Click Here to View as a .pdf

 

  

 

“A Bear was so enthralled by honey that he ignored the hum and ran right into the Bee-Garden.” 
This is the synopsis of a fable about unprofitable passion. That story didn't end well.

 

Investors commonly do more harm than good when altering their investment strategy in response to dramatic stock market changes or political events. The 2008 downturn generated intense emotion, with some selling just as the market was at its lowest. This year opens with indices at new peaks and, again, excitement is running high.

 

Retirement Weekly readers, familiar with the fundamentals of successful retirement planning, are advised to keep their objectives in focus with a keen eye on protecting their principal. Below are five rules-of-thumb that, when wisely applied, can help dispel some of the buzz.

 

Recognize your liquidity requirements. To start, investment decisions should always be based on your goals, time horizon, and tolerance for risk. Savvy planners will segment their assets with different event horizons in mind. Specific investment strategies can be guided by your tiered liquidity profile. The sooner the need, the wiser it is to invest in comparatively less volatile vehicles.  

 

An accepted wisdom is to lock in gains when the market is high. If money must be accessed soon, cashing out now could make good sense. The general rule is to withdraw funds from accounts that have realized higher gains. This can give lower, or negative, performing funds more time to grow. (But don’t use this guideline as license to hold on to consistently poor performing assets.)

 

Investments made for a mid-range timeframe may require a bit of caution in order to protect their principal. There’s no guarantee that the markets will remain this high. Research options that are traditionally stable and don’t lock your money away. Consult with your financial advisor to help determine which investments are appropriate for you.

 

Shareholders can typically afford to be more aggressive with investments made for the long run. Interim volatility is countered by the market’s overall rising trend. Seek out indicators that offer context, for example the VIX. This is the ticker symbol for the Chicago Board Options Exchange Volatility Index, which measures the market's expectation of 30-day volatility. It’s formulated using the implied volatilities of a wide range of S&P 500 index options. The VIX currently hovers around 12, which is a pretty low point when looking back over the past year.1 This signals that there's still room for growth. However,
this shouldn’t encourage investors to let their guard down.

 

If unpredictability is to be the new normal, then it’s even more important to diversify. Segmenting your holdings among a wide range of asset classes helps spread the risk throughout your portfolio, so investments that do poorly may be balanced by others that do relatively better. The trick is to assemble
a mix that does not respond to market forces in the same way at the same time.

 

 

An essential reminder: Neither diversification nor any other strategy can guarantee a profit or protect against loss. Investment risks include the reduction of principal.

 

 U. S. Equity assets, as an example, may
be parceled into common and preferred stocks from small, mid and large cap companies. Recognize that
a sizable concentration in any single asset class can be an indication of either oversight or overconfidence.

 This turns your portfolio into melodrama
and distracts from the more valuable aspects in life.

 

Assurance comes from researching firms and fund managers before investing in them.  Understanding all the nuances of economic modeling needn’t be the priority. Take the time to review a company's annual report or a product's prospectus. This can pay off handsomely. Sidestep the tendency to chase "hot" tips.  Jumping in and out of the market will rack up transaction costs and eat into your returns.

 

This is a large part of what makes Warren Buffett such a consistently successful investor. He doesn’t zig zag with the market's every move. He's patient and does thorough research. In ‘Warren Buffett Invests Like a Girl’, Louann Loften outlines the philosophy of “sticking with what you know”.2 Select vehicles that reflect your understanding or that you personally utilize as a consumer. Companies that offer useful products, good services and strong ethics tend to have better long-term prospects.

 

The goal is to avoid the off the cuff transactions that are endemic with speculation. If you’re unsure of
a particular investment, spend the time to learn a bit more. To paraphrase Bertrand Russell: self-doubt
is often a sign of intelligence. The confidence that comes from self-found knowledge creates calmer,
more disciplined decision making.

 

Buy and hold doesn’t mean buy and forget. As Economic conditions inevitably change, your portfolio’s success will require periodic review. The prospects of individual investments, or an entire class, will inevitably alter. The goal is to not let your asset allocations drift too significantly. When rebalancing
your portfolio, consider acquiring more of an asset class that has sunk below its intended proportion - possibly by using some of the proceeds of an asset class that’s become larger than expected.

 

Another reason for periodic reassessment: your priorities will change over time and your holdings will need to reflect those shifts. For example, as you get closer to retirement, you might decide to increase
your allocation of less volatile assets or move into something that provides an income stream.

 

Annual diversification and rebalancing offers yet further benefit: it addresses the ‘disposition effect’.
This defines the tendency to hold onto consistently lagging stocks due the belief that their value will
soon spike. Anomalies should encourage caution, not risky wagers.

 

It’s vitally important to avoid overconfidence. We are currently experiencing unprecedented market heights that will very likely change. The Price to Earnings Ratio is another gauge to watch. The S&P 500 is currently trading at 26 times the P. E. Ratio, when the long-term average is about 16.1 This is quite high.

 

Admittedly, there are no obvious signs of a downturn. The GDP has slowed to 2%, but unemployment is low at 4.7%. Wages are up almost 3% percent over the past 12 months. The American economy still appears strong.3

 

A considerable concern is that the market's current incline could embolden too much bravado. Continued uncertainty seems fairly assured. Seth Klarman, the ‘quiet giant’ of the financial industry, was unusually pointed in his most recent letter to investors. “Not only is [Donald] Trump unpredictable, he’s apparently deliberately so. He has said its part of his plan. The president”, Karman continued, “is high volatility. Investors generally abhor volatility and shun uncertainty. The erratic tendencies and overconfidence in his own wisdom and judgment, which he’s demonstrated to date, are inconsistent with sound decision making.”4

 

Attitude should stem from aptitude. As in chess, understanding how each piece moves and knowing how to set them up in their initial stance is the simple part. The skill comes in recognizing how opposing forces are operating and then deciding how to reposition your principals to orchestrate the proper response.

 

Our new president has promised to unleash economic growth by reducing corporate taxes and curtailing federal regulations. Institutional investors’ presumption about the future prospects of American business is a big reason for the stock market’s current rise. But individual industry segments may be disappointed by particular policies coming out of the White House.


Agra-business has already voiced concern about potentially reduced labor pools. Campaign assurances for new construction may be delayed by congressional gridlock. Tourism from overseas could soon decline. Backing out of international trade deals will certainly offer up a mixed bag of outcomes.

 

America’s two largest foreign creditors appear to be shying away from the United States. China’s concentration of U.S. Treasury bonds, still over $1 trillion, is at a seven-year low. In December alone, the Japanese reduced their American bond holdings by $21.3 billion.5 

 

To punctuate the moral: Responding to today’s uncertainty requires a level head. Overreaction will exacerbate volatility and could lead you into very ornery territory. 

 

 

 

1. https://www.nytimes.com/2017/02/03/business/the-trump-effect-whats-an-investor-to-do.html

2. https://www.amazon.com/Warren-Buffett-Invests-Like-Girl/dp/0061727636

3. https://www.census.gov/economic-indicators/

4. https://www.nytimes.com/2017/02/06/business/dealbook/sorkin-seth-klarman-trump-investors.html

5. https://www.bloomberg.com/news/articles/2017-02-12/america-s-biggest-creditors-dump-treasuries-in-warning-to-trump

 

 

 

Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. EH Financial and NPC are separate and unrelated companies. This material contains forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. The opinions voiced are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. ·Inclusion of indexes is for illustrative purposes only. Individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance is not a guarantee of future results.