Three key investment lessons from the past decade

As we unwrap a fresh new decade, we find ourselves looking both backward with appreciation for all the past has taught us and forward with energy and optimism. This kind of chameleon-eyed vision allows us to gather all we’ve learned, pack it up and take it into the New Year. Here are three lessons this decade offered that we’d all be wise to carry forward: Bull markets don’t last forever, but they don’t end with every dire prediction either. Like almost anything else in investing (and life!), the key is to analyze data and react based on knowledge and not emotion. All investors want to make money and, with sustained low interest rates, the place to do that right now is in the equity markets. So, the human desire to succeed is a key market driver and that won’t go away because a yield curve briefly inverts. Track the trends while ignoring the trendy. We live in a fast-changing, noisy world in which today’s Tik Tok video can become tomorrow’s CAN’T MISS INVESTMENT! But not every IPO gains traction and plenty of them fail outright. Patience is the key here, along with studied analysis. Who would have thought Amazon would be a good investment back in 1997 when it launched at $18 per share. Today, it trades at closer to $1,800 a share. For every Amazon, though, there’s a, which declared bankruptcy nine months after its IPO. Data drives sound decisions. Read the headlines, but don’t invest based on them. It’s important to keep up with the daily news but it’s equally important to understand their impact on the markets specifically and the economy as a whole. President Trump’s Impeachment hardly moved the markets at all, though his administration’s trade war with China had nearly a daily impact. Even when geopolitics develop into a headwind, they are just one of several factors impacting the markets. All three of these… | Read More »

Still fertile ground in the equity markets

Interest rate cuts and rising hopes for a trade deal between the United States and China are boosting confidence in the financial markets and creating fertile ground for investors who have stayed the course in the equity markets. As earnings season wraps up, the Winch Financial investment team is pleased with its current portfolios, which are well-positioned to take advantage of this extended bull market. The S&P 500, Dow Jones Industrial Average and NASDAQ Composite all have been trading at record highs recently as investors get a more positive picture of American corporations’ health. Additionally, the fact that the U.S. and China are close to finalizing a Phase One trade deal is a positive step and has changed market perceptions regarding the trade war. The low interest rate environment is also providing a bullish backdrop for stocks. After underperforming during the year, emerging markets are also starting to perform better. Although stock valuations are starting to extend, many still offer favorable risk/reward tradeoffs, which allow tactical investors like us to find even more solid investment opportunities. Of course, a pullback is always possible, especially when so much of investor sentiment is driven by headlines. We will be monitoring those factors carefully. It is equally likely that those investors who have trailed the market this year will be playing catch up before the end of the year, which will lead to some performance-chasing support for the market and a potential year-end rally. As always, our team will be analyzing these market factors closely and adjusting our portfolios as they deem necessary.

How to risk well

The single most important thing you need to know about risk as you plan your retirement is that you can’t avoid it. The less risk you’re willing to take in the stock market, the more vulnerable you make yourself to inflation risk. If you overweight your portfolio to bonds because you want to avoid market risk, you end up facing business and interest rate risk.  In general, the financial planning industry lists seven types of risks all investors face: default, business, liquidity, inflation, interest rate, political and market risks. Each risk affects the balance of your retirement portfolio, but you control the position of the fulcrum. We call that risk tolerance and we ask all clients and prospective clients to answer a series of questions to determine theirs. Most people find that their risk tolerance decreases as the get closer to retirement for both practical and emotional reasons. They have less time to make up for any sudden dips in the market and probably should shift assets onto more stable ground as they anticipate withdrawing from them Additionally, their sleeping level decreases as they become more hyper-focused on their accounts. Other factors influencing risk tolerance include major life changes like marriage, divorce, promotions, job loss, birth of children, inheritance, home purchase, caring for elderly parents, medical disability etc.  Because these dramatic changes can have a profound effect on your risk tolerance, it is important to check your risk tolerance periodically, particularly after experiencing any of these events. According to Finametrica, the risk tolerance surveyor to which we subscribe, the first part of the process is determining how much risk is required for you to meet your goals: What annual return will you need on your investments to meet them, given what you think you can save? Next, figure out your risk capacity, which is different from your risk tolerance.  Given your budget, retirement timeline and financial assets, how much risk… | Read More »

2,100, Here we are again!

The S&P 500 is the most widely recognized index to represent the overall stock market.  Once again we find ourselves in familiar territory. The S&P 500 is right around 2100 yet again.  In the past, this level (or a tad higher to be more precise) has represented a challenging level for the market to surpass.  What is in store this time?  It is our belief that the market might find the usual struggles again in gaining much ground above the 2100+ level. Earnings season is almost complete and while this quarter did not present too many time bombs, we witnessed a lot of companies reining in their forward outlooks.  The most common excuses were: Slowing global economy Slowing emerging market growth Low oil prices. Unfortunately we see all three excuses not going away anytime soon.  In fact, some of these problems continue to get worse. Also, with Fed. Chair Janet Yellen, increasing the rhetoric around expecting a rise in interest rates, this might add another obstacle to further market upside.  As we mentioned before, the most important reason for our more conservative tilt is valuation and lack of earnings per share growth.  Indeed as the second chart illustrates, we are looking at the market selling at a market premium to historical multiple averages.  At the same time earnings per share growth over the next twelve months is expected to be negative. Thus, we would not be too surprised to see the market struggle once again at this familiar 2100ish territory.