DWM Fall 2014 Seminar Recap

BMD seminarWe just wrapped up our fall seminars which focused on Pullbacks, Corrections, Bear, and Bull markets. Both venues – Palmetto Brewery in Charleston and Emmett’s Brewery in Palatine – served as great places to not only deliver an important financial presentation, but also as fine places to just hang out and visit with one another.

In case you missed our October seminars entitled “Is it Time for a Pullback, Correction, or a Bear Market?”, here is a quick recap:

  • Pullbacks, Corrections, and Bear Markets all signify a move down of 5, 10, or 20%, respectively, from a recent peak. They may sound scary but a Pullback/Correction might actually be a very healthy thing because it may signify that the underlying asset’s valuation is getting back in line with fundamentals. In other words, Pullbacks and Corrections are different from Bear markets in that they may be simply a “pause” that refreshes an otherwise healthy Bull!
  • Diversification plays a huge role to a balanced portfolio. The end of September and beginning of October saw a significant Pullback in equity indices, e.g. Russell 2000 Small Cap, S&P500, etc. However, other asset classes were not exhibiting same price movements. In fact, some fixed income indices experienced no pull back and traded at all-time highs. Alternatives also experienced non-correlation benefits. The media (i.e. CNBC) would have you believe that investing begins and ends with only large cap domestic stocks. Diversified investors don’t need to get caught up in their obsession.
  • History shows that Bull markets typically last greater than 5 years on average and Bears about a quarter of that. Bear markets experience more volatility, given the fear that usually surfaces during these times. Bull markets don’t end based on a particular time frame, but instead end from an external shock (e.g. overvaluation/bubbles, inflation, etc).
  • Bull & Bear markets are driven by greed and fear as much as economic fundamentals. Humans are not wired for disciplined investing, hence investors can help themselves gain discipline by using a wealth manager like DWM to focus on the things that one can control, and avoid emotional, poor decisions based on things one cannot control.
  • Trying to predict short-term markets is virtually impossible. Markets don’t necessarily correlate with current economic data. The world has changed and old formulas and rules of thumb may not apply. Global concerns can cause investors’ appetite for risk to diminish overnight. However, over the long-term, the markets have rewarded discipline, through world events of all types.
  • Trying to time the market is a fool’s game. Studies show that missing just a few days of strong returns can drastically impact overall performance.
  • Your financial adviser should help you focus on what you can control. This includes creating both a financial plan and an investment plan. You also need to stress test these plans. And, then you need to review your risk profile- which is a combination of risk capacity, risk tolerance, and risk perception.
  • The markets cannot be controlled, but asset allocation can be. Asset allocation is the primary driver of returns. Once you have your risk profile, you are in a position to construct an appropriate asset allocation target mix. Use of multiple asset classes (equities, fixed income, alts) lead to non-correlation benefits. Non-correlation leads to a smoothing effect to your return profile which means smaller downsides. Smaller downsides lead to better geometric compounding, hence better LONG-TERM RESULTS. The chart below shows the impact of downside volatility and why one wants to avoid that.
  • Seminar slideFocus on things you can control:
    • Create an investment plan to fit your needs and risk tolerance
    • Identify an appropriate asset allocation target mix
    • Structure a well-balanced, diversified portfolio
    • Reduce expenses through low turnover and via passive investments where available
    • Minimize taxes by asset location, tax loss harvesting, etc.
    • Rebalance on a regular basis, taking advantage of market over-reactions by buying at low points of the market cycle and selling a high points
    • Stay Invested

Using a dedicated and caring financial advisor can keep you focused on the above items and more. Most importantly, an advisor like DWM can keep you and your portfolio disciplined so you can reach your long-term financial goals.

LGD seminar2

Hope for the Best, Prepare for the Worst

grieving womanAutumn is here and the new season brings cooler temperatures and, perhaps, a change in routines. Life is all about change… it can be exciting change or unwelcome change and both kinds can be challenging. As wealth managers, DWM’s goal is always to maximize the positive and minimize the impact of anything negative that may occur. Becoming single, by death or divorce, is one of life’s most difficult challenges. Grief can cause emotional and physical distress and, sometimes, even cognitive impairment. Your resilience during this time can be directly affected by the stability of your financial resources. Though we all certainly hope that you never have to face the loss of a spouse or significant other, there are things that you can do now and guidelines to follow if necessary that will reduce the burden if something does happen.

A very important part of preparation is to collect all your financial data and keep it current and organized. Haphazard record-keeping can cause an agonizing and time-consuming chore in the midst of a stressful situation. Keep an accurate inventory of all your assets, accounts and property. Have a physical or electronic file of your most recent statements from your checking and savings accounts, credit cards, mortgages or home equity lines, as well as all investment accounts. You will need copies of your most current insurance policy declaration pages, policies and statements. These might include your life, homeowners, auto, disability, long-term care and any other property or casualty policies. Also, it is important to keep marriage and birth certificates together. Keep at least 2 years of tax returns available and a current paystub or income information. You will also need wills, trust documents or other pertinent legal paperwork. And it is good to have a current Social Security benefit statement, which you can access online. Finally, keep a record of ALL your password information for both financial and social accounts. Consider telling a close confidante where your information is available. DWM offers a safe and secure electronic “vault” on its servers for storing copies of all of your financial information for you.

If something does happen and you are faced with a loss or separation, be sure to first take some time to grieve and don’t feel like you must rush into any decisions. Once you are ready, you should contact your financial advisor, hopefully DWM, and your attorney to guide you through this process. Start notifying all financial institutions to change names or close accounts. Contact the insurance companies, credit bureaus, credit card companies and any other creditors. Consider closing accounts, memberships and subscriptions that are unnecessary. Start retitling all the assets and be sure to keep a list of who you have talked to and what needs to be done, as it can be a lot to remember. Be sure to pay all final bills, with a priority on mortgages and utilities. If need be, transfer bills, like utilities, into the new payer’s name. Also, notify the Social Security Administration, the Post Office and your or your spouse’s employer, if need be. Be sure to destroy old cards and shred any unnecessary financial paperwork. Try to avoid putting too much detail on social media pages or in obituaries to protect your security.

It is very important to have a proactive financial advisor, like DWM, before and after you become single. We can assist with getting everything organized and advise you on all the requirements during this difficult time. We will work with you to evaluate your net worth and review all your assets and liabilities. It is also a good time to re-assess your risk profile and investment strategies. We can help you look at your goals and budget and adjust your financial plan to accommodate new needs and changing situations. You might be thinking about some lifestyle changes… perhaps moving to a different home, getting a new job, or doing some travelling. Life’s challenges may bring some changes in your life. DWM welcomes the opportunity to be the leader of your transition team.

Is the Bull Market Turning to Bear?

bears stalk goldilocks marketStocks tumbled again last week. The last three weeks have seen a major pullback in equities of all types. The DJIA is now in negative territory for the year, the MSCI global index is at 1.14% ytd, small caps, the big winners last year, are now down 8.57%. The S&P 500 index is the one “bright spot” in equities, up 4.78% ytd.

This a big change. For several years, we’ve been in a “Goldilocks” economy, “not too hot, not too cold” which has produced calm, growing equity markets. Now, many investors are wondering if this pullback (a drop of 5% or more) will turn into a correction (10% or more loss) or a crash (20% or more fall) and signal the start of a bear market. Of course, every financial pundit has their own opinion which they are happy to share. Truth is, no one knows the future. We don’t.

However, we do know that there have been 12 pullbacks since March 2009 when this bull market started. The last correction was in 2011. The current bull market is now in its 68th month, which places it about in the middle in length and magnitude of the 17 bull markets since 1871.

We also know that at times like this people often lose track of the long-term. We humans don’t like uncertainty. Studies show we are not generally wired for disciplined investing. Therefore, when people follow their natural instincts, they tend to apply faulty reasoning to investing. These reactions can hurt performance.

We further know that markets have rewarded discipline. $10,000 invested in 1970 in the global equity markets would be worth $430,000 today ($370,000 net of inflation).

So, instead of following one’s emotions at a time like this, we suggest that you focus on what you can control:

  • Creating an investment plan to fit your needs and risk tolerance
  • Structuring a balanced portfolio using equities, fixed income and alternatives
  • Diversifying broadly
  • Reducing expenses and turnover
  • Minimizing taxes
  • Staying invested
  • Rebalancing regularly

A key point in these times is to review your risk profile. There are three components: First, your risk capacity, or financial ability to withstand risk. Second, your risk tolerance, which is your comfort level for risk. And, lastly, your risk perception, or how risky you feel about the current investment environment. For the long-term, you should focus on your risk capacity and risk tolerance and not your current risk perception.

We will be reviewing all of these important points and more at our DWM client seminars on 10/21 in Palatine and 10/28 in Charleston. And, of course, we’re available to our clients 24/7 to help you keep focusing on the key areas needed for long-term investment and financial success.

DWM 3Q14 Market Commentary

brett-blogWhat a difference a quarter, err a month, makes… After a modest but solid start for most areas of the market in 2014, September was the proverbial splash of cold water on one’s face. Almost all investment styles were hit relatively hard except for some areas within alternatives and the munis within fixed income. Unfortunately, many of the gains built up in July and August and from earlier in the year were trimmed or eliminated. Volatility, which we haven’t seen much of in a long time, finally picked up as investors got exceedingly nervous about expected rate increases from the Fed, not to mention some disappointing reports on US manufacturing, home prices, and consumer confidence. Then there are also tensions with Russia and continued economic weakness in Europe, Japan, and China. Investors continue to shrug many of these concerns off as evidenced by the relatively old age of this current Bull Run which started back in 2009, but could it be that we are finally heading for a “correction”?

Let’s look at the quarterly results and get back to that question later.

  • Equities: According to Lipper, the average diversified U.S. Stock fund dropped 1.9% in the third quarter and brought the trailing twelve month (“TTM”) return to 12.0%. International stocks (represented by the MSCI World ex-US Index) were slammed in the third quarter, down 5.7%, and are now only up 4.9% in the last year. Basically, diversification away from large cap, which empirical studies show to benefit long-term returns, did not help in the short-run.
  • Fixed Income: The average taxable bond fund was down 1.1% for the quarter as international and high-yields significantly underperformed, however remain up 3.6% for the last twelve months. Yields have remained low so far this year, yet rates are expected to surpass 1% in 2015 from its current near-zero level, and approach 4% by the end of 2017.
  • Liquid Alternatives: As readers of our blogs know, a major purpose of having alternatives is to add diversification/protection benefits to your overall portfolio. In a month or quarter like this where most areas of the traditional market are heading south, one would like to have an asset class that’s totally uncorrelated, and thus heading in a better direction. Unfortunately, in the short term this isn’t always the case as evidenced by many of the most common forms of liquid alternatives losing some ground. (The Credit Suisse Liquid Alternative Beta Index was -0.4% for the quarter and now +4.8% TTM). That being said, an example of a good non-correlated fund and something that helps offset the damage elsewhere would be the AQR Managed Futures Fund (symbol: AQMNX). This fund was up 3.5% in September and up 5.33% for the quarter!

Of course, many of you may have not heard about how poorly most markets performed in September given how focused the media is on large-cap domestic stocks. Definitely CNBC and other major media outlets like to focus on the biggest stocks (i.e. those within the S&P500) and only a fraction of its time is spent reporting on other cap styles within equities and other asset classes like bonds or alternatives. It’s what happens when large caps are in vogue and diversification doesn’t appear to be doing its job.

However, we know better than to get caught up in the short term. As a CFA charterholder, one becomes very familiar with the empirical studies showing that the best way to invest for the long-term is to diversify and mitigate concentrated risk to any one particular area. Diversification benefits don’t always show up in small time periods (quarterly, yearly) but they pay off over the long-term. We live in a world that moves very quickly these days, but patience in investing is something that is prudent. Getting swept up in, and being over-exposed to the latest fad and chasing short-term performance are not rewarded in the end. The key is staying fully invested in accordance with an appropriate, well-diversified asset allocation based upon your risk tolerance. Using an experienced wealth manager like DWM can help you stay disciplined.

Here’s to an interesting final quarter for 2014!

Fast Money: Financial Apps to Make Your Life Easier

look up sqNowadays, wherever you go, it seems half the people around you are looking down at their phones. (That is, if you take the time to look up and notice this phenomenon). In fact, over 90% of the US adult population owns a smart phone. But you can make good use of your screen time because one of the best ways to stay current on your investments is through mobile apps. We would like to spotlight two important (and free) ones today.

App logoDWM: We recently blogged about our Client Portal overhaul. Did you know you can see the same information through our mobile app? You can see all your accounts in one place, check balances and positions, see performance, run reports, view statements, and contact us. It’s available for iPhone/iPad & Android.

(Click on any image to see a full size version)

DWM screen shot valuesDWM screen shot performanceDWM screen shot reports

Schwab app logo

Schwab: In addition to Schwab Alliance, Schwab offers a very useful app. You can see your Schwab accounts, approve wires, electronically sign applications, deposit checks, pay bills, find a branch, and more. Even more exciting capabilities are coming soon. It’s available for iPhone/iPadAndroid, & Kindle. Schwab even has a one page guide that will walk you through set-up. (Again, click on any image to see a full size version)

Schwab screen shot account listSchwab screen shot check depositSchwab screen shot market overview










Credit card and bank or credit union apps are also handy to have on your devices. Simply search for them in the iTunes Store for Apple users, or the Google Play Store for Android devices.

If you have trouble finding what you’re looking for, AppCrawlr is “the app discovery engine”. This is a great, user friendly site where you can find apps by category or many other criterion, for any device.

Of course, make sure all your devices are password protected so sensitive information isn’t accessible to prying eyes. This is one of the easiest things you can do to protect your identity.

Lastly, for our clients, you are welcome to bring your tablets and smart phones to our meetings. We would like to make sure you are able to login and answer any questions you might have.