Category: Personal Finances

29
Sep

How Have I Changed?

Content provided by Rusty Vanneman, CFA, CMT, Chief Investment Officer

I’m often asked by investors, now that I have 30 years in the industry under my belt, how I have changed as an investment professional over the years.

It’s a good question and, frankly, it should be asked of every investment manager and advisor. The answers will likely be nuanced and perhaps not as easy to discern as trying to find the difference in the following photos:

***

Could you spot the difference?

So, how have I changed as an investment professional? At the core, I think I have always been a value-oriented investor with a contrarian sensibility. That has never changed. My personal attributes and my mission haven’t changed either.

While my analytical and portfolio management skills have surely been refined by years of experience, including multiple bull and bear markets (both in absolute and relative terms), I don’t think my peers, associates, or clients from the early years in my career would be surprised at what they see in me now.

What has changed the most is I have come to fully realize that being a good investment professional isn’t just about a number or portfolio return. The true goal is creating success for investors through my overall portfolio management. That means building attractive portfolios and providing the necessary communication and service to support the investors’ experience.

Let’s break that last sentence down.

I believe an attractive portfolio behaves as an investor expects. It doesn’t surprise or disappoint investors. The portfolio behavior is key. Does it behave as expected when prices move higher? Does it behave as expected when prices move lower? Surprising behavior, even when the markets go up, doesn’t necessarily provide comfort.

Creating an attractive portfolio goes beyond the selection of stocks and bonds. It also involves communication. Some recent feedback from advisors was that our investment team’s communication at CLS was commonsensical and transparent. Bam. That’s exactly what we strive for.

I believe successful communication should:

  1. Explain how markets work and educate investors. I have found my presentations on market history are way more useful to investors than the reviews of economic charts that I used to emphasize early in my career.
  2. Manage expectations in the context of the current market environment. For example, if valuations are high, such as they are now, expected returns should be lowered. Investors often get too high or too low. The key is to educate and manage expectations and bring investors back to center and back into balance.
  3. Maintain regular and reliable communications — and provide access at all times.

Early in my career, when I worked at Fidelity Management and Research in Boston, I had an opportunity to ask the head of the department, Gary Burkhead, who had such notables as Peter Lynch, Jeff Vinik, Joel Tillinghast, Will Danoff, and many other great investment minds and managers work for him, what made a great manager. He said it wasn’t the brilliance of managing a portfolio, it was the ability to communicate and keep investors confident and comfortable in their capabilities through all market environments. I always remembered those words. But, to be honest, I didn’t completely embrace them until years later when I learned that success wasn’t determined in my portfolio’s returns, but in my clients’.

3019-CLS-9/29/2017

18
Aug

Some Trading Maxims That Influenced My Investing

Content provided by Rusty Vanneman, CFA, CMT, Chief Investment Officer

Years ago, I worked with bond and currency traders around the world (mostly in New York City, Chicago, and London), providing trading recommendations and market commentary every 20 minutes during market hours. The work environment was fast-paced, fun, and absolutely awesome in terms of being totally immersed in the markets. I learned a ton and made many friends that I still have today.

But, that frenetic approach to the markets is nothing like how I invest these days, professionally or personally (which both are basically the same). It’s also not how I recommend anybody invests. It’s simply too crazy and demands too much time, emotion, and expense. It’s a tough game to play, and particularly so for any duration. There aren’t many old traders.

(To be clear on definitions, I define trading as an inherently short-term activity. One may hold a position for only days, or as short a time period as minutes or even seconds. Investing meanwhile, is a long-term activity, measured in years, if not decades).

Nonetheless, there were many valuable principles I learned that influence how I think about the markets today. Here are three market maxims, and why I think they’re important:

  1.     “Let your winners run, and cut your losers short.”

This is probably one of the most important keys to successful trading or investing.

For starters, many investors simply hold on to their losing positions too long, letting them get much deeper in the process. They might be emotionally attached to the position. Or, they have too much pride. Or, they don’t want to be wrong. In some cases, substantial losses result, often sabotaging overall portfolio returns. There is no reason this should happen in a taxable account. One could simply harvest tax losses to offset future realized gains. If the positions are held in non-taxable accounts, there should still be a disciplined process in place that will help investors get out of losing positions. Stop losses, regular reviews, or checklists are three tools that could be used.

Losses are not the only problem. Many investors like to realize gains in winning positions too quickly. From an emotional standpoint, it’s often satisfying to take the gain. It’s a win! Money in the bank. But, most successful investors attain success from their long-held positions. The big winners have an outsized impact on their overall portfolio success.

        2.    “The market moves in the direction that causes the most pain.” Or, on a related note: “What is comfortable is rarely profitable.”

Consensus thinking is wrong so often on Wall Street, it is amazing people continue to invest in what they think is “safe” by investing in what is popular. In my experience, the market moves in the direction most don’t expect — the direction that causes the most pain.

This actually makes sense. When there is an imbalance of emotion in a particular investment and investors are positioned accordingly, expectations make the investment become vulnerable to a reversal.

For instance, if most investors think a particular technology company will continue to grow at a spectacular earnings growth rate (let’s say 50% for example, which would be a supremely high expectation since the average company has pulled in earnings growth closer to 6% over the last 90+ years), they may bid up the company’s stock price and valuation. So, what happens when the growth rate is actually 50%? Perhaps not much. It was already priced into the stock price. Now, what if the growth rate is only 40%? That is still spectacular growth, but it’s below the stock’s expectations and what valuations warrant, so it’s probably a poor result for those who own the stock. And, what if earnings growth falls toward the long-term average — like all companies ultimately do? Not good.

        3.    “The train has left the station.”

This saying is a favorite of mine. It may not be as popular as the maxims above, but it captures a key principle behind many successful investments. And, quite frankly, it’s fun to say.

As it relates to investing, this saying refers to a situation where a particular asset class hasn’t gone anywhere in a while (it’s at the station), but has finally started to move and is likely ready to embark on a major trip. Many relative, value-oriented managers, such as CLS Investments, like to buy assets that have underperformed recently and are now undervalued and priced for relatively superior returns moving forward. Once the market starts to reverse the prior underperformance and appears to potentially (hopefully) have a long run of good performance ahead, then “the train has left the station”.

A good example, particularly in recent quarters, is emerging markets. After lagging for many years, emerging market stocks have started to outperform handily. We hope the train left the station for emerging markets last year and the sector has a long journey still to go.

The trading experience in the early years of my career helped me learn many techniques of successful (and not so successful) trading and investing and helped inform and shape my decision-making process. The maxims above are three of the most impactful I’ve learned thus far. Stay tuned for more in future blogs!

2827-CLS-8/10/2017

 

04
May

CLS Answers Your Questions

Content provided by Case Eichenberger, CIMA, Client Portfolio Manager

I’ve received a few thoughtful questions from advisors this week, and I’d like to address them as I believe they may be on the minds of many CLS clients.

  1. How will President Donald Trump’s tax plan affect the economy and how are we positioning portfolios?
    • The Story: Last week, Trump unveiled a broad package of tax reforms that aims to spark a sustained 3% growth rate. The proposal includes cutting the corporate tax rate to 15% (currently 35%), lowering individual rates, raising standard deductions to benefit the middle class, and repealing estate and alternative minimum taxes. Tax cuts have generated mixed results in the stock market, and the reforms must clear Congress first, so the potential impact is yet unclear. Trump has not proposed a method to pay for the cuts, which he hopes to enact in 2017, so they will add substantially to the federal deficit.
    • CLS’s View: Anything to spur economic growth is generally a good idea, and who doesn’t love lower taxes?! Tax cuts may help U.S. company earnings and allow them to grow into their already-high valuations. If growth improves and earnings continue to rise, we believe S. value stocks will benefit. Value is a current CLS theme, and we are overweight to this sector. We are also strongly tilted to financials as well as small- and mid-cap firms. Even though we have a slight tilt to large-caps, we are looking hard at smaller companies. Lower taxes should make smaller firms more competitive with larger ones as they derive most of their profits from within the U.S., while larger firms make much of their profits overseas and may defer their taxes.
    • Another View: Recently, a financial advisor asked me if the reforms happen and the economy and market shoot higher, am I worried our tilt to international stocks could be a bad call? The answer lies with diversification. Diversified portfolios mean CLS will hold some positions that will work well and some positions that won’t. But ultimately, we recognize policy doesn’t drive long-term returns; fundamentals and valuations do. Right now, U.S. valuations are high, which is a sign we should lower expectations and look for cheaper areas of the market. These are currently international stocks, which have performed terrifically so far in 2017.
  2. Are we worried about geopolitical risk, such as that posed by North Korea?
    • The Story: North Korea appears to be getting more active in terms of its capabilities to develop, test, and launch long-range nuclear weapons that have the ability to hit U.S. ships in the Pacific and possibly reach as far as San Francisco. Most experts, however, doubt it could accurately accomplish this and believe the U.S. would be able to stop an attack before it started. The U.S. and China are currently in talks on ways to handle the situation.
    • CLS’s View: There are always reasons not to invest, and when the market dips, negative stories show up more often and seem to make more sense. But, at CLS we don’t run to cash based on news headlines or short-term volatility. We typically buy what we like during times of stress, and at the moment, we very much like emerging markets (up 14% this year). In fact, even with North Korea acting up again (when has it not?) the countries that surround it have performed even better. China is up 16%, South Korea is up 17%, and Asian emerging markets are up 17%.
    • Another View: North Korea is not the only geopolitical risk in the world. France, Italy, Great Britain, and even the U.S. have the potential to roil markets. But, because there are always reasons to scare out of the market, it’s essential to have a plan in place. As the saying goes: “Investing is simple, not easy.” We must be disciplined and not react to stories; instead we must look at fundamentals and valuations.
  3. Given a normal CLS core portfolio, do we feel our allocation to international stocks right now is high enough?
    • The Story: An advisor asked me this question recently, and if I could have, I would have hugged him through the phone. It’s great to hear our advisors and clients share our vision for a portfolio. I told him, at 50% of equity, our international position is 10 points higher than our policy benchmark, but we have a view to add more (more on this can be found in CLS’s perspectives binder).
    • CLS’s View: We all know why we like international stocks: higher yield, lower starting valuations, improving fundamentals, weakening dollar, etc. Add to that improving momentum, as international stocks have outpaced U.S. stocks so far this year, and continue to approach a technical level of support.
    • Another View: We will always have a tough job ahead of us. Our belief that investing overseas is beneficial goes against most investors’ home country biases. We also believe buying assets that are on sale is beneficial to investors’ bottom lines long-term, which can often make our clients uncomfortable. But, we work with clients to help them stay comfortable throughout the process; we try to educate them and help prevent their emotions from getting the best of them. This is how our advisors and CLS earn our fee.

If you have additional thoughts or questions, please reach out to me at 402-896-7004 or case.eichenberger@clsinvest.com.

2530-CLS-5/3/2017

17
Mar

The Timing Game

Content provided by Grant Engelbart, CFA, CAIA, CLS Portfolio Manager

The market is always full of diverse opinions, and after the recent rally and multi-year bull market we’ve seen, now is no exception. Let’s look at an example. We all have friends who are a little bit crazy – let me introduce you to a couple of mine. Meet Timey McTimerson (“Timey”) and Chasey McChaserson (“Chasey”).

Timey gets very nervous when the market (as measured by the S&P 500) has a rolling one-year performance more than 20%. And so, when performance is high, he sells out for a month and reassesses his portfolio the next month. Chasey likes to see strong returns as a sign the market is heating up. He only invests when the rolling one-year performance is more than 10%. If it’s not, he sits on the sidelines. Now, these friends of mine might seem crazy at first glance . . . but are they really? It is very interesting the number of bulls and bears that come out of the woodwork after a large move in the market.

Chasey and Timey’s returns since 1990 are shown in the graphic below. Timey has more than quadrupled his money in 27 years, and Chasey has nearly six times what he started with. Scarily, both returns are roughly similar to those of the Morningstar Tactical Allocation category. However, an investor who sat in a value-focused index fund turned that dollar into almost $13 without lifting a finger (it’s worth mentioning that the S&P 500 would have returned $11.50). The point is: Timing strategies – even those much more complex than these – may work once or twice, but they hurt investors over the long run.

The value of financial advisors is huge to helping investors resist these temptations. It’s amazing how many individual investors only want to buy what has worked, or get nervous for reasons unknown. But we all can fall into this temptation, as overconfidence reigns supreme amongst financial professionals. Find the risk you are comfortable with and the approach that makes sense, and your goals will follow.

The “timing game” is, in fact, a fool’s one. Just ask my friends!

The market is always full of diverse opinions, and after the recent rally and multi-year bull market we’ve seen, now is no exception. Let’s look at an example. We all have friends who are a little bit crazy – let me introduce you to a couple of mine. Meet Timey McTimerson (“Timey”) and Chasey McChaserson (“Chasey”).

Timey gets very nervous when the market (as measured by the S&P 500) has a rolling one-year performance more than 20%. And so, when performance is high, he sells out for a month and reassesses his portfolio the next month. Chasey likes to see strong returns as a sign the market is heating up. He only invests when the rolling one-year performance is more than 10%. If it’s not, he sits on the sidelines. Now, these friends of mine might seem crazy at first glance . . . but are they really? It is very interesting the number of bulls and bears that come out of the woodwork after a large move in the market.

Chasey and Timey’s returns since 1990 are shown in the graphic below. Timey has more than quadrupled his money in 27 years, and Chasey has nearly six times what he started with. Scarily, both returns are roughly similar to those of the Morningstar Tactical Allocation category. However, an investor who sat in a value-focused index fund turned that dollar into almost $13 without lifting a finger (it’s worth mentioning that the S&P 500 would have returned $11.50). The point is: Timing strategies – even those much more complex than these – may work once or twice, but they hurt investors over the long run.

The value of financial advisors is huge to helping investors resist these temptations. It’s amazing how many individual investors only want to buy what has worked, or get nervous for reasons unknown. But we all can fall into this temptation, as overconfidence reigns supreme amongst financial professionals. Find the risk you are comfortable with and the approach that makes sense, and your goals will follow.

The “timing game” is, in fact, a fool’s one. Just ask my friends!

2344-CLS-3/14/2017

10
Mar

March Madness

Content provided by Marc Pfeffer, CLS Senior Portfolio Manager

March is one of my favorite months of the year. The days are getting longer, the NASCAR season is gearing up, baseball’s spring training is underway, and, of course, basketball is readying to take over our televisions for one “mad” month.

This year, the markets are making March even more exciting. We have hit new highs in all three indices of the U.S. stock market, and the Federal Reserve (Fed) has finally convinced us it is serious about raising short-term interest rates. Personally, I think that is a good thing. Why? It means the economy is on very solid footing. Also, as a saver, I am happy to start getting some income in my savings accounts and other short-term investments that I have sitting around (waiting to pay for those dreaded college bills).

And I’m not the only one excited to see rates rise. I was born in the last year of the so-called “baby boomer” generation, which is considered those born during the post-World War II baby boom that started in 1946 and ended in 1964. 76 million U.S. children were born during this time span. By some accounts, baby boomers control more than 80% of personal financial assets and account for more than 50% of all consumer spending. As baby boomers start to retire, it is anticipated they will become more conservative as they enter the next stage of life. The house will be paid off and possibly sold, the amount of travel will increase, and helping out the kids and grandkids financially will somewhat slow. These retirees will depend on cash and short-term investments to sustain their lifestyles, and these assets have returned virtually nothing since 2008.

On behalf of my baby boomer generation, I can say I will be happy to see rates moving up as that part of my personal balance sheet starts to earn some money. Here’s to continued economic growth, and kudos to the Fed for seeing the signs that we can finally take interest rates higher.

2311-CLS-3/7/2017

29
Dec
18
Nov

Financial Psychology 101

Shot of a young male teacher giving a lesson to his students on the lecture hall

Content provided by Kostya Etus, CFA, CLS Portfolio Manager

Psychology and human behavior are some of the most interesting and challenging aspects of financial management. Understanding the motivations behind a client’s behavior and how to effectively encourage him or her to develop healthy financial habits can mean the difference between success and failure for our clients — and ourselves.

Recently, I attended a wealth management conference and picked up a few tips on financial psychology. While most of these deal with client and financial advisor interactions, they can be used in other situations. I have actually tested some out on my wife in our conversations about finances (which in the past have not ended well), and they work!

  • Create a relaxed atmosphere.

A desk between you and a client creates stress, so use a living-room-type setting for a better conversation. Also, scrolling tickers (such as those on CNBC or ticker boards) create anxiety, so turn them off.

  • Develop an open rapport.

This can be facilitated through body language: an open posture, smiling, eye contact, mirroring (do what they do, talk like they talk). Basically, do what you would do while flirting at a bar (well, not exactly what you would do).

  • Remember, people don’t change.

Those who are married know this pretty well. Don’t try and force people to change their spending and saving habits. Telling someone they spend too much is discouraging. And, they probably already know they spend too much, which is why they are talking to you. Help them adapt, and guide them to want to do it themselves (e.g. help them visualize something to save for).

  • Don’t pepper people with questions.

Questions can sound like accusations (“Why did you spend so much last month?”) and create more stress and resistance. Use “tell me more” statements to decrease resistance. For example, if someone says, “I spend too much, and I don’t think I save enough for the future” (the two most common client concerns), you respond with: “Tell me…

  • …what happened to make you feel things need to change.”
  • …about a time when you have successfully faced a challenge like this.”
  • …what you are ready to do now.”

These statements help convey a sense of importance, confidence, and readiness.

  • Other best practices:
    • Wear glasses: They make you look smarter and build confidence.
    • Lower your voice tone: A higher tone is perceived as aggressive.
    • Give a drink and take a drink (water, of course): It helps people relax.
    • Show and tell: Use pictures and graphs (preferably ones that start at the bottom left and end at the top right), use stacks of coins or dollars to represent growth, and use real numbers to show outcomes (exact dollar amounts that need to be saved and at what age).
    • Visualization: Help the client visualize an ideal retirement that is personalized to him or her (the dream is not a drink with an umbrella on a beach for everyone). Effective visualization can lead to more saving.

The conference had loads of other useful insights. Here are a few of the most helpful:

  • Count your cash.

People feel better when they are counting how much money they have (give it a shot, take out your cash and count it) but worse when counting expenses. A useful application here might be: Don’t try to figure out how to reduce expenses by counting up credit card transactions.

  • “Save more” might make us spend more.

Marketing slogans and signs that highlight saving actually promote spending. For example, Walmart’s “Save Money. Live Better.” slogan encourages customers to spend more because they believe they have saved. So simply telling clients to “save more” is not going to be very effective.

  • Don’t trust your primal brain.

99% of brain function is automatic; it works off primal instincts. For example, when people go to conferences, they typically sit as far to the back as possible. That is a subconscious decision, which has been engraved in our DNA over thousands of years: we want to be closest to the exit in case a predator appears. But when handling money, we shouldn’t rely on our instincts. We should use the logical portion of our brains. Well, the logical portion of our brains shuts down when we are stressed. So, don’t discuss finances after a hard day.

  • Watch out for the tribal effect.

The follow-the-herd mentality can be a powerful urge. Our primal instincts tell us if we are away from the herd too long, we will die. So if investors see their friends making money on a hot stock or by flipping houses, they might think they should be doing the same thing — another example of when it’s not a good idea to trust our instincts (especially when dealing with investments).

  • Be your own person.

Most people manage money the way their parents did. For example, if someone lived through the Great Depression and lost all their money in the bank, they would have a strong aversion to putting money in the bank, and that could be passed down to their children. As times change, we all need to be open to new ideas and not tied down by old beliefs.

  • Cash decreases spending.

Credit card companies have gone above and beyond to ensure that nobody uses cash anymore. When you have cash, it is something physical that you can use up; credit cards (or mobile phone transactions) make you feel like you have no limit. That said, the decrease in the use of cash seems to have contributed to a decrease in crime over the last two decades.

I hope you found this useful and can utilize some of these tips and tricks in your personal and professional lives. Thanks for reading.

2668-CLS-11/15/2016

15
Nov
09
Nov

Election Reflection

The inauguration of President Barack Obama, January 20th 2009.  Unrecognizable crowds in the Washington DC Mall.

Content provided by Grant Engelbart, CFA, CAIA, CLS Portfolio Manager

It’s no secret that markets hate uncertainty. Trump presents uncertainty – and markets reacted that way overnight. S&P 500 Index futures were down nearly 5% at one point, but have come screaming back to trade positive on the day. Sound familiar? Following the surprise Brexit vote, markets reacted in similar fashion.

Why the snapback? Despite the uncertainty, Trump has made it clear that he wants fiscal stimulus. Whether through infrastructure spending or tax cuts, in general these policies are supportive of economic growth. Interestingly, one of the largest gainers on the news was copper – moving higher by nearly 4%. Copper is a classic gauge of global economic growth.

Despite the lack of historical precedent, history can give us some guidance. On average, markets have traded lower the day following a presidential election, so it shouldn’t be all that surprising that we opened lower. It is commonly suggested that a Democrat in the White House is favorable for stocks, but actually, historically, a Republican in the White House with a friendly Congress has been quite strong for equities.

Regardless of your feelings on the election, keep in mind that one person does not run our country. The forethought of the checks and balances system has gotten us to where we are today. As global asset allocators, we will continue to search for opportunities in all asset classes – and there are plenty of opportunities in today’s market. There will always be something to worry about and reasons to keep money on the sidelines.

 

 

The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change.  Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. This information is prepared for general information only.  It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report.  Past performance is not a guide to future performance.  Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk.  These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.

 

2640-CLS-11/9/2016

01
Sep

Why Investors Should Source Income Globally

Metal globe resting on paper currency

Content provided by Joe Smith, CFA, CLS Senior Market Strategist

Low interest rates mean one simple thing: the search for yield and income is a very real and difficult challenge for investors. With many of the world’s economies offering low, zero, or even negative interest rates, the ability for investors to generate income in portfolios without taking on too much risk has become a real concern.

As rates have remained low, investors have pushed into stocks as a possible source of higher income. (The average dividend yield for U.S. stocks is around 2%, while the U.S. 10-year Treasury yields around 1.5%.) Although dividend yields in the U.S. are almost 0.5% higher than U.S. Treasuries, U.S. stocks look expensive, currently trading on average at a 26% premium. This means investors are likely taking more risk than necessary to capture that yield premium relative to bonds.

Instead, investors should take a more global approach to finding income. Why? International stocks currently offer a dividend yield of just over 3.1% in the aggregate, implying an additional income spread over U.S. 10-year Treasuries of 1.6%. In fact, 92% of the international equity markets offer dividend yields with more compelling spreads to the U.S. 10-year Treasury than U.S. stocks provide.

Dividend Yield Minus US 10 Year Treasury Yield

These dividend yields are even more compelling once investors factor in the price for stocks in these countries. On a composite, dollar-weighted average basis, stocks with dividend yield spreads to Treasuries greater than those for U.S. stocks are trading at a 35% discount. That means investors can source higher levels of income at more reasonable prices and with less risk of those stocks becoming overbought in the near future.

Composite Average

Key takeaway? Investors should look abroad to find additional sources for their income needs. A balanced and diversified approach to income can help investors overcome the challenges of sticking to U.S. stocks, which are now priced well above international, as a traditional source of income.

 

The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change.  No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC.  Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such.  All opinions expressed herein are subject to change without notice.  This information is prepared for general information only.