Markets: Covering Our Eyes is a Bad Strategy

Reflated markets from 2009-2014 hid and created bad behaviors. It’s not too late to increase our odds for investment longevity. Many investors are paying too much and receiving little OR paying too little and not receiving enough practical guidance. Perhaps change is unnecessary; still, we need to build a statement of net worth, review cash and investment accounts, estimate new tax bills sooner than later, and prepare a written checklist of acceptable rewards and risks. The behavioral goal is to empower our brain to avoid emotional decision-making in case a real economic storm evolves.

China, Europe, Latin America, credit markets, global central banks, oil markets, currencies, geopolitics, and earnings will directly or indirectly IMPACT OUR retirement assets. Unfortunately, the very best and most vocal resources of the U.S. Federal Reserve, Wall Street, Econometric Models, Robots and Main Street Gurus cannot pinpoint an accurate outlook for 2016. So, let us instead improve cognitive functions with our eyes and an old fashioned pencil.

Let us focus on the more controllable aspects of wealth: saving, spending, and planning. Thus, we are REQUIRED to review, scrutinize, and reaffirm unique circumstances and financial plans. Is there alignment with the plans and fee structures executing on our family’s behalf? The goal is to IGNORE (mostly) the less controllable negatives of lower prices and scary headlines when confidence is reached in the answers to what, where, how, why, who, and how much!

As of this writing, the S&P 500 is slightly above last summer’s swoon to 1,860 from its previous high of nearly 2,135; however, this “normal” retreat disguises the extreme deterioration in markets across the globe. Hold on now…that information should not automatically steer us to buy, sell, or hold. However, it should signal relentless focus on our goals with a margin-of-safety!

20 Years Later…& Lots of Bad Markets

  • 7,500: Approximate number of days I have reviewed financial markets and portfolios as a professional advisor to advisors and private asset manager.
  • 250: Approximate number of days I pivoted from strategic plans to implement new well-reasoned plans.

Whether a professional or novice protector of hard earned wealth, we must address the suitability and reasonableness of expenses, leverage, complexity, liquidity, diversification, and risk management. It is our responsibility to proactively shield assets from the value erosion driven by emotional decision-making, unnecessary taxes, onerous inflation or deflation, and overly standardized or biased advice.

Covering our eyes is a bad strategy if change is necessary, and the only way to know is to look. Think strategically. Apply sound principles of investing, saving and spending. Avoid big directional bets. Also, see this recent Post with highlights on Patience, Discipline, Process, and Customization.

ABOUT THE AUTHOR:

Michael loves to empower investors with his expertise in securities and economic analysis, goals-based wealth management solutions, and FinTech smart decision-support tools. While directly managing over $5 billion in growth and retirement assets; his proactive advice and software innovations have influenced thousands of fiduciary advisors to better their practices and service to clients. He enjoys spending time with his wife and three boys, competing in USTA tennis, and mentoring others to succeed.

Email | Michael@empoweredportfolios.com

Twitter | @MichaelHakerem

Four of the Most Reliable Words in Investing, Coaching, and Parenting.

Patience, Discipline

“It’s tough to make predictions, especially about the future.” Yogi Berra

Armed with brainpower, insider information, and sophisticated tools, even the most powerful global institutions cannot outguess economic data and financial markets. One such institution, the U.S. Federal Reserve officially diverged from other central banks with a much anticipated December monetary policy  announcement, and Fed Head, Yellen, steadfastly exuded confidence in an ability to execute on central plans. While seemingly small now, this historic event does signal added change, uncertainty, and hypersensitivity to future news-flow.

Default risk, volatility and extreme downside in security prices were reintroduced in 2015. Well-intended 2016 forecasts are on the way to our inboxes, and these notes often serve only to confuse yesterday’s confident beliefs. Stocks, bonds, commodities, emerging markets, and currencies will continually jostle investors and prognosticators.

No crystal ball or “black-box” strategy guarantees consistent and successful market timing, so let us briefly examine four words able to more reliably trigger clearer thinking in times of added stress.

Patience, Discipline, Process and Customization have proven a helpful and mightily resilient decision-making framework throughout a career of investing, coaching, and parenting.

#1 Patience helps to promote less emotional decision-making. We have all been in that daunting place, a moment where reactions, words, and instructions are paramount to a more successful outcome. Take a mental moment or even physically remove yourself from a tough situation. Intentional breaths also enhance one’s ability to patiently respond when control is momentarily lost.

Quick Tip: Avoid an immediate investing decision if you have recently been exposed to the flashing of red and green price-change indicators.

#2 Discipline reinforces adherence to well-grounded investment strategies and financial plans. The temptation to impatiently chase the latest fad, change styles, or to abandon the “game plan” out of fear, often leads to instability more detrimental than whatever short-term deficit or problem exists.

Quick Tip: Avoid compromises or exceptions only made to make a decision work this time.

Fearful headlines and twitter feeds sell ads and keep people glued to screens, but fear does not make money in the stock market.

#3 Process translates into effective execution of less emotional disciplines. Successful investors, coaches, and parents rely on consistent process methods to evaluate reward-to-risk relationships. This ability is wired into survival–Is that a stick or a snake? Should we kick an extra point or go for two? What will tomorrow bring if the kids win the battle to stay up too late? Investors should define and document reward and risk targets to compare with current prices. Key stats and ratios can help to set the limited price you are willing to pay and the point at which a sale is appropriate for each holding. This preparation should be done prior to the potential constraints of euphoria or despondency.

Quick Tip: A scheduled routine to review financial plan health, asset, sector and security allocations, tax efficiency, all-in expenses, and risk-adjusted performance is important and helps to avoid random thoughts and decisions.

#4 Customization can produce more optimal bottom-lines over robotic or glide-path plans. Armed with patience, discipline, and a process for execution, the flexibility to adjust for the conditions on the field is critical. Hard-earned wealth is proactively built, so unique circumstances deserve collaboration and measured decisions. Simple strategies to achieve low cost, diversification, and risk management can be achieved while paying attention to the changing complexities of taxes, special requirements, and crazy markets.

Quick Tip: Be wise with model recommendations found in newsletters, popular media, or other widely distributed platforms. While often good advice on the surface, what is right for your neighbor is not always right for your family.

Happy New Year and Best Wishes for 2016!

It is tough to predict any 12 month period. This investing year is especially difficult with so many large players like China, the U.S. Federal Reserve, and the European Union attempting historic shifts alongside a daunting list of uncertainties. Besides turbulent markets, our basketball team is struggling, and we “welcome” our first teenager into the house. The written words of Patience, Discipline, Process and Customization will literally be turned to as reliable triggers to handle tough decisions (see pictured office whiteboard).

ABOUT THE AUTHOR:

Michael loves to empower investors with his expertise in securities and economic analysis, goals-based wealth management solutions, and FinTech smart decision-support tools. While directly managing over $5 billion in growth and retirement assets; his proactive advice and software innovations have influenced thousands of fiduciary advisors to better their practices and service to clients. He enjoys spending time with his wife and three boys, competing in USTA tennis, and mentoring others to succeed.

Email | Michael@empoweredportfolios.com

Twitter | @MichaelHakerem

Fed Week: 3 P’s of Portfolio Management a Better Focus

Trifecta

Portfolio Management efforts can focus on more controllable and proactive themes like Protect, Prune and Plant. Countdown to the FOMC’s September 17th target rate decision is beyond our control and demands the perfect trifecta of outguessing Action, Reactions & Duration of Said Reactions. Good Luck!

When will the Federal Open Market Committee (FOMC) raise the target Federal Funds Rate and move the U.S. out of the zero interest rate policy (ZIRP) environment? The last tightening came in 2006, and based on recent Fed Funds futures prices and trading activity, the probability for a hike on Thursday has dropped from 50% to 25%. The likelihood rises to 74% for March 2016. Interest rates are the price of money which reflect supply/demand balances as well as inflation, credit, and other risks. Demographics, technology, structural unemployment, and muddle-through global demand will continue to deliver counter-punches to expectations for higher rates and inflation.

Bottom Line for Me: Deflationary counter-forces are powerful and Mr. Market will ultimately prove more powerful than what you see in the below Effective Fed Funds graph.

Whether it is former Treasury secretary, Larry Summers or The New York Times, smart people take polar opposite sides of the interest rate debate that will impact benchmark rates all along the curve (10-Year Treasury shown below). Stock markets throughout the world, as well as global currencies and capital flows, will be heavily influenced by the FOMC’s every word or lack of words. Let’s pretend you know the decision to hike is a foregone conclusion. Will the “market” react favorably or unfavorably? Okay, let’s pretend you rightly picked a 25 basis point increase and the market roars up as an indication the economy is strong enough to withstand the marking of a new interest rate regime. So what happens Friday or next month as investors, traders, speculators, and sovereigns digest the implication on their books? Can you pick the FOMC Trifecta?!

Advice: Spend more mind-share on the portfolio(s) you manage.

Similar to outguessing a room full of brilliant economists, forecasting the weather that impacts our future lawn and garden is fairly difficult. Still, here in North Carolina, we take more controllable and proactive actions in the fall to reduce soil compaction, save water, and enhance root growth in order to rejuvenate a lawn full of summer stress. Global portfolios have experienced summer stress with large losses experienced in numerous asset classes, geographies, market caps, sectors, credit grades, and investment style boxes. Sixty-five percent of the companies in the domestic S&P 500 have negative year-to-date price returns in 2015, and international currency translation is brutal with the strong dollar surge.

PROTECT. PRUNE. PLANT.

There are numerous proactive methods and techniques to pursue portfolio management/asset allocation goals that include less compacted correlations and exposures, savings of taxes, and enhanced future reward-to-risk opportunities. Here is a small sample with no FOMC Trifecta required!

Protect:

Cash is “King, Queen, Prince, and Princess” when uncertainty reigns, volatility and correlations rise, and markets are downright mean. Lots of methods to choose source of funds; however, an example is to quantify and rank reward-to-risk ratios for every holding/exposure and remove a percentage of those with the least favorable margin of safety. With a Growth-at-a-Reasonable-Price (GARP) investment philosophy, I like to rank valuation metrics such as PEG ratios and a proprietary view of estimated Price-to-Sales versus Profit Margins. Dry Powder is never a bad thing and so-called “Cost of Opportunity” is a protection risk I am willing to absorb.

In-depth analysis will look beyond simple stock, bond, cash, and security-level allocation modeling. I focus heavily on portfolio character, risk budgeting, and overall posturing; therefore, protective decision-making can shape a 100% invested portfolio.

Prune & Plant:

When a tide of losses hits 65% of the S&P 500, it is a superb opportunity to proactively harvest tax losses by swapping dollar for dollar into securities with equal reward-to-risk opportunity sets: This captures the economic losses which may be used to offset current gains or banked into carry-loss forwards. Of course, you can modify the type of exposure you have at the same time, but in this case the same amount of dollars remains exposed.
Note: Avoid Wash Sale Rules. 

Isolate and cull through the non-market/price related characteristics of your holdings and prune securities that have failed to meet fundamental or quantitative expectations over your tolerance of time. Perhaps, the business model is shaky, currency risk is too high, dividends are subject to change, the fund manager left, earnings estimates dropped, debt coverage breached your preferred ratio, valuation is too high, or liquidity, spreads, relative strength have weakened. It is rare for a portfolio to be blemish or disappointment free–just the laws of probability and no reflection on your security selection skills 🙂 

There will be no escaping the media and market’s desire to correctly pick the FOMC Trifecta in September, December, March…

Every investor and portfolio is unique so take more controllable and proactive actions that reflect your unique circumstances–In my experience, taking action (no matter how minute) is often worth the behavioral reward when market and events are highly volatile and uncertain.

ABOUT THE AUTHOR:

Michael loves to empower investors with his expertise in securities and economic analysis, goals-based wealth management solutions, and FinTech smart decision-support tools. While directly managing over $5 billion in growth and retirement assets; his proactive advice and software innovations have influenced thousands of fiduciary advisors to better their practices and service to clients. He enjoys spending time with his wife and three boys, competing in USTA tennis, and mentoring others to succeed.

Email | Michael@empoweredportfolios.com

Twitter | @MichaelHakerem