Our thoughts on investing in today’s market environment

I hope you enjoy these thoughts on our investment philosophy and current market events.
– Beach Foster, AIF®, Managing Director, Investments

Tariffs and the Markets - June 2019

Tariffs are in the news daily, and the consequences of those tariffs are argued by different sides.

The recent threat of tariffs on Mexico caught many by surprise, and in many ways are more troublesome for U.S. companies than the tariffs on China.

In the 25 years since the North American Free Trade Agreement was signed, many U.S. manufacturers (particularly U.S. automakers) have built extensive supply chains in Mexico. Some parts cross the border several times before ending up in a finished automobile. Many U.S. vehicles have multiple parts manufactured in Mexico, shipped into the U.S., and tariffs would raise costs for these vehicles. General Motors’ large SUVs, like the Chevy Suburban and Cadillac Escalade, are built in Texas but half of their parts come from Mexico.

The tariffs could cause these manufacturers to find new supply chains, which makes it difficult for them to make decisions regarding capital investments in factories. This can make the manufacturing process more expensive and can result in higher prices for consumers and lower profits for manufacturers.

This is certainly one of the reasons the stock market has seen increased volatility and a consequential drop in interest rates in the bond market. While stock market prices have come under pressure, bond prices are the highest (and bond interest rates the lowest) they have been in several years.

How and when all this will be resolved is not known, but obviously financial markets are in favor of less tariffs than more. The Federal Reserve recently put out an estimate that the tariffs will increase the annual costs for a typical family by approximately $800 a year. While that may not seem very significant, if there are 10 families living on your block- that is $8,000 less that those families will have to spend at the restaurant, clothing store or grocery store in your neighborhood. In other words, lots of little cost increases can add up.

Diversification, which is our best defense and offense when it comes to investing, is working in that bond prices are up during this pullback in the stock market.

As always, please do not hesitate to call with any thoughts, concerns or questions. We all know that markets don’t reward investors with a straight line up, we have to earn it during certain periods by being disciplined. Investor behavior during times of stressful markets is key to long term success. Having a strategy and discipline prevents emotions and headlines from dictating our investment decisions.

Thank you as always for your trust and confidence in us.

Beach

Sources: Wall Street Journal

Any opinions are those of Beach Foster and not necessarily those of Raymond James. The information contained in this email does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected including diversification and asset allocation.

Accounting for Market Volatility in Your Strategy - May 2019

Some advisors and investors may create financial strategies using an average rate of return every year for the stock market, but the day to day experience with the markets are nothing like the long term average.

Below you can see how often “average” returns actually occur with the stock market. The chart below shows every calendar year return for the stock market since 1926. The shaded line is the long term average of 10% plus/minus 2%, or the annual returns that fell between 8% and 12%.

S&P 500 Index Annual Returns

As you can see, of the last 92 years of market returns, only 6 had an annual return between 8% and 12%. So the market rarely provides its “average” return.

Therefore, financial strategies that use simple averages, which don’t take into account market volatility, can lead to unpleasant results. It is especially true if your plan incorporates a long period of distributing cash, such as retirement, where the sequence of returns can often be more important than your average return. Once you start taking withdrawals from your portfolio, managing volatility, not just returns, is very important.

The chart below shows two different scenarios with the same annual returns, but with the sequence of returns reversed. The chart assumes the $50,000 withdrawal is made at the beginning of the year, before market returns are applied.

Sequence of Returns

This is why it’s necessary to build a plan that accounts for volatility and potentially unfortunate timing of returns.

As you know, our responsibility is to clearly understand what is important to you- your goals, your priorities, your timelines, and the resources you have to achieve your goals. With that information, we build a strategy that gives you a high confidence level in achieving these goals, while incurring no more risk or sacrifice to your current lifestyle than is absolutely necessary.

Please let us know if you have any questions or thoughts related to your current strategy.

Thank you as always for your trust and confidence in us.

Beach

Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Any information provided is for informational purposes only and does not constitute a recommendation. The charts and tables presented herein are for illustrative purposes only and should not be considered as the sole basis for your investment decision. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Individual investor’s results will vary. Future investment performance cannot be guaranteed. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Is Investing in the Stock Market a Gamble? - April 2019

Individuals who look at the stock market as a gamble are correct if their goal is to get in and out with a quick profit.

Is investing in a diversified portfolio of stocks a gamble if you own an asset that may pay you more every year with very few exceptions?

The table below was compiled by the Stern School of Business at NYU, using data from Bloomberg and Standard &Poor’s (S&P). One column that is important to many investors with a long-term time horizon is the “Dividends” column. That is your annual payment for owning one share of the S&P 500 index since 1980. With the exception the few years of the tech crash of 2000-2002 and the financial crisis of 2008-2009, it has been an uninterrupted stream of increasing cash distributions to investors.

Do those handful of the past 38 years make investing a gamble?

You were still paid in those years, just less than the year before. And as you can see, in a short time the dividend payment recovered and exceeded previous payments.

The 20% pullback in the stock market in the 4th quarter of last year reminded all of us that the stock market is not a Certificate of Deposit (CDs). But while the principal of CDs never decrease (or increase), the income from CDs are a fraction of what they were 10-20 years ago, while the income from the S&P 500 has increased dramatically.

All of this, of course, ignores the growth in the last 38 years of the underlying investment: price of S&P 500 (third column) up 18x, earnings up roughly 10x, and dividends up about 8x.

This is why we invest (not trade) in the stock market. As our world’s economy grows and millions join the middle class, as new technologies and industries are created, we get to participate in the long term growth of earnings and dividends of these companies.

So yes, from a price standpoint, investing in the stock market hoping to see your money grow on a short term basis is gambling- the stock market has gone down about 1 out of 4 years historically. But look at the long term growth of your income and principal from a diversified stock portfolio. Held long term, this is an investment that can put the odds on the investor’s side.

I thought that a long term look back on the real numbers of the stock market would be helpful. We will have another decline and another advance in the stock market, but nobody knows how much or when. Hopefully this piece of information will help you focus on the real long term benefits of staying in the market, through easy and more difficult times.

As always, thank you for your trust in us. And please don’t hesitate to call with any thoughts or questions.

Beach

S&P Pricing 1980-2018

Disclosure:  Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision.  Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index.   Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Dividends are not guaranteed and must be authorized by the company’s board of directions.  Inclusion of these indexes is for illustrative purposes only.  CDs are insured by the FDIC and offer a fixed rate of return whereas the return and principal value of investment securities fluctuate with changes in market conditions.

Can Our Political Views Affect Our Investment Results? - March 2019

Do your political views affect your investment strategy? Can they cause you to miss out on opportunities?

According to research, the answer is yes to both questions.

The Spectem Group, which does research on investors, has found that investors have extremely different views on the economy and stock market depending on their political leanings.

Its January 2019 survey, taken during the longest government shutdown in history, found:

  • Republicans liked what was going on in the market, while Democrats did not
  • Republicans were increasing their stock holdings while investors who identified as Democrats were decreasing their stock investments.

We now know that the S&P 500 was up 8% in January and is now up approximately 12% for the year.

So Republicans as a whole outperformed Democrat investors (or at least the Democrats who reduced their stock holdings as a function of their political views) during one of the strongest stock rallies in a long time. And it is not because Republicans are smarter, it is just because they were Republicans at this particular juncture in history.

Republicans are guilty of the same bias. Most Republicans were not optimistic about the market and economy under President Obama, however the S&P 500 did not have a single negative return under the 8 years of his presidency. In fact, in 5 of the 8 years the stock market had double digit returns.

So the issue is not whether we are Republicans or Democrats, it is recognizing our built in biases that influence our beliefs and expectations. The first step is to become aware of how our decisions are impacted by our views and how those views can dramatically affect our investment outcomes- if we allow them to.

We all have biases, whether we admit it or not. But being aware of our biases and not letting our view of the political climate make us abandon a personalized, long-term strategy is important to long-term financial success.

As Warren Buffet said, the most important attribute of a successful long term investor is temperament, not intelligence.

Thank you as always for your trust and confidence in us.

Beach

Sources:

  1. https://www.etf.com/sections/index-investor-corner/swedroe-tale-2-stock-markets?nopaging=1

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index. Raymond James is not affiliated with The Spectrem Group.

Did Diversification Work When We Needed It? - January 2019

Happy New Year!

I think.

Volatility (the downward variety) continues as 2019 begins. Stock markets worldwide are struggling as the New Year begins.

Apple has provided the latest high profile sign of a slowdown. Phone sales are going to be less than Apple had expected for the most recent quarter and China was blamed for the slowdown.

While the stock market’s downward volatility has grabbed most of the headlines, the bond market has been another story.

Didn’t the Federal Reserve (Fed) increase interest rates last month? Aren’t interest rates going up and bond prices going down?

Below is a chart showing the yield of the U.S. Treasury 10 year bond, which is the benchmark for many other interest rates (mortgages, corporate bonds, car loans etc.). It sure does not look like interest rates are going up, does it? In fact, the rate for this bond has dropped from 3.23% in November to 2.58% as of January 3, 2019 - a pretty significant drop!

Blog Graph

So are interest rates going up or down? The answer is yes.

Short term rates have been raised by the Fed, but longer term bonds are driven more by market forces and they have come down considerably in a short period of time.

What explains this disconnect and what does it imply?

The market driven bond prices are telling us to expect a slowing economy and few if any more rate increases from the Fed.

High quality bonds are supposed to provide some safety when the stock market decides it wants to go down. And since the end of September, they have done just that. The positive return of high quality bonds is not enough to offset all of the downside of the stock market, but has still proven to be a place that provides some shelter when the storms start to really kick up. Gold has also been a help since the market peak on 9/28/18.

The table below shows performance of the S&P 500, Gold, and US 10 Year Treasury Bonds since the end of September.

Blog Graph

While no strategy is perfect, experience (the great teacher) has taught us the importance of having portions of an investment strategy allocated to assets that have historically provided some shelter during turbulent times. Owning these assets can be frustrating when the stock market is on a roll. But when the inevitable market downdrafts occur, owning securities that have historically mitigated these risks can be very valuable.

Thanks as always and we wish you and your families a healthy, happy, and prosperous New Year!

S&P 500 Value is a market-capitalization-weighted index developed by Standard and Poor’s consisting of those stocks within the S&P 500 Index that exhibit strong value characteristics. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to side fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. The information contained in this email does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.

The Markets Test Us - December 2018

The markets tests investors sometimes, and it seems that this may be one of those times. After the second calmest market on record in 2017, the volatility in the last couple of months seems to be trying to make up for it.

Some reasonable questions you may ask are:

  • Why is it volatile now?
  • Why was it not volatile in that period before?
  • What changed?
  • How does this level of volatility compare with the volatility in the past?

These are all good questions, and we will try to answer them as well as we can.

Why is it volatile now?

We discussed some of the reasons in our last newsletter (which is included in our blog on our website). When volatility increases, regardless of the cause, it can create markets where there is less liquidity for trades. What that means is that buyers and sellers can become more reluctant to enter a transaction, leaving bigger spreads between the prices that buyers are willing to pay for a security and the price that sellers are seeking. As these spread widen, transactions can occur at a wider range which can increase volatility.

Also, there are hedge funds that are called “quant funds”. These are funds that have computers that use quantitative formulas to decide what percentage of money goes into stocks, bonds, cash and commodities. These computers have algorithms that decide these investment decisions, and it looks like many of these “quant funds” have similar algorithms and can create huge buy or sell orders that create very big short term moves in the market. We tend not to mind them when they drive the market up 600 points, but find them unpopular when they go in the opposite directions.

Why was it not as volatile in 2017?

Maybe a few reasons, such as President Trump had just been elected with a promise of lower corporate taxes and less regulation of many industries. The anticipation of these fiscal and regulatory changes may have helped create the “buy the dip” strategy that occurred whenever the market went down just a little bit in 2017. It seems that “buy the dip” strategy has disappeared for the time being. Also, global economies were stronger last year.

What changed?

This year, the new Federal Reserve Chairman Jerome Powell has been seen as more aggressive regarding increasing short term interest rates than Janet Yellen had been perceived. Also, real estate markets (residential housing in particular) have been softening due to higher interest rates, higher home prices and less new home construction (particularly in lower priced starter homes). Also, trade tensions have increased along with concerns about the effect of Brexit and the clear slowing down of economies in Europe and China. Remember, almost half of the revenues of S&P 500 companies come from overseas.

How does this level of volatility compare with the volatility in the past?

The chart below from American funds looks back at the stock market from 1900-2017 to see how often the market has witnessed varying degrees of pullbacks.  You can see that even bear markets (market declines of over 20%) have occurred with regularity.

Blog Graph

As the last chart below from Pension Partners shows, there have been a lot of down markets since 2009 (who remembers the 15% pullback from November 2015-February 2016?). The chart also shows the news that accompanied these pullbacks.

Blog Graph

The bad news?

None of this tells us what the future holds, and that is what we really want to know.

What it does tell us is that in order to achieve the long term returns of the stock market, we have had to endure more volatility than most of us actually remember.

While it is no fun experiencing the recent volatility, I thought it would help to see what we have all experienced to help put the recent volatility in perspective. Yogi Berra’s quote of “Déjà vu, all over again” comes to mind for some reason.

Thank you as always for your trust and confidence in us. And please, do not hesitate to touch base with us with any questions, thoughts or concerns.

Thanks,

Beach

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Past performance is not indicative of future results. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index.

Volatility Comes to Visit - October 2018

It is pretty obvious that volatility, both up and down, has decided to come visit the U.S. financial markets again. Halloween must be around the corner.

Why is there more volatility recently? The honest answer is that markets are acting more like they normally do. What was abnormal was the extremely calm markets of 2017.

However, here are some reasons investors might be a little more jittery than normal:

  • Interest Rates
    A rise in some interest rates to their highest level in almost 10 years. Although rates are still low for an economy at the lowest unemployment rate since the 1960’s, the yield on the 10 year Treasury bond has almost doubled since July 2016. Higher interest rates have also pushed 30 year mortgage rates above the 5% level, which does not help the housing market. Higher interest rates can also crimp new automobile sales. Together those industries represent more than 20% of our economy.
  • Trade
    Trade concerns and their potential to disrupt the global supply chain that has developed over the last couple of decades could crimp profit margins.
  • Labor
    Tighter labor markets could mean higher cost for wages at the same time corporations may be facing higher interest rates. Together these could also hurt profit margins, which have been at historical highs.
  • Psychology
    When investors get too complacent or too bullish (which some surveys have indicated recently), markets tend to deliver wake-up calls to remind us that is not always easy to stay invested. It occasionally takes some intestinal fortitude to earn the higher return that the stock market has historically delivered.
  • Expectations
    Markets are discounting mechanisms- discounting what it sees in the future (sometimes correctly and sometimes incorrectly). With such strong earnings growth this year, some investors may fear that next year’s earnings comparisons to this year’s earnings could be more muted.

So there are some legitimate current concerns for investors - but there are always legitimate concerns for investors. The coast is never clear.

Not long ago it was the Presidential election, with most “experts” forecasting a significant sell-off if Trump was elected. The “fiscal cliff” was a big concern before that. Remember Y2K- when the banks would not know how much money you have in your checking account? There is always a reason to be concerned, but we don’t usually get hit by the bus that we see coming down the street.

We do know that corrections (10% drop from market peak) and bear markets (20% drop from market peak) are part and parcel of investing in the stock market. We also know that the key to long term success is not achieved by avoiding them- nobody has done that with any accuracy. So what’s left? Warren Buffet says he will participate in every correction and bear market, but also every rebound and bull market. That puts us in pretty good company.

We control risk for you by deciding how much of your portfolio is invested in risky assets (stocks), not by responding to the latest market gyrations. We believe this is the only way to systematically manage the volatility that is inherent in markets.

Taking the least amount of risk necessary for you to achieve your goals is the cornerstone of our investment philosophy.

Thanks as always for your trust and confidence.

Thanks,

Beach

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Past performance is not indicative of future results. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index.

Why We Own Bonds In Your Portfolio - October 2018

Why would anyone own bonds?

The market volatility experienced last week reminds us why we do.

We do not own them to grow your capital. We own them to protect your capital.

Is it frustrating to pay your homeowner’s insurance when there is no hailstorm on the horizon or your automobile insurance when you haven’t been in a serious accident? Yes. But, I would say we are all glad when the premiums were unnecessary.

If we knew in advance when a hailstorm or a texting driver on our road would occur, we would know when to pay our insurance premiums and make sure our seatbelts were fastened. For most of us non-prescient people, we aren’t able to predict these events.

A question we have been asked a few times is “Shouldn’t we wait until we see things starting to go down before we own bonds?” It is a reasonable question. But like the homeowner and driver, we don’t know when the hailstorm, distracted driver, or bear market is coming our way. We have to put our seatbelts on while we are in our driveway.

Frequently, after the market has gone down some- investors who are in all stock portfolios don’t want to sell a portion of their stocks- “Why sell now?” Why not wait until the market goes back to where it was just a couple of weeks ago and then consider adjusting the riskiness of their investments? But then the market may go down a little more, and now it is really stupid to sell stocks. But let the market go down enough, and it eventually becomes “Get me out before I lose anymore!”

A lot of things have changed over the years, but this pattern of human behavior has not.

It has been a while since a normal correction or bear market has confronted us, and most investors have a strong “recency bias”. This means we tend to take our recent experiences and expect them to continue. This was true after the 50% drop in the stock market from 2007-2009. Many investors took their money out of stock funds and put it in bond funds. But this was AFTER much of the damage had been done. And on the flip side of the coin, most money goes into stock mutual funds AFTER the markets have had a big move up. We know this because we can track the flow of funds in and out of various types of mutual funds and see when and where investors are putting their money.

I have included two charts showing a history of down markets for the stock market and the bond market:

Blog Graph

Blog Graph

You can see that the worst bond market routs, even going back almost 100 years, pale in comparison to the downside volatility of the stock market. The good news for stock investors is that the U.S. stock market has always come back from those dips - sometimes quickly, sometimes slowly.

However the challenge for all investors is “hanging in there” when the ship hits the iceberg- and it is not easy. We can all feel foolish watching our portfolios go down and investor behavior proves time and again that many do the wrong thing at the wrong time.

The primary reason we own bonds is to mitigate the obvious volatility that comes periodically with the stock market. This helps you stay with your plan - and hopefully sleep well (or at least better) at night.

Thanks,

Beach

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Past performance is not indicative of future results. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index.

Investing With A Crystal Ball - September 2018

What if we were able, with a true crystal ball, to know in advance the top performing stocks in the S&P 500 every year? How would we do?

The answer is, as you would expect… very well. A study titled “Even God Would Get Fired as an Active Investor” by the Data Driven Investor looked at what the results would be going back to 1927. It assumes that with this wonderful crystal ball, we are able to invest in the top 10% best performing stocks of the largest 500 firms in the U.S. every year. And no surprise - we would have enjoyed a compound annual growth rate of 29.37%. See the chart below:

Blog Graph

Would we all pay a hefty subscription rate for this crystal ball? I sure would, and I am sure every sane investor would also.

The real question is - would we lose confidence in the crystal ball and cancel our subscription somewhere along the line? The answer is, probably yes.

Why? Because even with the best foreknowledge available, we would have had suffered some big down years that would make us seriously question the value of our crystal ball subscription. And when we are losing money or not earning much return, we all question our strategy. We all see what investments are working best, and wonder why are we not “all in” on those particular investments?

How much intestinal fortitude would it take to hang in there with this always correct crystal ball? Would being down over:

  • 75% for a 3 year period make you question your strategy
  • Another period where you are down 40%
  • And an additional period of watching your portfolio decline over 39%

Are you still hanging with this strategy, and paying for it? Below is a chart showing the drawdowns you would have had to endure to achieve the 29% annualized return.

Blog Graph

I can only speak for myself, but I would probably question, I mean cancel, my subscription while offering a few choice words to this little crystal ball.

The obvious message is that even the very best investment strategy has periods of losses and frustrating performance, but it does not mean that you are in a bad strategy. Patience is a virtue that most investors do not have, but it is probably the most valuable attribute.

This year is one of those periods when diversified portfolios are not providing much in the way of return. The one area that has provided an attractive return is the U.S. stock market. Bonds, international stock markets etc. are either flat to down this year, and portfolios that are invested in a broad spectrum of these asset markets have looked rather anemic in 2018 versus a non-diversified portfolio of just U.S. growth stocks. But it does not mean you are in a bad strategy.

Hopefully you will find this information helpful in understanding the patience and fortitude required to benefit from even the very best strategy. Unfortunately, we do not have access to that always correct crystal ball. But even if we did, we don’t believe it would be appropriate for most of you. Experiencing the drawdowns incurred by the “best strategy” could seriously impair your probabilities of reaching your goals, in addition to making it very difficult to stay with the strategy.

We believe we invest your portfolio in a manner that provides you the best path forward to reaching the goals that are important to you. Controlling what we control and taking can no more risk than is necessary to reach your goals is our best advice…. until we find the crystal ball that also eliminates the down periods.

Thank you again for your trust and confidence in us. It is the most important asset that we have.

Thanks,

Beach

Views expressed in this newsletter are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author's opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Raymond James & Associates, Inc., member New York Stock Exchange/SIPC.

Liability Driven Investment Strategy and Market Update - August 2018

We hope you are enjoying this summer - it is going fast! It seems that the yearly calendars need to be replaced with new ones more frequently than they used to.

Market update

The market has had a relatively quiet summer so far, especially compared to the quantity and decibel level of the economic news. Great job numbers and great profit numbers have been countered by daily threats of trade skirmishes/trade wars. According to JP Morgan’s Weekly Market Recap, with 471 of the 500 companies reporting so far in the S&P 500, profits are up 27.2% over last year. Profit margins are the highest they have been on record.

The bond market is trying to absorb a lot of new bond supply from the U.S. Government, as the projected level of this year’s deficit is requiring the Treasury to borrow significantly more than last year via bond issuance. While interest rates are up from the first of the year, they have been relatively stable lately with the ten year Treasury bond yielding in the 2.9% range recently.

International markets are down some, but a lot of that is due to their currency being weak versus our dollar. If a foreign country’s stock market is up 5% this year, but their currency is down 10% versus our dollar, then we as dollar based investors earn a negative 5%. Of course, the exact opposite can happen if the dollar weakens.

Retirement planning

As you may recall, when it comes to developing a retirement plan, we employ a liability driven investment strategy. This is very similar to the process pension plans use. An actuarial/consultant helps a pension plan test their current assets against their projected liabilities to determine their current funding status. The result is a pension plan that, based on a variety of factors, is either underfunded, appropriately funded, or overfunded. Various courses of action will be determined by the pension’s funding status.

When working with you to develop your strategy, we apply the same liability driven investment strategy, but with different factors. We want to make sure you have sufficient resources to provide the financial independence to support the lifestyle your desire.

The questions that our process allows us to answer for you are:

  • Am I on track to realize the goals that are important to me?
  • Am I taking more risk than I need … or too little?
  • Am I saving enough, too little, or too much?
  • Am I planning on retiring too soon or working longer than is really necessary?
  • Am I dependent on good market returns to be ok?
  • What is my status if investment markets aren’t particularly friendly?
  • What are the probabilities of leaving something for my heirs/charities?

The range of factors that our process takes into account include inflows such as:

  • Social Security
  • Pension payments
  • Rental income
  • Sales of assets to fund retirement goals (real estate, business ownerships etc.)
  • Consulting or part time compensation etc.

The variety of expected/potential outflows accounted for include:

  • Purchasing a vacation property
  • Funding a daughter(s) wedding(s)
  • Helping parents’ long term care needs
  • Long awaited vacation trips, etc.

With that information, we test your goals against a range of market returns to see how sturdy your strategy is, and what, if any, adjustments would help.

Regarding investment strategies to implement that portion of the plan, we are firm believers in helping you control what you can control as an investor. We do that by utilizing broadly diversified, low cost, tax efficient funds. This approach also minimizes the risk of missing out on market performance.

Please let us know if you would have an interest in hearing more about this topic. As always, don’t hesitate to call with any thoughts or questions.

And as always, thank you for your trust and confidence in us.

Thanks,

Beach

Views expressed in this newsletter are the current opinion of the author and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Opinions expressed are not necessarily those of Raymond James & Associates. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market Inclusion of this index is for illustrative purposes only. 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.

Tariffs & Trade Issues - July 2018

The constant talk about tariffs and potential trade wars has created questions about their potential effect on the economy and the investment markets. How this back and forth jawboning will end is unclear. The hope is that the threat of tariffs (some actually enacted now) will result in better trade terms for the U.S.

President Trump is hoping that increased tariffs on imported products can be used as leverage to get foreign countries to reduce the tariffs they apply to U.S. exports.

As an example, the U.S. applies a 2.5% tariff on European cars imported into the U.S., but the Europeans apply a 10% tariff on cars we export to them. These are the type of imbalances that the Trump administration is trying to remedy.

Closer to home, BMW’s Spartanburg plant, which is their largest factory, manufactures approximately 385,000 SUVs annually and employs 9,000 South Carolinians. The Spartanburg plant exported 20% of those SUVs to China last year. However in retaliation to new U.S. tariffs, on Friday China raised to 40% the tariff on U.S. cars exported to China. This could certainly hurt the demand for these locally produced SUVs.

Our farmers have already felt some of the consequences of these retaliatory tariffs. Soybeans are the largest agriculture export for the U.S. and China is the top market for our soybean exports. China has retaliated against our new tariffs by imposing a 25% tariff on U.S. soybeans, which has hurt the price of soybeans (as shown in the chart) and farmers’ profits. Other agricultural products, such as milk and hogs, are also being hit with tariffs. The charts below show the price decline on these important crops for farmers.

Blog Graph

Blog Graph

Blog Graph

The financial markets have moved up and down at times with statements about tariffs, and currently it appears the stock market is not expecting a full blown trade war to occur.

The bond market has responded with longer term interest rates moving down somewhat, in spite of the Federal Reserve’s previous and expected short term rate increases. These lower rates in the bond market may also imply a more subdued growth outlook beyond 2018.

Overall, the markets have been relatively flat this year but with more volatility than last year. Through the first half of this year, large U.S. stocks are up about 2.5%, small U.S. stocks up about 7%, international and emerging market stocks down approximately 3% and 7% respectively and the bond market down about 1.5%.

A strong U.S. job market, optimistic consumer confidence levels and positive leading economic indicators currently imply a robust U.S. economy- in spite of tariffs, both real and threatened.

Hopefully, cooler heads will prevail and realize that trade wars are bad for all participants and the end result will be free and fair trade with all our trading partners.

As always, don’t hesitate to call with any thoughts or questions.

Thanks,

Beach

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

What Happens to Stocks When Interest Rates Rise? - June 2018

The Federal Reserve Board raised short term interest rates by one quarter of a point at their meeting on June 13th. We have had several questions about rising interest rates and their potential effect on stock prices, so we thought some historical context would help.

Andrew Berkin, the director of research at Bridgeway Capital Management, authored an article in the Summer 2018 issue of The Journal of Investing title “What Happens to Stocks When Interest Rates Rise?” His study provides some interesting observations.

If all things were equal (which never happens), you would expect prices of stocks to go down when interest rates rise. Since stock prices reflect the sum of their discounted future cash flows, as rates rise, so should the discount rate rise, which implies that stocks should be worth less. Higher rates could also slow the economy and increase borrowing costs for companies. All are reasons to expect stock prices to go down in the face of rising interest rates.

However, rising rates often reflect a strong economy- which enhance corporate profits and cash flows. And remember, markets are discounting mechanisms, so current market prices should already reflect investors’ anticipation of future changes of interest rates and cash flows.

So to be able to forecast stock price movements accurately, an investor would need to know the direction and magnitude of changes in inflation, interest rates (both short and long term), corporate profits, investor attitudes, geopolitical trends and then know how these compare to what investors already expect as reflected in current stock prices. This is a difficult challenge.

So what does history tell us? Berkin presents U.S. stock returns and interest rate changes for a given year. His study provides 90 years of data, from 1927-2017. He found that the years were split almost evenly, with 46 years of rate increases and 44 years of rate decreases.

He found that the average return of the S&P 500 was 10.8% in the years when rates fell and surprisingly higher at 12.2% when rates rose. So the opposite result from what many investors would expect.

But how about a delayed reaction- how did stocks perform the year after rates increased or decreased? Here, Berkin found some evidence that stocks do better when rates fall. When rates moved lower, the following year equities returned 13.3% on average compared to a 7.55% return in years after rate increases.

So while investors may worry about the effects of rising rates, such concerns seem to be overblown. Remember, market participants are already expecting future rate hikes, so to have an impact, rates have to rise more than the market already expects. And not be offset by an increase in corporate profits and cash flows.

Thanks as always for your trust and confidence in us.

Beach

Views expressed are not necessarily those of Raymond James and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. There is no assurance these trends will continue or that forecasts mentioned will occur. The S&P 500 is an unmanaged index of 500 widely held stocks. Keep in mind that indexes are unmanaged and individuals cannot invest directly in any index. Index performance does not include transaction costs or other fees, which will affect the actual investment performance. Individual investor results will vary. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

Great Job Numbers in the U.S.: The Pluses and Potential Minuses - June 2018

The Department of Labor just released some statistics that it has been tracking since the year 2000. This statistic compares the number of available positions to the number of job seekers. And for the first time since this particular record keeping began, there are more job openings than there are people seeking employment.

U.S. job openings rose to a record high of 6.7 million in April versus 6.3 million people seeking employment. The jobless rate is down to 3.8%, the lowest since April 2000.

Job Vacancies

We have come a long way from October 2009 when the unemployment rate hit 10%. This is wonderful news for American workers. I am trying to think of the last restaurant that I walked into that did not have a “Help Wanted” sign on the front door.

Unemployment Rate

Demand for labor is outstripping supply, and it is showing up with increased wages. In May, hourly pay for non-supervisors rose 2.8%, the largest increase since mid-2009.

So there is good news on Main Street, as consumers are feeling more confident about their employment and pay prospects.

On Wall Street, there is a flip side to these good numbers. When companies have to pay workers more and are able to pass those increased costs on to their customers, inflation concerns start to be reflected in some part of the investment markets. Higher inflation expectations can cause the Federal Reserve to continue to raise short term interest rates and also push longer term interest rates higher. This could make it more expensive to buy a house, car etc. And it can also cause bond prices to go down.

There is also a possibility that the increase in costs of labor (and some raw materials) can’t get passed on to the customer, which could cut profit margins for companies. Recently, American companies have enjoyed some of the highest profit margins they have experienced.

Another possibility is that while profit margins might decrease some, an increase in overall sales could more than make-up for the lower margin and result in good profits. And we are seeing some evidence of that, with the S&P 500 revenues increasing approximately 10% in the first quarter of 2018- some of the highest revenue growth numbers we have seen in some time.

So there is good news for consumers and Main Street, and so far good news for sales and profits for the companies on Wall Street.

Regardless of the outcome, the benefits of diversification should be realized. Stocks tend to do relatively well in inflationary environments if higher costs are passed on to customers. However, if companies can’t pass along higher prices, inflation may stay low but we could witness a reduction in profit margins- a scenario where bonds should provide stability and a stream of income.

If we only knew how all of this will be resolved, we would know exactly what to do. Until we get that crystal ball that really works, we will remain diversified.

Thanks as always for your trust and confidence.

Beach

Sources: Job vacancies chart https://fred.stlouisfed.org/series/LMJVTTUVUSM647S. Unemployment rate chart: https://fred.stlouisfed.org/series/UNRATE.

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Past performance is not indicative of future results. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index.

Investors Are Their Own Worst Enemies - April 2018

Investors are constantly being presented with decisions in how they invest their portfolios. And unfortunately, our natural tendencies are often our worst enemies to a successful strategy.

One of the toughest obstacles that successful investors must fight is a natural bias called “recency.” Recency is the tendency to expect recent trends to continue uninterrupted. We look at what has done well in the last couple of years and make investment decisions based on that performance, with the expectation that the good performance will continue.

The mutual fund industry regularly provides information regarding the amount of money into and out of various asset classes and sectors, so we know how investors in aggregate are investing their money. And unfortunately, the same patterns continue. Investors put the most money into what has done well and take money out of what has done poorly- analogous to using your rear view mirror to drive your car.

As a result of that investor behavior, which repeats itself over and over, investors generally do not do as well as the overall market does. Obviously when the price of a certain asset class or sector has had great performance, they are naturally more expensive as a result of that appreciation, so investors continue to chase performance and add more money the area that has become highly valued.

Investors also suffer from confusing familiarity with safety. The brand names we see often and perhaps have grown up with impart a perception of safety to us. Wachovia was a name we saw everywhere in this area and had been a well-managed bank, until it wasn’t. Toys ”R” Us was the go to store at Christmas when my kids were small, and they recently filed for bankruptcy. Kodak was the film and camera we all used, and they have met the same fate as the other two companies. The list goes on.

All these human tendencies, left unchecked, lead investors to do the opposite of what a disciplined investor should be doing: rebalancing at reasonable intervals to the original asset allocation blend that provided them the best probability of meeting their goals while limiting unnecessary investment risk.

This rebalancing strategy, which we employ, makes us do what we don’t like to do- take away some dollars from the areas of our portfolio that have done the best and reallocate it to the portion of our portfolio that has become underweighted. But it instills the discipline to take some money from areas that have become relatively expensive and add to assets that have become relatively less expensive.

As always, please don’t hesitate to call us with any questions or thoughts regarding your investment strategy. We greatly appreciate and value your trust and confidence in us.

Thanks,

Beach

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Investments are subject to market risk, including possible loss of principal. The process of rebalancing may carry tax consequences. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

It's Not What You Earn, But What You Keep - March 2018

Sounds kind of corny, but when it comes to investing, it is a very important part of increasing the probability of meeting your goals.

When mutual funds and money managers advertise their performance, it is always on a pre-tax basis, as it has to be. They do not know every investors’ tax particulars, so the only reasonable way to communicate their performance is on a pre-tax basis.

However, when it comes to what works best for you, taxes have to be considered in your investment strategy for obvious reasons. A 10% return via a pre-tax short term gain or taxable interest may only be a 5%-6% return once federal, state, and the 3.8% net investment tax (for certain investors) is considered.

We think most of our clients would agree that there is a significant difference between 10% and 5%.

So if we agree that it is not what you earn but what you keep that matters, how does our style of investing help you?

As you know, we implement your strategy using broadly diversified, low cost, tax efficient exchange traded index funds (index ETFs).

At a Raymond James investment conference last month, a like-minded colleague presented an analysis of after tax returns for a portfolio incorporating index ETFs versus a similar portfolio using very recognizable names of actively managed mutual funds. The difference in after tax returns was significant for investors in the higher tax brackets. While we knew that our approach was very tax efficient, we had not appreciated the full extent of the after tax benefits of our strategy.

Every case is different, some actively managed mutual funds are more tax efficient than other, and each investor has their own unique tax situation. But the way in which index ETFs are traded has historically generated much less in realized capital gains compared to funds that are annually realizing short and long term capital gains -on which you have to pay taxes every year. Thanks as always for your trust and confidence.

Beach

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. ETF shareholders should be aware that the general level of stock or bond prices may decline, thus affecting the value of an exchange-traded fund. Although exchange-traded funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the funds may not be able to exactly replicate the performance of the indexes because of fund expenses and other factors. Investors should consider the investment objectives, risks, and charges and expenses of an exchange-traded product or mutual fund carefully before investing. A prospectus which contains this and other information about these funds can be obtained by contacting Beach Foster. Please read the prospectus carefully before investing.

Trade Deficits? - March 2018

“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.” A quote from Adam Smith in his book The Wealth of Nations.

In other words, if I can buy steel, groceries, or chicken sandwiches cheaper from you than I can make myself, of course I will buy them from you. It is only common sense, and such a natural decision that most of us make that choice every day without even considering it a “decision”.

The owner or employees at the grocery store where I buy groceries do not pay me for any advice regarding their retirement plan or investment strategies. So I use money to “import” items from them but I never “export” financial advice to them, therefore I don’t receive money from them. I seem to have a “trade deficit” with them. I also can’t remember the last time I was paid for investment advice from Chic-Fil-A employees either. Come to think of it, I have many “trade deficits” with the fellow members of my community.

I guess I could build and grow a garden, but I don’t own a tiller and really don’t have that big of a yard. And I can’t say I have ever built a temperature controlled chicken house. But to get a balanced trade account with the grocers and Chic-Fil-A folks, since they are not buying anything from me, an option would be to plant a garden and build a chicken house. I would not buy anything from them since they do not buy anything from me. Balanced trade!

Am I better off being self-sufficient?

These particular neighbors do not seem to have a need for my services, but I have a need for theirs. But there are people who have a need for my services and compensate me for them. The vast majority of my clients do not provide services or products that I use, but some do. So most of them have a “trade deficit” with me and I have a “trade surplus” with them.

As you can see, every day we are all involved in trade deficits and trade surpluses without giving it any thought. We all naturally employ Adam Smith’s quote without ever pondering, as we fill up our cars- “What would be the cost of owning my own oil well and small refinery?” The thought is so ridiculous, we don’t waste our brain power on it.

As some countries that we do business with end up with a “trade surplus”, what does that actually mean? It means they now have U.S. dollars that they need to do something with, while we have their goods. Is that a deficit? One has dollars and the other has goods of the same value. What have they done with those dollars? They did not disappear. They will either use those dollars to buy goods from us, or they will sell those dollars to someone who needs them in order to buy from us, or they will invest those dollars in U.S. Treasury bonds, stocks, bank deposits, real estate etc.

So, in some shape, form or fashion, these dollars have to be reinvested in assets that require U.S. dollars. The dollars don’t go in a black hole. We sometimes forget that we are dependent on foreigners to buy U.S. Treasury bonds to finance our government’s fiscal deficit. That is how many of these dollars come back to us.

So just remember, the deficit I have with Publix is not a bad thing. The deficit the Publix employee has as a patient of the doctor is not a bad thing. The deficit that the doctor has as a customer of Costco is not a bad thing. All of this is the division of labor, where we all have deficits and surpluses that allow all of us to be more efficient at what we do well.

Thanks as always.

Beach

Views expressed are the current opinion of the author, but not necessarily those of Raymond James & Associates and they are subject to change without notice.

Lessons From My Father-In-Law - February 2018

After the longest streak in U.S. stock market history without a 3% pullback, the market finally did what markets are supposed to do - go up AND down. The S&P 500 had spent 311 (11/7/2016 - 2/1/2018) trading days without a drop of 3%. The previous longest streak had been 241 days (1/26/1995-1/9/1996).

Another significant streak (a good one) was announced last week. That is 88 consecutive months of job creation- by far the longest in recorded U.S. history.

Other market changes that have occurred recently are in the interest rate and bond markets. The U.S. Treasury 10 year bond is now yielding approximately 2.80%, not very high but the highest it has been since January 2014.

Does the Dow’s drop of 666 points on and 1175 points on Monday, a drop of 6.9%, imply that Armageddon is around the corner?

I am showing my age, but I had a whopping 4 years of experience in the investment world when the Black Monday drop of October 19, 1987 occurred. On the previous Friday, October 16, the Dow dropped 108 points (4.6%), and on that memorable Monday it dropped 508 points (22.6%) for a total drop in two days of 27%. That was scary to many of us - I had no clue what to think.

What I remember clearly about that Monday in 1987 was calling my father-in-law to tell him what had happened to his stocks. He was an immigrant from Greece who had built and run several of the Pete’s restaurants in Greenville from the 1940s through his retirement in the late 1970s. While he had no formal education to speak of (he left Greece when he was 14), much less any academic studies in economics or finance, he had been a student of the U.S. economy as an entrepreneur and a student of consumers as a restauranteur for 40 years. He had seen, through good times and bad, many thousands of Greenvillians order hot dogs, hamburgers, French fries and Cokes. So he bought a fair amount of Coca-Cola stock since the early 70s, and still had it. If my memory serves me correctly, Coke dropped that day from the low $40s to the high $20s - about a 30% drop in one day. This was before CNBC was on everyone’s TV and in those days we actually had to tell people what was going on in the market- much different than today.

So when I told him what had happened to Coke, my next suggestion was going to be lets sell it before it goes to $20 - things are bad! However, he asked me one question that I will never forget. He asked me if Coke was still paying their dividend. I remember thinking what a strange question to ask as I watched the world dissolve right in front of me on my computer. I answered “Yes sir, they are still paying their dividend.” My very wise father-in-law replied “to heck with them, don’t sell anything” (this is the PG version of that conversation).

Well, Coke continued to pay their dividend and has managed to sell a few million drinks a year since then.

My point is that markets are much more volatile than the underlying economy- which almost always grows. And markets are much more volatile than the profits and dividends generated by the companies you own. And markets are always trying to get us to do what is the absolute worst choice for our own benefit- to be scared and sell when companies’ shares become cheaper, and to be over confident and greedy when their shares become more expensive. A lot may have changed in this world since 1987, but what never changes is human emotions and the action that those emotions can cause us to take.

While markets have had virtually no volatility the last couple of years, expect volatility to return because that is the norm- not this extremely placid experience since 2016. And remember that short-term volatility has historically had very little correlation on the underlying growth of our domestic and global economies.

And you are very diversified in your portfolios here, so no one stock or one group of stocks is going to dictate your return here- that is one risk my father-in-law took that he didn’t have to. But his wisdom from his many years of watching consumers, markets and realizing that investors don’t have to respond to short-term big moves up or down in the market is wisdom I still hold onto and try to share today.

Don’t hesitate to call us with any questions, thoughts or concerns as market may start acting more normally-with more normal volatility.

Thanks as always for your trust and confidence.

Beach

Disclosure: Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

The S&P 500 is an unmanaged index of 500 widely held stocks. The Dow Jones Industrial Average is an unmanaged index of 30 widely held securities. It is not possible to invest directly in an index. Dividends are not guaranteed and will fluctuate. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise.

Why We Own Bonds - February 2018

With the increased volatility (both up and down) that the stock market is experiencing, we thought it might be especially helpful to see how bonds have performed when the stock market has gone down.

While past performance is not indicative of future performance, it at least provides some insights into the historical relationship of stock and bonds.

It is interesting that in the last 90 years1:

  • the stock market has had positive return in 66 calendar years
  • of the 24 negative calendar years for stocks, 21 of those years saw bonds provide a positive return

… So, only 3 out of the past 90 calendar years did both stocks and bonds experience a negative return.

This is why we own bonds. Not because we expect them to outperform stocks over the long term, but to mitigate the volatility that is part and parcel of the stock market.

I saw this quote the other day that I thought summed it up well. “Stocks let us eat well while bonds let us sleep well.”

Thanks as always for your trust and confidence.

Beach

Sources:

  1. The Wall Street Journal
  2. Dimensional Fund Advisors “Equity Returns of Developed Markets 1997-2016”

Source:

1 Charlie Bilello: “When Stocks and Bonds Go Down Together.” https://pensionpartners.com/when-stocks-and-bonds-go-down-together/

Disclosure: Views expressed are the current opinion of the author, but not necessarily those of Raymond James & Associates and they are subject to change without notice. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise.

The Effects Tax Reform on the Markets and the Economy - January 2018

The markets have been strong since the start of the year. While the media keeps up with the political distractions in Washington and its various circuses, I think they are overlooking one event in Washington that is having a very big effect on the economy, markets, and investors- the tax bill that was passed in December.

While some of the bill is still being deciphered, some obvious consequences are being observed rather quickly. The telecommunications giant ATT announced a $1,000 bonus to 200,000 of their employees after the bill was signed. Wells Fargo announced they were raising its minimum hourly wage to $15 and Comcast also announced a $1,000 bonus to more than 100,000 of its employees. Also, Apple has announced they are bringing a portion of their $250 billion they have held overseas back to the U.S., hiring 20,000 new employees and building a new campus. Several large employers have also announced an increase in their minimum wages for their associates.

We knew that reducing the corporate tax rate would mean an increase in after-tax profit for shareholders, but how broadly the ripples of this tax change would affect the economy were not known at the time the bill was passed, and are still being discovered.

More money in employees’ paychecks can be felt in a variety of areas of our economy, since consumers make up over two thirds of the U.S. economy. There is also reason to expect more investment in our economy- Comcast announced a plan to invest $50 billion in the next five years in infrastructure.1

The increase in value of the stock market likely reflects the expectations of more after-tax profit as a result of this bill. But we are also seeing the most synchronized global growth in years. Europe had been in the doldrums for years and is starting to see their economies strengthen, as has Japan. There are currently only a handful of countries not seeing their economy grow. So a combination of strong earnings growth, continued low interest rates and a strong global economy is providing the fuel for the strength of the markets so far.

In 2017, as good as the U.S. stock market was, being diversified internationally paid off as most overseas markets provided an even better return. Interestingly, a study of stock market returns of all the developed countries (countries such as Germany, Japan, Australia, United Kingdom etc.) over the last 20 years, reveals that the U.S. stock market was the best market in just one of those years. 2

Staying diversified with a disciplined investment strategy is the key to successful investing outcomes. At some point the markets and economy will test investors with their normal cycles, but we know that is to be expected and we account for that in your plan.

As always, don’t hesitate to call us with any thoughts or questions.

Thank you again for your trust and continued confidence in us.

Beach

Sources:

  1. The Wall Street Journal
  2. Dimensional Fund Advisors “Equity Returns of Developed Markets 1997-2016”

Disclosure: Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Decisions, Decisions - October 2017

What is the fastest way to build wealth quickly in the financial markets? The answer is to own a concentrated portfolio. What is the fastest way to destroy wealth in the financial markets? The same answer.

Concentration doesn’t mean just one stock. It can also mean just owning a single asset class (all stocks, all real estate, all bonds, all gold etc.), or just companies in a single industry.

As a former employee of a large New York bank, I can tell you many tales of wealth disappearing as this company’s stock was in the $50’s in 2007 only to drop to $1 by 2009. It has since “rebounded” to $7- it currently trades in the $70s due to a REVERSE 10-1 split.

Owning stocks which we are familiar with and consider blue chip names may provide emotional comfort to investors. However, a quick look at some “blue chip” household names may prove interesting:

  • Coke traded at $42 in 1998, 19 years later is up $2 to $44
  • GE traded at $58 in 2000, 17 years later is at $22 down 62%
  • ATT traded at $56 in 2000, 17 years later is $35, down 38%
  • Pfizer traded at $46 in 1999, today is $36, down 21%

All this with the market making new highs almost daily. Some investors may have felt that the basket of stocks above, given as an example, provided reasonable diversification with premier companies in the consumer staple, industrial, telecommunications and healthcare industry respectively. However, the performance of those stocks has been very disappointing and could potentially have serious consequences on an investors’ lifestyle.

The example above doesn’t include the upside opportunities potentially missed as decisions had to be made whether to invest in new industries (e-commerce, social media, smart phones etc.) as represented by companies such as Google, Facebook, Apple and Amazon.

And to be frank, all these decisions can create a lot of stress. Whether to sell a “blue chip” stock as it goes down- or buy more, or whether to invest in a new company/industry are difficult decisions. The individual stock approach can create a lot of emotionally difficult decisions, and a lot of opportunities to make the wrong decision. Will this stock be the next Walmart or K-Mart, Apple or Compaq, Exxon or Enron? Nobody knows the answer at the time those decisions are made.

Our approach to investing eliminates the need for continuous single stock decisions for you and ourselves. We let the market and the combined knowledge of all the participants in the market work for us. As new companies emerge and prosper, our strategy includes them in the funds we use, and as companies go into their twilight year or worse, our goal is to own less or none of them.

There is no perfect way to invest. There are risks in every approach. But there are risks for which we believe you are not compensated and we don’t ask you to take. This is how we strive to put the odds of success on your side.

Thanks as always for your confidence and trust in us.
Beach

Views expressed are not necessarily those of Raymond James and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC.

Bear Proof Your Portfolio - September 2017

How to make your portfolio bear market proof!

That is a headline that probably gets more advisors and investors to read a particular article than any other headline. Why- because we all fear seeing the value of our portfolios go down, which is human nature. And the vast majority of us dislike losses a lot more than we like gains.

The good news is there are advisors and funds that portray themselves as using a “tactical strategy”. In the investment world, “tactical strategy” means moving around in anticipation of future events that the manager or advisor foresees in an effort to avoid risks and increase returns. They try to avoid the areas they expect to do poorly, put more money into areas that they anticipate will do well, and generally time the market using their “proprietary” process.

The bad news is that Morningstar, a large database that measures the performance of mutual funds reveals that no tactical mutual fund manager beat the S&P500 over the ten year period ending June 30, 2017. So it is a very attractive idea in theory, but the reality of successfully implementing it is obviously a very different story.

Avoiding bear markets is a tempting endeavor, but the market timing hall of fame is an empty room.

Warren Buffet is considered to be one of our greatest investors, and his company Berkshire Hathaway has returned 20.8% from 1965 through 2016. Did he do that by avoiding bear markets? No- according to Wealth Management.com, Berkshire Hathaway had peak to trough declines of 37% in 1987, 37% from 1989 -1990, 49% from 1998-2000 and 51% from 2007-2009. If he does not try to avoid bear markets, should we?

Recently the investment firm Ritholz Wealth Management looked back from 1950-2016 at every calendar year to identify the largest peak to trough decline of the overall market. It found that the average pullback during a calendar year is -13.5% and in more than half of those years there was a pullback of at least 10%. In spite of that, returns were positive in 79% of those calendar years.

Turns out that the road to riches is a bumpy one, but it has required patience and at times just plain “holding on” in order to benefit.

We don’t “bear proof” our clients’ portfolios, but by not exposing your strategy to any more risk than is necessary to reach your goals, and building a plan that takes bear markets into account, we know that whatever bumps in the road we encounter are unavoidable and anticipated.

Thanks,
Beach

Disclosure: Views expressed in this newsletter are the current opinion of the author, but not necessarily those of Raymond James & Associates and these opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index.

Quiet Markets - July 2017

Summer time is here, and the current heat and humidity making going outside almost a risky adventure.

One area that seems to have lost its risky nature are the financial markets. The political volatility of Washington, the inability of the Republicans to get major campaign promises passed and the cable news networks’ obsession with Russiagate is not disturbing the stock or bond markets so far. In fact, financial market volatility is at a multi decade low. This low level of volatility in the stock market is unusual.

Exactly why there is such little volatility I don’t know, but there is a flip side to the low volatility coin that we feel we should consider. A good analogy of the potential consequences of a long period of very low volatility involves a boat, passengers and a body of water. When a boat leaves the dock, the passengers are rightfully concerned about being safe. So they wear life jackets and prefer to sit in the middle of the boat, so if a big wave comes at them they are in little jeopardy of being bounced out. However, after a relatively long period of no waves, they may take their lifejackets off and may even enjoy sitting on the edge of the boat. Again, there are no rough waters to make them concerned about falling out, so they are more relaxed. However, they have unwittingly put themselves in a much riskier position. Now, should a big wave hit them, they are in a much more precarious position and are subject to some potentially serious consequences.

Human nature is no different whether we are on a big lake in a motorboat, or if we are investing our retirement plan assets etc. We are very aware of risk when we are experiencing it, but our memories can be rather short, and we often project current conditions into the future.

There is a good chance that what we are experiencing in the financial markets is that this long period of calm has enticed investors to take more risk than they normally would- certainly more than they felt comfortable taking at the end of the financial crisis of 2007-2009. Ironically, that is when financial market valuations were such that they were actually much less risky, as many financial assets were trading at low valuations. Low valuations are the financial market’s proxy for lifejackets and sitting in the middle of the boat- the low valuations can provide a “margin of safety”, a well-known term in the investment world.

Long periods of low volatility, especially when accompanied by low interest rates, can attract investors into riskier assets than they would normally invest in. And these monies can push market valuations into a more expensive level. This is important because these investors might not stay invested when normal market volatility returns. This can make a market pullback even greater than it would have been, as these investors who do not have the temperament to withstand the normal volatility of markets, exit the markets.

When and to what degree a normal correction (pullback) in this market will occur nobody knows. But this is why we maintain a disciplined approach to your portfolios and do not let the current lack of volatility lead us into putting you into a more risky position. We endeavor to make sure that you are not exposed to any more risk than is absolutely necessary for you to reach your goals. Whether today’s waters are smooth or not.

Thank you as always and do not hesitate to call us with any questions, thoughts or concerns you may have.

Beach

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC

Is past performance helpful in choosing investment funds? - June 2017

So far in 2017, large company stocks in the U.S. are up approximately 9%. While that is a nice return for just short of six months, overseas stock markets have performed even better. The developed international markets (i.e. Europe, Japan, Australia, Canada etc.) and the emerging overseas markets (Brazil, China, India etc.) are both up about 14%1,2.

We don’t ever know when markets will turn. It takes discipline not to react to short term trends and chase whatever has done well in the past, but unfortunately that is what most investors do.

If past performance led us to find the best place to invest, we would all be great investors.

Unfortunately, past performance is not indicative of future performance and can actually be dangerous to your financial success. A recent study3 looked at the top performing funds (defined as the top performing 25% of all mutual funds) for multiple five year periods i.e. starting from 2002-2007, 2003-2008 etc., all the way to 2011-2016. They then measured how these funds performed in the year following that five year period of outperformance. Not one of these funds was even in the top half of mutual funds in the following year, in fact they averaged being in the bottom 25% the following year. So if investing by looking in the rear view mirror is no more successful than driving while looking backwards, what does work?

The answer is that nothing works perfectly all the time, but there are strategies that do increase your odds of success. We employ those strategies on your behalf in the portfolios that we manage for you.

We focus on eliminating as many of the risks as possible for which you are not compensated. Risks such as guessing when to invest, guessing as to what handful of stocks are going to do best, guessing which firm or individual (and then paying them) to make those guesses for us are all examples of unnecessary risks.

Employing a disciplined strategy based on evidence can be frustrating at times, but it beats a strategy based on hope. We all want to hear someone promise us the upside of the market while also promising to protect us from the downside. And as long as there are people selling this hope, there will be people willing to pay them for it.

Knowing what increases and decreases our clients’ probability for good investment performance is essential to helping you meet your financial goals.

Thanks for your trust and confidence in us.

Hope you have a great summer!

Beach

References:
1. FTSE Developed ex North America Index
2. FTSE Emerging Index
3. Dimensional Fund Advisors Mutual Fund Landscape 2017
Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Please keep in mind that diversification does not ensure a profit or protect against a loss. There is no assurance that the objectives of the portfolio will be reached. All investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC

Politics and the Markets - May 2017

Politics and markets are often intertwined on a short term basis.

News channels that are broadcasting 24 hours a day are in constant need for something to keep viewers watching. The more people watching, the higher the ratings and the more money the networks make from advertisers. Boring news doesn’t keep people watching, but news about potential impeachable offenses or possible colluding with our enemies is good for their revenues. The news media does not need a lot of hard evidence to generate some headlines that grab your attention.

Bill Clinton spent a lot of his time in office fighting various charges. In 1998, he was impeached for perjury and obstruction of justice by the House of Representatives. FYI- the S&P 500 was up over 28% in 1998.

Wednesday May 17, 2017 the Dow Jones Industrial Average closed down 372 points with most reports attributing the decline to troubles in the Trump White House. The general bond market was up approximately .5% and gold up 1.6% - a good example of why we implement diversification to help smooth out declines like this.

But the bigger point is how the stock market performed in 1998 when the President of the United States was impeached. Warren Buffet was interviewed last week and said that he does not think one bit about elections when he invests his money in the stock market.

Consumers and businesses have a far greater impact on the economy than does the government. Federal, state and local spending account for approximately 18% of our economy, with private consumption, investment and trade accounting for 82%. Actually the economy influences who we pick for president more than the president affects the economy.

The media can lead us to think that the markets are tied to the ups and downs of the White House. Well, we know that short term there can be a link, but longer term it is the economy, profits and interest rates that drive market returns.

The market had been unusually calm and volatility is bound to come back at some point, and various reasons will be given for its return. We need to remember that some degree of volatility is the norm for markets and not get caught up in the scary headline of the day.

Thank you as always and do not hesitate to give us a call with any questions, thoughts or concerns you may have.

Thanks Again,
Beach

Views expressed in this newsletter are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author's opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. There is no assurance these trends will continue or that forecasts mentioned will occur. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

Investor Behavior is Vital to Success - March 2017
  • Shouldn’t the market pull back here?
  • Aren’t we overdue for a correction?
  • Shouldn’t I wait until the market goes down before I initiate or add to my equity positions?

These are questions many advisors, us included, are hearing from their clients lately. And it is understandable- we all want to know the unknowable. We often joke with clients about determining their best Social Security strategy. If they could only tell us exactly when they will die, we promise to give them the absolute best strategy. It is the unknowable that often bothers us, and there is a belief in many of us that there is someone out there who can protect us from bad things happening. Somebody, somewhere, knows what is around the corner, if we could just find them.

In one of Warren Buffet’s recent letter to shareholders, he said “the years ahead will occasionally deliver major market declines-even panics- that will affect virtually all stocks. No one can tell when these traumas will occur.” And in talking about stock market forecasters who try to predict these unknowable events, he said “Heaven help them if they act on the nonsense they peddle.”

Bloomberg recently provided a lookback at the stock market since 1981. While the annualized total return of large cap stocks from 1981 through the end of 2016 has been 12.8%, the average price decline during each calendar year has been 14%. So on an annual basis, investors had to weather an average price decline of 14%. But most importantly to benefit from the stock market’s positive performance during that period, they couldn’t have sold their stocks in reaction to those downturns.*

Many of us remember the October 19, 1987 Black Monday stock market crash. The stock market dropped 22% in just that one day. If you invested $100,000 in the S&P 500 on Friday before the crash, your portfolio would be worth $79,540 the following Monday evening. And if you sold your stocks then, you would have taken a serious loss. However, by the spring of 1989 your portfolio would have surpassed the original $100,000 investment- if you stayed invested. Our emotions often tempt us to make bad decisions in the investment markets. As referenced above, investor behavior is vital to reaching your financial goals.

Success in investing is not a function of avoiding market downturns. It is a function of having a strategy and a discipline and sticking with it, even when it feels stupid to do so. With our planning process we make every effort to ensure that you are not taking any more risk than is necessary to help you reach your goals.

We have no idea whether the next 1,000 or 5,000 point move in the stock market is going to be up or down. The good news is that we are not at a disadvantage because neither does anyone else. History suggests that it is time in the market, not timing the market that has differentiated the winners and losers in the investment world. As Warren Buffet said “The most important quality for an investor is temperament, not intellect.”

Thanks as always for your trust and confidence in us.

Thanks,
Beach

Disclosure: *Additional information available upon request.

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Atlanta Sosnoff is an independent organization and is not affiliated with Raymond James. Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC

Do stocks outperform Treasury Bills (cash)? And when? - February 2017

We all understand that over the long-term, the stock market has historically provided a better return than the returns you get by keeping your money in cash. The reason we are willing to tolerate the volatility of the stock market is the belief that we will be compensated over the long-term by achieving a higher rate of return than cash.

But there is a catch. While the stock market in aggregate has outperformed cash over most long-term periods, how have individual stocks done? Well, we know now and frankly it is very surprising what the studies have found.

Henrick Bessembinder of the Arizona State University Department of Finance recently released a study entitled “Do Stocks Outperform Treasury Bills?” The paper studies the performance of the 26,000 companies that have had their stock publicly traded from 1926 to 2015. They found that 58% of common stocks had returns less than Treasury bills over the stock’s full lifetime.

The most remarkable finding of this study was that of the 26,000 stocks that an investor could buy during that time frame, only 86 of those companies accounted for over half of the wealth creation of the entire stock market. If you didn’t own those select 86 out of 26,000 stocks but owned the other 25,994 stocks, you would only have had half the return of the long-term stock market performance.

Finding the needle in the haystack seems easy compared to those odds. The only way you know you will own these home run companies is to own all the stocks. That means that you also own all the stocks that went bankrupt. But the handful of stocks that had huge returns more than offset the vast majority of stocks that didn’t even do as well as cash, or did even worse.

This is why we invest the way we do. By using index funds to invest in the various parts of the market, we gain exposure to all the companies in that index- the good and the bad. But we eliminate the chance of not finding the handful of top performing stocks which vary from year to year.

The study also observes how the returns of the stock market similarly come in just a handful of days. Attached is a chart that shows if you miss the 30 best days of the 5,040 trading days between 1996 and 2015, you missed the entire return of the stock market. You could have been fully invested for 5,010 of the 5,040 trading days and earned nothing.

So it is literally a handful of companies and a handful of days that account for all the returns in the stock market. That is why we invest in the broad index rather than try to guess which stocks or which days to be in the market. We believe the evidence is very clear that this strategy gives you a better chance of success than picking individual stocks.

Thanks,
Beach

Views expressed in this newsletter are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author's opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Index Funds and Exchange-traded products (ETPs) are complex financial instruments that may not be appropriate for all investors. Some ETPs employ, to varying degrees, sophisticated financial strategies in order to achieve their investment objectives. Investing in ETPs poses unique risks to investors and such risks are noted in the product's prospectus. Investors should consider the investment objectives, risks, and charges and expenses of mutual funds and exchange-traded products carefully before investing. A prospectus which contains this and other information about these funds can be obtained by contacting (insert FA name). Please read the prospectus carefully before investing.

Post Election Rally - December 2016

Who would’ve thunk it? Since the presidential election through December 8, U.S. large cap stocks are up approximately 6.5% while small cap stocks are up approximately 14%.

Why has the stock market moved so dramatically? Nobody knows exactly why, but there are several possibilities at work that could help explain the strong performance of the equity markets since Election Day.

First- there is the overall sense that a business oriented person is occupying the White House. It is obvious that the Donald is a born negotiator and dealmaker. Governing and leading is more than deal making, but there is now a perception in the markets that the government is going to work with business rather than create new hurdles for it. His comments about eliminating regulatory strangleholds are well received.

His proposed corporate tax reform could have several positive effects. With a lower corporate tax rate, you could assume that the after tax profits of our economy will go up. Since stocks are often valued on an after tax earnings per share basis, all things being equal you could expect to see earnings go up since less is being paid in taxes.

Another part of corporate tax reform would encourage our corporations that have overseas operations to bring back to the U.S. their earnings from those operations. They have continued to hold the funds overseas to avoid the huge U.S. corporate tax bite. It is estimated that U.S. companies have parked approximately $2 trillion dollars overseas. Apple alone has about $200 billion, and Apple CEO Tim Cook stated in an interview with the Washington Post that Apple would have to pay approximately 40% of that in taxes (35% federal and 5% state) to bring it back home and Apple wasn’t going to do it until there was a “fair tax”. Should those funds be repatriated to the U.S., investors could reasonably expect those monies to be put to work in a variety of ways that could benefit them, including dividend increases, share repurchases and capital expenditures.

Fiscal policy changes that would increase infrastructure spending and potentially reduce taxes is being anticipated also. Commodities and commodity oriented companies are benefiting from anticipated new demand from construction spending.

Overall, global equities have increased in value by about $2 trillion since the election.

The other side of the financial coin has been an approximate decrease in the value of the global bond market by about $2 trillion. Expectations for growth in the economy and potential increases in borrowing demands have made bond market investors demand a higher rate of interest. Interest rates are basically back to where they were the first of this year.

With such a strong move in the stock market, we wanted to try to give you some reasons that could account for the stock market’s impressive performance in the last month.

Thanks as always,
Beach

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

Market Reactions Post Election - November 2016 (Part II)

The very strong stock market move since the election has drawn a lot of attention, as stocks normally receive more media attention than does the bond or interest rate market.

But there has been a less discussed but significant move in the bond and interest rate markets. The interest rate on the ten year U.S. Treasury Bond has increased from 1.74% on October 21 to 2.28% as of today, November 18, 2016 - a full ½ point increase that had nothing to do with Federal Reserve decisions. This was purely the bond market participants anticipating a change in direction for the economy.

This is important for the economy because of the many loan products whose interest rates are tied to the ten year treasury yield. Home mortgages are one of the biggest loan markets that have seen a rapid increase in rates. A week ago the interest rate on a typical fixed rate 30 year mortgage was approximately 3.875%, while today it is approximately 4.375%. That increase in monthly payments can reduce the value of the home potential homeowners will qualify for, or in some cases move them from qualified to non-qualified.

In the investment markets, we are seeing the current market value of outstanding bonds decrease as these yields have risen. One of the ways we mitigate this risk for you is managing the average maturity of your bond portfolios. By having a significant portion of your bond holdings in shorter term bonds, the value of your bond holdings have a more muted response to this change in rates than if they were all long term bonds.

In the stock market, you are seeing really big differences in how certain parts of the stock market are reacting to the change in the economic landscape. Stocks, such as utility and certain consumer stocks that had become very popular (and relatively expensive) for their high dividend yields have seen a selloff. A big, local electric utility as well as some of the big consumer stocks (soft drink, tobacco companies etc.) are down from 4% to 7% just since the election.

On the flip side, banks, energy and industrial stocks have been especially strong. The financial sector of the stock market last week was up about 11%. Banks are expected to be more profitable with higher long term rates and also benefit from a potentially friendlier regulatory environment. Commodity oriented stocks are also performing better as the markets anticipate fiscal policy (perhaps worldwide) initiating many infrastructure projects that could create some new demand for commodities.

So as we talked about last week, surprises are the norm in our business. Not only the timing of market reactions, but also the entirely different responses of various sectors of the stock market to the exact same news. Good luck to the predictors and forecasters who claim they can see what and when changes such as these will occur. We will stick with diversification.

Thanks and don’t hesitate to call with any thoughts or questions.

And Happy Thanksgiving if we don’t talk between now and then!

Best Wishes,
Beach

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. Diversification and asset allocation do not ensure a profit or protect against a loss. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

Election - November 2016 (Part I)

Understandably, many investors were fearful of what the market would do the week of the election, because the two potential outcomes seemed to be diametrically opposed to each other. The vast majority of polls predicted that Secretary Clinton was the favorite to win, and she also seemed to be more liked by Wall Street than Mr. Trump. When the FBI “all clear’ letter came this past weekend, the polls and the market seemed to conclude she was our next president and on Monday the stock market rallied almost 400 points celebrating the election of a “known” versus an “unknown”. The market followed that on Tuesday with a smaller rally. It seemed that the election was done and the markets liked the outcome.

Tuesday night around 10:30 or 11:00, I saw the news flash that the futures market indicated the stock market opening down around 700 points on Wednesday morning. The news said gold was surging and foreign stock markets were down significantly. That is when it struck me that the odds were very high that we were looking at a President Trump.

It is a night I will never forget. I am a neither a huge Trump or Clinton supporter, but like many Americans (who I think will never look at the media the same way again), I had been conditioned by the media and pollsters to expect an obvious Clinton victory. I stayed up until about 2:00 trying to take in the implications of this surprise and finally went to bed.

Well, it happened- we elected Donald Trump as president of the United States. Frankly, it is still hard for me to believe. I say that not because I think he will be great or terrible for our country, we don’t know that yet. But we have never elected anyone like him in my lifetime, maybe ever. Along with everyone else, I hope that he and the new Congress will address many of the regulatory, tax and other structural issues that have been impediments to our economy’s growth. I have to believe that he will govern differently than he campaigned and the weight of the office will make him more circumspect than he has appeared.

This election week was also a lesson in the total futility in trying to time the stock market. If ever there was a week of one surprise after another (with significant financial consequences), it could certainly be this one. So far this week, the stock market has rallied almost 4%, which is about half of the total return for all of 2016. The one week that most investors would have probably preferred to “sit out” turns out to be the biggest positive week of the year. You have to be there before lightning strikes, because it comes quickly with no warning and the vast percentage of yearly returns are frequently concentrated in just a handful of days.

So here’s to change! We all hope that it is change in a better direction for all of us.

Thanks,
Beach

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

Political Parties and the Markets - October 2016

Should we wait for our preferred political party to be in office before we invest?

The real clear answer is no.

While the Republican Party is generally perceived as pro-business, how the market has performed under Republican and Democratic administrations is interesting.

According to Oppenheimer Funds, if you invested $10,000 in the U.S. stock market at the beginning of President Dwight Eisenhower's administration in 1952 and only invested in the market when Republicans were in office, that $10,000 would be worth $57,948 at the end of 2015. During that same time period, $10,000 would be worth $119,545 if invested only when Democrats were in office. However if you stayed invested the entire period, it would be worth $692,739.

Past performance is not indicative of future performance, but it can at least shed some light on whether certain perceptions are based on facts or folklore.

Thanks,
Beach

The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed.

The Media and You - October 2016

“Wall Street Climbs, Led by Rise in Energy Stocks” - New York Times 10/5/2016

“How to play oil after the OPEC announcement” - Jim Cramer, Mad Money 9/26/2016

“Dividend Stocks Take a Hit” - Wall Street Journal, 10/5/2016

The financial media, providing you with the information you need, when you need it, to put you in the best position to realize your goals right now…right?

Unfortunately, no. The media’s job is to get ratings, sell advertising and be talked about- in other words to make money. Discussing important factors to your financial success (retirement age, savings rates, Social Security strategies etc.) versus the attention grabbing forecasts of unpredictable markets is not exciting. So, in turn, this information is not shouted at you over the screen or printed in big headlines.

This letter serves as a reminder to you, when all the noise wants to distract you, that choices you control can be more important to reaching your goals that the current gyrations in the markets.

Your financial plan is focused on your goals, choices you control- and then we factor in a wide range of market environments to arrive at an appropriate strategy for you. There are five factors that go into creating the plan, and the investment blend is just one.

The Five Factors

  • Savings Ability
  • Retirement Age
  • Retirement Income
  • Financial Estate Goals
  • Investment portfolio

What do the first four factors have in common? For most of you, each factor can be modified and adjusted. Some factors carry more weight than others. Some factors can be adjusted more than others. All of these work together to maximize your plan’s probability of success.

  • We can save more or less
  • We can retire sooner or later
  • We can aim to have a higher retirement income to live on or less
  • We can plan to leave financial assets to others, assets outside of financial securities, or none
  • We can choose the level of portfolio risk/reward based in conjunction with these other choices

Each way you adjust a factor (higher or lower) has a consequence on your plan. For instance, if you choose to retire later, one of many things happens. Here are just two possible choices:

  • Reduce investment risk, keep the same retirement income goal
    • Because of greater savings from additional years of work - you now require less return from the markets
  • Keep the same investment risk, increase retirement income goal
    • Because of greater savings into your portfolio and fewer years of retirement income required from it - you can aim for a higher retirement income

While none of this information is new to you, it is something that can be forgotten about or overlooked, especially in regards to the media we are exposed to and the conversations around us. So before you allow a newspaper headline or television show to cause concern or panic, remember that your success is built on a combination of these five factors.

Our job, working with you, is to make sure you have a clear picture of what you want to achieve. Given how much wiggle room you have in each choice, our job is to educate you regarding the consequences of your choices. This allows you to choose the path most compatible with your priorities.

Views expressed in this newsletter are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author's opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

Witnessing Rare Events - August 2016

We are all current or recent witnesses to events we have never seen before. The performance of Michael Phelps (23 gold medals) as well as four golds for Simone Biles and the nine medals for the entire U.S. gymnastic team (the most ever by the U.S. team) was fun to watch.

Some unprecedented events are more pleasant to watch than others. This presidential election is also unlike any election we have ever seen. Who is going to win will be decided in just a couple of months (mercifully). Regardless of who wins, we all still have retirements to fund, college educations to pay for and other goals that require us to save and invest. So should we try to incorporate unpredictable election outcomes into our investment strategy? And if so, how should we account for them? Does history provide any kind of guidance?

We have presidential elections with a lot of predictability- you can count on them every four years. But what has been unpredictable has been their effect on the U.S. stock market. But there are statistics for just about anything. Most investors perceive the Republican Party as more business friendly than the Democrats. But according to Kiplinger’s newsletter, the stock market since 1900 has averaged approximately 9% annually under Democratic administrations versus 6% under Republican. Election years have been a little more volatile than other years, and historically the third year of a presidential term has been the best performer. The worst year has been the year we are in now- the eighth year of a two term president (but we are up about 8% thus far in 2016). Beyond that, there is not a lot to glean from stock markets and election cycles. So trying to overlay the unknown outcome of a presidential election on top of already unpredictable markets in hopes of devising a better investment strategy is not very promising.

The other unprecedented situation is the incredibly low level of interest rates in the U.S. and worldwide. The level of interest rates can have a significant effect on stock market prices. We will use local businesses to make this point. If a local bank offered us a one year CDs at 5%, would you take money out of the bank and buy a local utility stock that yields 4.2%? Probably not, and neither would many others. However when the one year CD offers less than 1%, would you consider buying a stock that pays a 4.2% dividend yield, even though you know it can go down in price? Yes, you may very well make that decision because few people have enough capital to live off of a 1% return. If two years from now you could once again get 5% from the bank with no risk to the principal, would you consider selling your stock and moving it to the bank? You would likely consider it. So when a large amount of money worldwide is subject to those same considerations, you can see how low interest rates can “push” money into the various investment vehicles that are riskier (thus increasing their price) but offer higher returns than insured bank deposits. And you can also understand how investors might sell those vehicles (thus decreasing their price) to go back to safer places if a reasonable return is once again offered there.

The only defense against this is the same old story- diversification. It does not eliminate risk, but it does at least temper it. While we can’t know what the future holds, history does lead us to believe that the Coca-Colas, Bristol Meyers, Apples, Wal-Marts and GE’s of the world will figure out a way to be profitable for their shareholders- regardless of who is president and what interest rates might be. We also believe that a diversified portfolio of high quality bonds with a range of maturities will mitigate the stock market risks and manage interest rate risk also.

Thank you as always. Please don’t hesitate to call us with any questions, updates or thoughts.

Beach

Views expressed in this newsletter are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author's opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. Dividends are not guaranteed and will fluctuate. Diversification and strategic asset allocation do not ensure a profit or protect against a loss.

Britain's Decision - June 2016 (Part II)

Britain’s vote to leave the European Union has created uncertainty for the British economic and political outlook. It has also caused some disruptions in the global financial markets. While we don’t know what the consequences of this decision will be in the years ahead, I thought it would be helpful to look at its effects on the U.S. economy and markets.

Great Britain is only 2.5% of the world’s GDP and our exports to Great Britain amounts to less than 1% (.70% to be exact) of our country’s GDP. So from an economic and trading standpoint, it is not a significant part of our economy.

As we have written about in the past, there is a big difference between what affects our economy and what can drive markets at times. What is occurring now is expected to be a bigger factor for the financial markets.

Regarding financial markets, one outcome is when investors feel particularly uncertain of the future, they often move money into the U.S. dollar. This can drive the value of the dollar up versus different currencies. This currency move can cause a chain reaction that can affect the price of commodities, bonds and stocks. Oil is traded globally but is priced in U.S. dollars. When a country wants to buy oil, it must first buy dollars in order to buy the oil. If it costs more to buy dollars, then they may purchase less oil which weakens the demand for oil and can lead to a drop in the price of oil. The price of oil, as we have seen in the past year, can have an effect on the profits of energy related companies (and values of their stocks) in the U.S.

Concerning bonds, as money is moved into the U.S. dollar, it often goes into government bonds. This causes the price of the bonds to go up and yields on the bond to go down. Bank profits generally do better when interest rates are higher, and that is what the market was starting to expect recently. However the expectations of the Fed raising rates anytime soon have diminished with the global dislocations of the Brexit.

There can also be financial consequences for bank relationships that are global in nature. Extremely volatile changes in currencies, bonds and stocks can sometimes create problems in the investment and banking community. U.S. banks are very well capitalized as a result of the reforms that took place since the financial crisis, but it is possible that there may be some European banks that could come under some additional pressure.

The U.S. economy has been experiencing slow growth. We have seen real (after inflation) wages gradually increasing in the last several years and a job market that has been reasonably strong. Interest rates here on mortgages are getting near historic lows again which is supporting a housing market and construction market.

So there is a mix of results for our economy from the financial market reactions. From a portfolio perspective, stocks are acting weaker but bond and precious metal prices are moving up.

I hope this helps to put some of the recent news in perspective.

Thank you again for your confidence and trust in us.

Beach

Any opinions are those of Beach Foster and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. 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. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results.

Brexit, Interest Rates, Asset Prices, and Unemployment - June 2016 (Part I)

Summer is here and often it is a quiet period for the investment markets, but not so this year. There are several issues receiving a lot of attention in the current business news. In particular are:

1) the vote next Thursday in Great Britain on whether Great Britain will stay in the European Union or not

2) the U.S. Federal Reserve statements that have bounced back and forth, telling us a couple of weeks ago to prepare for higher interest rates and then this week implying rates may not go up any this year,

3) the concern that low interest rates are pushing up the value of variety of asset prices

4) unemployment rates that are low enough to create some higher wages for workers.

Receiving the most attention is the Thursday, June 23, Great Britain vote on a referendum on whether to leave or stay in the European Union. Currently the polls reflect 53% of the voters voting to leave. It is not clear what the consequences are should they leave the European Union, but the uncertainty has led to some increased volatility recently and potentially in the future. Europe is the biggest economy in the world and markets are concerned if Britain leaving may set a precedent for other countries. Time will tell.

Janet Yellen, Chairperson of the Federal Reserve Bank, spoke in New York several weeks ago and implied that interest rate increases were coming sooner rather than later. However, a very weak jobs report for the month of May coupled with concerns about global economic and financial conditions obviously changed their outlook. Chair Yellen spoke yesterday after the Federal Open Market Committee meeting and said “We are quite uncertain about where rates are heading in the longer term.” The flip-flops of the Federal Reserve’s comments leave investors scratching their heads regarding our country’s interest rate policy.

As we have talked about before, interest rates affect the price of virtually all assets. If we could get 6% on a 3 year CD at the bank, then we would demand a higher yield from a utility stock than the 3.5%-4%, several big utility’s stocks are currently yielding. Utility stock indexes recently hit all-time highs. If interest rates were to go back up substantially, you would see the value of these stocks move lower in order to offer a more competitive yield. Of course you would also see long-term bond prices move down significantly should that occur. That is one reason we carefully manage the average maturity of the bond investments that we own for you.

We had been seeing good news on the employment front, until this last report for May when only 38,000 new jobs were created. Over the last twelve months prior to May, our economy had been averaging 219,000 new jobs per month. Some of that drop could be accounted for by a strike of Verizon workers. That strike is now over so we will see in the coming months how big a factor the strike might have been. This is another reason that the Fed is not inclined to raise rates right now.

All this uncertainty brings us back to why diversification is so important. There are forces in the global economy that have deflationary implications ( low to negative interest rates, weak commodity prices, globalization of labor forces etc.) and potential inflationary outcomes ( money printing by many of the worlds’ central banks in hopes of achieving a certain level of inflation). Because we don’t know which end result will prevail, we better have assets that should do well in both outcomes. Bonds and cash have historically done well in deflationary periods; whereas stocks, precious metals, and real estate tend to perform well when inflation is on the rise.

On a planning note, let’s review the beneficiaries of your retirement accounts and any insurance investments you have with us this summer. Things can change in our families’ lives and old designations may not be what you currently prefer. Please call us at your convenience to double check these important decisions.

Thanks as always for your trust and confidence. We hope you and your families have a fun and safe summer.

Best Regards,

Beach

The opinions expressed are those of the writer, but not necessarily those of Raymond lames and Associates, and subject to change at any time. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed. Please keep in mind that bond investments may involve risks including market risk if sold prior to maturity, credit risk, reinvestment risk and interest rate risk. Diversification does not ensure a profit or protect against a loss. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

History of Market Recoveries - March 2016

Two pieces of good news!

1) Daylight Savings time is here
2) While stock markets have been disappointing since mid-2015, a little market history shows us that there are reasons for optimism.

Stock markets worldwide had a difficult time from mid-2015 through February of this year. Large U.S. stocks dropped 14% from their high in May 2015 to their low in February of this year (Wall Street calls a drop of over 10% but less than 20% a “correction”). U.S. small stocks dropped by over 25% from their high to their low in February (in Wall Street language, any drop over 20% is called a bear market). Developed foreign markets (Europe, Japan, Australia etc.) dropped about 14% and emerging markets (China, Brazil, Russia, India etc.) dropped over 30% during that same approximate time frame. So by anyone’s definition, it has been a difficult period of time for investors in virtually any stock market.

Thanks to our old friend diversification (money invested in stocks, bonds, gold and cash) our clients didn’t experience that kind of drop. But because we have money in all the stock markets mentioned above, nobody has really enjoyed opening their statements in the last year or so.

So what does history tell us about these types of markets? Past performance is not an indicator of future performance and every situation has its own peculiarities. But history does at least give us an idea of how these situations have resolved themselves in the past, and we will also look at what is different this time.

In a recent issue, Wall Street’s main newspaper provided a study of bad stock markets (bear markets). It found that the average period of time from when a bear markets begins in the U.S. to when stocks have recovered to their previous highs has been 3.1 years. However, the term “average” can be misleading. While the average is 3.1 years, the bear market of the 2007-09 financial crisis took 5 ½ years to recover to its October 2007 prices. The publication found that when adjusted for inflation and dividends, even the bear market of the Great Depression that started in September 1929 had returned to its former high by March of 1937- seven years and seven months. So while 3.1 years is the average, there have been cases where it was longer (and shorter).

So what is different this time? Interest rates (monetary policy) worldwide have never been this low in recorded history. Lowering of interest rates has been a tool that central banks have historically used to battle financial stresses. Given how low current interest rates are, it is not clear what tools are available to central banks to address future stresses. The amount of debt worldwide also hinders another response that governments have used to provide stimulus. Cutting taxes and increasing spending (fiscal policy) has also been used to fight slowing economies, but many governments are currently reluctant to increase their indebtedness.

While each difficult market has its own unique circumstances (oil embargo, gas lines and inflation in the mid-70s, the tech bubble along with the 9/11/01 tragedy in the early 2000’s, the housing and financial crisis of 2007-2009),what they all have in common is in that they recovered (for investors who stayed in).

The key to investment success is not having the ability to time and predict when bear markets will start and stop. No one has shown an ability to do that consistently. The key is having a disciplined plan that is not overcome by emotions. Left to our own devices, our emotions can lead us to make bad decisions at critical times. A vital piece of the discipline rebalancing your portfolio (selling some of what has gone up to buy what has gone down), which we do for you. This allows markets to work for you over the long term.

While no one can predict exactly what tomorrow holds, we thought that a reminder of how past challenges were resolved might be helpful.

Thank you as always for your trust and confidence in us.

Sincerely,
Beach

Disclosure: Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. The process of rebalancing may carry tax consequences.

Happy New Year? - January 2016

Happy New Year? Not in the financial market so far. It has been a rocky start for the stock markets in the world so far in 2016.

Several factors seem to be affecting the outlook for economies and markets right now.

The combination of news regarding China’s stock market selling off significantly, Saudi Arabia and Iran ratcheting up hostilities and the large drop in the prices of commodities (oil, copper, steel etc.) have combined to create an atmosphere of anxiety in the financial markets.

The oil market and Chinese stock market seems to be the main headline in the morning news. As the world’s second largest economy and the worlds’ largest consumer of commodities, it is understandable that big changes in China are important. There has been a lot of money borrowed in China to fund massive construction projects, and that has been well known for almost a decade now. Unfortunately we never know when these sort of over investment bubbles will burst, or exactly what the consequences will be until it finally happens. Chinese stocks make up approximately 25% of most emerging market indexes, so if a portfolio has 5% invested in emerging markets, then the entire portfolio would have just over 1% invested in the Chinese stock market. So while our portfolio has minimal direct exposure to Chinese shares, Chinese industries have supply chains and customers that reach throughout global markets.

Oil is down approximately 30% just in 2016. Geo-political tensions in the Mideast have gotten more heated with the diplomatic fall-out between Iran and many of the Gulf States. Historically when prices went down to a certain level, these Gulf state countries would coordinate a cut in production. But there is no trust between Iran and the other members of OPEC to cooperate. What is known is that the low price of oil is exacting a significant toll on many commodity dependent economies. Many of the Mideast economies as well as Russia, Brazil, Australia and our good neighbor Canada are seeing sizable drops in their national income as a result of much lower revenues from the sale of oil and other commodities. As these counties have less income to spend, their ability to import goods from the U.S. (and other countries) shrinks. We see that evidenced by the drop in the value of global trade that has happened, which means less global growth.

In the U.S., which is primarily a consumer oriented economy, you would think that the drop in the price of gasoline would be a plus for us- and it is in some areas. However the energy industry in the U.S. has grown significantly in the last 10 years. We used to import 60% of our oil and produce 40% here, now we produce 75% here and import just 25%. Our energy industry in the U.S. has become a bigger part of our economy. So when it shrinks, it is hurting a bigger part of our manufacturing sector than it had in the past.

Is there any good news? Yes, there is. Our financial system is in much better shape than it was in 2007-2008. After the banking crisis, the banks were required by the Federal Reserve to become better capitalized and thus able to pass the stress tests that the Federal Reserve required of the banks. While that may have hurt their incentive to lend temporarily (which has probably slowed our economic growth since the financial crisis), it has also reduced a lot of the risk in the financial system. Automobile sales set a record last year with approximately 17.5 million sold in 2015 versus 10 million in 2010. The housing market is in better balance and consumer’s balance sheets are much better than they were in 2007-2008 timeframe. Consumers are also spending less on debt service.

Diversification doesn’t eliminate all the pain, but it does mitigate it some. High quality bonds and gold are respectively up approximately 1% and 3% this year while large U.S. stocks are down about 9%.

We want to stay in touch with you and give our best effort to keep you informed during these volatile periods.

Thanks as always for your confidence and trust in us.

Sincerely,
Beach

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.

Markets, Interest rates, and Planning - December 2015

This year is flying by - hard to believe the holiday season is already here. One message that we want to make clear is that we are very thankful for the opportunity to work with you. We view your trust in us as our most valuable asset. We are very grateful for our relationship and want to say "Thank You" for your confidence in us.

What we are not thankful for is the performance of many of the financial markets this year. Large U.S. stocks have been the best major market this year- down (-.3%) as of December 3. The rest of the financial markets are down- ranging from the U.S. bond market (- 2.0%), developed international markets (-1%), emerging markets (-15%), a diversified basket of commodities (-24%) and gold (-9%). Energy related stocks in particular have had a very difficult year reflecting the 50% drop in the price of crude oil since early 2014. As a result of this performance, diversified portfolios are experiencing slightly negative returns this year.

The investment community has recently written much about the current and potentially future low returns from various global asset markets. While we don’t try to predict the future, it is possible that future investment returns could be more muted than the long term historical returns. This could result due to historically low interest rates worldwide, population growth that is non- existent or shrinking in some major economies (Japan, China, and Europe), a significant drop in commodity prices and a subsequent drop in the value of worldwide trade. These are important levers to financial asset returns and economic growth.

Much is being discussed about whether the Federal Reserve is going to raise short term interest rates on December 16. The ¼ point increase that is anticipated should largely be reflected in current security prices, but you never know exactly how markets will react. The potential tension resulting from our economy raising rates while our trading partners are lowering rates is something that can create some volatility in the currency markets. As we have discussed in the past, the stock market is more sensitive to international trade conditions than the majority of our domestic economy.

Recently, Raymond James introduced a very inclusive financial planning strategy process. This process takes into account your goals along with your current and future resources to determine the best path to accomplish what is important to you. By stress testing the probability of successfully funding your goals in a wide range of market scenarios, we take into account market returns that are less than average. While similar to a process we have used in the past, the new service is able to include many more scenarios. We look forward to integrating this process into our service for you.

Our team, in particular Matthew, has devoted a lot of time in the past year working with our financial planning team at Raymond James creating and testing various planning strategies using these new resources. As we migrate from our former planning process, we will be in touch to help you develop your strategy or in some cases update goals, assets and any new potential areas to be considered. We will review the plans and evaluate the best investment strategy to accomplish your goals. Some of the investment return assumptions are more conservative than our previous process, so there may be some adjustments we consider when we discuss your plan results. Some investment changes might be recommended as a result of this, but if so they should not be significant.

Thank you as always and we look forward to working with you in an even greater capacity soon.

Best Wishes,

Beach

Opinions expressed are not necessarily those of Raymond James & Associates. Information contained was received from sources believed to be reliable, but accuracy is not guaranteed. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Past performance may not be indicative of future results. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Investments are subject to market risk, including possible loss of principal. The process of rebalancing may carry tax consequences. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have potential for instability; and the market is unregulated. Commodities are generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. There may be sharp price fluctuations even during periods when prices overall are rising.

All Stock Markets are Not the Same - October 2015

Well, as bad as October’s reputation is for being the spookiest stock market period, it is actually September that has historically been the worst month for the U.S. stock market. So if nothing else, we have September behind us!

The third quarter of this year was a rough quarter, in fact the worst three month period for U.S. stocks since 2011. But once again diversification worked with bonds and stocks offsetting each other. For the quarter, the major U.S. stock market averages were down approximately 7% but the bond market eked out a small gain of around 1%. The bond market isn’t popular when the stock market is strong, but is appreciated during periods like this.

However, diversification among various stock markets has had different results. For the quarter, small U.S. stocks were down 12%, large international stock markets were down around 17%, and emerging economy stock markets down 24%. So diversification into stock markets outside large U.S. stocks has not helped the performance of portfolios this year.

Given the fact that the large U.S. stocks have been a very good place to be recently, it begs the question of why not keep all the stock investments here? The chart below shows the performance of various investment markets over the past 15 years. As you can see, the U.S. stock market (light blue box) was the best place to be in only 3 of the past 15 years.

The chart below shows a variety of investment markets that we invest in as well as the performance of a diversified portfolio (gray box). As we detailed in the July newsletter "Mid-Year Review", the reduced volatility of a diversified portfolio has a direct effect on your compounded rate of return. So there is a financial and an emotional benefit from reduced volatility.

While market pullbacks are stressful (but the norm), lower equity prices can provide an entry point that could lead to higher future returns.

As always, thank you for your trust and confidence.

Opinions expressed are not necessarily those of Raymond James & Associates. Information contained was received from sources believed to be reliable, but accuracy is not guaranteed. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Past performance may not be indicative of future results. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Investments are subject to market risk, including possible loss of principal. The process of rebalancing may carry tax consequences. Investing in stocks involves risk, including the possibility of losing one's entire investment. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise.

China and other Cross Currents in our Markets - September 2015

The volatility in the stock markets in the last month has been blamed on a lot of factors. Among them are a slowdown of China’s economy, a drop in emerging market economies that supply raw materials to China, concerns about the Federal Reserve raising interest rates and whether the U.S. economy can stay relatively insulated from the woes of its international neighbors. So in other words, there is no shortage of potential culprits.

The most talked about economic event in the media recently has been the slowing of the Chinese economy and its stock market pullback. Our economy is not particularly reliant on exports, as exports account for only about 14% of our country’s economy (GDP). And we export much more to our two neighbors Canada and Mexico than we do to China, with exports to China accounting for less than 1% of our GDP.

So what’s the big deal? Well, our stock market and our economy are two very different entities. While generating business overseas may not be important for many parts of our economy, for our biggest companies foreign revenues are approximately 35-40% of their total sales. To give you an idea, in 2012 foreign revenues for Intel, Exxon, GM and Apple accounted for 84%, 71%, 43%, and 61% respectively of their total sales. So international business is a very big deal to these type of companies.

Another difference in the economy and stock market is the effect of a drop in the price of oil. Lower oil and gas prices hurt earnings in the stock market -It is estimated that each $5 drop in a barrel of oil reduces the income for U.S. large stocks by about $7.5 billion. However, lower gasoline and energy costs for consumers acts like a tax cut, leaving them with more discretionary income.

One more headwind for profits is the strength of the U.S. dollar. While a strong dollar keeps import prices down, which again is good for consumers (we can buy more foreign goods with each dollar), it hurts our exports and the profitability of many multinational companies. For example- three years ago when Coca- Cola sold one Euro’s worth of Coke in Paris, that Euro converted to $1.50. Today, that same Euro’s worth of Coke only converts to about $1.12. So you can see how the dollar strength hurts their income. It’s estimated that a 10 percent rise in the value of the dollar trims our corporate profits by about $20 billion.

The U.S. economy, which is consumer oriented, is doing relatively well. Since the financial crisis, U.S. consumers have rebuilt their balance sheets by reducing debt and increasing their savings rates- and our housing and auto industries (among others) are benefitting from this.

In the financial markets, it’s been several years since we have had a pullback of any degree. That is unusual as the U.S. stock market averages a 10% correction about every 18 months. Most U.S. large stock indexes are down about 5-8% in 2015; bond markets are about even and developed foreign markets and emerging markets down respectively 3% and 15% so far this year.

This could be a year where not losing much money is success, but of course no one knows how 2015 will end up. However, we will be here and as always, thank you for your confidence and trust in us.

Views expressed are the current opinion of the author, but not necessarily those of Raymond James & Associates. Those opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Raymond James & Associates, Inc. member New York Stock Exchange/SIPC

Mid-Year Review - July 2015

With 2015 halfway over, I thought it might be helpful to look back and see how certain assets are performing so far this year, and discuss some of the turbulence from Greece and Europe and how it may be affecting our portfolios.

During the quarter that just ended, large U.S. stocks lost .2%, while year to date they are up .2%. Mid-cap and small-cap stocks in the U.S. are up 3.4% and 3.5% respectively through the end of the June. The best performing country for stocks in the 2nd quarter was Russia which was up 24% in U.S. dollar terms. One of the benefits of diversification is that not only do you not know where risk is going to appear, but neither do you know where returns might come from (Russia the best market?). So after several years of U.S. large stocks being one of the stronger performers, some other parts of the world are doing a little better in 2015.

Bonds have also been quiet this year with the broad bond market down 1.3%. Few investors believe that bonds are currently priced to provide a great return, but bonds have historically provided a counterbalance to the volatility that the stock market likes to provide with some regularity.

And reducing volatility serves several purposes. Less volatility makes it easier to stick to our financial plans, and that is true for all of us. Big swings in value can lead to emotional decisions that can be very detrimental to achieving long term goals. But it also provides an actual financial benefit. A simple example will demonstrate this. If over a three year period you earned 7% each year (7% average return) on a $100 investment, at the end of three years you would have $122.50. If during a three year period you earned +21%,-21% +21%, you would also have had an average return of 7%, but would have only $115.66- a significant difference after just three years. You can try this simple exercise with your calculator and see how as volatility increases or decreases, your final sum increases or decreases. So the primary reason we try to reduce the volatility in your portfolios is simple, so you can potentially keep more money.

And it does not look like volatility is going to leave us alone anytime soon. Greece and the political and economic anxiety in Europe are once again affecting our financial markets. Many financial forecasters were expecting a "yes" vote on the Greek referendum this weekend, but over 60% of the voters said "no" to accepting the European plan for their economy. While the economy of Greece is tiny, its debts are not so tiny (approx. $250 billion). And perhaps more importantly, this is a real test of whether countries with vastly different economies and cultures can share the same single currency. Right now it looks questionable, and while we are not sure of the consequences should Greece leave the Euro, it definitely raises the perceived riskiness of the Euro to investors worldwide.

Some volatility can’t be avoided, but by providing a somewhat smoother path- we hope we can keep you on track with your plan and also provide a monetary benefit to you.

Thanks as always and hope you and your families are having a great summer.

Examples provided are hypothetical for illustrative purposes only. It is not intended to reflect the actual performance of any security. Investments involve risk and you may incur a profit or a loss. This analysis does not include transaction costs and tax considerations. If included these costs would reduce an investor's return. Views expressed in this newsletter are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author's opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Investments are subject to market risk, including possible loss of principal. The process of rebalancing may carry tax consequences.

Why We Invest Your Assets As We Do - June 2015

We get asked from time to time why we use the types of investment vehicles that we use, and it is a very important question. The manner in which your assets are invested can have a significant impact on your investment returns and thus your probability of reaching the goals that are important to you.

The recommendations of your savings rate, allocation of your assets, retirement age, retirement spending and estate planning are all linked together in a comprehensive plan. These are all crucial “levers” where your choices can have a significant influence on your probability of achieving your goals. However, if your assets are not put to work in financial vehicles that give you your best chance of success, then your plan may miss the mark due to how your investment plan is implemented.

How we invest our clients’ assets is different than many advisors. One of the many benefits of experience is learning what doesn’t work. Having been in this industry since 1983 has afforded me the opportunity to observe the difference between the promise and projections of an investment company’s marketing sizzle and real results that our clients experience. “Nothing that is worth knowing can be taught” is a quote from Oscar Wilde. That quote is debatable, but the implication that it is experience that provides us with our most valuable lessons is a thought with which most of us could agree. It has certainly been the case in my career.

For the past ten years we have used “passive” or index funds (funds that track the performance of a particular market segment). This was not always the case and is very different from the vast majority of our peers. Our industry is constantly trying to devise and promote investment products to do better than the underlying markets themselves, or “beat the market.” For many years (a little over twenty years to be exact) we also believed our job was to help our clients find investments or money managers that would beat the market. But after many years of seeing the vast majority of these strategies underperform the markets, we concluded that this method of investing was not the best choice for our clients.

For the last ten years or so, we have seen our role as helping our clients create a clear path to the goals that are important to them, helping them understand the consequences of the variety of choices which they have in this process, and making the inevitable modifications that occur as life and markets change. When we implement your investment strategy, we believe that eliminating any uncompensated risk (such as the risk of your investment underperforming), while keeping your costs and taxes to a minimum is how we can best help you achieve your dreams. And that is why your assets here are invested as they are invested.

Thanks as always. We appreciate your loyalty and confidence in us.

Beach

*Index performance does not include transaction costs or other fees, which will affect the actual investment performance. Individual investor results will vary. Past performance is not guarantee of future returns.

How Low Interest Rates Affect All Your Investments - May 2015

Janet Yellen, who is the Chair of the Federal Reserve Bank (Fed) and is the leader of our current monetary policy, spoke at the International Monetary Fund headquarters this month. Among her comments, she said that stock prices are "quite high". A recent article in a leading financial newspaper highlighted some of the problems created by this extremely low interest rate policy that began with her predecessor Ben Bernanke and has continued since her appointment on February 1, 2014. Since the financial markets are where the bulk of your assets are invested with us, I believe we owe it to you to try to describe the current and potential consequences of this policy on your portfolio.

To begin with, no one has any experience in dealing with managing money during a zero interest rate policy (ZIRP) like we have now. A major investment firm recently analyzed data going back two centuries and found that no central bank had ever before set short term interest rates at zero, even when we were experiencing deflation. So we are very much feeling our way through this. We are literally in "unchartered waters."

One of the more obvious consequences of this current policy is that naturally risk adverse investors have to take much more risk than they normally would. Savers, senior citizens who have had money in bank CDs and bond investors who were trying to avoid the more volatile markets have all been forced into taking more risk than they had under normal monetary policies. With one year CDs paying .5% and two years paying not much more, a person has to have a huge amount of money to have a reasonable lifestyle if trying to live off their income from the bank. A person with $1 million in CDs earning a .5% return gets a nice annual income of $5,000. So this investor goes in search of a better return, leaving the federally insured safety and entering a riskier world. This new demand pushes up the prices of riskier assets.

Now, multiply this policy around the world to see the global effect. Central banks in China, Europe and Japan have adopted similar approaches in an effort to stimulate their economies- and you can see how these monetary policies have resulted in global asset price inflation. Bonds, stocks, real estate and other investment assets have seen their prices pushed up as a result of money coming out of heretofore safe investments looking for better returns. Prices of bonds in parts of Europe have increased to the point of having negative yields- you receive back less than you invested!

While the central bankers of the world are saying that they don't see consumer price inflation increasing much, if they would look at what it costs to have a decent retirement, they would see huge inflation.

This is the world in which we are charged with investing your money. We are concerned about the risks that these policies have created and look for every opportunity to minimize them. Safety is attractive, but a return of .5% does not enable many of you to reach your goals. There is also a risk of being too safe, which is not having a chance to meet the goals that are important to you and your family.

Views expressed in this newsletter are the current opinion of the author and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Opinions expressed are not necessarily those of Raymond James & Associates. Past performance does not guarantee future results.

Can Greece's Problems Affect Us? - April 2015

Should we worry about Greece's debt problems? We have heard a lot about the Greek debt situation over the last year(s), but a potential default on Greek debt is looking more likely and may be coming soon. Greece has said that they could deplete their cash by the end of this week and that it will have difficulty making end of month payments to Greek government employees, pensioners and vendors. On top of that, they are scheduled to make a one billion Euro payment to the International Monetary Fund on May 6, with bigger payments due in July and August.

So what happens and why would it matter to U.S. based investors if Greece defaults? How could an economy smaller than the Dallas-Fort Worth area affect the global financial markets?

We don't know for sure that Greece will default, or exactly what the consequences will be (on your portfolio or globally) if they do - but in an effort to educate our clients about the range of possibilities, we thought it would be helpful to discuss this now.

The big question is whether Euroland's financial system and banks have enough capital to withstand the hit from writing down the value of Greek debt. The U.S. regulators made our U.S. banks raise a lot of capital after the real estate crisis six years ago, but in Europe many of the banks are not as well capitalized as ours. So it is not clear how well the European banking system can weather the consequences of a Greek debt default. It is important to remember that Lehman Brothers was not the biggest financial institution in the U.S. when it filed for bankruptcy, but the consequences of its bankruptcy rippled through many different financial institutions and instruments in ways that no one predicted. Similarly, potential consequences of European bank problems might affect our financial system in ways we just can't foresee.

So how do we defend your portfolios from potential problems like this? Frankly, we can't avoid every potential problem while staying invested. But there are strategies that can mitigate the consequences on your investment portfolio. Diversification is the first line of defense - having a variety of assets that respond differently to various scenarios is a big plus. When investors are fearful and seek safety, the prices of the bonds that you own via your bond funds often benefit, as well as gold which can see an increase in demand. Not having too much of your portfolio in any one asset is critical to managing the inevitable surprises that financial markets have always provided to investors.

The real risk for investors is trying to act in anticipation of events (that may or may not happen) by trying to get in or out of markets. Just a handful of days over the course of many years provide the bulk of the market's return and if you are not there, you have missed it. Case in point, last year large cap stocks returned 13.5%, but if you missed the best 5 days- your return was 3.1%. So getting out of the market introduces significant risk also.

The Greek debt problem has been talked about and analyzed for a long time, and I am sure that many of the markets have already discounted some of these possibilities in their current prices. And it is also true we don't usually get run over by the bus that we see coming down the street. But sometimes the ripples of these financial events can reach further than anticipated, and we wanted you to know that we have taken this into account in how we manage your money.

Thank you as always and do not hesitate to call us with any thoughts or questions you may have.

Opinions expressed are not necessarily those of Raymond James & Associates. The author's opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. The price of gold has been subject to dramatic price movements over short periods of time and may be affected by elements such as currency devaluations or revaluations, economic conditions within an individual country, trade imbalances, or trade or currency restrictions between countries. As a result, the market prices of securities of companies mining or processing gold may also be affected. Investing in stocks involves risk, including the possibility of losing one's entire investment. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Investments are subject to market risk, including possible loss of principal. The process of rebalancing may carry tax consequences. Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC

Volatility and Performance Flip-Flops - April 2015

Volatility is increasing again, and 2015 so far has proven to have a lot more volatility than 2014, but without a lot of direction. So far in 2015 about 50% of the trading days have experienced a move of over 1% in the S&P 500 (equal to approximately 170 Dow Jones Industrial Average points), versus only 15% of the trading days in 2014 had moves of over 1%. We can guess at the reasons, and there are plenty of potential culprits, but certain financial markets - especially stock markets - are expected to be volatile. However, there are certain markets that don't normally exhibit the degree of volatility that we have witnessed of late, such as the currency markets and the huge commodity market

One of the largest commodities the world trades is oil, and it has lost approximately 50% of its value since last summer. It is very unusual for it to drop that much in such a short period of time. The value of the U.S. dollar has also been very volatile in a compressed period of time. It is not unusual for these prices to vary widely at times, but the speed and size of the moves combined is very unusual. When huge markets like oil and currencies quickly move that much, there are usually some consequences that rumble through the financial system in surprising ways.

The consequences of big, fast moves in large markets usually show up in the world of hedge funds. As you know, we don't use hedge funds or "alternative investments" in your portfolios- we are not really sure what alternatives investments are. While our ability to predict market moves has not improved one bit since our first day in this business, we believe that the more expensive an investment proposition is, the less the chances there are of you making a good return. Following our old fashioned investment philosophy of knowing what we own and controlling what we can control- you don't have to worry about a big "surprise" coming from an opaque, mysterious and expensive investment vehicle that Wall Street firms often recommend to clients.

So far in 2015, what did well and poorly in 2014 has flip flopped- large domestic stocks are flat, and international and small stocks are doing well. The S&P 500 was up 13.5% last year, but finished the first quarter of 2015 up just under ½ of 1%, while large international stocks which were negative 5% last year are up 5.7% so far in 2015. Small stocks also underperformed the large stocks in 2014 by a large margin, but in 2015 are up approximately 4%. The broad bond market is up about 1% this year and gold about 1% as well. So virtually every part of the market has outperformed large U.S. stocks (which was one of the better performing asset classes the last two years)- but it's not unusual to see these flip flops. However, we understand that it is not easy to stay disciplined and avoid chasing yesterday's winners.

Our team has recently expanded our ability to connect and communicate with you more efficiently with the use of social media. I am still learning how to use them, but this newsletter will now be found on our website etc. Bear with us as old dogs try to learn new tricks- thank goodness Matthew is on our team!

Thank you as always for your trust and confidence in our team at Foster Fitzsimmons.

Opinions expressed are not necessarily those of Raymond James & Associates. The author's opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance may

U.S. Dollar and Interest Rates - February 2015

Is a strong dollar good? Are our interest rates too...high?

The current investment world is focusing on several markets, interest rates and currency markets. These can have significant effects on the performance of the financial markets where much of our assets are invested, so I thought it may be worth some time to look at these and the potential consequences of their performance.

The U.S. dollar has been strong versus many other currencies over the last six months or so. This past summer it took $1.37 to buy one Euro, but today only $1.13. That is good news for those who plan to travel to a Euro denominated country and need to buy Euros for their vacation- but how is it for U.S. companies doing business in Europe? Let's use Coke as an example. This past summer when Coke sold one Euro's worth of soda in Europe- they got $1.37 of American dollars when they converted that Euro into their home currency. Today when they sell one Euro's worth of Coke, they only get $1.13 when they bring that money back home. So, to maintain their profitability- Coke either has to raise the price of their drinks in Europe and hope they don't lose volume as a result of the higher prices, or they leave the prices where they are and have less U.S. dollar income when they bring the money back home. So now you know why you may hear of companies that report disappointing earnings blame some of their problem on currency issues. This matters to your portfolios because foreign revenues now account for 46% of all revenues of large U.S. stocks, and these large companies comprise the biggest part of the stock portion of your portfolios. While many of these companies do use financial markets to hedge some of the volatility in currency markets, they rarely try to hedge all of the risk due to costs.

A potential plus to these exchange rates can be they force U.S. companies to be more streamlined and cost efficient (read more profitable). A downside can be companies examining their cost structure can decide to eliminate large layers of management (i.e. Coke and IBM recently announced layoffs).

Regarding interest rates, we are literally in uncharted waters. Our interest rates are making record lows in some parts of our bond markets. In fact, our rates were never this low during the worst years of the Great Depression. There is no history of a long term U.S. bond yielding less than 3.13%- yet today U.S. 30-year bonds are currently yielding a record low of 2.25%. So how could our interest rates be too high? Well, the German 30 year bond is yielding .93%, and the Swiss 10-year government bond is "yielding" a NEGATIVE .19% annually. That's right, you pay them .19% annually to lend them money for ten years. Currently there are 12 countries and approximately $4 trillion of government bonds worldwide that have negative yields (if there is such a thing as negative yield). So in spite of the fact our bonds are seeing record low interest rates in our market's history, they are offering significantly higher returns than many of the government backed alternatives overseas. FYI- this is also one factor contributing to a strong dollar- overseas investors buying U.S. securities for their better yield, thus driving up the value of the dollar in the process.

We do not invest your money based on where we think interest rates or currencies will be a year from now, for the simple reason that we don't know. Because we don't invest based on predictions, we have continued to hold long-term bond funds that have been beneficiaries of this interest rate move. We held these funds when virtually all financial publications and experts were predicting rates to rise last year (and long- term bond prices to go down). As it turned out, last year ended up being one of the best years of total return for long-term bonds in the U.S.

And still now, with our 10-year bond yielding 1.67% and Japan's 10-year yielding .28%- it is certainly possible that U.S. rates could fall some more. But rates might move up- and that's why we own short-term bond funds also.

Thanks as always for your trust and confidence.

Beach

Oil Prices and the Economy - December 2014

The price of gasoline has been in the news and in conversations everywhere. I read this week that a gas station in Oklahoma dropped regular unleaded to less than $2.00 a gallon. It is nice to see the total on the gas pump at $15- $20 less than usual when you get through filling up now.

There is an upside and a downside to the sudden drop in the price of oil that we are witnessing, but overall it should be a boost for the world economy. The most obvious beneficiary is the consumer- it is estimated that every 1 cent drop in the price of a gallon of gas equals a cumulative $1 billion increase in U.S. consumers pocketbooks. Another obvious beneficiary is the American automobile industry which saw car sales near records for the month of November. Airlines and trucking companies are seeing their cost of fuel go down and are expecting to see an improvement of their profits as a result. While energy costs are dropping, some other basic necessities such as food and healthcare are seeing price increases, so the net increase in discretionary consumer spending may not be quite as significant as expected.

The obvious downside to the 40% drop in the price of crude oil since this summer are the companies and employees of the energy companies, as well as countries that depend on revenues from the sale of oil. The booming energy sector has been a plus for the economy, especially in those geographic areas where they are finding oil and gas with shale fracking and unconventional methods. Obviously countries in the Mideast as well as Russia and Venezuela are the biggest losers as they depend on oil revenues to support their budgets and economies. In times like this, OPEC normally reduces their production to try to stabilize the price of oil, but they seem to have a different agenda this time.

On the jobs front, U.S. businesses increased hiring in November which could make 2014 the best year for job growth since 1999. Wage growth increased at a 2.1% rate which means that households income is roughly keeping up with inflation, but not increasing their buying power. The unemployment rate is now at 5.8% down from 7% in November 2013.

So mostly good news in the economic world, but the financial markets are finding something to worry about recently- so what is it? Probably a couple of things. Recently, a leading financial newspaper had a front page story about the Federal Reserve meeting December 16-17. That paper expects after the meeting, the Fed will indicate that interest rates may increase in the middle of next year. While the increase probably won't be substantial, it would be a change in direction and the market may get a little more volatile as it adjusts to a different monetary environment. Also, while the increasing job numbers are good for the newly hired, if labor costs start to rise for corporate America, then you could see their profit margins come down. There can also be unexpected consequences when a huge move in the price of such an important commodity as oil occurs. Are there significant increases in the risks to banks that have made large loans to energy companies or governments that depend on oil revenues? How will that affect the bond market? We don't know.

I don't remember anyone this past summer predicting a 40% drop in the price of crude oil in the next few months, and we have no clue where it will be six months from now. In your portfolios via mutual funds and in some cases individuals stocks, we own some companies that benefit from the drop in energy prices and other companies that are disadvantaged by the drop. If everything is moving in the same direction, then you are not diversified.

Thanks as always for your trust and confidence.

Beach

Increase in Market Volatility - October 2014 (Part II)

As a follow up to last week’s newsletter, I thought some discussion as to the “why” of the recent volatility might be helpful. Here are some of the potential reasons.

Last week the International Monetary Fund (IMF) issued a statement that lowered its forecast of growth on a global basis. In particular, there have been some economic reports from Europe – especially Germany – that show their economy slowing down. Europe does much more trade with Russia than the U.S. does, so the sanctions that have been imposed on Russia for its Ukraine invasion have hurt Europe more than the U.S. There have also been suggestions from the European Central Bank that European governments need to do more to encourage economic growth. Interest rates in Europe are already extremely low, with the German 10-year government bond yielding around 0.9%.

Europe is also a big market for China’s exports, so as Europe slows down so does China’s exports, and thus China’s demand for raw materials/commodities (oil, copper, iron ore, etc.). As a result, you are seeing the price of many commodities – especially oil prices – come down significantly in the last couple of months. China has been a big part of the growth of the world’s economy over the last decade, so its slowdown is felt by many other economies. Many countries (Brazil, Australia, South Africa, etc.) that are big suppliers of raw materials to China are feeling the effects in their economies as the demand for their natural resources has subsided. The concept that the hip bone is connected to the leg bone, and the leg bone is connected to the…is true in economics also.

So how long can the U.S. economy continue to grow when the vast majority of its trading partners are seeing a slowdown? We don’t know, but just this past weekend Stanley Fisher, vice chairman of the Federal Reserve, said at the IMF meeting that weaker than expected global growth could cause the Federal Reserve to further delay any increase in interest rates.

What are some of the potential consequences of all this? One possibility is that earnings from large U.S. companies that derive a lot of their business from overseas could see their earnings grow more slowly or perhaps decline. Fortunately, stock price valuations are about average historically – but if earnings decline you could reasonably expect to see that reflected in lower stock prices. However, you could also see an increase in the price of bonds, which we have seen over this period of volatility. Gold was also up last week.

It has been a while since the stock market has had a normal correction – we all know that markets don’t go in up in a straight line – but it’s no fun when these inevitable retracements occur. We may be in the process of going through that, we don’t know. The good news is that at least so far, the diversification that we use is helping smooth out the effects of this volatility.

Thanks again for your trust and confidence.

Beach

Benefits of Diversification - October 2014 (Part I)

Wednesday, October 1, the Dow Jones Industrial Average fell 238 points, or 1.4%. While the stock market was down about 1.5% that day, the broad-based bond market was up approximately 0.6%. For those who get frustrated by being diversified when one particular market is going up a lot, this is why we own the various investment assets that we own.

The primary reason for diversification is risk management, but it also increases potential for reward. On the risk side, diversification can minimize the chances of big down movements in your portfolio. To illustrate the consequences of big losses, I thought that reviewing the math of loss and recovery might be helpful. Should your portfolio go down 30%, the period of time it would take to get it back even, assuming your portfolio subsequently earns 8% a year, is four years and eight months. A 40% downturn translates to six years and eight months assuming the same 8% return. On the reward side of diversification, just as we don’t know what part of the market will go down, the same is true as to upside surprises. A good example of the reward side of diversification was during the two years from January 2009 through January 2011. During that period, the Dow Jones Industrials was up about 29% while emerging markets were up approximately 80%. Diversification is both a defensive and aggressive strategy at the same time.

The news on the front page every day – ISIS, Ukraine/Russia, Ebola etc. – can provide a lot of reasons for all of us to be fearful. However, listening to Warren Buffett on a news network last week was interesting. On Thursday his Berkshire Hathaway Inc. bought the fifth largest automobile retailer in the U.S. During the interview, he was asked about his feel for the stock market and economy over the next year or so. His reply was that on September 10, 2001, he had no idea what was going to happen, nor did anyone on December 6, 1941 and he currently has no idea where the market will be a year from now. But he said that anyone who has invested in a broad cross section of American businesses via a diversified stock portfolio has fared well over most 10-year and longer time frames, and he doesn’t want to bet against the long-term growth of this country’s or the world’s economies.

He also observed that there are people who are not psychologically equipped to be invested in the stock market – that an investment which is volatile and that can be liquidated instantly leads many individuals to do the wrong thing at the wrong time. And, unfortunately, the facts confirm that most people do the wrong thing at the wrong time when they are investing. Mutual fund companies report that most money goes into stock mutual funds after the market has gone up considerably, and that after the market has gone down the money flows out. Buying high and selling low is what investors have done consistently, at least without the help of a trusted advisor.

Thank you, as always, for your trust and confidence.

Beach

Investor Discipline - August 2014

Market volatility seems to have increased some recently, and there are enough geopolitical events to keep even the most enthusiastic followers of foreign affairs looking for a little break.

There seems to be every reason for the U.S. stock market to have a significant sell off, but as of today it hasn’t. Which brings up a subject that we hear often, “Should we take some profits now? Is it a good time to invest in the market, or a good time to get out? Where is the market going?” etc. As our clients know, we do not know which direction the next 1,000 or 4,000 points on the Dow Jones Industrial Average will be. But neither does anyone else. And that is one reason the portfolios that we manage for our clients don’t own just stocks.

As you know, we do our best to help our clients determine how much risk they have to take, not how much they can tolerate. Some people in the investment advisory business take great pride in a sophisticated process to determine their clients’ “risk tolerance”— and then position them in portfolios that make sure they get to experience it. The question of “Do you like mild pain, medium pain or a lot of pain?” does not make a lot of sense to us. We operate under the assumption that if all of us could meet our goals with no months or years when our statements get whacked, then we would sign on the dotted line. We only take risks because the alternative (i.e. not having any chance of reaching our goals) is even less attractive.

“If I see I am going to have a wreck, I’ll put my seatbelt on.” When it comes to investment risk management, you hear people talk about investment risks as if they can react to them just before they happen. “When things start to look bad, I will make some adjustments,” some investors say. Just like the thought in the first sentence in this paragraph, both are impossible to implement, even though the last sentence sounds plausible. The reason it is not? Because by the time things “look bad,” usually the stock market has already gone down some, and no one wants to get out after the market is already down.

Or on the other side of the coin, if someone has decided to get out, now they must decide if and when to get back in. To get back in at a higher price means to admit they were wrong, which is not something people generally enjoy doing. So they wait. And sometimes wait some more. Or if it continues to go down, they will wait until it “stops going down”— but you can’t ever know that without the benefit of hindsight. Difficult!

Emotionally and psychologically, investing is very demanding, especially at some crucial times. It can lead very intelligent people to make some unwise decisions. We take a lot of pride in keeping our clients from making decisions based on emotions, predictions, current headlines, etc. It may be frustrating at times, but having an investment discipline, implementing it and, importantly, sticking with it whether it feels good or not, is paramount to success. With all the headlines lately, we thought this may be a timely discussion.

Thanks as always,

Beach

Controlling What We Can Control - July 2014

The second quarter of 2014 just ended with many of the major asset classes (stocks, bonds, commodities, real estate) generating a positive return for 2014.

The good news:

  • The economy seems to be gaining some momentum. The most recent jobs number was better than expected with 288,000 non-farm jobs added in June. June marks the first time we have had five consecutive months of new job creation over 200,000 since the late 90s.
  • The housing market is seeing signs of stabilizing. Home prices are up 25% from early 2012. However, first time home buyers are still reluctant to make the move – a combination of student loan debt, interest rates that are higher than a year ago, and a somewhat subdued job outlook are factors in their decision.
  • The auto industry is experiencing nice growth. June 2014 sales were just released and they were the highest since June of 2006. To get an idea of how far auto sales have bounced back since the bottom of the recession, annualized sales are now at 16.98 million versus just over 8 million in 2009.
  • The U.S. stock market (as represented by the S&P 500) is up 7.1% in the first half. It is currently trading at a valuation of 15.6 times trailing earnings, which is right at its’ average multiple for the last fifteen years of 15.8 times earnings. So it is neither cheap nor expensive on a historical basis- the market has grown more or less in line with earning growth.
  • The bond market (as represented by the Barclays Aggregate ) also provided a nice and surprising total return in the first half, with the broad bond market returning 3.93%. Many forecasters predicted interest rates would rise as the Federal Reserve reduced the monthly amount of bonds they were purchasing. But obviously there are many other factors involved in the global markets than just the Fed’s purchases.
  • Gold and other commodities have also fared well in the first half, with gold up approximately 9% and a diversified basket of commodities up 7%.

The worries:

  • The biggest concern we have for our clients are the consequences of historically low interest rates worldwide — and the potential asset price inflation that these policies may be creating. The global search for investment income is a real issue whether it is a recent retiree in Greenville, the Furman Endowment, or a European pension fund, and it is causing some investors to take risks that they would normally not take. When a pension fund or endowment needs an 8% return to meet its distribution obligations – in a world where the 10-year Treasury bond yields 2.6% and the German 10-year government bond yields 1.25% – how does it get that return without taking on more risk that it has historically? Thus we are starting to see certain assets reach record prices. Junk bonds recently traded at the highest price (and lowest yield) we have on record. Certain high profile pieces of income-producing real estate have also changed hands at some very high prices recently.
  • We are concerned about protecting our clients from parts of the investment market that seem to be potentially overvalued – we don’t own high yield (junk) bond funds for instance. As you know, we make no attempt to time markets (because we know of no one having success at doing this). Peter Lynch, who was the manager of the Fidelity Magellan fund for a long period of great performance, was quoted as saying, “More money has been lost anticipating a stock market correction than in all the corrections combined.” While that may not be quantifiable, there is a lot of truth in that statement, thus we don’t try to anticipate what are the normal ebbs and flows of the market. But we do have a rebalancing discipline and implementing it – like we do for our clients – helps us take advantage of markets that have gone up as well as allocating capital to areas of the markets that have gone down in price.

As always, we will control what we can control: costs, taxes and levels of risk. And we will also use our brains when we see bright flashing yellow lights.

Thank you again for your trust and loyalty. Please know that we are making every effort to ensure that there is no unnecessary risk that our clients are taking. We will be getting in touch with you soon to update/review, but in the interim don’t hesitate to give us a call with any thoughts or questions.

Thanks Again,

Beach

The Dangers of Forecasting - May 2014

The financial market performance and our spring weather this year have had a lot in common – cold, warm, cool, warm, etc.

Last week our weatherman warned of a terrible storm system headed our way. While unfortunately some of our neighbors in the south got hurt badly, we barely got a drop. Early this year, we were also told by financial forecasters to be prepared for higher interest rates and a subsequent fall in the stock market. So far interest rates are down from the end of last year and the stock market is up one half of one percent.

Forecasting is a dangerous profession, but one that we are all tempted to do. We are frequently asked what do we think of the market and where is it headed (most of our long-term clients don’t bother anymore). I am afraid our answers usually disappoint. I believe most people know that we have no clue in which direction the next 1,000 or 3,000 point move in the Dow Jones will be. But most of us like to know what others think. Some may also believe that there is somebody out there who really knows what is going to happen next.

The only thing we know with certainty is that the future is extremely uncertain – and we can say that with a great deal of confidence. Investors who get hurt are the ones who know (or believe their advisor does) exactly what the financial markets will do and then position their assets in such a fashion to benefit when that particular outcome occurs. Even if a client or advisor is right about one or two outcomes, over an investing lifetime there will have to be a lot of bets, which also creates a lot of opportunities to be wrong. In addition to being a difficult task, it also creates the potential for a lot of stress, as well as potential tax and cost consequences of moving assets around frequently in anticipation of certain scenarios. We don’t feel this is a wise way to invest.

As most of you know, we don’t manage your assets in that fashion. We think there are good arguments for a future inflationary environment,but there is also data to suggest that we may be in for a long period of low inflation, slow growth and low interest rates. We don’t know which is correct, so we better be prepared for both.

We also don’t believe we can identify in advance which money manager or mutual fund will outperform their respective benchmarks. But we do know that over time the vast majority of the funds will not, so we eliminate that risk and cost in our investment process and let the probabilities work FOR our clients.

There are a lot of opportunities to be wrong in our profession. One of the cornerstones of our investment philosophy is to invest in such a manner that either eliminates or at least minimizes the number of opportunities to be wrong in investing your assets that you have entrusted to us. We believe this process is very crucial to giving you the best possibility of attaining the goals you have asked us to help you reach.

Thanks as always for your trust and confidence,

Beach