Commentary

     Second Quarter 2017 Commentary

Bill Russo, CFP®

“I would not want it to be thought that any system is the Kingdom of God on Earth. Capitalism isn’t. Democracy isn’t. The two combined are not. The best that can be said for them (and it is quite enough) is that, in combination, capitalism, democracy, and pluralism are more protective of the rights, opportunities, and conscience of ordinary citizens (all citizens) than any known alternative.” Michael Novak

We should appreciate the fact that we were born into a society that combines: capitalism, democracy, and pluralism. The opportunities are endless for those that have vision and a work ethic to start a business, fail, and start again. There has been more wealth created and hungry fed under our system than any other system worldwide. Despite this, all we hear is how bad things are in this country. Even with all of the negativity, all three major market averages have set all-time highs during this quarter. Here is where we ended as of the end of the second quarter[1]:

                        2nd Q   YTD

Dow Jones      4.16     9.35

S&P 500          3.27     9.34

NASDAQ         4.25   14.07                                                                                                 

Since November there has been an incessant drumbeat about Russian influence in the election and continued posturing to resist the new administration on any and all attempts to implement the Trump agenda. The prior eight years, Republicans resisted the Obama administration. Yet, over the past eight plus years the market has continued to climb out of the abyss it found itself in after the financial crisis.

Stock market returns may temporarily react to political news but long term the market moves are based on the fundamentals of the investments of those markets. That is why after each pullback that we have had; the market recoups the decline and reaches a new high.

As long as companies continue to grow revenue and profits the market will continue to rise. The next recession will bring on the next bear market. So far, there is no imminent threat of recession. There also seems to be concern about the Fed raising interest rates and liquidating their balance sheet thus unwinding the Quantitative Easing (QE) that they think saved the market from collapsing. Truth be told; Quantitative Easing did nothing to end the financial crisis. It was the change in mark to market accounting that solved the financial crisis. The market started to rise once mark to market accounting was changed. It was not fiscal stimulus or QE. By normal standards interest rates should be 1.5% to 2% higher than rates are now. That is why I am not concerned about higher interest rates that are being implemented on a gradual basis.

Coming out of a financial crisis, it is not uncommon for interest rates to stay low and economic growth to remain subpar for an extended period of time. What we need to realize is that the returns we achieve going forward may be lower than what we expect. With low rates of inflation, low growth and low productivity, investment returns will be lower. My expectation going forward with all else being the same is that we should look for mid-single digit returns for the next 5-10 years.

One would have to be positioned aggressively to achieve higher returns. Remember in order to receive higher returns; one must be willing to take higher risks. Currently the disruptors in the marketplace are achieving outlandish returns that will be hard to sustain going forward. Facebook, Amazon, Netflix and Google are the companies moving the NASDAQ higher and higher. Buying now, you do so with the belief that someone will be willing to pay a higher price in the future.

Never chase returns. Invest based on the returns needed to achieve the goals established in your financial plan. Your financial plan will help you achieve financial success. By clearly identifying, how much needs to be saved, returns needs, and when the goal can be reached; you will know how you should invest your money. These are the things within your control. You can adapt and adjust these things based on your investment returns.

My job is to prepare your financial plan based on the information you provide; financial situation, goals, and time horizon. Once this information is collected, we can prepare a plan that outlines what you need to do to be financially independent.

Once we do this, my job is to help manage your behavior so that you do not make decisions based on emotions. Fear and greed drive investor behavior causing people to do the opposite of what they should do.

Remember, politics, forecasting the economy, market timing and relative performance are not the basis for successful investing. Investment outcomes are based on how well one handles their emotions and how well one can stick to their financial plan and focus on the things that are within their control.

Allow us to do our job to help you achieve long term financial success. Let us prepare or update your financial plan. It is worth the investment of time and money. Call me at 440-349-4980 if you have any questions or concerns.

Wish you and your family an enjoyable summer. Smile and have a great day.

 

First Quarter 2017 Commentary

Bill Russo, CFP®

"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." - Peter Lynch

The major market indices started 2017 where they left off at the end of 2016. The market rally which was based on anticipated regulatory relief and tax reform continued until we hit the end of the first quarter. The first major piece of business taken up by the administration was healthcare reform. When it appeared that the healthcare legislation was in trouble, the market pulled back. The healthcare legislation was pulled and now we appear to be headed towards tax reform. Here is where we stand at the end of the first quarter of 2017[1]:

                                    YTD

Dow Jones               5.19%

S&P 500                    6.07%

NASDAQ                   9.82%

If tax reform legislation gets bogged down, be prepared for a pullback. While a pullback for some will create anxiety, it should be viewed as a buying opportunity. We have had several pullbacks over the past few years but nothing major. Despite this, the media excitedly suggests that the current situation is going to lead to the next bear market. Remember the beginning of 2016? The slowdown in china was going to cause a global crisis as markets sold off over 10% early in the first quarter only to fully recover before the first quarter ended.

Then there was BREXIT. When the United Kingdom voted to leave the European Union towards the end of June, the story was that another global crisis was going to occur. I believe the major market indices pulled back 6.5% over the next few days only to rally into July and at the time reached all-time highs.

Next up was the Presidential election. The media tried to scare us into believing that if Trump was elected; we would see a 20% or more decline in the markets. In the early morning after it appeared Trump had won the election the futures market was anticipating a decline of 5%. However, the Dow Jones closed up over 300 points.

While the current focus has been on the political agenda; interest will now shift to corporate earnings as businesses start to report their quarterly earnings. Disappointment on the earnings front along with tax reform could cause the market to pull back. Remember declines are temporary in the inevitable long term advance of the market indices.

Be aware that pullbacks will be hyped by the media and may cause your emotions to kick in. Most of you have been with me for ten or more years. During that time we have seen two major Bear Markets that ended, despite the media giving the impression things will never get better. They eventually do. While it is emotionally gut wrenching going through a bear market, by having a plan we are able to keep ourselves focused on the things within our control. Patiently awaiting for the rebound enables us to recoup the declines and subsequent advances.

Remember, I am paid to help keep you focused on your long term goals/plan and help you avoid making costly mistakes. That requires patience and discipline. While this is easy to say it is hard to do. This is due to the fact that emotions are very strong and can override reason and logic. If it was easy we would all be financially independent.

Portfolios should be based on what you are able to tolerate in a market decline. It is not possible for any advisor to position you more aggressively when the market is rising and more conservatively during market declines. Your portfolio is allocated based on what you have demonstrated your risk tolerance to be. If you say, “I want to minimize or avoid market declines,” realize that you will not fully participate in a stock market rally since you will have portions of your portfolio invested outside of the stock market. People are always more aggressive minded while the market is rallying and tend to get conservative when the market declines. This is typical of an investor that buys high and sells low. This has not proven to be an effective long term strategy.

What should we be focusing on? Spend less than you earn, invest at least 10% for your retirement (if you are not able, start with an amount you can and then each year increase that amount until you hit 10-15% of your income). Make sure you have 3-6 months of living expenses set aside for emergencies. Allocate your portfolio to match your time horizon and your risk tolerance. Don’t be swayed by what others say they are earning. People only talk about their winners, never their losers.

While use of credit cards is okay and their use is important in getting a good credit score; make sure you pay balances off and do not let them accumulate. This is one of the primary traits I see consistently in people that are financially independent. They can avoid immediate gratification and will spend when they know they have the ability to pay for the item without running up their credit card balances.

Life is a series of trade-offs that only you can decide what is important to you and your family. We can help you by providing the information you need to make those important decisions.

Thank you for giving me the opportunity to be of service to you and your family. Please let me know if you have any questions or concerns.

Fourth Quarter 2016 Commentary

Bill Russo, CFP®

“All the money that has ever been “lost” in all the temporary equity market declines of all time has now been returned – albeit to other people: long-term investors with faith in the future, patience, and the discipline to continue working their long-term plan. The tragedy of pessimism is once again complete” - Nick Murray

Hopefully you had the opportunity to enjoy family and friends over the Holidays.

The fourth quarter started on a down note as the uncertainty of the election created angst amongst investors. That uncertainty culminated the night of the election with the stock market futures declining over 800 points early Wednesday morning only to see the market advance almost 2 % by the market close. Here is how the market ended the quarter and the year[1]

                          4Q                   YTD

Dow Jones       8.79                 16.50  

S&P 500           4.12                 11.96

NASDAQ          1.42                   7.50

As we look back, 2016 started with the worst first six weeks in equity market history as the S&P 500 declined more than 11% through February 11. We recovered only to see the market decline over 6% in a day and a half in June following the Brexit vote. Once again the markets recovered and hit all-time highs by mid-August. With the uncertainty of the outcome of the Presidential election, the equity markets declined for nine straight trading days. This hasn’t happened since 1980. Then in the early morning hours after the election, the Dow Jones Futures declined over 800 points before starting their ascent and subsequent rally that lasted seven straight weeks before declining the last week of the year.

The equity markets put on a tutorial in 2016, highlighting the wisdom of tuning out shocking current events and subsequent market volatility. The media once again was at its worst as it created fear when none was called for. A crisis created; drives viewership; which creates more ad revenue and makes those that get sucked into their vortex poorer if they make decisions based on fear.

The following is not a political statement or view, but simply an observation that the advances we have seen since the election in the equity markets are based on the expectation of favorable economic policies that will benefit the long-term investor. These include policies that are more pro-growth and pro-capital. Interest rates on bonds are rising not because the bond market thinks there is an economic collapse coming, but in anticipation of pro-growth policies that will raise wages and lead to inflation. This is the opposite of what has occurred in prior years. The Federal Reserve has tried to enact monetary policy to spur the economy to no avail.

The market now has an optimistic view of the future growth potential of the U. S. economy. This is far different than what the media wanted you to believe as we awaited the outcome of election. As long as the anticipated policies become reality, economic growth should get back to normal.

It is worth repeating the nature and philosophy of my advice. My experience has shown that successful investing is goal focused and planning driven. Most failed investing is market focused and performance driven.

Current events in the economy and markets are distractions of one sort or another. I do not attempt to make investment decisions from today’s or tomorrow’s headlines, but rather align portfolios with your goals and objectives.

I do not forecast the economy or attempt to time the markets. I am a planner and believe my value to you is based on planning and behavioral coaching by helping you avoid overreacting to market events whether they be negative or positive.

The nature of successful investing is the practice of rationality under uncertainty. We will never have all of the information the way that we want, in terms of what’s about to happen, because we invest in and for an unknowable future. For that reason, we practice the principles of long term investing that have most reliably yielded favorable long term results over time: planning; a rational optimism based on experience; patience and discipline. These will continue to be the basis of my investment advice for 2017 and beyond.

For those of you turning 70 years old, you will need to make arrangements to start taking your required minimum distribution (RMD) from your retirement accounts. There are situations where you are able to delay the start of your RMD.

For those of you that have an employer sponsored retirement plan, you should contribute. If there is a match there is even more of a reason to contribute. Doing so in either case will benefit you in two ways. First, you are building your retirement nest egg that you will need to fund the portion of your expenses not covered by social security/pension. Second, your reduced spending lowers your cost of living making it easier for your nest egg to cover your living expenses in retirement.

Ideally, we all should be putting between 10-15% of our income aside. If you are not doing that now, you should increase the % you contribute each year. The sooner you get there the better. One key factor that is often overlooked is time. The more time that you contribute the appropriate amount, the larger your nest egg will be when you retire. The longer it takes to get started, the harder it will be to remain financially independent as you age. Once you understand the value of time and compound interest you will be in a position to make better financial decisions for your future.

A financial plan will help do this for you. It will provide the information necessary to identify what you need to do today to make your future goals a reality. Thank you for the opportunity to be of service to you. Wish you and your family a healthy, prosperous 2017.

 

Third Quarter 2016 Commentary

Bill Russo, CFP®

“For the record, Ben Bernanke and Janet Yellen have never fracked a well or pulled an all-nighter writing an app, and those who call the stock market a bubble are actually slapping entrepreneurs and innovators in the face. QE did not create the cloud or Big Data. Entrepreneurs did! The stock market, jobs and incomes and profits are all up because of these new technologies.” Brian Wesbury, “Beware of Popular Narratives,” August 15, 2016

As we started the third quarter of 2016, the market continued the rebound from the Brexit (Britain leaving the European Union) scare as all three major market averages reached all-time highs in the third quarter. Despite the rebound, there continues to be extremely high levels of cash on the sidelines. Even mutual funds are holding high levels of cash.

Here is how the major market indices have performed through the third quarter of 2016[1]

                                    3rd Q              YTD               

Dow Jones                  3.30                 7.71

S&P 500                      4.00                 7.84

NASDAQ                     9.37                 6.08

This is one of the least loved markets that I have seen in my 23 years in the business. Negativity is everywhere and there is concern because we have had one of the longest bull market runs in history. Not the longest but close. Because of this, there is a fear that a bear market is just around the corner.

Bear and Bull Markets follow the business cycle. Coming out of a bear market the economy expands as stimulus is added from fiscal and monetary policy. In turn, this creates excesses as the economy heats up and imbalances are created which leads to a tightening of monetary policy that slows the economy down.

Currently, we are in a slow growth environment that is caused by overregulation and above normal government transfer payments that crowd out investment. Monetary policy has reached the point where it is no longer effective and has forced people to increase saving and reduce spending. The options for low risk investments pay next to nothing forcing people to save more to meet their goals.

Those that do not work with an advisor or are not informed about investments and options available are fearful and therefore do nothing. Who can blame them with media hyping the following events since the financial crisis that would cause the economy to collapse and the market along with it: adjustable rate mortgage resets, which would cause another wave of foreclosures and lead to a double dip recession; threat of widespread defaults of municipal debt; hyperinflation caused by QE (quantative easing); fiscal cliff; sequester; government shutdown; recession from high oil prices then it was lower oil prices; bailout of Greece; and most recently Brexit.

In the end none of these crisis hyped by the media were ever a reason to bail out of stocks or not to invest. Instead these events provided opportunities to put money to work.

While we have gone an extended period of time without a bear market, it doesn’t mean one won’t happen in the future. Bear markets are a normal market occurrence. Despite the major bear markets from 2000-2002 and 2008-2009, the market recovered within three years. What is one to do? First consider your time horizon. The shorter the time money can be invested the more conservative you should be. Yes, you will have to accept the low returns available, but your money will be there when you need it. The longer you have the more your portfolio should be invested in stocks.

Currently the major concern of most investors is market risk. It is a risk that is always there. What we should be most concerned with is inflation and longevity risk. If you are not comfortable with asset allocation and want more active management, we have risk reduction strategies available. While they work well in down markets they will lag in a rising market. The only warning I have is that these strategies will disappoint in a rising market. You cannot have high returns with low risk. Put another way the lower the risk/return the narrower the range of outcomes, while greater the risk/return the wider the range of outcomes.

As I have mentioned time and again, the amount that you save will be the key determinant as to whether or not you are able to achieve your financial goals. It doesn’t matter what return you get on your money, you will never achieve your financial goals if you are not saving enough to begin with.

Real life experience has shown me that people that have saved consistently since the time they started working are able to realize financial independence without earning high wages during their work career.

Keep in mind there are no shortcuts to accumulating wealth. Over the years, people continue to get sucked into scams of promises of high returns and no risk or special situations that will cause certain investments to skyrocket. Please realize that they all sound good and believable, unfortunately they do not exist. The smartest wealthiest people out there who accumulated their wealth, did so by owning things; whether it is businesses, real estate or stocks. They have purchased, held onto and reinvested in their assets.

You can do the same by staying disciplined and focused on your goal(s). My job is to help you do so. Together we can block out the noise of the incessant negativity and stay focused on what is necessary to make your hopes and dreams a reality.

Before I end, please help me welcome my new assistant Hannah Anderson. She has come on board to replace Katie Sabo who had an opportunity she could not pass up.

Thank you for the opportunity to be of service to you and your family over the years. I look forward to serving you for years to come. Please call me at (440) 349-4980 if you have any questions or concerns. Smile and make it a great day.


[1] http://news.morningstar.com/index/indexReturn.html  October 3, 2016. Dow Jones and S&P 500 reflect total return with dividends reinvested

 

Second Quarter 2016 Commentary

Bill Russo, CFP®

“For reasons I never understood, people like to hear that the world is going to hell. Yet pessimism has consistently been a poor guide to the modern world.” Dierdre McCloskey, economic historian

“It is not inequality which is the real misfortune; it is dependence.” Voltaire

As we started the second quarter of 2016, the market continued its buy the dip, pull back, buy the dip scenario that has played out so far in 2016. This is the face of continued negative news concerning, global events and the nonsense being spewed by candidates in the presidential primaries from both parties.

Here is how the major market indices have performed through the second quarter of 2016[1]

                                     2nd Q               YTD               

Dow Jones                  2.12                 4.31

S&P 500                      2.49                 3.84

NASDAQ                    -.54                 - 3.29

The market rally comes despite the fact that we have had net redemption of equities totaling over $76 billion from January through May 12. The media convinced investors that the pull back in January was the beginning of the next big decline. Even though declines are inevitable, they are not permanent. Depending on what your situation is and when you need to withdraw your money, determines how your money should be invested.

One cannot let the media and the negativity that continues incessantly 24/7 impact on how you invest your nest egg. Investing should always be done within the context of your financial goals and timeline. Market declines are opportunities to put money to work. Those that continued investing during the financial crisis were rewarded for sticking with their plan. This time is no different.

Rarely does one get a positive opinion about any economic data that is reported. We are subjected to opinions that are biased on both sides of the aisle. The economic recovery has been sub-par because of over-regulation and government involvement in the economy. Nevertheless, the economy is growing at a much slower rate than is normal. What that has done has stagnated returns on all types of investments. Interest rates are being kept low in hopes of spurring the economy and that has penalized savers who utilize savings accounts and CD’s. Stock returns have been minimal over the past 18 months as the market has meandered sideways. They may continue to be lower in the future than what we have come to expect. Low economic growth and low inflation result in lower stock market returns.

Because of this people are getting impatient and may take risks they otherwise wouldn’t in hopes of getting better returns. Please be cautious and stick with your investment plan and focus on your financial plan and goals. These should be your main focus and what should drive your investment decisions.

Remember, the safer the investment, the lower the returns, the more fluctuation of investment returns the greater the potential return. Money that you will need within the next 12-18 months should be in liquid relatively safe investments. This will ensure that the money is there when you need it. Beyond that time frame, your investments should be aligned with your medium and long term financial goals. You should focus on whether or not you are on track to reach your financial goals.

While most people focus on market risk when investing, the real risk you should be measured by is the probability that you won’t meet your financial goals. Your investments should have the objective of minimizing that risk.

While there is a cost to having a financial plan prepared and maintained, it does provides you with the information needed to make informed decisions about your financial future.

Are you: spending more than you should, utilizing the appropriate investments for savings, college and retirement, paying down or accumulating debt, saving enough for retirement?

Do you have: a spending plan, an investment plan, adequate insurance coverages for the risks that you face, an estate plan?

Answering these questions is more important than focusing on what return you get on your money each quarter. If you are not saving enough to begin with, it doesn’t matter what your return is.

Over the years, the people that have achieved their financial independence, that has afforded them the opportunity to do what they want when they want, have spent less than they earned, saved on a consistent basis, paid off credit card bills monthly and not run up balances that they cannot pay off. They are able to do this because it is important to them to live within their means. They do not constantly check their returns but are more focused on having a sound allocation and quality investments.

The people that struggle always have a reason that they cannot save, spend as much if not more than they earn, have ever increasing credit card balances and are focused on obtaining market beating returns. They want the market to make up for their bad habits. Unfortunately, that is a recipe for financial failure.

In short, be patient. Focus on the aspects of your life that you have control over and be flexible enough to adapt and adjust to those things you have no control over. To do otherwise will lead to frustration.

As always, thank you for the opportunity to be of service to you. Please call me at 440-349-4980, if you have any questions or concerns about your financial situation. Enjoy the remainder of your summer.


[1] http://news.morningstar.com/index/indexReturn.html  July 1, 2016. Dow Jones and S&P 500 reflect total return with dividends reinvested

 

First Quarter 2016 Commentary

Bill Russo, CFP®

“The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient to patient people.” Warren Buffet

Due to concerns over China and a declining oil market, the Dow Jones got off to its worst 10 day start since 1897[1]. At one point in the first quarter, we reached the 30 year average intra-year decline of 14.2%. By Easter weekend the decline was erased. This was the second time in six months the market corrected abruptly and quickly turned around. After all the turmoil, we remain range bound, within five percent of the Dow Jones and S&P all time highs reached last May.

Here is how the major market indices performed[2]:

                                    YTD

Dow Jones                  2.20

S&P 500                      1.35

NASDAQ                    -2.75

Volatility has increased to what is considered normal. What we had seen over the past four years was abnormal. Over the past 115 years the Dow Jones index has averaged the following:

-5% or more decline about three times a year with the last occurrence January 2016

-10% or more decline about once a year with the last occurrence January 2016

-15% or more about once every two years with the last occurrence October 2011

-20% or more about once every three and a half years with the last occurrence March 2009

We have to understand that declines are common, temporary occurrences and they are part of a normal investment cycle. Unfortunately, emotions take control and people become impatient. Mistakes are made and as Buffet says wealth is transferred from impatient to patient people. While it is easy to say, “be patient”, it is hard to do in practice. My job is to help you focus on the long term and to help you overcome the emotional desire to do something when the markets are down.

The other thing that we have seen in the first quarter is the one hot sector over the past three years was decimated. Healthcare, in particular biotechnology and pharmaceutical stocks, took it on the chin. We have seen this over and over again over the years. Sectors stay hot for a period of time and then they go out of favor. When they do, the downturn can be severe and last several years.

It happened with technology in the late nineties, the financial sector prior to 2008, and the energy sector after 2008. The returns are great if you get in and out at the right time. Unfortunately, that is hard to do.

My experience over the past 23 years has shown me that a well balanced portfolio that is not constantly traded does better than a portfolio that is constantly traded chasing the hot trend.

Portfolios based on a specific goal, whether it is saving for a down payment on a house, college funding, retirement funding or wealth transfer, will keep you from making decisions based on emotions and gyrations of the market.

This commentary will be shorter than normal due to the fact that I will need to be back with you shortly. Within the next month, the Department of Labor (DOL) will be coming out with regulations concerning the process of handling employer based retirement plans and IRA’s. This will change the relationship between the advisor and the client. Depending on what is contained in the final regulations will determine what paperwork may have to be prepared. This does not affect non-retirement accounts.

As the regulations are currently written, all employer based retirement plans and IRA’s may have to become fee based where an advisory fee is charged or have a new agreement labeled BIC (Best Interest of the Client) exemption form completed. As the regulation is currently written, we may be in a position where we are not allowed to answer any questions concerning these types of accounts until one of these forms are completed.

Some feel that existing accounts may be grandfathered and the new paperwork may not be needed and would enable us to continue to service existing accounts without having to complete paperwork prior to providing service.

Until the final regulations come out, I am not sure what paperwork if any may need to be completed and whether or not our documented relationship will need to change. In either case, it is my desire to continue to provide you with the level of service we have provided over the years.

Please call me at 440-349-4980 if you have any questions or concerns. Thank you again for the opportunity to be of service to you. Smile and make it a great day.

Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal. Any opinions expressed in this form are not the opinions or views of APFS or APA. Opinions expressed are those of the writer only.


[1] http://money.cnn.com/2016/01/29/investing/dow-january-2016-worst-month

[2] http://news.morningstar.com/index/indexReturn.html April 1,  2016

 

Fourth Quarter Commentary 2015

Bill Russo, CFP®

“We are what we repeatedly do. Excellence, then, is not an act but a habit” Aristotle

This past year we returned to a normal volatile market. In the third quarter, we had our first correction in over four years and even that was less than an average correction. Since then we recovered some lost ground then moved sideways over the remainder of the fourth quarter as we finished more than 4% from highs reached earlier in the year. This was a difficult year for income producing securities but they should stabilize as we move forward into 2016. In fact, unless your portfolio was weighted towards Facebook, Amazon, Netflix, and Alphabet (Google) your portfolio lagged.

Here is how we ended the fourth quarter and year[1]:

                            4th Q                2015

Dow Jones          7.16                   .21

S&P 500              6.67                 1.38    

NASDAQ             8.18                 5.73

In our world today where everything is negative in the 24/7 news cycle and even good news is given a negative slant, I thought it would be good to gain perspective about how far we have come in the last 41 years. The following is an excerpt from Nick Murray Interactive Volume 15 Issue 12 December 2015.

1975

Saigon falls; President Ford escapes two assassination attempts within seventeen days. Margaret Thatcher becomes the first woman leader of Britain's Conservative Party. Andrei Sakharov, the great hero of Soviet resistance, wins the Nobel Peace Prize. Saturday Night Live debuts on my 32nd birthday, October 11. An American and a Soviet spacecraft link up in space; the event is memorialized on a beautiful ten-cent U.S. postage stamp.   

• Global population: 4.1 billion, fully half of whom live in extreme poverty, as defined.
• U.S. population: 216 million
• U.S. real GDP: $5.49 trillion

• S&P 500 year-end close: 90.19
• Earnings: $7.71
• Dividend: $3.73

1985
Gorbachev comes to power in the Soviet Union, and meets with President Reagan. The Internet domain name system is created. Windows 1.0 is published, and the first successful human heart transplant takes place. The song of the year is “We Are the World.” In the greatest marketing catastrophe since the Edsel, the Coca-Cola Company introduces New Coke. A first class U.S. postage stamp costs twenty-two cents.

• Global population: 4.85 billion
• U.S. population: 238 million
• U.S. real GDP: $7.71 trillion

• S&P 500 year-end close: 211.28
• Earnings: $15.68
• Dividend: $8.20

1995
The Oklahoma City bombing is the greatest domestic terrorist atrocity in American history. O.J. Simpson's murder trial begins, and ends ten months later in his acquittal. Israeli Prime Minister Yitzhak Rabin is assassinated. The Rock and Roll Hall of Fame and Museum opens in Cleveland. Jerry Garcia dies. A postage stamp costs thirty-two cents.

• Global population: 5.7 billion
• U.S. population: 266 million
• U.S. real GDP: $10.28 trillion

• S&P 500 year-end close: 615.93
• Earnings: $37.70
• Dividend: $14.17

2005
Hurricane Katrina devastates an American land mass larger than Great Britain. Saddam Hussein goes on trial for his life. July 7 becomes London's 9/11, as coordinated attacks on the bus and subway system claim 52 lives. Pope John Paul II dies; he will be canonized only nine years later. A postage stamp costs thirty-seven cents.

• Global population: 6.5 billion, but by the turn of the century, the rate of extreme poverty has fallen to one person in three.
• U.S. population: 296 million
• U.S. real GDP: $14.37 trillion

• S&P 500 year-end close: 1,248.29
• Earnings: $76.45
• Dividend: $22.38

2015 to 11/23
A radical Islamic faction, ISIS, casts the Middle East into chaos, and carries out terrorist atrocities in Paris and elsewhere. Refugees pour into Europe. The world's leading nations reach an accord with Iran on its nuclear development program. Yogi Berra dies. A postage stamp costs forty-nine cents.

• Global population: 7.29 billion, less than one in ten of whom live in extreme poverty.
• U.S. population: 322 million
• U.S. real GDP through 9/30/15: $16.39 trillion

• S&P 500 as of 11/23/15: 2,086.59
• Earnings (full-year estimate): $118
• Dividend (full-year estimate): $43

This, then, is the tale of four decades:

• Global population up nearly 80%, with extreme poverty slashed from one human in two to one in ten, creating wave upon wave of new middle class consumers.

• U.S. population up by half, and gaining a new person (through net births and migration) every fourteen seconds. And still almost unimaginable room to grow: population density per square mile in this country is 85, compared with almost 300 in France, 590 in Germany, 680 in the UK…and 870 in Japan. Staggering natural resources, with mineral rights vested in the landowner; a hundred years' worth of hydrocarbon energy reserves.

• Real GDP more than tripled, on only a 50% population increase—meaning real GDP per capita has soared.

• The S&P 500 rose more than twenty times, on an earnings increase in excess of fifteen times and a dividend boost approaching twelve times. Far more significantly, these gains must be measured against an increase in the general level of consumer prices scarcely more than four and a half times. Surely this is the greatest accretion of real wealth by the greatest number of people in the history of the world.

What are the megatrends underpinning this spectacular economic and financial progress? Well, there are two, and of course they form a virtuous cycle. They are the spread of the free market, as liberty vanquished communism and most extreme iterations of socialism during this period, and exponential progress in information technology. (Today, a middle school child carries in their backpack, a smartphone with more computing power than the state-of-the-art mainframe had in 1975.) This cycle continues apace.

Crisis may come and go, but the economy continues to grow and move forward. This is why the market continues on an upward path as time goes on.

My job as your financial advisor is to help you accomplish your financial goals by getting you to focus on the things that are within your control and to modify your investment behavior. My job is not to get you market beating returns. If a person isn’t saving enough to begin with, it doesn’t matter the returns they get on their investments. They will fall short of their goals. Why be anxious over things outside of your control while ignoring the things you can control and accomplish.

As we start the New Year, be aware that we have had major declines and corrections over the past 41 years. Despite them, the economy and market continue to grow.

Thank you for allowing me an opportunity to serve you. Wish you and your family a healthy, prosperous 2016.


[1] http://news.morningstar.com/index/indexReturn.html  January 1, 2016 Dow  Jones and S&P are total return

Third Quarter 2015 Commentary

Bill Russo, CFP®

“The great strategy you can’t stick with is obviously vastly inferior to the good strategy you can stick with.” Cliff Asness, AQR Capital Management

The third quarter was one of our worst quarters in years as all major stock indexes finished in the red and fell into correction territory during the quarter. It feels worse since this was the first correction that investors have experienced in over four years.

Here are the ugly details through the end of the third quarter[1]:

                                                3rd Q                YTD

Dow Jones                              -6.98                -6.95

S&P 500                                  -6.52                -5.29

NASDAQ                                 -7.75                -2.45

Barclays US Aggr Bond           1.23                 1.13

In my last mailing you received a graph of the intra year declines that have been experienced over the past 35 years. The average decline has been 14.2%. So by recent past history this correction is below normal and it would not surprise me if we were to go lower. So why is there all the anxiety?

First, we are anchored to the recent past. We have not had a 10% decline in over four years and have forgotten what it feels like to experience one. Some remember the declines we had in 2008-2009 and fear a repeat. We need to understand that it is normal to have at least one decline of 10% or more per year and a decline of 20% or more within each market cycle. What is not normal is low volatility for an extended period of time that we recently experienced. When that happens, volatility returns with a vengeance. This is what we are seeing now.

Second, all news we read and listen to is negative. Even positive news has a negative spin. Consider, on February 25, 2015 the Washington Post had a work blog titled “Why rising wages might be bad news.” September 1, 2015 the Wall Street Journal had a story “The Bad News in Strong Car Sales.”

Remember print and television media are businesses. They get their revenue from advertisers. The more readers/viewers they can reach, the more they can charge their advertisers. Crisis and negative news attracts those viewers. Unfortunately, the public is not aware of the bad economics, math and information that are contained within the news they read and view. The media rather than reporting the news as had been the tradition, now tries to make the news and slants it to their agenda. We all need to realize what is happening and stay objective and obtain news from various sources to get a better perspective as to what is really happening.

Third, political leadership on both sides use economic fear in an attempt to win votes. The right argues that as long as Obama is President nothing good can happen. So, vote for us and things will get better. The Left blames George Bush for all the bad economic news and that we need more government spending and redistribution to make things better.

We now have a crony capitalist system where each side takes care of their donors and not their constituents. Things would be a lot different if Congress could not vote on issues that involved their campaign donors. It is considered a conflict of interest if one votes on an issue involving a business relationship but not when it involves campaign donors. Maybe this is why candidates for president that are considered outsiders are doing so well. The public is finally getting fed up with the political class.

So what is one to do? It is what one should always do. Have a financial plan and an investment strategy that keeps one focused on the things that are in one’s control.

Markets will fluctuate and events will happen but the market continues to rise over time. Market volatility preys on emotions of fear and greed. If the market is going up; greed kicks in and one tends to feel they should be more aggressive and want to put idle money to work. When the market falls, fear takes over and one tends to want to get more conservative or want to sell what they have invested.

This is the opposite of what one would do with normal purchasing decisions. If an item that is purchased on a routine basis is marked down 20%; the tendency is to buy more of that item while it is on sale. If the item is marked up 20%; the tendency is to buy what is needed or not buy at all. So why do we do the opposite when we invest, buy more when the price is high, or sell when the price is low? The reason is pure emotions. Investment decisions based on emotions will always be the wrong decision.

If you have a financial plan you will continue to do the things outlined in your plan and adapt and adjust to events outside of your control. The key is finding an investment strategy that you can stick with. This is what the quote at the beginning of the commentary refers to.

There is not one investment strategy that works well in all market conditions. Just as types of investing (value vs growth) go in and out of favor so do investment strategies. While asset allocation will underperform a rising market, it should decline less in a falling market.  Market timing will make one feel better if they get out before a market decline but will cause one to miss returns if they are still sitting in cash while the market recovers. Where investors get into trouble is when they chase performance and get away from their investment strategy. The key is to be patient and consistent. It is easy to say and hard to do.

Remember, if you have questions, concerns, or feel you need to change your investment strategy to fit your emotional state, please call to set a time when we can talk. It is important that decisions are based on facts and not emotions. As always, thank you for the opportunity to be of service.

 

Second Quarter 2015 Commentary

Bill Russo, CFP®

 “Wealth is what you accumulate, not what you spend.” – Thomas J. Stanley Ph.D.

The market continued to drift during the quarter as concerns about Greece’s ability to pay back their debt, when the Fed will raise interest rates, and concerns about economic growth seems to have kept investors on the sidelines.

Here is how we ended the quarter[1]:

                                                            2nd Q               YTD

Dow Jones                                          -0.30                0.03

S&P 500                                                  .28                1.23

NASDAQ                                               1.82                5.30

Barclays Aggr Bond Index                -1.71               -0.10

As I mentioned in my prior commentary, do not be surprised or fearful of market volatility. It is normal and does provide opportunities to invest at lower prices. Those that have a long term investment strategy do not need to fear as your holding period is not affected by what your investments do in the short run.

As you can see on the chart “Annual Returns and Intra-Year Declines”, page 13 from https://www.jpmorganfunds.com/blobcontentheader/202/900/1158474868049_jp-littlebook.pdf market pullbacks are common and not something to be feared. The average decline within a year over the past 35 years is 14.2%. What that has provided is a buying opportunity, not an opportunity to sell at a loss. Unfortunately, some people can’t stomach a decline; they panic, guaranteeing losing money by selling versus staying the course.

The allocation you use and the investments selected are based on how long you have before you need to draw on your funds. If you may need a lump sum withdrawal within the next 12-18 months, that is money that should be in a money market, checking or savings account. No sense taking risk for that short a time period. We have to accept the low returns of these options to avoid a decline in principal at a time when the principal will be needed.

If you are taking a systematic withdrawal, that is different; the portfolio allocation should be designed to throw off income from dividends/interest. The key to portfolio design is to determine the ultimate use of the funds and when they will be needed. The portfolio today may be different than the portfolio you have in the future.

Most investments ultimately will be used for retirement income. The accumulation phase can be growth or growth and income oriented. For those with a long time horizon and an aggressive mindset, a growth oriented portfolio would be appropriate. However, declines that will come should not be feared but welcomed. They will enable you to buy your investments on sale.

Others may choose to go for growth and income. This type of portfolio will focus on stocks that pay dividends and bonds that pay interest. The reinvestment of interest and dividends will buy more shares which will generate more income. This is a slower steadier way to accumulate wealth. Downturns are also welcomed as reinvested dividends and interest can accumulate more shares at a lower purchase price.

In order to invest successfully it is important to overcome the fear of loss and focus on the long term objective. Portfolios need to be changed when your time horizon or goals change. They should not be changed based on gyrations of the market. A well balanced asset allocation will get you to your goal.

As we reach retirement, the objective is to distribute income to replace your paycheck. This would require a change in the portfolio and possibly the types of investments utilized. You should consider how much of your income you want that is guaranteed and how much do you want that income to grow over time. Realize that there are tradeoffs when making these decisions. Guaranteed income (CD’s or Annuities) will provide lower income streams that do not increase and may have a cost for that guarantee. A growing income stream (dividends) will come with some volatility but have shown they can keep pace with or exceed inflation over time. This is important since our expenses will increase each year due to inflation.

It is important that we discuss these options so that you can make informed decisions. Too often financial products are sold to consumers by telling them what they want to hear and preying on their emotions. Because people don’t know what questions to ask, they never find out the hidden costs of the guarantees. We fully disclose these for you. Remember, risk and volatility are free but guarantees have a cost.

Remember, it is essential to stick with your plan and investment strategy and not veer off course. There is not a single investment strategy that works in all market environments. Constantly changing investment strategies is no different than the person that is constantly changing investments in the never ending quest to outperform the market. It is a foolish endeavor. Experts who do it for a living cannot do it consistently. What makes any of us think that we can do something the experts can’t do?

For those getting close to making decisions on when to take social security, please make sure we meet to discuss your options. Over the years, I have had people ask me if they did the right thing after they had already made an irrevocable decision. It is better to research your options first and get a good understanding of the pros and cons of your options so that you can make well informed decisions.

Call (440)349-4980 if you have any questions or concerns so that we have an opportunity to assist you.

Thank you again for the opportunity to be of service to you. Have a great second half of 2015.

 

First Quarter 2015 Commentary

Bill Russo, CFP®

“Long Term Investing is about character, about depth of vision and the cultivation of patience, about whom you are and who you’ve made yourself to be.” Lowell Miller in his book The Single Best Investment

After three years of low volatility, the markets have virtually moved sideways over the past six months. Losses in January were followed by gains in February and March has started off as a windshield market where yesterday’s losses were offset by today’s gains.

The market averages ended the first quarter as follows[1]:

                                                YTD

Dow Jones                               .33

S&P 500                                    .95

NASDAQ                                3.48

Barclays Aggr Bond Index    1.61    

On March 9th of this year, we reached the six year anniversary of the start of the current bull market. With that has come angst about the next correction. Yes, one will come, and it too shall pass. The key for all of us is how we react. For those that have experienced the more than 45% declines from March 2000 - March 2003 and more than 55% declines during 2008-March 2009, you know that you can weather the storm by being well diversified and that you come out ahead by staying with your investments and not getting scared out of them.

While this is easy to say it is hard to do. One of the reasons is that we all tend to put more weight on losses than we do with gains. What successful investors are able to do is focus on their long term goals and to avoid the emotional fear of loss. A temporary decline only leads to a permanent loss if you sell.

Most investment forecasts miss the mark. For the past three years experts and investors have been calling for a market correction. If one were to have acted on the forecasts they would have missed returns provided by the market. We need to realize that the future is not knowable. So to try and time a bear market is to ensure that you will end up worse off than had you stayed the course.

What we need to establish is the long term goal we are looking to achieve with the money that we have to invest. Different pools of money should be invested differently based on the objectives and how long the money will be invested. Short term money will use different investment options than money needed for retirement. With a short term time horizon, one does not have time to recoup temporary declines. While a long term time horizon does.

If your objective is building a retirement nest egg that will generate sustainable income during a potential 20-35 year or more retirement, you will need growth and growth of income. The only way one can achieve their goal is to invest and stay invested in equities.

As an example in an interview in Financial Advisor magazine (March 2015 p98), Nick Murray states the following: “Nothing has provided greater risk control over the long term than equities, which are historically without principal risk over 30 year periods (unless you’re mistaking volatility for loss). And there has never been a greater source of increasing income as powerful or reliable as the constantly rising dividends of the Great Companies in America and around the world.

Today’s retirees will average age 62, which means they were born in 1953. If they were born in February the S&P index was at 26 and the dividend was at $1.40. As I write today, they are 2000 and $39.”

These have increased despite all of the global crisis’ that have occurred over the last 62 years and will continue to occur in the future. Our ability to achieve our financial goals will be determined by our behavior and discipline.

Again this reflects our ability to focus on the things that are within our control. How much we earn, spend and save. Remember, if we are not saving enough to begin with, it does not matter what return we get on our money.

One way to find out what the amount you should be saving is to have a financial plan prepared for you or you and your family. Doing so will enable you to tie all of your financial affairs together so that everything is working to help you achieve your goals. It will make sure that any product or service you are utilizing is working to help you achieve that goal and that you have an understanding of exactly what you own.

It is not unusual to discover that there is an asset or retirement plan that had been forgotten during the data gathering process. Goal setting gives you the reason to change behavior. Once you discover what it will take to achieve your goals it is much easier to change current spending habits.

Other aspects of planning that prove beneficial are making sure beneficiaries and legal documents are in order or have been updated to reflect your current situation. Also, having frank discussions about the inevitable, we all face but do not want to talk about, will assist you in making sure that you address how you would want things handled.

Remember I am here to assist you in achieving successful financial outcomes. Working together we can make that happen. Thank you for the opportunity to be of service to you and your family.

 

Fourth Quarter 2014 Commentary

Bill Russo, CFP®

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."  ~Warren Buffett

For more than three years now we have avoided a 10% correction. Most investors had become complacent until the first two weeks in October. It was then that we almost had our first correction in three years as the market declined just under 10%. This was due to any one or combination of the following (take your pick), ISIS, Ebola, and/or the dismal economies in Europe as they slipped towards recession. However, almost as quickly, it recovered and it reached all-time highs. Then came December and the markets took another tumble as the price of oil declined, the Russian Ruble collapsed, fears of deflation were raised, and concern about a slow-down in global growth.

Once the price of oil stabilized and the ruble stopped its fall, the markets stabilized and started to recover. It appears that we are returning to a more volatile market which is more normal than what we have seen over the past three years.

When the dust settled at year end, here is how things ended up in 2014[1]:

                                                4th Q               YTD

Dow Jones                              5.98                 10.04  

S&P 500                                  5.35                 13.69

NASDAQ                                 5.81                 13.40

 

Barclays Aggr Bond Index    1.87                   5.97

What is ironic is that as the market was recovering from the October turmoil, the drop in oil was cited as the reason the market was rising as lower energy costs were putting money in consumer’s pockets. Then it turned into a concern that falling oil prices were due to slowing in global growth. Which is it? This is why it is hard to take any discussion in the media seriously. They are always looking for the simple cause and effect.

Unfortunately, things are not that simple. While oil has stabilized for the moment, that doesn’t mean in cannot fall further. According to Brian Wesbury, Chief Economist for First Trust, the recent collapse in oil prices is not a sign of broad deflation. It is a result of a shift in the supply curve to the right, due to new technologies in energy – horizontal drilling and hydraulic fracturing. When a new technology increases supply at any price, the entire supply curve shifts. When this happens, output rises and prices fall, unless there is a shift in demand.

These days, two things are happening to keep a lid on demand. First, developing economies, like China and Russia are experiencing slower growth. Second, new technologies – like LED lighting, more efficient computer chips and less waste in office buildings, homes and manufacturing – are reducing energy consumption.

This is just an example of the complexity of the economy and the factors that drive supply and demand in each market. That is why we cannot get caught up in the hyper excited media chatter about what is causing the market to rise and fall. The market will adjust to supply and demand and find equilibrium over time. If you are a long term investor, you can be patient and not scared out of your investments.

If on the other hand, you are chasing performance and do not have an investment plan/strategy, the volatility in the market place will cause you to make trades as you react to news that is already priced into your investments. You cannot trade your way to wealth. Take the story in the media in mid- December that talked about the high school student that traded his way to $72m. The story was bogus. People wanted to believe, as well as the reporter, that it was true to show that there is an easy and quick way to accumulate wealth.

The one sure way to accumulate wealth and achieve your financial goals is to spend less than you earn and invest the difference on a consistent basis. The problem is that this takes time and the ability to save the correct amount on a consistent basis. In order to give yourself a chance for financial success it is important to have a financial plan that identifies what needs to be done to achieve the financial goals you have set while you have time. Time can be an enemy or an ally. It can be an enemy when you start to save too late and you do not have the time to let your money grow and compound. Doing so will increase the amount that you would need to save to make up for the time missed  to grow and compound your investment.

Everyone has a chance to be financially successful, if they give themselves a chance.

Please note, as we start 2015, we all will be collecting forms to do our tax returns. Those that are working and have health insurance through their employer may be receiving one of two new forms (1095-B or 1095-C) that I or whomever is doing your taxes will need to prepare your taxes. If you purchased your health insurance through an exchange you will receive 1095-A. Those that are eligible may receive form 8962.  If you were uninsured for more than three consecutive months you will need to file for an exemption on the Health Insurance Marketplace. If you were uninsured for three months or less, filing for an exemption can be taken care of on your return. Do not throw these forms out. They will be needed to complete your return.

Additionally be aware that the maximum employee contributions to a 401k, 403b, 475b plans have been increased to $18,000/year with a $6,000/year maximum catch-up contribution for those 50 and older. Simple IRA maximum employee contributions have been increased to $12,500/year with a $3,000/year maximum catch-up contribution for those 50 and older. IRA & catch-up contributions remain the same as they were in 2014. ($5,500 and $1,000 respectively).

Look forward to an opportunity to be of service to you. Have a healthy, prosperous 2015.

 

Third Quarter 2014 Commentary

Bill Russo, CFP®

“About every ten years, we have the biggest crisis in fifty years.� – Paul Volcker

“All of us would be better investors if we just made fewer decisions�– Paul Kahneman

I start with these quotes since the constant chatter is about the anticipated market correction that hasn’t happened for over two and a half years. Some people are still waiting on the sidelines for the market to pull back before they invest. They fear we will have another major downturn as we did in 2008 and the first quarter of 2009. Some have missed a 20-30% return while they worry about which bank has the highest CD or money market interest rate.

Here is how we stand at the end of the third quarter[1]:

                                                3rd Q                YTD

Dow Jones                              1.92                 4.60

S&P 500                                  1.20                 8.34

NASDAQ                                 2.05                 7.59

Barclays Aggr Bond Index    0.17                 4.10

While a pullback/correction is overdue, it should not affect an overall investment strategy for your long term money. Markets will rise and fall at random in the short run but over the long run they continue to rise. This is why money that is needed for short term goals does not belong in the stock market.

If you have long term money to invest but do not like the stock market, there are other investments that can be utilized. Alternative investments are not correlated (move in same direction) with the market and may provide another option to consider. As with any investment there are pros and cons that will determine whether or not they may be appropriate for you.

As mentioned many times before, market returns are not within our control. With that in mind there are many other things that affect our financial future that are within our control. Some can have more of an impact on your financial future than a temporary decline in the market because they are permanent. What follows are a few that you may need to consider.

One is deciding when to start collecting social security. Too many people decide to collect as soon as they turn 62. Doing so permanently locks in a lower monthly payment for the rest of your life and will reduce the spousal benefit that will be available in the future.

Another decision is when to sign up for Medicare. Missing the appropriate time period could permanently lock you in to a higher premium.

Not knowing what risks you are exposed to and therefore assume the risk of loss by not having adequate Auto, Homeowners, Life, Health, Disability, Long Term Care, or Liability Insurance. Without coverage or having adequate coverage you expose yourself and your family to the risk of loss. If you knowingly expose yourself to risk hopefully it is done because you feel that you are self -insured.

Taking on the wrong kind of debt or taking on debt with no plan to make sure it gets paid off in a timely manner.

Keep your beneficiary designations up to date and reflect life events such as birth, marriage, divorce and death as they occur. Failure to do so could lead to unintended consequences.

If you have a trust, are your accounts correctly titled?

Be aware of the fine print and details when shopping for a higher interest rate on your savings. Too often people think they purchase one thing and find out later that it is something else, or they do not realize that the advertised rate is for a set period of time, has restrictions or early withdrawal penalties.

Before you make any financial decision, you should have an understanding of how it will affect your financial plan. I am available to help you determine if the decision you are about to make will help you achieve your financial goals and to explain why it does or does not. It is always better to ask questions first before making a decision rather than ask questions afterwards when you are already locked in.

Remember, I am here to provide objective analysis and advice. While I can provide products or services to assist you with implementing your plan, I am not affiliated with an entity that has products. Therefore, I do not have any quotas or commitments and I am free to use what is appropriate for you and your situation.

Your financial success is measured by achieving the financial goals that you have set for you and your family. It is not measured by outperforming the market in any given time period. Realizing this will help you to focus on what is within your control and not get caught up by the crisis of the day. Remember we adapt to those things out of our control while focusing on those things that we do control. By doing so, we can eliminate stress and pressure.

Thank you for providing me an opportunity to be of service to you and your family. Make it a great day.

 

Second Quarter 2014 Commentary

Bill Russo, CFP®

July 2014

“Attempts to correct irrational investor behavior through education have proved to be futile. The belief that investors make prudent decisions after education and disclosure has been completely discredited. Instead of teaching, financial professionals should look to implement practices that influence the investor’s focus and expectations in ways that lead to more prudent investment decisions.�

“Explicit reasonable expectations are best set by agreeing on a goal that consists of a use of funds, a dollar amount and a date. Progress to meeting that goal is then tracked, showing how much the investor is ahead or behind the established goal. Linking the investment to a personal desire keeps the attention focused on that desire and avoids the distraction of market volatility that leads to bad investment decisions.� Dalbar, in the introduction to its 20th annual Quantitative Analysis of Investor behavior.�

Sorry for the long quote but this summarizes the approach we take in helping you achieve your goals. It is important to remember this since we have gone almost three years without a 10% decline in the market. According to Fidelity, equity market corrections occur with normal frequency: on average there are three corrections per year of 5% or more, one correction per year of 10% or more and one correction every three years of 20% or more.[1]  When these situations do occur and they will, you cannot let the media scare you out of your financial plan.

While we started the year with about a 6% decline in January, the markets have stabilized. They have taken one step back before taking two forward. As of the end of the second quarter, we find the market averages have performed as follows[2]:

                                                                2nd Q                      YTD

Dow Jones                                           2.83                        2.68

S&P 500                                               5.33                        7.14

NASDAQ                                              5.00                        5.54

Barclays Aggr Bond Index                 2.09                        3.93

Despite the crisis we see around the world, market volatility has remained low. How long that continues is anyone’s guess. Crisis will always be a part of what we deal with on a daily basis and in the overall

scheme of things they have a temporary impact. If we were to look at a chart of any market index and note the frequency and the major crises that have occurred on the same chart, you would see temporary declines followed by recovery. This is why it is never a good thing to panic out of your investments. We need to stick with our investment plan.

We cannot allow ourselves to get distracted by things outside of our control or by someone else’s agenda.

Follow what is stated in the second half of the quote at the beginning of this commentary. You can begin by setting your goals, determine when the goal(s) will be accomplished, inflate the need to arrive at future needs, determine how many months/years before you want to accomplish your goal, and calculate the rate of return needed to make your goal a reality. Once the return that is needed is calculated, a portfolio allocation can be determined. One size does not fit all. Each of us has a tolerance to risk. The key is to design an allocation that enables you to reach your goal and still be able to sleep at night.

As people get closer to retirement, the desire is to invest more conservatively. This is out of concern for safety. However, two of the biggest risks that we all face as we get closer to and when we reach retirement are longevity and inflation risks. Currently, safe secure investments do not exceed the rate of inflation. Therefore, we lose purchasing power even though we haven’t lost any principal.

We also need to realize that once we retire, the paycheck stops and some of us may be retired as long as we have worked. Therefore, we need to make sure that our nest egg lasts as long as we do. If we invest too conservatively, our principal will be eroded and will be exhausted while we are still living.

Once again we need to make sure that we must follow our financial plan and make sure that our allocation is structured to enable us to achieve our goals. We can’t be too safe or too aggressive without knowing whether or not we are on plan.

Social Security is another area where we need to make good decisions. Too often people want to take their benefits as soon as they are eligible. Doing so permanently locks them into a lower payment and could be detrimental to their surviving spouse. In other cases people that continue to work and apply for socials security end up losing benefits because they earn too much.

Ask questions first before applying for social security benefits. Find out whether or not you are hurting or helping your ability to spend your retirement years independently. Ask yourself, do I know what sources of retirement income I will have, how much will be coming in, what monthly expenses do I need to cover, what do I need to have saved before I can consider retiring, and how much will I need to cover medical insurance? These are just a few of the questions that need to be answered before making plans to retire.

If you, a family member, a co-worker or a friend need help in getting a plan in place to secure an independent retirement, give us a call at 440-349-4980 to help you make your dreams a reality.

 

[1] Fidelity- Alternative Investment Themes pdf p28 June 16, 2014

 

First Quarter 2014 Commentary

April 2014

"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."- Warren Buffet

The first quarter of 2014 got off to a rocky start as was anticipated. In the first month of the year the major averages declined about 6% and started to recover in February. March saw the crisis in Ukraine, disappearance of a Malaysian jet and the new Fed Chairwoman’s attempt to outline how the Federal Reserve is going to handle monetary policy going forward.

Here is how the major averages ended the first quarter[1]

                                                      YTD

Dow Jones                                 -.15

S & P                                           1.81

NASDAQ                                       .54

 

Barclays US Agg  Bond         1.84

After a period of low volatility over the past two years investors became complacent and started to return to the market. Now that normal volatility has returned, anxiety has increased. What is needed is a deep breath and a reminder that this is normal. As stated in previous commentaries, the average decline within a calendar year is about 14.5%. We have not been close to that in over two years.

Declines when they do occur provide long term investors opportunities to buy securities they value as they go on sale. For some reason people forget their long term goals and react negatively to short term noise. How else to you explain the rise in the Dow from 66 to 11,497 during the 20th century. It is hard to believe with the events that unfolded during that time. Each was worse than what we have encountered over the last 13 plus years. The difference is the media coverage that makes one think the unfolding crisis is the end of the world as we know it.

While it is easy to say stay focused on your long term goals, it is hard to do in this world of 24/7 news coverage. While basic and simple, it is still a struggle for many individuals and families; live within their means. That is where we can provide assistance by helping you build a firm foundation. You must spend less than you earn and invest the difference. While the amount will vary depending on your goals, time horizon and savings you have accumulated, the ideal number to shoot for is 15%. This would include any company match.  A retirement analysis would identify the amount you should be saving. At the very least you should be saving for retirement by taking advantage of a plan offered by your employer or funding an IRA (Individual Retirement Account). Business owners may have additional options available.

Another area within your control is using the Social Security claiming strategy that maximizes what you are able to claim from social security. Some people file too early and end up either receiving a permanently reduced benefit or losing a portion of their benefits because they earn too much money while claiming before they reach full retirement age (FRA). An analysis will help you make the appropriate decision. Learn how to maximize your benefit so that you can make an informed decision.

Another thing within our control is making appropriate decisions on how to position our hard earned money so that it is in the appropriate type of investment. This means using savings/checking accounts, CD’s, money market accounts for money we will need within the next 12-18 months. Beyond that time horizon other options are available for consideration. What is important is not to pursue a return that exposes one to more volatility than one can handle. Remember the higher the return you pursue, the greater the movement up and down in the value of your investment you will experience. You cannot get high returns with low risk. While there may be times where there is low volatility as there has been in the prior two years. Over time, the lower the potential return the lower the risk. The greater the possible return the greater the risk.

Over my 20 plus years in this business I have seen first-hand that the more active someone trades their account the lower the return they receive. Even if they take more risk than a person who has a well balanced portfolio that trades rarely if at all. The reason is the active trader is pursuing returns (akin to gambling). This results in trading out of an investment that may be out of favor into something that may be in the tail end of the period of time it is in favor. So they end up selling low and buying high. The process is repeated and after a period of time they ask why they aren’t making any headway. It is why study after study (Dalbar, Morningstar, and Fidelity) shows that there is a gap between fund performance and investor performance in the same fund.

Retirees that are successful have done all the right things over the years to put themselves in position to retire comfortably. It doesn’t happen by mistake, only by doing the little things consistently over time.

If you have not had a financial plan, a goal oriented analysis prepared, or need to update your existing plan, call 440-349-4980 today to make an appointment. This will enable you to implement changes that may be needed to make your financial goals a reality while you still have the time.

 

Fourth Quarter 2013 Commentary
Bill Russo, CFP®

“In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.� - Peter Lynch

“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.� - Seth Klarman

Hope you enjoyed the past Holiday Season and are looking forward to making 2014 a great year.

Despite the fear of going over the fiscal cliff, not raising the debt ceiling and the impact on the economy when the Fed reduced the amount of bond purchases, the market rose for the fifth year in a row in 2013. As it has been in the past, the hyped up fears were overblown. We have now gone over two years without a 6% decline within a year. This is in comparison to an average 15% decline within a year.

The Fourth Quarter finished strong as we reached all-time highs in December on the Dow Jones and S&P 500. Here are the results for the quarter and the year for the major averages :

                                                 4th Q            YTD
Dow Jones                             12.1            29.7
S&P 500                                  13.2            32.4
NASDAQ                                  13.4            38.3

Barclays US Agg Bond          -.1              -2.0

As we can see bonds had their worst year since 2008. For the first year since 2007 there were net inflows into equities while bonds experienced net outflows. Even with the inflows into equities, this is one of the least loved market rallies. With bond yields and bank rates at low levels, investors feel that the stock market is one of the few places where an investor can get a return on their money. With a five year rally in place, the focus is now on return on money versus the return of principal.

There are many advantages for having low interest rates, unless you are a saver. Savers are being penalized while purchasers of big ticket items, corporations and the Federal Government benefit from low rates. Corporations can borrow cheaply to fund expansion, purchase capital items or fund dividend payments and stock buybacks. The Government benefits from lower interest payments on Federal Debt. If interest rates were at normal levels the cost of Medicare, Social Security and interest on the debt would be approaching 80% on its way to 100% and more of the annual budget. This buys the government some time to get their fiscal house in order. So far Congress and the Administration have squandered the opportunity.

When we have a wide disparity of returns between different investments as we do now, we must stay disciplined. The tendency will be to sell the investments that have done poorly and invest in the area that has done well. This is not the time to make dramatic changes to your portfolio. The time to load up on a particular investment is when no one else wants to buy it. That time is long gone for stocks. I am not saying we avoid stocks, only that we must stick to our plan and asset allocation and not let emotions (greed) drive the investment decision. The investment decision should be based on time horizon and the return needed to achieve our goals.

Going forward into 2014, remember the two quotes that started this commentary. Over the past 20 years that I have been in business, I have seen the circumstances of performance chasing. For some reason those left to their own decision making or failing to take advice that they paid for, commit the same mistakes over and over. The typical reasoning is “this time is different�. Stocks can only go up (in 2000); real estate will never go down (2002-2007). Stocks will never come back (2009).

People will sell equities in a temporary decline only to buy back in at higher levels. We have seen that this year as there have been net annual inflows in equities for the first time in five years. This after the market is up over 100% from its lows in 2009. During this time money was flowing into bonds as yields got lower and lower to the point where there was little opportunity for capital gains and very low interest rates, therefore leaving room for little total return. The thought was, bonds most certainly are safer than stocks (until interest rates go up that is).

I mention these situations so that you stay focused on your plan and what you can control to make your plan a reality. Do not focus on things that you can only react to. My experience has shown that those that are financially successful have spent less than they earned and invested the difference on a routine basis. While they do spend money, they do so prudently. It is not a matter of showing others their wealth, it is a matter of building wealth to fund their goals and make them a reality.

While there were a number of tax and retirement maximum contribution changes for 2013. There are limited changes for 2014. All retirement plan maximum contributions remain the same except that the maximum combined defined contribution goes from $51,000 to $52,000. Tax brackets do creep up some. In 2013, there were numerous changes to tax brackets and deductions plus new taxes to fund the Affordable Care Act. Cost of doing returns is sure to climb as the complexity of doing returns has increased once again.

Also, if you have accounts held at any brokerage firm as opposed to being held directly at a mutual fund; expect to receive your 1099’s later in February and in some cases in March. Be sure to read the fine print on your statements and any inserts mailed to you in January. There will be information detailing the mailing schedule for 1099’s. Instead of things getting easier, they are only getting more complicated as government continues to become more involved in our lives. We will continue to do our best to make sense of all of the changes and to keep you on plan.

Thank you for the opportunity to serve you in 2013. I look forward to doing so again in 2014. Wish you and your family a healthy, prosperous 2014.
 

 Third Quarter 2013 Commentary

Bill Russo, CFP®

October, 2013

“It is the patient, disciplined equity accumulator - looking neither to the left at the economic events nor to the right at the market gyrations - who achieves his/her lifetime goals.� – Nick Murray

“The value of quality common stocks in the long run is essentially a function of the earnings, dividends and cash flows of the underlying companies.� – Nick Murray

Volatility continued in the Third Quarter. While all-time market highs were reached on the S&P 500 and Dow Jones in June, these broad market indexes fell about 6% during the quarter before they started to recover in September. After the Fed’s announcement in September that they would not begin tapering, (reducing their purchases of bonds from the open market) the Dow and S&P 500 reached new all-time highs while the NASDAQ reached a 13 year high.

Here are the results for the Third Quarter[1]:

 

                                                3rdQ                YTD

Dow Jones                              1.4%               17.6%

S&P 500                                  6.0%               19.8%

NASDAQ                                12.2%              24.9%

 

Barclays US Agg Bond         0.5%               -1.9%

As we start the Fourth Quarter there are a number of issues on the table that will have some impact on a short term basis. These include: Looming Budget battle and Debt Ceiling issue (the first salvo was launched on September 20 when the House passed a budget bill which included defunding the Affordable Care Act), who will be named as the next Chairman of the Federal Reserve, Syria and Immigration. Any of these issues by themselves or a combination of these issues can cause short-term volatility. However they are unlikely to have any long lasting impact.

This is the reason I started with the two quotes from Nick Murray. We can’t let news; real or doctored affect how we handle our financial affairs. There will always be reason not to invest or cause us to lose sight of our financial goals and plan. Fear or uncertainty is not the basis to change either.

On the flip side we cannot get too greedy and let a rising market or sector get us to change our investment strategy. Remain diligent and focus on your goals and strategy. Too often, peoplealways better to buy low and sell high, it is difficult to follow. Being able to control one’semotions is a big factor as to whether someone is a success or failure when dealing with their finances.

While it is easy to write and say the things that I have above and consistently have said over the years, it is difficult to do. I know it can be gut wrenching to see account values fall but they do rise again. It takes discipline to stay with your financial plan and investment strategy and avoid the strong emotional pull of the fear of loss. A decline is a temporary fluctuation while a loss becomes permanent if you sell in a decline. That is why there are not a lot of people that invest successfully on their own.

Look at athletes that have tremendous God given talent. They excel with coaching; but are just ordinary when relying on their own talent without any coaching. Business leaders have coaches or mentors that have helped them along the way. Coaches provide discipline to keep their clients on track.

While most people focus on their investments, what they need to focus on is their spending. If their spending can be reduced, they should be able to save adequately to achieve their goals. People that run short of their goals do so because they do not save enough, not because of the return they get on their investments.

Over the years, my most successful clients are those that have lived within their means and have consistently saved money. It’s not that they don’t spend. It’s that when they spend, it is planned out and funds are accumulated prior to spending. They understand the difference between needs and wants. Food, clothing and shelter are the basic needs (oxygen and water are a given). Everything beyond that is a want.

We all need to make tradeoff decisions as we go through life. Is the money we spend today taken from something that may be needed tomorrow/in the future? Unfortunately, people do not even think of what they are doing. They get caught up in the corporate marketing machine that does a tremendous job of creating perceived needs and they spend without ever thinking about their future. Everything is geared to what is going on right now. That is why action items for financial success include setting goals and preparing a plan to identify what is needed to make the goal a reality. Unfortunately, procrastination wastes valuable time. The longer people wait to get started the shorter the time period they operate in to make their goals come true. This means having to set more aside to be able to put a down payment on a home, fund a child’s college education, or retire in the lifestyle they choose.

This is not written with the intent to sound preachy but rather to help us focus on the things that are within our control. There will always be issues that affect the market on a short term basis. The quotes provided above should help to keep us focused on the rocky road ahead.

Let’s set a time to prepare a plan or update your existing plan so that we can ensure that you are on the right path; a path that leads to achieving your dreams and financial goals. Remember, “People don’t plan to fail they fail to plan.â€?  Thank you for the opportunity to serve you. Make it a great day.


[1]http://news.morningstar.com/index/indexReturn.html October 1, 2013

 

 

 

Second Quarter 2013, Commentary

Bill Russo, CFP®

July, 2013

 

Investors should not forget that stocks represent ownership in real companies that own andproduce real assets and generate real earnings that appreciate with inflation. Despite this,the cost of stocks relative to other “real� assets such as gold and oil is near 20-year lows.� —Savita Subramanian, Merrill Lynch equity and quant strategist.

We had a good start to the second quarter as we hit all-time highs in May on the Dow and S&P 500. This was followed with volatility as markets stayed within a 5% range as discussions concerning ending or tapering the Feds Quantitative Easing made their way into the headlines. Here are the results (includes Barclays US Aggregate Bond Index) for the second quarter[1]:

     2nd Q              YTD

Dow Jones                            3.27%             15.2%

S&P 500                                 3.2%               13.8%

NASDAQ                                 4.5%               12.7%

Barclays US Agg Bond       -2.3%              -2.44%

 

While the stock market has been off to a great start to 2013, the same cannot be said for Bonds. One of the objectives of Quantitative Easing was to bring down interest rates to help people refinance their mortgages, improve the housing market and to limit interest payments on the Federal Debt. This has been accomplished. We are starting to see a rebound in housing although 30% of home purchases are for cash versus 10% prior to the financial crisis.

However, after 30 years where interest rates have been trending down and bond prices rising, we are now at an inflection point with the coming end of Quantitative Easing. While rates may stabilize and could possibly stay within a narrow range from here, they offer little in the way of total return. In fact they have been a negative drag on overall portfolio performance in 2013.

Remember the media needs a crisis to keep us tuned in. So we will continue to hear more about Quantitative Easing. This is, in light of the fact, the crises of going over the Fiscal Cliff, the crippling effect on our economy of the Sequester, and bumping up against the debt ceiling have come and gone with no discernible impact. In fact the “plow horse economy�, no matter what obstacles are put in its way, keeps moving forward. This is one thing the media doesn’t understand; the economy and its people are resilient. Just think what this economy could do if government got out of the way and stopped trying to micromanage everything business and its citizens do.

With the market reaching all-time highs in the quarter and the current crisis being promoted, I have had a couple of clients call concerning how to protect their portfolio from the impact of the latest manufactured crisis. Realize that we will always have volatility and that even in years with positive returns; it is not uncommon to see a decline that on average is about 14% within a calendar year. In the past five years, we had intra year declines of 28% in 2009, 16% in 2010, 19% in 2011 and 10% in 2012[2].

Remember, in order to receive good long term performance, you have to be willing to accept short term underperformance and focus on long term fundamentals. I know this is easy to say but hard to do. This is what sets people apart that are financially successful from those that are not. It is my job to help you avoid making financial mistakes and by doing so help you achieve successful financial outcomes. It is not about getting the best returns year in and year out. People that go to advisors who claim that they can beat the market or can provide consistent returns without declines, find out the hard way that it is not possible. Remember Bernie Madoff, Allen Stanford and others like them that convinced people that they were able to decipher the market moves and were able to consistently beat the market. Neither you, I, nor any investor can consistently beat the market. What we can control is how much we earn, spend and save/invest. What we can do is develop a financial plan and adapt and adjust that plan to what we need to do to achieve the desired financial outcomes.

Do not get seduced by claims that are directed at your emotions and appear to give you an easy path to financial success. If it was easy, everyone would be able to do it. However, it takes discipline and hard work to establish goals, develop a plan, and implement the activities that are necessary to make the plans a reality. Ongoing review is needed to make sure the plan is on track.

Make sure we talk before you make any financial decision/purchase especially concerning social security. I’ve seen too many mistakes where questions were asked after the fact. Be well and “Thank You� for allowing me to be your financial advisor.
 


[2]Barron’s, June 24, 2013, A Change in Tune by Kopin Tan, p13. 

 

First Quarter 2013, Commentary

Bill Russo, CFP®

April, 2013

“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.� Peter Lynch

The start of 2013 was supposed to be disrupted by the fear of going over the “fiscal cliff, followed by implementation of the “Sequester� and as I write, the debt ceiling. Rearing its ugly head the last half of March was the crisis in Cyprus. As always, one can always find things to worry about. This economy is far more resilient than the media gives it credit for. First Trust Chief Economist, Brian Wesbury terms it the “Plow Horse Economy�. No matter what you throw at it, it keeps moving forward.

Despite all of the negative news and scare tactics by the media, the markets continued to climb higher as the Dow Jones and S & P 500 closed at all-time highs at the end of the first quarter.

Here are the results for the First Quarter of 2013[1]

Dow Jones     11.93

S & P 500         8.21

NASDAQ        10.61

There are many people out there that are waiting for one event or another to occur before they jump in. In each and every case the market has shrugged off the bad news or the impending doom that the media hypes. Many are frustrated with the low level of returns on their “safe investments� and have started to enter the market. Before doing so, there are things that people should consider.

First and foremost, money that is needed within the next 12-18 months is money that doesn’t belong in the market to begin with. We have to accept the little to non-existent returns for short term money. Other money that we have can be committed to long term investing. Then, and only then, should one look to pursue higher returns than what is available in money markets, savings accounts and CD’s.

In doing so we must realize that there will be fluctuations in the value of our investments. Whenever you pursue a return higher than the risk free rate available in U. S. Government, Bills, Notes, or Bonds, you will experience some level of volatility. The higher the return you pursue, the higher the volatility. You do not get one without the other. The shorter the time you have to keep the money invested, the lower the return you should pursue. Don’t get caught up in what a family member, friend, neighbor or co-worker is earning. First, realize they only will tell what is working, never will they tell you what didn’t work well. When was the last time someone bragged about how much they lost in an investment? Second, they may have a different tolerance for risk or a longer time horizon.

I mention volatility so that it is understood that we will have another recession, another correction, more fear, more anxiety, and more reasons to scare you out of your investment strategy. In a recent interview Warren Buffet stated that he bought his first stock at age 25 (1955) when the Dow Jones was at 492 and the S&P 500 was at 45. Since then there have been numerous crisis and reasons to sell investments and yet the markets are substantially higher today. He wouldn’t be where he is today if he listened to his fears and the reasons why he shouldn’t invest or why he should sell his investments. Mr. Buffet has stated in the past that his favorite holding period is forever.

The overwhelming numbers of people that invest do not have the discipline and intestinal fortitude of someone like Warren Buffet. It is hard to see your investments go up and down in value. It’s even harder when it happens day after day as we saw in late 2008 and the beginning of 2009. So how do we avoid letting the emotional rollercoaster affect our investment decisions? Realize that there is not a strategy that works well in all market environments. What does work is consistency. Pick an investment strategy and stick with it. The investment strategy we choose is the starting point and is the basis for investment selection.

So how do we cope with challenging markets? Invest regularly. For some reason most people invest only when the market is rising and avoid doing so when the market declines. Why not take advantage of investing in good companies when prices are down? Do you purchase goods and services when prices rise or try and bargain shop and pick things up on sale?

Avoid jumping in and out of the market. Nobody does that consistently well. While it may make you feel good, it requires making two correct decisions.

Maintain a diversified portfolio. This helps to lower your risk by not being overexposed to any one type of investment. While a diversified portfolio doesn’t guarantee a profit, over time it helps reduce the volatility of the markets. What I have seen over the years is that you can lower the volatility of your investments. This will help keep you invested in bad markets so that you are still invested when the turnaround occurs.

Don’t forget history. Markets do have steep declines from time to time followed by recoveries. This is part of economic cycles. In fact, in most years, it is common to see declines of 10% or more within the year. While they may be part of the normal workings of the market, it is hard to get comfortable seeing the value of your account fluctuate. Remember exceptional investment success comes from the practice of faith, patience and discipline. These are character traits. It is only the failure of these qualities that defines the failed investor.

Let us help you become successful financially. We will help you define your plan and assist you with achieving the character traits that will enable you to stay on track with your plan. Together we can make 2013 a successful one for you and your family.