1Q-17 Investment Committee Meeting Summary

We held our 1Q-17 investment strategy meeting on December 21, 2016. It was an interesting and fairly momentous meeting given the recent Presidential election. The outcome of the election adds an element of uncertainty that makes forecasting a bit more difficult currently. While there has been a lot of media coverage about what Trump’s strategies may be in areas such as foreign and domestic policy, defense policy, taxation, healthcare, and fiscal policy, it is still uncertain how all this will play out.

Based on what we have seen so far, it would appear that a Trump administration could be reasonably pro-business. Trump himself comes from the business sector and appears to be bringing into his cabinet a number of people with high profile business backgrounds. If the new administration is going to take more of a “pro-business” approach, on the surface it would appear to have positive implications for the economy and hence, the stock market. But again, at this point, “visibility” into the new administration and its policies is limited.

As of now, there does appear to be better visibility for some of the key factors that drive the stock market, the two most important being valuation and corporate profits. After 4-5 quarters of declines, corporate profits are now expected to grow 8-10% in 2017, which is a positive. Stock valuation is not exceedingly high. We estimate the forward P/E on S&P500 is now about 17x. This is above the long-term average of about 15x but not in a range that would be a material impediment, in our opinion, and certainly not excessive when compared to bond yields. The outlook for the U.S. economy remains stable. We continue to expect more of the “2+2” economy: 2% GDP growth and 2% inflation. And while we believe the Fed will raise rates again in 2017, we expect it will remain cautious and deliberate in its moves, which should not be overly disruptive to the stock market. These factors support a continued constructive outlook for U.S. equities. China and its economy, in our view, continues to be the greatest risk for global financial markets and is one reason why we decided at our meeting to eliminate a position in emerging markets.

With respect to changes in your portfolios following the meeting, overall equity exposure was reduced very slightly, about 2%, while fixed income exposure remained essentially unchanged. The slightly lower equity exposure should help to buffer against what could be increased market volatility in the new year. Within sectors, we slightly reduced our exposure to mature equity and increased exposure to small cap stocks. We think smaller cap stocks could stand to benefit more from the potential for lower business taxes currently being discussed by the incoming administration. Within the international sector, we eliminated exposure to emerging markets and added a position in large-cap European stocks. The investment in European stocks is based primarily on valuation which remains very attractive. We reduced our exposure to REITs by about 8% as we believe returns in the sector could be more muted in a rising interest rate environment. Within commodities/natural resources, we eliminated positions in gold and energy and replaced these with the Flexshares Global Upstream Natural Resources ETF (GUNR). We like this ETF because it has nicely balanced exposure across five important areas: energy, metals, agriculture, timber and water. Within the fixed income area, there were no significant changes and we continue to maintain a shorter duration by overweighting shorter-term bonds and underweighting long-term bonds.

All of us at S.R. Schill & Associates wish you and your family a very happy holiday season and a happy New Year !

Bob Toomey, CFA®, CFP®
Vice President, Research

Research Director’s Monthly Commentary: December 2016

Biggest Money Mistakes

 Recently, a major Wall Street newspaper ran an article entitled “Biggest Money Mistakes By Decade” which caught my interest. We see big money mistakes quite often in our practice as financial planners. Money mistakes can come in many forms: poor estate planning; speculating with retirement money (e.g., day trading); taking on too much personal debt; emotionally-driven purchases, such as a big boat or second home, that are outside of one’s financial capacity; poor savings discipline; etc…the list goes on and on.

 
The article highlighted several “mistakes” that that I thought were noteable. One was the somewhat paradoxical mistake of “playing it safe”. One would think “playing it safe” in investing is a good thing, but from a long-term planning perspective, it can have serious negative consequences. This appears to be a problem for the younger set, millenials and GenXers. This group, which saw their parents’ portfolios crushed in the 2001 and 2008 bear markets, appear to be avoiding stocks and favoring guaranteed income. Two big problems with this strategy: 1) rates of return on guaranteed income products are now quite low implying locking in low returns; and 2) by avoiding stocks they are not capturing enough growth in their portfolios to build adequate retirement resources. The long-term rate of return on large cap stocks is about 10% per year. This is where, for most people, the bulk of their asset growth comes from. Not capturing this growth can seriously impair one’s ability to reach their retirement goal.

 The article talked about the “nightmare scenario” of having to “catch up” later in one’s life (50s and 60s)  because of a lack of retirement savings. This happens to be huge problem for my generation, the baby boomers, who adopted a “live for today” mentality. Well, the chickens have come home to roost and that mentality has led to, for many boomers, a not so happy retirement outlook and potentially a struggle in the retirement years; and social security won’t be nearly enough to offset their lifetime savings deficit. This gets back to the point of how important disciplined savings is: it pays off in the long run. For example, using current IRA contribution limits of $5500 per year up to age 49 and $6500 per year over age 50, if we assume a person averages an IRA contribution of $5500 per year for 40 years (age 25-65) growing in a diversified portfolio returning about 7% per year, this savings at age 65 amounts to $1.17 million. Not bad for $5500 per year. To avoid some form of disciplined savings is a huge money mistake.

One other mistake the article points out that can be significant for many people is the mistake of not delegating financial responsibility, particularly as one gets older, like 70s and 80s, where cognitive impairment can be a problem. I would also add to this situations where one is smart enough to know they need help…..at any age. For many people, to try to “wing it” on their own can lead to big financial mistakes in the areas of spending, savings, estate planning, and investments. This is where sound financial planning and working with a planner you trust can offer significant benefits. What are some of these benefits? A financial plan provides a “roadmap” that imparts discipline around the key areas of spending and savings that are critical to achieving retirement goals. A good financial plan also includes a customized investment strategy that enables the client to meet their financial objectives (retirement, estate, education, philanthropy, etc) with lower risk. Additionally, studies have shown that working with a financial planner may result in higher retirement income and a larger estate*.  Another important benefit of working with a financial planner is the peace of mind knowing you have a plan (“roadmap”) and are taking rational concrete action to improve your odds of achieving your financial goals, whatever those may be.

 

As we move rapidly towards year end, you may want to reflect back on 2016 and what might be your biggest money mistakes right now…..and what steps can you take now to address them.  

 
I wish you and yours a very happy holiday season and a happy, successful 2017 !

 

* “Working With An Advisor Important To Retirement Savings”, Financial Advisor Magazine, April 25, 2013

 

Research Director's Monthly Commentary - November 2016

Fall Foliage: Variations on a Theme

Having grown up on the northeast, the autumn season always had a special significance, not just for the pretty foliage but also as a harbinger of change. But what change you ask? Lots: the advent of snow and ski season, "fun" winter driving conditions, the end of mosquito season (!!) to name but a few.

 

So what does this have to do with financial planning? A lot actually. Like the changing leaves in the fall, our lives and life circumstances are constantly changing. From a financial planning perspective, changing life circumstances can (and usually do) result in changing financial prospects that in turn, raise questions about our financial goals (such as retirement, estate planning, or kids’ education goals). A change in job status or health can also result in a change in financial prospects, which can call into question one’s ability to meet financial goals.

The good news is most if not all of the financial planning issues raised by changing life circumstances can be captured in a financial plan. Our work with clients presents myriad differing life circumstances and goals. The tools we use for developing a financial plan (primarily comprehensive planning software) enables us to model a wide range of financial circumstances and goals and probability of achieving these goals. The other bit of good news about the planning process is it goes a long way to putting clients’ fears and anxieties at ease and enables them to move forward more confidently knowing a) they have a financial plan and b) doing something to take charge of their financial prospects through the discipline that a financial plan offers.

Changing prospects for the financial markets are also part of the theme of “change”. We cannot predict the short-term course of the financial markets but we know assumptions about the outlook for financial markets will change. This invariably results in market volatility, which by the way, is one constant for the markets: while we don’t know what the financial markets will do in the short term, we know there will always be volatility in the markets (and sometimes it can get severe, as in a bear market).

 Right now, based on economic fundamentals (i.e. corporate profits, inflation, etc), we think the prospects for the stock market remain favorable. One “little” issue going on now for the markets, is the upcoming presidential election. While we don’t anticipate extreme volatility regardless of who wins, there could certainly be some increased volatility associated with the outcome. We handle portfolio volatility through a) due diligence in research and securities selection in client portfolios and b) employing a diversified investment strategy. This means holding multiple asset classes (e.g. stocks, bonds, international, real estate, natural resources, etc.). Because these asset classes have varying correlations to each other, this helps to dampen portfolio volatility. So while the market may “change” through increased volatility, long-term risk-adjusted return (IMO the most important measure of performance in wealth management) should benefit through the lower volatility of an appropriately diversified portfolio.

 

Bob Toomey, CFA, CFP

Research Director

S.R. Schill & Associates

November 4, 2016

Research Director’s Monthly Commentary, September 2016

Q4 Investment Strategy Meeting Summary

We held our Q4 investment strategy meeting on September 28, 2016. With respect to macro fundamentals, we do not see much change from last quarter’s meeting. We view the U.S. economy  currently mired in a “2% world”, meaning 2% GDP growth and 2% inflation. The U.S. economy is actually growing less than 2% so far this year, but we expect some acceleration in second half GDP growth. There are signs that U.S. inflation may be accelerating somewhat as a result of moderate upward pressure on wage growth; however, at this point, we continue to expect overall inflation to remain moderate. In terms of the global outlook, it appears that China’s economy has stabilized as a result of government measures to prop up growth; however, the estimated long-term growth rate for China’s economy is coming down. While the stabilization in China’s economy is positive for global growth, the slower expected growth in China could act as an additional factor keeping global growth relatively subdued.

We continue to view Federal Reserve policy as accommodative to the financial markets. It is clear from last week’s FOMC meeting that the Fed continues a relatively light hand with respect to interest rates. While we expect a fed funds rate hike in December, the latest FOMC meeting shows that the Fed has backed off its expected number of rate increases for 2017 and 2018 with the majority of FOMC now expecting only two rate hikes in each year, down from the previous four in each year. This is significant and indicates the Fed expects to remain gradualistic in its approach to monetary policy. The implication of this for the financial markets is positive, particularly for equities. This plus an improving outlook for corporate profit growth are reasons why we remain constructive towards stocks.

We made several tactical changes to your portfolios following the meeting. We increased exposure to equities slightly. Within the mature (large cap) equity area, we added a position in the biotechnology industry (IBB) as we believe health care remains an attractive secular growth story and biotech in particular appears undervalued. Within developing equity, we added a position in small cap value stocks (VBR), which we believe offer attractive value. We also continue to maintain a position in the homebuilding industry (ITB) which we view as one of the strongest sectors of the U.S. economy. Within the international sector, we added a small position in the emerging markets area (VWO) as we believe that sector will benefit from stabilization of the Chinese economy. Within natural resources, we added a position in energy (XLE) as we believe the outlook for oil prices should improve and valuation remains relatively attractive. Our overall exposure to fixed income remained unchanged. While we reduced exposure to long bonds, we increased exposure to short maturity bonds and increased portfolio yield through the addition of a shorter-term high yield bond ETF (SHYG).

In our objective to manage risk in your portfolios, we set a “trigger” at our meeting that would  cause us to reduce market exposure under certain conditions. The reason for this is our concern over the potential for increased market volatility around the upcoming presidential election. Historically, the presidential election can be a time of heightened stock market volatility and we believe it could be somewhat more acute this time. Our trigger is based on a combination of two factors: the combination of 1) a closing price on the VIX (forward implied CBOE volatility index) exceeding 20.0; and 2) a closing price on the S&P500 below 2000. We believe this combination would signal to us that market volatility may be increasing at a pace faster than we feel comfortable with and which would justify some action to reduce exposure.

Research Director’s Monthly Commentary August 2016

Being Prepared

 
As an avid hiker having spent many wonderful trips on the trails of our beautiful Cascade Mountains, one thing one learns is how important it is to be prepared out in wild. Prepared for what? A number of things: hiking mishaps, injuries, getting lost, blisters, water and food issues, to name a few. For example, on one trip into the Olympic Mountain National Forest, I had forgotten to pack a critical component of my camp stove. I did not find out about it until the first evening, eight miles from the trailhead (and another two-hour drive back to the nearest supply store!). I “prepared” for a mishap like this by remembering to pack matches to start a camp fire. In another “mishap” on a trip to the Enchantments, I slipped on loose gravel on a downslope and re-injured an earlier tear of my left quad tendon. I had nothing for an injury like this. Fortunately, one of my buddies had packed a self-adherent leg wrap that greatly helped me continue the journey; but we still had to cut the trip short because of the re-injury. I was NOT prepared for this. Not a good Boy Scout on that trip!

In hiking and mountain climbing, preparing for contingencies is critically important. This is no different with financial planning. There are many ways financial planning helps one to “be prepared” for the unforeseen.  What are these “unforeseen” events? Unexpected changes in your life or health, unexpected changes in the financial markets, or unexpected changes in your estate plan to name a few.

 

Financial planning is flexible. One thing that can be done to improve one’s preparedness for contingencies is running multiple planning scenarios. The process of iterative “scenario analysis” can provide great insight into how different life events or life changes can impact one’s financial future. From this analysis, we can adjust or fine tune spending, savings, and investment plans.

An integral part of our planning process is setting an investment strategy for each client in accordance with their financial plan. As part of preparing for the inevitable volatility of the financial markets, we embrace a diversified investment strategy. This entails investing client assets in multiple asset classes such as stocks, bonds, real estate, international, etc. Why? It has been shown that diversified portfolios exhibit lower volatility and higher risk-adjusted returns over time. We know the financial markets will be volatile and we can take proactive steps to prepare for and mitigate this factor in client portfolios.

 

Another way financial planning prepares one for uncertainty is the planning process itself. A disciplined review of one’s finances, spending, contingency planning, and an annual review all help to provide greater clarity, reduce financial risk, and improve confidence in one’s outlook for the future. It also places one in a stronger position to weather unforeseen changes or events by having a stronger financial position and discipline to stick with the plan for the long term. An insurance needs analysis can also be incorporated into a financial plan to provide not only financial risk assessment but also risk mitigation measures that can help one prepare for and protect against catastrophic and unforeseen financial mishaps.

 

Bob Toomey, CFA®/CFP®

Vice President, Research

Research Director's Monthly Commentary: Review of Q3 Investment Strategy Meeting

We held our third quarter investment strategy meeting on June 24, 2016. It was a particularly interesting day in that it was the day following the “Brexit” vote. The fact that UK voted to leave the EU came as a surprise to investors and financial markets reacted accordingly. The Brexit and its implications made up a large portion of our discussion at the meeting. We consider the 5% U.S. market pullback following the vote by no means a “panic” but more a normal reaction to a new uncertainty. At this point, it could be many months before anything actually happens from this vote and how this all plays out remains to be seen. This maintains the element of uncertainty which can be destabilizing to the financial markets.

 

Prior to June 23 vote, our feeling had been that the economy and corporate earnings were poised for modest acceleration in the second half of 2016 and 2017. Following the Brexit vote our view on the U.S. economy has not changed materially, although the rate of growth we had previously expected of about 2.5% could be impacted slightly, perhaps 0.2-0.4%; we don’t see it resulting in a recession. We believe Brexit will have a more palpable impact on Europe as it sorts out trade and monetary treaties. This could impact the flow of trade and currency in that region and it is not out of the question that Europe could experience a mild or moderate recession as it goes through this period of adjustment. This could potentially have further negative effect on the financial markets.

 

With respect to interest rates, we believe rates will most likely decline over the near term as investors seek a “safe haven” in quality government securities, such as U.S. Treasury bonds. We also believe any rate hike by the Federal Reserve will now most likely be postponed into 2017. U.S. stocks should most likely continue to be viewed as a “safe haven” and this could eventually prove positive for U.S. stocks as well as bonds.

 

Following our meeting, we have taken proactive measures to increase portfolio stability in what we believe could be a period of elevated market volatility. We slightly reduced overall investment exposure in order to increase cash. Within large cap equities, we added a position in U.S. consumer staples (XLP) as we believe this sector offers stable earnings and rising dividends with below average volatility. We also added a position in utilities as this group has also exhibited lower volatility while providing a stable income stream. Within natural resources, we moved to represent this sector entirely with gold through purchase of the IAU gold ETF. Gold has historically acted as a good hedge during periods of heightened financial market volatility. Within fixed income, there were no significant changes and we continue to hold neutral weightings across all three maturity sectors. We also set in place a trigger that would require us to take defensive action if the yield on the 10-Year U.S. Treasury bond falls below 1.0%.  You can hear more about these changes by viewing our third quarter-2016 investment meeting video on our website at www.srchill.com.

 

Research Director’s Monthly Commentary - May 2016

 The Beatles and Financial Planning

 

My favorite group growing up was The Beatles. I remember listening to (and loving) so many of their songs. Thinking back, it occurred to me The Beatles wrote a few tunes about the topic of “money”. See, you thought The Beatles had nothing to say about financial planning and this would be a corny article. In fact, they said a lot about the topic.

 

“Money can’t get everything, it’s true, but what it don’t get I can’t use”…..is a famous line from the song “Money”, a Beatles cover written by Barrett Strong. So while it is true that money can’t buy everything, good financial planning and sound investing can help what you have go further and improve your lifetime financial security. In fact, a study done a couple of years ago found that people who work with a financial planner significantly improved the odds of achieving higher income during retirement, potentially by as much as 40% higher income*. Doing a financial plan has many benefits including better organization of your financial affairs, better discipline and goals for savings, and a disciplined investment strategy. All of these factors play an important role in improving the odds of financial success and greater lifetime financial security.

 

“Taxman”, written by George, is a searing criticism of the tax system in England in the 1960s (in which the top rate could reach 98%). Fortunately for us in the U.S., we do not have to face tax rates they did in England in the 1960s. But taxes are very important from a financial planning standpoint. Good tax management can have a significant impact on one’s life savings and the success or failure of a financial plan. A comprehensive tax analysis is an integral part of any financial plan we do for a client. A thorough tax analysis provides us and the client with ideas and avenues for reducing taxes or pursuing strategies that may preserve capital in an estate.  

“When I’m Sixty Four” was a fun, (obviously) McCartney tune written about an idealistic retirement some 40 years hence. Most people hold an idealistic vision for a comfortable retirement. Financial planning can greatly improve the odds of achieving a comfortable retirement. By analyzing one’s expenses, income prospects, assets, and financial goals, we create plans/projections that provide clients with a much clearer vision and improved probability of achieving those goals. Like the song implies, it has to do with looking forward in many cases multiple decades. The process best starts in the 30s and 40s and goes a long way in improving the odds of having more “money” in retirement and greater peace of mind knowing one has a plan to improve the odds.

 

* “Working With An Advisor Important To Retirement Savings”, Financial Advisor Magazine, April 25, 2013

Research Director’s Monthly Commentary - April 2016

Industrial Metals A Leading Indicator?

 Wow, what a difference a month makes! Well, maybe two months. As of today, the stock market is up 15.7% from the February 11 low, a surprisingly strong rebound in a short period. Looking back at the fundamental data earlier in the year, we were perplexed why the market sold off so sharply as there seemed to be no significant changes in economic fundamentals that would warrant such a sell off. Investors now appear to be more sanguine about the outlook for the global economy and the risk of a global deflationary spiral. The Federal Reserve recently reiterated its stance on taking a very gradual approach in raising interest rates, and recent data out of China indicate the measures it is taking to shore up growth could be more effective. All that makes investors happy and more willing to put money into stocks.

 

  From a sector perspective, it is interesting that cyclical and industrial stocks have been leading the charge on the upside in this recent rally. For example, industrial metals stocks (copper, steel, aluminum, nickel) have been vastly outperforming the broad indexes as reflected in the XME, the S&P500 metals and mining ETF, which is up 59% since the February 11 low. Historically, rising industrial metals prices have been an early indicator of an improving economy and we think the strong move in the XME may be telling us that economic growth may be poised to accelerate. The strong move in this ETF has also been accompanied by significant weakness in the U.S. dollar, rising oil prices, and a jump in international freight rates. All these indicators look similar to what one might observe coming out of a recession. I think it is safe to say that the oil industry and certain industrial sectors have gone through a recession over the past year. We saw something like this, although more severe, in the early 1980s just before the stock market entered a strong bull market that lasted five years. Could this happen again? Quite possibly, as we believe the U.S. stock market remains in a secular bull market (i.e. a bull market lasting on average 15-20 years).

  

So what does this have to do with financial planning? From our perspective, it is an important element of the work we do for our clients in helping them achieve the objectives of their financial plans. Our investment committee considers fundamental and economic factors every quarter when we assess the investment allocations and securities holdings within our client accounts. At our most recent investment strategy meeting at the end of March, we added a position in the XME within our natural resource holdings because we felt if offered a way to enhance the growth of our clients’ assets. In previous quarters, we’ve done this in other sectors such as health care, technology, forest products, and housing. If we identify a sector that we believe offers significant value, as we do with XME, we can find ways to add that within our diversified structure to enhance returns to clients and enhance the overall value we bring to our clients.

 

Bob Toomey, CFA®/CFP®, Vice President, Research

Q2 Investment Strategy Update

We held our second quarter investment strategy meeting on March 22, 2016. At this meeting we deliberate and discuss various economic, market, and financial factors that influence our strategy for investing your assets. From this deliberation we set our investment policy and implement the policy through changes in holdings in your portfolio.

Right now the pace of global growth continues to remain sluggish due primarily to slowing growth in China, slow growth in Europe, and recessionary conditions in many emerging market countries. The U.S. remains one of the strongest of the major global economies growing at a pace of 2-2.5%. Slow global growth combined with a strong dollar has negatively impacted U.S. corporate earnings growth over the past few quarters which has been a hindrance for the U.S. stock market and a contributing factor to the recent market correction. The good news is the U.S. market appears to be recovering from its recent correction (now up 12% since the mid-February low) due to improving investor sentiment towards the U.S. economy. The outlook for both European and emerging market economies remains poor at this point.

The Federal Reserve came out with surprisingly dovish commentary following the March FOMC meeting. The Fed held off on a second Fed funds rate increase we believe due to concerns about slow global economic growth and disrupting other global monetary policy activity, particularly Europe, which is experimenting with negative interest rates to stimulate bank lending. While we expect the Fed may raise rates one or two more times this year, we would not expect these rate increases to derail the secular bull market in stocks as long as inflation remains moderate (which we expect) and economic growth continues at a moderate pace.

With respect to changes resulting from our meeting, the most significant change was our increase in weightings in value stocks. We did this across all equity categories because a) value stocks have underperformed growth stocks for a considerable period and therefore offer opportunity; and b) if corporate profit growth remains subdued, value stocks should have a greater opportunity for valuation improvement relative to growth stocks which are currently richly valued. The increased emphasis on value actually increased our overall equity exposure by about 2%.

Other significant changes following the meeting include slight increase in our weightings in natural resources/commodities including a new position in industrial metals (XME). We think industrial commodities offer value because of the severe decline they experienced over the past year as a result of concerns over a global recession. With respect to fixed income, there were no significant changes. We slightly reduced our weighting in both the long and short end of the yield curve. We remain essentially neutral in both the long and intermediate portion of the yield curve and overweight the short end. We continue to utilize corporate bonds for fixed income exposure due to their higher coupon yield and higher income to your portfolio.

3-24-16

 

Research Director Monthly Commentary: February 2016

What if there is a recession?

 There has been a lot of talk in the financial news media in the past few weeks about increasing probability of a recession in the U.S. Citigroup was out recently with an alarming report that, in their view, the risks of a global recession have increased materially. The primary reason they cite is concern that U.S. economic growth is slowing and because of that, the risk of recession has increased. Another argument for supporting the idea of recession focuses on U.S. corporate earnings growth, which has been negative for the past several quarters, and declining corporate profits have led to recessions in the past.

There is no question that concerns over a recession have added to market volatility this year. Market volatility has been further exacerbated by concerns over slowing growth in China, plummeting oil prices, and a change in Federal Reserve policy. But what is the real risk of a recession actually occurring?

 Recent growth in the U.S. measured by GDP has been slow, to wit Q4-15 real GDP growth of about 1%. We have to remember that the recent decline in oil prices and oil-related activity has had a material impact on the economy. Also, the theory that negative corporate profit growth will lead to recession also has to be put into context: if one excludes the energy sector from S&P500, corporate profit growth was a reasonable 5% in 2015 and is expected to be about that level in 2016. Employment in the U.S. remains stable and reasonably healthy and unemployment claims continue to decline. Housing remains strong and growth in consumer spending is also expected to remain healthy in 2016 at about 3%. The point is there is very little evidence aside from earnings, that the U.S. is on the verge of recession. The concern over the strength of the Chinese economy also appears to be misplaced: U.S. exports to China represent a very small 1% of GDP; and Barron’s magazine recently cited economist Michael Lewis who found that not a single recession in the post-World War 2 economy could be traced to foreign economic woes.

 
So what is the point of all this? 1) We think concerns over a U.S. recession are overblown; and 2) even if there is a recession, we know that that are ways to position portfolios to reduce the impact of a recession. What are some of those ways? Diversification by asset class can help to reduce portfolio volatility because of differing correlations of returns. For older clients who cannot withstand higher volatility, allocations can be more skewed towards fixed income investments which have a low or negative correlation with stocks. Through tactical asset strategies, investment managers can reduce overall equity exposure in a client portfolio or increase holdings in sectors with lower volatility (such as utilities or consumer staples).  In other words, there are ways to mitigate the risk of recession through proactive risk management, with the classic strategy in this regard being asset class diversification, and maintaining a financial plan that not only includes an appropriate investment strategy but also reduces the temptation to time the market by imparting investment discipline. Clients will be better positioned to weather a potential recession if their portfolios are properly positioned in accordance with a sound financial plan.

 

Research Director Monthly Commentary: January 2016

Deep Powder

 

Over New Year’s I was skiing with my family in the Washington Cascades in some of the best snow conditions I can ever remember: 170 inches of deep, soft powder….so deep you could stick your ski pole into the snow and it would not stop going down…down. As you might imagine, ski conditions were fantastic.  

We did some off trail skiing into what some might refer to as “backcountry”. To get there, we had to traverse through forested areas with cliffs, shelfs, and drop offs. One thing that occurred me trekking out in this was the “problem” one might have if one “slid” off the trail and head-planted into this deep, deep powder…..it could be potentially deadly because it would be so hard to get out of on your own.

So what does this have to do with financial planning? Two words: “risk management”.  Just as in investing, off-trail skiing has certain risks you don’t find when skiing the “groomers”. Risks include getting lost, getting injured far from help, hidden obstacles under the snow like rocks and fallen trees, or ironically, snow that is SO beautiful it has a seductive charm that can lead to a problem, such as a deep fall from which extraction is quite difficult.

We can take precautions to manage risk while skiing in the backcountry that improve our odds of success: don’t ski alone; carry a GPS device; carry safety equipment that may help you “dig out”; if you don’t know the area, go with someone who does; and most of all, know your limitations and abilities.  

Just as in backcountry skiing, there are precautions we can take to manage personal financial risk through financial planning.  One element of this involves preparation. Preparation comes in the form of information gathering, organizing one’s financial affairs, and setting goals as part of a plan. A good financial plan provides discipline which helps reduce risk by adhering to the goals of the plan, such as budgeting or savings goals, tax or estate goals, and discipline in investing. A formal investment plan, and the discipline to stick with the plan for the long term, can significantly improve the likelihood of achieving your financial goals.

Having a sound financial plan is like skiing on a trail you know is secure, it provides a rational roadmap to keep you on course with your financial and life goals and reduces the risk of a “headplant”. It’s also about knowing what you don’t know….if you are skiing backcountry, it is important to know about snow conditions, terrain, or how to find your way back down safely. The analogy to financial planning is guessing or not knowing if your financial plan is appropriate can increase personal financial risks and cause one to fall short of his/her goals. And it is important to be honest with yourself: if you truly do not understand your financial roadmap or how your investments can work better for you, seek the counsel of an advisor you trust.

Bob Toomey

Research Director

S.R. Schill & Associates