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Politics and the Markets

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Economy

The U.S. economy is still growing, albeit at a modest pace. Consumer confidence hit the highest level in nine years. The University of Michigan Consumer Sentiment Index also backs this up.
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When consumers are confident, they spend more money. In turn, this can act as a virtuous circle until an outside force acts upon it.

The presidential election and how the eventual winner impacts the economy is on investors’ minds. A few are worried about the election being the outside force that hits consumers.

One issue the incoming President will face is the likelihood of a recession at some point. By the time the new President takes office, this expansion will be closing in on eight years. The longest economic expansion ever for the U.S. was from 1991 until 2001. Simple math would tell us we are due within the next four years.

The chart below shows the federal government tax receipts as a percentage of total Gross Domestic Product (GDP). The increase in this rate over the past five years tells us it is a risk for the incoming President.start-2

Taxes drain money out of the system. Today, it is taking money out at one of the highest rates in the last 30 years. With interest rates at the lowest level since the 1950s, we would prefer to see more fiscal stimulus or lower taxes. This would help buoy the economy.

The financial media watches the Federal Reserve with bated breath every time a governor speaks. Still, there is only so much that they can do. Maintaining low interest rates certainly helped the economy. There is dissension within the ranks at the Fed with three members voting to raise interest rates at the last meeting. We will wait to see what happens in the fourth quarter with the possibility of another interest rate hike this cycle, the last one being in December 2015.

Equity

Stock markets rallied across regions during the third quarter. Emerging markets were the top performers followed by developed international. The U.S. lagged, with domsetic small caps outpacing mid and large caps.

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The chart below shows the sector performance on a year-to-date basis. Energy in the red line is the

top performer in 2016 after being the worst in 2015. The thin blue line for utilities and the thin   orange line for telecom peaked in July. Both were down during the quarter despite the broader market being up.start-4

Last quarter we talked about the outperformance of yield-oriented sectors. In a few circles these became known as R.U.S.T. (Real Estate, Utilities, Staples (consumer), and Telecom). Most portfolio managers felt these areas were overvalued. This was due to the flow of cash into these sectors and inexpicable prices paid (hence the not so affectionate label).

The U.S. equity market was the best performer over the last five years, as shown in aqua below. Japan has come back down to earth after the stimulus package from 2014 wore off, as shown in green. Europe’s stocks, in orange, lagged both Japan and the U.S. Political issues from not being fiscally linked produced imbalances between Germany and the periphery countries. The biggest underperformer was emerging markets in violet.start-6

In the past we discussed the cheap value in share prices and currencies for emerging markets. The chart above, however, is much simpler. Over the past five years, emerging markets has been the lowest performing region. Though it still turned in positive returns for investors. If the first rule of investing is “buy low and sell high,” which markets would an astute investor consider adding funds to?

The Aurum Asset Allocation Frameworks have strategic asset class targets for the long-term. Our tactical weights reflect value-based opportunities. This is where our research shows favorable conditions for an asset class.  Portfolios maintain a small underweight to developed markets in favor of emerging markets.

Fixed Income

Corporate credit spreads relative to comparable Treasuries decreased during the quarter. This allowed bonds to turn in a positive quarter, except for municipals.

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Yields on the 10-year Treasury bottomed in the first week of July and rose 0.40% since, shown in orange. This is the third multi-month rise in yields over the past four years. Each period below is highlighted by grey vertical bars. In each case, Japan’s Government Bonds (JGBs in aqua) rose sharply just before U.S. yields perked up.5

In 2013, the 10-year Treasury yield rose from 1.63% to 3.00% over seven months. In 2015, Treasury yields rose from 1.64% to 2.49% over five months. The sample size is quite small at only two, however, pressure on yields could continue higher for a few more months. The Federal Reserve’s rhetoric around raising interest rates in the fourth quarter is putting pressure on yields. Policy responses from Japan and Europe is as  well.

High yield bonds have done well this year. This followed a poor performance in 2015, driven by the energy sector.  Because of this, prices started  out at distressed prices for energy. The credit spreads were comparable to the distress in telecom in 2001 and financials in 2008. The graph below shows the spike in yields for each of these sectors at those points in time.6

With the price of  oil stabilizing  and doubling from $26 per barrel to $50 barrel, the price of stocks and bonds for energy came roaring back.

The Aurum Asset Allocation Frameworks maintain fixed income allocations at the strategic targets.

Our preference remains for fixed income securities collateralized by assets.   This provides an extra   layer of protection on cash flows or yield for our fixed income.

Alternative Investments

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During the third quarter, hedge funds led the way as credit and equity-oriented strategies did well. The reversal in bond yields hurt trend following managers. REITs fell while increasing inflation expectations helped TIPS.

Below is the yield of the Barclay’s TIPS index. TIPS stands for Treasury Inflation Protected Securities. The unique aspect of TIPS is that the principal price of the bond adjusts annually based on the consumer price inflation (CPI) index. With inflation averaging 2.2% over the past two decades, TIPS offered a great value in the early to mid-2000s with a yield well above inflation.8

Aurum Asset Allocation Frameworks

Inflation has actually been running below the yield of TIPS lately. This means investors are locking in a negative real yield. So today, this unique asset class  does  not  look attractive.

We increased our underweight to diversified strategies during the quarter as one of our managers retired. REITs and TIPS maintained a zero percent weight.

Conclusion

There are investment opportunities for those willing to look at uncomfortable places. Equity momentum is positive across regions. The back-up in interest rates could offer up compelling value in fixed income as well. The election is weighing on the minds of investors, however, historically the party leading the White House has little correlation to the performance of markets. Marking portfolio decisions based on politics just does not mix. We will stick to a diversified approach across asset classes.9

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.


Why Do We Love Round Numbers?

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As the stock market pushes to new highs, the Dow Jones Industrial Average Index is nearing a level it never breached before – 20,000.  Financial news anchors are downright giddy (so we hear, watching too much CNBC can rot your eyes).

There is something satisfying about round numbers.  Per a News Works article, SAT takers are more likely to retake the test if they fall just short of a round number.  Major League baseball players are four times as likely to end the season with a .300 batting average than .299.

It is how we talk about age, being in our 30s, 40s or 50s.  It is how we think about numbers all the time. So why this obsession with round numbers and the base of 10 number system?

According to Eugenia Cheng, a scientist at the School of the Art Institute of Chicago, “It’s very intimately linked to the fact we have 10 fingers.”  Experts agree that the evolutionary accident of humans having ten fingers for counting drives our obsession with a base-10 number system.  Why do we have ten fingers (and ten toes)?  One theory is the Limb Law, which states that based on the length of the limbs (arm), animals develop an optimal number of further limbs (in this case, fingers).  Based on the size and length of human arms, five fingers on each hand turns out to be optimal.

We fixate on round numbers due to our own selves.  And this is partly why we care about Dow 20,000.

The Dow Jones Industrial Average is a price-based index.  The price of all the stocks are added together to come up with the Dow’s price.  The actual size of the company does not matter, the dollar value of the stock price is what is important.  This makes it an imperfect measure of stock market performance.

As an investor, most important is the percentage move of an index, not the dollar-based price move.

Let’s show why this matters.  Goldman Sachs’ stock price is $243.  It is the highest price stock of the 30 companies in the Dow Jones Industrial Average.  Thus, it is the largest percentage weight of the index at 8.33%.  Yet, it is not the largest company by market value (at $99 billion) in the U.S. That honor goes to Apple whose value is $626 billion.   Goldman Sachs is the 45th largest company by market value.  The S&P 500 is an index based on market value.  Within the S&P 500, Goldman Sachs has a weight of 0.46%, or less than half a percent.  It is 18 times larger in the Dow Jones Industrial Average and its daily changes affect it that much more.  This is significant because the S&P 500 is the most popular index and most tracked by mutual funds and exchange-traded funds (ETFs).

There are other ways to consider the significance of reaching milestones or all-time highs in the stock market.  One could inflation adjust the index by dividing by the consumer price index to get a ‘real’ value of the stock market.  Alternatively, most quoted price indices exclude dividends, which is not really a true representation of the experience of a ‘buy and hold’ investor.  Looking at a ‘total return’ would be more accurate.

Setting new highs means equity portfolio values are also setting new high-water marks.  The nostalgia of passing the round numbers also holds some significance.  People remember the ill-timed book Dow 40,000, published in 1999 during the midst of the tech bubble.  Finally, 17 years later and flirting with Dow 20,000, we are half way there!

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

Sources: http://www.newsworks.org/index.php/local/the-pulse/80394-10-50-100-why-do-we-find-comfort-in-round-numbers

http://www.science20.com/mark_changizi/why_do_we_have_ten_fingers

Growth, Value or Both?

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The terms growth and value are often used to describe two different investment strategies, yet many investors may want both qualities in an investment. Famed investor Warren Buffett put it this way in a 2015 interview: “I always say if you aren’t investing for value, what are you investing for? And the idea that value and growth are two different things makes no sense…. Growth is part of the value equation.”1

Even so, analysts may look at specific stocks as offering more growth potential than value, and vice versa. And these concepts are used to construct many mutual funds and exchange-traded funds (ETFs). So it’s helpful to understand the opposing ideas, even if you want the best of both in your portfolio.

Poised to grow?

As the name suggests, growth stocks are associated with companies that appear to have above-average growth potential. These companies might be on the verge of a market breakthrough or acquisition, or they may occupy a strong position in a growing industry.

Growth companies may place more emphasis on reinvesting profits than on paying dividends (although many large growth companies do offer dividends). Investors hope to benefit from future capital appreciation of growth stocks, which tend to be considered higher risk than value stocks. However, it’s equally important for growth and value stocks to have strong fundamentals.

Undervalued?

Value stocks are associated with companies that appear to be undervalued by the market or are in an industry that is currently out of favor. Unlike growth stocks, which might seem expensive and overvalued, value stocks may be priced lower in relation to their earnings, assets, or growth potential.

Established companies are more likely than younger companies to be considered value stocks, and these firms may emphasize paying dividends over reinvesting profits. An investor who purchases a value stock typically expects the broader market to eventually recognize the company’s full potential, which may result in rising share prices. One risk with this approach is that a stock considered to be undervalued because of legal or management difficulties or tough competition might not be able to recover from the setback.

Focused funds

Identifying specific growth or value investments requires time, knowledge, and experience to analyze stock data. A more convenient and accessible way to add growth or value stocks to your portfolio may be through mutual funds or ETFs that focus on these categories. Such funds often have the word “growth” or “value” in their names. However, there could be a wide variety of objectives and stock holdings among funds labeled growth or value.

Also keep in mind that you might find growth, value, or both in a broad range of investments that do not employ growth or value strategies.

Diversification

Holding growth and value stocks and/or funds is one way to diversify the stock portion of your portfolio. Over the past 20 years, the average annual return for value stocks was about 1.5 percentage points higher than that of growth stocks (8.54% versus 7.02%). Yet growth stocks outperformed value stocks in eight of those years — in some years by large margins. This suggests that growth and value stocks may respond differently to varying market conditions.2

Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.

The return and principal value of stocks, mutual funds, and ETFs fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Supply and demand for ETF shares may cause them to trade at a premium or a discount relative to the value of the underlying shares.

Mutual funds and ETFs are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Stay up-to-date with the latest business trends, tips and revenue-generating ideas affecting you and your business by subscribing to the Skoda Minotti Blog or by following us on LinkedIn, Twitter @skodaminotti and Facebook.

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Advisory Services offered through Investment Advisors, a division of ProEquities, Inc., a Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member, FINRA & SIPC. Skoda Minotti is independent of ProEquities, Inc.

1CNBC.com, March 2, 2015

2 Thomson Reuters, 2016, for the period 9/30/1996 to 9/30/2016. Growth stocks are represented by the Russell 3000 Growth Index. Value stocks are represented by the Russell 3000 Value Index. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Rates of return will vary over time, particularly for long-term investments. Past performance is not a guarantee of future results.

 

Midyear Business Tax Saving Strategies

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Tax planning is probably something business owners think about twice a year: when the return is being prepared and possibly at the end of the year. This, however, is short-sighted. Now is a great time to evaluate your tax situation and implement some strategic measures. We suggest five approaches worth considering.

1) Review Income Tax Payments – If your model is to pay income taxes on business profits through estimated taxes, you have two more times to get it right: September 15, 2017 and January 16, 2018. Review the amounts with your accountant to prevent overpaying—why offer the government an interest-free loan? Then there is underpaying, which can cause costly tax interest and/or penalties. Remember that estimated taxes include not only regular income taxes (including the alternative minimum tax) but may also include:

  • Self-employment tax
  • .9% additional Medicare tax on earned income
  • 3.8% additional Medicare tax on net investment income

2) Assess Your Profitability – Consider a few strategies to boost tax savings if 2017 is revealing itself to be a solid year for you:

  • Buy Equipment. In 2017, you can expense up to $510,000 worth of equipment purchases (even if you finance them) instead of depreciating the cost over a number of years. This amount is phased out dollar for dollar to the extent your eligible property exceeds $2,030,000.
  • Hire Wisely. As you increase your staffing, bear in mind that the work opportunity credit rewards you for hiring someone from a targeted group, such as a qualified veteran.
  • Create a Qualified Retirement Plan. You can cut your current tax bill through contributions to a qualified retirement plan. There are several plan options, and the one to choose depends on whether you have employees and how much of the contributions the business can afford to shoulder.

3) Issue Stock – If you’re a qualifying C corporation (with gross assets less than $50 million in addition to other restrictions) in manufacturing, technology, retail or wholesale, you may qualify to issue stock (referred to as a small business stock, or Section 1202 stock) that will permit the shareholder to eventually obtain tax-free treatment for any capital gain. If you issue the stock now and it’s held for more than five years, then all of the gain is tax free. The stock must be acquired in exchange for cash, property or services (not received through a gift or inheritance). It can be used to bring in new investors or reward employees.

4) Meet With Your Tax Advisor – Most small business owners use CPAs or other tax advisors to prepare and file their returns. These professionals also can serve as business advisors throughout the year, offering guidance on what businesses can do to maximize profitability while minimizing taxes. Schedule a meeting to review your profits and losses, and craft a tax plan with current information, while also considering projections and past performance.

5) Expand Your Research and Development (R&D) – It’s not only big companies like drug manufacturers and technology companies that invest in R&D. Whether you engage in R&D to develop a product or to identify new methods for your operations by, for example, creating internal software, you may qualify tax credits. This could help to underwrite the cost for the research.

A “qualified small business” can choose to use the credit as an offset to the employer’s share of Social Security taxes (up to $250,000) rather than using it against income taxes. Businesses that qualify are those with less than $5 million in gross receipts for the current year and no gross receipts for any year preceding the fifth year prior to the current year. For example, a business with $4 million in receipts in 2017 and no gross receipts prior to 2012 may use this option.

In summary, the key takeaway here is to prevent missing an opportunity to review your tax position and determine the strategies you can use between now and the end of the year to optimize your 2017 tax bill.

Do you have questions about how to approach midyear tax-saving strategies? Please contact Jim Forbes at 440-449-6800 or jforbes@skodaminotti.com.

12 Great Ideas for Tax Savings

Picking a Stock: Not For The Faint of Heart

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Jesse Livermore, considered by some the most famous trader ever, learned to trade in the bucket shops in the early 1900s. He profited from the 1929 market crash by betting it would fall, and certainly earned his nickname, “Boy Plunger.” In today’s dollars he would have been a billionaire. The wealthy Mr. Patridge was a keen influence on Jesse Livermore, especially in his early days.  Mr. Patridge never traded off stock tips and anyone who would ask him for one would get a simple response, “Well it’s a bull market, you know.” It was his way of saying that the trend in stocks was up (without giving away an actual tip). Telling another person a stock to buy never was his thing, because how would the person acting on another’s information know when to cash out?

“What’s your favorite stock today?”

“Give me a name.”

“What are you buying?”

Everyone in the financial advice business has been asked this question.  Sad to say, most were probably disappointed with my response.

Typically, I explain that picking single stocks is just not what we do. If you want to talk about grilling a portfolio manager to separate the wheat from the chaff, we are all over that.  Talking about asset classes that are rich or cheap – yes, please! Both matter far more to portfolio outcomes anyways.

We have stock ideas, of course. Talking to sharp portfolio managers on a regular basis will bring this. While learning about emerging industries and trends, more possibilities unfold. But narrowing it to a single recommendation, the possible outcomes are just… far too random.

When it comes down to it, picking a stock is quite an arrogant activity.

In choosing a stock, the selector is saying he or she knows more than the collective wisdom of “Mr. Market.” Domain expertise could give one an edge to make the activity a positive tilt. Still, many things can go wrong for a single stock. A product could be upended by technological innovation.  Management could be bad actors. A value stock could stay cheap for a good reason and never recover… the list goes on.

Professor Hendrik Bessembinder of Arizona State University recently published a paper in August 2017 titled, “Do Stocks Outperform Treasury Bills?” In it, he studied the database of returns from 1926 to 2016 from the Center for Research in Security Prices for all public stocks that ever existed. This included about 25,300 stocks, which over time created $35 trillion in shareholder wealth.   He found that 1,092 of these stocks accounted for all wealth creation, or only about 4% of stocks. Just 90 companies, or one third of one percent, accounted for half of the wealth creation!

In addition, he found that 58% of stocks did not beat 1-month Treasury bills (i.e., cash) if held forever.  The most common outcome for holding a stock forever is a complete loss, -100%.

In more recent decades, the same study produces similar results. The chart below shows that two thirds of individual companies underperformed the Russell 3000 index and 40% produced negative returns. The extreme winners are what drives the market index higher, which comprise just 7% of the market (think Amazon, Berkshire Hathaway).

stock

 

 

 

 

 

 

 

The bottom line is that diversification plays an important role in financial planning and portfolio management. Missing out on the big winners would diminish the average returns for a portfolio. While picking stocks for a small portion of assets could be interesting or even entertaining, it stacks the odds against outperforming a simple market index.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

Picking a Stock: Not For The Faint of Heart

0
0

Jesse Livermore, considered by some the most famous trader ever, learned to trade in the bucket shops in the early 1900s. He profited from the 1929 market crash by betting it would fall, and certainly earned his nickname, “Boy Plunger.” In today’s dollars he would have been a billionaire. The wealthy Mr. Patridge was a keen influence on Jesse Livermore, especially in his early days.  Mr. Patridge never traded off stock tips and anyone who would ask him for one would get a simple response, “Well it’s a bull market, you know.” It was his way of saying that the trend in stocks was up (without giving away an actual tip). Telling another person a stock to buy never was his thing, because how would the person acting on another’s information know when to cash out?

“What’s your favorite stock today?”

“Give me a name.”

“What are you buying?”

Everyone in the financial advice business has been asked this question.  Sad to say, most were probably disappointed with my response.

Typically, I explain that picking single stocks is just not what we do. If you want to talk about grilling a portfolio manager to separate the wheat from the chaff, we are all over that.  Talking about asset classes that are rich or cheap – yes, please! Both matter far more to portfolio outcomes anyways.

We have stock ideas, of course. Talking to sharp portfolio managers on a regular basis will bring this. While learning about emerging industries and trends, more possibilities unfold. But narrowing it to a single recommendation, the possible outcomes are just… far too random.

When it comes down to it, picking a stock is quite an arrogant activity.

In choosing a stock, the selector is saying he or she knows more than the collective wisdom of “Mr. Market.” Domain expertise could give one an edge to make the activity a positive tilt. Still, many things can go wrong for a single stock. A product could be upended by technological innovation.  Management could be bad actors. A value stock could stay cheap for a good reason and never recover… the list goes on.

Professor Hendrik Bessembinder of Arizona State University recently published a paper in August 2017 titled, “Do Stocks Outperform Treasury Bills?” In it, he studied the database of returns from 1926 to 2016 from the Center for Research in Security Prices for all public stocks that ever existed. This included about 25,300 stocks, which over time created $35 trillion in shareholder wealth.   He found that 1,092 of these stocks accounted for all wealth creation, or only about 4% of stocks. Just 90 companies, or one third of one percent, accounted for half of the wealth creation!

In addition, he found that 58% of stocks did not beat 1-month Treasury bills (i.e., cash) if held forever.  The most common outcome for holding a stock forever is a complete loss, -100%.

In more recent decades, the same study produces similar results. The chart below shows that two thirds of individual companies underperformed the Russell 3000 index and 40% produced negative returns. The extreme winners are what drives the market index higher, which comprise just 7% of the market (think Amazon, Berkshire Hathaway).

stock

 

 

 

 

 

 

 

The bottom line is that diversification plays an important role in financial planning and portfolio management. Missing out on the big winners would diminish the average returns for a portfolio. While picking stocks for a small portion of assets could be interesting or even entertaining, it stacks the odds against outperforming a simple market index.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

Market Update

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We are in the midst of the 28th time the stock market fell between 10% to 20% since 1945.  A peak to trough move in prices such as this happens every three years on average.  It should be expected by stock investors.  The speed of this fall, however, was extremely quick.  It spanned only two weeks in time.  On average, these declines average 14%.  Typically, the fall lasts four months and takes another four months to recover.

Declines in the S&P 500 (Since 1945)

Source: Ned Davis Research, Guggenheim

As it stands today, we do not know if this will be a fall greater than 20%, which has happened 11 times (8 between 20% to 40%, 3 greater than 40%).  Typically, recessions cause declines greater than 20%.  Absent an external shock like a trade war, a recession seems unlikely this year.  Fundamentally, the economy looks strong.  Wages for individuals and earnings for companies are higher.  Still, it is the ninth year of this economic expansion and the Federal Reserve is hiking interest rates.  We are most likely in the later innings of this cycle.

Why has the market crashed?  It is always tough to pin down the exact reason for more sellers than buyers.  Here is our best stab at it.

  • Blow up of the “short volatility” trade.  Every so often a strategy perks up that is akin to picking up pennies in front of a steam roller.  It works great until it doesn’t, and all of the profits that were made the last few years vanish.  People were betting on the volatility (or variation in the price) of the stock market to keep falling.  When volatility instead increased at an exponential higher rate (more than quadrupling in just two days!), that trade gave back all its gains and then some, falling 80% to 95%.
  • Inflation expectations rising.  With the new tax plan, federal budget passed, and an infrastructure plan looking possible, interest rates began to rise to price in the higher risk of inflation.  Economists have been dumbfounded as to why there is no inflation.  To us, its been clear the private sector has been starved for fiscal stimulus.  With a one-two punch of lower taxes and federal spending, this puts more money in motion and in the private sector’s pockets.  In turn, this increases inflation expectations, which tends to lower profit margins for companies and the stock market as a whole.
  • Too many people being too positive on stocks.  Disagreement is what makes a market.  When everyone agrees that stocks should go higher, as they did in the consumer confidence survey last month, everyone is all in.  Without fresh buyers, no one was left out of the boat.  Equity holdings for households were the highest ever since the technology bubble in 1999.

A washout of bad strategies and investor sentiment is ultimately good for long term investors.  In the moment, the feeling can be terrifying.  While the past is a guide, we remind ourselves that the unexpected happens.  Markets are not a “normal” distribution and outcomes different and in greater magnitude than the past are possible.

Systematically executing is a way we combat behavioral biases.  Human emotions are not built for a world where we see our (monetary) resources on screens, instantaneously going up and down in bright red numbers.  It creates an urge to protect resources and often stop the pain, by reacting emotionally.  Our rational mind should re-frame falling prices as an opportunity for higher expected returns.

The best approach is not to predict the short-term gyrations.  Have your shopping list handy and stick to your investment plan.  Our Investment Committee regularly updates the prices of all asset classes where we would be buyers in the event of a decline or crash scenario.  This way, there is no question in the moment of what to do.

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

Dividend Investing: Small Payments Can Boost Returns

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Owning shares of stock or stock funds might increase the value of your portfolio in one of two fundamental ways: capital appreciation (i.e., price increases) and dividend payments. Of the two, capital appreciation carries the greatest potential for return, but it also carries the greatest potential for loss. And any gains or losses are only reaped when you sell your shares.

By contrast, dividends typically offer more consistent modest returns that are paid while you hold your shares. For this reason, dividends have long been popular with retirees and others who are looking for regular income. But focusing on dividends can be appropriate for almost any investor, especially if dividends are reinvested to purchase additional shares. Although reinvesting dividends from individual stocks may not be cost-effective, mutual funds and exchange-traded funds (ETFs) generally offer an option to reinvest dividends and/or capital gains.

Growth and volatility

In general, more established companies tend to pay dividends, and these companies may not have as much growth potential as newer companies that plow all of their earnings back into the company. Even so, dividends can boost total return. A 2015 study found that dividends had accounted for about onestock

-third of the total return of the S&P 500 index since 1956, with the other two-thirds from capital appreciation. In the fourth quarter of 2017, more than 80% of S&P 500 stocks paid a dividend with an average yield of 1.87% for the index as a whole and 2.24% for dividend-paying stocks. Many mid-size and smaller companies also paid dividends.1

Because dividends are by definition a positive return, even during a down market, dividend-paying stocks may be less volatile than non-dividend payers. However, dividend stocks tend to be more sensitive to rising interest rates; investors looking for income may move away from stocks if less risky fixed-income investments offer comparable yields.

Quarterly payments

Dividends are typically paid quarterly in the form of cash or stock. The amount is set by the company’s board of directors and can be changed at any time. Dividends can be expressed as the dollar amount paid on each share or as yield — the annual dividend income per share divided by the current market price. When the share price falls, the yield rises (assuming dividend payments remain the same), enabling investors who reinvest their dividends to buy more shares that have the potential to grow as market performance improves.

Investing in dividends is a long-term commitment. In exchange for less volatility and more stable returns, investors should be prepared for periods where dividend payers drag down rather than boost an equity portfolio. The amount of a company’s dividend can fluctuate with earnings, which are influenced by economic, market, and political events. Dividends are typically not guaranteed and could be changed or eliminated.

The return and principal value of all investments fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Supply and demand for ETF shares may cause them to trade at a premium or a discount relative to the value of the underlying shares.

For assistance with planning for your financial future, contact Robert Coode at rdcoode@smcofinancial.com or call us at 440-449-6800.

Mutual funds and ETFs are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

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Advisory Services offered through Investment Advisors, a division of ProEquities, Inc., a Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member, FINRA & SIPC. Skoda Minotti is independent of ProEquities, Inc.


The Browns and Investor Behavior

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A passion around here is football.  We love talking about the Cleveland Browns, the NFL, and the analytics teams use to make better informed decisions.

Any Browns fans knows how much losses hurt, we felt plenty of pain the last few years. While commentators often refer to teams that ‘find a way to win,’ the Browns always hit a new low in the level of losing.  The 2018 season was such a revelation, what a better feeling!

In the latest news, we love the Freddie Kitchens hire.  He upended much of the conventional football wisdom, that offenses need to establish the run to succeed. Kitchens reversed this, calling aggressive passing plays to eventually set up game breaking runs. The FiveThirtyEight website just wrote a great data driven piece on this, You Called a Run on First Down. You’re Already Screwed.  Also, having some guy named Baker Mayfield execute these plays with pinpoint accuracy helped a little bit too.

The Kitchens head coaching hire was important.  If Freddie was just the Offensive Coordinator next year and repeated the success of the past 8 games for the Browns offense, he would likely have been offered a head coaching job next year. The loss of a successful coach would have hurt quite a bit, no matter who might have replaced him.

If you have ever been to the Aurum offices or talked to one of our advisors, you will know behavioral finance is a passion. The intersection of psychology, money, and investment decision making is so not only interesting, but also vital to long-term financial plans.

The chart below shows the behavior gap of returns in different asset classes and actual investor returns. While the S&P 500 Index returned 8.19% the last 20 years, investors earned 4.67% in equity funds (highlighted in yellow).

Our main objective is helping clients achieve their definition of financial success, and a major part of this is closing the behavior gap.

From a pain and pleasure standpoint, behavioral finance has taught us that while gains feel good, the same amount in losses hurts twice as much!  In our brains, the same receptors that feel physical pain respond in the same way when we see temporary financial losses.

The behavior gap was on display in December when stocks were falling sharply.  Because of the pain of loss, investors sold stock funds at the greatest rate ever (some hedge funds and investors may have been forced sellers due to margin loans being called).  According to Ned Davis Research, equity mutual funds and exchange traded funds had redemptions of $94 billion.  This was clearly not a part of a long-term investment plan but a reaction to the market volatility.

—-

Like many other professional sports franchises, the Browns took a long view to rebuilding. This included acquiring player contracts at favorable terms, building strength across the lineup, trusting the process, and patience (a lot of patience).

Similarly, investment strategies succeed over the long-term due to acquiring assets at favorable values, diversifying, sticking to a process, and patience.

Behavioral finance applies to sports just as much as investing. We cannot wait until next season.

—-

Important Information Disclosure

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Aurum Wealth Management Group, LLC-“Aurum”), or any non-investment related content, made reference to directly or indirectly in this tweet will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this tweet serves as the receipt of, or as a substitute for, personalized investment advice from Aurum. Please remember that if you are an Aurum client, it remains your responsibility to advise Aurum, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Aurum is neither a law firm nor a certified public accounting firm and no portion of the tweet content should be construed as legal or accounting advice. A copy of Aurum’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please note that Aurum does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Aurum’s web site or tweet or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Picking a Stock: Not For The Faint of Heart

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Jesse Livermore, considered by some the most famous trader ever, learned to trade in the bucket shops in the early 1900s. He profited from the 1929 market crash by betting it would fall, and certainly earned his nickname, “Boy Plunger.” In today’s dollars he would have been a billionaire. The wealthy Mr. Patridge was a keen influence on Jesse Livermore, especially in his early days.  Mr. Patridge never traded off stock tips and anyone who would ask him for one would get a simple response, “Well it’s a bull market, you know.” It was his way of saying that the trend in stocks was up (without giving away an actual tip). Telling another person a stock to buy never was his thing, because how would the person acting on another’s information know when to cash out?

“What’s your favorite stock today?”

“Give me a name.”

“What are you buying?”

Everyone in the financial advice business has been asked this question.  Sad to say, most were probably disappointed with my response.

Typically, I explain that picking single stocks is just not what we do. If you want to talk about grilling a portfolio manager to separate the wheat from the chaff, we are all over that.  Talking about asset classes that are rich or cheap – yes, please! Both matter far more to portfolio outcomes anyways.

We have stock ideas, of course. Talking to sharp portfolio managers on a regular basis will bring this. While learning about emerging industries and trends, more possibilities unfold. But narrowing it to a single recommendation, the possible outcomes are just… far too random.

When it comes down to it, picking a stock is quite an arrogant activity.

In choosing a stock, the selector is saying he or she knows more than the collective wisdom of “Mr. Market.” Domain expertise could give one an edge to make the activity a positive tilt. Still, many things can go wrong for a single stock. A product could be upended by technological innovation.  Management could be bad actors. A value stock could stay cheap for a good reason and never recover… the list goes on.

Professor Hendrik Bessembinder of Arizona State University recently published a paper in August 2017 titled, “Do Stocks Outperform Treasury Bills?” In it, he studied the database of returns from 1926 to 2016 from the Center for Research in Security Prices for all public stocks that ever existed. This included about 25,300 stocks, which over time created $35 trillion in shareholder wealth.   He found that 1,092 of these stocks accounted for all wealth creation, or only about 4% of stocks. Just 90 companies, or one third of one percent, accounted for half of the wealth creation!

In addition, he found that 58% of stocks did not beat 1-month Treasury bills (i.e., cash) if held forever.  The most common outcome for holding a stock forever is a complete loss, -100%.

In more recent decades, the same study produces similar results. The chart below shows that two thirds of individual companies underperformed the Russell 3000 index and 40% produced negative returns. The extreme winners are what drives the market index higher, which comprise just 7% of the market (think Amazon, Berkshire Hathaway).

stock

 

 

 

 

 

 

 

The bottom line is that diversification plays an important role in financial planning and portfolio management. Missing out on the big winners would diminish the average returns for a portfolio. While picking stocks for a small portion of assets could be interesting or even entertaining, it stacks the odds against outperforming a simple market index.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

Market Update

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We are in the midst of the 28th time the stock market fell between 10% to 20% since 1945.  A peak to trough move in prices such as this happens every three years on average.  It should be expected by stock investors.  The speed of this fall, however, was extremely quick.  It spanned only two weeks in time.  On average, these declines average 14%.  Typically, the fall lasts four months and takes another four months to recover.

Declines in the S&P 500 (Since 1945)

Source: Ned Davis Research, Guggenheim

As it stands today, we do not know if this will be a fall greater than 20%, which has happened 11 times (8 between 20% to 40%, 3 greater than 40%).  Typically, recessions cause declines greater than 20%.  Absent an external shock like a trade war, a recession seems unlikely this year.  Fundamentally, the economy looks strong.  Wages for individuals and earnings for companies are higher.  Still, it is the ninth year of this economic expansion and the Federal Reserve is hiking interest rates.  We are most likely in the later innings of this cycle.

Why has the market crashed?  It is always tough to pin down the exact reason for more sellers than buyers.  Here is our best stab at it.

  • Blow up of the “short volatility” trade.  Every so often a strategy perks up that is akin to picking up pennies in front of a steam roller.  It works great until it doesn’t, and all of the profits that were made the last few years vanish.  People were betting on the volatility (or variation in the price) of the stock market to keep falling.  When volatility instead increased at an exponential higher rate (more than quadrupling in just two days!), that trade gave back all its gains and then some, falling 80% to 95%.
  • Inflation expectations rising.  With the new tax plan, federal budget passed, and an infrastructure plan looking possible, interest rates began to rise to price in the higher risk of inflation.  Economists have been dumbfounded as to why there is no inflation.  To us, its been clear the private sector has been starved for fiscal stimulus.  With a one-two punch of lower taxes and federal spending, this puts more money in motion and in the private sector’s pockets.  In turn, this increases inflation expectations, which tends to lower profit margins for companies and the stock market as a whole.
  • Too many people being too positive on stocks.  Disagreement is what makes a market.  When everyone agrees that stocks should go higher, as they did in the consumer confidence survey last month, everyone is all in.  Without fresh buyers, no one was left out of the boat.  Equity holdings for households were the highest ever since the technology bubble in 1999.

A washout of bad strategies and investor sentiment is ultimately good for long term investors.  In the moment, the feeling can be terrifying.  While the past is a guide, we remind ourselves that the unexpected happens.  Markets are not a “normal” distribution and outcomes different and in greater magnitude than the past are possible.

Systematically executing is a way we combat behavioral biases.  Human emotions are not built for a world where we see our (monetary) resources on screens, instantaneously going up and down in bright red numbers.  It creates an urge to protect resources and often stop the pain, by reacting emotionally.  Our rational mind should re-frame falling prices as an opportunity for higher expected returns.

The best approach is not to predict the short-term gyrations.  Have your shopping list handy and stick to your investment plan.  Our Investment Committee regularly updates the prices of all asset classes where we would be buyers in the event of a decline or crash scenario.  This way, there is no question in the moment of what to do.

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

Dividend Investing: Small Payments Can Boost Returns

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Owning shares of stock or stock funds might increase the value of your portfolio in one of two fundamental ways: capital appreciation (i.e., price increases) and dividend payments. Of the two, capital appreciation carries the greatest potential for return, but it also carries the greatest potential for loss. And any gains or losses are only reaped when you sell your shares.

By contrast, dividends typically offer more consistent modest returns that are paid while you hold your shares. For this reason, dividends have long been popular with retirees and others who are looking for regular income. But focusing on dividends can be appropriate for almost any investor, especially if dividends are reinvested to purchase additional shares. Although reinvesting dividends from individual stocks may not be cost-effective, mutual funds and exchange-traded funds (ETFs) generally offer an option to reinvest dividends and/or capital gains.

Growth and volatility

In general, more established companies tend to pay dividends, and these companies may not have as much growth potential as newer companies that plow all of their earnings back into the company. Even so, dividends can boost total return. A 2015 study found that dividends had accounted for about onestock

-third of the total return of the S&P 500 index since 1956, with the other two-thirds from capital appreciation. In the fourth quarter of 2017, more than 80% of S&P 500 stocks paid a dividend with an average yield of 1.87% for the index as a whole and 2.24% for dividend-paying stocks. Many mid-size and smaller companies also paid dividends.1

Because dividends are by definition a positive return, even during a down market, dividend-paying stocks may be less volatile than non-dividend payers. However, dividend stocks tend to be more sensitive to rising interest rates; investors looking for income may move away from stocks if less risky fixed-income investments offer comparable yields.

Quarterly payments

Dividends are typically paid quarterly in the form of cash or stock. The amount is set by the company’s board of directors and can be changed at any time. Dividends can be expressed as the dollar amount paid on each share or as yield — the annual dividend income per share divided by the current market price. When the share price falls, the yield rises (assuming dividend payments remain the same), enabling investors who reinvest their dividends to buy more shares that have the potential to grow as market performance improves.

Investing in dividends is a long-term commitment. In exchange for less volatility and more stable returns, investors should be prepared for periods where dividend payers drag down rather than boost an equity portfolio. The amount of a company’s dividend can fluctuate with earnings, which are influenced by economic, market, and political events. Dividends are typically not guaranteed and could be changed or eliminated.

The return and principal value of all investments fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Supply and demand for ETF shares may cause them to trade at a premium or a discount relative to the value of the underlying shares.

For assistance with planning for your financial future, contact Robert Coode at rdcoode@smcofinancial.com or call us at 440-449-6800.

Mutual funds and ETFs are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

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The Browns and Investor Behavior

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A passion around here is football.  We love talking about the Cleveland Browns, the NFL, and the analytics teams use to make better informed decisions.

Any Browns fans knows how much losses hurt, we felt plenty of pain the last few years. While commentators often refer to teams that ‘find a way to win,’ the Browns always hit a new low in the level of losing.  The 2018 season was such a revelation, what a better feeling!

In the latest news, we love the Freddie Kitchens hire.  He upended much of the conventional football wisdom, that offenses need to establish the run to succeed. Kitchens reversed this, calling aggressive passing plays to eventually set up game breaking runs. The FiveThirtyEight website just wrote a great data driven piece on this, You Called a Run on First Down. You’re Already Screwed.  Also, having some guy named Baker Mayfield execute these plays with pinpoint accuracy helped a little bit too.

The Kitchens head coaching hire was important.  If Freddie was just the Offensive Coordinator next year and repeated the success of the past 8 games for the Browns offense, he would likely have been offered a head coaching job next year. The loss of a successful coach would have hurt quite a bit, no matter who might have replaced him.

If you have ever been to the Aurum offices or talked to one of our advisors, you will know behavioral finance is a passion. The intersection of psychology, money, and investment decision making is so not only interesting, but also vital to long-term financial plans.

The chart below shows the behavior gap of returns in different asset classes and actual investor returns. While the S&P 500 Index returned 8.19% the last 20 years, investors earned 4.67% in equity funds (highlighted in yellow).

Our main objective is helping clients achieve their definition of financial success, and a major part of this is closing the behavior gap.

From a pain and pleasure standpoint, behavioral finance has taught us that while gains feel good, the same amount in losses hurts twice as much!  In our brains, the same receptors that feel physical pain respond in the same way when we see temporary financial losses.

The behavior gap was on display in December when stocks were falling sharply.  Because of the pain of loss, investors sold stock funds at the greatest rate ever (some hedge funds and investors may have been forced sellers due to margin loans being called).  According to Ned Davis Research, equity mutual funds and exchange traded funds had redemptions of $94 billion.  This was clearly not a part of a long-term investment plan but a reaction to the market volatility.

—-

Like many other professional sports franchises, the Browns took a long view to rebuilding. This included acquiring player contracts at favorable terms, building strength across the lineup, trusting the process, and patience (a lot of patience).

Similarly, investment strategies succeed over the long-term due to acquiring assets at favorable values, diversifying, sticking to a process, and patience.

Behavioral finance applies to sports just as much as investing. We cannot wait until next season.

—-

Important Information Disclosure

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Aurum Wealth Management Group, LLC-“Aurum”), or any non-investment related content, made reference to directly or indirectly in this tweet will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this tweet serves as the receipt of, or as a substitute for, personalized investment advice from Aurum. Please remember that if you are an Aurum client, it remains your responsibility to advise Aurum, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Aurum is neither a law firm nor a certified public accounting firm and no portion of the tweet content should be construed as legal or accounting advice. A copy of Aurum’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please note that Aurum does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Aurum’s web site or tweet or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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