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Top Themes in Financial Services

A recent article outlined investment themes to look for over the next decade and listed some growing trends in financial planning. It’s reassuring to see these trends. We’ve been working hard to innovate within this industry and find ways to help our clients.  These trends are very similar to what we’ve been working on for the past two years:

Retirement Planning: We’ve focused our efforts on building Retirement Income Distribution Strategies that take into account all pots of money (savings & investments) and all sources of income (pensions, Social Security and annuities).  Our planning factors in the slow, ever-present, erosion of purchasing power that occurs each and every year –inflation.  In 20 years, the cost of living may double! Many clients don’t think about that when they retire, unless we illustrate it for them.

Low Cost Asset Management:  Many firms have very high minimum fees, where the firm will only accept new clients with at least $500,000 or more in investable assets.  Due to technology and automation these minimums are decreasing.  We’ve always kept our minimums lower than average and are happy to see the trend finally start to shift in this direction.  Ultimately, it will allow more investors to get more help than if they were to do it on their own. We often waive our minimums for referrals from existing clients.

RIA Advisory Services: The old model of charging upfront commissions on investments is disappearing.  Client don’t like paying high sales charges and we don’t like being in the position of having to “sell” a fund.  The alternative is to pay a small fee for advice and management on an ongoing basis.  It opens up the investor to a much wider pool of investments without having to incur new sales charges, and it allows for greater flexibility.

In the end, these trends are great for the investor: More affordable investment advice, better planning tools, and less in the way of expenses are all going to benefit the investor.

If you’re interested in learning more about any of these themes and how they apply to you, please contact us.

A Brief History of Bubbles

Excerpt from Faber’s “Learning to Love Investment Bubbles: What if Sir Isasc Newton Had Been a Trendfollower”

“From a behavioral and psychological standpoint [a trend following investment strategy] is often the most difficult to deploy when it is most useful. Strong discipline would have been required to sell technology stocks in 2000, REITs in 2007, or South Sea stock in 1720, especially when one’s colleagues, friends and neighbors were making money hand over fist. In the end, for those who imposed such discipline, it was the prudent choice.”

Seems relevant for what we’re seeing in today’s recovery.

If you want to read more about how trend following works during investment bubbles, read this paper (especially the summary at the end):

The Mississippi Bubble: One of the First Bubbles

There’s a lot of talk about if the US market is in a bubble these days. It’s next to impossible to determine if we are, in fact, in a bubble. But the media will do just about anything to produce a story that will get more people to read their publications.

Instead of reading their predictions, consider watching this video about one of the first economic bubbles ever recorded.

John Law and the Mississippi Bubble by Richard Condie, National Film Board of Canada

John Law and the Mississippi Bubble

Why Wasn’t There a Taper Tantrum?

If you recall, the markets declined by about 5% in May and then again in August due in part to the possibility of the fed reducing its bond buying program.

And then yesterday happened – the Fed went ahead and started to taper the bond buying program.

Based on the past, you would think the markets would have declined, right? Wrong. They surged upon hearing the news.

USA Today has a brief article that outlines five reasons why the markets reacted positively to the news.

Why the standard 60% stock / 40% bond portfolio is in decline

By using just the two asset classes listed above, investors can put together one of the most common, all purpose allocation portfolios consisting of 60% stocks and 40% bonds. For decades, it has the recommended allocation for just about any age group. But, like the “4% withdrawal” rule of thumb, even these tried-and-true strategies may not be as relevant as they once were.

For the past few years, investors have experienced very unusual situations that have left them looking for new investment strategies and new asset allocation mixes. Three factors that have reduced the effectiveness of a 60/40 allocation are:

  • Low bond yields and low stock dividends.
  • During significant downtrends, such as the recession of 2008 and 2009, bonds and stocks both move down together (a strong correlation).
  • Volatility in the marketplace with no clear market direction.

It has even been suggested that 60/40 portfolio has 80% of the volatility of a 100% stock portfolio. That comes as a shock to many investors who thought they were more diversified than they really were.

Contact us for a free consultation to help you build your asset allocation