Media Scare Tactics: The Coming ‘Bond Bubble’

Is the media scaring you about the so-called coming ‘Bond Bubble’? Block out the noise and focus on what matters: asset allocation.

With all the hoopla going on about fixed income being the possible next “bubble”, I thought it prudent to talk about asset allocation. Fixed income is just one part of a well-balanced portfolio. At DWM, we believe in multiple asset classes including traditional asset classes like fixed income and equities, along with alternatives.

You do not want to all-out avoid or shun an asset class. We’ve seen people that have been out of equities since 2008 and they’ve missed one of the biggest bull markets in history.

You also do not want to load up in just one asset class. We saw people that were in 100% stocks going into 2008 that felt the full pain of a 35-50% drop. That’s a deep hole to dig out of.

The key is balance. A case can be made that everyone should have about at a minimum 20% allocated to each asset class. So how does one determine what percentage of equities, stocks, and alternatives their portfolio should have? DWM does this by identifying your goals, risk tolerance, return objectives, income needs, time horizon, and other special requirements. As every client is unique, so is each client portfolio. A younger client with a high risk tolerance may be 50% equities / 20% fixed / 30% alternatives. An older client with low risk tolerance may be 20% equities / 50% fixed / 30% alternatives.

Take a look at the graphic below which shows a sample individual investor portfolio versus an institutional portfolio from 2009:

pie charts 061313

You can see that institutions have the majority of their assets allocated to alternatives. And because of it, they have had pretty good success. The individual investor is just starting to catch up, as access (or rather the previous lack thereof) to alternatives has changed. Until the last several years, only institutions and the extremely wealthy had access to alternatives. Furthermore, there were high minimums, lock-up periods, bad transparency, and high expenses that were not practical for the individual investor. But that is really changing. We at DWM have been using liquid alternatives for the last several years. More and more of these liquid alts come available almost every day.

In a time and age where the 30 year bond bull market may be coming to an end and a time when the equity market is being called “overheated”, alternatives may offer a complementing asset class that can give your portfolio better overall risk-adjusted returns. Alts can play many different roles in a portfolio from return enhancer to fixed income substitute to diversifier. They can provide investors insurance against declines to the traditional 60 / 40 model. They can mitigate downside risk and lower volatility.

Now, don’t get me wrong: there is no silver bullet. Not all alternatives are created equal, and not all are going to be consistent winners. But with a diversified portfolio consisting of all asset classes, you should have a much smoother, consistent ride which can ultimately lead you to better financial success.

Concentrated Positions: Don’t Let a Torpedo Sink Your Hard-Earned Ship!

No torpedos

One of the many things we do when a prospect comes to us is analyze their current portfolio. We do this so we can assess the current risks in their portfolio that they may not be aware of and identify ways to minimize those risks, thereby getting the overall portfolio working for them, in a way that is in line with their particular risk tolerance.

We see many issues when analyzing portfolios, including, but not limited to:

  • asset allocation that is much riskier than their tolerance
  • lack of multi-asset class benefits by using only one or two asset classes (e.g. 100% equities / no fixed income / no alternatives)
  • heavy cash exposure – we often hear from people that they build up cash as they are hesitant to make a decision on how to invest it. Unfortunately, with cash returning about 0.001% these days it creates a huge drag on the portfolio.
  • the use of securities with high expenses (e.g. variable annuities (typically over 3.5% in expenses) or front-load mutual funds (may charge 5% up-front))
  • management fees that are higher than industry standards – we’ve seen people with significant size portfolios paying over 2% – that’s crazy!

We could do a blog on each one of these issues, but this week the focus will be on concentrated position risk.

So what is a concentrated position? It is a held position (typically equity) that makes up a substantial part (20% or more)

of an investor’s overall portfolio. A common example is a stock inherited from a grandparent. Another situation that we often see is a concentrated position risk stemming from a client’s company stock.

Some public companies offer many ways for the employee to get company stock. Here are just a few examples: restricted stock grants, ESOP programs, deferred comp programs, stock options, company stock within the company’s 401k plan, etc. Many people don’t realize how much these positions may have grown over time or, because of “bucket mentality”, they don’t even think of it as part of the overall portfolio. But they should.

In a recent meeting with a prospect, we identified that her company stock made up close to 30% of her overall portfolio. She wasn’t aware that her position was anywhere near this percentage until we pointed it out, but like many people she didn’t seem too concerned at first.

Here’s the problem: the major risk associated with such a portfolio is a lack of diversification; a concentrated position makes a large portion of the investor’s wealth dependent upon the performance of one particular stock. At DWM, we also call concentrated position risk ‘torpedo risk’, because that’s what a concentrated position can do to your whole portfolio, and hence your overall financial plan. It can hit and sink it just like a torpedo- not good. People tend to think this won’t happen to them, but so did the former employees of Worldcom and Enron.

Don’t let ‘torpedo risk’ from a concentrated position ruin your portfolio and/or financial future. A good rule of thumb is to keep all company-specific positions to less than 6% of your overall portfolio value, if possible.

Of course, there may be reasons for keeping a concentrated position such as restricted stock/options that follow vesting timelines, emotional attachment, low cost basis tax concerns, trading volume concerns, etc. An advisor like DWM can help you work through those issues via different strategies (e.g. dollar-cost averaging out, “collars” and other derivatives strategies, prepaid variable delivery forward contracts, exchange funds, etc.) and help you put together a portfolio that’s working for you, free of unnecessary risk and capable of meeting your long-term goals.

DWM 1Q13 Market Commentary

Brett DetterbeckRemember how ‘scary’ the Fiscal Cliff ordeal was just a few months ago?! Well, not only did stock markets shrug that off, but they also shrugged off a spending-cuts-sequester, higher tax rates, and further turmoil in Europe to soar to all-time record highs. Amazing really. “How is this happening?” one might ask. The simple reason is: Federal stimulus. The Fed Quantitative Easing bond-buying program continues to keep interest rates low, thus reducing the attractiveness of ‘safer’ investments such as Treasuries, and hence propelling ‘riskier’ assets such as stocks.

And did they ever propel! The S&P500 was up over 10% for the first quarter. Small Cap and Mid Cap fared even better, up 11.8% and 13.5%, respectively. Domestic certainly outperformed international markets as Eurozone worries continued. (For example, you may have heard about the tiny island in the Mediterranean called Cyprus who has a big banking presence. Unfortunately, both its banks and its government are a mess. To fix it, depositors with over $100K will have to give up some of their hard-earned money. This is the first time that depositors have had to share the pain in the modern era so it’s a big deal. The fear is that if they can put this in place within Cyprus that it could happen anywhere else in Europe, creating tremendous anxiety.) The MSCI ex-US was “only” up 4.7% and emerging markets were actually down 3.5%.

Fixed income on the other hand did not do much, with the well-known Barclays US Aggregate Bond Index about flat (-0.1%). Investment models that employed more than just the basic “Agg” type of exposure – like high yield (up 2.9%) and currencies (up 4.2%) – were able to produce small albeit positive fixed income results.

We urge clients to have a minority stake in alternatives, typically 10-30% depending upon their profile. Many investors may be familiar with the famous “alts” like commodities (essentially flat for 1q13) and real estate (up over 7% as represented by the SPDR Dow Jones Global Real Estate ETF ).  But many aren’t familiar with the majority of alternative vehicles and strategies out there.  For some quick education, here’s an example of an alternative publically traded mutual fund we utilize: Pioneer Floating Rate (symbol: FLARX), a fund which holds bank loans. What makes this fund so attractive is that unlike traditional fixed income funds where there is an inverse relationship between interest rates and price, this fund actually benefits when rates go up. Why? Bank loans are tied to interest rates in that they can go up when rates go up. Thus, this fund offers not only a decent current yield but is poised for appreciation when rates do in fact start marching higher.

1Q13 is a good reason why we don’t try to “time” the market. Many going into this New Year said that equities after a strong 2012 were poised for a correction particularly given all the global economic headwinds. Yet, here we are in April with a strong first quarter stock market showing and a good start to 2Q13. By not avoiding any one particular asset class and having at least a portion of your portfolio within all of the three major asset classes (equities, fixed income, and alternatives), an investor employing relatively little risk should benefit with stable, steady returns. This is the benefit of having a diversified, multi-asset class portfolio, with 1Q13 being a perfect example.

As we prepare for Spring – I know both our Charleston and Chicagoland clients are waiting patiently (Will it ever get here?) – we also look forward to what the markets will bring us in 2Q13. Will the US continue to show healthy signs of improvement like we’ve been seeing in the housing market? Will the sequester slow the US down? Will there be an equity correction of some sort after this tremendous rally? Will Europe ever recover? How much will Europe woes affect us here in the US? And the questions go on and on, but ultimately lead to “How does this affect me?” As our client’s wealth manager, we know that’s the most important question and one of the reasons why we are here: to filter out the noise and make the correct portfolio management moves to ultimately enhance your personal and family’s wealth and well-being. Protecting and growing these portfolios and helping clients attain their long-term financial goals are what we take pride in.

Happy Spring!

“Where’s my social security statement?”

fee-only financial planning, going digital

Remember that special green and white report, which includes your retirement benefit estimates at various ages and also a personal earnings history, that would show up in your mailbox every twelve months?

Well, if it seems like it’s been awhile since you last received one, it’s because the Social Security Administration, in cost-cutting mode, suspended mailing hard-copy statements with few exceptions beginning in mid-2011. The info is still available but you’ll need to go to www.socialsecurity.gov/mystatement and set up your account. (Be prepared for some deep questions that the agency employs in an effort to thwart identify theft.)  We’re urging all of our clients to do this this month as this information is a critical tool in financial planning. It can also serve as a reminder of the need for adequate personal savings to supplement these benefits. 

By the way, benefit payments are going digital-only too. If you’re currently receiving Social Security checks by mail, you must switch to direct deposit by March. You can set up direct deposits by going to the Social Security link above or by calling 800-772-1213.

Even though this switch from paper to digital will save the government $70MM+ per year, please recall that this program is “under water” and we wouldn’t be surprised to see these “entitlements” have significant changes in the near future. DWM uses sophisticated financial planning software to address these issues. We can literally stress-test your plan to see what happens if your Social Security benefits were cut or totally eliminated. There are also tools like www.maximizemysocialsecurity.com that we use to calculate maximum distribution strategies.

If you don’t already have an online Social Security account set up, take action now thereby keeping your financial planning up-to-date and making sure the government gets your hard earned benefits to you without any issues.

DWM 4Q12 Market Commentary

DSC05539

Happy New Year! After a relatively strong first three quarters for both the equity and fixed income markets, fourth quarter readings were pretty muted. Frankly, that’s pretty good considering all of the headwinds we faced going into this last quarter of 2012. Probably the biggest story of all was the so-called “fiscal cliff”. It reminded us of all of the Y2K scares of a decade or so ago. Legislation to forestall this “cliff” passed before trading could start in the new year, and the market reacted by sending up stocks nicely. Ironically, this cliff agreement offered little to address our significant long-term debt issues. The proverbial “can” in WashingtonD.C. was indeed kicked down the road again. 

 Let’s celebrate the honorable return achievements of 2012 before looking ahead to 2013. 

Stocks finished the year up about 16% in most areas (S&P500: 16.0%, S&P600 Small Cap: up 16.3%, S&P400 Mid Cap up 17.8%, and MSCI World Index (ex-US) up 16.4%), reflecting a nice, unusual level rise across almost all equity investment styles.

Bonds showed some fair returns for calendar year 2012: Long-term Treasuries up about 3.5%, the US Aggregate Bond Index up 4.2%, and Munis up a solid 6.8%.

Commodities (which DWM classifies as alternatives) did not produce much evidenced by the Dow Jones-UBS Commodities Index falling 1.1% on the year. Also in the alternative area, some illiquid investments like equipment leasing and private timberland REITs did not provide as much bang for the buck this year. DWM expects these investments to recover as the global economic recovery continues. On the other hand, there were niches in the alternative landscape that fared quite well like public REITs and some absolute return strategies. A few noteworthy liquid alternative funds to mention are Marketfield Long/Short (up 13%+), RiverNorth/Doubleline Strategic Income (up 12%+) and Pimco All-Authority (up 17%+). A portfolio of liquid alternative funds continued in 2012 to help investors’ overall portfolios with solid results and non-correlation benefits in respect to the rest of the portfolio holdings.

All in all, 2012 was a rewarding year for most investors that weren’t sitting in cash. 

Looking forward to 2013, headwinds include lack of household income growth, lackluster consumer confidence, and further Washington political theater.In fact, the latter is a major problem as Congress continues to kick the can down the road. The cliff agreement was no “grand bargain” or a deal looking at both tax revenue and spending cuts in a way that can get our Federal deficit under control any time remotely soon. Certainly, Moody’s didn’t like it, basically putting the US on notice that it will most likely cut its AAA rating if it can’t make something happen soon. And something will need to happen quickly as the federal borrowing limit (aka “debt ceiling”) will be reached around the end of February. Remember the ludicrousness that played out in 2011 the last time we came close to hitting the ceiling?!? Expect more of the same. Long story short, Washington policy stalemate will continue to be a major story.

There are some real positives domestically like the recovering housing market, expanding manufacturing activity, and improving trade balance. But things aren’t so rosy overseas where the Eurozone is still in recession and China’s financial sector looks dicey. For a world where we are becoming more and more connected, we should all hope for a successful global economy. 

In conclusion, 2012 results show that positive results can occur in what may seem like shaky times. DWM cherishes the opportunity of providing its clients with solid investment results and sound financial planning that can help people achieve their long-term goals. DWM wishes a prosperous and healthy 2013 for you and your family.    

Brett M. Detterbeck, CFA, CFP®

 

DETTERBECK WEALTH MANAGEMENT

DWM 3Q12 Market Commentary

 

fiscal cliff, multiple asset allocationWith current readings of anemic economic domestic growth, a recession widening in Europe, and a possible “Fiscal Cliff” on the way, it’s ironic how well the stock market and frankly most markets have done in 3Q12 and year-to-date (YTD) 2012.  It certainly didn’t hurt in mid-September when the Fed announced QE3 which is yet another round of government bond-buying designed to jumpstart the US economy and job market. Just how effective is this prolonged monetary policy? Weak US economic data, political unrest in the Middle East and Africa, even a slowdown in growth in China, are just a few of many things that show the situation really hasn’t gotten much better. At some point, the market will no longer reward this so-called “Quantitative Easing”.

But let’s talk about the good news for a little bit – the 3Q12 results:

The average US diversified stock fund posted a 5.3% return for the third quarter and is now up close to 13% Year-To-Date (“YTD”)! Results were also quite nice outside of the US with diversified international stock funds averaging 6.8% in the 3Q12 and now up almost 11% YTD. DWM equity portfolios enjoyed these run-ups.

Bonds chugged along with the riskier debt securities seeing more inflows and thus better returns. This was evidenced by the Barclays Capt’l US Aggregate Bond Index being only up a respectable 1.6% for the quarter (and almost 4% YTD) yet the Barclays US High Yield Index up 4.5% for the quarter (and 12% YTD). It should be noted that DWM fixed income portfolios have really enjoyed great performance both on the quarter and YTD and as such is reflected in your overall return. 

 Our DWM Liquid Alternatives portfolio showed it participates in bullish quarters like this, up around 3.6% for the qtr and up almost 9% YTD. This alternative part of the portfolio will really be needed when, not if, equities markets (and fixed income markets for that matter) turn bearish. 

Nice results, huh?! Unfortunately, that’s where most of the good news ends. Besides some improving housing data, which simply shows a bounce off a very low bottom, it really isn’t pretty out there. Now is not the time to “get out the Dom Perignon” and start dancing in the streets. Now is the time, for those who aren’t DWM clients, to make sure you have reviewed your financial plan, your risk tolerance, and your portfolio asset allocation to make sure it’s ready for the challenging near-term future. DWM clients already have these areas covered. We have many potential big risk events on the horizon: the Presidential Election, a possible replay of the debt ceiling debacle, and then the possible Fiscal Cliff, which is the term referring to the simultaneous spending cuts and tax increases that are slated to take place at the end of 2012 unless Congress takes action and actually comes to agreement on something. 

Frankly, this is a good example to show it’s impossible to time the stock market, as it does not necessarily operate in-line with fundamental data. It’s another reason why a well-diversified, low-cost, multiple asset allocation approach like ours is so prudent in times like these. Rather than trying to “time it”, we use disciplined strategies and vehicles to produce stable and steady returns over time, thereby helping you achieve your long-term financial goals. 

Hope to see you at one of our Fall seminars in either Charleston or Palatine where we will discuss these important items in more detail.  

Brett M. Detterbeck, CFA, CFP®

 

DWM 2Q12 Market Commentary

Detterbeck Wealth Management sherpaAfter the investor party that took place in the 1st quarter, 2q12 started like a bad hangover with most stock indices getting hit hard in May. Fortunately the best month of June (at least for the S&P500) since 1999 helped recoup some of the early losses. 

For the record, the average US diversified stock fund posted a -4.6% return for the second quarter yet remains up 7% so far this year! That’s pretty amazing given the soft economic conditions here in the U.S. and the turmoil overseas. And speaking of overseas, the international markets continued to lag the domestic markets in the second quarter as evidenced by diversified international stock funds dropping 7.1%, yet still up 3.8% Year-To-Date (“YTD”). It should be noted that international outperformed domestic in the month of June, a trend we expect to continue. Another note was value outperformed growth in 2Q12. 

With stocks trending down most of the quarter, investors gravitated to safety as expressed by the relatively strong showing in the bond world. The Barclays Capt’l US Aggregate Bond Index was up 2.1% for the quarter and now up 2.4% YTD. Yields on 10-year Treasury notes fell to 1.5% last week, near the lowest levels in generations, reflecting market dreariness about the economy and also possibly the anticipation of more action by the Fed. 

Turning toward alternatives, our DWM Liquid Alternatives portfolio did its primary job of protecting first, participating-in-upside second, up almost 1% for the quarter and now up almost 5% on the year. During the quarter, we successfully merged in alts like real estate, gold, and other commodities that were held in strategic models into the LA portfolios for more-focused strategy tracking moving forward.    

Going forward, there are many challenges: 5 of 17 Eurozone countries have received a financial bailout in the last 2½ years with more on the horizon. Let’s face it, its not just the PIGS (Portugal,Ireland,Greece, and Spain) that we need to worry about; the whole Eurozone faces recession. Move Far East, and even China is slowing down. Back in the homeland, our latest readings show slowing new orders, production, etc. Three years after the end of the nation’s most recent recession, the U.S.employs almost 4 million fewer Americans than when the recession began and 12.7 million people remain jobless. And the worst is that Joe Consumer is not spending as much as he did just last year. In the political arena, we are now in the Presidential Election wait-game with not much getting done in Washington D.C.before that wraps up. And frankly there’s a lot that needs attention politically… Did you know that Federal spending on Social Security, Medicare and Medicaid has risen from 16% of total government spending in 1967 to 41% of spending in 2011 and the percentage is only going to go higher unless serious changes are made?

The good news is that almost all of the major global central banks are taking steps to bolster economic output. U.S. Fed Head Bernanke said last month “We are prepared to do what’s necessary”. We think they’ll keep this attitude for the near future and hence don’t anticipate rates/inflation moving up any time soon. This should create an environment where stocks are volatile, bonds have modest returns, and alternatives are the key driver in your portfolio’s total return.  

In conclusion, here are a few more general comments on the stock market. Of course, stocks (equities) only represent a minority allocation for our clients’ portfolios. Diversification amongst stocks, bonds, and alternatives is the key to achieving a stable, long-term return. But equity is the asset class that gets the most headlines. So I thought it would be fun to remind people that as gloomy as the stock market may seem, the S&P500 is now entering its 41st month in the current bull market and has gained 115% (total return) since bottoming 3/09/09. Here’s another tidbit: The average bull market for the S&P500 since 1950 has lasted 58 months. It’ll be fun to see if this current run, even though it may not feel like one, can eclipse the average. As a reminder, if you haven’t already done so, please download the DWM Mobile App to your smartphone so you can see your portfolio at any time and take advantage of the many features within. Enjoy your summer and we hope to connect with you again soon! 

 

 

What Would You Do With A Windfall of Money?

Money windfallDid you know that 90% of lottery winners are bankrupt within 5 years? Or that 70% of all wealth transitions fail? The reason is that most people are resistant to change and only a minority can handle it.

The questions that normally surface when coming into large sums of money can be both technical like:

  • “What should I do next?”
  • “Who can help me?”
  • “Who can I trust?”

and emotional like:

  • “How did I get this money?”
  • “How has this changed my life?”
  • “Why are people treating me differently now?”

Frankly, new wealth presents challenges that can be disorienting and possibly dangerous. It can bring on a feeling of identity dissolution – the end of your old self. In particular, if there is suddenly no economic need to work, you may need to redefine yourself. This can affect your career, relationships, and lifestyle (like home, community, and location).

There are many possible sources of wealth. You can be born to it, like a trust fund. You can inherit it as a result of someone’s death. You can win it. You can create it from the sale of a business, idea, or as an entertainer. You can earn it through stock options. You can sue for it. You can marry into it.

The ability to keep this windfall depends a lot on from where the money came. If it came via inheritance from an unexpected death, it may be seen as “blood” money and the heir will tend to lose it quickly. Money “earned” from a business sale, for example, tends to stick better.

Besides the source of the money, people’s reactions are shaped by a number of influences:

  • The windfall amount relative to your current income/net worth.
  • Your age and stage in life.
  • Your career satisfaction.
  • Your class background.
  • Your current community and social network.
  • Your family dynamics.
  • Your money style. For example, if you’re already frugal, you may have a better chance of keeping the money and vice-versa if you’re loose with money.

People who receive a windfall have a tendency to make irrational, impulsive decisions in the first few months after coming into this new-found money. Some examples of this include:

  • The desire to get rid of money via gifting.
  • Going on a spending spree.
  • Giving up control of funds.
  • The urge to move.
  • The urge to change work.
  • Feeling stuck or frozen.
  • Hanging on to inherited stock for sympathetic reasons even though you know you’d be better off diversified.
  • Doing nothing.

This emotional period can basically mirror the stages of grief. Our job as advisors is to anchor our client during this “wave” of emotions and listen to them. We help them understand their decision-making approach, focusing in on the decisions they would have made before getting this money. We can help the client realize the true value of the money. We help build the client’s support team which includes their estate planning attorney, CPA, etc. We help set goals to enable the client to “live a life that is about fulfilling their greatest potential.” And most importantly, we can urge the client to take ample time to make solid, not hasty, decisions.

Coming into a great deal of money sounds fantastic at first, but empirical studies show that without proper planning it can lead to many painful experiences and put people in worse shape emotionally, financially, and/or physically, than they were to begin with. By working with an advisor that cares, you may be part of the small minority who don’t lose their windfall and actually prospers!