The Market feels a bit… “Toppy.”

5 03 2012

Jonathan N. Castle, CFP®, ChFC®

Where does the time go?  It is already nearly the end of February and it seems like 2012 is speeding along faster than last year!  So far this year, the financial markets have been reasonably good to all of us, with the S&P 500 up about 8.5%, the Dow up 6.6%, and the NASDAQ up an eye-popping 13.9% as of this writing.

The Dow Jones Industrial Index has broken through the psychological barrier of 13,000 – the highest it has been since March of 2008 a few times now.  In fact, the markets have been remarkably – almost eerily – calm for the last 3 months, quietly marching upward, shrugging off the occasional bad news (such as the Greek bailout nearly unwinding last week and the ever increasing tension over oil in the mideast) with little more than an occasional flinch. 

As we have said for the past 8 months, we remain cautiously optimistic.  “Moderately Bullish” is a term that I have used in the past.  Based upon historical behavior of Secular Bear Markets, we expect that over the next 3 years or so, we will see substantial ups (and downs) in the markets with a slight overall uptrend.  

As it pertains to the current rally, we believe this leg of the rally is probably due for a drawback of some kind.  The next chart shows our reasoning for this.  When the market approaches a point where it had difficulty breaking through previously (such as the Dow’s 13,000 level), this is known as “resistance.”  Typically, as a market index approaches a resistance level, it generally will pause, draw back, and then, IF the level is to be broken, will punch through that level to achieve new highs.  Similar to a person drawing back before breaking through a door, the market will generally draw back before “breaking out” to a new level.  As we are at that resistance level now, a drawback would be a natural – even necessary – part of a normal market rally. 

Despite the recent market rally, we do not feel it is time to break out any party hats on a new sustained bull market just yet.  There are a number of reasons to remain cautious about the markets:

  • According to the Investment Company Institute – the total inflows (new money) going into equity (stock) mutual funds from February 1st through February 15th was a little over 4.6 Billion Dollars.  While this seems like a lot, compared to the inflows to bond funds, which netted 15.2 Billion – it was just a trickle.  Clearly, investors are not ready to assume lots of stock market risk just yet, and the recent rally did not have the market breadth that would indicate the start of a new bull market.
  • The price of oil is going up.  Part of the reason is that US refineries shut down every May to retool to EPA requirements, so oil nearly always rises during this part of the year.  However – increased tensions in the mideast are also driving oil prices higher.  Higher oil prices mean slower economic growth.  As businesses must pay more for energy, they spend less on payrolls and other things which drive growth.
  • Europe’s financial situation is still quite a mess.  While it seems that the European Union is working feverishly to keep from imploding – and they may well succeed – the fact is that Europe is already mired in what appears to be a deep recession.  This will have a global impact, slowing growth in emerging markets as well as within the United States.
  • Our National Debt is a significant problem – and only getting worse.
  • We are in an election year, so significant economic policy will likely not be passed until next year.  Given the uncertain outcome of the 2012 elections, it is anyone’s guess as to whether any new policies will be helpful or harmful.
  • The Bush tax cuts are set to expire this year.  This expectation is curbing business spending.
  • And the list goes on… given the recency of the 2008 market crash, investors are not yet hungry enough for returns to take additional risks and dive head first into the markets. 

However – there are numerous reasons to be bullish as well.  Institutional investors are slowly beginning to see the opportunity in stocks – and have publicly stated their plans to acquire more stocks in their portfolios over the next several years in preparation for a future bull market.  Some reasons to own stocks – and to expect the market will go up are: 

  • Stock valuations are more attractive than they have been in decades.  Based upon the price of stocks compared to company earnings, stocks are cheap.  In the past, investors who loaded up on stocks at current valuation levels were handsomely rewarded over the next 10 years.  Institutions know this – and their demand for stocks during this period may well keep the market afloat.
  • We are seeing a new “flurry” of IPO’s (Initial Public Offerings).  New companies – such as Facebook – offering publicly traded stock for the first time.  Historically, when there are a lot of IPO’s, the market does well.
  • We are seeing a significant increase in companies buying back their own stock.  Not only does this activity boost the stock market – but it is also an indication of what company insiders think of the future prospects of their companies.  Who would spend good money to buy their own company stock – unless they believed the company woud do well?
  • Corporations are hoarding more cash than ever.  While initially this might seem a bad sign – it is a an indicator of the huge potential that exists.  Eventually, this cash will be deployed.  When it is – there is enough of it to have an enormous impact upon virtually all parts of the economy.
  • Currently, the dividend yield on the Dow Jones is a very attractive 3.07%.  So, hypothetically if the market only goes up 5%, an investor who owned the Dow Jones would reap over 8% in total return.  It is only a matter of time before return-starved pension funds, institutions, and corporations currently investing in Treasuries earning less than 3% begin to move money to other assets to seek greater returns.  When this begins, the market has the potential to move up very quickly.

This balance between bullish and bearish factors is a normal part of the recovery process, but makes for a challenging investment environment. In summary, we remain cautiously bullish, with an expectation for occasional market corrections which may exceed 20% or more.  Likely, it will feel like taking three steps forward, only to take two steps back.  However, we feel that reasonable gains are available with the correct strategy.  The most successful investors that we have worked with have carefully chosen their risk tolerance, and then invested in portfolios scientifically designed around that risk tolerance – and remained focused on the long term.  

This blog post is not personal investment, financial, or tax advice.  Please consult your financial professional for personal, specific information.  Indexes mentioned are a general barometer of the stock or bond market they represent.  You cannot invest directly in an index.  Past performance is no guarantee of future results.   

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment adviser.  http://www.WealthGuards.com 

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So I’ve Been Saving…Now What?

4 04 2011

 Michael Carignan, CFP®, CRPC®

Have you ever wondered how to get a clear picture of all of your current financial resources and how much retirement savings you need to provide your vision of retirement, taking into account your potential health or market risks?  This is just one of many questions people ask when thinking about personal retirement planning.  If you find your self in this boat, there are a number of solutions for you.  First, with some time, research and diligence, spreadsheets and of-the-shelf software, you can creat your own retirement plan.  However, it is likely that if you are asking these questions, you probably don’t have one of those key ingredients to success, or you would already know the answer.  A more comforting solution may be to get some professional help.  WebMD can help you diagnose some medical conditions, but most people feel better having a trained medical professional give them their expert opinion and recommend a treatment if warranted.  In a similar fashion, finding the right financial professional to help you can be a key step in the right direction on your path to financial success.

Just like finding the right doctor is important, (you don’t want to go see your dermatologist if you have a cough) finding the right kind of financial professional can be equally important.  There are many financial professionals out there; selecting the right one may be the most important factor in ensuring you have a favorable planning experience.  There are some questions you need to ask when looking for a professional to help you construct a retirement plan.  The first question should be, “are they qualified to provide the answers I’m looking for?”  One good resource in this search is www.letsmakeaplan.org where you can search for a local Certified Financial Planner™.

Most people are more comfortable dealing with a doctor that has the same philosophy on treatment and they personally like.  By “same philosophy on treatment,” I mean do they recommend a diet and exercise regimen or a or do they push a diet pill to help lose weight?  If you and your doctor disagree on the basic philosophy of medical treatment, you probably will have disappointing results, since you won’t follow his or her advice.  In the same way, it is very important to look for a financial professional that has the same general philosophy that you do when it comes to investing and money management.  If you believe that it’s possible to outsmart the financial markets and pick the best performing mutual fund or stock next year, then you need to find a broker who believes that as well.  If you believe that investing involves taking some prudent risks and adhering to a long term plan with a scientifically designed portfolio, you likely should  find a different advisor.  Neither philosophy is necessarily wrong, but making sure you select a financial professional that has the same philosophy as you have is of paramount importance to a successful planning relationship.

Some additional specific questions you should ask are:

    • Do you prefer fee based or commission based compensation for your advisor?
    • Do they have experience with other clients like you?
    • Can they advise you on all aspects of your financial life or will you need several advisors to get the answers you need?
    • What is the charge for the plan?  In most cases, you get what you pay for; if it’s free there is going to be a sales agenda you might not know about right away.
    • What is included in the service they provide?
    • Will they be able to help you implement planning suggestions?  If so, is it a requirement of the planning process?  Be careful of the solutions that can only be done through them.
    • Do they make “suitable” recommendations or are they a “fiduciary”?  (For more information on the difference click here)

Finding a professional that you can understand and trust is critical when choosing to have a retirement plan constructed for you and your family.  You are unlikely to follow the advice, good or bad, if you do not trust the person providing the advice.  Once you find your ideal fit of personality and capabilities, be ready and willing to provide answers to all of their questions, since a retirement plan is only as good as the information you provide.  Don’t hesitate to ask them probing questions and provide honest answers if they ask you some difficult questions.  When dealing with the money you have worked so hard to accumulate, stumbling into retirement without a carefully crafted plan can be a dangerous prospect at best. Once your retirement plan is complete, then it becomes time to “work your plan” if you have a few more years, or “live your plan” if you are already retired.

The earlier you start planning for retirement the better, becasue finding yourself in retirement and unsure if you’ll be able to live it how you’d like is a scary proposition.  It has been my experience that those who are most successful in retirement have taken the time to get the advice that helps them sleep well at night and knowing they have done everything they could to create the retirement they wanted for them and their family.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment advisor.





Will there be a herd mentality to “sell bonds” causing bond funds to suffer more than balanced funds?

21 01 2011

As with any financial market or product there is the possibility that investors will “sell bonds” as a herd, but there are a few things to consider.

First thing to think about is – what are balanced funds?  Many “balanced” funds are made up of a few different bond and equity funds, the blend depending on their ultimate goal and risk.  Others invest directly in stocks and bonds to create their portfolio.  What that means is that while they do hold some bonds in their portfolio, they also own equities, and since these asset classes don’t typically move together, balanced fund portfolios will most likely suffer less than a bond-only fund if there were a hard bond sell-off.

In the event of a bond sell-off, it can be helpful to picture where in the market the moeny that is currently in bonds would be reinvested.  Is it likely the “herd” is moving into cash, into equities, or into another asset class?  If you believe that the money from the bonds is moving to equities, then balanced funds will almost certainly perform better in this situation.

Additionally, it is important to consider what kind of bonds are suffering the sell-off.   The behavior of municipal bonds, for example,  is very different than the behavior of high yield bonds; the behavior of long term bonds is generally very different than that of short term bonds.  It is similar to trying to discern if stocks will suffer- without knowing if you are talking about emerging markets, developed foreign markets,  or US stocks. Each will behave differently under different interest rates, currency valuations, and economic conditions.

As with equities, you need to have a firm understanding of why you are holding any particular bond investment.  If you are looking for extreme safety of principal,  then most investors would hold short duration, high quality bonds; but but at the expense of a competitive yield.  If you are looking for a higher yield in bonds, in the current market environment you are going to have to take some additional risk to your principal to get it.  Whether that risk is best taken by holding a longer term bond (more interest rate sensitivity), or a lower quality bond (higher risk of default), typically seems to be an individual preference.

The ultimate answer for most investors is to find a mix of assets that you are comfortable with and stick with them.  If there is one thing the markets have proven time and time again, it’s that the patient, well diversified, properly allocated investor will typically fare better over the long run than the investor who is constantly making changes to his investments based on daily news and the “hot pick.”

Information in this article does not constitute a recommendation or solicitation for any product mentioned.  Mutual funds may only be sold by prospectus.  Past performance is no guarantee of future performance.  Consult your financial advisor for specific recommendations.