Monthly Archives: February 2016

Before the Bell: 2/26/2016 (Thursday’s Close)

 

Major Stock Indexes

9:15 AM EST 2/26/2016

Last Change % CHG
DJIA 16697.29 212.30 1.29%
Nasdaq 4582.20 39.60 0.87%
S&P 500 1951.70 21.90 1.13%
Russell 2000 1031.58 9.50 0.93%
Global Dow 2173.29 10.51 0.49%
Japan: Nikkei 225 16188.41 48.07 0.30%
Stoxx Europe 600 332.06 5.52 1.69%
UK: FTSE 100 6092.74 79.93 1.33%

 

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Up and down Wall Street

As we write this, the stock market is up.  After the volatility of the past two months we decided to look at the Dow Jones Industrial Average stocks to see how that index fared.

Of the 30 stocks in the DJIA, year-to-date nine stocks are up and twenty-one are down.

The five biggest winners (as of this moment) are

  1. Wal-Mart +11%
  2. Verizon +11%
  3. 3M +5%
  4. Exxon +4%
  5. Procter & Gamble +3%

The five biggest losers are

  1. American Express -21%
  2. Boeing – 19%
  3. Goldman Sachs – 18%
  4. Intel -15%
  5. JP Morgan -14%

Please note that this is not a recommendation, suggestion of solicitation of any kind.  We just thought it was interesting to see which stocks were affecting the DJIA so far this year.

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Dominion Power Savings Plan

The employees of Dominion Power are offered a 401(k) SAVINGS PLAN for their retirement benefits. This plan allows employees to save money in a tax sheltered account for their retirement.  As an added incentive, there is a company match for contributions to this plan.  The following are the choices for employees who wish to select their own individual mutual funds or separately managed accounts.

S&P 500 Index Fund – This is a stock mutual fund that is designed to match the performance of the S&P 500 stock index.

Small/Mid Cap Equity Index Fund – This is a stock mutual fund designed to invest in the Dow Jones Total Stock Market index with the exception of the stocks in the S&P 500.

International Equity Fund – This is a stock mutual fund that invests in companies located outside of the United States.

Emerging Markets Equity Fund – This is a stock mutual fund that invests in companies in countries that are considered “Emerging” rather than “Developed.” Examples of Emerging Markets include Brazil, China, India, Korea and Mexico.

International Bond Fund – This is a bond mutual fund that invests in bond issued by governments and companies outside the United States.

Intermediate Bond Fund – This is a bond “Separate Account” that invests in government and corporate bonds in both the United States and in other countries.

1 to 3 Year Bond Fund – This is a bond mutual fund that invests in short-term bonds issued by corporations, the United States government and agencies.

Dominion Money Market Fund – This is a “Separate Account” that invests in high quality very short term assets designed to preserve capital.

Real Estate Fund – This is a “Separate Account” that invests in stocks of companies in the real estate business.

Multi-Asset Class Inflation Managed Fund – This is a mutual fund that invests in a large variety of assets including stocks, bonds, commodities and real estate.

Company Stock Fund – This is the option for employees who want to invest in Dominion stock.

Call us for more information.

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Is your money going in the right direction?

An acquaintance recently asked me how his money should be invested.  With banks paying virtually zero on savings, it’s a question on everyone’s mind.  Should he invest in stocks or bonds? If it’s stocks, what kind: Growth, Value, Small Cap or Large Cap, U.S. or Foreign?  The same can be asked of bonds: government or corporate, high yield or AAA, taxable of tax free?  That’s a question that faces many people who have money to invest but are not sure of where.

It’s a dilemma because we can’t be sure what the future holds. Is this the time to put money into stocks or will the market go down? If we invest in bonds will interest rates go up … or down? How about investing in some of those Asian “Tigers” where economic growth has been higher than in more developed countries?

There is no perfect answer. We are not gifted with the ability to read the future. And what is this “future” anyway? Next week? Next year? Or 20 years from now when we will need the money for retirement?

We know that generally, people who own companies usually make more money that people put their money in the bank. Another word for “people who own companies” is “stockholders.” That’s why, over the long term, stockholders do better than bondholders. On the other hand, bonds produce income and are generally lower risk than stocks. So my first answer to the question I was asked is: invest in both stocks and bonds.

Choosing the right stocks and bonds is a job that is best left to professionals. That’s the benefit of mutual funds. Mutual funds pool the money of many investors to create professionally managed portfolios of stocks and bonds. They are an easy way of creating the kind of diversification that is important for reducing risk.

To circle back to the original question our friend asked: the answer is to create a well diversified portfolio. We know that some of the time stocks will do better than bonds, and vice versa. We know that some of the time foreign markets outperform the U.S. market. We know that some the time Growth stocks will do better than Value stocks. We just don’t know when. So we select the best funds in each category and measure the over-all result. With so many funds to choose from, the smart investor will get help from a Registered Investment Advisor like the folks at Korving & Company.

Call us for more details.

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A quick market roundup, Wednesday 2/24/2016 at 3:00 PM

U.S. equities have recovered from this morning’s decline caused by disappointing reads on housing and services sector activity and oils price declines in the morning.  The U.S. dollar is up marginally. European and Japanese stocks were pressured by oil & gas and basic materials issues.  Oil continues to drive the market.  

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Passive Investing and the Risk of Bubbles.

“Passive Investing” has become very popular with investors as some financial writers and the index industry tout the benefits of buying an index fund. It’s said to be the kind of “set it and forget it” investment strategy that appeals to people who have limited investment experience and believe they are doing both the “smart” and “safe” thing.

But there is a downside that people who are not familiar with index funds are not aware of. It’s what happens when an investment “Bubble” breaks.

Legg Mason wrote an informative white paper on this subject recently. We want to quote some of what they said.

The end of a market bubble is never pleasant, but it can be especially painful for investors in passive strategies that track major stock indexes.  A key reason: those indexes tend to increase the weighting of rapidly rising sectors as bubbles inflate, setting up investors for a bigger fall.

When sector bubbles collapse over shorter time periods, the overweights can impact major market indexes as well. Example: as the Internet bubble of the late 1990s collapsed, the weight of the S&P 500 Info Tech sector, one of the ten sectors represented in the S&P 500, shrank by more than half, from 33.3% to 15.4%, as the sector generated a cumulative loss of 73.8%. The same effect could be seen during the global financial crisis, with financials plummeting nearly 80%.

Investors investing $1000 in the very popular index that tracks the NASDAQ market would be investing roughly $120 dollars in Apple, $90 in Microsoft and $50 in Amazon. More than $500 of that investment would go into only 10 stocks. This is an illustration of the fact that the investor who believes that buying an index provides broad diversification may find out that this may not be the case. While buying an index is not necessarily a bad idea, it should be done understanding how indexes are constructed and the amount of risk it involves.

These are only a small sample of the kinds of distortions reflected in passive capitalization-weighted indexes, whose construction forces them to overweight sectors as they become more popular with investors. When added to the well-documented tendency of investors to herd toward supposedly “hot” opportunities, the damage to investment returns can be substantial.

The core issue, however, is not that every success contains the seeds of its own destruction. Rather, it’s that using conventional passive, index-based investing as the center of a balanced investment strategy can introduce unexpected — and unwanted — volatility into a supposedly conservative portfolio, at just the moment when investors may be seeking refuge. And that’s the real trouble with bubbles

The hidden dangers of investing, even in the most common strategies, are just another reason to get professional advice.

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Preventive maintenance.

Most of us know that we should see a doctor for regular check-ups. But did you know that it actually took a while for the medical community to educate people that staying healthy was a better approach than waiting until they got sick? An entire industry – Health Maintenance Organizations (HMOs) – is built around the principle of making sure that people are staying healthy with regular check-ups. This not only ends up saving people money, it also saves lives.

The same thing also changed the way that dentists do business. In the old days you saw a dentist when your toothache got too bad to ignore. Today you get our teeth cleaned twice a year and, instead of dentures, people maintain healthy teeth throughout their lives.

Financial wellness is equally important. Your finances often have as much impact on your quality of life as your health. In fact, your financial wellbeing often helps determine the quality of the health care you receive.

Like a doctor or dentist prescribing preventive care, a financial advisor will prescribe the best way for you to stay financially healthy, will chart your path to financial security and help you avoid those activities that lead to a financial breakdown.

The best time to get financial guidance is when you’re young. However many people believe that they don’t have enough money saved to interest a good financial advisor. Many advisors are willing to work with beginning investors as a way of developing a long-term relationship that will pay off for both parties. Many of our younger clients were referred to us by their parents who knew the value of good financial guidance.

We welcome the opportunity to provide you with a financial check-up.

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Active vs. passive managers

Amateur investors continue to move money into passively managed funds.  However, according to Ignites Research, elite professionals are largely using actively managed funds, favoring active managers by a ratio of 4 to 1.

What explains this contrarian approach? The answer is risk control. Passively managed funds don’t have the ability to use judgment, being required to continue to match an index no matter what. And as the markets have become increasingly volatile, passive funds are at the mercy of traders who don’t care about fundamental values.

When markets are going up consistently, a case can be made for passive index investing. However, when the market is roiled by rumor and headlines that have little to do with economic fundamentals, passive funds are at the mercy of short term traders. Actively managed funds can take advantage by shopping for bargains. Active managers can raise cash to ride out temporary storms, something that passive funds don’t do.

Amateur investors are attracted to passive investing after years of being sold on low fees and performance claims. However, low fees – measured as fractions of a percent – do little to help the investor watching his or her investments drop by 10, 15, or 20% during bear markets.

And those performance claims assume that the alternative to an index fund is the average of all actively managed funds. This is simply not the case. One leading portfolio manager puts it this way:

“It’s a myth that you can’t find outperforming active managers who can beat their benchmarks over time. So for us, sorting out and tracking the best active fund managers is a worthwhile pursuit and helps add value for our clients.”

We agree. At a time of increased volatility and lowered expectations it’s a good time to get a professional review of your portfolio.

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How a stock market slump affects retirees

Because retirees are no longer earning income, they view a decline in their investments with more concern than those who are still working.

Many savers in retirement also focus on a number that represents the peak value of their portfolio and view any decline from that value with concern.

Psychologists refer to this as the “anchoring effect.”

The unfortunate result of this is that it causes them to worry, leading to bad decisions. This includes selling some – or all – of their stock portfolio and raising cash. This makes it more difficult for their portfolios to regain its previous values, especially when the return on cash-equivalents like money market funds and CDs are at historic lows.

The answer to this dilemma is to create a well-balanced investment portfolio that can take advantage of growing markets and cushions the blow of declining markets.

This is often where an experienced financial advisor (RIA) can help. One who can create diversified portfolios and who can encourage the investor to stick with the plan in both up and down markets.

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Thoughts From Around the Investment World – 3

We thought that our readers would be interested in reading the thoughts of some of the leading money management companies. We get information from these companies on a regular basis, and wanted to start passing some of it along. Today we look at the view from the money management shop Neuberger Berman.

Complex Trends, Challenging Markets

The complexities of today’s markets and economies are not lost on those who spend each day sorting through them. Diverging monetary policy, plummeting energy prices and shifting economies are all examples of fundamentals on which our investment professionals are focused. These issues have been debated for the better part of 2015 and have led to a very turbulent period for the markets, both equity and fixed income. [The] past year [2015] will shape up as one of the more challenging in recent memory.

As we enter 2016, the issues of stagnant global growth, monetary policy and China’s bumpy economic transition that have roiled markets will continue to be a major focus, the outcomes of which will likely drive market returns. We believe the Federal Reserve will take a slow approach to rate increases, that the ECB [European Central Bank] will remain accommodative as necessary, and that China has the financial wherewithal to avoid a severe “hard landing.” As for low commodity prices, they are largely supportive for now, but eventual increases are likely to come for the right reasons, reflecting broader economic health and proper supply/demand balance.

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