Use LeBron to Assist Your Portfolio Plan

LeBron will probably stay with the Heat; how I came to that conclusion can apply to portfolio management.

In all likelihood the best player in the NBA isn’t leaving the Heat.  As someone who likes the Cavs, I am a tad bummed; however, the Cavs and Heat should both be very entertaining.

On the surface this has little to do with your portfolio, but let’s use this as an example:

1. What I did in the above picture is list reasons why he would stay on the Heat and why he would leave. 
2. Everything in the above picture I deem as signals, items that indicate the direction of the ultimate outcome. 
3. Items above the red are why I think he stays, and below why he might leave (though those are more mixed).
4. Anything else I hear about LeBron I deem as noise, distortions that cause a loss of focus on what is the likely outcome.  For example: his kids are enrolled at school ABC, his wife wants to move back to Akron, he wants to play with Carmelo, etc.
5. Thus, given the signals as I read them the evidence is overwhelming he stays.

In short, I ignore the noise and read the signals to formulate that thesis.  But in practice it isn’t that simple: maybe some of the noise were actually a signals OR vice versa OR one of the mixed signals comes to fruition OR I missed something entirely OR maybe I am looking for confirmation bias.  Despite the sound process in theory, it certainly isn’t infallible given the highly subjective nature.

When it comes to portfolio management, I apply the same decision making process – look for signals (e.g. + likelihood of solid economic growth, + loose Fed, - uncertainty of QE unwind, +/- above average valuation) and ignore the noise (e.g. whatever is going on in Ukraine, endless Fed comments) to formulate a thesis (e.g. the background for stocks should be positive though with some headwinds).

Much like my LeBron thesis, the above can ultimately prove to be untrue as my assessment of the signals is subjective.  However, unlike like the LeBron thesis there are more objective signals from the market I can incorporate into portfolio management in the event my thesis fails.  It’s these objective signals that help hedge against the “OR” mistakes listed above, a luxury that wasn’t available when I formulated my assessment on LeBron.

So while in portfolio management it’s imperative to ignore noise and pay great attention to signals when going through the process, it’s equally imperative to have measures in place to guard against making the wrong decision.  The latter may not help figuring out where LeBron will land, but it could help minimize your drawdowns when the market corrects.

Please see the important disclosures that apply to this commentary HERE.

Cash is Okay, if You Hold it the Right Way

Don’t be in cash for the wrong reason, be cognizant of all the risks you can, but avoid making investment decisions until they start to materialize…

Investors are holding cash.  Not only that…

• They are holding more than they were a few years ago
• This is a global phenomenon with the US being somewhere in the middle at roughly 36% of assets in cash (40% Global average)
• This is true, regardless of age and wealth
• Paradoxically, younger investors who have a longer time horizon are increasing their cash holdings as much as older investors

(Source: NYT)

Why the apprehension?  Fear makes the most sense.  The amount of things to worried about seems to be endless and evolving, off the top of my head: high frequency trading, Iraq, Iran, Afghanistan, let’s just call it the whole Middle East, Europe is on the brink (as always), Russia is being mean, China’s real estate bubble never goes away, the Fed will tighten and the market will drop, the Fed will stay easy and inflation will be a huge issue, stock valuations are high, we just had a negative Q1 GDP print, Game of Thrones is gone for a year, the Cavs will blow another top pick, etc.

But despite all that, the S&P 500 is up almost 40% since the start of 2013 and positive this year.  Just my guess, but those who have been invested in cash have maybe earned 1%?  I would guess cash people at the start would list those risks as why they are in cash.  Now they would mention those reasons and a rising equity market as to why they should stay there.

Admittedly this is easy in hindsight.  Further, there are legit strategic investment reasons to hold cash, many investors psychologically can’t handle the volatility of the markets (and that’s okay), and/or who is to say that some of those fears won’t materialize?  What is of concern is how those decisions are made, if reading headlines, watching the News, looking daily at your portfolio values, or listening to a Gold infomercial has you moving to cash there is a high probability this move(s) was made for the wrong reason(s).

Naturally, this begs the question of what to do.  I will tackle this working backwards, here is a list of don’ts:

1. Don’t take on more volatility than you can handle – too much risk means you will likely move to cash as soon as the market moves against you, but most of the time this will be noise
2. Don’t be overly reactive – going to cash because XYZ just happened, again most of the time this will be noise
3. Don’t be overly proactive – dismissing everything as noise, when sometimes there are signals that indicate a market shift
4. Don’t Not Have a Plan (sorry for the 2x negative) – pretty much encompasses the prior three

My approach is simple – be cognizant of all the risks you can, but avoid making investment decisions until they start to materialize and always stay hedged against the unknown and those risks which occur quickly. 

Side Note:  We are working on a way to shrink the disclosures.  Hopefully in the future they won’t be as overwhelming. 

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts, Inc. or Lincoln Investment.  The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.

S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. 

International investing involves special risks, including, but not limited to, currency fluctuations, economic instability, and political uncertainties, not typically present with domestic investments.

Gross Domestic Product (GDP) is a measure of output from U.S factories and related consumption in the United States.  It does not include products made by U.S. companies in foreign markets.

Inflation is the rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market.  Moderate inflation is a common result of economic growth.  Hyperinflation, with prices rising at 100% a year or more, causes people to lose confidence in the currency and put their assets in hard assets like real estate or gold, which usually retain their value in inflationary times.

Advisory services offered through Capital Advisors, Ltd, Capital Analysts, Inc. or Lincoln Investment, Registered Investment Advisors. Securities offered through Lincoln Investment, Broker Dealer, Member FINRA/SIPC. www.lincolninvestment.com

Capital Advisors, Ltd and the above firms are independent, non-affiliated entities.

Selling Your Business: The Right Price at the Right Time

First, sorry for posting this twice; however, I was informed the first link didn't work in the last post.  Thus, I have updated the link so those who receive by email have a working link to part 1...

Neil and I wrote this two part blog series for Crain's.  They are different from the typical investment themes on here; however, they are still worth checking out!  Please go to Crain's to read:

1. http://www.crainscleveland.com/article/20140528/BLOGS05/140529902/selling-your-business-the-right-price-at-the-right-time-part-1-of-2
2. http://www.crainscleveland.com/article/20140604/BLOGS05/140529901/selling-your-business-the-right-price-at-the-right-time-part-2-of-2

Selling Your Business: The Right Price at the Right Time

Neil and I wrote this two part blog series for Crain's.  They are different from the typical investment themes on here; however, they are still worth checking out!  Please go to Crain's to read:

1. http://www.crainscleveland.com/article/20140528/BLOGS05/140529902/selling-your-business-the-right-price-at-the-right-time-part-1-of-2
2. http://www.crainscleveland.com/article/20140604/BLOGS05/140529901/selling-your-business-the-right-price-at-the-right-time-part-2-of-2

Bonds Holding Strong?

Bonds are moving against what logic would dictate this year and investor portfolios should be prepared for a multitude of outcomes.

As of last Friday bonds, as measured by ETF AGG, are up 2.88%. (per Yahoo! Finance)  This is a slap in the face to the consensus, which expected yields up and bond prices down.

Here are some facts/consensus:

1. Stocks are also up a little over 2%.  (per Yahoo! Finance)
2. While economic growth stunk it up in Q1, consensus is still positive for the year.
3. The Fed is tapering, which means they are buying less long dated bonds.

The above, at least in theory, should equate to higher bonds yields and lower prices because:

1. Stocks and bonds are thought to move in opposite directions as the former is considered risk-on and the latter is risk off.
2. Positive economic growth should increase risk appetite (see above) and inflation, which hurts bonds.
3. Less buying = less demand with same supply = lower prices = higher yields.

So it all makes sense for higher yields, but maybe this is the reality:

1. Stocks and bonds aren’t really negatively correlated.  Sometimes they move together, other times they don’t, sometimes they move in opposite directions.  It really depends on the period.
2. Maybe bonds are telling us the economy isn’t going to pick up?  Inflation is still in a downtrend too. 
3. Some other buyers are picking up the slack.  Think about it, a 10 year at 2.60% is a lot more appealing than at 1.40%.
4. BONUS!  The bond market is wrong.

I am not sure which one it is, but one thing is certain - bonds are moving against what logic would dictate this year and investor portfolios should be prepared for a multitude of outcomes.

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts, Inc. or Lincoln Investment.  The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.

Inflation is the rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market.  Moderate inflation is a common result of economic growth.  Hyperinflation, with prices rising at 100% a year or more, causes people to lose confidence in the currency and put their assets in hard assets like real estate or gold, which usually retain their value in inflationary times

Advisory services offered through Capital Analysts, Inc. or Lincoln Investment, Registered Investment Advisors. Securities offered through Lincoln Investment, Broker Dealer, Member FINRA/SIPC. www.lincolninvestment.com

Capital Advisors, Ltd. and the above firms are independent, non-affiliated entities