This past Saturday, many clients/family/friends attended our annual Charleston Friends of DWM Appreciation Event at Sweetgrass Pavillion in Mt. Pleasant, SC. Although the sun evaded us, the room was filled with bright faces!

A great time was had by all!



Marilyn Dingle, the resident sweetgrass basket weaver, educated us on the history of sweetgrass baskets.


And some even participated!

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Everyone learned a thing or two about Marilyn and the art of sweetgrass basket weaving!

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And had lots to talk about!

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Many thanks to all who waded through the rain and joined us for our appreciation event! And to both those that did attend and to those that couldn’t make it, let us reiterate that we are honored to have you all as our friends and look forward to a continued great relationship! Thank you!!!

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Our Charleston Office is Moving on March 29, 2016!

2016-03-28 we are moving truck3
Our Charleston office is moving tomorrow, March 29th, to:

            104 CHURCH STREET

            CHARLESTON, SC 29401

Our main phone number remains the same: 843-577-2463 as does our fax: 843-937-9407.

We’re three buildings south of Broad Street on the east side of Church St.  And, here’s the big thing, we have four permanent parking spots across the street for clients and guests.  Assured parking places and more space for our growing business were the principal reasons for the move.

Elise and Les bought the building last June.  Built in 1800, it housed a law firm on the first floor and had two apartments on the second floor until this past September.  Now, after six months of renovation and restoring its old urban rustic charm, the first floor will become DWM’s Charleston office and Elise and Les will make the second floor their home.

We’ll look forward to welcoming each of you to our new spot.

Hopefully, for March 29th only, our office internet and phone may not be working.  However, we will continue to receive and send email and communicate via our mobile technology.  You can also contact Brett at brett@dwmgmt.com  or call him in Palatine at 847-934-6262.  Or feel free to call Les on his cell phone at 843-901-0088.  We all know he doesn’t lift heavy boxes, so he’ll be standing around all day awaiting your call!

Advice for New Nesters

New NestersThey have graduated from college and have finally secured their first job. They are officially launched. Give yourselves a high five. It is what all parents dream of and sometimes fear. An empty nest with quiet solitude and, presumably, less mess and lower grocery bills. Now those fledgling adults need their own places to roost, but rents are high in Charleston or Chicago or other cities where they may have migrated. The best areas to live and work are always the most expensive. Paying rent to a landlord can seem like throwing money away. Wouldn’t it make more sense for them to buy their own nest?

The good news is that mortgage rates are favorable now and the real estate market is stronger in many areas. Real estate will likely be an asset that appreciates. There are some favorable mortgage programs for first-time home buyers. Generally, there are two categories for loans: the conventional mortgages offered by Fannie Mae/Freddie Mac and then the slightly more lenient programs offered by the FHA. There is also a kind-of hybrid program offered by Fannie Mae called My Community Mortgage that is similar to the FHA loan programs, but has income limitations based on the HUD median income in your area. Lastly, if looking in a small-town area, there is a USDA loan program that offers favorable rates, flexible lending guidelines and can offer options with no down payment. There are location and income limitations for the USDA loans, but worth looking into, if purchasing real estate in a small town. The individual banks will occasionally offer short-term “niche” loan programs, but there can be some catches with those.

The first place to start in the home-buying process is to get an accurate and current credit score and credit report for your first-time home buyer. All loan programs will require this information from the buyer and it is good for them to know where they are before starting the process. Lenders look carefully at payment history, debt ratios and employment history for young buyers. FHA loans will allow letters of explanation for credit issues and flexibility in some of the other guidelines. They can get pre-approved for a mortgage so they know exactly what amount is possible to borrow. Generally speaking, the conventional mortgages require a credit score minimum of 680. The other programs are more flexible and will individually evaluate to qualify, though 620 is probably their minimum. They can certainly start by checking with their bank on what they can do. The mortgage broker we spoke with says that they work hard to find the best available option for the borrower and to make sure that they manage the underwriting process to ensure qualification. Having options and someone to help with underwriting can be especially useful for a first-time buyer. The rates and down payment minimums might be better in a conventional loan program, but the guidelines are a little stricter. It is advisable for the new buyer to get educated and look into improving their credit worthiness, if needed.

Prior to real estate shopping, it is also recommended that the buyer have a very good understanding of their budget so they know exactly how much house they can afford. It is good to remember all the “sleeper” costs in both the purchase and ownership of a home. There are settlement costs, taxes, insurance, maintenance, repairs, HOA fees etc. that all should be considered as part of the budget. Also, have the potential new nester check out the neighborhood at different times of day to see if it meshes with their lifestyle. And be sure to test the commute to and from work… in this day and age, that can be a very big consideration for quality of life as well as resale!

There are several options for you to participate in as parents. All of the programs allow some down payment and/or settlement cost help from family members. The rules vary, but there are definitely options to provide 100% as a gift, as long as the buyer can qualify for the mortgage on their own. The lender will require proper gift letters and possible bank statements. There is also the ability to be a non-occupant co-borrower that can help with qualification, as long as the occupant can demonstrate that they can afford the payments with their income. This will affect the parents’ debt ratio and appear on their credit report. You could also purchase something and rent it to your child, possibly even with a rent-to-own contract. There are, of course, tax advantages to ownership for the young buyer and may be advantages for you, also.

DWM clients know that financial planning assistance for their children, including first time home buying, is covered as part of our Total Wealth Management process. We’re happy to help with nest-building for the entire family.

DWM’s “Spooky” 3Q15 Market Commentary

Nightmare on Wall StWith Halloween coming later this month, some people may perceive October as scary. But after the blood-bath that took place in the markets during the third quarter, August and September may well be claiming themselves as more frightening than Frankenstein and Dracula (or Freddy and Jason, for you 80s/90s movie buffs). In fact, it was the worst quarter that stocks have experienced since 3Q11. What is creating all of this horror one may ask? Well, the black cats are the uncertainty of what the Fed will do with interest rates and China’s economic slowdown (see our recent blog for more info). Fortunately, it’s not so gruesome for most of our clients, as they have well-balanced portfolios which also include fixed income and alternatives. These two asset classes can really help cushion the equity carnage in times like these.

Here’s how the major asset classes fared:

Equities: The MSCI AC World Equity Index suffered a 9.5% stabbing in the third quarter and has dropped 7.0% Year-To-Date (“YTD”). International funds had an even bloodier quarter, with the MSCI AC World Index Ex USA down 12.2% and now off 8.6% for the year.

Fixed Income: The Barclays US Aggregate Bond Index was up 1.2% and 1.1%, 3Q15 and YTD, respectively; and the Barclays Global Aggregate Bond Index +0.9% and -2.3%, respectively. Longer term bonds did the best, but not many people have much of that exposure going into the lurking rising interest rate environment. The lower the duration and lower the quality, the more ghastly it was for the quarter. High yields which correlate more to the equity market fared the worst, down 4.9%, as represented by the Barclays US Corporate High Yield Index.

Alternatives: We prefer alternatives that aren’t that correlated to the equity market for wicked times like these. Some alternatives did just that. For example, the BlackRock Long/Short fund was a positive at 0.7%, the Pioneer Insurance-linked Securities fund was up 4%, and the AQR Managed Futures fund was up over 6%. Unfortunately, not all of the holdings went a positive direction. MLPs have been under attack all year, as have many energy-related securities, but we think it is gravely overdone and there may be opportunity here. Gold is typically a great diversifier and behaves differently than equities, but it sold off in 3Q15. In any event, alternatives definitely fared better than equities, but unfortunately produced overall negative results in 3Q15, with the Credit Suisse Liquid Alternative Index down -2.5%.

So, is this Nightmare on Wall Street almost over? It should be noted that at the time of this writing, just a few days into the quarter, the markets have rallied. In fact, the S&P500 has risen 5.6% over the past five sessions, its’ best 5 day gain since December 2011. Ironically, in the ‘bad news is good news’ department, it was a weak jobs report last week that fueled the rally. See, the market is convoluted in that many times it reacts positively to bad news and vice versa. The weak jobs report was actually perceived as good because that means that weakness from abroad may be spilling over into the US, which cools expectations for a Fed increase in interest rates. And, as long as we stay in a low interest rate environment, that’s good news to stocks because the other asset classes aren’t as attractive on paper. Confused? Unfortunately, that’s how these markets work and why you want a professional wealth manager helping you.

Markets don’t always go up. And 2015 may go down as only the 2nd losing year for the stock market in the last 12. But that doesn’t mean that the Grim Reaper is lurking around every corner. It’s just part of a market cycle. By staying invested in a well-diversified portfolio made up of multiple asset classes, you can fend off the evil the market throws at you from time to time and come out unscathed. But you need to be disciplined and controlled, something a good Financial Sherpa can help you with. Don’t let emotions take over, which could haunt you for the rest of your life. Know that a disciplined investor looks beyond the concerns of today to the long-term growth potential of markets.

Here’s to a not-so-scary October. Happy Halloween!

Homeowner’s Insurance: Covering Your Asset

Here in Charleston, the height of hurricane season is approaching and the weather reports around the country at times seem dire. Disasters, natural and otherwise, are vividly portrayed on the nightly news or in many of the entertaining insurance company commercials. Do we consider what would happen if we were the ones looking at the tree down on the roof or water pouring out our front door? Most people only think about their homeowner’s insurance policy when selling or buying a property. Even then, it is usually just a “to do” item to satisfy the lender or something to handle before the closing. There are many features in a policy that need careful consideration and it is good to understand the many options.

For example, you might be surprised to learn that opting for coverage at your home’s appraised value may, in some cases, leave you underinsured. Standard homeowner insurance policies use industry estimates to set their replacement coverage for rebuilding, replacing or repairing insured items. The cost to restore historic homes or homes with high-end customization or upgraded features may exceed what these standard policies will allow. As an article in the Wall Street Journal noted, “the cost of construction could be two, four or sometimes even 10 times the market value of the home”. Especially after a natural disaster when the price for materials and labor can skyrocket from the demand. Many insurance carriers, particularly those that specialize in high-value properties, will offer additional coverage above the industry standards for replacement costs. A knowledgeable agent can find the right amount of coverage for your property.

Also, you may have some very valuable items in your home that are worth much more than the replacement value. There are riders for particular high-value items like jewelry or art that you can insure for a specified value for replacement if lost, stolen or damaged. Usually the premium for the replacement of these valuables is well worth the cost and will allow them to be separately scheduled from the replacement coverage of your home.

In some cases, you may find you can save money by reducing your coverage, for example, on personal property or liability, especially if you already have a valuables rider or umbrella policy in place. You can also save on premiums by increasing your deductibles or self-insuring for some of the extras that a policy might cover. Installing security systems or safety features like storm shutters or sprinkler systems may qualify for discounts, as well. Be sure to let your agent know about any features like these or about any additional policies you have so you don’t duplicate coverage.

Some other things to consider:

  • There may be options in policies that offer coverages for lodging or other expenses in the event you must vacate your home during repairs.
  • Homeowners insurance does not cover damage caused by flooding, tsunamis, earthquakes or even some acts of war, like terrorism. Separate riders or policies may be needed if your property is at risk.
  • Many policies don’t cover for mold damage, sewage back-up or termite infestation. You can generally purchase additional coverage to protect against these or you may choose to self-insure.
  • Homeowners should note the liability coverage in their policy and make sure it is adequate to protect them or their guests. Additional umbrella policies can be used to cover your total net worth for extra protection.

It is always a good idea to know the details of your homeowner insurance policy. It is also smart to catalogue, videotape, or in some way record your property and the items inside. This will help you get your full value when faced with any insurance loss. At DWM, we hope you never have to face any type of insurance claim. Although we don’t sell any insurance or endorse any particular insurance products, we are happy to help you review and evaluate your insurance needs and make sure your assets are properly covered.

DWM 2Q15 Market Commentary

Sideways fireworksIt was a special year for me. Instead of just my normal one annual firework viewing, I was able to see a number of displays this season including one in Kentucky, one in Wisconsin, and one in my hometown of Glen Ellyn, IL. On top of that I was able to witness the market fireworks that came early in June. Usually we wait until the 4th of July for fireworks. But not this year as the second quarter was chugging along somewhat quietly until “bang goes the dynamite” in the last week of June. The Greek turmoil was the cause of these fireworks and it sent global markets tumbling and cut the year’s gains to almost nothing. It’s unfortunate as we think that “Grexit” is overblown – please see our recent blog for more on Greece.

Let’s take a closer look into each asset class:

Equities: The most popular index, but generally not the best one for proxy use, the S&P500 managed to eke out a small gain for 2Q15, +0.28%, and is now up only 1.23% for the year. The MSCI ACWI Investable Market Index, a benchmark capturing ~99% of the global equity markets, registered 0.35% for the quarter and has returned 2.66% Year-To-Date (“YTD”). International funds continue to outperform domestic ones in 2015.

Fixed Income: It was a difficult quarter in bond land as we saw the Barclays US Aggregate Bond Index fall 1.68% and 0.10%, 2Q15 and YTD, respectively; and the Barclays Global Aggregate Bond Index drop 1.18% and 3.08%, respectively. Corporate bonds really suffered as represented by the iBoxx USD Liquid Investment Grade Index, off 3.82% for the quarter and now down 1.31% for the year.

Alternatives: It wasn’t a great quarter for stocks or bonds and unfortunately not a good one for alternatives either. A lot of the areas that did well in the first quarter stumbled this time around, for example, managed futures and real estate. MLPs were also down but we believe MLPs are mistakenly getting lumped into the “sell-anything-related-to-oil” trade. There were some bright areas. For example, there are insurance-linked (“catastrophe”) funds that continue to chug along with positive returns. They have really no correlation whatsoever with the financial markets as they are tied to natural events instead. We love non-correlation like this!

So at the half way point of 2015, many investors are sitting with small, albeit positive net gains for the calendar year. We are cautiously optimistic about the second half as there are many positives out there including:

  • The US economy is definitely headed in the right direction – unemployment and wage data keep improving. We are expecting a modest pick-up of growth in the second half.
  • Even with the Fed poised to start raising rates later this year – a sign of US economy strength – comfortably low US inflation should continue and is good news for American businesses and consumers. It also lends support for stocks.
  • Outside of the US, central banks are easing which usually is a catalyst for global markets.

That being said, beyond Grexit, there are other headwinds including:

  • China’s stock markets have been in extreme whipsaw lately. Hopefully there is no spillover effect for the rest of the world.
  • Large cap domestic stocks as represented by the S&P500 are a little pricey. The S&P500 finished 2Q15 at 17.9 times Trailing Twelve Months (“TTM”) earnings. That’s higher than the 15.7 average for the last ten years and higher than the 17.1 at the start of the year. Frankly, US stocks have risen so fast since the financial crisis of 2008 that future gains are likely to be weaker than historical averages. (On the flip side, a lot of the international markets look relatively cheap.)
  • The Fed, via its unprecedented QE program, has created this artificial low rate environment which has led to recent major volatility in bonds. Not only should we expect this to continue, but it to lead to increased volatility in other asset classes. Furthermore, nervousness is abundant as the Fed tries to unwind this artificial un-natural setting.

In conclusion, the “fireworks” may continue and keep us on our toes. The market doesn’t always go up. We need to remember to be patient when quarters, and perhaps years, like this come along. It’s important to stay disciplined, to stay focused on the long-term, stay invested, and not let emotions drive irrational behavior based on short-term events.

In closing, the best firework display I saw this year was the one last week in Kentucky. It was amazing! Besides being kicked off by a 15 minute video that gave thanks to our troops, the fireworks were synchronized to music from AC/DC to the theme song from Frozen, “Let it go!” Unlike the other fireworks events I attended, only this one had a unique set of fireworks that actually go up, make a huge bang, and then go sideways. Yes, sideways, as in totally horizontal for some time. Frankly, I think it may be appropriate if our markets moved like these fireworks: up for a short while and a healthy move sideways…

Brett M. Detterbeck, CFA, CFP®


DWM 1Q15 Market Commentary

brett-blogBoring. That’s what we could call our investment style, but we like it that way. In baseball terms, which seems appropriate given Opening Day 2015 is upon us, we are all about cranking out consistent singles and doubles; we are not interested in striking out going for that home run. We use low cost securities that give us broad diversified exposure to many asset categories. This disciplined approach will take away the volatility found in speculative investors’ portfolios, provide more stable returns, and help one achieve their long term goals. It isn’t flashy, but it’s a tried and tested process that works.

As part of our philosophy, we believe:

  1. Traditional capital markets (like equities and fixed income) work and generally price securities fairly. (Which is why we use generally passive instruments in our equity and fixed income models.)
  2. Diversification is key. Comprehensive, global asset allocation can neutralize the risks specific to individual securities. (Which is why we don’t utilize individual stocks.)
  3. Risk & Return are related. The compensation for taking on increased levels of risk is the potential to earn greater returns.
  4. Portfolio Structure explains performance. The asset classes that comprise a portfolio and the risk levels of those asset classes are also responsible for most of the variability of portfolio returns.
  5. We can increase returns and minimize downside through portfolio design using our special blend of both passive (found generally within our equity and fixed income models) and active (found generally in our alternatives model) investment styles.

As one can see above, our approach involves the understanding of asset allocation – a portfolio’s mix of equities, fixed income, alternatives, and cash – and what mix is appropriate for the client based on their risk tolerance and other unique factors.

Given all above, to understand performance is to understand how the asset classes within your portfolio are doing. Hence, we find it prudent to incorporate a discussion on how each of the major asset categories (equities, fixed income, and alts) are doing within these market commentaries. The same way a baseball manager may look up and down his line-up, seeing what is working, what isn’t, and why? That being said, let’s take a closer look into how each asset class fared in the latest quarter:

Equities: The MSCI ACWI Investable Market Index, a benchmark capturing ~99% of the global equity markets, registered +2.3% for the quarter. International (+4.9%), small cap (+4.3%), and mid cap (+5.3%) outperformed large cap (+1.6%) this quarter. The S&P500/large cap has outperformed the other styles for a good while now, and as we have said many times before: expect reversion to the mean. Well, it’s happening. Traders and investors are noticing that the S&P500 is getting a little expensive, trading at 16.7 times forward 12 months forecasted earnings which is above the 10 year average of 14.1. The economies overseas may not be as strong as here in the US, but most are modestly improving and frankly international markets are cheap. Also there are many multinational companies that lie within the large cap space – with the dollar surging, the profits of these big boys are decreased.

Fixed Income: Most bond investments had modest price increases with the Barclays US Aggregate Bond Index up 1.6%. However, international markets didn’t fare as well as shown by the Barclays Global Aggregate Bond Index being down 1.9%. So what’s going on? Outside of the US, many central banks around the world are cranking up the easy money policies, bringing yields on overseas bonds down, in some cases to negative yields. US bond yields are very low but are higher than their international counterparts, so foreign buyers continue to buy our US bonds, thus pushing prices up. In fact, US Government bonds rose for the 5th straight quarter in a row as the yield on the US 10-yr Treasury Note fell from 2.17% at end of 2014 to 1.93%, confounding many traders that expected yields to rise in response to possible higher interest rates and improving signs in the US economy. We do think yields on the US government bonds should rise soon as the Fed has indicated an interest rate increase occurring in the near future. They’ve also made many traders happy when they said the cycle upward, once started, will be a slow one.

Alternatives: Nice start for the Credit Suisse Liquid Alternative Beta Index (+2.8%) and many of the liquid alternatives we follow. Of course, oil was down big, however if your current exposure to commodities was via a managed futures vehicle, you were most likely “short”. Which means that with commodities going down last quarter, you most likely profited. In fact, the AQR Managed Futures Fund which we follow was up 8.5% this quarter. Other notable alternatives include: 1) real estate, up +5.4%, as represented by the SPDR Dow Jones Global Real Estate Fund, and 2) a global tactical fund called John Hancock Global Absolute Return, which was up 3.7% on the quarter and invests by tactically trading (going long and short) equities, bonds, and currencies (e.g. betting the US dollar versus the Euro).

In our last quarterly commentary, we said to expect more volatility and indeed that’s what happened in 1Q15, as evidenced by the S&P500 closing up or down more than 1% nineteen times. But by continuing with our “boring” style, the expected increased volatility in equities won’t significantly affect our batting line-up. In fact, our ball club is built to endure whatever is thrown at it. By having diversified players (i.e. investment styles like equities, fixed income, and alternatives) focused on things that can be controlled, we’re confident this team can bring home the championship!

Brett M. Detterbeck, CFA, CFP®, AIF®


DWM 4Q14 & 2014 Market Commentary

brett-blogDiversification. We talk a lot about it. It’s basically our religion when applying reasoning to investing. Diversification is a technique that reduces risk by allocating investments among various financial asset classes, investment styles, industries, and other categories. It aims to maximize return by investing in different areas that would each react differently to the same event. Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-term financial goals while minimizing risk. As great as “diversification” is to CFA Institute practitioners, it might be just a long winded word to someone that doesn’t enjoy the occasional financial periodical. In fact, to that someone, diversification may seem pretty silly in a year like 2014 where really only a couple areas of the market stood out and made everything else seem trivial.

What am I talking about? Well, if you haven’t heard by now, the S&P500 just racked up another double-digit year, gaining 13.7% in 2014. However, the rest of the equity markets, weren’t close to this. In fact, the average US stock fund was only up 7.6% and the average international stock fund was down 5.0% for 2014. In other words, besides a few dozen mega-cap stocks that powered the market-cap-weighted S&P500, most stocks were up for the year, but only modestly.

Frankly, like I’ve said before, the S&P500 is not the best benchmark for a diversified investor. A better barometer or benchmark may be the MSCI ACWI Investable Market Index which captures large, mid and small cap representation across 23 developed markets and 23 emerging markets countries. With 8603 constituents, the index is comprehensive, covering ~99% of the global equity investment opportunity set. For 2014, this index was up 4.16%.

Changing gears, let’s talk about bonds. Like equities, developed international exposure didn’t help much shown by the Barclays Global Agg Bond Index only posting a 0.59% return on the year. Here in the US, it unexpectedly turned out to be a decent year for bonds with the average taxable bond fund notching a 2.8% return. Long-term US Treasuries, which everyone was afraid of going into this year, did really well (+5.1% for the Barclays US Total Treasury Index) because interest rates went down instead of up as almost everyone was predicting. In fact, the yield on the 10-year Treasury Note started 2014 right at 3.0% and just dipped under 2.0% at the time of this writing! One should not expect a marked rise in US rates any time soon and the basic reason is a lack of inflation. Remember the days when we fought inflation?! Well, now it’s looking like central banks around the world need to worry about deflation. Case in point: the US has not been able to get to its 2% CPI inflation target, the biggest culprit being oil down over 50% from its June 2014 peak. New Fed Head Janet Yellen has laid the groundwork for the central bank to raise interest rates around midyear 2015, but she’ll need the economy to keep cooperating to do so.

Liquid Alternatives were a mixed bag this year. Real estate securities had a great year as most real estate related funds were up well over 10%. Managed Futures also were a bright spot with our fund of choice AQR Managed Futures, up over 9% for the year. If you were long-only commodities, it was a terrible year with energy down big with the oil drop. And some hedge fund type strategies that employ a very active approach had difficult times. For example, a manager betting on rising rates and increased inflation going into 2014, most definitely was a loser. Like any other actively managed investment, the liquid alternative managers need to be monitored closely. Again, alternatives are a prudent part of someone’s overall portfolio because of the extra diversification it brings to the table. For the record, the Credit Suisse Liquid Alts Beta Index was up 3.6%.

Turning the page to 2015, we can only truly count on one thing: increased volatility. Volatility has been very low the last few years and that most likely will change as this bull market which started in 2009 has created equity prices in the US that are above historical fundamental standards. And whereas the US economy is now on a roll – evidenced by the best hiring stretch since the 1990s boom, record auto sales, unemployment falling to 5.8%, job openings near a 13 year high, and the number of Americans working surpassing its prerecession high – there are also significant headlines our global economy still faces. Some of these concerns include China’s slowing growth, Europe’s flirtation with recession, Russian instability, a US labor force participation rate that is near the lowest since the 1970s, US wage growth which remains weak, and US part-time workers that want, but can’t find, full-time work.

We would also like to point out how there is a relation to inflation and returns. When inflation is higher, expected returns are higher and vice versa. Inflation has averaged over 4% per annum over the last 40 years, e.g. a “balanced” portfolio with a historical nominal return may be around 7.3%, but adjusted for inflation, the real return is actually 3.1%. We are in a hugely different inflation environment now where inflation is much lower, hence expected returns will also be lower. Our clients know first-hand that it is the real return that is they key and what it used for their planning scenarios.

In conclusion, now perhaps more than ever is a good time to be working with a wealth manager to keep you on track to reach your long-range goals and to prevent you from taking on unnecessary risk, like loading up in any one stock or investment style. Investing is like a marathon. You want to be well prepared, resilient, disciplined and focused in order to complete the long race. Sprinting, like short-term investing or investing in the latest fad, is really a different sport entirely, and for a lot of people, a way to quickly hurt themselves. Just as a marathoner in training benefits from a good running partner or coach, your long term results can be enhanced with the right financial advisor.

Here’s to an excellent 2015.

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!