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