Searching for yield outside savings accounts, CDs or treasuries

 A few nights ago my 7-year-old daughter and I sat on her bed and opened up her “Ariel the Mermaid” coin bank as it was starting to overflow.  While we were rolling up the coins she asked, “What are we going to do with this money?”  I explained we are going to the bank and deposit it into her account and, in exchange for holding it, they will pay her more money.  Her eyes lit up and she asked how much. Putting it as simply as possible, I explained that her $20 bill would earn about $.05 in one year.  She looked at me with her brow furrowed and said why would I do that? 

Why, indeed, is a good question many savers are asking themselves today.  People are feeling compelled to take much more risk in order to earn what a simple savings account was paying me when I was a teenager.

Seeking Higher Returns

During the recent Morningstar Investment Conference, many portfolio managers were expressing concerns on this vey topic.  Investors have gravitated toward high yield and floating rate bonds at alarming rates in the past few years in the absence of a reasonable interest rate from the savings accounts, CDs or treasuries. The chart below shows how many billions of dollars have flowed into strategies that invest in floating rate (blue bar) and high yield bonds (gray bar) each of the last ten years. You can see the spike in the past five years as rates were driven to historical lows by the Federal Reserve.

1^st Quarter JP Morgan Guide to the Markets; Flows include ETFs and are as of May 2014. Past performance is not indicative of comparable future results.

Many investors don't realize that high yield bonds are highly correlated to stocks and when stocks go down these types of bonds will also likely take a hit.  Even more concerning managers like Ben Inker of GMO and Michael Hasenstab of Franklin Templeton, see a lack of liquidity in this market.  This means if they do start to go down and people start running for the exits, there may be no willing buyers in the marketplace until the prices get low enough, resulting in potentially amplified losses to the investors left holding the bonds.  Suddenly the 4.9%* interest rate doesn't sound high enough for taking on that level of risk.  These types of investments should be no substitute for a regular savings account even though the interest rates are embarrassing!

So while my daughter may never know compelling savings accounts yields in her childhood, I still find teaching her this simple process of money and saving an invaluable lesson to start at a young age!

*Yield on Barclays Capital Corporate High Yield Index as of 6/30/2014

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. 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. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise. High-yield (below investment grade) bonds are not suitable for all investors. When appropriate, these bonds should only comprise a modest portion of your portfolio. All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. The Barclays Capital High Yield Index covers the universe of fixed rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, and 144-As are also included. Michael Hasenstab, Ben Inker and GMO are independent of Raymond James. C14-022057

Strategy for an Intra-Year Market Drop

 With minutes remaining in the game, my youth hockey team had just scored, sending the nail-biter state championship into overtime. I was 11 then, and I remember the packed stands full of parents waving signs and pom poms. The other teams were even cheering us on. Only a few minutes into overtime, I watched the puck deflect off our own player's skate into the net, ending the game and our season in agony. Through the tears and heartbreak, I'll never forget what coach said to us, "we didn't play our game." Not the most comforting line after such a loss, but it was 110% true.

That year, our team had been undefeated until our final opponent took us down. The reason we were so successful was because we had a game plan that worked for us and we stuck to it. It wasn't anything fancy; we just did the simple things really well and were consistent. If we had our backs against the wall or faced adversity during a game, we stayed true to what we knew about winning. But that's not what we did when it mattered most. We let a very good team get into our heads and it caused us to make bad decisions. We didn't stick to the game plan that had provided us with so much success through the season - something that can also easily happen to investors during a market pullback or a time where there is fear and uncertainty. 

At the Raymond James national conference in Washington D.C. in May, I listened to a JP Morgan presentation about past, present, and projected market conditions. The most intriguing fact I heard was this:

Since 1980, the average intra-year market decline has been 14.4%. However, 27 out of those 34 years, the market has closed the year positive.

So what does that tell us? To me, it highlights the importance of having a game plan and a strategy and sticking to it. The market will not always move in a straight line up like we have seen over the past few years, so being prepared for bumps along the ride is imperative. As my hockey team experienced, when you begin to deviate from a disciplined strategy, bad things can happen.

Making knee jerk decisions during difficult times can cause you to stray off your path to financial independence. This is when we, your financial planners, step in as coach to talk you through the game plan that we have helped you establish. It is a team effort and working together through the good times and bad is what we do best for our clients.

Nick Defenthaler, CFP® is a Associate Financial Planner at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. C14-019163

What should I do with bonds if interest rates go up?

 Lately the bond markets have been making headlines.  It’s no secret that we, as a country, are in a historically low interest rate environment and, as a result, a lot of so-called “experts” are talking about rising interest rates in the near future.  These experts usually go on to state that if interest rates begin to rise and you have bonds you could face substantial losses.  Unfortunately, like many things in finance, this type of blanket statement is misleading because not all bonds are created equal! 

Traditional Bonds

First, let’s dissect their argument to understand why an investor might lose money in a rising interest rate environment. Bonds are typically issued by a government, a municipality, or a corporation.  These entities need money for a variety of purposes and one way they can get that money is by taking a loan from investors.   In exchange for an investor loaning that money to these entities, there is a promise to pay back the original loan amount (principal) as well as an interest rate paid on that principal over the life of the loan.  The challenge and the risk to current bond investors is that if interest rates begin to rise, the traditional bonds they hold might not look as attractive to new potential investors.  If you think about it, why would I, as a new potential investor, want your bond paying an interest rate of 3.5% when I can buy a new bond from the same company (or government/municipality) paying 4.5% today?  Assuming all else is equal except the rate of interest, then I think the answer is pretty clear. It would be silly for me to purchase a bond paying 1% less. 

So how does the bond holder with the unwanted 3.5% bond get rid of it?  The answer is he has to sell it at a reduced price.  This reduction in price is the big risk that experts keep referring to.  It’s important for investors to remember that if you hold individual bonds you will get your principal back at maturity as long as the company stays in business and doesn’t default.  Regardless of what your statement says the bond is worth at any given time, that value or number only applies if you choose to liquidate the bond at that exact point in time.  

Hopefully, this very simplistic example helps you understand the inherent risks involved with more “traditional” bonds and a rising interest rate environment.  As I said, not all bonds are created equal, and some types will probably benefit from a rising interest rate environment. 

Floating Rate Bonds

It’s probably clear by now that the biggest issue, in a rising interest rate environment, is the fixed rate of interest that “traditional” bonds pay.  If rates started to rise, and the interest rate on your bond rose along with it, then you probably wouldn’t have to discount your bond much, if at all. 

So are there bonds out there that can rise as overall market rates rise?  Yes! They are called floating rate bonds.  A floating rate bond typically “resets” its interest rate annually, although some will reset more frequently.   Because of this “reset” floating rate bonds can be a very attractive investment option when overall interest rates are projected to rise in the near term.  Please keep in mind that floating rate bonds aren’t without risk of loss…the point is just that they typically maintain their secondary market value even when interest rates rise.

Now that you have read this, the next time you see the headlines that claim bonds are bad and to avoid them like the plague, you should have a good sense of what type of bonds they are referring to.  Also, know that it is still possible to make money in bonds in a rising interest rate environment!  Floating rate bonds may or may not be suitable for your portfolio.  In order to make that determination you would need to perform a total portfolio analysis in coordination with your financial professional.

Matthew Trujillo, CFP®, is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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As with any fixed income investment, there is a risk that the issuer of a floating rate investment will be unable to meet its payment obligations. In addition to the risk, floating rate bonds also face the following risks:

Reference rate risk: While the market value of a floating rate bond under normal circumstances is relatively insensitive to changes in interest rates, the income received is, of course, highly dependent upon the level of the reference rate over the life of the investment. Total return may be less than anticipated if future interest rate or reference rate expectations are not met. It is also important to note that since short-term rates are usually lower than long-term rates, the initial coupon of a floating rate bond is typically lower than that of a fixed-rate bond of the same maturity.

Call risk: A floating rate bond may be issued as either non-callable or callable. If a callable floating rate bond is called by the issuer prior to maturity, the investor may be unable to reinvest funds in another floating rate bond with comparable terms. If the floating rate bond is not called, the investor should be prepared to hold it until maturity.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. 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. Any opinions are those of Center for Financial Planning Inc. and not necessarily those of RJFS or Raymond James. C14-013999

A Timely Reminder About 529 College Savings Plans

With school now out for most universities, who would want to talk about college planning?  But I couldn’t pass up 5/29 without discussing 529 plans!  All corny jokes aside, a 529 college savings plan is a fantastic vehicle to utilize for higher educational costs and something that all parents that plan on sending kids to school should at least consider.   

A 529 is a state sponsored educational savings account where the money in the account grows tax-deferred.  One of the major benefits of the account is that the funds are not taxed upon withdrawal (even growth), as long as they are used for qualified educational expenses (tuition, room & board, books, etc.)  A 10% penalty and ordinary income taxes would apply to any earnings portion of non-qualified distributions.  Many states (including Michigan) also offer a state tax deduction on contributions, up to a certain limit, which is an added bonus for the owner of the account.    

To maximize the benefits of a 529 plan, young parents can establish the account early for their children to allow for many years of potential growth. Typically, as the child approaches the first year of college, the plan becomes more conservative.  If other family members would like to assist with college expenses, they too can open an account for the child.  The child is the beneficiary of the account and the account owner or “custodian” is the person in charge of the account.  Unlike an UGMA or UTMA (which used to be a very popular savings account for school), the child does not automatically have access to the account at age 18 or 21. The custodian has complete control.  The beneficiary can also be changed on the account at any time, but typically this occurs if the child gets a scholarship or decides to not attend college.  This provides flexibility so the money can still be utilized for educational expenses for another child or family member.

As with any financial planning decision, a 529 may or may not make sense for your personal situation.  However, it is a great tool and resource to consider when taking on the challenge of saving for college.  If you ever have any questions about college planning or would like to dig a little deeper, don’t hesitate to contact us. That’s why we’re here!

Nick Defenthaler, CFP® is a Associate Financial Planner at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement. The official statement is available through your financial advisor, and should be ready carefully before investing. Rules and laws governing 529 plans are varied and subject to change. There is a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Before investing, it is important to consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Investors should consult a tax advisor about any state tax considerations of any investment in a 529 plan before investing. C14-015839

Trades in a Flash: The High Frequency Trading Debate

Imagine making a trade in less than the blink of an eye. That’s called High Frequency Trading (HFT) and it has generated a lot of buzz lately. HFT trades are executed between 2 and 7 milliseconds … we’re talking one thousandth of a second (1/1000).  There are as many milliseconds in one second as there are as many seconds in 16.67 minutes.   

High Frequency Trading Changing the Spreads?

There is a pretty lively debate going on right now between proponents of HFT and some outspoken critics.   Proponents of HFT claim that it’s good for the markets because it creates a lot of liquidity and volume for exchanges so the spreads aren’t as wide for different types of securities. For instance, if you wanted to buy Ford stock back in the 90’s the bid (what someone was willing to buy it for) and the ask (what someone was willing to sell it for) may have been as much as .125 or .25.  However, nowadays, if you look at the bid/ask spread for most heavily traded stocks (such as Ford) it’s usually as little as one penny.  The proponents of HFT claim that these “tight” spreads are because of all the activity and volume their computers bring to the markets.

Is High Frequency Trading Essentially Front Running?

The critics of HFT say that these computers and algorithms are engaging in front running.  That’s an illegal practice involving having prior knowledge that a large trade is going to take place, and just before that trade happens you go in and buy the stock yourself.  When the large trade is placed, it will naturally eat up all of the available shares at that price point, and push price slightly higher allowing the front runner an opportunity to exit with a few pennies profit.   

So why should we care?  If you are a long term investor, the simple answer is that paying a few extra pennies for your Google or Apple stock probably doesn’t matter. However, if you are a day trader, then I hate to break it to you, but the deck may be strongly stacked against you.

Matthew Trujillo is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

In reality, this practice mostly impacts those who are in the actual business of trading stocks. And more narrowly, the debate concerns a particular segment of traders who leverage speed to gain an advantage. Raymond James has long held that investing in the markets, with the assistance of an advisor, can help clients best meet their long-term goals through strategic, customized financial planning. We encourage our clients to buy and sell in context of those long-term plans, rather than make quick trades. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. C14-009411

The Investment Pulse: What we’ve heard in the First Quarter

At The Center each of us spends a substantial amount of time reading, listening to speakers and attending conferences. The goal is to provide our clients with the best possible advice. Here’s a brief summary of the high points the Investment Department has heard this year so far.

Municipal Bonds

In January, Melissa Joy and Angela Palacios spoke with a Municipal bond specialist from T. Rowe Price. We discussed the current environment and what may affect municipal bonds looking ahead.

• Distressing news from Detroit and Puerto Rico last year caused retail investors to flee from municipal bonds in general, creating what many believed to be an excellent investment opportunity.

• This caused unusual cross-over buying which means that investors that typically only invest in taxable bonds were compelled by valuations and yield to purchase tax free bonds for portions of their portfolios. Banks are even utilizing municipal bonds as part of their liquid investment buckets. These are rare events.

• Tax filing time creates buying opportunities for municipal bond investors as taxes are top of mind in the March/April time frame when checks are being written to pay for taxes due.

Stock Market Valuations

There has been much heated debate as to whether the stock market is over or under valued on the fifth anniversary of the bull market. We attempt to review varying arguments in order to make educated decisions on the allocation of our portfolios. One extreme yet interesting view-point comes from Eric Cinnamond, Portfolio Manager for an Aston/River Road fund. Eric has strict valuation guidelines as to what he will and will not pay for small companies and is willing to hold cash in absence of opportunities.

• He has more cash than he ever thought he would have, currently 70% of his allocation. He feels valuations are very bloated and that for valuations to continue to expand, the U.S. economy will have to continue running at peak profits with no recession indefinitely (he did state that these valuations can continue for quite some time before correcting).

• When we get to these points in the market cycle, you start to hear the question, “Is it different this time?” Cinnamond says he is getting this question a lot lately because of his contrarian viewpoint.

• He will continue to hold cash as dry powder to deploy in the event of a market pull back and stands by his process.

Bond Giant Woes

In mid-January, PIMCO announced that Mohamed El-Erian resigned his role as co-Chief Investment Officer and Chief Executive Officer for PIMCO funds. While he had only an indirect impact on our PIMCO holdings we are continuing to watch further developments at PIMCO. Bill Gross & Rob Arnott remain the key managers to the PIMCO strategies we utilized for clients. While it currently appears Bill Gross is a difficult personality to work with he continues to provide excellent returns compared to the bond market in general.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. 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. Any opinions are those of Angela Palacios and not necessarily those of RJFS or Raymond James. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. Income from taxable municipal bonds is subject to federal income taxation; and it may be subject to state and local taxes. Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.

Tactical Asset Allocation Dashboard

The below chart reflects the Center for Financial Planning’s Investment Committee current positioning relative to our longer-term strategic models.

• Maintain a modest equity overweight as Leading indicators suggest better global growth ahead

• Expect equities to outperform bonds and cash and fixed income to underperform

• Continue to favor tactical allocation strategies

• Underweight U.S. equity allocations given relative valuations and we see potentially better opportunities in select international equities.

Asset Class Definitions

Core Bonds: Securities with primary exposure to bonds with historically low default risk and high correlation to Barclay’s U.S. Aggregate Bond Index.  This includes Investment Grade bonds with Intermediate Maturities.  This index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.  These major sectors are subdivided into more specific indexes that are calculated and reported on a regular basis.  Municipal Bonds are also included.

Strategic Income: Securities with primary exposure to bonds with less interest rate risk and types of bonds that are less correlated to the Barclay’s U.S. Aggregate Bond Index.  This covers the universe of fixed-rate, non-investment grade debt (High Yield).  Canadian and global bonds (SEC-registered) of issuers in non-EMG countries are included.

U.S. Large Cap Equity: Securities correlated to the Russell 1000 Index: Based on a combination of their market cap and current index membership, this index consists of approximately 1,000 of the largest securities from the Russell 3000. Representing approximately 92% of the Russell 3000, the index is created to provide a full and unbiased indicator of the large cap segment.

U.S. Small/Mid Cap Equity: Securities correlated to Russell Midcap Index: A subset of the Russell 1000 index, the Russell Midcap index measures the performance of the mid-cap segment of the U.S. equity universe. Based on a combination of their market cap and current index membership, includes approximately 800 of the smallest securities which represents approximately 27% of the total market capitalization of the Russell 1000 companies. The index is created to provide a full and unbiased indicator of the mid-cap segment.  Securities also correlated to the Russell 2000 Index.   The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 Index is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.

International Large Cap:  Securities are correlated to the MSCI EAFE.  This index is a free float-adjusted market capitalization index that measures the performance of developed market equities, excluding the U.S. and Canada. It consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

International Small/Mid Cap:  Securities are correlated to the MSCI EAFE Small-Cap Index.  This index is an unmanaged, market-weighted index of small companies in developed markets, excluding the U.S. and Canada.

Strategic Equity:  Securities with exposure to alternative investments that are less correlated to stocks and bonds with expectations and investments that can span across asset classes.  Also includes investments in managed futures.

*This material is for informational purposes only and should not be used or construed as a recommendation regarding any security outside of a managed account. Any opinions are those of The Center for Financial Planning and not necessarily those of Raymond James. Expressions of opinion are as of 03/31/2014 and are subject to change. Diversification and asset allocation do not assure a profit or protect against loss. The prices of small company stocks may be subject to more volatility than those of large company stocks. International investing involves additional risks such as currency fluctuations, differing financial and accounting standards, and possible political and economic instability. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer's credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of a portfolio. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. Global bonds tend to be denominated in the currency of the country in which they are issued. Most global bonds have higher default and currency risks than U.S. bond issues. Also, in some cases foreign governments don't allow the purchase of government bonds by non-residents. Managed futures involve specific risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. You should consider the special risks with alternative investments including limited liquidity, tax considerations, incentive fee structures, potentially speculative investment strategies, and different regulatory and reporting requirements. You should only invest in hedge funds, managed futures or other similar strategies if you do not require a liquid investment and can bear the risk of substantial losses. There can be no assurance that any investment will meet its performance objectives or that substantial losses will be avoided. Individuals cannot invest directly in any index. Past performance does not guarantee future results.

5 Steps to Being Cautious While Still Taking Life’s Chances

In the arena of finance, risk is inherent.  Think about the risks you take everyday. When it comes to investment expectations there is always the risk that the outcome will be different than anticipated. When it comes to the income your family depends upon, there is always the risk of job loss. When it comes to budgeting, there is always the risk of inflation, which could leave you without enough to keep up with the rising cost of things around you. When it comes to your family, there is always the risk that someone could face a health challenge or a long-term illness.

Learning About Risk

After 25 years working with people, I have seen families lose children and grandchildren to tragedy.  I have witnessed divorce and marriage and have seen first-hand financial windfall and destruction. Helping clients through all this has helped me gain a better understanding of risk tolerance and realize that risk preferences vary greatly.  Most people want to avoid risk as much as possible, but many have to learn that the hard way.  Remember your first loss? The big one? How did it affect you? If it was truly the big one, then it made you sit up and take notice.  It left an impression on you and your decisions.  And it may have given you a deeper understanding of what risk really means.

5 Steps to Managing Risk

Despite the fact that we all must learn to live with risk, there are steps we can take to help mitigate the downside when it comes to financial planning:

1. Diversification, asset allocation and rebalancing: While this won’t make you rich quick, it should help reduce overall portfolio volatility.

2. Insurance: For a relatively small cost you can provide for the safety of a young and growing family for many years and provide protection in case of premature death or disability.

3. Emergency Funds: Always maintain the appropriate emergency balance for your situation.  A simple rule of thumb is 3-6 months of expenses. Then you may want to consider choosing investments that are marketable and liquid for your taxable portfolios.

4. Long-term Care Insurance: To avoid a catastrophic financial blow if a spouse develops a long-term illness and needs expensive health assistance, consider long-term care insurance when you’re in your late 50s.

5. Estate Planning:  By taking just a few minutes to write out a plan, there’s a better chance of things happening as you wish. Write a holographic will (handwritten and signed) or go to your state website and pull off the appropriate documents (like wills, powers of attorney, patient advocate designations, etc.). Complete them or set up a meeting with an estate planning attorney to help you with this process. 

If you need help getting started with any of these steps or making a personal plan to help you prepare for life’s inherent risks, contact me at matthew.chope@centerfinplan.com.

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.

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.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute investment advice. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Diversification and asset allocation do not ensure a profit or protection against loss. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Investing involves risk and you may incur a profit or loss regardless of strategy selected. C14-005525

Investment risk is real. Every day. Every year. In up and down markets.

It is generally in good times – when, for example, US Equities are performing well  – that we all could use a friendly reminder like this:

The management of investment risk is constant in successful investing.     

Benjamin Graham, known as the “father of value investing”, dedicated much of his book, The Intelligent Investor, to risk.  One of his many timeless quotes states, “The essence of investment management is the management of risks, not the management of returns.”  This statement can be counterintuitive to many investors.  Risk does not have to be an alarm; rather a healthy dose of reality in all investment environments.

Our Take on Risk

How do we at The Center attempt to manage risk as stewards of approximately $850 million dollars? 

•   Executing a defined investment process

•   Individual investment policy statements

•   Asset Allocation – both Strategic and Tactical

•   Rebalancing guidelines

We have been managing client assets for over 28 years.  We fully understand and appreciate that investment returns are important. We also know that risk is an important element in constructing portfolios intended to fund some of life’s most important goals such as sending a child or grandchild to college, funding a long and successful retirement, having sufficient funds for long-term health needs, and passing a legacy to loved ones.  While no one can guarantee future investment returns, our experience suggests that those following our risk management tactics above may better stay on track with their financial plan. 

If you are a client, we welcome the opportunity to talk more about how your portfolio is constructed.  Not a client?  We’d enjoy the opportunity to share our experience and review your goals and risk.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

Investing involves risk and investors may incur a profit or a loss. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. C14-004278

Downside Hedging: The Diversified Portfolio Effect

 Wow, what a year for the markets in 2013!  Despite a rough end to 2012, uncertainty regarding the affordable care act and fiscal cliff, political tension in Syria and a government shutdown, U.S. stock markets surged and reached record highs.  When all was said and done, the Dow was up 26.5% and the S&P 500 rose by 29.6% for the year.  When you see numbers like that, you may think, “My accounts did very well this year, but they aren’t up close to 30%!”  That is a perfectly natural reaction. One reason you most likely did not see these types of returns is due to diversified asset allocation. 

Building a diversified portfolio using asset allocation can be tricky.  Let’s use a 60% stock, 40% bond portfolio as our example. Stocks are typically more risky and bonds tend to be more conservative and they often work inversely with one another.  When one is doing well, the other may be lagging.  This can help to even out returns and reduce the large swings in account values.  Within those two categories, one may see several different classes that comprise the 60% stock and 40% bond allocation. The stock side may include domestic large and small cap equities, international, emerging markets, energy, real estate, etc.  The bond side may include options such as short-term corporate debt, international, emerging markets or government bonds, etc.  The key is to build a portfolio that fits an investor’s individual long-term goals and needs so that the proper amount of stock and bonds can be utilized to help achieve those goals over different market conditions. 

In the chart below, we compare a $500,000 portfolio that is invested in  60% stock, 40% bonds and one that is 100% invested in stocks, as represented by the S&P 500 from 2000 – 2013.  The results are pretty staggering.  As you can see, in years the market did well, the diversified 60/40 portfolio lagged the performance of the S&P 500.  This is something we would expect because of the portfolio’s exposure to bonds.  However, in years where the S&P 500 did very poorly, such as 2001 and 2008, the 60/40 portfolio was down significantly less compared to its counterpart.  The downside hedging is what I want to focus on.  When one loses 40% of their account values like many investors experienced in 2008, he or she would need to realize a 67% gain to get back to even.  It can take a very long time to recover such substantial losses like we saw in 2008.  Diversification is the main reason why the 60/40 portfolio is worth $272,000 more than the all-stock portfolio during the same time period.

Indices Used: S&P 500, MSCI EAFE, & Barclays Cap Agg

 

Sources: Barclays Cap Agg Indices, Standard & Poor’s Indices, MSCI EAFE, and Bloomberg Markets

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. 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. 

Let’s be honest – we all wish we could have the best of both worlds.  Who wouldn’t want to eat poorly, not exercise and still have that six pack?  The same can go for investing.  Many investors want to achieve 30% returns like we saw in 2013, but they don’t want to lose money in an environment where stocks decline 30%.  This is why The Center builds diversified portfolios for clients using asset allocation.  Asset allocation is not necessarily a “flashy” way of investing, nor does it get a dedicated nightly television show like Jim Cramer.  However, the lack of media attention has no bearing on its potential effectiveness for long-term, disciplined investing.  We understand and can empathize with clients when they are concerned that their accounts may not be participating in a market run up as much as they are seeing in the headlines. However, it is our job as your financial planning team to discuss the reasoning for this discrepancy and to help keep you focused on the long-term plan, which is what ultimately leads to investor confidence.

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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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. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. C14-003064