Everyone’s Unique

Jeff Raupp Jeff Raupp, CFA, Senior Investment Manager

Whenever I go to the bowling alley it strikes me how unique people are. And no, it’s not because of the multi-colored shoes or even the matching team jackets complete with catchy names like “Pin Pals” or “Medina Sod” sewn on the back. It’s because of the bowling balls.

Every time I head to the lanes, I can bank on spending at least ten minutes trying to find a ball that works for me. You have the heavy balls with the tiny finger holes and the huge thumb, the balls with the finger holes on the other side of the ball away from the thumb, and the ones where it seems like someone was playing around and drilled three random holes. Half of the time I find myself weighing the embarrassment of using a purple or pink ball that feels okay versus a more masculine black or red ball that weighs a ton but can only fit my pinkie. I’m always left thinking, “Where’s the guy or gal that this ball actually fits?”

Raupp_Everyones_Unique_2.14.14But at the end of the day, I find that if I find the right ball, where my hand feels comfortable and the weight is just right, I have a much better game.

In the same way, how to best save toward your life goals is unique to each investor. Even in the scenario where two investors have the same age, same investable assets and generally the same goals, the portfolio that helps them achieve those goals may be decidedly different between them. Investor emotion can play a huge role in the success or failure of an investment plan, and keeping those emotions in check is vital. There is nothing more damaging to the potential for an investor to meet their goals than an emotional decision to deviate from their long-term strategy due to market conditions.

Fortunately, there’s often more than one way to reach a particular goal. There are strategies that focus on total return versus ones that focus on generating income. Strategies that are more market oriented versus those that look to produce a certain level of return regardless of the markets. And there are tactical strategies and strategic strategies. For any investor’s personal goal(s), several of these, or a combination of these, might provide the necessary investment returns to get you there.

Raupp_Everyones_Unique_2.14.14_1Here’s where the emotions can come into play—if you don’t feel comfortable along the way, your emotions can take over the driver’s wheel, and your investor returns can fall short of your goal. In 2008-2009, many investors panicked, fled the markets, and decided to go to cash near the market bottom; but they missed much of the huge market rebound that followed. While in many cases the investors pre-recession strategy was sound and ultimately would have worked to reach their goals, their irrational decision during a period of volatility made it a tougher road.

Unfortunately, you don’t have the benefit of rolling a few gutter balls while you’re trying to find the right portfolio. That’s why working with an expert to find an investment strategy that can get you to your goals, and that matches your personality and risk profile, is vital to success.

Good bowlers show up at the alley with their own fitted ball and rightly-sized shoes. Good investors put their assets in a strategy fitted to their goals.

Economic Headwinds and Tailwinds

Magnotta @AmyMagnotta, CFA, Brinker Capital

We continue to approach our macro view as a balance between headwinds and tailwinds. The scale tipped slightly in favor of tailwinds to start the year as we saw a slight pickup in the U.S. economy, some resolution on fiscal policy, and even more accommodative monetary policy globally. However, we continue to face global macro risks, especially in Europe, which could result in bouts of market volatility. The strong market move in the first quarter, combined with higher levels of sentiment, and a potentially disappointing earnings season, may leave us susceptible to a pull-back in the near term, but our longer-term view remains constructive. While the second quarter may bring weaker growth in the U.S., consensus is for economic activity to pick up in the second half of the year.

Tailwinds
Accommodative monetary policy: The Fed continues with their Quantitative Easing Program and will keep short-term rates on hold until they see a sustained pickup in employment. The European Central Bank has also pledged support to defend the Euro and has committed to sovereign bond purchases of countries who apply for aid. Now the Bank of Japan is embracing an aggressive monetary easing program in an attempt to boost growth and inflation. The markets remain awash in liquidity.

U.S. companies remain in solid shape: U.S. companies have solid balance sheets that are flush with cash that could be put to work through M&A, capital expenditures or hiring, or returned to shareholders in the form of  dividends or share buybacks. While estimates are coming down, profits are still at high levels.

Housing market improvement: The housing market is showing signs of improvement. Home prices are  increasing, helped by tight supply. The S&P/Case-Shiller 20-City Home Price Index gained +8.1% for the 12-month period ending January 2013. Sales activity is picking up and affordability remains at high levels. An improvement in housing, typically a consumer’s largest asset, is a boost to confidence.

Equity Fund Flows Turn Positive:  After experiencing years of significant outflows, investors have begun to reallocate to equity mutual funds. Investors have added over $67 billion to equity funds so far in 2013 (ICI, as of  3/27/13), compared to outflows of $153 billion in 2012. Investors continue to add money to fixed income funds as
well ($70 billion so far this year).
shutterstock_112080815
Headwinds

European sovereign debt crisis and recession: The promise of bond purchases by the ECB has driven down borrowing costs for problem countries and bought policymakers time, but it cannot solve the underlying  problems in Europe. Austerity measures are serving only to weaken growth further and cause higher unemployment and social unrest. After how it dealt with Cyprus, there is again risk of policy error in Europe.  We are also closely watching the Italian elections in June after February’s elections were inconclusive.

U.S. policy uncertainty continues: After passing the fiscal cliff compromise to start the year, Washington passed a short-term extension of the debt ceiling and more recently agreed on a continuing resolution to avoid a government shutdown. The sequester, which was temporarily delayed as part of the fiscal cliff deal, went into effect on March 1. The automatic spending cuts have not yet been felt by most, but it will soon start to show  up in the second quarter and will shave an estimated 0.5% from GDP. In addition, the debt ceiling will need to be addressed again this summer.

Geopolitical Risks:
Recent events in North Korea are cause for concern.

This commentary is intended to provide opinions and analysis of the market and economy, but is not intended to provide personalized  investment advice. Statements referring to future actions or events, such as the future financial performance of certain asset classes, market segments, economic trends, or the market as a whole are based on the current expectations and projections about future events provided by various sources, including Brinker Capital’s Investment Management Group. These statements are not guarantees of future performance, and actual events may differ materially from those discussed. Diversification does not ensure a profit or protect against a loss in a declining market, including possible loss of principal. This commentary includes information obtained from third-party sources. Brinker Capital believes those sources to be accurate and reliable; however, we are not responsible for errors by third-party sources on which we reasonably rely.

The Law of Unintended Consequences

Andy RosenbergerAndrew Rosenberger, CFA, Brinker Capital

History is littered with examples of “unintended consequences” – a term referring to the fact that decision makers (and more importantly, policymakers) tend to make decisions that later have unforeseen outcomes.  I was reminded of such a fact this weekend as my wife and I launched into our annual (and seemingly unending) springtime yard cleanup.   In addition to the mulching, planting, trimming, and other routine undertakings associated with yard maintenance, every year, we spend more time and money than I care to admit trying to rid our yard of the dreaded English Ivy.  As any other homeowner with a similar problem can sympathize with, there is no amount of weed killer, weed-whacking or online product remedies that seem to tackle the problem.  Our English Ivy problem is the unintended consequence of the prior homeowners’ decision to turn their yard into an “English Garden”.

On a much grander scale, unintended consequences pop up everywhere.  Most go unnoticed by the broader public.  As one such example, The Wall Street Journal recently ran an article titled “U.S. Ethanol Mandate Puts Squeeze on Oil Refiners”.  The article highlighted that consumers could see higher prices at the pump due to government enacted mandates that force refiners to purchase market-based ethanol credits.  The original idea was that increasing the amount of ethanol used in gasoline would make gasoline cleaner burning and be better for the environment.  However, since the policy was enacted, two unforeseen issues have unfolded.  First, prices for these ethanol-based credits have skyrocketed in the past few months.  The higher ethanol credit prices mean that refiners will be forced to pass along higher prices for gasoline to the end consumer.  Second, automakers are suggesting that cars and trucks aren’t well equipped to burn the new gasoline blend.  As a result, we have a policy that was intended to produce cleaner burning gasoline which ultimately turned into higher gas prices for a product which most cars aren’t able to use.

consequencesThe reality is that the vast majority of consumers will never be informed of policy misstep.  Only industry experts and select individuals with knowledge of the matter will truly understand the costs involved.  Sometimes; however, unintended consequences have a much more visible impact on the broader economy.  That’s been the case over the past two weeks as policymakers have tried to tackle the banking problems in Cyprus.  If we rewind to last year, Greece was the conversation of topic.  Ultimately, policymakers decided that private sector bond holders should bear the brunt of the losses on Greek debt.  Fast forward to today and we have insolvent Cyprus banks.  Why?  Because Cyprus banks, which were one of the largest holders of Greek debt, were forced to write-down their assets.  So while at the time the policy of having private sector investors take the loss on Greek debt seemed like a good idea, ultimately the unintended consequence was that it would later result in Cyprus banks becoming woefully undercapitalized.

The European Union’s response to the Cyprus banking issue was subsequently just as perplexing.  As initially proposed, depositors, regardless of their size, would be taxed to cover the insolvency of the local banks.  Ultimately, while the policy was later reversed to preserve deposits below €100,000, the sanctity of small deposits suddenly disappeared.  Most market pundits will agree that Cyprus is too small and irrelevant in the grand scheme of things to bring down the European economy.  I worry, however, that the unintended consequence of Europe’s policy response will make depositors in other peripheral countries a bit more anxious when it comes to where they store their money for safekeeping.  After all, one of the tenants within economics is that if two investments have equal return, investors will choose the one with lesser risk.  With interest rates near 0% across the developed world, wouldn’t it make the most sense for depositors to store their wealth in a place with little chance of future default?  While we often like to believe that these matters are completely thought through and weighed carefully by policymakers, unfortunately, this most recent policy decision appears to driven more for domestic political purposes as opposed to European “Union” driven.

The War Against Your Credibility

Sue BerginSue Bergin

While you were enjoying some quiet family time on Sunday morning, America’s most read magazine was advising its readership to dump you.

In an article “How to save $1,000 this year,” Parade magazine tells its 33 million readership that the average investor could save $750 if they moved to a self-directed IRA.

In case you missed it, here is the excerpt:advice ahead

Shed Investment Fees

It’s one of the quickest ways to save …. Consider rolling over 401(k) assets from old jobs into a self-directed IRA.  Since the average 401(k) is $75,0000 saving 1 percent makes sense.  Potential Savings:  $750 per year.

The article fails to mention is that the average U.S. individual stock investor doesn’t fare very well.  In fact, they typically get significant lower returns than the S&P.  Over a recent five-year period, the average U.S. investor got an annual return of just 1.9%, while the S&P 500 returned 8.4%.[1]

The do-it-yourself investment management trend is gaining momentum in the media.  This is just the latest example.  Know that there is a war being waged against your credibility and the value you bring to your relationships.

Fight back.


[1] The Most Destructive Behavioral Bias, Summer 2012, The Journal of Investing

Economic Headwinds and Tailwinds

We continue to approach our macro view as a balance between cyclical tailwinds and more structural headwinds. While we have seen some improvement in the economy and strong global equity markets, helped by easy monetary policy, we continue to face global macro risks and uncertainties. The unresolved risks could result in bouts of market volatility. As a result, portfolios have a modest defensive bias, and are focused on high conviction opportunities within asset classes.

To read more, click here

turbines

What Does “Help” Look Like to Your Clients

Sue BerginSue Bergin

When someone asks for help they usually have something specific in mind.  For example, when I hit a website “help” tab, I want a contact number.  I don’t want to engage in an online chat.  I don’t want to hunt through generic questions and answers to find one that resembles my issue.  And, I certainly don’t want to send an e-mail and wait for a response.   Others may find these alternatives helpful.  Not me.  I just want a number.

The same can be said for financial advice.  An advisor may provide clients with all kinds of helpful information, data and insights yet the client may still feel dissatisfied.

For example, you could have an in-depth discussion about the fiscal cliff.  You could wax poetic about the political winners and losers, and long and short-term economic impact.  Unless you discuss precisely what it means to her financial situation, the client may describe the conversation as interesting … but not helpful.

BlackRock recently surveyed plan sponsors and plan participates and asked whether sponsors had done enough to help participants achieve financial security.  In the plan sponsor camp, 76% said they believed they had done enough.  Only 40% of participants felt the same.

help

Three dangerous assumptions that can lead to client dissatisfaction:

  1. Presuming to know what the client wants
  2. Assuming the client will proactively disclose what they are seeking in the relationship
  3. Assuming (without confirmation) that the client’s needs have been fully met

Always remember to ask clients how they want to be helped.  Once you define what “help” looks like to that client, you can tailor your approach. At the end of a meeting or conversation, ask if you have met the client’s needs.   Find out if you have been helpful as they define the term. These simple questions will close the kind of gap in perception that exists between the survey participants in BlackRock’s study.

Combat the Fear of Missing Out

Sue BerginSue Bergin

The fear of missing out has always been a strong motivator, but its power is increasing.  Social networking exposes us to what more people are thinking and doing.  This is causing many clients to question their choices, and at times make rash decisions.

According to marketing and communications agency JWT, fear of missing out (FOMO) is the uneasy and sometimes all-consuming feeling of missing out — that peers are doing, in the know about, or in possession of more or something better than you.

The role FOMO plays in motivating clients to action should not be underestimated.  It may be behind the Monday morning call from a client inquiring about absolute return investment strategies.  The call may leave you somewhat confounded, particularly if he rejected your previous overtures towards absolute return strategies.  The client’s change of heart can probably be attributed to a cocktail party discussion.  He may remember some of the buzz phrases and maybe even some fund names, but what sticks with him the most is that “they” are in and he is not.  He doesn’t want to be left behind, perceived as out-of-touch, or miss out on a great opportunity.  The opportunity is not immediately valued on its merits, but by whether the client wants to be part of the “in” group.

Social media adds fuel to the fear of missing out fire.  As you poke around on Facebook, LinkedIn or Twitter or media message boards it is easy to get influenced by the perceived masses.

In the example above, your client may have been perfectly comfortable with his decision to ignore your recommendations for incorporating absolute return strategies when presented in March.  Now that he has heard that his friends all have a certain percentage of their portfolios in absolute return strategies, he suddenly wants to follow suit

Investments aren’t the only ways that FOMO can affect your practice.  Clients are also going to hear talk or be exposed to social networking chatter about the level of service, accessibility and transparency offered by their advisor.  If everyone else in their social circle or aspirational social circle is working with advisors who provide online access to an aggregated and consolidated view of their portfolios, your relationship is vulnerable unless you can match or beat that service.

The best way to ensure that FOMO doesn’t lead clients astray from their financial plans or their relationships with you is to stay ahead of the curve.  Keep the lines of communication open, and offer your thoughts on a wide range of investment strategies.  This way, clients will remember where they heard about investment strategies first.   From you.  They’ll remember that you had an opinion, and they simply have to reach out to you for your opinion as to whether it is in their best interests.