap: Nick Defenthaler gave us an update on tax reform looking at the changes to income tax brackets, changes in the standard deduction and deductibility of state and local income taxes. If you’d like to hear more on this please listen in on our Year-end tax planning webinar for the details!

• Client Portal: A Center for Financial Planning, Inc.® app??!!! We hope you are as excited as we are! Nick Boguth gave a quick demo of our new client portal and document vault. If you are interested in learning more or want to sign up for this service just reach out to your planner!

Angela Palacios, CFP®, AIF® is a partner and 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.

Restricted Stock Units vs. Employee Stock Options

Contributed by: Kali Hassinger, CFP®

Some of you may be familiar with the blanket term "stock options." In the past, this term most likely referred to Employee Stock Options (ESOs), which were frequently offered as an employee benefit and form of compensation. But over time, employers have adapted stock options to better benefit both their employees and themselves.

ESOs provided the employee the right to buy a certain number of company shares at a predetermined price, for a specific period of time. These options, however, would lose their value if the stock price dropped below the predetermined price, making them essentially worthless to the employee.

Shares promised

As an alternative, many employers now use another type of stock option, known as Restricted Stock Units (RSUs). Referred to as a "full value stock grant,” RSUs are worth the "full value" of the stock shares when the grant vests. So unlike ESOs, the RSU will always have value to the employee upon vesting (assuming the stock price doesn't reach $0). In this sense, the RSU is a greater advantage to the employee than the ESO.

As opposed to some other types of stock options, the employer does not transfer stock ownership or allocate any outstanding stock to the employee until the predetermined RSU vesting date. The shares granted with RSUs essentially become a promise between the employer and employee, but the employee receives no shares until vesting.

RSU tax implications

Since there is no "constructive receipt" (IRS term!) of the shares, the benefit is not taxed until vesting.

For example, if an employer grants 5,000 shares of company stock to an employee as an RSU, the employee won't be sure of how much the grant is worth until vesting. If this stock value is $25 upon vesting, the employee would have $125,000 of income (reported on their W-2) that year.

As you can imagine, vesting dates may cause a large jump in taxable income, so the employee may have to select how to withhold taxes. Usual options include paying cash, selling or holding back shares within the grant to cover taxes, or selling all shares and withholding cash from the proceeds.

In some RSU plan structures, the employee may defer receipt of the shares after vesting, in order to avoid income taxes during high earning years. In most cases, however, the employee will still have to pay Social Security and Medicare taxes in the year the grant vests.

Although there are a few differences between the old-school stock options and more recent Restricted Stock Unit benefit, both can provide the same incentive for employees. If you have any questions about your own stock options, we’re always here to help!

Repurposed from this 2016 blog: Restricted Stock Units vs Employee Stock Options

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

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kali Hassinger, CFP® and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. This is a hypothetical example for illustration purpose only and does not represent an actual investment.

Job Transition and Your Investments

Contributed by: Center Investment Department

We at The Center know that people can be overwhelmed with difficult decisions, especially during stressful life events such as job loss or change.

GM recently announced plant closings and layoffs across the country, which will affect thousands of workers. This hits close to home for those of us in the Motor City and reminds us to look at your investment portfolio, ensure proper allocations, and ask these questions:

Am I close to retirement?

It may be time to scale back your portfolio’s risk. If you are invested within a target date retirement fund, this may already be happening for you.

How long before I have to use this money?

With funds you won't need for more than 5-10 years, you may want to ensure you are taking enough risk to help meet your goals. If you are invested within a target date retirement fund, this may already be happening for you.

What is my ability to take risk?

You may be able to take on more risk if you don't depend entirely on your portfolio. In this case, a target date fund may not be appropriate.

Do I get uneasy or worried when my portfolio drops by a certain percentage and feel the need to take action?

If this affects your decision making, even under normal circumstances, guidance from an advisor during a time of change may help alleviate additional stress.

What Can I do?

Review the investments in your account and your beneficiaries. We often neglect our 401(k) accounts in times of change.

Maintain a diversified portfolio to help stay on track for your retirement goals. Some plans offer an overwhelming number of choices, while other plan offerings seem insufficient to diversify a portfolio. Your advisor can help with your comprehensive investment strategy, especially during challenging times.

When you’ve spread assets among multiple financial institutions, maintaining an effective investment strategy – one that accurately reflects your goals, timing, and risk tolerance – may become difficult. Consolidate, and your financial professional can help ensure these assets are part of an overall allocation strategy that reflects your current financial situation and long-term retirement goals.

For more information on consolidating retirement accounts, read “Simplifying Your Retirement Plans.”

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Any opinions are those of the author and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice.

Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. Changing market conditions can create fluctuations in the value of a mutual fund investment. In addition, there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.

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.
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