Category: Portfolio Strategy

Portfolio Strategy

What a Year in the Market. Is it Time to Make Changes for 2018?

It has been a fantastic year in the stock market – so far! This statement could be uttered by people all over the world in 2017.

In the US, stocks have gained 19.9% for the year through November. The average long tem rate of return for the US stock market has been 10% so the market is up nearly double the average. Stock market analysts at the major banks were calling for returns of about 6% before the year, well below actual results.

In international markets, after years of trailing US stocks, they broke out with a 24.5% return through November. Similarly, the long term return of international stocks has been about 10%, so again 2017 has blown past the historical average. Results were particularly impressive in emerging markets. After many analysts thought the asset class could show some growth entering 2017, emerging markets have been by far the best major asset class in 2017 soaring 32.8%.

Finally, fixed income has gained 3.1% for the year despite two Fed interest rate increases to date and likely a third this month. Interest rates, as measured by the 10 year Treasury yield, have instead come down over the course of the year. The yield started the year at 2.45% and is now at 2.33% (when yields fall, existing bond values climb). Again, the average projection by the major financial prognosticators was for bonds to post a negative return. They expected interest rates to rise with the 10 year Treasury yield at 3.0% at year end – substantially off from what occurred.

So how could so many analysts and economists have got it so wrong? The simple answer is, no one knows the future. Not even the top members of the field. This has proven out year after year. Sure, sometimes a market guru gets a call right and the press rushes to get more predictions. Meanwhile the many other inaccurate predictions drift form memory. This article does a good job of tackling how these predictions are covered.

What lies ahead for 2018? I advise against listening to the “experts” who are making their predictions now about the next hot asset class, or their year end target for the S&P 500. As you can see from the above, they were wrong by a wide margin this past year. Instead, the best course of action is to focus on your circumstances and whether or not there have been any changes that might drive a change in your portfolio. Has there been a change in time horizon for your portfolio or a change in risk tolerance? Is more/less cash needed throughout the year? While it may be tough to ignore the pundits in the financial press, concentrating on your own ability and willingness to take risk should be your main focus and let that drive changes in your investments. By remaining disciplined to your target asset allocation and only making adjustments if there have been changes in any of the above issues, it best positions you to achieve your financial goals.

Index Performance Nov. YTDTrl 1 Yr
US Stock (Russell 3000)3.04%19.93%22.27%
Foreign Stock (FTSE AW ex US)0.93%24.54%27.94%
Total US Bond Mkt. (BarCap Aggregate)-0.13%3.07%3.21%
Short US Gov. Bonds (BarCap Gov 1-5 Yr)-0.29%0.70%0.71%
Municipal Bonds (BarCap 1-10yr Muni)-0.92%2.83%3.58%
Cash (ML 3Month T-Bill)0.08%0.74%0.79%

Photo courtesy Anthony Quintano.

About
Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

 

There is no guarantee that any investment strategy, including those described here, will be successful. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results.  You should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management, LLC.  This information was gathered from reliable sources but we cannot guarantee accuracy.  Indexes do not reflect the fees associated with actual investments and such fees would reduce the performance illustrated.

How Does the Proposed Tax Plan Impact You?

A major focus of the President and Congress has been tax reform. After much deliberation the House unveiled the Tax Cuts and Jobs Act which would represent the most sweeping changes to US tax rules in over 30 years. Given it is very early on and there are many competing groups fighting for their interests, there will likely be many changes before anything is passed.

However, we thought it would be helpful to provide a high level overview of the potential changes that are being considered. We don’t recommend taking any actions yet, but if a final version of the bill becomes more likely to pass we may make recommendations in order to best position and take advantage of the changing rules.

This article does a great job of summarizing many of the key changes.

 

Index Performance Oct. YTDTrl 1 Yr
US Stock (Russell 3000)2.18%15.55%24.93%
Foreign Stock (FTSE AW ex US)1.95%23.38%23.82%
Total US Bond Mkt. (BarCap Aggregate)0.06%3.20%0.90%
Short US Gov. Bonds (BarCap Gov 1-5 Yr)-0.10%0.99%0.05%
Municipal Bonds (BarCap 1-10yr Muni)0.07%3.79%1.67%
Cash (ML 3Month T-Bill)0.09%0.66%0.72%

 

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

Photo courtesy Anthony Quintano.

Active vs. Passive Investing – What is RWM’s take?

What does active vs. passive investment management mean? How do you define these investment styles?

We get this question or hear this discussed frequently and the answer isn’t as black and white as many think.

Active investment managers are actively seeking to outperform an investment benchmark by making decisions on what assets to hold and at what measures that differentiate them from the benchmark. They believe that through their research and investment processes they can identify assets that are under or overvalued and exploit that pricing discrepancy.

On the opposite end of the spectrum is index investing. What investors typically think of with index investing is an investment fund trying to match a widely known index such as the S&P 500, Russell 2000, or MSCI EAFE. The goal of these investments are to try to match the performance of the index (or benchmark) as tightly as possible.

However, there is also a significant gray area. There are investments that seek to track specific industries, sectors, countries, benchmarks that are created by the manager, and certain risk factors like fundamental indexes. There are also funds that broadly cover asset and sub asset classes, but are not beholden to following an index. While you could argue that these funds are not doing due diligence on specific securities in an attempt to determine whether they should be held in the fund, they also are not reflecting a market neutral allocation to a broad market asset class. These strategies are often referred to as passive which may send a conflicting message to investors given that they are not seeking to track a broad asset class.

Where do we land between active investing, passive investing, or tracking an index? Our approach is to advise on the characteristics that are important to delivering a reliable experience rather than focusing on fund descriptors such as “active” and “passive.” Our experience, and the culmination of extensive research, leads us to believe that the most reliable investments are those that are broadly diversified, very inexpensive, and exhibit very little turnover. Mutual funds and ETF’s that track broad market indexes will deliver an almost perfectly “reliable” experience because they are comprehensively diversified, very inexpensive, and exhibit very low turnover. We believe this is a great start!

Broad market index mutual funds form the core or our client portfolios. But we also use additional funds to seek excess returns or mitigate downside risk. And while these additional funds may not seek to track an index, and therefore fall into the gray area, they are all very inexpensive, broadly diversified, and exhibit very low turnover. We know of very expensive and highly concentrated sector specific index funds whose use would not, in our opinion, deliver a reliable investment experience. Similarly, we are aware of very inexpensive, highly diversified funds that seek to outperform markets that we believe to be highly reliable. We strongly believe in focusing on a fund’s characteristics and seeking those funds that will deliver a reliable experience.

 

Index Performance Sept.Qtr. YTDTrl 1 Yr
US Stock (Russell 3000)2.44%4.57%13.91%18.71%
Foreign Stock (FTSE AW ex US)1.88%6.01%21.03%19.83%
Total US Bond Mkt. (BarCap Aggregate)-0.48%0.85%3.14%0.07%
Short US Gov. Bonds (BarCap Gov 1-5 Yr)-0.34%0.29%1.09%-0.06%
Municipal Bonds (BarCap 1-10yr Muni)-0.51%0.73%3.72%1.00%
Cash (ML 3Month T-Bill)0.09%0.26%0.57%0.66%

 

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com