Mid-Year 2016 Commentary - Independence Financial Partners

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Unfortunately for investors here on Earth, things are beginning to look a lot like Bizarro World!

Introduced in the early 60's, Bizarro World (also known as htraE, or "Earth" spelled backwards) was a cube-shaped planet that was home to Bizarro versions of Superman, Lois Lane and friends. The Bizarro code stated, "Us do opposite of all Earthly things!", and in one episode, "Bizarro Bonds" are sold that are "Guaranteed To Lose Money For You!"

From ZIRP to NIRP…
savers are paying a big toll in an effort to spark global growth

IFP ResearchThe past year has marked the return of volatility to capital markets, and perhaps more importantly, an end to the "bullishness in complacency" that we have seen within the current bull market. Investors today are faced with a greater deal of uncertainty, and for better or worse, unprecedented global monetary policy continues to be the main driver of markets around the world.

The Next Step
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In an effort to stimulate global economies, ZIRP (Zero-Interest-Rate-Policy) has been replaced by NIRP (Negative Interest Rate Policy) in many parts of the world, and more than $7 trillion in government bonds around the world now offer yields below zero percent.[1]

That's right. Governments and private investors around the world are now paying for bonds that are guaranteed to lose money for them if held to maturity; Bizarro World indeed!

IFP's Spring 2016 Investment Advisory Committee brought together a group of exceptional investment talents from across the country to discuss the current market landscape and the broader implications for our clients.

We also offer three steps for clients to consider as they look to successfully navigate through "Bizarro World".

 

Step # 1: Calibrate Your Compass…
Talk to your Advisor about Risk and what it means to YOU.

In the asset management business, the academic definition of risk is, volatility associated with a particular expected return. Here at IFP research, we believe that while volatility can be a symptom of risk, it falls short of matching the catch-all definition of risk. After all, an apple is a fruit, but apples do not define fruit.  

Volatility is an overworked concept… you shouldn't be imprisoned by volatility."
- Charlie Munger

We believe this is a great way for our clients to think about market volatility. Fluctuations, by definition, are temporary, and a temporary downturn does not present a problem if an investor can hold on and come out the other side.  In fact, a rational understanding of volatility can be a significant advantage for investors with longer time horizons, as some of the best opportunities often present themselves during the most volatile times.

Risk can mean different things to different people, and the academic definition of investment risk does not typically take into account the hard- to- measure assets that may be more important to an investor.

IFP's research team believes that investors should take time to consider the risk, and how it affects them. An honest conversation between yourself and the client about the client's interpretation of risk and how it's best managed, can help calibrate your compass as you begin your journey through Bizarro World.

 

Step #2: Keep an eye on your landmarks…Understand where you've been, where you are, and where you're headed.

 

Where this Bull Market Stacks up in calendar days

We have come a long way since the depths of the Great Recession in March 2009. In fact, the end of April marked the second longest bull market in American history[2] :

While it's anyone's guess as to how long this bull market will ultimately last, IFP research believes that "where we are" is in an investment environment, potentially marked by lower returns and greater volatility. We've seen variation in returns across individual securities, in many asset classes, reach it's highest level in many years, which gives high quality active managers the opportunity to show off their skills.[3]

rising opportunity

Investors should no longer relys on a rising market lifting all boats. While out of favor for some time now, active management may begin to show its value in an increasingly choppy market.

As for where we are going, the business drivers of returns may be shifting as we potentially enter an investment landscape unlike any we've seen in the last 30 years. Interest rates and inflation, which have been on a steady decline since the 1980's, may begin to rise as economies improve. Productivity, a key driver of long term growth, may be slowing, and corporate profits may face increased pressure from overseas competition.

Economics and business drivers of equity and fixed-income returns are shifting

IFP research believes that it is a great time for investors to take a step back and reflect on where they've been, where they are currently, and where they want to go with respect to their financial future. Reviewing things like risk tolerance, savings rates and portfolio goals and objectives can make a big difference as we move towards the latter stage of the current business cycle.

Step #3: Stay disciplined and use your map…Process Matters

Another topic that our committee spent some time discussing was the importance of process, especially during challenging times. Emotions can wreak havoc on long term plans, which is why serving as behavioral coaches is one of the highest value adds that an Adviser can provide to their clients.

By failing to prepare, you are preparing to fail.
- Benjamin Franklin

In fact, a Vanguard report showed that over time, good advice can potentially add about 3% in overall returns. Things like cost-effective plan implementation, dynamic spending strategies, withdrawal order in retirement, and intelligent asset allocation, as well as asset location are all value added components that a good Adviser can implement regardless of what the market is doing.

When used within a comprehensive, goals-based wealth management framework, the "Adviser Alpha" is a concept one that we very much believe in here at IFP Research. As passive investing continues to gain momentum, investors are thinking more and more about portfolio construction and the costs they pay for certain exposures. Where to use active vs. where to use passive is of critical importance, and can go a long way in terms of cost effective portfolio implementation. IFP research truly believes that an intelligent blend of passive and active management, where active management is used for less efficient asset classes such as Emerging Markets and U.S Small Caps for example, can add tremendous value in the long term.

For many investors, separating your portfolio into a series of smaller "Buckets", each of which has a specific role in the overall portfolio, can make for a better understanding of the drivers that affect underlying returns.

If this method is implemented: What you end up with is a "Conservative" bucket, used to fund short term expenses and create portfolio stability, "Core" bucket comprised of passive index funds for that low cost exposure to more efficient parts of the market, and a "Growth" bucket, focused on active management in areas where such a style has the best potential to succeed. While there are many variations of the bucket strategy, the overall concept tends to be the same; breaking down a portfolio into smaller building blocks with different objectives in a goals-based wealth management process makes the most sense.

Conclusion

Volatility has returned to markets over the past year, and the second half of 2016 seems destined for that trend to continue. A contentious presidential cycle here in the U.S., a potential "Brexit" as the British consider their role in the E.U., and a few more potential FED rate hikes are just some events that could continue to drive volatility in the market. All of this against the backdrop of slowing global growth and historically unconventional monetary policy should make for an interesting second half of the year.

IFP research encourage investors to make sure they remember the three steps for navigating "Bizarro World" , and prepare for an investment landscape that may be more difficult than anything we've seen since the start of this bull market.

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. You are encouraged to seek such advice from your professional advisors. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

Securities and Investment Advisory Services offered through Signator Investors, Inc., Member FINRA, SIPC, a Registered Investment Adviser. OSJ address and phone. 

SMAR #121-20160525-296418

[1] Source: http://www.bloomberg.com/quicktake/negative-interest-rates
[2] Source: http://money.cnn.com/2016/04/29/investing/stocks-2nd-longest-bull-market-ever/
[3] https://www.blackrock.com/investing/insights/blackrock-investment-institute/outlook
[4] Important: The projections or other information generated by the Vanguard Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time. These hypothetical data do not represent the returns on any particular investment.

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