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DWM is committed to learning for its team, clients and friends. In this changing world, it’s extremely important to stay current in all areas impacting your financial future.

We encourage all of team members to “drill down” on current topics important to you and contribute to our weekly blogs.  Questions from our clients and their families are often featured in our blogs.  

Financial literacy for clients and their families is very important to us.  We generally hold an annual wealth management seminar for all of our clients.  We encourage regular, at least semi-annual, meetings in person with our clients to review family updates, progress on financial goals, asset allocation and performance of investments.  We’re happy to assist younger members of the family as part of our total wealth management program.

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DWM 4Q18 & Year-End Market Commentary

Written by Brett Detterbeck.

Fantasy Football

 

Fantasy Football and portfolio management may be more similar than one would think. Over the past weekend, I drafted a playoff fantasy football team which I’m hoping will amass more points than the other five “owners” in my league. Fantasy football drafting for both the regular season and playoffs is similar in that you want to take the NFL players that get the most touchdowns and the best stats in turn for rewarding you with higher points. The team with the most collective points wins! However, playoff fantasy drafting is much different than a regular season fantasy draft, with the key difference being one doesn’t know how many games that a player will actually play! Patrick Mahommes may be the best player available per game on paper; but if his KC Chiefs lose in their first game, a middle-of-the-road player like Julian Edelman from the Patriots who is expected to play multiple games, can be superior. Thus, the key is trying to pick not only the best available player, but also the one who will play the most games.

It’s sort of like investing, where picking NFL players and their teams become synonymous with picking companies. You want a collective bunch of players/securities that outperform others which ultimately leads to higher values. I looked at this draft pool of players like I would constructing a portfolio: diversifying my picks by player positions and teams.

Some of the other owners didn’t follow this disciplined approach, instead opting at throwing all of their marbles into the fate of one team and hoping it would lead them to the Fantasy Football Holy Land. And just like investing all or the majority of your dollars into one stock, this type of “coaching” can lead to utmost failure. Case in point: one owner loaded up on one team, taking several players on the Houston Texans. Ouch. (If you’re an NFL fan, you know that the Texans were squashed by the Colts and are out of the playoffs, just like this “owner” is now out of contention in our Fantasy League!) The morale of this story is: there is no silver bullet in football or investing; stay disciplined and diversified and reap the rewards over the long term.

And now onto the year-end market commentary…

Unfortunately, there were not many good draft picks this year. In fact, as stated in one of our previous blogs, around 90% of asset styles were in the red this year. And I don’t mean the Red Zone! Let’s see how the major asset classes fared in 4q18 and calendar year 2018:

Equities: Stocks were driving down the field, reaching record highs right before the 4th quarter began and then…well, let’s just say: “FUMBLE!” with the MSCI AC World Index & the S&P500 both dropping over 13%! This was the steepest annual decline for stocks since the financial crisis. Yes, investors were heavily penalized in 4Q18 for several infractions, the biggest being:

  • The slowing of economic growth
  • The ongoing withdrawal of monetary policy accommodation, i.e. the Fed raising rates and until recently, signaling more raises to come
  • Trade tensions continuing to escalate
  • The uncertainty of a prolonged US Government shut-down
  • Geopolitical risk

None of these risks above justify the severe market sell-off, which brought the MSCI AC World Index to a -10.2% return for 2018. This is in stark contrast to 2017, when it was up 24.0%! “Turnover!” Frankly, the stock market probably overdid it on the upside then and now has overdone it to the downside.  

Fixed Income: The Barclays US Aggregate Bond Index & the Barclays Global Aggregate Bond Index “advanced the ball” in the fourth quarter, up 1.6% and 1.2%, respectively. Still, it wasn’t enough to produce any “first downs” with the US Agg essentially flat and the Barclays Global down 1.2% on the year. Bad play: In December, the Fed raised rates another quarter-point and indicated they may do more. Good play: within the last week, they may have completed the equivalent of a “Hail Mary” by signaling a much more dovish stance – it certainly made the stock market happy, now up 7 out of the last 9 days at the time of this writing.  

Alternatives:  Like an ordinary offense playing against the mighty Chicago Bears D, alts were “sacked” in the fourth quarter as evidenced by the Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, falling 4.0% for the quarter and finishing the year down 5.1%. This is the worst showing ever for this alternative benchmark. Frankly, we are shocked with this draw-down, chalking it up to 2018 going down as the year where there was no place to hide. Gold*, Managed Futures**, and Merger Arbitrage*** proved to be good diversifiers in 4q18, up 7.5%, 3.6%, 2.4%, respectively; but not many “W’s” (aka “wins”) for the year in alts or any asset class for that matter.

Put it all together and a balanced investor is looking at negative single-digit percentage losses on the year. Yes, 2018, in particular the fourth quarter, was a brutal one for investors. It was like we were in the Red Zone about to score an exhilarating touchdown, only for a “Pick 6” to happen. (Pick 6 is when the football is intercepted and returned into the opposing end zone.) What we learned is that “L’s” (aka “losses”) or corrections can still happen. Going into this year, many had forgotten that markets actually can and do go down. Further, markets can be volatile, down big one day, and up big the next. So what is one to do now, besides putting the rally caps on?

The answer is: essentially nothing. Be disciplined and stay the course. Or, if your asset allocation mix has fallen far out-of-line of your long-term asset allocation target mix, you should rebalance back to target buying in relatively cheap areas and selling in relatively expensive areas. Or, if you happen to have come into cash recently, by all means put it to work into the stock market. This may not be the absolute bottom, but it sure appears to be a nice entry point after an almost 20% decline from top to bottom for most stock indices. From a valuation standpoint, equities haven’t looked this attractive in years, with valuations both here in the US and around the globe below the 25-year average.

And speaking of football, it’s easy to be a back-seat quarterback and say, “maybe we should’ve done something differently” before this latest correction. But we need to remember that empirical studies show that trying to time the market does NOT work. You have to make not just one good decision, but two: when to get out and when to get back in. By pulling an audible and being out of the market for just a few days, one can miss the best of all days as evidenced by the day after Christmas when the Dow Jones went up over 1000 points. In conclusion, if you can take the emotion out of it and stay fully invested through the ups and downs; at the end of your football career, you give yourself the best chance to make it to the Super Bowl. 

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

 

*represented by the iShares Gold Trust

**represented by the Credit Suisse Managed Futures Strategy Fund

***represented by the Vivaldi Merger Arbitrage Fund

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Can Money Buy You Happiness?

Written by Lester Detterbeck.

Happiness-is-the-meaning-quote-about-happiness-by-Aristotle.jpg

 

Happy New Year!! We hope you had a fantastic holiday season. Now, it’s on to 2019 with planning and resolutions for the New Year. What are your goals? More money? More Happiness? More Joy? As you tackle these huge questions of money and meaning, we’d like to offer you some ideas.

Does money buy happiness? King Midas was rich, but his gold didn’t bring him happiness.   That’s because there’s a difference between being rich and being wealthy. Brian Portnoy, in his book, “The Geometry of Wealth,” articulates this well: “Being rich is having ‘more.’ The push for more is a treadmill of which satisfaction is typically fleeting. Wealth, by contrast, is funded contentment. It is the ability to underwrite a meaningful life- however one chooses to define that.”

Money, of course, is a huge part of our daily lives. Our life cycle with money includes earning, spending, saving and investing. Our first paycheck shows us our ability to earn and sustain ourselves. Next, where do we spend the money and how much do we save? Lastly, as we accumulate money, we choose to put our financial capital at risk to grow at a higher rate of return than cash. Money is like the oil in your car; without it, the car grinds to a halt, but with it, YOU still have to steer the car in the right direction.

Sonja Lyubomirsky in “Pursuing Happiness,” identifies three factors which determine happiness/human fulfillment. These are disposition (who you are), circumstances (what you face) and intentions (what you do). Her research shows that outcomes are impacted as follows: 50% comes from disposition, 40% from intentions and 10% from circumstances. The good news is that we can control our intentions; which, of course, is our review, planning, implementation and monitoring of our life planning.

As Daniel Kahneman (featured in earlier DWM blogs) has proven, how well we handle our intentions and planning has a lot to do with “Thinking Fast and Slow.” The fast brain is the home of impressions, impulse, and feelings. The slow brain is engaged when we are deliberately thinking and making informed choices. The two systems work together; the key is using our slow brain as we shape a life of money and meaning. The process of building and executing a plan can be, in itself, a source of happiness.

In 2015, the Dalai Lama and Archbishop Desmond Tutu met and discussed life; recapped in “The Book of Joy.” They separated happiness into two categories; one, experienced happiness, which comes and goes with daily pleasures, and, two, reflective happiness, the achievement of joy, which takes work. Dr. Portnoy identifies the four pillars of joy:

  • Connection-the need to belong
  • Control-the need to direct one’s own destiny
  • Competence-the need to be good at something worthwhile
  • Context-need for a purpose outside of one’s self

These “Four C’s” are at the heart of funded contentment. And while contentment can be achieved by all, including those in lower levels of income, money helps.

Dr. Kahneman found in his research that happiness directly increases as income increases. However, after about $75,000 of annual income (per person), experienced happiness levels out. The concept is that good and bad moods come and go at the same pace for someone making $100,000 per year as compared to someone making $1 million per year. However, reflective happiness, or funded contentment, does increase with higher incomes for many people. This is because at higher levels of income, money, allocated wisely, can underwrite the Four C’s, which constitute reflective happiness. Money can be used for both experienced and reflective happiness and, by using both our fast brain and our slow brain, we can achieve both.

In our crazy, chaotic world, it’s important not to let our fast brain guide all of our intentions. We need to have a plan and a process and be ready to adapt it as the world changes. True happiness takes work. Our goal, as wealth managers, is to assist you with a process not only to protect and grow your money, but also to help you achieve “funded contentment”- the ability to underwrite a meaningful life- however you choose to define that.

Good luck on your planning for 2019. Please let us know if you would like us to help.

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Nowhere to Hide for Investors

Written by Lester Detterbeck.

Nowhere-To-Hide_stock_market.png

Most years, financial markets are a mixed bag; some asset classes are up and some are down. Some years, like 2017, everything is up. And then there are years, like 2018, when everything is down. It’s been decades since stocks, bonds, commodities and gold all have reported negative results. Even though the American economy remains strong, with low unemployment and steady growth, expectations for the future have diminished. Rising trade tensions, a sharp slowdown in Chinese spending, rising interest rates and no additional tax reform have reduced the outlook for economic growth and corporate profits worldwide.

So, what’s an investor to do? We suggest you go back to the basics and review your financial and investment strategy for the future:

1)Determine how much risk you need to take on to meet your financial goals. What is the annual real rate of return you need to have enough money for your lifetime(s) and the legacy you wish to leave? When we say real return, we mean the nominal return less inflation. You, perhaps with help from your financial adviser, need to determine your expected investment portfolio at your time of “financial independence,” the annual amount you expect to withdraw from the portfolio to cover your needed and wanted expenses (any annual amount over 4% of the portfolio could be a problem), estimated inflation and estimated longevity. The calculation will produce a rate of return needed to meet your financial goals.

2)Next, determine how much risk you want to take on. Your “risk profile” is based on your risk capacity (your financial assets), your risk tolerance (your attitudes about risk), and your risk perception (your current feelings about risk). We’re all hard-wired with certain attitudes about risk. Some of us are aggressive and some of us are conservative or even defensive. Some of us are victims of the “recency bias,” which means that we think that whatever direction the markets have moved recently will continue (forever). At a minimum, we need to take on the risk we earlier determined necessary to meet our goals. If that seems too aggressive then we need to revise our financial goals downwards. If we want to take on more risk than is needed to reach our goals, that’s a personal choice.

3)Your risk profile should be based on the long-term, but may need to be adjusted. Once you, perhaps with help from your financial adviser, have determined you long-term risk profile as defensive, conservative, balanced, growth or aggressive, you should maintain that profile for the long-term and not move up or down due to short-term market conditions. Don’t try to time the markets’ ups and down. Staying invested for the long-term in an appropriate risk profile is your best strategy. However, life events can result in major changes in a person’s life. Death of a family member or loved one, marriage, relationship issues, changes in employment, illness and injury are all examples. At these times, your risk profile should be reviewed and, if appropriate, adjusted.

4)Determine an asset allocation based on your risk profile. There are three major asset classes; stocks (equity), bonds (fixed income), and alternatives (gold, real estate, etc.). Your risk profile will determine how much of your portfolio would be in each of these categories. A defensive investor would likely have little or no equity, substantial fixed income, and some alternatives. An aggressive investor could have most or all in equity, some or no fixed income and some or no alternatives. A balanced investor might have 50% equity, 25% fixed income and 25% alternatives.

5)Compare the real return you need to the asset allocation. Let’s use a balanced investor, for example. If equities have an expected net long-term return of 8-10%, fixed income 2-4%, and alternatives 2-4%, a balanced investor would have a hypothetical long-term net return of 6%. (9%x.5 + 3%x.25 +3%x.25). A 6% nominal return during times of 3% inflation produces a 3% real return. Compare this real return to your return needed in exercise one. A defensive investor who has no equities will be fortunate to have a hypothetical return equal to inflation. Someone who sits in cash will not even keep up with inflation. An aggressive investor, with all or mostly equities, will, over time, have the greatest return and will experience the greatest volatility. Aggressive is not for the faint of heart, aggressive investors generally lost 30-45% of their portfolio value in 2008.

6)Diversify your portfolio. After selecting your asset allocation, you need to look at your “investment styles” within each asset class. You should consider a global allocation for diversification. In 2018, while all equities are down, the S&P 500, led by Facebook, Apple, Netflix and Google, has been down the least. But, it doesn’t always work that way. The S&P 500 index was down 9.1% cumulatively from 2000-2009, while international stocks were up 17% cumulatively including emerging markets, which were up 154%. In the 11 decades starting in 1900 and ending in 2010, the US market outperformed the world market in 5 decades and underperformed in the other six. Consider perhaps having 20-30% of your equities in international holdings and make sure you have exposure to mid cap and small stocks domestically.

Conclusion: 2018 has been a tough year, particularly after 2017 was so good. We sometimes forget that even with the 10% and more corrections in the markets since October 1, equities have been up 7-10% per year, fixed income and alternatives up about 2% per year over the last three years ending this Monday, December 17th. If you need/want a real return above zero, you will likely need to invest in equities in some proportion. Determine how much risk you need/want and stick with it for the long-term, subject to life events changing it. Stay diversified and stay invested. Focus on what you can control, including enjoying the holiday season. Happy Holidays.

 

 

 

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