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

A Plan When Good Things (Rising Equity Market) Come to End

Tailoring downside portfolio risk to an investor’s risk tolerance, goals/objectives, and future cash flows can help reduce the probability the investor will experience a catastrophic loss. 

I last wrote (way too long ago) that hope isn’t an investment strategy when the markets start moving against you, but I failed to give a solution.  A client then wisely asked me to elaborate on the plan we have in place for him, so I walked him through it.

Below is an abridged version of my response.  It outlines his, as well as other clients, portfolio risk management strategy.  Nothing is full-proof, but what this strategy does attempt to do is prevent losses from becoming catastrophic.  This is where panic selling often takes place, compounding the losses. 

By focusing on the client, their risk tolerance, goals/objectives, and future cash flow we can put together a plan that helps reduce the probability of a loss that would have drastic implications for the client moving forward: 

1. Diversification.  By utilizing bonds we can help reduce the downside if equity markets fall.  This smooths returns over the long-run and helps balance the account when stock returns get ugly.  Still, even with diversification returns can be much lower than would be expected given historic returns and volatility…
2. Quality.  We keep the bulk of our assets in Large Cap equities and also allocate more to blue chips in that space.  This minimizes exposure to some of the riskier equity asset classes out there.  So while we may have a muted upside, we believe the downside should also be muted.  Still, the baby can get thrown out with the bath water when the market tanks, so we aren’t done…
3. De-Risk.  We are still bullish on equities now, but what if that changes or we are wrong?  We look for market signals to tell us when we should de-risk the portfolio (e.g. sell equities).  These signals tell us if the market is at a greater risk of a large loss and happen as the market moves down, so we aren’t trying to pick the top, but rather avoid much of the bottom(ing).  These signals have been very good in the past, we have custom models that illustrate this, but there is a chance they could not work…
4. Custom Waterline.  We put together a bespoke cash flow model for our clients, which maps their inflows and outflows moving forward.  From this we can develop a “waterline” – the minimum portfolio value a client can have and may still reach their long-term financial goals.  What this means is that if all the above risk metrics fail we can move to cash on the equity side when this value is met.  Using the waterline allows us to manage specifically to THE CLIENT’S needs and helps increase the probability we keep them financially stable over the long-run.

Ultimately these strategies are in place to protect the downside for the client, and subsequently help give them some clarity.  If we can do that by minimizing the downside risks, the returns should take care of themselves.

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.

While there is no assurance that a diversified portfolio will produce better returns than an undiversified portfolio, and it does not assure against market loss, a diversified portfolio can reduce a portfolio’s volatility and potential loss.

Large cap stocks typically have at least $5 billion in outstanding market value.