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Putting Economic Dark Clouds in Perspective

By Posted on In Economy, Finding Confidence, Investment Behavior, Uncategorized

Many experts argue that the Great Recession may have been the worst economic event since the Great Depression. But how does it compare to other economic events that have happened?

According to a new more encompassing economic indicator by the International Monetary Fund, there are several other economic events in the country’s history that were worse than the Great Recession, one of which happened 25 years AFTER the Great Depression. The indicator charted below combines several measures such as inflation, unemployment, government deficit, and GDP growth in one chart.

Notice in the charts below how this indicator paints a different pictures. During the Great Recession the indicator dropped down to the orange zone. But there were eight other economic situations in the past hundred years that resulted in this indicator dropping to orange as well, including the time period around World War II.

You can read more about the IMF white paper here.

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Should I invest now?

By Posted on In Investment Behavior, Investment Strategies, Rule of Thumb, Saving, Uncategorized

I’ve been getting this question a lot this summer: “Should I invest in the market now, or is this the top of the market?”

Here’s my response:

If you watch the news, there’s always a reason not to invest. Think back to the election and the fiscal cliff.  Who would be crazy enough to invest at the end of 2012 when the fiscal cliff was right in front of us?  Then again, The market has gone up and up this whole year with only a few speed bumps.

If you run the numbers, the research suggests that you’re better off moving the money into the markets despite what you hear from the media. Don’t try to time when to buy or sell. But that may be too hard to stomach for many investors.

And then there is the middle ground – invest in the markets on a regular basis over a certain period of time – called dollar cost averaging.  Instead of investing 100% of your portfolio right away, you could invest 25% of it for four months.  That may reduce the risk of buying a security only to see it drop shortly after you purchase it. This allows you to ease back into the markets, instead of jumping in.  Keep in mind, this method does not ensure a profit and does not protect against loss in a declining market, so investors should consider their willingness to continue purchases during a declining or fluctuating market.

3 Negative Views… And How to Spot Them.

By Posted on In Finding Confidence, Investment Behavior, Uncategorized

The talking heads and supposed experts have done a good job of scaring investors away from the markets.  Their job isn’t to help investors reach their financial goals, rather they are looking to shock investors and make them stay tuned to the channel to learn more (and of course watch their advertisements).

“A connoisseur of woe, needs fresh worries from time to time, or he will become complacent”

Peter Mayle, A Year in Provence

A recent post at dragonflycap.com, has done a pretty good job at classifying these fear mongering talking heads.  Greg Harmon, breaks them into three categories:

The Postponement: Their rhetoric sounds like this, “The big market decline we’ve been talking about is going to happen, just not as soon as I said”.  This camp believes something big is coming and that it’s always right around the corner.  Remember Y2K, the election, the fiscal cliff, and even the recent Fed announcement?

The Rationalization: After a pundit makes a prediction and it turns out to be wrong, his strategy may be to rationalize why some unforeseeable event prevented his prediction from coming true.  It’s easy to explain everything away after it’s already happened.

The Decay: These “experts” look for all the small disappoints and set backs and attribute it to an overall decay of the markets, the economy, the country, etc.  This camp will look into the lowering of the GDP and turn it into something much, much larger.

These mindsets can be debilitating to an investor if they only look for the negative stories.  It’s important to remember these are opinions of people paid to keep you watching the TV and reading their articles.

Four Strategies to Determine Your Asset Allocation.

By Posted on In Investment Behavior, Investment Strategies, Retirement, Rule of Thumb, Uncategorized

Asset allocation is an important component to any portfolio.  It deals with the ratio between various asset classes such as stocks and bonds.  Many investors don’t know where to start or how to determine if their asset allocation is appropriate based on their objectives or risk tolerance. Below are four strategies to determine an appropriate asset allocation.  Each one with pros and cons.

  • Rule-of-thumb Formulas are useful for quick planning purposes.  For an investor, this should be a starting point to see if their current allocation is in the ballpark.
  • Risk Tolerance. Investors can complete questionnaires which can identify how comfortable they feel about volatility in their portfolio.  The questions identify how the investor would feel if they were to see their account value decline by X% over various time frames.  Based on their answers, a portfolio is designed around their risk profile.  This is an objective data-driven solution, which many find appealing. But an investor’s risk profile is not static. It changes day to day, depending on their experiences, the news, and a variety of other factors.  When the economy has a negative outlook, an investor’s appetite for risk is usually much lower than when the economy is bullish.
  • Stage of Life.  Age based asset allocations that adjust over time have grown in popularity.  The premise is simple: as an investor gets closer to retirement, his allocation shifts to more conservative asset classes.  This can help reduce the risk of extreme market volatility right before they enter retirement.  The downside, this approach does not factor in personal considerations such as risk tolerance, longevity or financial goals.
  • Goal based. At times, we have built portfolios around a client’s financial goal, such as having $500,000 in assets by the time they retire.  We can show the client the risk factors he/she would take on to try to reach that goal.  This often sparks a conversation with the client about other factors that should be explored, such as increasing the savings rate or adjusting the goal.

If you’re looking to get started, begin with this popular rule of thumb: subtract your age from 110 to determine your stock percentage, put 10% in cash, and the remainder in bonds. From there, you can edge the portfolio to be more aggressive by increasing your stock holdings or more conservative by increasing cash or bonds.

This is starting point, although you should seek professional guidance in determining an asset allocation that will meet your objectives.

Why is my portfolio lagging the stock market?

By Posted on In Economy, Finding Confidence, Investment Behavior, Uncategorized

We’ve fielded a few phone calls from clients in the past few weeks confused about why their statements are not reflecting the same rate of return of the S&P 500 which they’re hearing about in the news.

We’re not surprised by the observation.

The S&P 500 has been having a banner year so far! US equities have been our best performing asset class. Actually, it’s one of the few asset classes that has maintained a positive trend over the last few months. While almost all other asset classes have been struggling to show any gains, such as commodities, bonds, real estate, and some foreign holdings, the US equity market has been surging ahead.

It’s as if the US equities were the last ones at the party and didn’t notice that everyone else left the room until the music was shut off!

You are correct. Your portfolio is not reflective of what you see in the headlines, and has not surged ahead like the US equities as measured by the S&P 500. But, then again would you want a portfolio consisting only of US stocks? What if the Fed raised interest rates or stopped buying up bonds? Would you be fearful that a market correction could occur, wiping away all of your gains (or most of them)?

In effect, a portfolio consisting too much of any asset class would be, as a result, taking on excess risk. We work with our clients to diversify their portfolios to lower risk and volatility. In case some asset class declines, the other asset classes can support the ones in declines. We are maintaining diverse portfolios for our clients in order to spread risk out and try to minimize volatility.