Anchor Rob Boisvert speaks with financial planner Michael Baker

Anchor Rob Boisvert speaks with financial planner Michael Baker of Vertex Capital® about an upcoming lecture and other resources for those thinking about retiring soon. – See more at: http://coastalnc.twcnews.com/content/news/in_depth/713518/in-depth–michael-baker–vertex-capital/#sthash.JHC3wqTC.dpuf

Market Review September 2014 – Reducing Risk in a Month of Uncertainty

September was a rough month for investors. After stocks pushed to new highs in the early days of the month, disappointing economic numbers, mixed signals from central banks, and political uncertainties gave investors several excuses to reduce the risk in their portfolios or increase their cash positions. As we enter the fourth quarter, many investors are reevaluating their portfolios and starting to plot changes for the coming year.

US jobs data was disappointing. This really concerned US investors. Ever since January, investors have been hoping that the economic indicators were just lagging behind, but the US economy was growing. The summer’s data was lackluster and the preliminary September data was discouraging. While the jobs data released last week revised those figures upward for September and the preliminary October data was better than analysts hoped, investors remain cautious.

Adding to this cautious attitude, the end of Federal Reserve’s quantitative easing (QE) program is predicted for October. This program stabilized the bond market and encouraged lenders to make money available to borrowers. This allowed companies and individuals to borrow at lower interest rates and encouraged investment. The Fed has used similar programs in the past and the conclusion of these programs is always a delicate time for the markets.

Meanwhile, the EU continues to struggle with price stability and deflation is now a significant concern for EUmember nations. Mario Draghi, president of the European Central Bank (ECB), followed through on his plans to take interest rates even further into negative territory and proposed a variety of possible QE measures similar to those used by the Federal Reserve. Those QE measures are expected to be announced in early October. Investors with European interests are waiting impatiently for the direction of the EU economy to come into focus, and much of that picture is dependent on the actions of the ECB in coming months.

The Scottish independence vote was also a source of uncertainty in September. Since Scotland controls large portions of the oil in the North Sea and the more liberal Scottish voters would surely subject the petroleum industry to additional taxes and regulation, investors were paying careful attention to this vote. Additionally, Scottish leaders proposed staying on the British Pound, but there was no formal agreement. Some economists speculated that Scotland might join the EU and adopt the Euro. Even without a formal currency agreement in place, no one seriously thought that they would create their own currency, which means that the Scottish government would need to negotiate the use of either the Euro or the Pound. In either case, the more liberal Scots were sure to adopt a much different attitude toward corporate interests than their British counterparts.The failure of the Scottish independence referendum was a relief to investors, once the vote was certified later in the month.

ISIS/ISIL continues to wreak havoc in the Middle East. Over the summer, investors were merely concerned about oil supplies from the region. Now, it appears that the West is planning to get involved in the conflict and investors are wondering how large those operations will be. With most western nations still running deficits and western citizens wary of new military conflicts, it is unlikely that large or long-term military operations would be beneficial to western economies.

Market Movers

The events of September were a valuable reminder that diversification is crucial. Nearly every asset class suffered as many investors scaled back the risk in their portfolios. A variety of our portfolio holdings managed to stay relatively flat, but there were no significant gains. This was welcome relative to the dismal performance across the major equity markets. The investment selection of our portfolios helped to weather some of this recent volatility.

Sept 2014 Market Review Market Movement Table

Sept 2014 Market Review Market Movement Table

Some investors lost by chasing the record highs of the US stock market. Some investors also lost by betting against the market and holding large amounts of precious metals. However, our carefullyconsidered, diversified portfolios were weathered the uncertain events of September. We benefited from our allocation to several investment categories. Our Investment Team continues to closely monitor the market and economic developments, and these situations will continue to factor in to our future investment allocations. The following summarizes the major movements within our portfolios:

  • This pattern of risk reduction carried through all asset categories. Both US and foreign equities pushed negative, but the largest declines were in those asset classes that carry the most risk. In equities, those were small caps (VB) and emerging markets (VWO), which significantly underperformed large cap stocks (IVV & VEA).
  • US treasuries (SHY) and US mortgage-backed securities (MBB) both saw nominal gains for the month and functioned as safe havens for investors that were looking to reduce their risk without going to cash. This greatly benefited our lower risk portfolios.
  • Foreign bonds saw more significant declines than US bonds. Also, high-yield (JNK) and emerging markets bonds (PCY) ventured further into the red. Regardless, these bond types are critically important as they are typically less sensitive to interest rate changes relative to many other bonds.
  • When markets respond out of fear, we would expect precious metals to do well. This was not the case as metals (GLTR) and commodities (DBC) continue to underperform most other investments. In looking at these September figures, it is important to review the year-to-date numbers. Every asset category still shows a positive return for the year. Digging a little deeper, 18 of the 23 asset classes in the models are still in the black for the year, and every model in the Core Allocation Series is still well into positive territory.

 

INVESTMENT ADVISORY SERVICES OFFERED THROUGH ALPHASTAR CAPITAL MANAGEMENT, A SEC REGISTERED INVESTMENT ADVISOR. INVESTMENT MANAGEMENT SERVICES MAY BE PROVIDED BY A SUBADVISOR. INVESTING INVOLVES RISK, INCLUDING THE POTENTIAL LOSS OF PRINCIPAL. NO INVESTMENT STRATEGY, SUCH AS ASSET ALLOCATION OR DIVERSIFICATION, CAN GUARANTEE A PROFIT OR PROTECT AGAINST LOSS IN PERIODS OF DECLINING VALUES. PLEASE NOTE THAT REBALANCING INVESTMENTS MAY CAUSE INVESTORS TO INCUR TRANSACTION COSTS AND, WHEN REBALANCING A NON-RETIREMENT ACCOUNT, TAXABLE EVENTS WILL BE CREATED THAT MAY INCREASE YOUR TAX LIABILITY. REBALANCING A PORTFOLIO CANNOT ASSURE A PROFIT OR PROTECT AGAINST A LOSS IN ANY GIVEN MARKET ENVIRONMENT. INVESTMENTS INVOLVE RISK AND, UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO CONSULT WITH A QUALIFIED FINANCIAL ADVISOR AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGIES DISCUSSED HEREIN. THIS REPORT IS PRESENTED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SECURITIES. FURTHER, THIS INFORMATION IS NOT INTENDED AS A REPLACEMENT FOR THE ACCOUNT STATEMENT SENT TO YOU BY THE QUALIFIED CUSTODIAN. THE INFORMATION PRESENTED IN THIS REPORT IS BELIEVED TO BE ACCURATE, BUT OUR FIRM CANNOT GUARANTEE THE ACCURACY OF THE DATA. UNDER NO CIRCUMSTANCES SHALL OUR FIRM OR ANY OF ITS AFFILIATES, OFFICERS, EMPLOYEES, OR AGENTS BE RESPONSIBLE FOR DAMAGES, ERRORS, OMISSIONS, INACCURACIES, OR MISUSES OF THIS REPORT BY YOU OR YOUR AGENTS. THE PERFORMANCE INFORMATION PRESENTED IN THE ASSET CATEGORY SECTION OF THIS REPORT IS BASED ON EQUAL-WEIGHTED AVERAGES OF THE FOLLOWING: US STOCKS (ISHARES S&P 500 ETF, S&P DIVIDEND ETF, VANGUARD MID CAP ETF, WISDOMTREE MIDCAP DIVIDEND ETF, VANGUARD SMALL CAP ETF, WISDOMTREE SMALLCAP DIVIDEND ETF), FOREIGN STOCKS (VANGUARD MSCI EAFE ETF, ISHARES INTERNATIONAL SELECT DIVIDEND ETF, VANGUARD EMERGING MARKET ETF, WISDOMTREE EMERGING MARKETS EQUITY INCOME ETF, ISHARES MSCI EAFE SMALLCAP ETF, VANGUARD FTSE ALL WORLD EX-US SMALL ETF), US BONDS (ISHARES BARCLAYS 1-3 YEAR TREASURY ETF, ISHARES 3-7 YEAR TREASURY BOND ETF, ISHARES 10-20 YEAR TREASURY BOND ETF, ISHARES BARCLAYS MORTGAGE BACKED ETF, ISHARES IBOXX INVESTMENT GRADE CORPORATE ETF, VANGUARD SHORT-TERM CORPORATE BOND ETF, ISHARES BARCLAYS TIPS ETF, PIMCO 1-5 YEAR US TIPS INDEX ETF, SPDRS HIGH YIELD ETF, SPDR BARCLAYS SHORT-TERM HIGH-YIELD BOND ETF, POWERSHARES SENIOR LOAN ETF), FOREIGN BONDS (SPDRS BARCLAYS INTERNATIONAL TREASURY ETF, SPDR BARCLAYS SHORT-TERM INTERNATIONAL TREASURY BOND ETF, POWERSHARES EMERGING MARKET DEBT ETF, SPDRS DB INTL GOVERNMENT INFLATION ETF, POWERSHARES INTERNATIONAL CORPORATE BOND ETF), HARD ASSETS (POWERSHARES DB COMMODITY ETF, SPDRS GOLD ETF, ISHARES SILVER TRUST ETF, JP MORGAN ALERIAN MLP ETN, SPDRS DJ GLOBAL REAL ESTATE ETF), AND HYBRIDS (ISHARES S&P US PREFERRED STOCK ETF, SPDRS BARCLAYS CONVERTIBLE SECURITIES ETF).

Market Review July 2014 – Risk Adjustment

July started on a strong note. The US stock market pushed to new highs in the early days of the month, and then pulled back slightly as world events weighed on investors’ minds in the following weeks. US markets saw a nice recovery coming into the final week of the month, but renewed tensions with Russia squelched any momentum and US stocks finished the month in negative territory.Jul 2014 Market Review Movement Table

The conflict in Ukraine continues to concern investors. While that situation seemed to quiet down during the spring, fighting intensified in July. The crisis grabbed headlines again, when a passenger jet was shot down by separatists in eastern Ukraine. Commercial flights were rerouted to avoid entering Ukrainian airspace and both sides scrambled to blame each other for the tragedy. The ensuing finger-pointing between Ukraine, Russia, and western nations only added to the confusion and unsettled European markets. By the end of the month, Russian troops were massed along the Ukrainian border and western nations approved another round of economic sanctions to pressure Russia into aiding the stalled diplomatic process.

Meanwhile in the Middle East, the simmering conflict between Israel and Palestine came to a boil in Gaza, and the conflict in Syria spread deep into Iraq. In Gaza, fighting escalated quickly and, for a time, halted western flights to Israel’s major airport at Tel Aviv. While the fear in Israel is that this could be a prolonged war, the fear in Iraq is that their government could be overthrown by the end of the summer. Militants swept in from Syria and seemed to brush aside the Iraqi military. Government officials are now requesting western military assistance, but the US and the EU are reluctant to reenter the fray.

The markets’ responses to these conflicts reflect general concern for the global economy, rather than specific fears. None of these regions is an economic center. In each case, specific sectors (e.g. energy) responded, but the broader economic impact should remain limited as long as western nations avoid direct involvement.

The more fundamental risk to world markets came out of Portugal. Banco Espirito Santo (BES), Portugal’s largest lender, saw its shares suspended from trading for a short time due to concerns that it was insolvent. Those concerns proved justified and the Portuguese central bank was forced to bail out the bank to prevent a default. As of the end of the month, the courts were still determining whether this action was a “bankruptcy action” that would trigger the insurance provisions on some of BES’s more complex products.

The concern with BES is that it is indicative of the types of risks that still lurk in the European financial system. Technically, the rescue of Portugal’s financial system concluded this spring, when aid from the EU and the International Monetary Fund ended. Investors are right to be concerned by the fact that an event of this magnitude could occur so soon afterwards.

After investors seemed largely optimistic through the frigid winter and lackluster spring, they finally started to move toward lower-risk investments or cash. August and September will determine whether these moves are just small movements to adjust for the increased risks or larger shifts in investing strategy.

 

Market Movers

In July, investors were clearly looking to control the risk in their portfolios. Across the major asset classes, those with higher risk usually suffered more than those with lower risk. US equities dominated last year but are continuing to fall behind in 2014. This is not surprising and a strong reminder of the need for broad-based diversification.

Both US and foreign stocks declined during July and those returns were led by small cap stocks, which represent some of the highest risk companies traded on the market. During periods of economic expansion, they use low interest rates to finance their rapids growth, and they are also more agile than larger companies. These characteristics make them very attractive to investors looking to benefit from an optimistic stock market, but investors must remember that their reliance on borrowing makes them more susceptible to economic downturns.

Foreign stocks also saw declines. In light of the renewed concern for the European banking system, it is not surprising the stocks declined in developed nations. Until investors can have confidence that the banking system can facilitate lending safely, it will be difficult for foreign stocks to find their footing. Emerging markets did comparably well, and were one of the only positive performing equity markets in July. This may come as a surprise in a month when investors sought to limit their risk exposure, and it indicates that investors still see significant potential in those markets. After last year’s dismal performance, many investors chose to stay clear of the emerging markets and did not benefit from their strong performance.

Relative to stocks, US bonds held better value during July. Treasuries and TIPs held up especially well in a difficult month. On the other hand, high-yield bonds saw a slight decline as investors preferred lower risk bonds. Relative to the US, foreign bonds suffered more, due to the concerns about European bank health. Emerging market bonds avoided this pull-back and, like emerging market stocks, experienced small increases in values.

Although traditional assets (i.e. stocks and bonds) were quite weak, alternatives were surprisingly disappointing. When investors are frightened, commodities and precious metals usually get a boost. This month, it seems that investors were not acting out of fear, but merely trying to adjust the risk in their portfolios. As a result, they elected to move their money to low-risk bonds or cash, rather than turn to more pessimistic safe havens. For the first time this year, hybrids were lackluster. Investors clearly preferred the relative safety of bonds and were less concerned about foregoing the growth potential of the stock markets. As a result, hybrids saw modest declines in values during July. However, hybrids remain the best-performing asset class for the year.

INVESTMENT ADVISORY SERVICES OFFERED THROUGH ALPHASTAR CAPITAL MANAGEMENT, A SEC REGISTERED INVESTMENT ADVISOR. INVESTMENT MANAGEMENT SERVICES MAY BE PROVIDED BY A SUBADVISOR. INVESTING INVOLVES RISK, INCLUDING THE POTENTIAL LOSS OF PRINCIPAL. NO INVESTMENT STRATEGY, SUCH AS ASSET ALLOCATION OR DIVERSIFICATION, CAN GUARANTEE A PROFIT OR PROTECT AGAINST LOSS IN PERIODS OF DECLINING VALUES. PLEASE NOTE THAT REBALANCING INVESTMENTS MAY CAUSE INVESTORS TO INCUR TRANSACTION COSTS AND, WHEN REBALANCING A NON-RETIREMENT ACCOUNT, TAXABLE EVENTS WILL BE CREATED THAT MAY INCREASE YOUR TAX LIABILITY. REBALANCING A PORTFOLIO CANNOT ASSURE A PROFIT OR PROTECT AGAINST A LOSS IN ANY GIVEN MARKET ENVIRONMENT. INVESTMENTS INVOLVE RISK AND, UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO CONSULT WITH A QUALIFIED FINANCIAL ADVISOR AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGIES DISCUSSED HEREIN. THIS REPORT IS PRESENTED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SECURITIES. FURTHER, THIS INFORMATION IS NOT INTENDED AS A REPLACEMENT FOR THE ACCOUNT STATEMENT SENT TO YOU BY THE QUALIFIED CUSTODIAN. THE INFORMATION PRESENTED IN THIS REPORT IS BELIEVED TO BE ACCURATE, BUT OUR FIRM CANNOT GUARANTEE THE ACCURACY OF THE DATA. UNDER NO CIRCUMSTANCES SHALL OUR FIRM OR ANY OF ITS AFFILIATES, OFFICERS, EMPLOYEES, OR AGENTS BE RESPONSIBLE FOR DAMAGES, ERRORS, OMISSIONS, INACCURACIES, OR MISUSES OF THIS REPORT BY YOU OR YOUR AGENTS. THE PERFORMANCE INFORMATION PRESENTED IN THE ASSET CATEGORY SECTION OF THIS REPORT IS BASED ON EQUAL-WEIGHTED AVERAGES OF THE FOLLOWING: US STOCKS (ISHARES S&P 500 ETF, S&P DIVIDEND ETF, VANGUARD MID CAP ETF, WISDOMTREE MIDCAP DIVIDEND ETF, VANGUARD SMALL CAP ETF, WISDOMTREE SMALLCAP DIVIDEND ETF), FOREIGN STOCKS (VANGUARD MSCI EAFE ETF, ISHARES INTERNATIONAL SELECT DIVIDEND ETF, VANGUARD EMERGING MARKET ETF, WISDOMTREE EMERGING MARKETS EQUITY INCOME ETF, ISHARES MSCI EAFE SMALLCAP ETF, VANGUARD FTSE ALL WORLD EX-US SMALL ETF), US BONDS (ISHARES BARCLAYS 1-3 YEAR TREASURY ETF, ISHARES 3-7 YEAR TREASURY BOND ETF, ISHARES 10-20 YEAR TREASURY BOND ETF, ISHARES BARCLAYS MORTGAGE BACKED ETF, ISHARES IBOXX INVESTMENT GRADE CORPORATE ETF, VANGUARD SHORT-TERM CORPORATE BOND ETF, ISHARES BARCLAYS TIPS ETF, PIMCO 1-5 YEAR US TIPS INDEX ETF, SPDRS HIGH YIELD ETF, SPDR BARCLAYS SHORT-TERM HIGH-YIELD BOND ETF, POWERSHARES SENIOR LOAN ETF), FOREIGN BONDS (SPDRS BARCLAYS INTERNATIONAL TREASURY ETF, SPDR BARCLAYS SHORT-TERM INTERNATIONAL TREASURY BOND ETF, POWERSHARES EMERGING MARKET DEBT ETF, SPDRS DB INTL GOVERNMENT INFLATION ETF, POWERSHARES  INTERNATIONAL CORPORATE BOND ETF), HARD ASSETS (POWERSHARES DB COMMODITY ETF, SPDRS GOLD ETF, ISHARES SILVER TRUST ETF, JP MORGAN ALERIAN MLP ETN, SPDRS DJ GLOBAL REAL ESTATE ETF), AND HYBRIDS (ISHARES S&P US PREFERRED STOCK ETF, SPDRS BARCLAYS CONVERTIBLE SECURITIES ETF).

Market Review June 2014 – The Specter of Deflation in Europe

Once again, the US stock market pushed to new highs. This year and last, it seems almost commonplace for the US market to march to a new highpoint on a monthly basis. However, it is important to recognize that these advances contradict the relatively soft economic data, which invites a more cautious perspective. At this point, the steady growth of US stocks seems to be based on the relative strength of the US economy in comparison to other developed markets, rather than on the belief that the US economy is poised to grow more quickly.

One of the more sobering indicators is the final report on the gross domestic product (GDP) for the 1st quarter, which indicated that the US economy actually pulled back significantly during the first three months of the year. Some analysts are optimistic that the forthcoming data for the 2nd quarter will show that the economy bounced back strongly, but it must be noted that leading indicators are not lending credence to those predictions. Analysts will carefully monitor the jobs reports and purchasing indicators in July to see whether they indicate that the US economy is recovering from the harsh winter.

Last month, we discussed falling prices in Europe and the dangers of that trend continuing. Early in June, the European Central Bank (ECB) reacted to those troubling signs. The ECB announced a stimulus package that cut interest rates, promised to keep those rates low, and effectively encouraged banks to lend money. This response looks especially bold in light of the fact that the ECB is not allowed to engage in the more aggressive purchasing strategies that central banks in the UK and the US have used to avoid deflation.

China continues to work through its debt crisis. While the People’s Bank of China (PBoC) is handling the situation well, new revelations are providing a better picture of the extent of the problems. During the past month, it came to light that borrowers were misleading lenders by pledging assets as collateral to multiple lending institutions. This means that these loans are not nearly as safe as those lenders believed. In the short-term, the banks will be reexamining the collateral behind each of their loans and calling in those loans that are backed by fraudulent collateral.

The situation in Ukraine remains complicated. The status of eastern Ukraine remains uncertain and Russia continues to use that region to aggravate the government of western Ukraine. At the same time, Russia is threatening to shut off the natural gas pipeline that runs through Ukraine and provides a significant portion of the country’s revenue. Such a response remains unlikely, since it would also limit Russia’s ability to provide natural gas to European customers, but it is a serious threat to the shaky Ukrainian economy.

Violence from the Syrian civil war spread to Iraq in the early days of the month, and militants made rapid progress in capturing important Iraqi resources. As you may expect, oil wells and refineries were among the captured facilities. Mid-month saw oil prices reach a nine-month high of $115.71 per barrel due to fears that oil supplies would be disrupted. By month-end, oil prices pulled back slightly, but remain poised to rise in the event of further threats to oil supplies.

Market Movers

Both US and foreign stocks were strong performers in June, but US stocks pulled ahead for the year. As long as investors remain optimistic and central banks keep interest rates low, stock markets should stay on this course. Unfortunately, these situations can change quickly, especially as behavioral factors come into play.July 2014 Market Review Movement Table

In the meantime, our strategy of favoring small- and mid-cap stocks provides an advantage in an environment where investors are seeking risk. These asset classes perform best when borrowing
costs are low and when investors are willing to accept more risk, and both of those conditions are true in the current market. The result is that small- and mid-cap stocks are driving the performance of our US and foreign stock categories. Foreign stocks are keeping pace with US equities in 2014, which is a shift from the 2013 trend. In particular, emerging markets are exceptionally strong, despite their ongoing economic and political challenges.

Fixed income performance was weak both in the US and abroad. Prices were up marginally and remain strong, but stock performance was too attractive and investors preferred those prospects as opposed to the relative safety of the bond markets. With bond yields so low, investors are unlikely to prefer bonds unless market events convince them to reduce the risk in their portfolios. However, the current bond market environment is rewarding those who diversified their bond holdings to include foreign bonds. Foreign bonds remain a critical part of our fixed income strategy and outperformed US bonds since the beginning of the year.

Hard assets remain a bright spot for investors. While commodities in general continue to be lackluster, energy and real estate responded well to investors’ appetite for risk. In particular, our investment in master limited partnerships (MLPs) did very well year-to-date. MLPs are primarily investments in energy and they respond well to concerns about energy supplies and international conflicts. The concerns about Middle East oil production provided a boost to MLP values in the month of June. As usual, precious metals were volatile, but finished out the month with a large gain. After last year’s dismal performance for gold and silver, this year’s gains are welcome. Also, hybrid securities were consistent performers yet again. In a market where both stocks and bonds are showing strength, hybrids are thriving. Preferred stocks and convertible bonds performed well since the beginning of the year, yet are too often overlooked by investors.

Although equities continue to show strength, the performance of other investment types has shifted significantly since last year. Our portfolios are responding well, generating equity-like performance but with reduced risk.

 

INVESTMENT ADVISORY SERVICES OFFERED THROUGH ALPHASTAR CAPITAL MANAGEMENT, A SEC REGISTERED INVESTMENT ADVISOR. INVESTMENT MANAGEMENT SERVICES MAY BE PROVIDED BY A SUBADVISOR. INVESTING INVOLVES RISK, INCLUDING THE POTENTIAL LOSS OF PRINCIPAL. NO INVESTMENT STRATEGY, SUCH AS ASSET ALLOCATION OR DIVERSIFICATION, CAN GUARANTEE A PROFIT OR PROTECT AGAINST LOSS IN PERIODS OF DECLINING VALUES. PLEASE NOTE THAT REBALANCING INVESTMENTS MAY CAUSE INVESTORS TO INCUR TRANSACTION COSTS AND, WHEN REBALANCING A NON-RETIREMENT ACCOUNT, TAXABLE EVENTS WILL BE CREATED THAT MAY INCREASE YOUR TAX LIABILITY. REBALANCING A PORTFOLIO CANNOT ASSURE A PROFIT OR PROTECT AGAINST A LOSS IN ANY GIVEN MARKET ENVIRONMENT. INVESTMENTS INVOLVE RISK AND, UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO CONSULT WITH A QUALIFIED FINANCIAL ADVISOR AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGIES DISCUSSED HEREIN. THIS REPORT IS PRESENTED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SECURITIES. FURTHER, THIS INFORMATION IS NOT INTENDED AS A REPLACEMENT FOR THE ACCOUNT STATEMENT SENT TO YOU BY THE QUALIFIED CUSTODIAN. THE INFORMATION PRESENTED IN THIS REPORT IS BELIEVED TO BE ACCURATE, BUT OUR FIRM CANNOT GUARANTEE THE ACCURACY OF THE DATA. UNDER NO CIRCUMSTANCES SHALL OUR FIRM OR ANY OF ITS AFFILIATES, OFFICERS, EMPLOYEES, OR AGENTS BE RESPONSIBLE FOR DAMAGES, ERRORS, OMISSIONS, INACCURACIES, OR MISUSES OF THIS REPORT BY YOU OR YOUR AGENTS. THE PERFORMANCE INFORMATION PRESENTED IN THE ASSET CATEGORY SECTION OF THIS REPORT IS BASED ON EQUAL-WEIGHTED AVERAGES OF THE FOLLOWING: US STOCKS (ISHARES S&P 500 ETF, S&P DIVIDEND ETF, VANGUARD MID CAP ETF, WISDOMTREE MIDCAP DIVIDEND ETF, VANGUARD SMALL CAP ETF, WISDOMTREE SMALLCAP DIVIDEND ETF), FOREIGN STOCKS (VANGUARD MSCI EAFE ETF, ISHARES INTERNATIONAL SELECT DIVIDEND ETF, VANGUARD EMERGING MARKET ETF, WISDOMTREE EMERGING MARKETS EQUITY INCOME ETF, ISHARES MSCI EAFE SMALLCAP ETF, VANGUARD FTSE ALL WORLD EX-US SMALL ETF), US BONDS (ISHARES BARCLAYS 1-3 YEAR TREASURY ETF, ISHARES 3-7 YEAR TREASURY BOND ETF, ISHARES 10-20 YEAR TREASURY BOND ETF, ISHARES BARCLAYS MORTGAGE BACKED ETF, ISHARES IBOXX INVESTMENT GRADE CORPORATE ETF, VANGUARD SHORT-TERM CORPORATE BOND ETF, ISHARES BARCLAYS TIPS ETF, PIMCO 1-5 YEAR US TIPS INDEX ETF, SPDRS HIGH YIELD ETF, SPDR BARCLAYS SHORT-TERM HIGH-YIELD BOND ETF, POWERSHARES SENIOR LOAN ETF), FOREIGN BONDS (SPDRS BARCLAYS INTERNATIONAL TREASURY ETF, SPDR BARCLAYS SHORT-TERM INTERNATIONAL TREASURY BOND ETF, POWERSHARES EMERGING MARKET DEBT ETF, SPDRS DB INTL GOVERNMENT INFLATION ETF, POWERSHARES INTERNATIONAL CORPORATE BOND ETF), HARD ASSETS (POWERSHARES DB COMMODITY ETF, SPDRS GOLD ETF, ISHARES SILVER TRUST ETF, JP MORGAN ALERIAN MLP ETN, SPDRS DJ GLOBAL REAL ESTATE ETF), AND HYBRIDS (ISHARES S&P US PREFERRED STOCK ETF, SPDRS BARCLAYS CONVERTIBLE SECURITIES ETF).

Market Review May 2014 – Record Highs . . . Again

Written by: Steve Osterink, Jr.

By the end of May, the US stock market hit another record high. Now that winter is behind us and world events are less fraught, investors seem more willing to show confidence in the stock markets. However, it is important to note that this confidence should not be interpreted as an increased appetite for risk. Many investors are conflicted about the prospects for the US economy and they are not without justification. The stock market continues to climb, but it is starting to strain credibility. The economic data remains a mixed bag. In addition, the strength of the bond markets, especially in the US, indicates that investors are still carefully controlling the risk in their portfolios.

European stocks did not fare as well. In recent months, poor European performance could have been attributed to the situation in Ukraine, but economic data from the European Union (EU) continues to discourage. Across the EU, the core countries (e.g. Germany, France, etc.) are persevering through the difficult economic climate, but others (e.g. Spain, Greece, Italy) are still struggling.

Prices for consumer goods are starting to fall throughout the EU and threaten to push it into deflation. While falling prices sound like a good thing to individuals, they actually mean that companies are cutting prices in order to generate enough demand to sell their products. Those price cuts eat into profits and also affect the taxes that governments are able to collect from those sales. Understandably, this puts pressure on both the stock markets and the economies of those countries.

Meanwhile, the situation in Ukraine found a bit of equilibrium, although a dangerous one for its citizens. With Russia content to use more subtle forms of influence and Europe rendering economic aid to the tenuous government, the impact of that crisis seems contained for a while. However, this conflict still has the potential to cause more serious issues for the EU, particularly if Ukraine is unable to supply natural gas to the EU during the winter months.

The Chinese economy continues to be a cause for concern, but the People’s Bank of China (PBoC) is doing a skillful job of controlling the fallout of their debt crisis. Bond defaults remain rare and, while lending requirements tightened up smartly, banks are still lending money. We will probably see a few more bumps along the way, but the PBoC gives investors good reason to have confidence in the Chinese economy.

On a more uplifting note, India is riding a wave of optimism after electing a reform candidate, Narendra Modi, who ran on a promise of economic development. In the past decade, India experienced some periods of remarkable growth, in spite of inconsistent or confusion economic policy. Both foreign investors and Indian citizens seem excited by the country’s prospects in the wake of this historic election.

Market Movers

Both US and foreign stocks made gains during the past month, and US stocks pushed to new highs by month’s end. Investors seem content to ride the stock market to its peak, specifically in the US. Foreign equities have outperformed US since the beginning of the year, but have lagged over the last several years. This indicates that the foreign stock markets may not be at such heights compared to the US stock market. The dividend yields reflect this as well. Foreign stocks are paying roughly double that of US stocks over the last twelve months. Emerging market equities have exhibited oddly low correlation to the broader, global stock markets. We maintain exposure to this region, which has paid off since the beginning of the year as emerging market stocks have shown significant performance.May-2014-Asset-Matrix

Bonds continue to defy expectations, specifically the higher quality and longer-term sectors. At a time when stock markets are at historic highs, we would expect that money would be flowing out of the bond market and into the stock market. Currently, that does not seem to be the case. This is yet another illustration that diversification is valuable. Our portfolios were able to benefit from the gains in the bond market, while many ‘market timers’ found themselves missing out as they attempted to outsmart the market.

Foreign bonds continue to benefit from the strength of the US bond market. So long as the yields on US bonds remain low, investors will seek out bonds in other markets. In particular, emerging markets bonds become most attractive when investors are struggling to find yield in the US or Europe. Those emerging bonds carry more risk, which may be a deterrent when yield is readily available elsewhere, but they do pay higher interest rates to compensate for that additional risk. Our portfolios have responded exceptionally well to these developments.

Hard assets suffered again in May. The strength of the bond market indicates that many investors are more pessimistic than the stock markets seem to show, but very little of that sentiment is trickling into hard assets.
Physical metals took another hit and finished the month in negative territory again. Regardless, we remain convinced that hard assets are critical, especially as we look forward from this time of equity market highs. We lightened this exposure at the beginning of the year and plan to adjust this as stock volatility rises.

Hybrids are another asset category that has benefited from investors’ uncertainties. By offering characteristics of both stocks and bonds, they allow investors to benefit from certain strengths of both asset categories. While they may not offer the full benefit of stocks during periods of rapid growth, we have been content with the respectable performance and reduced risk. Hybrids have been the single strongest asset category year to date.

 

 

 

 

 

INVESTMENT ADVISORY SERVICES OFFERED THROUGH ALPHASTAR CAPITAL MANAGEMENT, A SEC REGISTERED INVESTMENT ADVISOR. INVESTMENT MANAGEMENT SERVICES MAY BE PROVIDED BY A SUBADVISOR. INVESTING INVOLVES RISK, INCLUDING THE POTENTIAL LOSS OF PRINCIPAL. NO INVESTMENT STRATEGY, SUCH AS ASSET ALLOCATION OR DIVERSIFICATION, CAN GUARANTEE A PROFIT OR PROTECT AGAINST LOSS IN PERIODS OF DECLINING VALUES. PLEASE NOTE THAT REBALANCING INVESTMENTS MAY CAUSE INVESTORS TO INCUR TRANSACTION COSTS AND, WHEN REBALANCING A NON-RETIREMENT ACCOUNT, TAXABLE EVENTS WILL BE CREATED THAT MAY INCREASE YOUR TAX LIABILITY. REBALANCING A PORTFOLIO CANNOT ASSURE A PROFIT OR PROTECT AGAINST A LOSS IN ANY GIVEN MARKET ENVIRONMENT. INVESTMENTS INVOLVE RISK AND, UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO CONSULT WITH A QUALIFIED FINANCIAL ADVISOR AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGIES DISCUSSED HEREIN. THIS REPORT IS PRESENTED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SECURITIES. FURTHER, THIS INFORMATION IS NOT INTENDED AS A REPLACEMENT FOR THE ACCOUNT STATEMENT SENT TO YOU BY THE QUALIFIED CUSTODIAN. THE INFORMATION PRESENTED IN THIS REPORT IS BELIEVED TO BE ACCURATE, BUT OUR FIRM CANNOT GUARANTEE THE ACCURACY OF THE DATA. UNDER NO CIRCUMSTANCES SHALL OUR FIRM OR ANY OF ITS AFFILIATES, OFFICERS, EMPLOYEES, OR AGENTS BE RESPONSIBLE FOR DAMAGES, ERRORS, OMISSIONS, INACCURACIES, OR MISUSES OF THIS REPORT BY YOU OR YOUR AGENTS. THE PERFORMANCE INFORMATION PRESENTED IN THE ASSET CATEGORY SECTION OF THIS REPORT IS BASED ON EQUAL-WEIGHTED AVERAGES OF THE FOLLOWING: US STOCKS (ISHARES S&P 500 ETF, S&P DIVIDEND ETF, VANGUARD MID CAP ETF, WISDOMTREE MIDCAP DIVIDEND ETF, VANGUARD SMALL CAP ETF, WISDOMTREE SMALLCAP DIVIDEND ETF), FOREIGN STOCKS (VANGUARD MSCI EAFE ETF, ISHARES INTERNATIONAL SELECT DIVIDEND ETF, VANGUARD EMERGING MARKET ETF, WISDOMTREE EMERGING MARKETS EQUITY INCOME ETF, ISHARES MSCI EAFE SMALLCAP ETF, VANGUARD FTSE ALL WORLD EX-US SMALL ETF), US BONDS (ISHARES BARCLAYS 1-3 YEAR TREASURY ETF, ISHARES 3-7 YEAR TREASURY BOND ETF, ISHARES 10-20 YEAR TREASURY BOND ETF, ISHARES BARCLAYS MORTGAGE BACKED ETF, ISHARES IBOXX INVESTMENT GRADE CORPORATE ETF, VANGUARD SHORT-TERM CORPORATE BOND ETF, ISHARES BARCLAYS TIPS ETF, PIMCO 1-5 YEAR US TIPS INDEX ETF, SPDRS HIGH YIELD ETF, SPDR BARCLAYS SHORT-TERM HIGH-YIELD BOND ETF, POWERSHARES SENIOR LOAN ETF), FOREIGN BONDS (SPDRS BARCLAYS INTERNATIONAL TREASURY ETF, SPDR BARCLAYS SHORT-TERM INTERNATIONAL TREASURY BOND ETF, POWERSHARES EMERGING MARKET DEBT ETF, SPDRS DB INTL GOVERNMENT INFLATION ETF, POWERSHARES INTERNATIONAL CORPORATE BOND ETF), HARD ASSETS (POWERSHARES DB COMMODITY ETF, SPDRS GOLD ETF, ISHARES SILVER TRUST ETF, JP MORGAN ALERIAN MLP ETN, SPDRS DJ GLOBAL REAL ESTATE ETF), AND HYBRIDS (ISHARES S&P US PREFERRED STOCK ETF, SPDRS BARCLAYS CONVERTIBLE SECURITIES ETF).

Ross Marynell earns CRPC® Designation

We congratulate Ross as he earned the Chartered Retirement Planning Counselor designation. Individuals who hold the CRPC® designation have completed a course of study encompassing pre-and post-retirement needs, asset management, estate planning and the entire retirement planning process using models and techniques from real client situations.

Retirement Income Planning, “How To” or “How Much”?

I recently searched the terms “Retirement Income Planning” on the web and found that the majority of returned searches focused primarily on “How to” generate retirement income, with only a few posts beginning with a more logical question–“How much” income do you need?

Certainly there is no shortage of opinions on how to generate retirement income. Academics, economists, advisors, and insurance professionals have broad, and often polarizing, opinions. Income generation ideas include: systematic withdrawals, flooring strategies, bond ladders, dividend investing, and annuitization. The debate continues into the wealth management field as to which investment strategy is best suited for the majority of retirees.

As important and interesting as these conversations may be (all depends on what you find interesting!), these varying opinions may fail to reach reader’s expectations because they are missing a critical piece of information—“How much income do you actually need and desire to have in retirement?”

The amount of income you plan to generate from savings, along with your views toward growth and safety, should have a substantial influence on determining the best path to create a suitable stream of income in retirement. In other words, there is no universal strategy for the masses, only what is right for you.

So how much income should you plan on replacing?

To help uncover your retirement income number, grab a pen and paper and complete the following exercise:

Let’s begin by calculating the essential and lifestyle expenses you anticipate in retirement (what you expect to spend). Take that number and subtract your anticipated Social Security and pension income (what you expect to receive before using your savings). If you have not recently estimated your Social Security benefits, you can calculate expected benefits at www.ssa.gov. For a more detailed analysis of the claiming options available to you through Social Security, please contact us for a complimentary Social Security Analysis.

If you complete the calculation above and your expenses exceed your base income, then you have an income shortfall.  With this figure, you’ve likely pinpointed how much income you’ll need to start producing from your savings to sustain your desired quality of life.

So, with a detailed budget and a clear understanding of your expected Social Security and pension income, you will be more prepared for a thorough “How To” conversation with your financial planner.

The Wisdom of Warren Buffett

“American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don’t forget that shareholders received substantial dividends throughout the century as well.)

Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.”

–Warren Buffett

*The quote above is taken from Berkshire Hathaway’s most recent annual letter.  It was cited by Morningstar in their most recent article about the stock market.

At the end of every year, analysts from all disciplines will weigh in with their forecasts for the next year. In one recent publication from a very well-known financial paper, I read 3 extremely different predictions for 2014. One expert predicted that the market was due for an immediate correction, and on the very next page, there was another gentleman saying that the bull market would continue to run (although not quite at the pace of 2013). I turn the page and we have yet another analyst saying that he didn’t know why everyone was giving predictions because no one knew what was going to happen.

The beautiful thing about editorial content that promises some type of prediction or foretelling of the future is that it’s almost a surefire way to attract readership. Just about every investor that is looking for the extra edge drinks it all in, hoping for the one secret that will unlock the mystery of the stock markets.

Sadly, most people tend to suffer from confirmation bias, which leads them to only confirm their pre-existing opinions.  People who are looking for growth will seek out analysts forecasting more growth. Fearful investors who are anxiously looking for any sign that another market apocalypse is upon us will cling to the words of the most bearish analysts. And, for those who don’t know what to believe, many will end up more confused that they were to begin with in the first place.

Here’s what you need to know– No one, I mean no one, can predict what will happen in the stock market on a consistent basis over the long term. Understand that if you are going to be an investor, you must first realize that, yes, there is money to be made. Yes, it can be scary. However, if you can stay focused on your long-term goals, hold steady when the markets face volatility, and play for the long-run; you have the best chance at winning (at least that’s what Warren Buffett thinks).

Why do YOU invest?

“Knowing WHY is essential for lasting success and the ability to avoid being lumped in with others.”  –Simon Sinek

 

Do you ever stop to think about how many different decisions we make every single day?  The average person potentially faces hundreds of decisions every single day, but few of us actually realize that our days are so filled with actionable choices. The reason for this innocent blindness is that we have conditioned our mind to make so many of the choices for us–to remove the actual thinking part of the decision and just be on autopilot.

Don’t believe me?  Consider when you are driving your car–how many actions do you actively think about? Do you have to focus intently on staying in your lane? Do you have to send brain signals to you foot so that you press the brake in time to stop for the red lights? If you are not a teenage driver, the odds are your body and mind have conditioned themselves to operate that vehicle on a subconscious level—allowing your mind to focus on more important things like what song you want to play in your mp3 player or where you might eat lunch or “did I forget shut the garage door again?”

We don’t realize it, but we live so much of our lives on autopilot simply because our brains are wired to do that—take care of the easy stuff so that more brainpower is available to focus on difficult tasks.  Sadly, this also applies to our financial lives, especially in the realm of investments. You see, I have rarely met anyone who doesn’t believe they need to save more or invest more money for retirement. It’s become a social norm in our society that, for the most part, investing in a 401k, IRA, or some other type of account is just what you do.

Unfortunately, that’s where our minds fail us once again…by focusing on the WHAT or the HOW before we focus on the WHY. I meet clients from all walks of life that have a portfolio of some sort. In truth, portfolios are not hard to put together…especially now that we have all of the online discount brokers (I’m trying to hide my sarcasm).  What IS hard, however, is helping someone understand why they are actually doing what they are doing—you know, what’s the real purpose?

The-Golden-Circle

Too many institutions and representatives in the financial sector only focus on the WHAT or the HOW.  Very few take the initiative to engage their clients on a personal level to find out the WHY. I know this because whenever I speak with clients that have been working with another group, they react as if they’ve never been asked that before…and it’s because they haven’t.

What is your WHY?  Why do you Invest?

Michael Baker earns the CFP® Designation

We congratulate Michael as he earned the Certified Financial Planner Practitioner designation.

 

CFP® – Certified Financial Planner  The CERTIFIED FINANCIAL PLANNER™, CFP® and federally registered CFP (with flame design) marks (collectively, the “CFP® marks”) are professional certification marks granted in the United States by Certified Financial Planner Board of Standards, Inc. (“CFP Board”).  It is recognized in the United States and a number of other countries for its (1) high standard of professional education; (2) stringent code of conduct and standards of practice; and (3) ethical requirements that govern professional engagements with clients.