With the rise of new technologies, each one more advanced than the last, a new form of electronic payment has emerged.
Bitcoin is a decentralized digital currency created for efficient electronic payments. It is run and controlled by what is known as a ‘blockchain’, a public ledger of all transactions in the bitcoin network. A ‘blockchain’ is essentially a company-wide spreadsheet that can be accessed by all. The purpose of the ‘blockchain’ is to determine legitimate transactions and deter attempts to re-spend coins that have already been spent.
Bitcoin works similarly to a check in that there are two different numbers per transaction: your personal private key (or account number) and a signature that confirms your transaction on the above mentioned ‘blockchain’. The digital currency can be spent in a number of different ways, but can only be held in two forms. A bitcoin user can hold an electronic wallet (e-wallet) via a web wallet or a software wallet by using a downloadable software. An e-wallet is essentially an online bank account that allows you to receive bitcoins, store them, and send them to others. A software wallet is a downloadable software that allows the consumer to be the custodian of their bitcoins. Often the latter leads to more liability for the consumer.
It all sounds pretty enticing, and maybe you are wondering if you should jump into this next innovative technological trend. But the rapid growth of bitcoin has many people concluding that it’s just another bubble waiting to burst.
Markets have seen many different financial bubbles over the years, and none of them have ended particularly well. A financial bubble occurs when market participants drive prices above market value. This investment behavior can be attributed to herd mentality, where people think that because everyone else is investing in a certain entity and seeing short-term success, that means it’s a good investment. Inevitably, these financial bubbles can’t be sustained long term and they burst.
The first documented economic bubble in history occurred in the 17th century, when Dutch tulips were all the rage. The contract prices of the newly introduced and popular bulbs grew to an outrageous high, eventually leading to a dramatic collapse or “burst” in February of 1637. Today this is known as “tulipmania.” More recent examples include the dot-com bubble of the late ‘90s and the housing bubble in the 2000s. I’m sure we all remember how those financial bubbles ended, and the repercussions that followed those bursts.
Looking back on all of these events, it’s easy to see now how these bubbles formed, so we can use these prior experiences to better predict financial bubbles. Today, the cause for concern is bitcoin, and it’s more the question of when the bubble will burst rather than if it will.
Bitcoin got its humble start six years ago at $2. Three years later it was at $300 and last week it topped off at $11,000. With a 1000% increase so far this year alone, it’s easy to see why many people are raising the alarm or joining the frenzy, depending on the person!
With its frequent surges and sharp price moves, bitcoin is as volatile as they come. In other words, if you think you want to give bitcoin a shot, it’s best to assume that you’ve already lost that money. Everything we’ve learned about financial bubbles over the past four centuries points to an imminent burst in this digital currency’s future, and you and your money don’t want to be caught in a tight spot when it does.
There is also speculation that regulators will step in at some point because of the potentially disastrous economic consequences associated with the runaway bitcoin prices. The first concern is as we’ve outlined above, the bubble will burst and cause devastating losses. Additionally, future contracts are opening bets for bitcoin, and some funds are set to take form in early 2018 to pitch bitcoin to more mainstream investors. The more bitcoin gets wrapped up in our financial system, the worse it will be for everyone when it bursts.
The other major consequence presents the other side of the “bitcoin”: what if the bubble doesn’t ever burst, and bitcoin becomes an alternative, or worse, a replacement for standard U.S. currency? We cannot see regulators allowing what to happen, so it’s safe to say that even if this bubble miraculously doesn’t burst, it will most likely lose traction one way or another.
As many of you know, at DWM we don’t try to time the markets, and when it comes to speculative investments that require you to do so, it’s best to avoid them altogether.
Plant the Seed & Let It Grow: How DWM is Helping Emerging Investors
Coming out of college can be a very stressful time for an individual. One goes from the structured and carefree life of being a student to someone bewildered with what is often their first glimpse of responsibility, trying to grab the wheel and get some control on their future. For a lot of recent graduates, it’s not an easy transition.
Having graduated from Carthage College in Wisconsin last May, I understand what some of these sobering realizations feel like. Fortunately, my family relationship with DWM team member, Jenny Coletti, earned me an interview at Detterbeck Wealth Management and, fast forward a few weeks, I’m proud to be a new part of the DWM team!
Even though I majored in mathematics, as a young person fresh out of college, it is extremely daunting on how to get your hands around your financial wherewithal and start planning for your future. DWM is guiding me through that process and in the near future will be doing this for other “emerging investors”!
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Automated investment management utilizing DWM investment strategies via the Schwab IIP Platform
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Emerging Investor On-Boarding – Financial assistance geared directly toward an Emerging Investor needs, which could include the following:
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Budgeting/cash flow planning
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Debt Management
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Asset Allocation including assistance with your employer-based plan
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Assistance with other work benefit options
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Access to nifty financial tools
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Educational planning (for those with kids or planning to have them soon)
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Access to the DWM Emerging Investor Relationship Managers
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In Charleston: Ginny Wilson & Grant Maddox
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In Palatine: Me, Jake Rickord!
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The ability to graduate to DWM’s Total Wealth Management (“TWM”) Platform – the one that our current clients benefit from – when their account value reaches a certain level
This platform can serve many needs, but Brett and Les are very excited about this being a nice spot for children of TWM clients and other select younger people looking to grow their portfolios, where they become their own investor and spread their own wings!
It should be noted that this Emerging Investor program is a different service package than our more sophisticated Total Wealth Management experience. Given that it is geared toward a younger audience, which have different – typically less complicated, but still important – needs, the areas of focus are much different. For example, my recently graduated college friends are more interested in cash flow/budgeting management and making sure that their 401k through work is getting the most bang for the buck, given the employer’s match and investment choices, and less interested in retirement, estate, tax planning, etc. The investment management portfolios are still constructed by the same team at DWM, but do not utilize the more sophisticated alternative investments. Also, from an administrative perspective, reporting is completely handled through the Schwab IIP Client portal – no custom Orion/DWM reports like our TWM clients receive. In fact, with this EI program, everything is on-line and paperless, which to a Millennial sounds fantastic, but may be daunting to the older generations. A co-browsing session between the new EI client and one of our team members can be scheduled to make on-boarding a piece of cake. And whereas this new EI program has many differences from our traditional TWM program, the main theme remains the same: we will help select investors make their money work harder by addressing the unforeseen landmines hidden within their financial plans by equipping them with education, knowledge, tools, and sound advice.
Overall, I am extremely excited to be a part of the DWM family. I’ve learned a great deal and met some great people since joining several weeks ago. I look forward to meeting all of the clients in due time. And I cannot wait to help roll-out this new Emerging Investors platform. We still have plenty of work to do, but stay tuned for the official launch!
Time for a financial caddie?
“Pro Jock.” “Looper.” That’s what I strived to be in my early days of youth. Those that are familiar with the movie Caddyshack may recognize the reference and, yes, one of my first jobs was that as a caddie. And whereas the Caddyshack movie was quite whacky, in real life the lessons learned by growing up as a golf caddie were life lessons and things as a “financial caddie” I still exhibit today.
- Preparation / Guidance – a good golf caddie (“GC”) should arrive to the ball before the golfer and remove any surrounding debris and have yardage-to-the-green ready for the golfer. This is quite similar to how a financial caddie (“FC”) prepares his client for the next big shot in their life, by assessing the current investment environment and creating an Investment Policy Statement/target asset allocation mix and chart of course that can help the client navigate “all 18 holes”.
- Paying attention – a good GC needs to be paying attention to their golfer’s needs, i.e. is she cold and needs a jacket from the bag?, is her ball dirty and in need of cleaning?, is she familiar with what the next hole does? A good FC is one that is not only paying attention but being proactive with the client’s needs, i.e. running tax projections to make sure there are no surprises come tax time, running estate planning flow reports to make sure that the clients’ estate planning is in-line with their wishes, etc.
- Commitment – I remember some caddies that would quit – sometimes physically, sometimes mentally, sometimes both – out there. That’s bad caddying and a lack of commitment and perseverance. Some days will be beautiful, sunny ones but some will be stormy with difficult conditions. Like a good GC, a good FC makes you, the client, the priority and makes sure that our professional attention, focus and best efforts always have you in mind.
- Resourcefulness – Every “loop” is different, every golf shot is different, every round is different the same way in the financial world there are always new things being thrown at you. A good GC and FC will embrace change and always look for new possibilities to solve the problem, unravel the puzzle, and complete the task.
- Attitude – the good caddies know that they need to show up to the caddie shack early in the morning with a smile and a hard-working, respectful attitude if they want to earn the continual right of “toting the bag”. At DWM, one of our most valued qualities is a conscientious attitude used to apply diligence for the timeliness of project completion and adherence to punctuality in schedules in respect to the clients we gratefully
That being said, I’d like to share a wonderful experience with you. Schwab & Co invited my father/business partner, Les, to play in the Schwab Cup Senior Pro-Am last week. Pros like Bernard Langer, Vijay Singh, Fred Couples, Lee Janzen, and our new favorite, Brandt Jobe were all there. These are golfers my dad grew up watching and idolizing. Les was able to share the course with these guys and, after a 20+ year break, I came out of golf caddie retirement to strap on the bag one last time!
“So, I tell them I’m a pro jock, and who do you think they give me?” No, not the Dalai Lama, but Les Detterbeck, himself. Third generation of the first Lester. The long putter, the grace, not yet bald… striking. So I’m on the first tee with him. I give him the driver. He hauls off and whacks one – big hitter, the Lester – long, into a one foot crevice, a couple miles east of the bottom of the desert, right on the fairway. And do you know what the Lester says? Gunga galunga…gunga…No, actually he says, “give me the 4 wood” and the Lester proceeds to put it onto the green and two putt for a gross par, net birdie to start our Pro-Am team off in the right direction.
It was exhilarating day to say the least. We didn’t win the event, but we had a once-in-a-lifetime day, coming just a couple weeks before Les’ 70th birthday. And whereas I doubt I will ever caddie for someone in an official tournament ever again, I know that I will always strive to do my best as a FINANCIAL CADDIE to the wonderful clients we currently serve and future ones.
Of course, this was the first time I had officially caddied in over twenty years. I thought I did a splendid job, my gift to Les for his 70th. Back in the 80’s, I’d be happy to earn $20-$40 for the round to go blow at the local music shop on a few CDs. But this time… there was no money; only total consciousness. So I got that going for me, which is nice.
(*If you haven’t figured by now, Caddyshack is the author’s favorite move of all time. Happy BDay, Les! Gunga Galunga!)
Understanding Risk and Reward
Mark Twain once said “There are three kinds of lies: lies, damned lies and statistics”. We are inundated nowadays with statistics. Statistics are a scientific method for collecting and analyzing data in order to make some conclusion from them. Very valuable indeed, though not a crystal ball by any means.
When you study investment management, you must conquer the statistical formulas and concepts that attempt to measure portfolio risk in relation to the many variables that can affect one’s investment returns. In the context of investing, higher returns are the reward for taking on this investment risk – there is a trade-off – the investments that usually provide the highest returns can also expose your portfolio to the largest potential losses. On the other hand, more conservative investments will likely protect your principal, but also not grow it as much.
Managing this risk is a fundamental responsibility for an investment advisor, like DWM. You cannot eliminate investment risk. But two basic investment strategies can help manage both systemic risk (risk affecting the economy as a whole) and non-systemic risk (risks that affect a small part of the economy, or even a single company).
- Asset Allocation. By including different asset classes in your portfolio (for example equities, fixed income, alternatives and cash), you increase the probability that some of your investments will provide satisfactory returns even if others are flat or losing value. Put another way, you’re reducing the risk of major losses that can result from over-emphasizing a single asset class, however resilient you might expect that class to be.
- Diversification. When you diversify, you divide the money you’ve allocated to a particular asset class, such as equities, among asset styles of investments that belong to that asset class. Diversification, with its emphasis on variety, allows you to spread you assets around. In short, you don’t put all your investment eggs in one basket.
However, evaluating the best investment strategy for you personally is more subjective and can’t as easily be answered with statistics! Investment advisors universally will try to quantify your willingness to lose money in your quest to achieve your goals. No one wants to lose money, but some investors may be willing and able to allow more risk in their portfolio, while others want to make sure they protect it as well as they can. In other words, risk is the cost we accept for the chance to increase our returns.
At DWM, when our clients first come in, we ask them to complete a “risk tolerance questionnaire”. This helps us understand some of the client’s feelings about investing, what their experiences have been in the past and what their expectations are for the future. We also spend a considerable amount of time getting to know our clients and understanding what their goals are and what their current and future financial picture might look like. With this information in mind, we can then establish an asset allocation for each client’s portfolio. We customize the allocation to reflect what we know about them, looking at both their emotional tolerance for risk, as well as their financial capacity to take on that risk. We also evaluate this risk tolerance level frequently to account for any changes to our clients’ feelings, aspirations or necessities. While we use the risk tolerance questionnaire to start the conversation, it is our understanding of our client that allows us to fine tune the recommended allocation strategy.
A Wall Street Journal article challenged how clients feel about their own risk tolerance and suggested that being afraid of market volatility tends to keep investors in a misleading vacuum. The article suggests that investors must also consider the risk of not meeting their goals and, that by taking this into account, the investor’s risk tolerance might be quite different.
The WSJ writer surveyed investors from 23 countries asking this question:
“Suppose that you are given an opportunity to replace your current portfolio with a new portfolio. The new portfolio has a 50-50 chance to increase your standard of living by 50% during your lifetime. However, the new portfolio also has a 50-50 chance to reduce your standard of living by X% during your lifetime. What is the maximum % reduction in standard of living you are willing to accept?” Americans, on average, says the article, are willing to accept a 12.65% reduction in their standard of living for a 50-50 chance at a 50% increase. How might you answer that question?
So, bottom line, it is the responsibility of your advisor, like DWM, to encourage you to choose a portfolio allocation based on reasonable expectations and goals. However, understanding your own risk tolerance and seeing the big picture of your investment strategy is also your responsibility. Our recommendations are intended to be held for the long-term and adhered to consistently through market up and downs. We know that disciplined and diversified investing is the strategy that works best for every allocation!
We want all of our clients to have portfolios that give them the best chance to achieve their financial aspirations without risking large losses that might harm those chances. Through risk tolerance tools and in-depth conversations, we get to know our clients very well, so we can help them make the right choice. After all, our clients are not just numbers to us!
Ready for a quick quiz?
Two-thirds of the world can’t pass this financial literacy test. Can you? You don’t need a calculator, just 3-5 minutes of time.
Risk Diversification: Suppose you have some money to invest. Is it safer to put your money into one business, piece of real estate or investment or to put your money into multiple businesses or investments?
a)One business, piece of real estate or investment
b)Multiple businesses, pieces of real estate or investments
Inflation: Suppose over the next 10 years, the cost of things you buy including housing, food, taxes and health care and all others double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today?
a)Less
b)The same
c)More
Mathematics: Suppose you need to borrow $100 for one year. Which is the lower amount to pay back: $105 or $100 plus 3% interest?
a)$105
b)$100 plus 3% interest
Compound Interest: Suppose you put money into a bank and the bank agreed to pay 3% interest per year to your account. Will the bank add more money to your account in the second year than the first year, or will it add the same amount of money for both years?
a)The same
b)More
Compound Interest II: Now suppose you have $100 to invest in a (very aggressive) bank who will pay you 5% interest per year. How much money will you have in your account in 5 years if you do not remove any of the principal or earned interest from the account?
a)Exactly $125
b)More than $125
c)Less than $125
Pretty simple, right. The answer is b for all. We’re sure our regular DWM blog readers got them all right.
Across the world, however, the 150,000 people who took the test didn’t do so well. Two-thirds of them answered at least 2 of the 5 questions incorrectly. The survey pointed out some key findings. Norway has the greatest share of financially literate people worldwide. Canada, the UK, the Netherlands and Germany also finished in the top 10. The U.S. didn’t.
In the Emerging Market countries, like China, India, Brazil and Russia, the young people, ages 15 to 35 were the most financially literate. Apparently the kids in Shanghai “knocked the cover off the ball” (just like George Springer of the Astros).
So, what’s the takeaway? Financial literacy for Americans could use improvement. In addition, as we pointed out in our blog two weeks ago highlighting Nobel Prize winner Richard Thaler, people, even if they are financially literate, can make systematically irrational decisions. This means you may need a financial coach and advocate. That’s what we are for our DWM clients. Whether it’s professional investment management, financial decisions and planning, income tax planning, insurance and estate planning matters, we provide our financial literacy, rational analysis and proactive solutions and suggestions. It’s our expertise and our passion. At DWM, this is how we hit home runs!
DWM SAYS THANKS – LAST WEEKEND AT THE SWEETGRASS PAVILLION
This past Saturday, many clients/family/friends attended our annual Charleston Friends of DWM Appreciation Event at Sweetgrass Pavillion in Mt. Pleasant, SC. Although the sun evaded us, the room was filled with bright faces!
A great time was had by all!
Marilyn Dingle, the resident sweetgrass basket weaver, educated us on the history of sweetgrass baskets.
And some even participated!
Everyone learned a thing or two about Marilyn and the art of sweetgrass basket weaving!
And had lots to talk about!
Many thanks to all who waded through the rain and joined us for our appreciation event! And to both those that did attend and to those that couldn’t make it, let us reiterate that we are honored to have you all as our friends and look forward to a continued great relationship! Thank you!!!
Nobel Prize Winner Helps Add $30 Billion to Retirement Accounts
Richard Thaler received the Nobel Prize in economics last week, principally by showing that people don’t always behave rationally and, in fact, we are systemically irrational.
Here’s an example: Two friends are given tickets to a basketball game in the Northeast. The night of the game there is a tremendous snowstorm. One friend calls the other and suggests there is no way they are going to the game now, in the snowstorm, and they don’t go. But, he said “You know, if we had paid for those tickets ourselves, we’d be going.”
Studies by Dr. Thaler show that if the friends had paid for the tickets, they would likely driven through the snowstorm because they didn’t want to “lose” their money. Classical economics would say that’s crazy, but it’s true. People pay huge attention to “sunk costs,” often irrationally.
Because of Dr. Thaler and others, we know more about human biases and anomalies that impact our financial decisions. These include compartmentalizing (putting money in mental boxes), mental accounting (thinking differently about money in your pocket versus money in the bank) and the endowment effect (once you own something you value it more than before you owned it).
Dr. Thaler not only helped discover our biases but also identified ways to make irrational behavior work to our advantage. Savings and retirement has always been a big area for him. He applauds the fact that if we compartmentalize (have a “mental box”) for retirement savings we are doing a very good thing. Putting money in a 401(k) plan makes it much “stickier” than other money and it stays there.
In 2004, Dr. Thaler and Shlomo Benartzi published “Save More Tomorrow.” It is based on the idea that instead of asking people to save more now, ask them to save more in the future. We tend to irrationally discount our future commitments. Hence, we tend to put off savings because retirement is so distant, but we will commit to future savings because it is also so distant. Dr. Thaler suggested that people save 50% of every raise. No need to give up anything now. And, this concept would mean that if you save 50%, then the remainder will be left for current spending, without any guilt. Every raise therefore increases both spending and savings- a much more palatable idea than taking away some of our current income to save.
Over the past few decades, most company pension plans have been discontinued and replaced by company sponsored defined contributions plans, where employees needed to make contributions. These voluntary accounts should have worked better. Rational employees were expected to save and invest to meet their long-term goals. But, it didn’t work that way-participation rates early on were very poor. Dr. Thaler was asked about the problem and his response was that workers can be their own worst enemies- “without help, they’ll never retire.”
His solution: “Nudge” them into joining company retirement plans, using a concept known as automatic enrollment. Rather than waiting for employees to complete paperwork, companies would automatically enroll them and workers, if they don’t want to be in, can opt out.
Last year, 58% of companies were automatically signing up workers. That’s up from 8% in 2000. And some companies are automatically escalating the contributions or giving the employees the option to do so. Thaler and Benartzi’s research shows, as compared to 2011 data, 15 to 16 million more people are saving. Assuming an average contribution of $2,000 a year, that’s $30 billion a year in additional contributions.
Dr. Thaler, with his colleague Hersh Shiffrin, suggested that our mental accounting of money is often a battle in our brains between the “doer” (focused on short-term rewards) and the “planner” (focused on the long-term.) How choices are presented to us (“the choice architecture”) makes a big difference in our decision. Making enrollment in the 401(k) occur by default and requiring a worker to “opt out” will likely put the “planner” in control, not the “doer.”
One of our key jobs and challenges at DWM is to assist our clients by framing questions and choices in the appropriate way. Like Dr. Thaler, we understand that wealth, health and happiness decisions are not always rational yet we do our best to find a way to “nudge” both your doer and planner parts of your brain in order to help protect and grow your assets and your legacy. We haven’t made a $30 billion impact yet, but we’re passionately working on it every day.
October: Halloween and National Cybersecurity Awareness Month
What a combo! Ghosts and goblins seem pretty tame compared to the potential theft of our financial information. 146 million Americans got a big scare last month when Equifax announced that hackers had stolen their personal information. Fast food chain Sonic just announced that customers’ debit and credit card information was stolen last week. So, while Halloween costumes, haunted houses and trick or treats get put away on November 1st, cybersecurity issues cannot be put away in the attic trunk or tossed into the garbage.
We probably all wish we could just email Equifax a two word message: “You’re Fired!” Unfortunately, it’s not that easy. For example, Fannie Mae, who sets the rules for most mortgages, requires information from all three credit “repositories.” If you will never need a mortgage, you can try to delete your files from Equifax. However, those who have tried have been put “on hold” for hours and then told that deletion of their files was impossible. The “no” response to deletion was confirmed by Equifax former CEO Richard Smith last week to Congress. For now, the best we can do is freeze (not “lock”) our accounts at Equifax, Transunion and Experian.
New “cyber-vampires” are emerging from the darkness. Did you ever watch the movie “Catch me if you can?” Great film. It is the story of Frank Abagnale, Jr., played by Leonardo DiCaprio, a master of deception and a brilliant forger who stayed one step ahead of the FBI (Tom Hanks) for five years with his highly successful scams. Once arrested, he spent five years in jail from age 21 to 26. Since that time, Mr. Abagnale has put his unique skills to good use teaching FBI agents around the country about cybercrime, identity theft and fraud. He also serves as an ambassador for AARP’s Fraud Watch Network and lives in Daniel Island, SC. Here are some of Frank Abagnale’s (“FA”) recent warnings:
FA: “Stop writing checks- if you are still paying by check, you might be putting your life savings at risk.” If you go into a grocery store and write a check, you have to hand the clerk the check with your name and address, phone number, your bank’s name and address, your bank account number, the bank routing number and your signature. And then, the clerk may ask to write down your date of birth and driver’s license number as well. You never get the check back, it goes to the store’s warehouse, where it may be destroyed thoroughly (or not) six months from now. Anyone seeing the check has all they need to draft on your bank account tomorrow.
FA: “It is now 4,000 times easier to forge checks (with today’s technology).” 50 years ago, FA used a Heidelberg printing press, originally costing $1 million, to forge checks. The press was 90 feet long and 18 feet high. Now, one simply opens their laptop and says, “Who’s my victim today?” In fact, FA indicates that forging checks is so easy these days that street gangs that used to deal in drugs and narcotics are forging checks instead. FA: “It’s easier and you spend a lot less time in jail if you are caught.”
FA: “Technology breeds crime-whether it is forging checks or getting information.” Facebook is a great source of information for the crooks. One of the most common scams now is the “grandparents scam.” The bad guys go on Facebook and find out who the grandparents are and see who the grandson is dating. They easily manipulate their telephone caller ID to show a call coming from the NYPD or other police department. The thieves place their call on a Friday night and tell the grandparents that the grandson is at the jail after being picked up for DUI/DWI and being held for bail. If money for bail is not received in two hours, the grandson will have to spend the weekend in prison. “Millions of grandparents have fallen for this scam.”
At DWM, we recognize that you have worked and continue to work very hard for your money. Our goal, in every facet of providing Total Wealth Management, is to protect and grow your assets. Cyber-safe practices are a key element of risk management. Our first job is to educate our clients and friends about the importance of cybercrime, identity theft and fraud. Charles Schwab & Company, the custodian for our clients’ money, is as dedicated as we are to keep you and your funds safe and help prevent attacks.
Watch for more blogs this month (and beyond) on cybersecurity. It’s a tremendously important topic!!
DWM 3Q17 Market Commentary
“Train Kept A Rollin’ All Night Long…” The US economic expansion continued on during the third quarter of 2017. It is the third longest expansion since World War II and is now closing in on 100 months. There were plenty of negatives that tried to slow it down. Politically, we had the debt ceiling deadline, a failed attempt to repeal Obamacare, and a war of words with North Korea. Even the lives and economic losses from the likes of Hurricane Harvey, Irma, Maria, western wildfires and two Mexican earthquakes – amounting to what could be the most expensive year for natural disasters ever – couldn’t slow this train down.
Thing is: the positives outweigh those negatives. At the end of the day, the market is powered by companies’ earnings. And those earnings have been robust and are expected to continue to be! And it’s not just domestically; growth is accelerating at a global level with Eurozone businesses and households more confident about their prospects than at any time in more than a decade. Japan has shown decent growth and inflation this year. And emerging markets are enjoying better fundamentals with more credible politics. Choo! Choo!
We are big believers in asset allocation which is why we showcase the major asset classes each quarter. Here’s how each fared:
Equities: The S&P500 rose 4.5% on the quarter and is now up 14.2% year-to-date (“YTD”). Sounds excellent, but actually a more diversified benchmark, the MSCI All Countries World Index, which includes US large cap stocks, US smaller cap stocks AND international stocks, did much better, up 5.3% quarter-to-date (“QTD”) and now up 17.3% YTD. We’ve been saying for some time that domestic large cap stocks in general look pretty “frothy” and hence it’s not surprising to see this rotation out of domestic large cap stocks into other cheaper equities. The other thing at play is the renewed interest in the so-called “Trump trade”. The areas that moved post-Trump Presidential Election, like small cap and value, have ‘steamed ahead’ in the last few weeks from the renewed hope of possible tax cuts. In just September, the Russell 2000 outperformed the S&P 500 by 4.2% and the Russell 3000 Value outperformed the Russel 3000 Growth by 1.6%.
Fixed Income: During the quarter, the Fed announced that they are pushing ahead with an aggressive schedule for rate increases. We are happy to see the Fed take this path toward “normalization” while the economy is strong. The US needs to get back to higher rates so that the Fed has “some coal for their engines” if things go bad. That said, this announced path has succeeded in boosting inflation expectations, which has pushed up yields in both the 2-year and 10-year US Treasury notes, with the latter closing the quarter at 2.3%, its first quarterly gain of 2017. For the record, the Barclays US Aggregate Bond Index gained 0.9% in the third quarter and is now up 3.1% for the year. The inclusion of global fixed income assets led to better results with the Barclays Global Aggregate Bond Indexregistering +1.8% for 3Q17 and +6.3% YTD.
Alternatives: Let’s take a look at a few ‘alts’ we follow. Gold gave back a little in September, but registered a +3.1% 3Q17 return represented by the iShares Gold Trust. With 2017 going down as one of the worst natural disasters year on record, the alternative exposure to reinsurance-linked securities (sometimes referred to as ‘catastrophe’ securities) took a hit. One would have thought oil would have suffered from the hurricanes as well, but demand was strong and with slowing US production, oil prices (WTI) ended the quarter up 12.2%. For the record, the Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, was up 1.6% for the third quarter and 2.8% YTD.
For balanced investors, It’s been a pretty nice three quarters to start 2017. Looking forward, this bull market train can continue to roll, and a case can be made that returns can even get stronger given the great economic fundamentals around the globe. If Washington can get something done relative to a tax cut, look for stocks to accelerate into year-end.
Of course, there will always be (rail) road blocks. We are thrilled to see inflation measures move toward the Fed target range around 2%, but there are many out there concerned that inflation might ‘chug’ right through those target levels and create havoc on the back-end. Furthermore, the announced and about-to-start-very-soon Federal balance sheet reduction is an unprecedented experiment. And it’s not just the US attempting this. Global central banks at some point need to do some house-cleaning and will be reducing their balance sheets as well. There is a huge risk something can go wrong and send this train off track. Lastly, we don’t think the markets are adequately pricing in the geopolitical risk out there, which some would say is approaching multi-decades high. Frankly, when a small probability risk is hard to price in, the market usually just shrugs it off. With trading activity so light recently and little risk currently priced into the market, things could get ugly very quickly if anything goes wrong.
In conclusion, these are challenging times. It’s not easy to navigate the terrain out there. So make sure you have good direction and management. Don’t fall victim to a bad conductor and wind up like Ozzy Osbourne “going off the rails of a crazy train!” Make sure that your engineer is keeping you on track. At DWM, we engineer our clients’ portfolios to ride safely through the peaks and valleys that this train has and will travel through. With the right team at the controls, you can make your journey a pleasant one.
Brett M. Detterbeck, CFA, CFP®
DETTERBECK WEALTH MANAGEMENT
DWM SAYS THANKS – LAST WEEKEND AT ARLINGTON PARK!
This past Saturday, many clients/family/friends attended our annual Chicagoland Friends of DWM Appreciation Event at Arlington Park Race Track in Arlington Heights, IL. We were blessed with a warm, sunny day under the shade of one of Arlington Park Race Track’s marquee tents!
A great time was had by all!
Don the Handicapper educated us aka “Arlington Park Betting 101”.
And we had some lucky winners!
Then again not all of us were old enough to bet, but still had fun!
Some just wanted to chill…in a tree!
Some of us – both young and old – even had a roll down the hill match! (Thanks for organizing, L.M.)
For those that attended, thank you very much for coming and partaking in what was a truly special day for our Detterbeck Wealth Management team. And to both those that did attend and to those that couldn’t make it, let us reiterate that we are honored to have you all as our friends and look forward to a continued great relationship! Thank you!!!
Lastly, for those in Charleston area, we look forward to hopefully seeing you at our October appreciation event!