3 Ways to Prepare for a Market Correction

Contributed by: Matthew E. Chope, CFP®

Markets need to correct from time to time – I believe it’s as natural as the day is long. We may even be past due. I attend a lot of conferences and lectures about everything related to finances, financial planning, investments and economics – All the fun stuff!  Well, fun to me.

Recently, I heard the presenter talk about this chart, the “S&P 500 Growth/Value index Ratio”.  He actually said the S&P 500 still has a ways to go - like 25% before it's at the same peak of 2000. My thought was: Why anyone would want to get back to the type of silliness we had in 2000? 

Three years ago I did not see excesses in the market valuations and most economic indicators were still getting better, and rightly so.  I believe today valuations are rich.

Economic Cycle in Extra Innings

Someone asked me recently what inning we’re in for this economic cycle. I responded: Probably the 13th inning! The average lifespan of a US economic cycle is 4.9 years and we are almost at our 6th year.  However, there may be time left. We could see the rest of this inning, maybe more, before a 10% downturn or more.  A 10% downturn is a very normal annual event, historically speaking. And we have not had a 10% downturn in the Dow or S&P 500 since the 3rd quarter of 2011 -- almost 3 ½ years.

3 Steps to Prepare for Volatility

At The Center, we strongly believe in a philosophy of investing, not attempting to time the market.  So I’m not here telling you this a market top.  No one is smart enough to do such a thing with any consistency and getting in and out can be more detrimental than staying put over the long haul. These are the 3 steps I suggest to my clients no matter the market cycle:

1. Make sure your long-term allocation is still appropriate

2. Double check that your time frame is correct for the investments in your portfolio

3. Review and consider your risk tolerance for those investments

If there is money you need in the next 12 months for a project or money invested for less than 5 years, discuss with your planner where to put this so that it has less volatility. In my next blog, I’ll take a look at the bigger picture and what to watch for signs of a potential downturn. 

Matthew E. Chope, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Matthew Chope, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Keep in mind that 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 does not guarantee future results. 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. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

View from the Morningstar Conference

 Nearly 2,000 people gathered at McCormack Place in Chicago this June.  The views of the Chicago skyline, while beautiful, were not the views I flew to Chicago to see.  Advisors, asset managers and press gather once a year at this conference to listen to some of the greatest minds in investing share their views of the markets and economies around the world.  This is one of my favorite conferences of the year. 

We heard from legendary investors including Michael Hasenstab, PIMCO's Bill Gross a.k.a. The Bond King, and AQR's Cliff Asness a.k.a. The Father of Momentum Investing.

Bill Gross: The New Neutral

Keynote speaker, 70-year-old Bill Gross did not disappoint.   Very aware that his image has been dinged in recent months with the departure of his heir apparent Mohammed El Erian, and subsequent departure of $50 billion of money flowing out of his flagship product, he took the stage wearing sunglasses and spent the first 10 minutes of his speech poking fun at himself while jokingly trying to brainwash the crowd and press Manchurian Candidate style.  All fun aside, he came to the conference to coin a new phrase the “New Neutral".  He is encouraging investors to look at interest rates from a different, more muted perspective.  What does this mean for investors?  Overall lower return expectations going forward for stocks and bonds.  This is an extension of PIMCO’s 2009 “New Normal” which stated that economic growth will be sluggish as it has been. 

Employment Outlook: Labor Shortages?

Bob Johnson, Morningstar's very own economist, predicted that next summer at this conference the hot topic of discussion will be labor shortages.  He explained that the unemployment rate remains high despite the extremely large amount of open requisitions for new job postings.  He argues that there is a mismatch in job skills causing the unemployment rate to stagnate despite companies needing to hire so many.  He goes on to explain that the Federal Reserve cannot fix this skill mismatch, only the private sector, corporations and individuals, can acquire the necessary skills needed to match people to the needed job openings.

International Opportunities

Emerging markets and Japan were hot topics of discussion.  "Go anywhere" Investment managers, with the world as their oyster, prefer to access emerging markets through companies domiciled in developed markets that derive most of their revenues by selling to emerging market consumers.  Japan was a hotly debated topic, with about half of the experts loving it and half not wanting to touch it with a 10-foot pole.

In addition to these larger investing and macro-economic themes, I also find value in speaking directly with portfolio managers about their investing processes and trying to discover new strategies that may be beneficial to our clients’ portfolios.  There is never a shortage of ideas after a few days spent at Morningstar listening and learning!

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Please note that international investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in wellestablished foreign markets. Investing involves risk and investors may incur a profit or a loss. Bob Johnson, Michael Hasenstab, Bill Gross, Cliff Asness are independent of Raymond James. Any opinions are those named herein and not necessarily those of RJFS or Raymond James. C14-022058

Raymond James Alternative Investment Conferences

 Risk seemed to be the word on everyone’s lips at two recent Raymond James conferences. In early April, Portfolio Manager Angela Palacios attended a conference in New York dedicated to alternative investment. She attended sessions where experts spoke on topics including Venture Capital, Real Estate, and Managed Futures. The goal of many of these investment options is to seek to reduce overall portfolio risk over time. Because volatility has been very low over the past few years, investors have ignored some of these risk-mitigating investing options, leaving them behind the flashier equity market returns. Angela’s take-away from the conference:

This is precisely the time to be reminded why these alternatives are an important aspect of all portfolios.”

Center Partner Matthew Chope attended another Raymond James conference in April. The Las Vegas alternative investment conference echoed the theme of risk management. Matt attended sessions that broadened his knowledge about mitigating risk by adding specialized securities to portfolios. Matt said the strategy comes with challenges:

We want to find ways to mitigate risk without impacting long-term returns. I came back looking for ways to implement these ideas for our clients on a case-by-case basis.”

With a vigilant eye on the ever-changing landscape of investing, The Center team is committed to staying at the forefront of the latest strategies and then putting them to work for our clients.

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Alternative investments are available only to those who meet specific suitability requirements, including minimum net worth tests. Please review any offering materials carefully, and consult with your tax advisor or accountant prior to investing, There are special risks involved with alternative investments, including investment strategies, and different regulatory and reporting requirements. There can be no assurance that any investment will meet its performance objective. Futures trading is speculative, leveraged, and involves substantial risks. Investing involves risk and there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss. C14-013296

Happy St. Patrick's Day!

 

Happy St. Patrick's Day from everyone at The Center!

Research Trip to Wall Street

In April, Dan Boyce and Melissa Joy joined a small group of financial planners for three days visiting Wall Street Firms. With an exclusive group of 30 participants from around the country, discussions were highly interactive. The main focus of the meetings was on Asset Allocation and Portfolio Construction in today’s market environment. Main sessions were held at Blackrock, JP Morgan Asset Management, and Goldman Sachs Asset Management.

The low interest rate environment and future return scenarios for bonds was an enduring theme across firms. It was interesting to see different strategies and perspectives based upon individual firms. Perhaps not surprisingly, the European debt crisis was also a dominant topic. We also always find value of being able to “look under the hood” of financial firms on their turf.

In addition to the larger group meeting, Melissa visited portfolio managers at IVA and American Century. Intellectual curiosity is a cornerstone of our research process and an important component to our investment committee decisions is hands-on due diligence. One of the highlights of the trip was sharing ideas with other financial planners and wealth management firms. We value insights from our peers and are always open to new ideas.

Center Team Attends Invitation-only Raymond James Investment Conference

Angela Palacios, Melissa Joy, and Tim Wyman. The three headed to St. Petersburg, Florida January 25^th and 26^th to attend the Portfolio Manager Group investment conference. Top industry experts talked portfolio monitoring, analyzing risk in portfolios, and even about the current political environment’s impact on investments.

“It is very energizing spending time with a group of peers and sharing ideas,” Angela said of the conference. “It provides valuable insight into how to better serve our clients.  Also, it is always a great opportunity to hear from economists and money managers in person as this is key to our investment decision process.”

Melissa and Tim joined the experts at the podium, sharing The Center’s processes in the portfolio monitoring space. Tim explained the history of The Center’s Investment Process and Melissa detailed ten tips for monitoring investments for clients. The audience was particularly interested in learning about our Due Diligence Questionnaire, which is a pre-requisite for investment in our model portfolios. Our investment communication process and firm-wide investment strategy were also well-received.

The advisors at the conference are part of an ongoing Institute of Investment Management Consulting group (IIMC) that was formed last year.  The goal of the IIMC is to provide institutional quality education for investment management. 

Learning from peers and sharing with others puts our process to the test. By that standard, our trip was an overwhelming success. And, coming from Michigan, the weather wasn’t half bad either.

Clients and Friends: Please Join Us

WHAT: 2012 Financial Planning & Investment Opportunities FOR: Clients and Friends of The Center Clients are encouraged to bring a guest WHEN: Offered at two convenient times. Please choose which time works best for you! Tuesday, February 14th, 10:30 am - noon Wednesday, February 15th, 7:00 pm - 8:30 pm WHERE: Bloomfield Twp Public Library 1099 Lone Pine Road, Bloomfield Hills, MI 48302 www.btpl.org CONTACT INFORMATION: Gerri Harmer at (248) 948-7900 or Gerri.Harmer@CenterFinPlan.com www.CenterFinPlan.com

Register Online Now! Register for: Tuesday, February 14th Register for: Wednesday, February 15th

Matt Chope and Angela Palacios Sharpening the Saw in Seattle

Matt Chope and  Angela Palacios recently attended a three-day user conference in Seattle for Tamarac, our portfolio rebalancing software provider.  The meetings were held September 14–16. 

They were joined by 220 advisors, thought-leaders, and product experts from around the country.  Together they collaborated on ways to leverage our current software, learned operational best practices, and gained insights into new technology opportunities.   This collaboration is a result of The Center's ongoing commitment to utilize technology to better serve our clients.

Matt commented:  “To remain competitive, the best financial planning firms need to obtain a better return on information.  We are encouraged by our technology partner's work in this area.  They are forging on, working tirelessly toward better integration of information systems.  These systems will allow for smoother functioning of client information, with the goal of enhancing better decision making.  They are also designing a platform to develop better workflows for our staff and provide better service and overall client experience.”