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Happy New Year 2016. Update January 3, 2016 Please Read
Money Matters airs this Thursday January 7th 2016 at noon PST on KVMR FM or www.kvmr.org worldwide.
"The Zombie Apocolypse"
Commentary on today's confusing markets.
Marc's notes:
Building a portfolio for investors can be a daunting task. Many portfolios I see use what I call a “shotgun” approach.
What I call shotgun portfolios are built on a variety of mutual funds which may include large cap (large companies) mid cap (midsize companies) , small cap (small companies) , emerging markets, global stocks, municipal bond funds, corporate bond funds, high yield income funds (usually comprised of a variety of junk bonds) and even individual stocks. I also might see sector funds (certain industries), mortgage REITs (real estate investments trusts), business development companies (BDC’s) and even Treasury debt and a variety of other debt instruments.
The common thread among this shotgun approach is to buy some of everything with the belief is your “covered”, or in plain English “diversified”.
I often find this approach grossly inadequate for today’s markets but this is my opinion only.
Rarely if ever do we see all assets classes move in concert. Every day I see red and green on my board, meaning certain market areas will go up while others go down and some will even remain where they are on any given day.
That being said, holding a shotgun portfolio may have a tendency to be profit neutral, meaning it may be going nowhere fast, a complaint I hear often.
Going nowhere may be desirable in down markets but in up markets can be frustrating.
There are different strategies and many theories on how to build a successful portfolio and it may not include just buying a chunk of every asset class
Select a period in time and there will always be sectors that are hot and some that are not, some that have had tremendous runs and some that have been hammered mercilessly
The trick is of course when do you buy into a sector, hold a sector or outright sell it?
Although no one holds the proverbial key to guaranteed success, active involvement in selecting certain sectors and avoiding others may have its advantages.
Selling sectors whose run could be over might avoid losses. Buying beat up sectors (known as value investing) looks to capitalize on assets that could be regarded as “on sale”.
Avoiding assets that are sensitive to interest rates (fixed income such as bonds, preferred stocks and even utilities) might be considered when interest rates are expected to rise.
If world markets are reeling, the US market may attract “flight to safety” capital in lieu of emerging markets which tend to sell off more violently during global upsets.
If markets look to run however, emerging markets may amplify a move, allowing more profits to investors placed there.
In inflationary environments, precious metals and commodities may rise and during deflationary times, cash and cash equivalents hold value while most other asset classes may deflate.
For conservative investors, higher cash percentages might sooth anxious nerves and younger investors may want to take on more risk in high growth areas.High cash positions may also be warranted in uncertain times for all investors. High cash not only preserves portfolio balances, it’s also dry powder one can use to buy more of an asset after a crash when prices are lower.
Retirement accounts have compounded growth from assets that pay out cash because of their tax structure (avoiding the yearly tax that non IRA accounts may pay) while non retirement accounts may look to hold some tax free assets such as certain municipal bonds. Avoiding income tax on tax exempt assets essentially gives investors a higher net return if the asset is tax free or taxed at a lower rate.
Dividend paying stocks and funds pay an investor income while they hold the security in lieu of assets that yield nothing. In flat markets, these payments can bring smiles to the faces of investors while others wait for markets to rise with assets that pay nothing.
Target funds aim to maximize time frames with a moving mix of stocks and fixed income holdings. This means investors select a definitive time period to target maturity in which the fund then slowly goes from risk assets to lower risk assets as the target date approaches.
Target funds are popular in college accounts, where the age of child is known as is the projected date of college enrollment. The thinking is when a child is younger, the account can hold more stocks which might grow over time, but as the college date approaches, stock are slowly replaced with a higher percentage of fixed income assets such as bonds and preferred stocks which traditionally are less volatile.
There are many considerations which depend on the factors of the investor and of the market in general. Avoiding the typical “Shotgun” approach to investing could be compared to the mistake that one size fits all. Each market is different as is each investor. That being said, instead of a blasting away with shotgun, perhaps a better approach would be a carefully selected advisor with a good aim.
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Note: Thank you to all who supported Turkey Matters and donated to a food bank. I matched a portion of funds and we estimated we fed about 600 people!
Great job~
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Dear fans,
For years people have listened to my show and read my columns. Because many thought I made sense and agreed with my economic views, they requested I manage their funds and for years I have refused. I simply had too much work in the radio/ media business. But after so many requests and having given it serious consideration, I have joined a very dear friend at his firm MKB Financial Services in Auburn. Matt Baltz and I think alike. We are like family. We strive to provide the best service, with integrity, straight forward analysis with detailed and concise communication. We offer a full range of money management, retirement planning, income planning, family planning, investment recommendations and more. We have developed 3 portfolios to help meet the needs of our clients. The cost will be a simple fee commensurate with the industry on the amount invested.
I will talk with you quarterly to review your investments and more often if you require it.
Annually we meet and you and I will update your financial information to keep us on track and make sure you and I are up to date on your situation and your expectations.
We will handle the transfer paperwork for you. I will sit down with you and gather your individual situation and your needs, basically getting to know your financial picture so together we can decide what is best for you and your family.
I am excited to be able to offer you this opportunity to go "Money Matters"!
Call me today at my personal number (530) 559-1214 (private cell- do not give out ) to talk with me about meeting with you or just to get more information. I expect to be busy with this announcement so give me a call to beat the expected rush! Or send me an email at mcuniberti@cambridgesecure.com
Thank you again and I look forward to meeting of all of you!
Website news:
The website moneymanagementradio.com was overhauled to reflect this new opportunity. It is more streamlined and is at no cost. Recent shows are up and posted. Some older shows are absent but the recent ones are there. It takes about 1-3 weeks for us to post a show. Newsletters are obviously going out.
Thanks again for your patience and I look forward to speaking with you on and off air! All the best and I am so excited to hear from all of you on my new role in managing your finances if you would like me to fill that roll.
Marc
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Musings:
In a move that sent shivers through Wall Street investors, Third Avenue Management took the rare step of freezing withdrawals from its 780 million dollar credit mutual fun.
In the beginning of the 2008/09 crisis, the Reserve Primary Fund made a similar move by freezing redemptions and reducing redemption value to 97% of an investors deposit if and when they did get their money out. Eight years ago BNP Paribas SA also helped spark a global financial crisis by freezing withdrawals from three investment funds because it couldn’t “fairly” value their mortgage holdings
The extremely rare move by this latest fund Third Avenue Management was instigated as its bond portfolio consists mainly of high yield debt, commonly referred to as junk bonds.
With yields soaring and investors selling off high yield, management felt it could not or would not sell off its assets at fire sale prices to meet redemptions.
This is another in a plethora of problems that may be materializing in the junk bond/high yield market.
High yield assets tend to sell off when markets get jittery and with many high interest loans made to energy companies who now face the music due to plunging oil prices, a wave of energy related defaults may be stressing this market.
Outflows from U.S. high-yield bond funds are running at the fastest pace in more than a year and yields on this market have jumped about 35% from June 2014 levels.
Yields on bonds tend to rise as bonds sell off. The price of bonds moves inversely from yields so jumping rates means bond prices are plunging.
As bond prices plunge, funds that hold these bonds lose value resulting in dropping share prices. This can feed on itself where as share prices drop, more investors sell, causing share prices to decline even further.
The carnage in the high yield bond market is drawing some noticeable attention.
World renowned investor Carl Icahn recently tweeted “The meltdown in High Yield is just beginning,"
Icahn has been betting against the high-yield market which mean as junk bonds fall in value and yields subsequently rise, he profits.
With oil prices continuing to plunge and stock markets falling worldwide, more companies may find it hard to make their payments on borrowed monies. Keep in mind the junk bond/high yield market is where the riskier companies have to go to obtain financing. This market thrived in recent years due to the near zero interest rates that have existed, placed near zero by the Federal Reserve in an attempt to stimulate the economy and rescue the banking sector.
An argument could be made and indeed has been by some analysts (including this one) that the ultra-low interest rates set by the Federal Reserve and indeed central bankers around the world have encourage investors to seek higher returns elsewhere and that elsewhere has been in the high yield market.
Investors piled into high yield markets making billions in monies available to companies seeking loans to continue operations. This massive influx of capital seeking higher yields also placed billions in junk bonds in the hands of investors everywhere, including many retirement plans and pension accounts. Masked under the term “high income funds” or other enticing names, many an investor may have no idea they hold IOU’s from risky companies or at least companies on the lower end of the credit spectrum, and many of them in the oil sector.
Now that the price of oil is at historic low levels, these companies are having a hard time making end meets and paying their loans. With rising defaults the mass influx of capital into the high yield market may now slamming in reverse with a massive exodus.
This exodus of funds in the high yield bond market is real and yields are rising. If funds continue to flow out of the high yield market, large losses may be in store for investors who hold these bonds. It is also possible the high yield fall out spreads contagion to other types of bonds and even stock markets, such as we saw in 2008/09 where fear in one market led to sell off in many others as the crisis progressed. High yield bonds are traditionally the first to sell off when investors perceive risk in markets, the proverbial canary in the coal mine.
Is that bird beginning to sing as we speak?
Do you hold high yield bonds in your portfolio, mutual fund or pension plan?
Perhaps it’s time you ask your investment professional what it is exactly you own in your account and whether he or she is aware of the potential danger brewing in the high yield debt markets.
