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

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.