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!

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!

DWM 2Q14 Market Commentary

brett-blogIt’s unusual when nearly all asset classes move in one direction and even more unusual when that direction is up. But that’s what has happened so far in 2014 with stocks having another good quarter, alternatives having a solid quarter, and most surprisingly bonds having a stellar quarter. The primary driver behind the rallies in both stocks and bonds remain the aggressive efforts of global central banks to keep printing money in efforts to keep sluggish economies moving in the right direction. In other words, results have been good but one can’t help but feel like this rally is mostly due to artificial catalysts. And what happens when those aren’t good enough to propel us forward? Back to that question in a little bit.

Let’s look at the numbers:

    • Stocks have been on a roll with the S&P500 notching its sixth consecutive quarterly gain. The average diversified US stock fund returned +3.4% in 2q14 and is now up 4.9%.
    • In the fixed income markets, bonds prices surprisingly rallied as evidenced by the US Barclays Aggregate Index registering +2.0% for the quarter and up 3.9% Year-To-Date (“YTD”). This unexpected bond rally so far this year is from generally declining bond yields as evidenced from the 10 Year US Treasury rates falling from 3% at the start of the year to about 2.5% at quarter end. Almost everyone had expected rates to move higher, but the reverse happened when central global banks pushed looser monetary policy in response to slow economic indicators. That being said, with little further room for yields to fall, we expect rates to gradually move back up with the Fed moving toward higher rates in 2015.
    • Many liquid alternatives fared very well in the second quarter. Here are some of the ones we follow and use within our DWM Liquid Alternatives Model:
      • *JPMorgan Alerian Master Limited Partnership Index (symbol: AMJ) – up 7% 2Q14
      • *SPDR Gold Trust (GLD)– up 3.5%
      • *SPDR DJ Global Real Estate (RWO) – up 7.4%
      • **Pimco All Asset Authority (PAUDX) – up 3.9%
      • **RiverNorth DoubleLine Strategic Income (RNDLX) – up 3.3%

* denotes an alternative asset
** denotes an alternative strategy

Another important factor is that housing appears relatively strong. The Case-Shiller 20-city Home Price Index rose 10.8% in the year ended in April. However this has been driven by a lot of cash buyers. As many people with great balance sheets know, the mortgage approval process is complicated, lengthy, and no fun these days. Furthermore, the strength is showing up in pockets – one suburb may be hot, but another nearby may not be moving at all. If you’re considering a real estate transaction, make sure you have done your due diligence and it’s also a good idea to get your real estate broker and financial advisor helping you together.

As we move into the second half of 2014 (crazy how fast this year has gone!), we look to history to give us a relative view of what to expect. For example, the current S&P500 bull market is now over 5.3 years old. The longest bull market since 1950 lasted 9.5 years, so we may have some time left. Furthermore, the S&P500 has gone over 1000 calendar days without a double-digit pullback, the fifth longest stretch without a 10% or greater drop in the last 50 years. Some fear that this represents the “calm before the storm”; on the other hand, perhaps we are in a “Goldilocks” environment and this low volatility environment can continue on.

It definitely is not all roses out there. Interest rates are still low, but trending up, meaning inflation could be right around the corner. Jobs look better on the surface, but the wage growth isn’t really there as companies continue to squeeze productivity out of their workers. That means Americans won’t spend money like they use to, and hence economic growth could be kept in check. Case in point of this comes from the final 1Q14 GDP reading which showed negative growth of 2.9%. This was worse than expected and the worst reading since 1Q09, the height of the recession. The report showed that consumer spending, the main component within the GDP calculation, fell from 3 to 1 percent. Sounds serious, but in 2014-style, investors simply shrugged it off saying, hoping, that it was due to the harsh winter weather. The 2Q14 reading to be released at the end of July will need to show serious improvement or we doubt the market will just shrug it off again. The nation’s quarterly growth has only been as bad as or worse than this reading only 18 times in the last 67 years.

To sum it up, 2014 has not been flashy but it has been a profitable one for most investors so far. There is a lot of noise out there, but no one knows exactly what is going to happen next. There are both many headwinds and many tailwinds. That said, make sure you and your portfolio have a captain to steer you through those winds. One that will help you stay well-diversified and employ strategies that can help in all market scenarios, be it up, down, or sideways. We at DWM have a lot of experience navigating these terrains. We looking forward to continuing the journey with our crew and reaching new heights.

DWM 1Q14 Market Commentary

Brett DetterbeckGrinding higher. That’s what the markets did in the first quarter of 2014, evidenced by both the S&P500 Equity Index and Barclays US Aggregate Bond Index, registering a 1.8% advance. There may be a sense of calmness now, but January tested investors’ nerves with stocks experiencing one of their worst months in a long while. What we liked seeing was how the liquid alternatives investments that we follow performed during that time.  As a group they had a positive result, thus behaving in a non-correlated manner to stocks which is exactly what we like to see.  Please recall that the use of multiple assets classes helps to smooth out overall results, which leads to better long-term results. January served as a good reminder why it is necessary to look beyond just the equities asset class.

That being said, we aren’t “Debbie Downers” on stocks. We think for most investors they should represent a majority allocation. Frankly, there is a lot of good news out there:

  • Continued low interest rates and the belief that, even as the Fed pulls back from its most aggressive measures (i.e. “tapering”), it will keep them low for an extended period.
  • US growth remains on track, enough to keep currently strong corporate earnings rising.
  • The job market is slowly but steadily improving.
  • Consumers and companies that delayed spending during the harsh winter may soon be playing catch-up from pent-up demand.
  • Housing is no longer a drag.
  • Political parties in Washington have actually been cordial lately, and somewhat productive.
  • Outside of the US, Europe’s economy is seen as slowly mending.
  • The violent swings in emerging markets have calmed after central banks moved swiftly to defend their currencies by raising interest rates thus luring investors with higher returns.

On the flipside, it’s not all coming up roses entering 2Q14:

  • The Fed has done a great job of late walking its tightrope on tapering. Nevertheless, nervousness comes hand in hand with the Fed’s plan to end unprecedented efforts to aid the economy which could lead to choppy waters.
  • The stock market is showing some strains. For example, many investors in the first quarter shifted from growth companies to value companies, suggesting that some sectors may have run their course.
  • From a fundamentals perspective, stocks in the S&P500 were trading at 15.2 times the next twelve month’s expected earnings, which is higher than the 13.2 times average of the past five years, and 13.8 times average for the last decade.
  • There has been a lot of soft economic news out of China. With China being the second biggest country in terms of GDP, the whole world can feel the effects of their hiccups.
  • Cold War nervousness – all bets are off if a huge geopolitical issue unfolds. Frankly, it was pretty amazing how investors shrugged off the Crimea headlines, but who knows what the next event will be and what it will bring.

It might be overwhelming to think about all the factors at play and how they can affect you and your portfolio. But no matter what the world throws at you, remember we cherish our role as our clients’ first-line of defense for their portfolio and helping them reach long-term goals. We take pride in filtering out the noise and keeping them abreast of what is really important.

Consider talking to a wealth manager like DWM today if you feel like you’re lacking that first-line defense and want help in achieving those long-term goals.

Brett M. Detterbeck, CFA, CFP®


DWM 4Q13 & 2013 Market Commentary

Brett M. Detterbeck, CFA, CFP®Happy New Year! The story of 2013 was how US stocks blew away market expert predictions by registering its best year since 1995. It has now been over 825 days without a 10% or greater drop for the S&P500, the 5th longest stretch in the last fifty years. Fueled by easy money policy from the Fed and improving signs in the economy, it was basically “off to the races” for most stocks in both 4q13 and all of 2013. Unfortunately, for the diversified investor, most other investments lagged far behind the big figures posted by US stocks, yet still helped produce what overall will be considered by most to be a very good year for their portfolio.

Let’s celebrate the honorable return achievements of 2013 before looking ahead to 2014.

US Stocks finished the year up 30%+ as evidenced by the S&P500’s 32.4%. Domestic markets trumped overseas ones as the MSCI World Index (ex-US) was only up 21.0% and the MSCI Emerging Markets Index was actually negative 2.6%. This really showcases what’s going on in the world right now: the US recovery is making strides while the rest of the world is still trying to find its legs.

Unlike the fun times in equity-land, bonds had a bleak turnout in 2013, with the Barclays US Aggregate Bond Index down 2.0%, its first losing year since 1999. Per our recent seminars, we have been “pounding the table” on bonds urging others to follow our lead and change up or decrease their bond exposure given the new rising interest rate environment we’re in. The 10-Yr Treasury Note is now hovering around 3.00%, its highest level since July 2011, having climbed 1.61% since the start of May, which is a pretty monstrous move in bond land. Given the inverse relationship between rates and bond prices, this made for a tough year. Fortunately, there were places within fixed income to find some modest returns including high yields (up 7.4% per the Barclays US Corp High Yield Index) and floating rate funds (up over 4% as exhibited by the ETF many of our investors hold, PowerShares Senior Loan Portfolio (symbol: BKLN)).

Most alternatives did not come close to faring as well as equities. There are not many benchmarks in this category but we like to look at the DJ Credit Suisse Core Hedge Fund Net Index which posted a 2.92% return for 2013 and the CPI which was up 1.5%. Many of the liquid alternatives securities we follow posted modest, albeit positive single-digit returns. The fact is: if all alternatives were up 30% like equities, they wouldn’t be doing their primary job at being a diversifier and protector for the overall portfolio. With five straight years of positive stock market returns with no meaningful correction and an unattractive bond market, we think this asset category is of utmost importance.

We’re cautiously optimistic looking forward to 2014, however we’d be surprised to see equities continue their recent trajectory. Furthermore, we would not be surprised for fixed income to post much-lower-than-historical-average-like returns. And we would expect alternatives to remain that diversifier and protector with results in the mid- to high- single digits.

Of course, a lot depends on how the economy fares and how market participants react to it. The key factors to look for are the following:

1) Housing recovery snap – home prices are back to pre-Financial Crisis peaks in many areas. However, with interest/mortgage rates much higher than just several months ago and expected to go higher, affordability is not what is was and buyers may get spooked.

2) CAPEX anyone? – will businesses continue to be wary about spending, either by hiring, adding new equipment, or other measures?

3) Washington gridlock – with the Federal borrowing limit set to be hit soon and many other political wrestling issues ahead, we’re sure to get more fireworks here which could cause some negative ramifications.

4) Fiscal Stimuli no more – the Fed has laid out a timetable to slow and ultimately end its current humongous bond buying program. What happens if there’s a sharp economic downturn along the way and how might that affect markets?

5) ex-US – we didn’t get the confidence-shaking headline international news stories in 2013 that were overkill in 2009-2012, but severe vulnerabilities still exist across the pond. It’s important to investors everywhere, including us here, that this global economic recovery continues.

In conclusion, on the investment management side, DWM looks forward in 2014 in continuing to do what we do best: preserving and growing our clients’ capital. We do that by controlling what we can control within a low-cost, properly diversified investment portfolio, consistent with clients’ long-term goals, and regularly rebalancing it. On the financial planning side, DWM looks forward in 2014 to working with clients to firm up their financial plans using our state-of-the-art dynamic financial planning software.

For those of you currently not using a wealth manager, we urge you to make 2014 the year you help yourself by getting one. Here’s to a wonderful and prosperous 2014!

Bond Bull Market May be Over- Time for Revised Strategies

Source: James O’Shaughnessy / WSJ
Graph Source: James O’Shaughnessy / WSJ

What were you doing in 1981? A mere twinkle in someone’s eye? Attending school? Working? Married? Elise and I were buying our fifth house and taking on a 15% mortgage. The rate seemed pretty decent to us. 20-year Treasury bonds were yielding 15%, businesses were paying 21% for a “prime” lending rate, and inflation was in double digits. Many people thought we were living in Jimmy Buffet’s “Banana Republic;” where inflation and interest rates would continue at record highs for decades to come.

This was not to be. We had reached a turning point in 1981, where apparent trends started to reverse. In fact, inflation and interest rates decreased steadily for the next thirty-one years. Inflation has averaged less than 1.5% over the last five years and 20-year Treasury bonds yields reached a low of 2.11% last year. Now, it appears that we have a new, permanent change of direction-rates are beginning to rise. The thirty year bond bull market seems to have ended.

Until this year, bonds have provided a great place for investors to put a good share of their money. Performance has been very good and the risk has been low. Total return, as Brett pointed out a few blogs ago, is equal to the yield (interest paid on the bond) plus the change in value of the investment. Because bond prices increase when interest rates decline, bond investors have been rewarded with both their interest income plus an increase in market value for last thirty years.

From 1/1/2000 to 12/31/12, 20-year treasury bonds produced a total return of 7.6% per year. The S&P 500 had a total return of 2.4% over the same period. It’s no surprise that investors fell in love with bonds, not only for the excellent return but also for the lower risk and volatility. However, the experience of the last three decades in bonds is unlikely to continue.

It’s a shame, particularly for older investors.

Here’s a simple example. Let’s say that you own a bond paying 4% interest that matures in 5 years. If the interest rates for similar bonds decline by 0.50%,then the value of your bond is reduced by roughly 2.5% (0.50% decline x 5 years to maturity). Hence, your total return that year would be 4% interest income less 2.5% of price reduction. Hence, a net total return of 1.5%.

So, why would someone even own fixed income investments? The simple answer is that they still serve an important role in your portfolio. Fixed income has traditionally provided diversification and low volatility and should continue to do so. When equities rise, bonds won’t keep pace. But, when equities decline, fixed income historically advances. In addition, fixed income provides superior capital preservation qualities over other asset classes, including equities.

We believe in long-term investing and are known for not making “knee jerk” reactions. However, when there are major investment turning points, as we are seeing now, it is time to review portfolios with new proactive strategies in mind. This may include reduction of the allocation to fixed income, modifications within the fixed income asset class, and other techniques. Our DWM clients have seen a number of rebalancings focused on these matters in the last few months.

If you want to hear more, mark your calendars. DWM’s annual client educational update this year will focus on proactive strategies in a rising Interest rate environment. Our Charleston/Mt Pleasant event will take place October 23rd in the afternoon and our Palatine event will take place the afternoon of October 30th. We do recognize that the topic may, for some, be important but unexciting. That said, we can promise all attendees some pleasantries at the receptions that will follow. Be sure to watch for more details soon.