Fall 2015 Investment Advisory Group Commentary

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The Primary Themes of Fall 2015's meeting: Unconventionality and The Final 10

IFP ResearchIndependence Financial Partner's semi-annual Investment Advisory Group meeting brought together an all-star panel of market experts, academics, and portfolio managers from across the country to discuss the current state of the global economy, investing in a low-rate environment, and the broader implications for our valued clients.

A wedge seems to exist between market valuations and real economy fundamentals around the world. Negative headlines have helped usher in a wave of global volatility that hasn't been seen in years, and has left many of our clients wondering what's next. As we attempt to navigate through increasingly volatile markets, sound financial planning coupled with outside-the-box thinking will be more important than ever.

The goal of this commentary is to try and help our clients make sense of current market events, and provide them with an inside look at the topics our investment research department is focused on.

Enjoy the Fall,

Al Cumplido
Director of Investment Research


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Advice matters:  Unchartered territory may require unconventional solutions

A wedge seems to exist between market valuations and real economy fundamentals around the world. As we attempt to navigate through increasingly volatile markets, IFP believes that value of sound financial planning will be more important than ever.

While improving economic fundamentals in the U.S. have the Fed looking to raise rates, global deflationary pressures have caused them to delay liftoff.  We at the investment research department believe that while a move off zero should be welcomed and would mark an important next step in the U.S. economic recovery, the pressures in the medium-longer term across the world will be in fact to ease, not tighten.

Investors may need to broaden their horizons and embrace some out-of-the-box investment strategies in order to successfully navigate their way through what may be a period of low rates, low growth, and low returns.

Viable asset classes such as Global Bonds, International Equities, Currencies, and even Gold…all of which tend to be underutilized throughout the average portfolio…may play bigger roles as longer term secular forces begin to take hold. Understanding these asset classes and the important role they can play in a diversified portfolio will is something to consider.

Investment strategy during The Final 10: Bend but don't break

Sequence of returns risk isn't just something that retirees need to worry about. It's also a major risk for clients during the final ten years of their accumulation phase, which we'll simply call the "Final 10".

The returns an investor experiences during their Final 10 can have a big impact on the wealth they have throughout retirement. Market returns during this time are highly correlated to terminal wealth values, so avoiding significant drawdowns and low returns over this time fame can make a difference during your retirement.

Utilizing a "bucket" strategy will be important in this environment, but understanding which strategy fits best within each bucket may be even more important. With the next 5 years likely to look much different than the last 5 years risk tolerances may need to be reassessed, return expectations may need to be recalibrated, and financial plans may need to be reviewed.

The concept of "bend but don't break" refers to the fact that it's hard to remain confident in your strategy when you see volatile ups and downs.  Larger secular headwinds may require investors to work with their Advisor to develop strategies that can take advantage of market opportunities, but also withstand the potential of increased and prolonged market volatility. This makes having a plan in place more important than ever.

Price is What you Pay, Value is What you get

Another topic discussed in our meeting was the impact that starting valuations can have from both a return and risk management standpoint. Higher starting valuations are systematically related to lower subsequent long term returns, and lower starting valuations are systematically related to higher subsequent long term returns. Simply put, buying low and selling high isn't only the best way to make money in the market, it can also be a viable way to protect yourself during market downturns.  The graph below illustrates this concept. 

Value Can Help by Dampening Drawdowns

Unfortunately, the average investor tends to do the exact opposite; often buying high when everything is going great and selling low after market declines. This may be one reason why the average investor tends to underperform over time.  Please refer to the graph below.

The Average Investor Underperforms

Expanding your horizons means learning to ignore the "noise" in financial media

We understand that investors can be overwhelmed with all the information that's out there. Financial media outlets generate substantial revenues from companies focused on making people trade frequently, which may help explain the frantic swings in emotion as markets move between great days and terrible days. Ignoring the noise can be difficult, so we spent some time in our investment advisory meeting discussing some of the behavioral factors that affect the average investor.

"Herd behavior", which is the tendency for individuals to mimic the actions of a larger group, is a big reason why the average investor experiences sub-par results over time.  As Warren Buffett once said, "You pay a very high price in the stock market for a cheery consensus." 

While we all know that buying low and selling high is the golden rule in investing,  buying when an asset is cheap and selling it when it when it becomes expensive will almost always deviate from what the herd is doing. Working with a professional who can act as a "behavioral coach" as well as spot potential opportunity in the midst of uncertainty can go a long way in managing risk and can potentially improve long term outcomes.


There are times to focus on making money in the market, and times to focus on not losing it. We're probably somewhere in between. Optimistic economic data in places like the U.S., the Eurozone, Japan, and U.K. have been offset by uncertainty in places like China and other Emerging Markets. One thing is for sure…the need for sound investment advice and a proactive approach to planning will be critical in an increasingly complex market environment.

This information is for educational purposes only and does not constitute investment advice. The information contained in this newsletter is not intended as tax, legal or financial advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. The content is derived from sources believed to be accurate. Please consult with your financial advisors before taking any action.  Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.


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