Choosing the Right Investment Manager for Your Needs

Would you like to know how investment managers are selected for your portfolio?  It certainly is not a case of “we like this guy,” or “who has the best return.”  There is a very clear and defined due diligence process.  But because our team of advisors recognizes that this may not be visible for you, it seemed valuable to share more about it.

Nick Lacy is the Chief Portfolio Strategist for Asset Management Services within Raymond James.   Nick took the time to articulate what goes into making investment manager selections.  Check out the video, or read more in the blog.

Investment manager selection is step 3 in our 4-Step Investment Process.  For a bit of review, step 1 is Forward Looking Capital Market Assumptions based on economic data and indicators.  Step 2 is optimizing asset allocation to maximize return potential at various risk levels.  For more on the 4 Step process, go to the RJ Freedom Investment Approach page, and click on “The 4-Step Investment Process” tab.

Now back to step 3:  manager selection.  This is where our advisors want to add top quality managers for each of the appropriate asset classes in the portfolio.  By its nature, our due diligence team takes their time, perhaps a year or more, in order to determine if a manager is a fit.  We want to understand, how has this manager generated good returns in the past, and can they repeat it in the future?  Did they hit a few lucky home runs?  Or are they consistent, with a well-designed and consistently executed investment strategy? 

In order to determine if a manager is actually consistent, Nick Lacy’s team will ask the manager for 100% of their trading history over the last 5 years, and evaluate every trade.  By going into such intense detail, the team can determine what is making the manager successful, and understand what economic environments the manager will perform well or poorly in, going forward.  Take note, even great investment managers may not look smart every year, since their process can come in and out of favor compared to the market from time to time.  Nick mentions Small-Cap Managers (which are tasked with investing in smaller, lesser known companies), who had a few very poor years, compared to other asset classes.  Yet they were doing quite well in early 2016, as Small-Cap investing came back into style, so to speak.

So, when would Nick’s team fire a manager from your portfolios?   Normally personnel changes are the catalyst.  Because we have done the due diligence, Nick’s team knows who the contributors are on the investment manager’s team.  If several of them are exiting, or the leadership is changing, that is a sign to us that things may not continue as we expect.  Recently, we made a major change away from a well-known Fixed Income investment manager for just this reason.  We don’t want the risk of an unknown team making decisions on your money.

Thank you to Nick and his team for all their time and effort to add a robust process to your investments.  If you wish to discuss Investments, feel free to call our office at 920-617-6830.

Respectfully,

Patrick Stoa
Financial Advisor.
patrick@maccofinancial.com

Any opinions are those of Nick Lacy, Mike Macco and Patrick Stoa and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss. Diversification and asset allocation do not ensure a profit or protect against a loss. Keep in mind that there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss.

Investing is like...Toothpaste.

They say, “More choices are better.”   I am not so sure.  Recently I went to the grocery store to buy toothpaste.  Instead of a handful of decent choices, I was assaulted by 122 choices (yes, I counted).

How should I choose between having “Deep Cleaning,” “Optic Whitening,” “Anti-Plaque,” and so many other important sounding features.  The selection was overwhelming, and I felt like I knew less about toothpaste than ever.  Isn’t that silly?  So how does this relate to investments?

Watch our video or read below to find out.

First, did you ever stop using toothpaste due to the confusing choices?  Of course not.  Like toothpaste, there is an enormous selection of investment possibilities.  I have seen some people avoid making a decision about what to invest in due to being so overwhelmed.  Sadly, the indecision normally means that money is not invested at all, which works about as well as not using toothpaste.

In the beginning, thankfully, most of us didn’t start out “choosing” a toothpaste.  Our parents provided it, and we faithfully stuck it in our mouths.  The key was to be brushing with any standard toothpaste to get started early and form the habit.  As kids, we weren’t actually good at brushing.  But by doing it every day, we got better.  And by the time we were adults, it became an automatic habit. 

Unfortunately, while most parents indoctrinate their kids into brushing their teeth, few pass along the investment habit.  If only they did.  The key is the same as brushing: start early, and make it a habit.  Don’t let the overwhelming array of investment choices stop you.  It is probably best to start with something rather plain anyway.  Make the choice to invest.  Just start now, and make it a habit.  Or better yet, make it automatic.

We are here to help you make it happen.

Cheerfully,

Patrick Stoa
Financial Advisor
920-617-6830

Opinions expressed are those of Patrick Stoa and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk, investors may incur a profit or a loss. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

How to turn your tax refund into $300,000

In the United States, the average federal tax refund is about $3,000.¹ Simply put, this means that the average American tax filer pays the U.S. government about $250 per month too much and then gets their own money back in one chunk in the spring. That brings up three questions:

1.       Should they be giving the government an interest free loan? 
2.       What should they do with this money?
3.       Seriously… $300,000… How do I get that?
To find out, watch the video or read the text below.

The first question is obvious. Let’s simply be clear that we should not be giving the government an interest-free loan for $3,000 each year.
As to the second question, what people say they want to do is not bad. According to a variety of online polls, about a third of Americans say they will pay down debt, and a third will use it to invest.^2,3,4,5

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Unfortunately, although people generally have good intentions, they must not be following through in a disciplined way over the long term.  If two-thirds of the people were actually paying down debt and investing their tax returns on a regular basis, more Americans would be better prepared for their retirement.  Reality would not look like this:

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The short story from these graphs?  More than 60% of the households, age 55-64, have less than $50,000 in retirement savings, with the median net worth of households, 55 and older, being $34,760.  Don’t let that be you.

Now to the third question.  The one you want to know.  How do you get $300,000?  Thankfully, it is mostly math and discipline.

If a person were to get an average refund of $3,000 per year and they were to simply invest that money, $250 every month for 30 years at 7% return, they would have $306,772. (Future growth and investment performance are not guaranteed; see additional disclaimers below.⁶).

Now you see why I say that people must not be following through with their intentions. The math works, in good weather and bad. It’s discipline that must be breaking down. If two-thirds of the population were actually paying down debt, saving, and investing, we would not have so many people arriving at retirement age with so little. Although $300,000 is probably not enough for a prosperous retirement, it sure would be better than the retirement crisis that is the reality for a large portion of the population.

As to how you can use this information, take a look at the chart below. (Note that inflation and taxes are not considered here.) It shows you what $250 per month will do in various time-frames and various returns.

Besides highlighting the value of starting early, this chart can be used as a quick reference to determine the possible results of your savings efforts.  If you are saving $1,000 per month, for example, your results would be four times as large as saving $250 per month.

If you want to do a more comprehensive in-depth analysis of your savings requirements, taking into account taxes, inflation, Social Security, and numerous other factors, feel free to reach out to me.  I am happy to help.

To a prosperous retirement,

Patrick Stoa
Financial Advisor
920-617-6830
patrick@maccofinancial.com

1.  https://www.irs.gov/uac/Newsroom/Filing-Season-Statistics-for-Week-Ending-March-11-2016
2.  http://www.usatoday.com/story/money/2015/03/12/how-to-use-income-tax-return/70152934/
3.  http://www.bankrate.com/finance/taxes/how-americans-will-spend-their-tax-refund-1.aspx
4.  http://newsroom.hrblock.com/people-spending-tax-refunds
5.   http://www.cnbc.com/2014/02/28/save-vs-splurge-what-we-really-do-with-tax-refunds.html
6. This case study is for illustrative purposes only; it is not a representation of any individual person or situation. The investment return figures represented are not intended to reflect the actual performance of any particular security. Individual cases will vary. Investment yields will fluctuate with market conditions. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.

The information does not purport to be a complete description of the securities, markets, or developments referred to in this material, it has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Rebalancing

Imagine a situation where you were at the playground on the seesaw with your older brother.  It works well at first.  Then winter comes. The next spring you hop on the seesaw again, but it doesn’t work anymore.  Your brother grew faster, and now the seesaw is out of balance.  He gets on, you fly up on your side, and you’re stuck with your legs dangling in the air, suspended until he lets you down.  Your seesaw is out of balance.  You need to rebalance to make it work the right way again.

In the video, we talk about rebalancing your investment portfolio.  Rebalancing is simply one form of investment discipline.  Rebalancing implies that something is out of balance, and needs to be returned to its original state.  It might go something like this:  We meet with a client and discuss their hopes, fears, dreams, and resources.  We agree on an appropriate mix of assets to address their situation.  We initiate investments to match that asset allocation.  Over time, some assets perform better than expected, some about as expected, and some worse than expected.  As those realities take place, the asset allocation drifts away from the agreed upon allocation.

Rebalancing is the function of bringing that portfolio back to the originally agreed upon asset mix.  This does two things for the client.  First, it brings the desired risk/return profile back to where it was intended to be.  Second, it adds a discipline to selling off some assets that have risen faster than expected and purchasing assets that have not done so well in order to restore the balance.  In simple terms, rebalancing effectively forces the portfolio to sell high priced assets and buy low priced assets. 

Of course, there is an issue of frequency.  How often should rebalancing take place?  In our opinion, it should not be daily, weekly, or monthly.  That is generally too short a time-frame for any truly significant shifts to have occurred between asset classes. 

Thanks for reading and watching.

Patrick Stoa

For questions, comments, and conversation, call us at 920-617-6830. 

The discussion contained in this video is a hypothetical illustration and is not intended to reflect the actual performance of any particular security.  Future performance cannot be guaranteed and investment yields will fluctuate with market conditions.  Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment.  Investing involves risk and you may incur a profit or loss regardless of strategy selected.  Re-balancing a non-retirement account could be a taxable event that may increase your tax liability.

Types of Risk

Many investors view the stock market as risky, because they may lose money.  In our eyes, it is worthwhile to have some awareness of the various types of investment risk.  In our video, we share several sources of investment risk that you may not have fully considered.  Below, we talk in more detail about those risks.

First, let’s simply list a few of the investment risks, and we will dive deeper into a few of them to illustrate the point.  Here is a list of well-known risks:

•    Market Risk (also known as Systematic Risk)
•    Interest Rate Risk
•    Business Risk
•    Inflationary Risk
•    Liquidity Risk
•    Reinvestment Risk
•    Social/Political/Legislative Risk
•    Currency/Exchange Rate Risk
•    Call Risk and Credit Risk (specific to bonds)

Those are a lot of risks, but hopefully it is not overwhelming.  For example, in our last video we talked about diversification and asset allocation which, combined, can be used to mitigate (but not eliminate) several of the risks above, including Market Risk, Business Risk, Exchange Rate Risk, and even Social/Political/Legislative Risk.  

Today, I would like to point out Inflationary Risk, in particular.  An item costing $100 in 1985 would cost about $220 in 2015 due to inflation.  This is serious damage to your purchasing power and can make retirement a lot less enjoyable than you might want it to be.  In general, it is a good idea to have many of your investments at least keeping up with inflation.  Historically, stocks have done this while cash or near-cash investments have not.

Another current risk to be aware of is Interest Rate Risk.  Interest rates have been at historically low levels, and it is hard to imagine them doing anything other than going up.  As interest rates rise, the unfortunate result is that bonds go down in price.  We did not elaborate on the mechanism for this in the video, but we will do so here.  If a person owns a bond that is paying $50 per year on a $1,000 investment, that is a 5% return.  Now imagine that over a few years, the market interest rate has moved up to 10%, and the owner wishes to sell the bond.  Who will buy that bond at the full price of $1,000?  No one.  The new buyer wants to earn the current market rate.  Since the bond will continue to pay only $50, the way to achieve a current market rate is discount the price so that 10% is earned on the reduced price.  

The key takeaway from this is that there are many risks to consider.  Sometimes the risks are the ones that scream from the media headlines on a daily basis.  Just as often, risk can be silent but can significantly affect the value of your investments, nonetheless.

Patrick Stoa

For questions, comments, and conversation, call us at 920-617-6830  

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Mike Macco and Patrick Stoa and not necessarily those of Raymond James.

Diversification & Asset Allocation

If I were to ask you to take your life savings, drive to the casino, walk to the roulette wheel and put all of your money on black 17… would you do it? Probably not. But why? Because it’s risky. You’ve put all of your hope in that one thing. If it works, are you a genius? Umm…no. You were very lucky. Take your money and walk away. It’ll probably never happen again. The same is true for investing in stocks. Would you put all of your money in, say, Tesla? As desperately as I want a Model X and as much as I may like and respect Elon Musk - their founder and CEO, in case you were wondering - that would be foolish. In investment speak, that’s called a concentrated position. It’s the “black 17” of the investment world. And in my experience, most people understand that. So we take that risk and “diversify it away” by investing our hard-earned money into different stocks… say Microsoft, Apple, Wisconsin Energy, Ford… and the list goes on and on. So while the success of our investment strategy no longer rides on Elon Musk’s shoulders, we still have a problem. They’re all large (large cap) US Companies and they’re all stock. Different in some aspects, the same in others. Enter asset allocation.

If diversification is the process of having different kinds of similar things, then asset allocation is the process of having completely different things. Let’s unpack that. In the example above, we had lowered the risk of investing in only one company. Yet we were still left with the problem of having companies that were all still large and all located in the USA. That would be fine if those were always the best investments. But of course, there is no “always” in investing. Sometimes, medium-sized (mid cap) and small-sized (small cap) companies perform better. Sometimes, companies in growth mode (growth) or companies who have gone through difficulties (value) are better places to invest. Sometimes, companies in other developed countries (international) or companies in developing countries (emerging markets) offer better long-term investment opportunities. And let’s not forget about silver, oil, wheat and cotton (commodities) or apartments, office buildings and houses (real estate). And we haven’t even talked about bonds, which are essentially loans to federal, state and local governments, companies and even home owners. Each of these categories is a different “asset class”. They are all different and react differently to different economic conditions. 

So what is an investor to do? Well, if you like the idea of putting everything on black 17, have at it. I wouldn’t recommend that, and you probably wouldn’t be a good fit for our firm. But if you’re like most people, you probably understand the value of not taking excessive risk. Which means you’ll have a portfolio with some of everything in it. We would call that a “blended portfolio”. Domestic and international stock, commodities, real estate, alternatives, and probably some bonds if you’re trying to limit volatility. But do you have equal amounts of everything? Probably not. That’s where the art comes in. Most portfolios have a large percentage in US stocks because the US economy is the most stable (less uncertainty/risk). And most believe Europe, India and East Asia have decent growth opportunities, too, so another – typically smaller - chunk of their portfolios is invested there. Even China and Africa have some growth prospects, so a portfolio may even include a small percentage invested there. If you’re closer to or in retirement or if volatility makes you uncomfortable, you’ll probably shift some of those stock investments into bonds which are typically less volatile and considered safer than stocks. Add on smaller parts of commodities, real estate, alternatives, and you’ve got yourself a portfolio!

I’d be remiss if I didn’t bring this back home to the importance of working with professionals. As I hope is obvious from the process I just outlined, the concepts are relatively easy to grasp. But executing all of this is a whole different ballgame. What stocks and bonds should you buy? What percentage of each should you have in your portfolio? Are the investments you’ve chosen performing as they should? Should you cut your losses and sell or recommit and double down? And are they right for your situation? Good topics for another blog post.

Michael J. Macco

Tesla, Ford and Wisconsin Energy are not closely followed by Raymond James Research.  Raymond James makes a market in Apple and Microsoft.

Diversification and asset allocation do not ensure a profit or protect against a loss.

Any opinions are those of Michael Macco and not necessarily those of RJFS or Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance may not be indicative of future results.

What is Investing?

Here is an interesting question:  What does it actually mean to invest?  When we were thinking of topics to bring to you, we kept coming back to foundational questions, to help you understand what we are really doing.  At the most fundamental level, investing is spending time, effort, or money in the hopes that whatever is acquired or built will return a better value to you in the future. 

In one sense, we invest every day.  For a simple example, we may spend time building a deck on our house, because we value the time we will spend there with family more than we valued the time, effort, and materials it took to build it.

Before we continue, perhaps it makes sense to question why we should invest at all.  Why not just spend all our money as we earn it?  Well, if we could work all our lives, and earn what we need up until the day we die, there would be no need for financial planning at all.  That used to be a reality.  The average life expectancy of someone born in the 1920’s was 53 years.   Fortunately, general health and medical advancements provide most of us with a much longer life well beyond our working and earning years. 

For a time, pensions were somewhat common, to provide income after our productive years.  Now, however, pensions are quite rare.   

So, back to the question – Why invest at all?  People have to invest because they are likely to outlive their ability to produce income, and most people would like an income and lifestyle above the income provided by Social Security.

There are many types of investments available.  Two very common types are:

1.        Stocks – owning a portion of a company and participating in the potential profitability of that company.  The company may pay out cash on hand to owners in the form of dividends.  At some point in time, the investor may sell their ownership interest.  If they can sell it for more than they paid, a profit will occur there as well.

2.       Bonds – loaning your money to a company.  The company then has regularly scheduled interest payments, and eventually a payment to return the principal of the loan. 

One subject that comes up relative to investing from time to time is the sense of “gambling.”  There are a few common sources to this feeling.  Market volatility is well reported in the media, can create unease, and is completely outside of your control.  There are a few things within your control, however.  Proper diversification and asset allocation can change both the level of risk and types of risk in your portfolio.  It really takes a team approach between the client, the advisor, and professional money managers to consider these things to be systematically and purposely invested.

Patrick Stoa

For questions, comments, and conversation, call us at 920-617-6830 

Any opinions are those of Mike Macco and Patrick Stoa and not necessarily those of Raymond James. Diversification does not ensure a profit or guarantee against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Dividends are not guaranteed and must be authorized by the company’s board of directors. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.

How long could you live without the stock market?

Would you worry if the stock market closed for five months?  It did just that at the outbreak of World War I.  I’ll admit, that is over 100 years ago.  But what if the market was only open a few days a month?  I would guess that after a time, most people would actually worry less than they do now.  To see why that is so, let’s talk about what a market is, and what it does for us.

So, we hear about the stock market all the time.  Our media outlets seem to yell to us about the Dow Jones Industrial Average and the S&P 500 indexes on a daily basis.  However, those are indexes, not a market. 

The true definition of a market is a place where buyers and sellers meet to agree on the price and delivery terms for a transaction – the best known being the New York Stock Exchange, which traces its roots to 1792.  The NYSE trades in stocks, but there are other markets for stocks, bonds, options, commodities, and many other financial instruments throughout the world. 

Let’s also think about what a market is not.  It is not a determinant of value.  A market only reveals what buyers are willing to pay, and what sellers are willing to accept at one point in time.  The actual value of the items being negotiated can be far in excess or far less than the price that is agreed upon.

So why is the definition of a market relevant?  It’s all in how we choose to think about the whole concept of a market.  The various stock markets, for example, do us an incredible convenience.  They provide the opportunity nearly every day to sell shares we own, or buy new shares.  The transaction is typically quick, easy, and really quite cheap.  Basically, stock markets offer what we call “liquidity,” which is the ability to quickly convert your asset to cash.

In exchange for the convenience of liquidity, we are subjected to the daily drumbeat of good and bad market news, along with favorable and unfavorable valuations on everything we own each and every day.  Stock prices in particular can be very close to the actual value or very far from actual value of a company at any point in time.  Over longer horizons, they will tend to follow the growth in the value of a company, but in any shorter period they can drift quite a lot.

In contrast to the stock market, real estate transactions are generally not quick, easy, definitely not cheap and, by the nature of real estate, they are local.  In other words, liquidity is low in most real estate markets.  If the real estate market was more like the stock market, someone would knock on your door each morning offering you a new price for your house.  It might be higher than you expect, or lower.  If someone offered you a price you knew was too low, would you sell because of the new price?  Would you even worry about it?  Unless something has changed in the neighborhood, you probably would not give it a second thought.  You are likely to wait for a more reasonable offer from another buyer.    

The key takeaway is to think of financial markets and investments much more like real estate.  Despite the media shouting S&P, NASDAQ, and DJIA indexes at you, the market price of your assets today is only an opportunity to sell or buy, and certainly not indicative of true value.  Remember, the financial markets only provide a price and liquidity, which is convenient.  But if you have no need for your invested money for several years, you certainly do not need to pay attention to the daily financial news. 

So back to the original question – would it worry you if the stock market was closed for an extended time?  It should only concern you if you needed the cash during that time.  Otherwise, you still own your assets, and the business you own is still operating.  Your worrying energy would be better spent elsewhere.

If you want to have a coffee and debate about how long you should go between looking at the value of your holdings, give me a call at 920-617-6830.

Patrick Stoa  

This information does not purport to be a complete description of the securities, markets, or developments referred to in this material, it has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Please note that direct investment in an index is not possible.