October 15, 2013
“Risky Business”
As the saying goes, “Investing, when it looks easiest, is at its hardest” and this is our feeling regarding the market right now. From time to time we play the contrarian as we are skeptical of situations that sound too good to be true and with the S&P 500 up 19.79%i for the year our caution signals are flashing. It has been said that the riskiest thing in the world is widespread belief that there is no risk. In particular, the Federal Reserve’s current policy of effectively printing 85 billion dollars a month has us concerned that the market increase is illusory and could disappear with a single word as simple as “tapering” or “(government) shutdown”. Warren Buffet put it concisely many years ago when he said “Be greedy when others are fearful and fearful when others are greedy”. We fear some people are greedy today and consequently they could be ignoring risk.
In fact as the S&P has skyrocketed this year emerging markets (down 6.42%i based on MSCI Emerging Markets Index), which make up 50% of the GDP of the world now, have plummeted on fears that the Fed is about to unleash rampant inflation. Meanwhile the Shiller P/E ratio stands at 24.01i for the domestic market and rests around 10 for emerging markets. Admittedly, we are encouraged when the domestic market does well but these returns seem fragile in our mind. The Morningstar Moderate Target benchmark that is up 9.66%i is a realistic rate of return in our opinion as it pulls in the international performance (MSCI EAFE +16.14%i) as well as fixed income (Barclays Capital Aggregate Bond -1.89%i). Additionally, if you add the hedge fund index return (HFRI Fund of Funds Composite) which is up 5.56%i then client portfolios look far more inline than the ebullient performance of the S&P 500.
We continue to emphasize the returns of the Morningstar Moderate Target benchmark and hedge funds versus the S&P 500 as we believe we must continue to be vigilant about risk and the bulk of our portfolios have international and fixed income exposure as well. When one becomes complacent about risk, bad things happen. When one no longer worries about valuations then one buys 10 yr treasury bonds yielding 1.63% or stocks with no earnings. Our goal is to steer our clients towards value and away from speculation. For example, our fixed income call to shorten duration on bonds the past two to three years has worked out well. While the bond index was down 1.89%i the majority of the bond funds we follow are up for the year or down less than the benchmark.
Similarly, approximately four and a half years ago when we received calls to purchase 5 year CD’s at 3% we instead recommended flexible managers such as FPA Crescent, Ivy Asset Strategy, TFS Market Neutral, Pimco All Asset All Authority, and Wells Fargo Asset Allocation to name a few. The worst one of these funds has doubled the annualized rate of return vis-à-vis the CD whereas two have tripled it. The contrarian in us said to be greedy then and we are grateful for your confidence in us as we weathered the storm and provided upside. Please continue to indulge the contrarian in us now that we are leery.
At the risk of sounding like a broken record we are going to end with another quote from Warren Buffet about risk, “the less prudence with which others conduct their affairs, the greater prudence with which we should conduct our own affairs”. Our continued goal is to practice the adage of using prudence before valor when it comes to your investments. We know that the air goes out of the balloon much faster than it goes into it. Please call with any questions.
P.S. We couldn’t find a way to work this Mark Twain quote about risk into the letter but we thought it was worth sharing “”It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
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Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions; investments in securities or other financial products involve risk and the possibility of loss, including a permanent loss of principal. Investments are not FDIC insured and have no bank guarantee.
Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to
January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.
Investment products and services provided by Synovus are offered through Synovus Securities, Inc, Synovus Trust
Company, N.A., GLOBALT, Inc. and Creative Financial Group. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.
The U.S. Securities and Exchange Commission adopted new oversight rules designed to help and protect all investors. These rules generally reflect a reaction to the Madoff and custody scandals, but they do require that we, like all investment firms, adopt new policies and procedures related to verification of your accounts. As such, we request that you take time to compare your account balances and statements from NFS and to contact us if you do not receive those quarterly statements and/or that the values are materially different.”
Cost basis reporting
If you buy and sell a security in a taxable account on or after the effective date, NFS will report cost basis for the sold security to you and the IRS on Form 1099-B. If you have a mix of covered and uncovered positions in the same security, NFS will report cost basis to you and the IRS for any covered position that is sold. NFS will apply the FIFO (First In, First Out) default method unless you inform us of a different method. Your cost basis method for all transactions must be final by settlement date. If you choose to change the default method, you can do so by notifying your Financial Consultant.
Use of Indexes
iThe investment return and style information and comparisons employ a variety of popular indices, and the index contents and strategies are the property of their respective companies (e.g., Dow Jones, Standard & Poor’s, Morningstar, Barclay Capital, Russell, Morningstar). Although the data is believed to be reliable, CFG makes no warranty with respect to the contents, accuracy, completeness, timeliness, suitability, or reliability of the information, which is represented here for informational use only and should not be considered investment advice or recommendation. None of the indices can be invested directly, and the return figures for these various securities indices are reported without management fees, trading costs, or other expenses subtracted from the returns, and are shown on a total return basis that assumes reinvestment of applicable capital gains and dividends. Components of indices may change over time. Small capitalization stocks are represented by the Russell 2000 Index. Mid Capitalization stocks are represented by the S&P Mid Cap 400 Index. Foreign stocks are represented by the MSCI EAFE Index and emerging markets are represented by the MSCI Emerging Markets Index.
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Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank. You can obtain more information about Synovus Securities, Inc. and its Registered Representatives by accessing BrokerCheck