Reacting To Market News
“The news tricks us because it is compelling and tells a story. Our mind instinctively estimates risk based upon vividness and recency…In order to counteract what we are feeling, we need to pull away from the media and the behavioral biases it exploits in us, and focus on what the data reveals.” (Marshall R. Jaffe)
“Short-term trading conditions remain at the highest risk level…Long-term trading has also returned to the highest risk level…Fundamental analysis remains strongly bullish. Earnings are great, prices are lower, and there is even less competition from bonds. We reduce fundamental positions (as we did in 2011) when we get a warning from the recession or financial stress indicators, not merely as a reaction to technical signals. At this point there are no significant fundamental warnings.” (Jeff Miller)
Sharpe Ratios And Recessions
“All in all, years with negative Sharpe ratios - like 2018 - tend to be followed by positive years outside of recessionary environments. At this point, I still view a domestic economic recession - defined as consecutive negative quarters for GDP growth - as quite unlikely in 2019.” (Ploutos)
From Trade War To Currency War?
“After four rate hikes in 2018, the Fed could actually start cutting rates by next summer. In turn, U.S. rate cuts will forcefully push down the dollar. Unfortunately, neither China nor Europe is in a position to tolerate this… Make no mistake - the next U.S. recession is likely to trigger a global currency war (i.e., competitive devaluations). Importantly, it is no longer the U.S.-Japan but the U.S.-China exchange rate that will dictate global fortunes in 2019 and beyond.” (WisdomTree)
The Antifragile Portfolio
“The benefits of designing an antifragile investment portfolio are only appreciated when everything seems to be going wrong. Instead of breaking during times of massive chaos, massive volatility, and a multiplicity of disorder, the antifragile portfolio actually benefits. While the fragile portfolio is vulnerable to losses, the antifragile portfolio is poised for gains.” (ETFguide)
“A major oil price shock starts to affect equity markets in real time, not just as a leading indicator. Look back a year on any given day during humdrum times, and you won't find much of a relationship between oil prices and stock returns. When oil prices are well below their five-year average, however, oil prices and stock performance move in lockstep. When oil falls, so do stocks. When oil rises, stocks breathe a sigh of relief, and rise as well.” (AllianceBernstein)
Thought For The Day
A regular reader has reached out with an intriguing question, which I paraphrase (for the purpose of brevity): Should an investor ideally seek a different financial advisor in retirement from the one who helped him reach that phase?
In particular, this reader is of the view that the investor’s concerns and needs differ greatly during these two stages of the financial life-cycle, and it may serve investors better to have different advisors, different strategies and different fee models (i.e., lower remuneration) in each of these phases.
I will take a stab at this, but I hope financial advisors with greater experience will chime in with their thoughts. Under the current dominant fee-based model, this subject would seemingly be anathema to advisors because the asset-based fee is generally near its peak for retiring clients who begin to draw down their portfolios. But it’s senseless to not give this or any other idea a fair hearing. Advisors enjoy no monopoly and if the idea of a Phase II advisor, with a reduced fee, makes sense to consumers, you can be sure somebody in Advisor Land has built or will build a model around it.
First, what are the key differences between pre- and post-retirement financial advice? The earlier phase is all about advance planning for major life expenses such as retirement, home purchases, and college costs. More broadly, it is about accumulating as much wealth as possible. The later phase involves providing the client with income on which to live while managing the portfolio, which is generally dwindling, except in favorable circumstances where the withdrawals are small as a percentage of the overall portfolio and the market cycle is conducive to growth.
While it is true that each phase centers on different lifecycle priorities – with retirement being the key to the former and healthcare expenses and generational transfer issues as focuses of the latter – I see an overall unifying theme in both, and it seems to me that a competent financial advisor should oversee the full lifecycle.
What both have, or should have, in common is a focus on paying the client. Retirement is all about receiving an income as a substitute for the cessation of the paycheck that comes with employment. That income is funded by decades of previous paychecks if and only if the worker “pays” him or herself first. Today’s underfunding crisis is the result of people succumbing to the pressures of the moment and neglecting to sock away present earnings for future benefit.
So the first phase involves paying one’s future self and the second paying one’s present self. Both benefit from experience managing investments, with the former emphasizing long-term growth, which is also vital to the second phase if the first one produces a surplus of savings; and if not, income generation would be the key skill needed for the latter phase.
It makes sense for one person to oversee these related processes, with possibly one difficulty, which ironically lies in the sensitive area of advisor compensation. Based on an asset-based fee model, the client and advisor have the same incentive to see the highest level of assets possible. But during the withdrawal phase, the advisor, at least theoretically, may feel at odds with a client who wants to distribute the funds to philanthropies or heirs not under the advisor’s management.
Practically, I doubt most advisors would have anything to say in opposition to the client’s wishes, though I’ve heard a few horror stories over the years. Sometimes there’s a pigheaded branch manager behind the scenes leaning on the advisor to make the account more “productive,” by pressuring the client to make investments that perform nicely for the firm, but less well for the client. Investors need to be aware of this hazard, and deal with advisors who demonstrate a genuine fiduciary commitment.
As far as the lower fee my questioner inquired about, retirement income strategies are actually more complicated than the standard portfolio management seen in the accumulation phase. And in any case, the real value of the advisory service in that phase is generally a sense of accountability, and sometimes behavioral coaching. The second phase may be where most of the investment management skill and advice reside.
So I don’t see any particular reason for lowering the fee, which may decline in any event as asset levels recede. The real imperative in this and any scenario involving the employment of professional financial advice is finding a person of knowledge, wisdom and integrity. If you can find that, the advisor’s fee will likely be worthwhile.
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