First Quarter Investment Pulse

Contributed by: Angela Palacios, CFP®

During the first quarter of the year, managers and strategists are eager to travel and get the word out on what they think is to come in the New Year. This quarter was no exception. Here is a summary of some of the standout guest speakers we were able to host at the Center!

Priscilla Hancock, Global Fixed Income Strategist of JP Morgan

Priscilla Hancock stopped by to visit our office to discuss the current state of the municipal bond market. Priscilla’s insight into this market is both logical and insightful. She discussed that, for the most part, municipal bonds are less expensive now. Investors often worry about the performance of their municipal bonds in an environment of falling tax rates—which it seems we are on the verge of. Investors have sold off the space recently for that reason. But she has found there is very little to no correlation between municipal bond performance and tax rates over the long term. The municipal bond market is driven primarily by the retail investor, so you or I. We can benefit from the tax-advantaged status that the interest from municipal bonds produces. As rates fall, municipal bonds tend not to experience as much price appreciation because retail investors focus more on the yield a bond provides rather than the total return aspect they can provide. So as rates fall, the retail investor tends to sell. As rates rise, they experience the opposite effect. Rates then start to look attractive again, so investors may resume buying and help prevent prices declining, as much as treasuries, while rates rise.

Wendell Birkhofer, Senior Vice President, Investment Policy Committee Member of Dodge & Cox

Wendell Birkhofer brought Dodge & Cox’s unique value-based outlook to discuss equity markets both here in the U.S. and abroad. They are seeing value in financials here in the U.S. and also in Europe. Regulation changes and interest rate increases are a couple of the market forces that tend to be favorable to bank stocks—and are occurring right now. There is pent-up cash on hand at banks that could potentially get paid to shareholders in the future—if regulations loosen under the new Trump administration. In the U.S. markets, they see middling valuations (although some pockets are expensive). This tends to be a favorable environment for active management over passive management from their perspective. They also continue to find good value in emerging markets, while countries like Japan still struggle with corporate governance headwinds.

Ted Chen, Portfolio Manager and Aditya Bindal, Ph.D, Chief Risk Officer with Water Island Capital

Short volatility and the illusion of diversification were the topics we discussed with Mr. Chen and Mr. Bindal. They shared their groundbreaking research on the topics to a packed conference room of Center staff. They discussed how since the 2008 market crisis, the volatility of volatility has been off the charts (this is how much the VIX, a measurement of volatility in the equity markets, has, itself, been volatile). The markets have seen volatility spikes to the tune of two standard deviation events fourteen times over the past nine years! Alternative investment strategies are supposed to be uncorrelated to equity markets; however, they showed us that during these volatility spikes, most investment strategies lost value. This is what they call “short volatility.” They went on to share that true alternative strategies should possess characteristics, such as: low beta, market neutrality, and a lack of correlation regardless of low or high volatility time periods. These concepts are something we explore in our own portfolio construction process, and they have given us some excellent food for thought to chew on in the coming months and years!

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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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 Angela Palacios 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. Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Please consult an income tax professional to assess the impact of holding such securities on your tax liability. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss. Alternative Investments involve substantial risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. These risks include but are not limited to: limited or no liquidity, tax considerations, incentive fee structures, speculative investment strategies, and different regulatory and reporting requirements. There is no assurance that any investment will meet its investment objectives or that substantial losses will be avoided. Diversification does not ensure a profit or guarantee against a loss. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investments mentioned may not be suitable for all investors. Raymond James is not affiliated with Priscilla Hancock, JP Morgan, Wendell Birkhofer, Dodge & Cox, Ted Chen, Aditya Bindal and/or Water Island Capital.

A Tax Cut for Corporations?

Contributed by: Angela Palacios, CFP®

President Trump has discussed that corporate tax rates need a face lift. It is likely some changes could be on the horizon for U.S. corporations. But do they need this tax break?

A Little Background

Right now, the US has the 2nd highest corporate tax rate in the world. Over the past 20 years, corporate tax rates around the world have come down while ours have stayed the same, resulting in our goods becoming less competitive and production moving out of the country. 

Source: Government Accountability Office, Office of Management and Budget, KPMG, Tax Foundation, Bureau of Economic Analysis, American Action Forum, and Morgan Stanley

There are a couple of ideas being floated right now.  The House GOP is proposing dropping the corporate tax rate from nearly 40% to 25%, while President Trump is proposing a more drastic cut down to 15%.  Either of these changes could be positive for corporations here in the U.S. potentially boosting performance of their stock prices and/or increasing dividends paid to investors. 

Do Corporations Actually Pay the Stated Rate?

If you look at the chart below you see the answer is no. The effective rate the median S&P 500 Corporation pays is below 30% (blue line) and has steadily declined over the past 20 years. The tax cut would still be a boost to the bottom line of the average corporation, since many still pay more than the highest proposed rates.  A cut could also potentially prevent off-shoring since the current effective tax rate paid by the average corporation now still falls in the ranks of the most expensive countries to do business in, from a corporate tax perspective.

For some companies paying well below the median, a tax cut and simplification (removal of tax deductions) of the tax code could negatively effect the corporations by increasing the amount of taxes they end up paying. This is one example of how we continue to monitor the economy and policies and how changes may affect your portfolios. Please don’t hesitate to reach out with questions! We are happy to help!

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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This information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Opinions expressed are those of Angela Palacios and are not necessarily those of Raymond James. Opinions expressed are not intended as investment advice or to predict future investment performance. Economic forecasts set forth may not develop as predicted.

Dow Milestone Making Headlines

Contributed by: Angela Palacios, CFP®

In late January the Dow Jones Industrial Average eclipsed a much awaited level of 20,000. Many investors are left wondering “Does this mean I should buy or should I sell?” Depending on who you listen to, you could get very conflicting answers. Valuations are in the eye of the beholder. Depending on the metrics you utilize to judge valuations the markets can look overvalued to even slightly undervalued. Perhaps a history lesson of Dow milestones is in order.

Dow 2,000

30 years ago on January 8th, 1987 the Dow first hit 2,000. Many felt that the Dow would likely take a breather and trade sideways for a while. Eight months later, however, the Dow nearly reached 2,800! Little did investors know that later in October the Dow would experience a day that would live on in infamy: Black Monday. 

The Dow went on to finish the year out positively.

Dow 10,000

At the height of the dotcom bubble in March 1999, the Dow eclipsed 10,000 and shortly thereafter, 11,000. The excitement was palpable. I recall this very vividly as I had just started my career. No one wanted to even think about owning bonds in their portfolio even though the ten year treasury was paying a rate of 6% (wouldn’t that be nice!). The next three years the DOW experienced a gut wrenching drop back below 7,000.

Dow 15,000

You probably don’t even remember headlines from this milestone reached in early 2013 as investors still didn’t believe in the bull market run after living through the depths experienced in March 2009. This market, as you know has quietly proceeded to hit the 20,000 mark less than four years later.

Dow 20,000

That brings us full circle back to today. Many industry professionals have welcomed this milestone with indifference. Milestones contain exactly zero information regarding what the future holds for the market. What I do know, is that excitement is not palpable like the euphoria experienced back in the late 90’s. Regardless of whether or not you traded brilliantly around these milestones, sticking to your investment discipline and simply staying invested through the time periods from Dow 2,000 to Dow 20,000 has created some handsome returns regardless of the bumps along the way. Who would have thought back in 2009 when the Dow was trading right around 7,000 at its low we would be celebrating Dow 20,000 just 8 short years later?

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index used to measure the daily stock price movements of 30 large, publicly owned U.S. companies. 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. This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This content does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk, investor may incur a profit or loss regardless of the strategy or strategies employed.

The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index used to measure the daily stock price movements of 30 large, publicly owned U.S. companies. 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. This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This content does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk, investor may incur a profit or loss regardless of the strategy or strategies employed.

Fourth Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®

2016 has been the year of the stock market taking major geopolitical news in stride. From the UK Brexit vote to an unexpected Trump victory in the U.S. presidential election, the market has shrugged off some major news that could have jolted it in a very negative way. Equity markets, however, once again demonstrated their resilience, and along the way this has become the second longest bull market in US history as of April of 2016. The S&P 500 ended the year up strong returning 11.96%, while bonds gave back great returns in the first three quarters of the year (they were up 5.8% as of 9/30/16) to end up only 2.65% on the Barclays US Aggregate Bond Index. International markets continued to struggle as they were nearly flat in 2016 with a 1% return for the MSCI EAFE while emerging markets bounced back strongly returning 8.5% on the MSCI Emerging Markets index.

Source: JP Morgan

2017 is likely to usher in a market driven more by fiscal policy than by monetary policy. The Federal Reserve is anticipated to continue their slow pace of raising interest rates into the New Year while Trump takes office very soon and launches his 100 day action plan. So if you choose not to give up and move to Canada, here is what we are watching in the New Year!

Trump’s 100 Day Action Plan:

Donald Trump has plans to shake up many potential areas such as trade, Obamacare, immigration, education (common core), tax code, and infrastructure improvements. Political risk could amplify volatility globally, although it hasn’t yet. This populist movement as shown by Brexit and our own election (people fed up with the status quo) is a theme likely to continue abroad as France, Germany, and Holland will host their own elections in 2017. The U.S. dollar has reached its highest level in 14 years in the wake of the presidential election, and a strong dollar has traditionally been a headwind for the earnings of large companies with significant international exposure. Taken together, these factors tell a somewhat cautionary tale for equities going into 2017.

The Economy:

Our economy continues to chug along with unemployment at very low levels. According to the Bureau of Labor Statistics as of November 2016 we were at 4.6% unemployment. We are considered at full employment now. This means that wage inflation is starting to pick up, although slowly, which could start to be reflected in the overall inflation rate creeping up in the U.S even though it has been subdued for an extended period of time. Inflation currently stands at 1.7% (bls.gov). 

A Note on Diversification:

2016 has tested our patience on diversification yet again. Locally, The U.S.’s flavor of the month benchmark has morphed from the S&P500 to the Dow as the benchmark to keep up with. Pure U.S. equity exposure has continued to drastically outperform a diversified portfolio to historically unusual levels. This year other asset classes have had the opportunity to shine as Emerging markets*, small cap equities** and high yield debt*** have also performed well. Diversification seems to once again be working after a long drought. We, at The Center, still see merit to utilizing a diversified approach when it comes to managing our investments. As geopolitical risk rears its ugly head around the world, it will likely be important to tap into the long-term returns of many different asset classes to hopefully limit portfolio volatility.

We understand that you need to retire and achieve your goals regardless of what markets are doing. This is why we build portfolios to be all weather and stick by our strategy of diversification as a sound long-term approach to investing. It is a task that we take very seriously and we thank you for your continued trust in us.

Checkout Investment Pulse, by Angela Palacios, CFP®, a summary of investment focused meetings for the quarter.

Does the order in which you achieve your average returns really matter?  Of course, it all depends.  Check out when the sequence of returns matter!

Nick Boguth, Investment Research Associate dives into the surprising reality of what it takes to dig out of the hole of negative returns.

Jaclyn Jackson, Portfolio Coordinator, discusses the trends of investor behavior during significant events over recent history.

If you have topics you would like us to cover in the future, please let us know! As always, we appreciate the opportunity to meet your financial planning and investment needs. Thank you!

Angela Palacios, CFP®
Director of Investments
Financial Advisor

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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* As measured by the MCSI EAFE Index
** As measured by the Russell 2000 Index
*** As measured by the Barclays Aggregate Bond Index
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. 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 Angela Palacios, CFP®, 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. Diversification does not ensure a profit or guarantee against a loss. 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 Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. 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. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. Investing in emerging markets can be riskier than investing in well established foreign markets. Investing involves risk and investors may incur a profit or a loss. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

Investor Ph.D.: Sequence of Returns

Contributed by: Angela Palacios, CFP®

When planning for our goals, we often think in terms of “What return will we average over time?” But does it matter what pattern these returns happen in? What if they are choppy or we experience very negative returns right before we need the money or as we are drawing it? The answer can be startlingly different depending on what phase of your goal you are in.

If you are accumulating for a future goal the sequence of how to help achieve your returns in general doesn’t matter as long as you average what you need at the end. Look at the following example:

Source: Blackrock

The chart below shows two 30-year income scenarios. The solid line shows a withdrawal plan that started off with three years of negative returns in a row. The dotted line repre­sents a withdrawal plan with the negative years at the end. Both plans started with $250,000 and both took out $12,500 per year inflated by 3% for inflation. No other actions were taken to manage income withdrawals. Both plans had a 6.6% average annual rate of return on the underlying investment for the 30-year period.

These nuances are why it is critical to work with a financial planner to plan for and pursue your goals!

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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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 Angela Palacios, CFP®, 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.

Fourth Quarter Investment Pulse

Contributed by: Angela Palacios, CFP®

Some great research this quarter!  From a headline grabber, to sage words of wisdom from long tenured investors, take a look!

Kevin O’Leary from Shark Tank – 11/18/16 CFA® Society of Michigan

The investment department had the opportunity to listen to “Mr. Wonderful” himself discuss what he has learned being an entrepreneur and his outlook for 2017.  Highlights included that he prefers to invest in companies run by women because they set and accomplish achievable goals for themselves and their employees.  He also discussed his plan for the future generations of O’Learys.  He is not interested in handing his children a privileged life on a platter.  Rather he will pay for them from birth through college and then they are on their own to make their way in life.  The same will happen for their children and so on.  He said his mother taught him this important lesson:

“The only birds that dies leaving the nest are the ones that don't learn how to fly.”

Kevin's predictions for 2017 included:

1. Donald Trump wins the election (he called this a week before the election on television)

2. Oil will end 2017 under $50

3. The 10 year US Treasury bond interest rate will end the year under 3%

4. The S&P 500 will end 2017 at 2,300

5. Financials will underperform the S&P 500 in 2017

6. Real Estate Investment Trusts will outperform the S&P 500 in 2017

7. Energy will underperform the S&P500 in 2017

8. Russell 2000 will outperform the S&P 500 in 2017

9. Europe (currency unhedged) will surprise in 2017 and outperform US markets

Investment team gathers before the presentation: From left to right: Jaclyn Jackson, Portfolio Administrator and Financial Associate, Lauren Adams CFA®, Director of Client Services, Melissa Joy CFP®, Partner; Angela Palacios CFP®, Director of Investments; Nicholas Boguth, Investment Research Associate

David Fisher of American Funds

It was a pleasure learning from David Fisher, equity portfolio manager at Capital Group, and his 50 years of investment experience.  David spent time discussing the culture of their firm and how important it has been over the years to attract and retain high quality investment professionals.  Analysts are compensated on how they perform relative to a benchmark rather than relative to each other.  They feel this has contributed strongly to their years of serving clients well.  David spent his career researching media, consumer electronic and electrical equipment companies.   He discussed how vastly those markets have changed over the years.  He said:

“If you don’t obsolete yourself, someone else will obsolete you.”

He was referring to Eastman Kodak.  Remember those cameras?  The type where you would have to take your film in to develop?  The company held the patent to digital technology and didn’t develop it because it would have put their profitable film and camera areas out of business!  Oops!

Scott Davis, Portfolio Manager of Columbia Dividend Income Fund

We have sat down many times with Scott.  He brings great perspective to our portfolios with his dividend growth focused strategy.  Many investors have chased dividend yields over the past few years when they found their bond portfolios lacking.  Scott argues that the quality of the dividend rather than the yield is most important.  Dividends are not contractually committed to like bond interest.  It is completely up to a Board of Directors whether the dividend is paid or not.  A high yield is only positive if it is sustainable.  A stock price generally depreciates very strongly before a dividend cut occurs, which is why the work Scott does is so important. 

He also discusses with corporate management the type of shareholders that they want to have.  A company’s shareholder base changes when they commit to paying/growing a dividend.  When doing this they have a more stable investor base that tends to hold a position longer term.

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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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. 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 Angela Palacios 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. Holding investments for the long term does not insure a profitable outcome. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investments mentioned may not be suitable for all investors. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. 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 Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. 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. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. Dividends are not guaranteed and must be authorized by the company's board of directors. Raymond James is not affiliated with and does not endorse the opinions or services of Kevin O'Leary, David Fisher, Capital Group, Scott Davis and/or Columbia Dividend Income Fund.

Center Stories: Angela Palacios, CFP®

Contributed by: Angela Palacios, CFP®

Getting to focus on what I love has made The Center a natural fit for me. While I spend much of my time “behind the scenes” here, you may not know exactly what it is that I do. 

Research and investments is what initially drew me to a career in the investment world. I came to the realization after working for a few years that investing and financial planning go hand-in-hand. Without financial planning, investing alone doesn’t always produce satisfactory results. That is why I got my CERTIFIED FINANCIAL PLANNER™ certification early in my career. Eventually these two passions landed me at The Center. Learn more about our investment department, its role within our firm and me here!

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

Nick Boguth on his way to a CFA® designation

Contributed by: Angela Palacios, CFP®

This summer Nick completed his first milestone on his way to completing his Chartered Financial Analyst (CFA®) designation. Nick started as an intern with the Center in May 2014, eventually joining us full time after graduating from the University of Michigan (Go Blue!) with a degree in Economics and Statistics. Almost immediately after starting full time he began the long road to achieving his CFA® designation.

What is the CFA® designation?

The curriculum is designed to build a strong educational foundation of advanced investment analysis and real-world portfolio management skills. Upon completion the average designation holder has spent roughly 1,000 hours studying! 

There are 3 levels that Nick will have to pass and several other hurdles before he can utilize the designation.

• CFA level 1 – Tests your basic knowledge and comprehension focused on investment tools and ethics.  Congrats Nick on passing this level on your first try!

• CFA level 2 – Tests more complex analysis along with a focus on valuing assets.

• CFA level 3 – Requires a synthesis of all the concepts and analytical methods in a variety of applications for effective portfolio management and wealth planning.

Along with passing the courses and the exams, Nick must have four years of work experience in investment decision making which he is on his way to earning with his role as Investment Research Associate here at The Center and as an Investment Representative with Raymond James. He must also agree to follow a rigorous Code of Ethics and Standards of Professional Conduct and become a member of the CFA institute. After obtaining the designation he will be required to complete continuing education to hold on to it.

Is this easy?

While Nick may have made it seem easy to the rest of us, it is far from simple. It is a popular designation to seek out. Each year nearly 200,000 people from all over the world register to take one of the exams always offered in June (level 1 additionally offered in December) and 100,000 will fail because it is extremely difficult! In June 2016, only 43% of people taking level 1 passed!

It is not uncommon to see Nick at his desk early throughout the week studying! It took him roughly 300 hours of studying to pass Level 1. When I asked Nick his thoughts on the program so far he said:

It felt great to pass level 1 my first time through, and it definitely helped having the support of everyone at The Center for extra motivation (and those extra few days off to study as the test approached).

We will continue to be there cheering him on while preparing for the last two levels. His education already adds more depth to The Center’s Investment Department knowledge in order to serve our clients! Way to go Nick!

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

Third Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®

After a very interesting first half of the year with early negative returns, followed by Brexit in June, markets performed well in July and then quieted down in the month of August. September brought with it a bit of increased fluctuation when investors thought the Federal Reserve Board may raise rates at the September meeting but calmed back down when that fear subsided. As of October 1st the S&P 500 gained over 7.8% this year including dividends with nearly half of that gain (3.85%) coming in the third quarter. The year-to-date story, however, has not been told primarily by the S&P 500 as we have gotten so used to over the past several years. 

Diversification Works Again

This year other asset classes have had the opportunity to shine as Emerging markets; commodities and high yield have topped S&P 500 returns. Diversification seems to once again be working after a long drought. The chart below shows performance of various asset classes by year with the best performer’s bars on the top of the stack and worst relative performers on the bottom. Notice the Green line (S&P 500) has been near the top of the list for the past three years but that hasn’t been the norm over the last 14 years. This year we have returned to the more normal pattern where the S&P doesn’t dominate.

Source: Blackrock

Rate Hike Kicked Down the Road

Not surprisingly the Federal Reserve opted not to raise interest rates last month. The dissention among the voting members, though, was surprising. Three members of the voting board voted for an interest rate increase going against Janet Yellen’s recommendations to hold course. This is the first noted dissention since 2014. The next meeting occurs in November just a few short days before the election. It is highly unlikely they will make waves that close to the election so it looks likely that if a rate increase occurs it will be at the December 13-14th meeting.

Election

I would be avoiding the elephant in the room if I didn’t mention the election. Jaclyn Jackson wrote a piece on political parties and their impact to your portfolio, I would encourage you to read this before making any rash investment decisions based on the election. The battle between Clinton and Trump is proving to fulfill every media fantasy. They both certainly make for excellent headlines. Trump will be doing his best to rally voters to change by making promises but also by making things seem worse in the economy than they likely are. While there is often some volatility leading into an election because of these negative headlines, usually after the decision has been made markets settle down and most often continue in a positive direction the remainder of the year.

Checkout Investment Pulse, by Angela Palacios, CFP®, a special summary of the Morningstar ETF conference she attended.

Harvesting tax loss may sound counter-intuitive but can go a long way to enhance net after-tax returns for investors. Find out some strategies to implement and common mistakes to avoid.

This month Nick Boguth, Investment Research Associate, gives us an introduction to cost basis methods and what we typically have our clients utilize.

Jaclyn Jackson, Investment Research Associate, explains to us how just like the right mix of ingredients for a tasty meal, we also need to know the asset allocation mix that makes our investment journey palatable.

If you have topics you would like us to cover in the future, please let us know! As always, we appreciate the opportunity to meet your financial planning and investment needs. Thank you!

Angela Palacios, CFP®
Director of Investments
Financial Advisor

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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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. 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 Angela Palacios 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. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss. Investing always involves risk, including the loss of principal, and futures trading could present additional risk based on underlying commodities investments. Diversification does not ensure a profit or guarantee against a loss. 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 PhD: Harvesting Losses and Avoiding Gains

Contributed by: Angela Palacios, CFP®

This may sound counter-intuitive, but taking some measures to harvest tax losses on positions and avoiding unnecessary capital gains distributions this time of year can go a long way in improving your net (after tax) returns.

Make sure you are reviewing your portfolio throughout the year for tax losses to harvest.  Stock losses were at their peak during mid-February, but if you waited until this fall to think about tax loss harvesting you have most likely missed the boat as much of those losses have been recovered and moved on to higher highs. The end of the year is rarely the best time of the year to harvest tax losses. 

Harvesting losses doesn’t mean you are giving up on the position entirely. When you sell to harvest a loss you cannot have had a purchase into that security within the 30 days prior to and after the sale.  If you do you are violating the wash sale rule and the loss is disallowed by the IRS. Despite these restrictions, there are several ways you can carry out a successful loss harvesting strategy.

Loss harvesting strategies:

• Sell the position and hold cash for 30 days before re-purchasing the position. The downside here is that you are out of the investment and give up potential returns (or losses) during the 30 day window.

• Sell and immediately buy a position that is similar to maintain market exposure rather than sitting in cash for those 30 days. After the 30 day window is up you can sell the temporary holding and re-purchase that original investment.

• Purchase the position more than 30 days before you want to try to harvest a loss. Then after the 30 day time window is up you can sell the originally owned block of shares at the loss. Being able to specifically identify a tax lot of the security to sell will open this option up to you.

Common mistakes some people make when harvesting:

• Dividend reinvests count!!! So if you think you may employ this strategy and the position pays and reinvests a monthly dividend you may want to consider having that dividend pay to cash and just reinvest it yourself when appropriate or you will violate the wash sale rule.

• Purchasing a similar position and that position pays out a capital gain during the short time you own it.

• Creating a gain when selling the fund you moved to temporarily that wipes out any loss you harvest. Make the loss you harvest meaningful or be comfortable holding the temporary position longer.

• Buying the position in your IRA. This will violate the wash sale rule just like if you bought it in your taxable account. This is identified by social security numbers on your tax filing. So any accounts held under those same tax payer IDs are not allowed to purchase the security in that 30 day window of harvesting the losses.

Personal circumstances vary widely so it is critical to work with your tax professional and financial advisor to discuss more complicated strategies like this!

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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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 Angela Palacios 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. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.