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

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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

Investing is Easy, Right?

emotional_cycle_of_investing

Just actively buy low and sell high, or passively buy cheaper index funds. Oh, or just hire a computer to unemotionally model a portfolio on your behalf. The real world is routinely a little more complicated and no easy glide-path exists in life or investing. Still, I offer a simple asset allocation framework at the end.

Keep a full toolkit and diversify your resources,
methods, and judgments.

Decision-making has become a lot more confusing for pros and novices due to unprecedented global Central Bank manipulations, the euro zone experiment, and the overwhelming amount of information, opinions, and recommended investing strategies. Whether a fiduciary advisor or self-directed individual investor, active or passively inclined, please focus on risk management. Also, it helps to seek trusted mentors who will challenge your portfolio strategies and convictions.

End of Days?

It has been over 2,300 days since the S&P 500 bottomed in March 2009: The average bull runs lasts about 1,240 days. The last stock market correction in the U.S. began in August 2011, when the U.S. Congress fought over the U.S. debt ceiling and federal budget, causing Standard & Poor’s to downgrade the sovereign debt of the United States. However, remember the 1987-2000 bull run lasted nearly 4,500 days.

Days Don’t Mean Much. How About Valuation?

Trailing S&P Price-to-Earnings is about 20X; however, the popularly used Cyclically Adjusted PE Ratio (CAPE Ratio or Shiller Ratio) is 26.5X. Courtesy of the superb resources of Karl Case and Robert Shiller.

Data on Investor Skills

The excellent Dalbar organization tracks actual returns earned by investors by analyzing mutual fund purchases and redemptions. Per the statistics, the average stock fund investor underperformed the S&P 500 by a gap of 8.19% in 2014 and an average annual deficit of 4.66% over the previous 20 years. The average bond fund investor underperformed the Barclays Aggregate Bond Index by 4.81% in 2014 and an average annual deficit of 5.40% over the previous 20 years.

In 30 years of monthly investor returns, Dalbar found that equity investors underperformed the S&P 500 to the greatest extent in October, 2008. In this month, equity investors lost 24.21% compared to an S&P loss of 16.80% for a net underperformance of 7.41 percentage points. The next greatest underperformance occurred in March, 2000, when the S&P surged 9.78% but investors took home only 3.72% for an underperformance of 6.06%.

It’s really hard to invest throughout the emotional cycle shown in the opening chart. Bad investor decisions come at the most critical points; whether in the face of severe market declines or when the equity market surges.

 Simple Asset Allocation Framework

Ark: This core and stable vessel is built to last, to withstand storms, to leave mostly untweaked in times of stress–emotional or market related. This majority of my portfolio should be untethered to a reliance on any one central bank, one asset class, one direction of interest-rates, or my ability to outguess new bulls or bear markets. This is not to say that significant shifts in underlying investments simply stay put forever or that damage will not occur. More importantly, this reliable piece of my asset allocation remains steadfast in its character traits. Perhaps this is a good place for your passive investments.

Speedboat: This satellite and more aggressive watercraft is built for quick maneuvers, possibly fun and entertaining, and an opportunity to impress myself (or teach humility). This smaller allocation should demonstrate my most active portfolio management, style, and security selection skills. Rockin’ and Rollin’, these investments better take advantage of great ideas, dislocated markets, and short-term behavioral mistakes made by my fellow investors. These vehicles provide an opportunity to earn much greater returns than those generated by the more passive portion of the portfolio.

Tight Bathing Suit: I wholeheartedly pay attention to risk management. Famous investor, Warren Buffett is credited with the following quote, “You never know who’s swimming naked until the tide goes out.” A rising tide of asset prices like we have lived through since 2009 can make a lot of people and investments appear intelligent. Over my twenty-year career, many of my most important lessons occurred when I realized just how dumb I could be. You worked hard to actively build wealth so avoid getting caught showing your assets at the wrong time! Perhaps this is a good place to use unemotional computer-drive risk analysis to monitor and evaluate your strategies, risks, and security selection.

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. He has directly managed over $5 billion in growth and retirement assets, and his proactive advice has 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 l Michael@empoweredportfolios.com
Twitter | @MichaelHakerem