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

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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

Is Central Bank Reflation, Deflationary?

balloons

Alan Greenspan, aka The Maestro, used a playbook whereby the leaky economic balloon was reflated with hot air. Unfortunately, tools like money supply, target funding costs, and quantitative easings are blunt, struggle to repair holes in economic performance, and may cause or reinforce more threatening deflation.

In general, more cash for future purchasing power and opportunistic selection in bear-market sectors as well as holding high quality income-producing stocks (in-particular, defensives) and bonds may offset some of the macro pain. Lowering debt service and managing liabilities is wise, too; however, an outright deflation scare in the headlines and Fed Minutes is probably an all bets are off scenario.

Structural issues often fly in the face of central banks’ best laid plans to stimulate growth and inflation. Demographic shifts, technology, financial market infrastructure and liquidity, and malfunctioning political and economic systems move more swiftly to impact product demand, employment, asset allocation decisions, productivity, and collaborative trade. Legal, social, health, and cultural changes can shift economic performance through regulatory barriers, buying patterns, and human activity. A central banker may temporarily reflate a wounded balloon; however, it will deflate again unless the structure is repaired.

Too much reflation can further damage the economic balloon!

Reflation strategies can weaken infrastructure via destabilization of “normal” economic cycles and relationships. Market participants may be forced into misguided behaviors; for example, income investors reaching for yield in junk bonds, Puerto Rico municipal bonds, and Energy MLPs. Part of the reflation strategy is to stimulate prices in risky assets (like stocks) and thereby cause a “wealth effect” of spending throughout the economy. This activity can cause overvaluation which leads to behavioral missteps in areas such as asset allocation, use of margin, and securing collateral accounts.

Unprecedented global reflation is deflationary if market participants and consumers delay purchase, construction, and investment activity with the expectation that cheap money and still lower prices will occur in the future. Perceived current investment risks, fear of a collapse in liquidity, and actual bursting of bubbles or balloons reinforce deflationary pressures.

Global central banks, led or steered by Mario Draghi, Abe Shinzo, and Xi Jinping, are repeating a risky playbook rekindled under Ben Bernanke. 

A tour around the globe just before Halloween reveals lower and even negative interest rates (Germany, France & Italy), low to zero inflation, falling commodity prices, decelerating production and demand, insufficient gross domestic production in every major economy, and weakening aggregate revenues and profit margins. Gloomy, right?

The United States is often cited as the best global performer: See below for a graphical look at the U.S. FOMC preferred PCE inflation indicator, U.S. 10-Year Rates, WTI Oil Prices, and Manufactures’ New Orders. Even the globally exposed S&P 500 constituents have seen 2015 bottom-up operating earnings estimates retreat from $131 to $110 since December 31, 2014.

balloon fred 1

balloon fred2balloon fred3

balloon fred graph

Proactive supervision and comprehension of the factors that impact your hard earned wealth and probability of meeting unique goals is essential. Perhaps no action is necessary; however, mental preparation for the price volatility discovered on your statements makes for better investing.

deflated balloons

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

CHINA: YEAR OF THE SCAPEGOAT 2015?!

scapegoat

It is a mistake to place sole rationale and therefore sole resolution in headlines like: China Fears Slam Stocks. China Data Hits Markets. China to Blame. Occupying the 8th position in the Chinese Zodiac, the Goat (or Sheep) symbolizes such character traits as creativity, intelligence, dependability, and calmness. Half-way through the Chinese New Year that began in mid-February, investors are steered to solely focus on Beijing’s corruption, lack of control, manipulation, and extreme volatility.

There is no doubt that China is HUGE in terms of the mood of her populous, politics, internal objectives, economy, and massive historical demand for Western luxury goods and infrastructure inputs like Copper, Iron Ore, and Concrete. It is disturbing to read stories of the Chinese government arresting and detaining traders to “resolve” its stock market problem. An extremely tense Pacific will become further inflamed as China celebrates the 70th anniversary of the defeat of Japan in WWII. A parade of 12,000 troops, 200 aircraft and dozens of tanks and missiles are expected to march down Beijing’s central Avenue of Eternal Peace and through Tiananmen Square on Sept. 3 — the day after the Japanese army surrendered to Allied forces in 1945. Still, global stock market turmoil, plummeting currencies, crashing commodities, and economic instability are problems not entirely “Made in China.”

The Maestro (I admit the pic is my cMaestroopy.) of the real orchestrated manipulation that impacts us today dates back many Lunar
cycles and from the United States. With complete humility, I will note there is no crystal ball at my shop. However, the source of the 2015 pullback is potentially deeper, more problematic, and more painful than simply laying blame on the recent Chinese stock market rout and slowing manufacturing data. The U.S. Federal Reserve as directed by Greenspan to Bernanke, and now Yellen, have led the world’s most powerful central banks into the most manipulated (no matter how well intended) and experimental monetary phase of our lifetimes.

The lack of control, manipulation, and volatility your investments are experiencing is most likely not China-centric so do not ignore the plethora of other concerns, risks, and opportunity sets. 

Unconventional tactics were used to counter the late 90’s Asian currency crisis, hedge fund blowups, and Y2K cash build-out. The bursting of the dot-com bubble in 2000 kicked off massive interest rate cuts via the Effective Fed Funds from 6.5% to 1% (2000-2003) with a repeated playbook during the 2008-09 Financial Crisis. When interest rate options ran dry, Fed Chair Bernanke revealed experiments like Operation Twist and a series of so-called Quantitative Easings (QE). The Fed balance sheet has skyrocketed from $600 billion to $4.5 trillion! Perhaps the counter-factuals would have been worse–the unwind from unconventional to normalcy represents an unknown larger than China.

Throw away advice lines like “normal pullback,” “another buy the dip opportunity,” or “healthy return to volatility” are less useful for concerned families no matter what happens this fall. 

Zero interest rates plus QE1, QE2, and QE3 created a massive misallocation of capital that has affected everything from rental properties, fracking, high yield bonds, share-buybacks and dividend payments, the US dollar, and stock market valuations. These trends have been on a tear so perhaps the recent weakness is the painful process of deflating back to reality–you or your trusted advisor should not completely discount this possibility.

So what is useful?

An emphasis on market-timing, outguessing economic releases, or using gut feel to manage portfolios is foolhardy for most of us. There are tremendously positive innovations in medicine, technology, and consumer goods worthy of your hard-earned investments. You still need to identify and navigate the right investing paths, know your portfolio’s return and risks trade-offs, and plan for the future with foundations based on your family’s realities.    

  •  Real communication and proactive, goals-based wealth advice: Watch out for canned, standardized, and biased steering.
  • Implementation should include a combination of core strategic investments, tactical satellite investments, and a relentless focus on client-centric management of risks, taxes, and fees: Watch out for mass produced, standardized, and advice that comes too quick and easy.
  • Special attention should be paid to the more controllable aspects of planning, spending, saving, and an extra margin of safety: YOU are the best qualified and most accountable for this part.

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

Navigating The Global Market Selloff

Bull and Bear

Wealth is most often built through risk-taking, hard-work, blood, sweat, and tears, so never be passive about its management and preservation! My 90’s Bull and Bear artwork was unearthed this weekend from a dusty box. The old pic was an early career motivator to keep me focused on serving financial advisors and private clients no matter the market direction.

Always be PROACTIVE with the proper balance of capital appreciation and rewards as well as wealth preservation and risks.

A market sell-off swept Asian-Pacific stock markets Monday, led by China’s Shanghai Composite, which gave up 8.5%. Hong Kong’s Hang Seng Index dropped 5.2%, Japan’s Nikkei 225 lost 4.6%, Australia’s S&P/ASX 200 fell 4.1%, South Korea’s Kospi declined 2.5%, India’s Sensex was down 5.8%, and U.S. Dow Jones Industrials dropped over 1,000 points on the open. Market volatility, as witnessed by the widely followed VIX indices, had the greatest week to week percent increase on record. As expected, all kinds of assets start to correlate-downward.

This Post is not about fear or encouraging unnecessary action: It is also not about complacency or ignoring the world around us. Families deserve, require, and desire financial stewardship.

Three Things You Can Do Right Now

  1. Check Your Risk Attributes. Security-level modeling is fine; however, I suggest you heighten priority on portfolio-level characteristics like forward-looking valuation ratios (reward-to-risk, price-to-sales, PEG, Yield), draw-down metrics (return dispersion, Sharpe & Sortino, duration, value-at-risk, up/down capture), and sensitivities to varied economic scenarios (including disinflation & recession). Know where you stand — Is your portfolio suitable and aligned with expectations of the future (long and short-term)
  2. Cash is King, Queen, Prince & Princess. The appropriate “pruned” level is investor-centric; however, cash tends to be the simplest and most effective method to satisfy volatility reduction and emotional satisfaction. Why not target a security you never liked anyway, has above-average fees, or generally was not a complementary fit? The psychological impact of taking action (no matter how small) is often rewarding.
  3. Tax-Loss Swaps. In taxable accounts, when multitudes of securities experience large moves down, it makes a lot sense to capture paper losses, turn them into an economic benefit for the future (carry-loss forwards can even offset a little ordinary income) and immediately regain market exposure through another equally attractive security. This is one of the great proactive moves you can make in this market without attempting market timing or outguessing new moves from the People’s Bank of China.

A Few Pictures to Contemplate

1Fred Graph 8-25
The character of the world’s financial markets has changed as easily seen through market breadth, volatility, and sentiment; therefore, it is generally smart for investors to at least appreciate that expectations should adjust. The $4.4 trillion U.S. Federal Reserve balance sheet shown above is one anecdote that clearly illustrates the unusual and unprecedented nature of our economic world. For this reason, and even though I am a student of market history, I cannot accept advice like “this is just a normal and healthy pullback.” The world’s central banks have not a clue how to unwind this experimental game. See, Don’t Roll the Dice with Your Retirement.

2Fred Graph 8-25

The 2015 summer market selloff is blamed on a powerful U.S. dollar surge versus other currencies, plummeting commodity prices (led by oil), earnings and GDP slowdowns in China, Europe, Japan, and the United States. Incoming data is fairly mixed; however, the distribution of risks to global economic activity is still tilted to the downside with deflationary forces gaining momentum.

It only takes one snowflake to cause an unexpected avalanche.

3Fred Graph 8-25

Three More Points to Think About

  • Know Thy Messenger. As you seek guidance and read commentaries, watch for biases and conflicts. This is true whether listening to someone who is always talking market crashes or Armageddon, a strategist paid to keep you in their firm’s asset management products, or a salesperson disguised as an “advisor.”
  • Proactive Preparation, Reaction, and Communication. It may not be necessary to change your asset allocation, safety cash levels, or solid financial plan based on 2015 market dislocations. An allocation to “passive” and “cheaper” index investing has its place, too. Still, organization, scrutiny, and awareness of your portfolio’s expected rewards & risks, diversification, liquidity, credit, leverage (direct or indirect), and fees (on the statement and hidden) is important. How else will you know if a “reaction” is warranted? Whether an advisor(s) is present or an investor is self-reliant, other interested parties (like spouses and children) benefit from an increased level of awareness and communication: where we stand, the game plan, how we implement said plan, and the method of supervision/monitoring.
  • Focus on the More Controllable vs. Less Controllable. Most of us do well to place energy in estate and tax planning, social security strategies, and the fundamentals of diversification and risk management. Even if you 1) knew the exact outcome of potentially significant market moving events like the September Federal Reserve meeting or a surprise People’s Bank of China stock market intervention, you still have to 2) guess market reactions and then 3) the duration of those reactions. That’s a difficult trifecta!

In 1995, an early mentor required me to read and hand record daily levels of copper prices, 10-year bond rates, major currency levels, and about 70 other market inputs. I am not suggesting you watch that closely; however, a proactive approach with your hard-earned wealth is warranted!

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

5 Truths to Take Back the Wheel: Is Your Portfolio Driver-less?

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Steve Jurvetson via Flickr

Riding in the back of a Google robocar is probably thrilling! Now imagine your family, your business, and your hard-earned assets shaken side-to-side with sole reliance on a machine. Financial advice can often times focus on the rear-view mirror, drive the same speed for all passengers, and suffer from numerous blind spots when it comes to risk management.

Machines Can Break & Markets Can Bust Through the Cones

  • The #NYSE (New York Stock Exchange) was halted from 11:32 AM to after 3 PM on July 8th due to a computer error.
  • United Airlines issued a statement saying it suffered from “a network connectivity issue this morning” that grounded 4,900 flights worldwide.
  • The #ChinaMeltdown in equities has more than 50% of A-share listings halted for volatility. Since June 12, the Shanghai Composite has lost an unnerving 32%. The Shenzhen market, which has more tech companies and is often compared to America’s Nasdaq index, is down 41% over the same period.
  • Resolutions for #Greece have strong implications for the euro zone and contingency plans for larger neighboring countries. Importantly, what avalanche could this snowflake unleash?
  • Second-quarter earnings reporting season is set to ramp-up in a few weeks. Volatility and surprises are sure to come even as bottom-up operating earnings estimates for 2015 ($115.5 per S&P) have already dropped double-digits since the beginning of the year with an implied above-average multiple of 18X.

Take Back the Wheel or Hire An Experienced Driver

Global central banks, regulators, and governments are constantly manipulating the course and the rules of the road. Whether you are a fiduciary agent or an individual investor, please seek a powerful combination of smart decision-support tools and human wisdom to help navigate the potential bumpy environment ahead.

Radar Charts are a great method to easily visualize portfolio attributes. Below is a generic illustration I created in two minutes with Excel to view credit risk and interest rate sensitivity scores for different fixed-income groups. You could do the same for “Comfort-Score,” Forward Price-Earnings Ratios, Expected Yield, and other easily obtainable data items.

1) Rear-view mirror: Modern Portfolio Theory, historical standard deviations and 5-Year Betas are only useful starting points. Like a family budget or business proforma, portfolio stress testing and awareness should use a majority view through the windshield. You do not have to outguess the stock market or own a crystal ball on interest-rates, inflation, or economic growth to know what investments you own, why you own them, and the most likely sensitivities under different scenarios. Taken a step further, you can assign a probability structure like 50% confident interest rates stay the same and 25% each to interest-rates jump or interest rates retreat again.

2) Differentiation: Plan Scores and Probabilities of Success produced by finance software serve as great baseline assessments and help to facilitate deeper conversations. However, be wary of any tool, product, or advisor that claims an ability to properly and holistically gauge your comfort “speed” in just a few standardized questions. Your age, planned retirement date, and view that you “wish to make as much money as possible without experiencing a historical market drop” is rarely a view complete enough to evaluate your portfolio needs.

3) Risk Management: An experienced driver has proven techniques and disciplines to manage varied roads, traffic, and driving conditions. Here are five categories important for my family of passengers.

Seek Five Truths To Protect Your Hard Earned Money 

  1. Stewardship: A business culture based on a higher order of care that originates from a passion to serve and protect the long-term well-being of others. Even the trend of marketing “legal fiduciary” has gotten jaded when disclosures and conflicts are buried in the paperwork and the advice model still favors business-centric decisions. This is probably the most important and sometimes the most difficult to ascertain by those outside the financial services industry. Do your homework and start here!
  2. Integrated, Goals-Based Wealth Management: Builds collaborative long-term and shorter-term trading road maps on the foundations of a client’s unique and multifaceted goals, constraints, preferences, sensitivities, legacy holdings, financial wherewithal and emotional elements. How many other investors have the exact same portfolio as my family? 
  3. Proactive Asset Management: Defines “Style” as agile and flexible with an approach to evaluate rewards and risks. Will use passive & active strategies, strategic & tactical allocations, and quantitative & qualitative assessments where and when most suitable. Are my investments always an up-sized or downsized version of my previous holdings even when analysis reveals opportunities to target specific buys and sells that could improve my portfolio, tax situation, or risk profile?
  4. Humility: While considered an expert, the experienced driver is willing and able to admit mistakes or seek input from other seasoned professionals. Able to pivot unemotionally with the client’s financial interests taking precedence over the pride of the professional and the firm.
  5. Uses Technology to Implement Strategies–Not Sell Products: Faster, smarter, and prettier tools are available to empower clients and advisors throughout the four primary phases of wealth management (Discovery, Planning, Implementation, and Monitoring). Unfortunately, technology also enables product-steering, standardization, and mass distribution of advice. Slick reports, colorful pie charts, and mesmerizing statistics can also provide cover for lack of expertise and the effort put forth on your family’s behalf. Honestly, excluding the 24 hours before this review meeting, when was the last time you looked at my portfolio? Why does this tool always recommend your firm’s proprietary funds?

I welcome your thoughts in the comments section below. 

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