Four Things: What Investors Shouldn’t Do Now

By Jason Zweig, Wall Street Journal, Aug. 21, 2015

Stocks slumped world-wide this week, with U.S. and European markets off more than 5% and the Shanghai Composite Index losing more than 11%. Oil prices also skidded, dropping more than 6%.

Traders feared that slowing growth in China, the devaluation of the Chinese currency and the overhang of too much debt could stifle global economic recovery.

Here are four things you should know about how not to react.

Don’t fixate on the news.

The more often you update yourself on the market’s fluctuations, the more volatile and risky it will appear to you—even though short, sharp declines of 5% to 25% are common.

The U.S. stock market has, in the past few years, been extraordinarily placid by historical standards. Even the sudden drops of the past few days are well within the long-term norm.

Fixating on fluctuations in the short term will make it harder for you to remain focused on your long-term investing goals.

Don’t panic.

While stocks are certainly not cheap, they aren’t wildly overpriced, given today’s levels of interest rates and inflation. U.S. stocks are trading at 24.9 times the average of their long-term, inflation-adjusted earnings, according to data from Yale University economist Robert Shiller—down from 27 in February.

Over the full sweep of bull and bear markets in the past 30 years, they have traded at an average of 23.8 times adjusted earnings.

Don’t get hung up on the talk of a “correction.”

A correction is typically defined as a decline in price of 10% on a widely followed index such as the S&P 500 or Dow Jones Industrial Average.

The term doesn’t have official status, however: Until fairly recently, declines of 5% and even 15% or 20% were often called “corrections.” A market decline of 10% has no real significance in and of itself.

What matters is the outlook for the future; that doesn’t depend on whether the market is down about 10.2% rather than 9.8%.

Don’t think you—or anyone else—knows what will happen next.

After a market drop, or at any other time, no one knows what the market will do next.

The one thing you can be fairly sure of is that the louder and more forcefully a market pundit voices his certainty about what is going to happen next, the more likely it is that he will turn out to be wrong.

Stocks could drop another 10% from here, or another 25% or 50%; they could stay flat; or they could go right back up again.

Diversification, patience and, above all, self-knowledge are your best weapons against this irreducible uncertainty.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Update on Municipal Bonds

By Rodney Johnson, Senior Editor, Economy & Markets

Municipal Bonds.  This boring corner of the investment arena generally has all the excitement of a pet rock circus, but recently that’s changed. The new worries in the muni market might be troubling for some, but they give the rest of us a chance to snag assets on the cheap.

The long-term default rate in municipal bonds is a fraction of one percent. Only 0.17% of the bonds in the S&P Municipal Bond Index defaulted in 2014. This followed an even lower rate of 0.11% in 2013.

Based on this information, the risk of default appears exceptionally low. But the historical numbers don’t tell the whole story. There are two big caveats.

A spectacular default in one city can cloud the entire market. Besides that, municipalities have new challenges that they have not faced before.

As for big defaults in the news, Detroit comes to mind. I’ve written before that its bondholders were treated worse in the bankruptcy than the letter of the law allowed. They brought home pennies on the dollar, while other creditors that were subordinate were made whole.

This is a recurring theme across the country, so it’s no surprise, but it still serves as a warning to all municipal bond investors.

General obligation bonds state that the payments to bondholders are backed by the full faith and credit of the issuer, but in times of crisis, issuers don’t hold up their end of the bargain.

Bond buyers are forced to accept less than they’re owed, and so far haven’t prevailed when they challenged these outcomes. Creditors of cities like Pritchard, Alabama, Central Falls, Rhode Island, and Stockton, California have all suffered similar fates.

A large bankruptcy on the horizon is Puerto Rico. In fact, it defaulted on its bonds last Monday. The U.S. territory can’t pay its bills, so now it’s calling on all “stakeholders” to negotiate in “good faith.”

In other words, they want bondholders to agree upfront to cut the face value of what the territory owes them. This is despite the fact that many of those bondholders own general obligation bonds – which, again, are backed by the full faith and credit of the territory.

Territory officials are putting investors on notice that even though their constitution states debts must be paid before all other creditors, the government won’t cut any operational expenses (salaries, services, etc.) in order to make good on their principal and interest payments.

Adding to the uncertainty unleashed by the proceedings in recent municipal bankruptcies and the developments in Puerto Rico are the ballooning costs of pensions and health care benefits that cities and states around the country are facing.

While unfunded pension liabilities are old news, the accounting board governing these entities only recently required that unfunded health care liabilities be included in city and state calculations of financial health.

The results are ugly. In addition to a trillion-dollar unfunded pension problem, it’s now clear that municipalities in the U.S. also have a trillion-dollar unfunded healthcare problem.

As these figures make it onto the financial statements, the fact that many cities and even a few states are bankrupt on paper will start to sink in with ratings companies, analysts, and investors.

While none of this is good news, it can have a good outcome.

The combination of high-profile bankruptcies, bondholder treatment in bankruptcy proceedings, the direction of negotiations in Puerto Rico, and the sudden addition of a trillion dollars in liabilities to books should produce enough uncertainty and concern in the municipal market to drive prices down and yields higher.

The negative news cycle could even cast a pall over all municipal bonds, giving investors a chance to pick up high quality names on the cheap.

This is where work and patience pay off.

The key to buying municipal bonds is the same as purchasing any other investment. Do your homework. The old way of buying bonds – look at the rating and pull the trigger – is dead. Anyone who trusts a rating deserves the outcome, whatever it is.

Instead, investors can and should review the finances of bond issuers and determine for themselves how likely it is the city or state will make good on its debts. I know the overwhelming majority of them will, but not all.

Once investors have found and purchased bonds issued by solid municipalities, then they must be patient. The negative news over municipal bonds won’t go away anytime soon.

This particular market will likely be roiled by turmoil as the problems in cities and states in tough financial positions, like Chicago and Illinois, come to the surface. But as long as investors did their homework and hold solid bonds, they won’t have to worry.

Their principal and interest will keep landing in their mailbox. And the best part is, they still won’t have to send any of it to the taxman.

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.472% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 10 August  2015). 

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

REITs Could Rebound from Here

By Tom Lydon, ETF Trends

Real estate investment trusts and related exchange traded funds have weakened in response to rising rate concerns. However, fundamentals may still support the market.

Over the past three months, the Vanguard REIT ETF (NYSEArca: VNQ) fell 8.9%, SPDR Dow Jones REIT ETF (NYSEArca: RWR) decreased 8.4% and iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) declined 7.9%.

Citigroup’s Michael Bilerman argues that after the sell-off, REITs have become increasingly attractive to net asset values, bonds and broad equities, reports Teresa Rivas for Barron’s.

Specifically, Citigroup analysts point out that healthcare REITs look better after the upward movement in interest rates weighed on recent performance. The sub-sector is especially sensitive to change sin rates because of its elevated external growth expectations and spread investing.

Hotels and lodging-related REITs also have solid fundamentals that remain intact, with improving demand, and will support the group through the second half of the year, Citi said.

Office REITs were weak over the second quarter, but Citi argues that the group could present opportunities for outperformance.

Citi is also overweight residential REITs as growth and valuations remain attractive. While new supply is coming online, demand for rental apartments is still high – recent data showed that apartment occupancy rates are at record highs.

Lastly, Citi sees increased demand among strips or mall-related retail REITs.

The various broad REITs ETFs allow investors to capture diversified exposure to these these sub-sectors. For example, VNQ includes 13.2% healthcare REITs, 7.4% hotel & resort REITs, 16.3% office REITs, 16.8% residential REITs and 25.1% retail REITs. RWR holds 18.4% apartments, 16.2%, regional malls, 12.4% healthcare, 10.8% office, 7.4% strip centers, 7.1% hotels and 3.9% mixed industrial/office space.

Additionally, investors would also be taking a broad view on economic growth with REITs investments. Some investment experts argue that since commercial property has a larger presence in the U.S. economy than REITs do in the equities market, investors could benefit from a 5% to 10% allocation to REITs to bring their investments more in line with commercial property’s significance in the overall economy.

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Vanguard REIT (VNQ) and Vanguard Ex-US REIT (VNQI) are components of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 6.01% (as of 5 July 2015).  

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.

Ride Those Real Estate Investment Trusts

By Richard Stavros, Investing Daily

Real Estate Investment Trusts are cheap now. The stocks have oversold, as investors overreacted to expected U.S. Treasury rate increases this year. Since the beginning of the year REITs are down 2.54% versus a 2% gain for the S&P 500.

And yet, the Federal Reserve doesn’t appear to be in any hurry to raise rates. Last week Fed Chair Janet Yellen said that she would raise rates this year only if the economy met her economic forecast.

Don’t bet on the economy catching fire anytime soon. A recent analysis by Bloomberg shows that since 2012 Fed policy makers have consistently overestimated the strength of the economy.

So, it’s possible that rate hikes will be more modest than expected. 

But even with rate hikes, REITs are a good deal, which gives us more faith in the Global Income Edge eight-REIT portfolio. REITs have been an excellent investment to preserve value during rate hikes, are good inflation hedges, and provide diversification because REITS don’t move in sync with the overall market.

For example, during rate hikes REITs have generated an average annual return of 11.4% over the six monetary tightening cycles that have occurred since 1979. And over the seven periods since 1979 when U.S. Treasury yields were rising, REITs generated an average annual return of 14.9%, according to a report by Cohen & Steers.

And three Wharton professors recently found the two assets providing the most dependable inflation protection have been commodities and equity REITs. Commodities equaled or exceeded inflation during 70.4% of high-inflation periods and equity REITs were close behind at 65.8%.

For example, inflation in the U.S. was 13.5% during 1979, the worst inflationary year since 1947. But dividend income from REITs averaged 21.2% that year, and total returns amounted to 24.4%.

So we hope investors will always keep in mind the value of diversification which REITs can bring, even as we recognize how powerful the promise of rate hikes in U.S. Treasuries can be to any income investor.

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Vanguard REIT (VNQ) and Vanguard Ex-US REIT (VNQI) are components of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 5.73% (as of 16 June 2015).  

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

The Case for Dividend-Paying Stocks, Now and Later

By ThinkAdvisor

Financial advisors concerned about the outlook for stocks given the length of the current bull market — now in its seventh year — expectations of a Federal Reserve rate hike and a slowing U.S. economy might want to consider favoring dividend-paying stocks for their clients.

In a recent note to clients, Goldman Sachs equity strategists wrote that dividends and buybacks will be “the sole contributor to the total return in stocks for the next 12 months” because stocks are expensive. The median stock in the S&P 500 is trading at 18.2 times earnings — the 99th percentile of historical valuation price-to-earnings ratio, creating a “limited scope for further upward expansion,” according to Goldman.

There are other reasons to favor dividend-paying stocks this year:

—The yield on the S&P 500 is 1.92%, which, according to John Buckingham, chief investment officer of Al Frank Asset Management, is competitive with the 2.2% yield on the 10-year U.S. Treasury. Moreover, stocks have a much greater potential for capital appreciation than Treasuries.

— Stock dividends have been rising and could rise more this year. Buckingham says 381 companies in the S&P 500 hiked dividends in 2013 and 375 did so last year, but “payout ratios are still relatively low so corporate America continues to have the capacity to increase dividends.”

Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, says companies paid out a record $93.6 billion in the first quarter, continuing a trend of rising quarterly dividends that began two years earlier and has room to grow.  “Investors are getting more than they ever got before, but that doesn’t mean companies are being generous,” says Silverblatt. “Companies are paying out only 37%-38% of GAAP earnings to dividend holders, but historically they paid out 52%.”

— Dividend-paying stocks, like many stocks, have historically performed well in past periods of rising rates, despite reports to the contrary, says Buckingham. The key for performance will be earnings. “If the stocks have higher growth rates, and can raise the dividends as interest rates rise, these stocks will be less sensitive to interest rates and likely a good place to be invested,” writes Ryan Wibberley, CEO of CIC Wealth, a financial advisory firm in the Washington, D.C. metro area, in Forbes. Six months before and 12 months after, stocks overall have gained ground, notes Buckingham.

But if stock prices fall this year—because of earnings disappointments, a long overdue correction or a Fed rate hike -- dividend-paying stocks could still perform relatively well because their payouts will cushion losses.

— Dividend-paying stocks outperform in the long run. Looking beyond this year, Buckingham says dividend-paying stocks are a better investment for the long term. From 1927 through 2014, dividend-paying stocks have had an annual total return of 10.4%, trumping the 8.5% for non-dividend payers, says Buckingham, citing data from famed value champions Professors Eugene Fama and Kenneth French. The larger the dividend, the greater the outperformance, says Buckingham, who hosted a webinar on "The Case for Value Investing in 2015 and Beyond," which focused largely on the appeal of dividend-paying value equities.

— Dividend payers are less volatile. The volatility of dividend payer, as measured by standard deviation, is 18.3% compared to 30.1% for non-dividend paying stocks. That could calm investors' fears during a market correction, which is not unexpected.

“Given the historical evidence, we believe that dividend payers deserve a large portion of any equity allocation,” says Buckingham.  He favors dividend-paying value stocks, which have outperformed growth stocks 80% of the time, though not lately. “The fact that value has underperformed increases the odds in favor of value versus growth,” says Buckingham. 

Longer term, says Buckingham, “while not risk-free, of course, neither value nor dividend stocks as a group have ever lost money for those who held for 15 years or longer.”

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Why You May Want to Be (and Stay) in Bonds

By Heather Pelant, Personal Investor Strategist for BlackRock.

Perhaps no asset class is as lingo-loaded as bonds. Fixed income, rising (or falling) yields, junk bonds, Fed tightening, TIPS, spreads, mortgage-backed securities – there’s no shortage of jargon for this supposedly “boring” investment that most of us own in our portfolios.

Bonds are admittedly complicated, and it’s easy to feel intimidated or confused by what’s happening in the news. Fortunately, you don’t need to be a numbers geek to be an informed investor. So let’s get past the industry-speak and focus on what you really need to know about bonds.

What are they?

My BlackRock colleague Matt Tucker regularly explores bond basics. In short, bonds are loans that investors make to governments, companies, pools of mortgage owners or many other types of issuers. In exchange for your money, the borrower promises to pay back the principal at maturity, with regular interest payments along the way. That interest income is a bond investor’s primary source of return, although bond prices can also appreciate or decline in the marketplace.

One important concept to understand is yield, which is the annual income on a bond, based on its market price; it’s sometimes used interchangeably with “interest rates.” Matt recently took a closer look at yield when discussing yield curve basics.

Today, yields are exceedingly low. In Germany, for example, some government bond yields are negative, meaning that investors are actually paying the government for the privilege of lending it money. U.S. yields are somewhat higher – around 1.9% for 10-year Treasuries – but the big question for bond investors right now is, how much higher they might go?

Why do people invest?

Investors look to bonds to meet a number of key financial goals. These are the top three:

Diversification. This should always be on everyone’s list. Bonds help serve as a true diversifier to a stock portfolio, meaning they almost always react differently to economic and financial conditions. If you go back to 1926 (88 years), stocks were negative in 24 calendar years. Bonds were negative in only two of those years. That divergence can help smooth out your overall returns, and add a cushion when stocks go down.

Income. The regular interest payments of bonds have historically provided a steady stream of investment income. With yields so low, however, investors have had to think differently about how to source it, either by taking on a little more risk or investing in bond funds that specifically target income.

Capital preservation. Bonds – specifically core, high-quality, intermediate-term bonds – have been significantly less volatile than stocks, making them a good anchor for your portfolio. Diversifying across different types of bonds can further help manage risks such as inflation, rising rates and default implosions, which can hurt bond prices.

How do I get in?

Most investors should own some bonds, at least for diversification. And investors have a wide field to choose from, whether it’s through actively managed bond mutual funds or low-cost exchange-traded funds (ETF), or a combination of both. 

How much, how many and what kind will depend on your own risk tolerance, financial circumstances, goals and so on. This is a great conversation to have with your advisor or someone else you trust.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Why International Diversification Matters Today

By Russ Koesterich, CFA, Chief Investment Strategist for BlackRock.

Given the breadth and diversity of the U.S. economy and market, it’s understandable that many U.S. investors feel comfortable keeping their money within U.S. borders. Indeed, over the past six years, U.S. investors have been rewarded for staying close to home.

Since the start of this bull market in March 2009, one of the longest in history, a 60/40 split of U.S. stocks and bonds would have been hard to beat. The S&P 500 has gained roughly 200% during this time period, while U.S. bonds have been surprisingly resilient.

However, while the tendency to invest close to home is understandable, it may not be optimal. Case in point: A big U.S. equity overweight has been less successful year-to-date, given the recent pullback in U.S. equities and particularly strong performance from Europe and Japan. While three months of relative performance shouldn’t change anyone’s long-term asset allocation, recent events are a useful reminder that U.S. outperformance isn’t pre-ordained and that it’s important to consider having exposure to international stocks. In fact, there are three reasons why international diversification matters now more than ever for U.S. investors.

Relative valuations.

A willingness to pay up for U.S. equities has resulted in several years of steady multiple expansion. While the current premium on U.S. stocks makes some sense in the context of low inflation and low rates, valuations look stretched relative to stocks in the rest of the world. This is particularly true based on the price-to-book (P/B) measure. Currently the P/B on the S&P 500 Index is roughly 75% higher than for the MSCI ACWI-ex U.S. Index. This is the highest premium since the market bottom in 2003. Longer-term metrics, such as cyclically adjusted price-to-earnings, or CAPE, ratios, are even more troubling, suggesting that U.S. stocks are likely to produce, at best, average to below-average returns over the next five years. The U.S. may have the best fundamentals, but U.S. equities have rarely posted stellar returns from today’s valuation levels.

U.S.’s declining share of world GDP.

While the U.S. is still arguably the world’s most dominant economy, its relative share of the global economy is shrinking. Thirty years ago the United States accounted for roughly one-third of global output. Today the number is closer to 20%. Depending on the exact methodology, China is now the world’s largest economy or soon will be. While China’s rate of growth is slowing, China along with India, Indonesia and many other emerging markets may continue to outgrow the United States and other industrialized countries for the foreseeable future. This suggests that owning a predominately U.S. portfolio underweights the potential dominant and fastest growing portion of the global economy.

The basic tenets of portfolio construction.

Finally, owning a portfolio solely focused on the United States may lead to sub-optimal risk-adjusted returns. In other words, investors may be taking on risk that could otherwise be managed with diversification. This is a particularly important point today as stock correlations have fallen to their pre-crisis level, suggesting a greater benefit to diversification. To be sure, diversification isn’t a magic elixir, and it may not protect against market risk or loss of principal. The biggest caveat is that it’s least likely to work when most needed, i.e. during a crisis. Instead, the benefits are derived, almost imperceptibly, over a multi-year time frame. But given the state of the U.S. market and economy, while international diversification may be a sensible idea for most U.S. investors, its benefits are even more likely to accrue in the coming years.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

What a Rate Hike May Mean for Stocks

By Russ Koesterich, CFA, Chief Investment Strategist for BlackRock.

By the end of the year, investors will likely be contending with the first Federal Reserve (Fed) rate hike in nearly a decade.

While the pace of monetary tightening is likely to be gradual, more than a few investors are worried about the equity impact of any marginal tightening, believing that the entire edifice of today’s bull market has been built on a foundation of cheap money.

I would agree with the view that monetary policy has been one of the principal catalysts and sustainers of this bull market. But I’m skeptical that an initial rate hike will herald the end of the rally, though history does suggest that it could result in a modest correction.

Not only is any tightening likely to be gentle and from an exceptionally low base, but tighter monetary conditions are generally associated with more volatility and downside risk, not bear markets.

When you look at S&P 500 performance during rate cycles for various periods going back to the 1970s, a clear pattern emerges. Regardless of the period, 3-month returns following the start of a period of steady tightening were on average negative and more volatile, as markets initially reacted negatively to the start of a tightening cycle. However, looking out at 6 or 12 months, markets rebounded and generally produced positive, albeit subpar, returns. The chart below looking at forward 3-, 6- and 12-month returns on the S&P 500 following an initial change in the Federal Funds target rate shows this pattern.

The averages above do hide a significant amount of variation in returns, and the direction of equity valuations at any given point in time also matters. Indeed, in the past, U.S. equity markets have been more resilient to tightening monetary conditions if valuations were flat or lower over the preceding 12 months. But if valuations had been rising in the previous year, the S&P 500 has historically performed much worse following the start of a tightening cycle.

Put differently, markets characterized by multiple expansion—in other words, when investors are paying more per dollar of earnings—are more vulnerable to a change in monetary conditions. The fact that U.S. equity multiples have been consistently rising since 2011 suggests that markets are at greater risk for at least a modest correction following a rate hike. In addition, one area of the market – namely small caps – may be particularly vulnerable and warrants caution. Historically, small caps have been more sensitive than large caps to the reduction in returns associated with monetary tightening.

To be sure, this will be a very different tightening cycle than previous instances. Rates have never been this low for this long, and the Fed will be forced to adopt a new set of monetary tools to wind down its bloated balance sheet.

As a result, the equity market’s reaction to tightening is more unpredictable than it has ever been, a fact likely to increase anxiety and uncertainty throughout the cycle. Still, a normalization in U.S. monetary policy is unlikely to herald a catastrophe.

Starting this fall, investors should, at the very least, expect more volatility and a heightened likelihood of a correction.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Guaranteed! Make LESS money investing!

Recently a new client came to the office.  His small Roth Individual Retirement Account was not doing very well.  He opened the account a few years ago with a company well known for working the "Middle America" and "Main Street" marketplace and constantly trying to recruit folks to pitch their offerings.

At first glance of his Account Statement I noticed that the person responsible for managing the account was not referred to as an "Advisor" but rather he was a "Dealer."  Dealer?  I expect to see "dealers" in Las Vegas, and not on someone's individual retirement account.

Then I looked further into the account.  There I saw why the poor fellow's account was underperforming.

He had taken the responsible steps of making $150 contributions monthly to his Roth IRA.  But out of that $150, only around $141 was being invested.  Each month the "investment company" was skimming almost six percent in sales charges on each transaction.

So right off the bat his investment was in the red six percent.  He has to earn all that back just to break even!

Then we looked at just where the money was being invested.  It was in a single mutual fund that held conservative large companies based in the United States.  There were no mid-sized or small-sized companies.  No global companies either.  All of the eggs were in a single basket with no diversification.  While this fund would serve as a good cornerstone for a portfolio, it was missing entire chunks of the total stock market which would significantly increase the value and growth of the portfolio.

Obviously the new client was both surprised and distressed over the findings.  Going forward we're going to work our hardest to make this account perform significantly better.  You only have one shot at retirement.  Make it count.

Lesson learned?  If you want to gamble your money with a "dealer", then go to Las Vegas, Best Bet, or Victory Casino Cruises.  If you want competent, impartial and professional investment advice consult with a registered investment advisor.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Families Failing in College Preparedness

By Andrew Shilling, Financial Planning Magazine

There is more to be done when it comes to helping clients prepare for college, according to the researchers at Edward Jones.

A new study from the financial services firm found that, while most American families cannot afford to send their child to college, nearly two-thirds are also unaware of college-savings products such as the 529 plan.

"While the cost continues to be a major concern, Americans still recognize the value of a college education – so finding ways to manage those costs becomes paramount in the process," Steve Seifert, principal at Edward Jones, said in a statement in response to the firm's fourth annual 529 Plan Awareness Survey. ORC International's CARAVAN Omnibus Services analyzed landline and cell phone interview responses from 1,008 U.S. adults to compile this data, the firm says.

Nearly 83% of respondents admit they are not fiscally prepared to send their kids to college. However, just 34% could correctly identify a 529 plan. While this is up from 30% in the 2014 survey, it was reported that awareness is down since the firm's inaugural 2012 study, when 37% of respondents said they did not know about the 529 plan.

In response to these findings, Seifert says advisors should continue to remind their clients about the wide array of strategies currently available. "Consider all avenues for covering the cost – leveraging a 529 plan to start, but then encouraging clients to fully explore scholarships and other opportunities," Seifert suggests in an emailed statement. "Additionally, to the extent loans may be needed, take the time to help a client fully understand their options."

The 529 plan, first offered in the U.S. in 1996, is a state- or state-agency-sponsored college savings product allowing participants to save and invest on a tax-advantaged basis to pay for tuition, boarding, books and other required education-related expenses from most two- and four-year colleges and universities.

"While there are UGMAs [Uniform Gift to Minors Act], pre-paid tuition plans and other options, when it comes to saving for college, the 529 plan is often the best option," Seifert adds.

Awareness of the plan among survey respondents varied depending on household income, family size and the age of their child. Nearly 58% with a household income of $100,000 or more correctly identified the 529 plan, according to the study. Of those, 37% say they could afford the cost of college. Meanwhile, 25% of respondents with less than $35,000 could identify the 529 plan.

Parents with teens were also less aware of the 529 plan when compared to those with younger children. Nearly 35% of respondents with teens, ages 13 to 17, and roughly 41% of parents with children under 13 recognized the plan, according to the study.

"Demographically, people are living longer and having children later in life, narrowing the time between a child's college bills and his or her parents' retirement age," Seifert says. "This, coupled with the fact that the cost of college is increasing at a much higher rate than inflation, means that many are grappling with how to stay on track to meet savings goals."

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Four Financial Tips for Moms

By FIDELITY VIEWPOINTS
For many mothers, family comes first, especially before finances. But just as you take care of your children, you need to take care of yourself. And that applies to financial matters.

“Mothers are busy,” says Ann Dowd, CFP®, a vice president at Fidelity. “And they often don’t put themselves, let alone finances, first.”

But even for busy mothers, it makes sense to pay attention to your financial life. That’s because 90% of women will have to manage their finances on their own at some point.1 They may leave the workforce to care for a sick family member, become divorced, or find themselves widowed.

Here are four quick financial tips for mothers—and really just about anyone.

1. Get involved in finances.
Whether your spouse handles the majority of family finances, or you split the tasks, it’s a good idea to have a full picture of the family financial situation. At minimum, know what accounts you have and with whom. That includes bank and investing accounts, life insurance, mortgages, and loans. Make sure you know the account numbers and passwords, too.

2. Save for retirement.
Whether you are a stay-at-home or working mom, saving for retirement is important. If you don’t work, consider a spousal IRA. This type of IRA allows non-wage-earning spouses to contribute up to $5,500 for 2015 to their own Roth IRA or traditional IRA, provided the other spouse is working and the couple files a joint federal income tax return. If you are a working mom, contribute as much as you can to your 401(k) or other workplace retirement account.

3. Look for growth potential from your investments.
U.S. stocks have consistently earned more than bonds over the long term, despite ups and downs. Take a look at how $100 (see chart) would have grown over the history of the stock market (S&P began tracking performance in 1926). During this time period, stocks delivered more than a 10% average annual return, bonds 5.3%, and short-term investments 3.5%, before inflation.2 Of course, no investment just goes up and past performance is not a guarantee of future results. That's why it may make sense to find a mix of stocks, bonds, and short-term investments that match your risk tolerance and investment timeline, and growth potential to help you meet your goals.

4. Protect your legacy. 
In order to ensure that what you've accumulated is distributed to the people and causes you care about most, it is important to name beneficiaries and create a will and health care proxy. Yes, it's an uncomfortable topic, but think of it this way: Do you really want someone else making these decisions for you?

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Does Diversification Still Work?

By Russ Koesterich, BlackRock Chief Investment Strategist

If you read my recent post on why U.S. investors should consider having exposure to international stocks and you still aren’t sold on the benefits of international diversification, you may have this objection: Diversification didn’t work during the last market crisis.

This is certainly true, but it’s not an argument for staying close to home. As I wrote previously, it’s true that during the financial crisis about the only two asset classes that provided any real hedge were safe haven bonds, including Treasuries, and gold. Virtually all other risky assets moved in lockstep.

Even in the immediate aftermath of the crisis, correlations remained unusually high as investors fixated on macro events—the European debt crisis, the U.S. fiscal cliff, Greece—that transcended asset classes and geographies.

Looking back before the most recent crisis, we also saw high correlations during earlier periods of stress. For example, in the prelude to the Asian crisis in 1997, the U.S. equity market had a relatively low correlation, around 0.32, with non-U.S. stocks. That correlation jumped by more than 50% as the world focused on the turmoil in Asia. A similar phenomenon occurred a year later with the Russian default in 1998.

In other words, correlations typically rise during a crisis. Investors, who normally have different time horizons and strategies, all suddenly focus exclusively on the here and now. As everyone’s focus narrows to a single event or issue, risky assets tend to all behave in a similar fashion and benefits of international diversification are more muted. It’s also certainly true that diversification may not protect against market risk or loss of principal.

This all, however, shouldn’t take away from the importance of having a diversified equity portfolio. Why? Periods of crisis – and their associated high correlations — don’t last, and the benefits of diversification are derived, almost imperceptibly, over a multi-year time frame.

According to the basic tenants of portfolio construction, a portfolio that is concentrated in just one market, even a large, diversified market such as the United States, will rarely produce the best long-term risk/reward trade-off. This is because such portfolios are taking on risk that could have been managed with diversification; a well-diversified, global portfolio can help minimize this unnecessary risk.

Indeed, while international diversification is a sensible idea for most U.S. investors, its benefits may be even more likely to accrue in the coming years, given that U.S. stocks are more expensive than their international counterparts and the United States’ relative share of the global economy is declining.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

High-Yield Preferred Stock ETFs for a Low-Rate Environment

By Tom Lydon, ETF Trends

With the economy essentially stalling out over the first quarter, diminishing the likelihood of an interest rate hike any time soon, investors may be tempted to steer toward attractive yield-generating assets, such as preferred stock exchange traded funds.

Income investors may like preferred stock ETFs since the asset class offer stable dividends, don’t come with taxes on qualified dividends for those that fall into the 15% tax bracket or lower, are senior to common stocks in the event liquidation occurs, are less volatile than bonds and provide dividend payments before common shareholders, writes Dan Moskowitz for Investopedia.

Preferred stocks are a type of hybrid security that show bond- and equity-esque characteristics. The shares are issued by financial institutions, utilities and telecom companies, among others. Within the securities hierarchy, preferreds are senior to common stocks but junior to corporate bonds.

Additionally, preferred stocks issue dividends on a regular basis, but investors are unlikely to enjoy capital appreciation on par with common shares.

However, while preferred stocks provide investors with an attractive source of yields, the assets are vulnerable in a rising interest rate environment. If rates rise, the holdings must decline in price to elevate their yield to attractive levels. Furthermore, most preferred stocks are either perpetual or long-dated, which exposes investors to significant interest-rate risk.

The PowerShares Preferred Portfolio (NYSEArca: PGX), which tries to reflect the performance of the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index, is broad U.S. preferred stock ETF option. The fund has a 0.50% expense ratio and a 5.9% 12-month yield.

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PowerShares Preferred Portfolio (NYSEArca: PGX) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 5.59% (as of 29 April 2015).  Year to date the portfolio is up 3.29% compared to the S&P 500 which is up 2.3%.

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Three Reasons to Consider Munis Now

By Fidelity Viewpoints

Until the financial crisis of 2008, a municipal bond that offered more yield than a comparable Treasury was a rare bird. Indeed, because interest from munis may be federally tax exempt, it was often said that munis were attractive when they yielded more than 80% of Treasuries—a level that was about the historical average. Now, many municipal bonds have ratios that can be 100% of their corresponding U.S. Treasury bond yield, and, although the tax impacts of municipal bonds may be complicated, particularly for retirees, these bonds still have the potential advantage of tax-exempt income.

Higher tax-equivalent yields and the potential for tax-free income make this a great time to look at municipal bonds.

Here are three key reasons to consider munis now, particularly if you find yourself in a top tax bracket.

1. Higher yields than Treasuries.  As of March 13, 2015, the yield on a 10-year Treasury bond was 2.09%, while the yield on munis with the highest credit rating, AAA, reached 2.64%. Of course, that is before accounting for the tax benefits of municipal income. For an investor in the 35% federal tax bracket, the muni provided the equivalent of a Treasury yielding slightly more than 4%.

It is not an isolated incident. In recent years, muni bonds have frequently offered higher tax-equivalent yields than Treasuries for investors in most tax brackets—and in many cases higher pretax yields as well.

Global demand for U.S. Treasuries and bond buying by the Federal Reserve has been a key driver of the shift in relative rates. The U.S. government has been a huge buyer of bonds as part of its stimulus program. A shrinking deficit has also reduced supply of new debt. Meanwhile, even lower interest rates and currency concerns in Europe and Japan have attracted foreign investors to Treasuries for higher yield and exposure to the U.S. dollar. Demand from foreign investors and the Fed has outpaced the net new issuance of Treasuries, leading prices up and yields down.

While Treasury rates have been suppressed by strong global demand, the dynamics are different in the muni market. Many foreign investors simply do not invest in the municipal market, says Cummings. Therefore, munis may offer an attractive yield pickup for investors looking for more yield in today’s low-rate environment.

2. Adding munis may help manage risk.  Many investors turn to the bond market to help manage the risk of a stock portfolio. Munis may offer a couple of potential advantages for an investor looking to add diversification.

Diversification cannot guarantee a profit or ensure that you won’t experience a loss, but adding investments that tend to perform well in different market conditions can help manage the overall risk of a portfolio, as one investment may perform well while another struggles.

Like taxable bonds, munis have a very low correlation to stocks.  This means they have the potential to add diversification to a stock-heavy portfolio. But adding munis may offer a second diversification advantage. Over the past 20 years, municipal bonds and investment-grade taxable bonds have outperformed one another at different times. As you can see in the table, munis and taxable bonds are not perfectly correlated—a correlation of 0.6, well below a perfect correlation of 1.0. This means that adding both to your investment mix may help to balance risk in your overall portfolio.

Most investors understand the potential benefits of diversifying between stocks and bonds. What may be less understood is the case for diversifying within an asset class. Adding munis to a bond portfolio may be able to help reduce the risk of a portfolio.

3. Higher taxes add to munis' appeal.  Munis have always held appeal for investors in higher tax brackets because, in many cases, they produce income that is federally tax exempt. In recent years, the benefits of tax-exempt income have increased as tax rates have gone up. Since 2013, tax rates on the highest-income earners have been raised to 39.6% and some investors have run into the Medicare surtax on net investment income, which can increase taxes another 3.8%—for a top rate of 43.4%.

How big a difference do the new tax rates make? Let’s say your tax rate went from 35.0% to 39.6%. That 4.6 percentage point change shifts the math for municipal bonds. For instance, say you were considering a municipal bond offering 2.8%. If you paid 35.0% in taxes, that would be equivalent to a taxable bond yield of 4.16%. If you paid taxes at 39.6%, the muni would offer an after-tax yield of 4.49%. Add in the Medicare surtax and your tax-equivalent yield would be 4.95%.

While munis generally offer income that is exempt from Federal income taxes, and in some cases state income taxes, the tax impact for some retirees may be more complicated. Muni income, while it may be exempt from income taxes, still counts towards modified adjusted gross income (MAGI) for the purposes of Medicare and Social Security. If your MAGI passes a key threshold ($170,000 for couples filing jointly in 2015), you will be charged higher Medicare premiums for part B and prescription drug coverage. If your municipal income pushes your MAGI over $32,000 for a couple filing jointly, some portion of your Social Security benefits will become taxable. You should consult a tax advisor if you have questions.

The bottom line.  The market for bond investors is always changing. But recent shifts in bond market dynamics, the interest rate outlook, and federal tax rates may make now a good time to consider how municipal bond income fits into your diversified portfolio.

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.431% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 8 April 2015).  Year to date the portfolio is up 1.04%

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.