Turn on any media outlet and there’s plenty to worry about. Will China’s slowing economy lead to a global recession? Has the Federal Reserve waited too long to raise rates? Are energy stocks in a long term bear market? Will Donald Trump really become our next president?!
But what is real “risk” for individual investors? In general, risk is uncertainty of the future. Technically speaking, risk for investors the standard deviation of returns. Most investors understand key tenets of portfolio management, such as the power of diversification in reducing the risk of future portfolio returns. (We discuss such topics in detail in our white paper.)
But with all of this attention focused on the markets and the portfolio, we fear many investors are missing the forest through the trees. What about the uncertainty associated with retirement? How long should you plan for? What about the risk that your portfolio won’t get you there?
I recently sat down with one of our clients who had enjoyed significant success in building their wealth through the concentration of a publicly traded company. Throughout his twenty plus year career as an executive, he had amassed hundreds of thousands of shares of company stock representing several millions of dollars. With a goal of winding down his career in the next 3 years and
nearly 87% of his family’s entire net worth in this single stock, it was clear the potential dangers outweighed the benefits of having a portfolio so dependent on one single publicly traded company.
After showing the husband and wife through our Strength-Based Wealth Management™ (SBWM) process that they could not only meet but exceed their ideal lifestyle from the assets they have accumulated, I asked the following question…You can continue to take on this level of risk, but why? In this particular case, the couple agreed it was more than time to unwind this concentration and re-allocate to a broadly diversified, risk-adjusted portfolio. This decision released a level of tension and stress the couple had been feeling for a number of years, and offered peace of mind they would be able to weather any type of economic storm with a more balanced approach.
The risk of another retest of recent correction lows has sufficiently reduced to encourage us to go back into an overweight stock/underweight bond posture after moving into a short defensive oriented neutral position from early/mid August to early October. While our bear watch, rally watch and top watch models rarely trigger short-lived tactical stock market moves, this was the case this time.
In short, our evidence based investing discipline has encouraged us to closely watch for signs of a relatively normal correction (shallow -10% decline in equities worldwide over short 45 day (+/-) period) or signs of a more severe cyclical bear market (-20% decline over 9 months (+/-)). Enough signals have turned from bearish to neutral to bullish to compel us to shift back to the bullish equity stance we have maintained for quite some time.
Many investors have the general understanding that fixed income prices move inversely with changes in interest rates. An increase in rates typically results in a decrease in value of the underlying fixed income security. However, many investors are uncertain about the relationship between interest rates and equity markets.
Over the past year, investors have been attentively watching for when, or if, the Fed will raise rates. The Fed has stated its plan to raise rates slowly to avoid derailing previous economic gains. Before assuming that rising rates will detract from the overall health of the economy, let’s focus on how rising rates will affect your portfolio’s allocation to equities.
It is important to understand why the Fed is preparing to raise rates. The Fed has been very accommodating to the economic recovery by holding rates at historic lows. The Fed is not raising rates with a goal of slowing down the economy, but rather to get back to a more “normal” level.
Janiczek® is excited to announce that Kyle Kersting has joined the firm’s investment team to leverage our research excellence with our partners in the marketplace.
Kyle graduated from Colorado State University with a Bachelor of Arts degree in Finance and Real Estate, and Regis University with a Master in Business Administration degree with a concentration in Finance. Kyle is a level III CFA candidate. Kyle comments, “I am very excited to start a new chapter with the Janiczek® Wealth Management team and leverage my previous experience to contribute to the future success of the firm.”