2016 Year End Comments

December 25, 2016 by  
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December 2016                 

As I pen this letters, the stock market’s recent surge has confirmed the trend higher, hitting our predicted long term records.  But, that does not mean a correction can’t come before creating more new highs. As we have been saying for over a year now, a correction is still way overdue. Although there are many reasons for this prediction, another  point has recently become glaringly obvious: Just five stocks have accounted for over 60 percent of the move up.

According to Weiss Research, “…about two-thirds of the rally in the Dow can be attributed to five companies: Goldman Sachs Group Inc. (GS), UnitedHealth Group Inc. (UNH), JP Morgan Chase & Co. (JPM), Caterpillar Inc. (CAT), and Boeing Co. (BA).

But, one company has stood above the rest during this post-election rally: Goldman Sachs.

In fact, the investment firm has been responsible for a huge amount of the increase in that index — a mind-boggling 30 percent of the recent gains. The other four stocks combined make up the other 30 percent.

Still, for investors even thinking about chasing these high-flyers, keep this in mind: When the rally backs up some — which I believe it will — these five will likely get hit the hardest.

And while market breadth — or the number of stocks advancing compared to those declining — is improving, it’s still not what I’d like to see for a rally of this magnitude”

Does this sound confusing?  Not if you have been listening to us regularly and you have worked with us to create a plan.

This year marks the 36th anniversary of our financial planning firm.   Many of you, friends and clients, have been with us for most of these thirty-six years.   We are grateful for your loyalty.   From the beginning of our practice, we have always placed first, the interest and financial goals of our clients.    

As investment advisors, 2016 has been a challenging year, as we worked to keep our anxious clients focused on their long-term goals while guiding them through the turbulent periods.  Stock markets began the year with a declining performance as oil prices plummeted and the Chinese stock market sell-off reverberated globally.  Our advice to fearful and anxious clients then, was: Keep calm, stay the course, and, had we taken some profit earlier, view a market decline as an investment opportunity to invest any idle cash in their investment portfolio.  History has proven time and again that investors who are willing to wait out short-term volatility have been rewarded over the long term. 

Over the years of our association, we have frequently discussed the various views of risk from your investment perspective.  We have always emphasized the importance of portfolio diversification to minimize the effect of market volatility, and the associated risk of loss. The inclusion of diverse asset classes in a range of industries has the effect of dispersing investment risk.  

Diversification of management and strategy discipline are other ways we continually explore in order to reduce risk as well. This is an interesting topic we will elaborate more on if you are interested, or when we speak next.

Risk has always been pervasive in investing, no matter how “conservative” an investor may consider themselves.  In today’s ever-shifting global landscape, it has become even more pervasive.  There are often misperceptions about risk.  For investors, there are two important misperceptions.   The first and most prominent misperception in investing is that all risk is bad.   In reality, investors must accept an element of risk in order to realize a return.   The familiar adage applies:  “No risk, no reward”.    We apply the perception of risk as we work to construct an investment portfolio for our client, as we discuss the goals, investment objectives, time horizon, and investment risk profile of every client to fashion an allocation policy.   Thus, the risk may actually be perceived as a way to assist the portfolio construction process. 

Diversifying can improve a portfolio’s investment risk profile.  The challenge with this is that “risk” means different things to each investor, and there is no magic formula to risk management.  The prime way to diversify a portfolio is by attempting to achieve optimal balance of risk-taking to generate returns.  To adequately diversify risk in the portfolio, the investor must determine and define what risk means to them by thinking about the investment objective, and to assess that risk.  There are multiple ways to assess risk.  Is currency risk more important than market risk, or country (political) risk?

Another common misperception about risk has to do with cash.  Most investors assume that cash is risk-free and that holding it is the best safety net.  That may not be the case.  Investors need to consider that cash also carries risk since it is currency, and currency can inflate and deflate in value.  The amount of cash the investor holds at a moment’s time may not be worth the same at another time.   While inflation is not a major concern today, investors should be wary of holding too much cash.  Holding cash is risky because holding it is gambling that the currency value will always remain the same, or increase in value.          

Finally – One of the riskiest asset classes is “alternatives”.  Alternatives have long been known to be among assets reserved only for those investors who are willing to bear the heightened risk that comes with the ability to achieve sizable returns.  However, sorting risk in alternative investments involves assessing varying risk dynamics.  The wide range of alternatives, such as hedge funds, private equity, venture capital, property, and infrastructure involve varying risk dynamics.  Each of these investments may produce outsize returns, but present unfathomable risk as well.                      

There are few investors today who invest in only one asset class, essentially putting all their eggs in one basket.  When diversification is recognized as the correct way to reduce risk and gain income in the process, it is essential to differentiate among the available eggs and choose the right ones to create the best combination.  What risk means to you is not the same as what risk means to someone else.  Knowing how various asset classes impact your portfolio and strategizing accordingly is essential.  And, sometimes you need to take some gains, even if you think the peak has not yet arrived.             

One more commonly over looked point: Do not assume your work retirement plan or 401k is immune to undue risk. On the contrary, there has been a dramatic rise in law suits against 401k sponsor and providers due to poor due diligence, unnecessary risk, conflicts of interest and unreasonable expenses related to 401k plans – in particular, Fidelity and other large brand names are leading the guilty suspect’s list. We have expanded our ERISA fiduciary relations to better analyze and advise you with employer sponsored 401k plans and other benefits options.

Our client reviews involve reappraisal of client investment objectives, risk assessment, time horizon, and portfolio diversification, in conjunction with life, estate and elder care planning.  

Please call soon to schedule a meeting for your review.                                                                                                                                                                                                                                                                                                                                            

Thank you for your continued trust and confidence.

We Wish You A Happy Holiday and A Prosperous New Year


Richard St-Laurent, cwpp