Risk Expectations – Markets Go Down Every Year

Contributed by: Nicholas Boguth

Investing is risky: the price of securities can go down, but there are strategies to help mitigate this risk: diversifying and sticking to your plan.

The chart below shows the price return (gray bar) and the largest intra-year decline (red dot) of the S&P 500 since 1980. This is one of my favorite charts because it reminds me that stock prices have indeed gone down at some point during EVERY year, but ultimately returned a positive number a vast majority of the time.

It states an appalling statistic: the average intra-year decline of the S&P 500 over this period is more than 14%. I say appalling because despite the average decline being -14%, the average return by the end of each year is over 8%, and this does not even include dividends! This acts as a great reminder to stay invested and don’t change your plan when the markets take a dive.

Our ultimate goal is to diversify in order to reduce that average intra-year drawdown, without sacrificing too much return. It is not easy for most investors to stomach watching their money decline by 14%, which is why risk management is a key part of the investment process. The right amount of risk is going to be different for everyone; working with us to determine your financial goals and capacity/willingness to take risk is step one in building your personalized portfolio.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. 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. Dividends are subject to change and are not guaranteed. Diversification does not ensure a profit or guarantee against loss. There is no assurance that any investment strategy will ultimately be successful, profitable nor protect against loss.

Investor Basics: Exchange Rates

Contributed by: Nicholas Boguth

An exchange rate is just the price of one currency in terms of a different currency. For example, as I wrote this blog on 9/29/17, the USD/EUR exchange rate was .85. This means that 1 US Dollar would buy 0.85 Euro.

Exchange rates fluctuate though, and this is where things get complicated for investors. Inflation, interest rates, asset flows, trade, and economic stability are all factors that move exchange rates. Below is a chart showing just how much the exchange rate between the US Dollar and the Euro has fluctuated in the past 10 years.

Now these exchange rates may not directly affect you in your day to day purchases, but if you are invested internationally, exchange rates affect your portfolio. Head on over to our Director of Investments Angela Palacios’s blog (coming on Thursday!) to read about exactly how exchange rates have affected returns recently.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

Investment Pulse: 3Q 2017

Contributed by: Nicholas Boguth

We’ve been busy here in the Investment Department! Check out some of our research highlights from the third quarter.

Angela Palacios, Director of Investments at The Center, attends Capital Group Advisor Forum

Angela traveled to Capital Group’s headquarters in California, to look under the hood at their investment strategies focusing on their process, people and investment outlooks.  You may know the strategies as the American Funds family. The discussion spanned from macro-economics to fixed income and equity discussions. On the macroeconomic front they discussed their recession outlook. Anne Vandenabeele, Economist, stated that expansions don’t die of old age, they die because imbalances build up in the economy or the Federal Reserve raises rates too quickly. They don’t see either of these scenarios right now. Most severe bear markets are when you have a bear market combined with a recession. While there may be a bear market in the next several years they don’t see a recession occurring at the same time. 

Clayton Shiver, Portfolio Manager at Stadion Money Management

Part of our investment process is to stay on top of investment products being offered in the marketplace. Nick Boguth met with Clayton Shiver to discuss Stadion’s alternative product platform and understand the team’s investment process. Clayton discussed their three sleeve alternative approach that included an equity, income, and trend sleeve implemented with the buying and selling of stocks and options in order to generate very different potential returns from the S&P 500 or Barclays US Aggregate Bond Index.

Matt Lamphier, Portfolio Manager at First Eagle

Matt Lamphier, director of research for the Global Value team at First Eagle Investment Management, joined us at our office for a jam-packed hour of investment updates. We discussed First Eagle’s investment process, outlook, and rationale behind their investments. Matt stressed the importance of being a value investor, and choosing companies that will outperform over the long term. One surprising statistic that Matt shared was that the average timespan of a stock in their portfolio is over 10 years!

What to expect next time…

We have a busy schedule next quarter and are looking forward to sharing highlights from our upcoming conferences including: Thornburg Investment Management, First Eagle, and Investment News.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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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 opinions are those of Nick Boguth and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. 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. Raymond James is not affiliated with Anne Vandenabeele, Clayton Shiver, Stadion Money Management, Matt Lampier and/or First Eagle Investment Management.

Irma’s Devastating Winds Don’t Devastate The Market

Contributed by: Nicholas Boguth

Hurricane Irma, one of the strongest and longest-lasting hurricanes ever recorded, recently passed leaving a long path of destruction behind it. People from the Caribbean to Florida prepared for the beast of a storm prior to labor day weekend, but there is only so much that could be done before its 180+ mph winds tore through the Virgin Islands on Wednesday the 6th, Cuba on Friday, and finally Florida and Georgia by Sunday. Entire islands were left in shambles across the Caribbean, Florida and Georgia sustained major damage, and millions of people are left without power and water.

How did the market respond?

We are constantly reminded that the markets do not like uncertainty, and this rings true when you look at short periods of volatility, but look at all of the uncertainty that we’ve seen in the past 15 years. Since ’02, we’ve had 3 presidents from republican, to democrat, back to republican, Congress party control flipped multiple times, we’ve seen 2 major wars, devastating natural disasters, massive oil spills, major business and even city bankruptcies, and a “Great Recession”. What did the S&P 500 do over the past 15 years? It is up about ~9% annualized, which is right on par with the average return of the S&P over the past 100 years.

Reminder: be a long term investor. Do not try to time the market, and if you ever have any questions – we are here to help!

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. 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 opinions are those of Nick Boguth and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. 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.

Investor Basics: Embedded Bond Features

Contributed by: Nicholas Boguth

This time around in our “Investor Basics” series, we’re going to take a look at the most common bond features. For a dive into a more complex bond pricing topic, check out our Director of Investment’s Investor Ph. D blog on why buying premium bonds can make sense.

First off, what is an embedded bond feature?

An embedded bond feature is a provision attached to a bond that changes its maturity, risk, or liquidity. A bond issuer may release a bond with an embedded feature in order to make it more attractive to a bond buyer, or to give itself a more favorable debt structure. The most common types of embedded features that you may have seen in the market, and that I will briefly go over in this blog, are call, put, and conversions.

Call features give the issuer of the bond the right to “call” the bond back from the bondholder at a specific date. This provision benefits the issuer because they are able to buy back debt, and then issue new debt at a lower interest rate. A company will typically issue a callable bond when they believe that interest rates will decrease in the future. Since this feature benefits the issuer, the company will have to make the yield or maturity more attractive to entice a buyer.

Put features give the bondholder the right to “put” the bond back to the issuer at a specific date before it matures. This provision benefits the bondholder because it allows him or her to put the bond back to the issuer (maybe interest rates have risen or the company’s credit is deteriorating). Since this option benefits the bondholder, he or she may have to accept a lower yield or longer maturity on the bond.

Another common embedded bond feature is the conversion option. This actually lets the bondholder convert the bond into shares of the company’s stock at a predetermined price and date. A company may issue convertible bonds as a way to issue cheap debt (they may not have to pay as large of a coupon because they are giving the bondholder the option to convert their bond to stock).

Each of these bond features may have a place in an investor’s portfolio, but knowing when and how to include them can be complex and differs from investor to investor. If you have any questions on these bond topics or any others, feel free to reach out to us at any time!

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. 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. Investments mentioned may not be suitable for all investors. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise.

Talking Bitcoin

Contributed by: Nicholas Boguth

What is it?

Think of Bitcoin as internet cash. It is a currency that does not exist in a physical form - a cryptocurrency.

It is decentralized which means that there is no central authority that manages it. Instead, there is a set number of Bitcoin in the market. The creator of Bitcoin created 21 million bitcoins, and no more will ever be created.

Each transaction is “peer to peer,” and each peer or “user” is anonymous. There is no middlemen such as banks or credit card companies that monitor and clear each transaction. Instead, there are companies, groups, and private individuals who reconcile transactions and are awarded bitcoins in exchange.

“$100 in bitcoin in 2010 is worth $75 million today.”

I love these headlines. Here is another fun fact: the first material items purchased with bitcoin was two pizzas. The “user” paid 10,000 BTC – about $25 at the time. In today’s dollars (6/15/17), that pizza cost over $22,000,000.

You may have seen these headlines, but what drove this value increase? To put it simply: demand. Demand is affected by a number of things (who accepts it as a form of payment, transaction volume, liquidity, tax treatment, security, news articles, etc.), but the demand has rose significantly since 2010 which has driven the price increase. As I mentioned before, there are a set amount of 21 million bitcoin, so the currency is designed to be deflationary. As its demand increases, its price will increase.

Investing in Bitcoin

While the headlines are fun to read, it is difficult to give investment advice regarding the currency. It is relatively new (created in 2009). There are very limited laws and regulations with regards to bitcoin. It is not widely accepted as a form of payment. There has been high volatility in the past. Ultimately the future of bitcoin is still very uncertain, but we will be staying up to date with the currency to keep you informed.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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Any opinions are those of Nick Boguth and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. 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. Past performance may not be indicative of future results. Sources: https://www.washingtonpost.com/news/on-small-business/wp/2017/05/23/100-of-bitcoin-in-2010-is-worth-75-million-today/?utm_term=.cce93f146de2 http://www.businessinsider.com/bitcoin-pizza-day-passes-2000-20-million-2017-5

Investor Basics: Intro to Fundamental Analysis

Contributed by: Nicholas Boguth

There are two major types of analysis when it comes to investing: Technical Analysis, which you can read more about in Angela Palacios', CFP®, Investor PhD blog, and Fundamental Analysis, which I will break down for you right now.

Ultimately, fundamental analysis is an evaluation of the financial position and performance of a company or strategy.

When doing fundamental analysis on a stock, the process involves breaking down all of the quantitative information found on the company’s financial statements. Digging into a company’s balance sheet tells you about their current position as it pertains to assets, liabilities, and shareholders’ equity. The information on income statements and statements of cash flow reveals how the company has performed, or how much expense, revenue, or profit it generated. Fundamental analysis also involves looking at qualitative factors such as management, the business model, accounting practices, and competitors. All of this data is then analyzed, compared to peers, and used to make an investment decision.

The graphic above lays out The Center’s investment selection process. You will see that there is both quantitative and qualitative fundamental analysis done when choosing the strategies in our model. The process is slightly different when comparing all strategies as opposed to only stocks, but the same considerations have to be taken into account before making an investment decision. We look at quantitative factors such as manager tenure, ownership, costs, risk metrics, and return metrics, just to name a few. We also look at a vast amount of qualitative information about the fund companies, managers, and investment team. Fundamental analysis is step one to selecting each individual strategy for our portfolios. If you have questions on how we build portfolios or fundamental analysis, please reach out to our investment team!

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. 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 opinions are those of Nick Boguth and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Investor Basics: Inflation 101

Contributed by: Nicholas Boguth

The most basic definition of inflation is “the rise in price of goods and services.”

Below you will see the Bureau of Labor Statistics’ (BLS) inflation data for the past 10 years, but what do these numbers mean?

Let’s look at last year for an example – average inflation was 1.3%. That means the price of goods and services in the U.S. increased by about 1% last year. It does not necessarily mean that the t-shirt you bought last year for $10.00 is now going to cost $10.10, but rather 1.3% was the average change of all the goods and services that the BLS measures.

Inflation is largely determined by the supply of money, which is why it is a major long-term goal of The Fed to target a certain inflation rate (that target right now is 2%). Keeping a clear inflation goal can promote price stability, interest rate stability, and aligns with The Fed’s goal to help maximize employment.

Since The Fed has explicitly stated that it will be targeting a 2% long-term inflation rate, you may see why investing can be a very important tool for personal retirement planning. If The Fed nails the 2% target, $1 that sits in your change jar for the next 20 years will likely only buy you the equivalent of what $0.67 will buy you today. Feel free to talk to us about strategies about how to combat the effects of inflation!

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. 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 opinions are those of Nick Boguth and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Studies. 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.

Investor Basics: Drawdowns 101

Contributed by: Nicholas Boguth

It is imperative to try to avoid major drawdowns when investing. This may seem intuitive, but let’s take a closer look.

Drawdown is a metric used to measure risk. It is a measure of the peak-to-trough decline of an investment or portfolio. Minimizing drawdown is arguably more important than seeking large returns when it comes to investing, and here is why:

Below is a simple chart showing the returns investors would need to get back to where they started if they lost 10%, 30%, and 50%. The math is relatively simple: if you start with $100 and proceed to lose 50%, you now have $50. In order to get back to the $100 that you started with, your $50 would have to gain $50, or increase by 100%.

So the math is simple, but who really cares about the hypothetical? Let’s look at how the S&P 500 actually performed compared to diversified portfolios during the drawdown that started in ’07. The chart below, from JPMorgan’s Guide to the Markets, shows how the S&P 500 lost over 50%, and took 3 FULL YEARS before it recovered back to its peak. Compare that to the 40/60 portfolio. Since the drawdown was significantly less, it was a much quicker recovery and broke even after just 6 months. This is why it is important to try to avoid major drawdowns when investing.

For a more in depth look on drawdowns and sequence of returns, check out the Investor PhD blog written by our Director of Investments, Angela Palacios, CFP®.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. 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 opinions are those of Nick Boguth and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. 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.

China's Currency - Revisited

Contributed by: Nicholas Boguth

I want to revisit a topic I first discussed back in March – China’s currency.

In the previous blog, I explained why China was devaluing their currency and what potential effects it could have on their economy. As previously stated, one of the biggest risks with currency devaluing is the risk of capital outflow. If investors think that there are better opportunities elsewhere, they will move themselves or their money into a country with stronger currency prospects. In the chart below, we can see this exact event currently happening in China.

http://www.tradingeconomics.com/china/capital-flows

This is a topic that catches a lot of headlines, and it should be useful to have some background to filter through all the noise. We are likely to see headlines about how China is managing its currency well into the New Year; maybe headlines about Chinese goods getting cheaper as the US Dollar strengthens relative to the yuan, or you may have already seen the most recent headline about China placing restrictions to attempt to slow the capital outflow from the country. They want to slow this mass capital outflow because it is increasing their supply of yuan and triggering inflation that can be harmful in excess. We will stay tuned and observe how the country acts and reacts going forward. If you have any questions about these changes, don’t hesitate to reach out to the Investment Department here at The Center!

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. 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 opinions are those of Nick Boguth and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance may not be indicative of future results.