Sip Your Wall Street Carefully

Michael's Cup2

A great mentor required me to hand record daily and weekly prices of copper, oil, interest rates, currencies, money flow, sentiment, etc. from the Wall Street Journal & Barron’s onto a card stock grid. I know, I know…no automated download and this task was usually completed by 6:30 am. What an awesome way to get close to the data, market barometers, and the pulse of the world’s financial markets.

My LinkedIn Post on December 5th entitled An Ark, a Speedboat, a Tight Bathing Suit, outlines a thought process and framework for asset allocation and portfolio construction. The last paragraph read,

Thoroughly review all your taxable and tax-deferred accounts. Make sure you and the advisors who work on your family’s behalf have coordinated strategic (long-term) and tactical (short-term) estate, asset allocation, and margin-of-safety plans. The tides will inevitably change so do not wait to hear the thunder before the next big storm!

There are thunderous signals abound as prices of oil, copper, and money plummet. See below for a graph of the benchmark 10-Year U.S. Treasury Yield–dropping from 3% to well below 2%. If upward moving 401k plans and investment values have delayed urgency to this point, then the sheer velocity of recent change should cause an immediate review of your complete portfolio and unique circumstances. True, draw-downs of 10% in broader stock gauges are considered “normal” through the course of any given year; that is, a change in prices from some high point to a low point, before reversing upward again. Also true, professional and novice investors are clearly getting burned with dramatic moves taking place in specific sectors, asset classes, and investment vehicles. 

Sound investment strategies expect and withstand this level of two-sided volatility and, in many cases, a buy and hold strategy may make sense. Unfortunately, anecdotal evidence shows clear signs of misalignment and potential hidden dangers. For example, history-making low interest-rates have caused investor’s to demand and advisor’s to reach for a myriad of new products and solutions. Do you or your advisor clearly understand and appreciate the costs and risks in higher yielding MLPs, exchange-traded-products, and lower-rated bonds? Was publicity, slick marketing or a cool chart enough to place your hard earned wealth into a buy decision?

Wise from all points as investor, advisor, and chief investment officer, I can write with certainty that sometimes it just feels right to make changes, no matter how slight, to satisfy a behavioral need to feel more in control of the often uncontrollable. Stress levels are sure to rise in 2015–Investors at all levels will come to appreciate an emotional connection and plenty of great communication with peers and advisors!

10-Year Yields

Let me repeat some advice, do not count on your advisors’ portfolio review timetable or ability to proactively call you. Take the appropriate initiatives (this is not the same as panic) and be aware that various Wall Street incentives and potential conflicts of interest exist on Main Street and Your Street. Be an astute consumer of financial services and feel confident that you have a comprehensive understanding when it comes to fees, rationale of advice, allocation of time to your family, methods of implementation, risk assessment techniques, and so forth. Even good professionals get ensnared in poorly constructed advice business models, overly simplistic tools, and limited offerings. Yes, a so-called fiduciary relationship infers a certain standard of care. Still, a discretionary fee-based relationship is not a license of faith. Some advisors consider marketing fiduciary acts as a license to avoid more laborious and detailed work. Trust, but verify!

Difficult Discussions:

http://www.cfainstitute.org/learning/investor/Documents/difficult_discussions.pdf

Investor Rights: http://investorrights.cfainstitute.org/en/

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