Broker Check

April Newsletter

April 9, 2018

“My Advice Is…”

With ever-shocking news becoming the norm, today’s concerns revolve around the possibility of trade wars and clearly, the markets have responded to such uncertainty.  Trade negotiations could grind on for several months in an effort to guide our country toward a fairer free-trade path.   We will surely witness continued “saber rattling” that is hopefully more “bark” than “bite”.

Our globally diversified portfolio continues to be “defensively” allocated with an emphasis on principal protection and income. As of April 6, our total portfolio is allocated 49 percent to equities and 51 percent to income investments.  The results from this allocation on a one-year look-back basis show equities have returned 12.03 percent and the total portfolio has returned 5.78 percent.  As a comparison to our equity results, the S&P 500 has produced a one-year look-back return of 10.48 percent. 

As an example of recent market volatility, last Friday’s latest reaction to the headlines pushed the DOW down over 700 points during the trading day, resulting in a drop of 2.43 percent by the close of that day. Our equity portfolio fared much better with an unrealized drop of 0.89 percent. This shows the resiliency of a globally diversified portfolio providing built-in downside protection. 

Fundamental economic indicators look strong and if the threat of trade wars does produce negative impact on the overall economy, I feel that the Fed would slow down its indicated rate hikes to keep the economy on an even keel.  Most countries around the world are in an expansion mode as seen when viewing expanding global manufacturing orders. In the US, consumer-spending remains strong based on strengthening wage growth, reduced personal income tax rates and continued high employment rates. 

The cure for the long-term investor during times of uncertainty is diversification, in other words, “Don’t put all your eggs in one basket”.  Nobel Prize winning economist Harry Markowitz, the father of Modern Portfolio Theory (MPT), was the first to demonstrate that a diversified portfolio can deliver improved performance and decreased risk relative to individual asset classes.

A diversified portfolio contains a portion of many asset classes, so it reaps the benefits of top performers without bearing the full effect of owning bottom performers. By avoiding the extreme peaks and valleys of each individual asset class, a diversified portfolio can help manage volatility over time and can help outperform less-diversified portfolios over the long run.  Markowitz famously called diversification “the only ‘free lunch’ in finance.”  The notion that you would get something for nothing is nearly unheard of in economics. Our globally diversified asset allocation includes US Equities (Large, Mid and Small Caps), International Equites (Developed and Emerging Markets), Alternative Investments (Commodities, Real Estate, Energy), a Fixed Income Bond and CD Ladder as well as Alternative Fixed Income Investments (Preferred Stocks, Utilities, Convertibles).

The one-year and five-year equity results for our aggregate managed portfolio met our expectations, in spite of years with negative global growth combined with the decline in energy:


Over the last year, dividends and interest have been responsible for two-thirds of the total return of our investment portfolio.  This is consistent with our long-term strategy of achieving regular gains through the payment of dividends and interest rather than relying on a much more volatile strategy of pure market growth.  In 2018, volatility is likely to persist with limited equity market growth and the only meaningful gains could come from dividends and interest.  Never the less, we believe that current valuations can be maintained based on corporate earnings, growth and an underlying strong economy.

Independent Registered Investment Advisors (RIAs) are subject to a fiduciary duty for their investment advice, but a broker-dealer is not necessarily subject to the same fiduciary standard. Yet the expansion of advice delivered by brokers and commissioned sales representatives is precisely why the Department of Labor (DOL) is modifying the ERISA based fiduciary rule.  Over time there has been a sizable shift from defined benefit (pension plans) and defined contribution plans (often 401(k) plans) to a more client driven individual retirement accounts (IRAs)  where individuals can chose a more broadly diversified portfolio.  With this shift, more and more people need the help of a qualified investment advisor who has a solid record of performance, with a focus on individual client relationships and individual client goals.  The good news is that the CFP Board has already updated their fiduciary standard, thus they are leading the way in the financial advice industry, regarding the fiduciary status of its members. Under the new rule all CFP®s — including brokers — must act in the best interests of their clients when providing financial advice; this is scheduled to take effect in 2019.  Please take note that the CFP Board is not waiting for DOL to implement a Fiduciary standard.

If you have a company retirement plan there is one benefit to keeping that company retirement plan that should be discussed prior to making a rollover transfer to an IRA.  A one-time tax election could benefit some individuals.  Please call James or Steve to discuss this if you are considering rolling over a former employer’s retirement plan.


Intelligent Investment Management, LLP