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Market Commentary

Investor Jitters or Real Concerns                              September 30, 2019                                                        

Year to date the S & P 500 index is up 20.54% through the third quarter, which might cause us to get excited.  We may ask why investors aren’t pouring money into the equity markets.  Looking through a different lens we may begin to understand why.  The S & P 500 is up 4.25% over the last twelve months through 9-30-19.  The most recent Institute for Supply Management (ISM) monthly survey showed manufacturing activity had shrunk to its lowest level since June 2009[i].  Economic indicators remind us of the late 90’s when an inverted yield curve (short-term rates are higher than long-term rates) signaled a lurking recession which didn’t develop.  Like then, the Federal Reserve made mid-cycle rate cuts to ward off global risks. 

Surveys and business sentiment point to deeper slowing in economic activity which could impact future hiring.  As we head into earnings-season we will begin to get a firsthand look at how businesses have fared in 2019, and what their prospects are looking forward over the next twelve months. Unemployment claims could begin to rise if businesses begin to see slowdowns.  Although the stock market hit new highs this year, this doesn’t translate into earnings for companies.  The trade war with China is taking its toll on business sentiment and the stimulus from the 2017 tax cuts has run its course.     

Jeffery Gundlach, CEO of DoubleLine Capital and so called “Bond King” spoke recently at an event in London and, according to Bloomberg, said the odds of a recession before the 2020 election are 75%[ii].  Consumer spending and low interest rates may delay a recession.  However, recessions are quite normal during an investor’s lifetime. They come in different degrees of volatility; but even the recession of 2008, which is the worst recorded in modern times, eventually passed and markets recovered to new economic highs.

What’s the best advice leading into a recession?

  • Know your risk tolerance
  • Diversify your portfolio
  • Know your lifestyle needs
  • Be patient and allow enough recovery time

The best defense is knowing that a well-diversified portfolio is not suddenly loaded with bad investments just because the portfolio declines during a recession.  Rather, a well thought out strategy provides you with the ability to weather the storm over time.  Although you might feel like the portfolio is sinking, you’re really feeling your emotions taking charge.  Positioning your portfolio between equity and bonds, fixed income and cash will help to mitigate your emotions. 

Throughout this year we have allocated your portfolio to be resilient for the next downturn.  That is not to say your portfolio won’t decline.  The weather may be changing but your portfolio is positioned to absorb some shocks.  Please call us with your questions or concerns.

Thomas L. Menzel, CFP                                                    Laura A. Biermann, CFP

President/Principal Owner Vice President/Principal Owner

[i] Source: Schwab Center for Financial Research, October 2, 2019

[ii]Source: CityWireUSA.com, by Nicole Piper, September 19, 2019

IMPORTANT DISCLOSURES:  The opinions presented in this communication are subject to change without notice and no representation is made concerning actual future performance of the markets or economy.  Information obtained from sources is considered reliable but is not verified.  The research and other information provided herein speak only as of its date.  We have not undertaken and will not undertake any duty to update the research or information or otherwise advise you of changes in the research or information.  Performance information presented is not an indication of future results and index data is provided for market reference purposes only.  This is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy.  This document is the property of Legacy Financial Advisors and is intended solely for the use of the Legacy client, individual, or entity to which is addressed.  This document may not be reproduced in any manner or re-distributed by any means to any person without the express consent of Legacy.  This material is for educational purposes only.  Mis-transmission is not intended to waive confidentiality or privilege.

Market Commentary 06/30/2019

How do you make money in a sideways market?

Had you asked anyone, during fourth quarter 2018, if the S &P 500 would be up 18.54% halfway through 2019, they would have thought you were insane.  Fortunately, we have experienced a positive bounce from a market low point.  Long-term investors generally don’t pay attention to short-term market fluctuations.  We thought it might be interesting to look back at how we arrived at 18.54% in the S & P 500 year to date. 

Over the last six months:

  • In January the Federal Reserve reversed course on interest rates.  The market rallied to all-time highs.
  • In February a return of inflation put a scare in the markets sending the Dow down 3,200 points, or 12%, in just two weeks.  It felt like here we go again.  The fear returned that the Federal Reserve would raise rates.  Speculation by investors was brewing.
  • In March, Central Banks in the U.S. and Europe were leaning to a more supportive economic growth policy.  The markets recovered from February and posted gains.
  • In April, the calm before the storm.  The month was propelled by positive economic news, economic growth beat expectations, unemployment remained low and inflation subdued.  The markets continued to rise. 
  • In May, the markets initially rose, then the trade war escalated between the U. S. and China with the U.S. increasing the tariff percentage from 10% to 25% on certain Chinese goods.  Out of nowhere the U.S. talked about imposing tariffs on Mexican imports starting in June.  The markets grew nervous and the S & P 500 dropped 6.58% in May.
  • In June, the U.S. and China agreed to a truce on further tariffs and again opened talks.  The market rallied and had its best June in decades. 

Who knows what the future has in store for markets?  Investors are aware that the U.S. stock market is at all-time highs and has set new highs several times during the past ten years.  Following the market too closely can feel like a marathon but can also be exhausting in the short run if one reacts, as above.  We do know smart investment decisions can be made while the market is up.  Even in a sideways market (it goes up and then comes right back to where it started) money can be made.  We also know that taking profits from time to time smooths out volatility in your portfolios.  We think 2019 is the ideal time to harvest profits in your retirement accounts (401k’s, 403b’s, IRA’s); also consider looking at after-tax returns in your taxable accounts.  Watching a gain disappear due to a sustained downward market makes no sense when those gains can be preserved by paying some tax.  Paying taxes is prudent when you have gains in your portfolio.

You may see an increase of trade confirmations as we rebalance and take profits during the most opportune times as markets rise.  These profits may not be used today but they will be handy in the future when the market retreats.  Many experts write that we are in the late cycle of the markets.  This might mean markets could advance for another six months to two years.  Since we never try to predict the direction of the markets, we think it prudent to take profits when they are present. 

We look forward to discussing any concerns or questions you may have.  Enjoy the second half of the year knowing you’ve pocketed some of the benefits from the first half. 

Thomas L. Menzel, CFP®                                             Laura A. Biermann, CFP®

President/Principal Owner                                              Vice-President/Principal Owner

Market Commentary 3/31/2019

Our Thoughts                                                                                                         

Investors’ heads must be spinning after the fourth quarter sell-off driven not by fundamentals but primarily geo-political events such as government shut downs, potential firing of the Federal Reserve head, Brexit and tariffs, just to name a few.  You’re most likely saying ‘so tell me what’s new’.  It’s not new, it’s normal.  We call it noise.  As investors we need to pay attention to these occasional noises and evaluate how we’re invested.  We hear advice to keep our thoughts on the long-term when markets decline but this is easier said than done.  We referenced a table in last quarter’s commentary – “Market Downturns Happen Frequently and They Don’t Last Forever”.  True to history the market bounced back as quickly as it sold off.  Keep in mind the S & P 500 fell 13.6% overall in the fourth quarter and the bounce has erased most of its losses this year.  The Federal Reserve’s decision to pause and not raise interest rates three times in 2019 as it stated in December 2018, along with Jerome Powell remaining as head of the Federal Reserve, the government re-opening and US-China optimism on reaching a trade deal have fueled recent reversal in the markets.  Some market experts wouldn’t be surprised to see the Federal Reserve cut rates if the economy slows more than expected. 

Does this Bull market continue or end?

Investors seem to believe this bull market has no end, but it will; we just don’t know when.  Business cycles typically are composed of three stages – early, middle and late.  This is generally followed by recession and is measured by various economic indicators.  We are by no means forecasting or predicting when this will occur, we just know it will.  The brightest minds in investing will try to guess or pinpoint when it may happen, but until all the data is gathered no one will know.  We’re in a late cycle when growth slows, credit tightens, corporate earnings are reduced, interest rates increase, investor confidence peaks and inflation increases.  We recently had an inverted yield curve, which can be a sign of an upcoming recession.  An inverted yield curve is when short-term rates are higher than long-term rates.  Investors may be more inclined to invest in higher quality (safer) short-term investments such as treasuries than take on more risk with a lower yield and longer time frame.

As of March 31, 2019, we are in earnings season and experts are predicting lower earnings and slowing growth.  These are only two of the above-mentioned late cycle segments.  We need to continue watching other late cycle segments.  As we experienced within the last 120 days, the Federal Reserve was tightening, inflation briefly appeared, and investor confidence was impacted with the sell off.  However, now that the Fed has paused, investors have returned to the markets and inflation seems to be non-existent. 

What to do?

Continue to take profits that appear, make sure you remain balanced in your investment approach in-line with your needs and look for opportunities that are characteristic to long-term success.  We still believe that emerging markets are in early cycle, meaning they are under-valued.  These economies across global markets are typically faster growing when the U.S economy is slowing.  We may be early, but hopefully patience will position us for future growth.   

We look forward to our conversations, welcome your calls and appreciate your continued confidence. 

Thomas L. Menzel, CFP®                                             Laura A. Biermann, CFP®

President/Principal Owner                                    Vice-President/Principal Owner

Market Commentary 12/31/2018

Markets, Emotions, and Common-Sense                                                       

This past quarter was tough on all our portfolios.  Your December portfolio statements may make you feel uneasy, concerned or second guessing why you should stay the course.  If we were investing only for the past 90 days and not the long-term, there might be some cause for concern.

The fourth quarter began with the S & P up 10.56% ending the year down 6.2% including dividends.  The Morningstar Moderate Target Risk Index (60% Equity/40% Bonds) ended down 4.75% for the year.  Market downturns have different themes as to why they go down, but this is in fact very normal.  The headline news deems a 4% decline these days as a “rout” in the markets.  We see it as an adjustment in the market.  This chart, from American Funds January 2019 “The Capital Ideas” helps us to understand:

As you can see above, the average market downturn lasts less than a year.  This doesn’t mean that it can’t last longer.  Historically, between 2000 – 2002 we saw the market drop 37% over three years.  The markets recovered to the levels we’re seeing today.  Since then, the markets have more than doubled.  Having a long-term perspective is key to investment success.

The return of volatility in 2018 to our portfolios is not a new discovery.  Investors are human beings with the ability to make irrational decisions regarding investment decisions.  We can learn from Richard Thayer, Nobel Memorial Prize winner in Economic Sciences, for his work in behavioral Economics.  He studied investor behavior and how the stock market responded to stock market movements.  In behavioral economics it is well known that people attach too much weight to the most recent information.  This is known as recency bias.  Capital Group summed up Thayer’s findings, with helpful information for investors:

  • Investor biases can affect how the stock market behaves, leading to extreme and varied movements in stock prices.
  • Investors who focus too much on the short term can miss out on opportunities.
  • Stocks react differently to news.  It takes research and investment experience to analyze how they might react. [1]
  • Emotions will always be a part of the investment experience, and what is most important is how you handle those emotions.  We believe the best way is through commonsense thinking.  For example, when markets are falling as they did in December, stop and ask yourself a few questions:

    • Do I need all my money today?  If you answer ‘yes’ you shouldn’t be in the market.  If your answer is ‘no’, then ask yourself:
    • Do I have adequate money available for my cash flow needs to last through a downturn?
    • Is my portfolio constructed to withstand the worst of the downturns?

    If you can answer ‘yes’ to the last two questions, you should be able to weather the volatility.  This doesn’t mean this part of the investment experience is easy, it means you are positioned appropriately to handle the volatility.  Volatility is our friend, but we don’t know it at the time it’s experienced.  Investors have known that the market advance would eventually run out of gas.  We are beginning to see signs of low fuel as the global economy has slowed, but the market is still growing.  Globally, easy money times have passed by and we are now seeing a tightening of monetary policies.  Corporations throughout the world have borrowed heavily during this easy money time-period to buy back their stock and in turn are carrying higher debt heading into the next recession. 

    In preparing for the next recession, we shortened our durations and are now shifting to higher quality bonds given the higher debt load caused by the monetary stimulus.  Your portfolios will reflect this with trade confirmations you may receive in the weeks ahead.  We remain optimistic in holding and adding to developed international and emerging markets for the future.  The U.S. markets remain steady after the sell-off in December but are not cheap.  We have pared back holdings over the past few years in taking profits.

    Over the past year we have discussed the importance of diversification, how portfolio construction prepares for changes in market direction, taking profits when prudent, and how the impact of risk can play out in your combined portfolios.  Our strategy and philosophy have always been building portfolios that work in good or bad markets. 

    We appreciate your continued trust and confidence as we move forward.  Don’t let the emotions of the moment distract you from your overall objectives.  We sincerely believe that staying the course is the right plan.  We need to stay focused not solely on the markets but on a well-diversified portfolio, which has proven to reduce volatility over time.     

    Please call us with any questions or concerns you may have.  We look forward to our next conversation.

    Thomas L. Menzel, CFP® President/Principal Owner

    Laura A. Biermann, CFP® Vice President/Principal Owner

    [1] January 2019, American Funds “The Capital Ideas”

    Market Commentary 09/30/2018

    What matters today                                                                                         

    The third quarter faced numerous challenges, but the S&P 500 still posted a solid 7.4% return for the quarter and is up 10.56% year to date.  This momentum in the U.S. market is due to a few investor favorites.  The FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) contributed to more than half of the S&P 500 index gain this year.  International and emerging markets continue to struggle due to tariffs, a strong dollar, and geopolitical disruptions. The bond market continues to reset with gradually rising interest rates.

    The numbers in most sectors, due to earnings, are still showing strong signs of continued growth.  Recently however, Liz Ann Sonders, Schwab senior vice president and chief investment strategist, said a weak housing market can be a drag on growth.  “Housing is what we call a leading indicator:  It can signal future turning points in the economy before they actually show up. And even with all the good news out there for unemployment, wages and the stock market, the recent data from the housing market is sending some negative signals. It’s not all bad, of course, but it’s still worth watching.”[1]

    Clearly no one really knows when the market will turn negative.  In fact, an August 2018 Betterment survey found that 48% of 2,000 American adults thought the US stock market had been flat over the last 10 years.  Another 18% of those surveyed thought the US stock market had declined over the last 10 years.[2]   We are in an almost ten-year bull market which has had its volatility throughout the run up.  As we all know, stock markets don’t go straight up.  This extended bull market has experienced seven corrections of 10% or more over the past 9½ years, including one in 2011 of 19.4%.  There have also been four smaller pullbacks in the 6%-8% range.[3]   This added volatility may be one of the reasons those surveyed by Betterment felt the market was flat.

    We have had many discussions with our clients over the course of the year about preparing for the next downturn.  They are now expressing their concerns about the potential for declining markets in the future.  No one knows when that may happen, but our investment philosophy has always been about building a portfolio that lessens the decline.  Although most economists and market strategists don’t see a recession until 2020 at the earliest, we believe portfolio construction should be our focus.

    Why portfolio construction matters

    Portfolio construction is not just simply owning different sectors for the sake of diversification.  We instead help identify the risks associated with each asset class relative to your needs.   For example, as the economy slows in a rising interest rate environment, you want to own higher quality stocks that can sustain a slowdown, and higher quality low duration bonds to ride the rate cycle up to protect principle investment.   Don’t ignore recently underperforming sectors that have positive outlooks such as developed international and emerging markets.

    We have been slowly restructuring our client portfolios over the last few years by taking profits, increasing exposure to small company stocks, and adding to developed international and emerging markets to position portfolios for the next leg up when the U.S. markets slow.  Sometimes we are early in the cycle and therefore are buying low.  Keeping a long-term view can benefit your success.  As Warren Buffet states in his October 16, 2008, New York Times article, “be fearful when others are greedy and be greedy when others are fearful.”[4]

    The FAANG stocks have contributed in large part to this momentum market recovery that began in March of 2009.  Investors have been greedy as these stocks have advanced despite being costly to buy.  Momentum markets can excite investors to think that there is no end in sight.  When they decline the lack of diversification eventually appears.  The fear factor shows up when the momentum disappears, and investors sell based not on price but on loss.

    Although the investing landscape has changed over the past decade with investors gravitating to more indexes, their emotions still drive their investment decisions.  It’s difficult to be patient when it looks so easy to just pick an index.  We certainly are not saying don’t own these in your portfolio, just don’t overweight in a momentum market.  Investors don’t realize the inherent risk that is within the broadly followed index.  When a single index falls during a sell off, what is your offset investment that balances the volatility?

    A well-constructed portfolio will allow you to own those investments that provide income when you need it, opportunities for the future, and provide peace of mind to get through the toughest of markets.  We think prudent portfolio construction will smooth out investors’ outcomes over time.  Our philosophy is to construct a portfolio that will withstand short-term emotions by allocating enough to bonds and fixed/cash investments to weather the downturns.  This enables you to maintain your lifestyle regardless of volatility.

    It is almost impossible to predict the next downturn, although we know it will happen.  Keep your expectations in line with your portfolio.  Portfolio construction is somewhat like maintaining a home.  There are always ongoing repairs that go into maintaining it.  If you keep up the property you slowly build value.  The same is true of our portfolios; if we keep them up to date by managing risk you will have opportunities for smoother and better outcomes.

    Thank you for believing in the philosophy that has helped our clients weather all market conditions.  We welcome your questions and concerns and look forward to our continued discussions.


    Thomas L. Menzel, CFP®                     Laura A. Biermann, CFP®
    President/Principal Owner                  Vice-President/Principal Owner

    [1] Liz Ann Sonders, Schwab Newsroom Insights, 10/03/2018
    [2] AMG Funds, 09/24/2018, By the Numbers; Betterment survey
    [3]  Wall Street Journal, 09/09/2018 “Reflections on the 91/2 Year-Long Bull Market
    [4] Warren Buffett, New York Times 10/16/2008, “Buy American, I Am”

    Market Commentary 06/30/2018

    Navigating Headwinds                                                                                                                               

    At the end of 2017, the consensus of many forecasters for 2018 was for volatility to return, interest rates to stay low, global growth to remain strong, the dollar to remain stable at the low end of a three-year range, and tax reform to boost economic growth.  Year to date, tax reform has boosted corporate profits and volatility has returned, however so much for the rest of the 2018 economic forecast.  According to Jeffrey Kleintop, Senior Vice President and Chief Global Investment Strategist at Charles Schwab & Company, broad global economic and earnings growth continues, but the momentum is slowing.[i]  Considering all the volatility that returned during the 1st quarter after a fifteen-month hiatus, the second quarter stayed relatively flat for investors.  The Dow Jones Industrial Average was down 0.73% and the broader S & P 500 ended up 2.65% year to date.

    There were many twists and turns during the quarter, not only in the markets but also in investors’ minds.  Geopolitical issues on trade tariffs and rising interest rates at home as well as abroad sparked volatility in fixed income, technology, developed international and emerging markets.  Why are the broader markets not down more significantly?  U. S. corporate earnings boosted by tax reform have offset some of the volatility.  Although the economy is slowing, it’s still growing in the U.S.  The fundamentals are strong globally, yet global economies are slowing with the unwinding of various forms of stimulus abroad. Therefore, some global economies are showing some disconnect in 2018 due to the above-mentioned headwinds.

    Tariffs (border taxes charged on imported goods) are only part of the 2018 headlines.  They have been imposed on imports (with exception to certain countries) of lumber, washing machines, solar cells and modules, steel and aluminum.  Understanding who benefits and who gets hurt by tariffs is mixed.[ii]  According to Andy Rothman, Investment Strategist at Matthews Asia, the tariffs will only be levied against about 2% of all Chinese exports, since the Chinese economy is no longer export-driven.  Likewise, only 1% of all U.S. goods exported are affected.  These are small numbers in the bigger picture, yet investors have reacted by pulling out funds from international and emerging markets in anticipation of a full-fledged trade war.  When there is dislocation due to disruption, opportunities for investment become available. We continue to believe that the underlying story in emerging markets (EM) remains strong and we continue to add to EM while others are reacting.  Although EM are down the first half of the year due to the strengthening dollar, rising interest rates and trade tariffs, the EM consumer is very much alive. For example, the middle class has gone from 0% of India and China’s populations in 1994 to 12% and 30%.[iii]  Over the next twenty years, this number is set to grow to over 70% in many EM countries, so short-term volatility doesn’t reflect the case for EM.

    Rising interest rates are also on many investors’ minds.  Over the past thirty-plus years we have enjoyed a bond environment that was the perfect storm.  Interest rates had fallen in the early 80’s from double digit to the lowest in our country’s history.  With the Fed continuing to tighten monetary policy and the economy now in late-cycle, investors will need to continue being selective within fixed income.  No one is calling for runaway rates or runaway inflation.  However, investors must rethink their bond strategy to maneuver through this adjustment from low yields to higher yields.  We continue to believe that keeping the duration shorter will provide more downside protection as rates move up.  Since we use bonds in our strategies as a ballast to the portfolio, principal preservation is weighted higher than seeking the highest yield.  We will be adjusting bond duration and seeking higher quality bonds in our bond allocation throughout the remainder of the year.  We will also seek out bonds and strategies that lend to the changing sector.  The Federal Reserve has indicated two more increases this year and possibly 3-4 next year.

    Having the patience to wait near the sidelines with less yield will provide opportunities to extend our duration in the future as rates stabilize.

    Although the days of easy money in our global markets is over, a new era begins ever so slowly as rates begin to rise and central bank infusions return to more normalized practices.  Over the past year we have taken profits in this now ten-year bull market.  The bull market party may not be over yet, but now it’s time to rethink our asset allocations.  We continue to discuss the importance of diversification to help smooth out the bumps.  Now it’s time to roll up our sleeves and dig deeper into the portfolio to identify where your risk exposure lies and align that with your long-term investment objectives.   Benjamin Graham, author of The Intelligent Investor, said:

    “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” 

    We continue to believe in the strategies we have discussed with you through a diversified portfolio.  We look forward to our conversations with you and welcome your questions or concerns.  Enjoy the summer months ahead and relax.


    Thomas L. Menzel, CFP®                                             Laura A. Biermann, CFP®


    [i] Source: Schwab.com, 2018 Global Mid-Year Outlook: From Sugar High to High Tariffs? Jeffrey Kleintop, June 25,2018
    [ii] Source: CEIC, Matthews Asia Perspectives, Andy Rotham, Investment Strategist, “Our Views on the U.S.-China Trade Dispute”
    [iii] Source: J.P. Morgan Asset Management, “What is going on with tariffs?”  contributor Gabriela Santos


    Market Commentary 03/31/2018

    Thoughts on Market Volatility

    2018 started like a cannon shot with January’s almost daily records in the equity markets. However, the return of market turbulence in February erased all of January’s gains.  March was more like an old-fashioned roller coaster with increased up and down days winding through the ever-changing news flashes. Normal times may have returned after a fifteen-month hiatus of no volatility.  The optimism shared in 2017 by investors and their renewed appetite for stock investments show signs of changes to come if the coming second quarter aligns itself with the first quarter.

    According to Bank of America Merrill Lynch, during the week of January 15, 2018, investors invested almost $24 billion into equities, bringing the cumulative four-week inflows to the strongest level ever. After piercing through 26,000 on the Dow Jones Industrial, the market reversed course in February losing 10.2% over the next few weeks.  Investors withdrew $24 billion from stock funds as their fear increased due to uncertainty.  This is a good example of an old story set in current times.  Companies, personnel, products and themes change but throughout history investors remain somewhat predictable.  They sell into market volatility, generally entering late and leaving too early.

    Over the past year we’ve written about complacency and how the long uninterrupted positive market is not sustainable, so it’s no surprise that volatility is back. Volatility has been triggered by the fears of inflation, rising interest rates, and now trade tariffs.  Only three months ago investors were flooding money into the stock market on the upbeat news of tax reform and the potential for increased opportunities to participate in the upward market trend.  Investor behavior with respect to volatility in the stock market is like the weather at times; you can see it heat up with no end in sight and then a sudden event, like a storm, can cause disruptions that drive the markets down.  Today, it almost feels like a quick summer storm given all the warnings issued pre-storm.  But even with all the sophisticated technology Mother Nature is still unpredictable as to short-term damages.

    Our investing philosophy has always been to anticipate and advance plan for volatility. Although 2017 was great for investment performance, looking back it was a year of risk management preparing for a year like 2018.  Although early in the year, we can certainly acknowledge that volatility has returned. We prepared for some of the downside that has prevailed during this first quarter.  Like the weather example above, when the National Weather Service tells us in advance that a storm is heading our way we prepare to take cover until the storm passes.  When markets are setting records, taking profits allows us to protect your portfolios until various conditions begin to improve.

    It is hard to predict what the months ahead will bring. We can hope that the trade tariffs are only a short-term skirmish, that interest rates rise slowly, and that the fear of inflation is gradual.  It might be partly cloudy with an occasional storm, but the sun will shine again.  Even though the markets are volatile, the economy is strong, interest rates and inflation remain low and companies are reporting earnings.  Your diversified portfolio will allow you to weather the storm over the long-term and give you peace of mind.

    We welcome any questions you may have as we move through these normal market conditions. We look forward to our conversations and meetings as we head into the summer months. Thank you for your continued belief in our philosophy that has worked well over the years.

    Thomas L. Menzel, CFP®                                            
    President/Principal Owner  
    *Source: Volatility Investment Guide 2018, Calamos Investments, LLC

    Market Commentary 12/31/2017

    Time to question the rise?

    In February of 1984 the legendary investor, Sir John Templeton said “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” As markets have risen to all-time highs in 2017, what is expected in 2018.  Many economists, investment strategists and portfolio managers see 2018 as a year where global growth continues to be strong.

    This is echoed by the Executive Summary of experts in Schwab’s 2018 Market Outlook as follows:

    • Global economic growth lifting earnings is likely to be a key driver for both U.S. and international stocks in 2018.
    • Falling correlations across global stock markets bolster the case for diversification.
    • We expect inflation to rise due to a tight labor market and accelerating wage growth.
    • The Federal Reserve is poised to raise rate two or three times in 2018.
    • 2018 could be the year the 10-year Treasury bond yields exceed the three-year high of 2.6%

    Jeffrey Kleintop, Senior Vice President, Chief Global Investment Strategist at Charles Schwab, states that global economic growth is the broadest in a decade. According to Kleintop, every one of the world’s 45 major economies tracked by the Organization for Economic Cooperation and Development(OECD) grew in 2017. This trend is expected to continue to grow in 2018.

    Although 2017 will be remembered as a year of records broken, investors in 2018 may need to consider a portfolio check-up. Could we be in the late stage of this bull market that continues to present us with opportunities or is it a dilemma?   Investors in general are beginning to ask that question of when does the market decline.  If you have been there before you know the feeling of uncertainty and if you are new to investing you may not understand the risk exposure you have.

    One of the best teachers of all-time on investing was Benjamin Graham. In his book “The Intelligent Investor, Revised Edition”, he said “The best way to measure your investing success in not by whether you’re beating the market but whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”

    Knowing your Recovery Time is Peace of Mind

    Asset allocation shows how much exposure your portfolio has relative to volatility. It’s not your age that matters; it’s the recovery time you build into your portfolio allowing you to have the ability to weather the downturn in the market.  Look at investors that jumped out in the last down turn that bottomed on March 9, 2009 that are still out.  The fear of losing it all was greater than the sense of staying the course.  Investors were driven by fear thinking that they were preserving the remaining value of their portfolio.  The emotional so called “chicken little syndrome” of the sky is falling weighed heavier than logic in 2009. Although in the investors mind they thought they preserved assets, but instead they locked in losses.  In some cases, they have never returned to invest in the markets.  To be a long-term investor, you must understand the underlying risks that you are willing to take on.  Under what circumstances would you make a change in the way you are invested.  Is it a number that it drops to, an influential source that changes your thinking that it is Armageddon or simply you begin to believe it will never recover?  These thoughts may seem sound while the market is in a downturn, but ultimately the emotional part of the brain has taken over.  However, that is where our philosophy has benefited our clients over the past 36 years and we believe that is true going forward.

    Why did so many of our investors stay the course during the Financial Crisis?

    It wasn’t because they weren’t concerned or worried as the markets tumbled. We believed they stayed because they understood diversification and their risk exposure.  It is important to review asset allocation often during up markets.  Watching your portfolio go up and back down again isn’t taking advantage of rebalancing the portfolio from time to time.  The best time to rebalance a portfolio is when you are ahead not after it has gone down.  We believe that risk is a measurement of time and lifestyle needs.  If you look back at the major stock market declines of 1973-74, 2000-2002 and 2007-2009 you will begin to see a pattern.  Portfolio values during each of these time periods from the top of the market to the bottom and back up to the previous top shows us approximately a six-year cycle.  Therefore, if you know your monthly need from your portfolio, then you know how much safety you can build into your portfolio for the worst of times.  Matching your monthly needs to how long you can wait for recovery from peak to valley to peak is key to developing a well-diversified portfolio.

    Today we all know that markets have propelled ahead to record levels. The news on the street is how much higher can this market go.  Our experiences over the years tell us it doesn’t matter how much higher if you have your portfolio positioned to move through all kinds of markets.  In 1981, when I enter this profession the Dow was at 875 and today it has pierced through 25,000.  Looking back, it is just a number, since the companies that made up the Dow then are different today.  It is more about what companies themselves are doing with regards to performance, then an index of stocks that has ever changing names.

    What investors should be doing today is taking profits, paying attention to their asset allocation and understanding their ongoing needs from their portfolio.   As markets continue to move higher investors should also consider selling profits inside their taxable accounts.  Figure out what your after-tax return is overall not the extra dollars that you pay in taxes due to the long-term capital gains. The market is not selective when it goes down.  It takes the profits in your taxable accounts if you don’t. Don’t ignore these high markets.  The times have been good for all of us as investors over these past ten years.  When farmers have bumper crops, they put hay in the barn.  As investor’s it’s okay to take taxable profits to provide for your future cash flow needs or have cash for opportunities after the market declines. As an investor don’t be afraid to pay taxes on your gains, it certainly better than waiting for your gain to be a loss.  In 2017, we took profits in all our retirement accounts, it’s prudent to consider taking some in the taxable accounts given the run up in the markets.

    As investor’s we should all have our portfolio plan firmly in place whether the market goes higher or lower. It is easy to allow your psychological part of your brain to cast doubt. It is also easy for the various media outlets to create doubt or fear in the minds of investors.  It’s hard to ignore the noise. Don’t change your asset allocation to be more aggressive based on how the market is doing.  Instead base your allocation on need and recovery time.  You will be happier, less worried and a successful long-term investor.

    We welcome your thoughts in the coming year. If you have concerns as this market advances, give us a call so we can talk through your situation.  We are grateful that you have believe in the philosophy of diversification over time.  Thank you for trusting in our approach.

    Thomas L. Menzel, CFP®                                            
    President/Principal Owner  
     Sources: 2018 Schwab Market Outlook, The Intelligent Investor, Revised Edition updated with new commentary by Jason Zweig, page 220, Franklin Templeton Distributors, Inc.

    Market Commentary 09/30/2017

    Why do markets worry us?

    This past quarter resembled the previous one in many respects.  The major indexes were all setting records, in some cases daily.  Although increases slowed, the Dow Jones Industrial Average was up 4.9% and the S & P 500 up 3.52%.  The NASDAQ Composite Index was up 5.63% and the MSCI EAFE (International) index was up 3.53%.  New themes have emerged during the year that intensified the so-called “Wall of Worry” which can form at major market peaks.  The current short-list of concerns includes geopolitical tensions, potential replacement of our current Federal Reserve chairperson, the tax overhaul proposal, healthcare repeal and all-time market highs.

    65% of investment managers surveyed last quarter by Northern Trust believe shares are over-valued, the highest ever in the firm’s report.  Bank of America Merrill Lynch and Federal Reserve policymakers have also expressed alarm about higher prices.  Robert Shiller, Nobel Prize-winning economist at Yale University, says the share gains reflect optimism about where the economy is heading, but is an unreliable forecasting tool and shifts quickly.  He goes on to say, “The stock market is mostly psychology.  The fluctuations in it mean that we’re in an optimistic mood but we could change and we could change suddenly.”

    Market increases can be a general surface distraction or may give investors a perceived sense of security as they see no end in sight.  Although optimism exists today, investors are always faced with fear of the unknown.  Information is readily available, coming from many sources and devices multiple times daily.  Sifting through the data, it’s hard to decide what is noise and what is real.  Simply stated: We don’t know what may happen with any of these concerns and we don’t know how the market will respond.  It’s difficult to predict whether this optimism will change to pessimism anytime soon.  Investors need to understand that it’s normal for markets to rise and fall.

    Preparing for a market decline in a rising market is difficult.  We’ve learned from down markets like 1973-74, 1987, 2000-2002, and 2007-2009 that we can thrive, not just survive, when the market changes direction. I remember Monday, October 19, 1987.  The Dow Jones Industrial Average (DJIA) plunged 508 points to 1,738.74, equivalent today to a 5,100-point decline or 22.6%.   It’s known as “Black Monday,” the worst day in stock-market history.  Investors were stunned and their confidence shattered.  The market had advanced for almost nine years with no end in sight. No one knows exactly why it fell but investors’ worries heightened.  Were there concerns or even references to the 1929 market crash?  Absolutely.  Did it resemble 1929?  Not at all.  It was one day in 1987 history.

    That was 30 years ago, and the DJIA was at 22,405.09 through quarter end.  We just completed the ten-year anniversary since the market peaked on October 9, 2007.  Optimism has increased as the markets have risen.  Themes have changed but investors still worry.  The key to lessening concerns is preparation.  Investors need to understand what they can and can’t control.  Taking profits while the market is advancing allows investors to capitalize on staying fully invested in their diversified portfolio, while putting away profits for future use and needs.  It is important to know where opportunities exist; what you do during a market rise or fall makes money over the long-term.

    We continue to believe in and implement our 30 plus year philosophy that a well-diversified portfolio works over the long-term.  We allocate portfolios relative to needs, not whether a new record index has been reached.  Through our meetings and discussions, we have structured your asset allocation to help offset some of the downside when it comes by lowering your equity exposure.  We have strategically taken profits to protect and provide for future needs.  This philosophy and implementation has helped our clients during their accumulation phase, distribution phase and, most importantly, given them peace of mind.

    We welcome your input and questions as we close out the final quarter of 2017.   Thank you for your continued support and confidence in our investing philosophies.


    Thomas L. Menzel, CFP®                                            
    President/Principal Owner  
    Natalie Sherman, Business Reporter, New York BBC News August 2, 2017, “US markets are rising-so why are some people worried?”

    Market Commentary 6/30/2017

    Is low volatility a sign of investor complacency?

    As of the midpoint in the year, many of the headlines remain the same.  World economies seem to be on the road to recovery even with energy prices plummeting.  The U.S. led recovery may be slowing even as major indices have propelled ahead setting new milestones.  The Dow Jones Industrial Average and the S & P 500 were up more than 9%, while the NASDAQ Composite Index and the MSCI EAFE (International) Index were up more than 14%.  Morningstar Moderate Target Risk Index was up 6.90% year to date.  The U.S. market has outperformed since its bottom in 2009, elevating its market capitalization to near historic highs while overseas markets remain low according to a recent American Funds article.  To add fuel to this positive picture, the economy continues to grow with manufacturing, capital spending and earnings all strengthening, yet valuations are stretched in many sectors.

    Portfolio managers are concerned that the market continues to ignore high valuations in U.S. stocks. The word that shows up in most articles these days is “worry”.  Last quarter we wrote about volatility and preparing for turbulent times in order to create awareness that times like these are when investors can easily become complacent and caught up in the successful performance of their portfolios.

    A recent article in the Wall Street Journal may help us to understand the lack of volatility.  In 1993 the volatility index (VIX) was created.  VIX is a measure of the volatility expected over the next 30 days and is sometimes referred to as a “fear gauge”.  Although this is a short-term measurement, the VIX was in the lowest 1% of historical readings as of June 30th.  Investors are concerned about central banks ending their monetary stimulus (easy money), yet their appetite for stocks continues.  As the market has moved up, investors have formed a belief that the market is one directional, which is not the reality. If unmonitored during market advancements, stock appreciation can affect the asset allocation balance, potentially increasing the risk exposure of the portfolio.

    We have all heard the expression “Don’t worry be happy”.  In order to be happy and not worry about what we can’t control, take control of what you do know.  As investors we need to be aware of what influences or drives our decisions, not our emotions.  We think that understanding your risk is more important than trying to guess when the market will go up or down.  Knowing where you stand relative to your needs and goals goes along with managing the element of risk.  Risk should not be a concern if you know your plan.

    Over the past decade many investors have shifted money from cash, savings accounts and certificates of deposits without understanding the risk being added to their portfolio. Portfolios that allocated more into domestic stocks over the last 8 years enjoyed boosted portfolio returns, but that doesn’t address managing risk, a key component to long-term success.  It is okay to have measured risk within a diversified portfolio as long as it meets your lifestyle needs and objectives. Under current market conditions awareness of risk is low.

    Our philosophy is to continually rebalance in rising markets and reevaluate your allocation to smooth out the volatility that will occur from time to time.  In our meetings, we spend time discussing how much to allocate the portfolio based on your risk tolerance and time horizon.  Having the right asset allocation prepares your portfolio for downward pressures.  In the months ahead, we will continue to evaluate your portfolio to keep it aligned with the asset allocation that meets your risk parameters.  Keep in mind that prudent investors don’t wait for the alarm to sound; they take profits to preserve assets for future needs.

    We welcome your questions and look forward to our next meeting.  Enjoy the summer months knowing that your diversified portfolio will prepare you for any future volatility.


    Thomas L. Menzel, CFP®

    President/Principal Owner


    Mackintosh, James. “Spike in VIX Fear Gauge Should Set Off Alarms.” Wall Street Journal, July 5, 2017. “2017 Midyear Outlook: Global Economic Picture Brightens.” Capital Group, July 2017.

    Market Commentary 3/31/2017

    Preparing for Volatility

    The bull market is now the second longest since the Great Depression with the third largest overall gain. The past eight years have been driven by monetary policy supporting low interest rates, low inflation, and low unemployment.  When we look back at this quarter, there is momentum of perceived change on the horizon that is running alongside an underlying improving U.S. economy.  As investors, we all enjoy quarters like this, especially when almost every sector was up.  So far this year international equities have outperformed domestic equities, which is a surprise given the elections to take place in France and Germany.

    Should we be concerned that stocks have risen to all-time highs even though the fundamentals in the overall market remain unchanged? In reality you would think that the stock market is off the charts high. However, a recent T. Rowe Price report found that the S&P 500 price-earnings ratio of 17 based on estimated 2017 earnings was only 10% higher than the markets average P/E of the past 15 years.1 Share prices are not way out of line, just slightly. Most economists and portfolio managers are not seeing signs of a major pullback although they always welcome one since it provides investment opportunities.

    Is there a shift in the wind?

    Clearly the winds of change we wrote about last quarter are blowing. We have seen markets rise rapidly on talk of decreased regulation, infrastructure spending, reduction in personal and corporate tax rates, construction of a wall, better trade agreements, increased military spending  and revamping of the Affordable Care Act.  Since the election, the wind has been in our sails in anticipation of a transition away from monetary policy geared toward enticing consumers to spend more in a low interest and no inflationary time period.  Now we are faced with a new transition from monetary policy to fiscal policy driven by tax cuts and less regulation.

    Is this new transition cause for concern or celebration? We believe it is still too early to tell since there are many headwinds.  The underlying economy is showing signs of improvement not only in the U.S. but also globally.  The Federal Reserve is showing more confidence in the economy with its recent rate hike.  According to Janet Yellen, President of the Fed Reserve, the economy shows it has more tread to absorb inflation and higher interest rates with more rate hikes in the future planned, provided key inflation and labor targets are met.2

    What do prudent investors do at times like these?

    We believe you should prepare for volatility by taking advantage of increases in portfolio value. Successful investors take profits from time to time, while staying well-diversified in case markets move higher.

    Since you know the market is trading at all-time highs ask yourself whether you have a need for cash, immediately or within the next five years. Remember successful investors over time have the discipline to sell high and buy low.  You don’t have to time the market.  Our thought is to take what the market gives you from time to time.  If you are wrong and it continues to rise, consider taking profits again.  It’s okay that you are pocketing profits along the way.  When the market declines, you can look back knowing you sold at a high point.  Don’t be afraid to put some money back in after it goes down.

    Our philosophy has always been don’t worry about volatility, but instead be prepared. A well-thought-out, diversified plan will help prepare you for the ups and downs in the market.  Most of the time, investors think that volatility is only downward, but we are of the mindset that volatility also has an upside.  Taking advantage recently of upside gains we think will bode well for you to meet your lifestyle needs going forward.

    We appreciate the opportunity to help you align your investment risk along with your goals. Planning ahead, we hope will help you cope with volatility when it returns in the future.  We welcome your questions and look forward to talking with you soon.  Enjoy the spring ahead.

    Thomas L. Menzel, CFP®                                            
    President/Principal Owner          


    [1] James K. Glassman, “Investors, stop worrying about a bear market ,” Fidelity, March 26, 2017, accessed March 30, 2017, https://www.fidelity.com/insights/markets-economy/stop-worrying-about-a-bear-market.

    2Josie Cox, “US Fed chairwoman Janet Yellen’s interest rates comments send dollar to highest level in a month,” The Independent, February 14, 2017 accessed March 30, 2017, http://www.independent.co.uk/news/business/news/us-fed-chairwoman-janet-yellen-interest-rates-us-dollar-latest-rise-highest-level-federal-reserve-a7580071.html

    Market Commentary 12/31/2016

    Winds of Change…

    The election of the 45th US president on November 8 introduced a wave of speculation here and across the globe about economic policies for 2017 and beyond. Investors’ hopes for a new, pro-business attitude in Washington drove the S&P 500 to record highs, yet there have also been concerns about the economic impact of changes proposed by the incoming administration. Historical trends caution us against taking the post-election market rally as an indication of what the future holds for this presidency. Nevertheless, many of President-elect Trump’s proposals have the potential to propel the economy forward, though, as always, there is by no means certainty for the road ahead.

    Looking back at 2016, US markets generally remained upbeat from November 9th through year end, with the S&P 500 recording a quarterly return of 3.8%. While the markets rallied post-election, they first had to erase the losses sustained in October. Much of this turnaround was driven by financials. Rising rates and a bet that the new administration will lighten the sector’s regulatory environment drove financial stocks up 21.1% for the quarter. The markets also saw continued gains in energy and industrials, rising 7.3% and 7.2% for the quarter respectively. Even more than large companies, smaller US company stocks had big wins with a total return for the quarter of 8.8% as measured by the Russell 2000.

    By contrast, European equities did not perform well. An aggressive monetary stimulus program wasn’t enough to turn around Europe’s weak economic growth, and an increasing sense of populism and anti-establishment politics created additional uncertainty for European markets. US investors saw their already modest international returns cut even further after the sharp November spike in the US dollar.

    2016 ended relatively well across the board for fixed income despite gyrations along the way. The benchmark 10 year Treasury yield started the year at 2.27% before hitting a bottom of 1.36% in early July. Post-election, the yield shot up again in anticipation of Fed rate hikes and inflation, closing 2016 at 2.45%. Even with a sharp rise in yield and the consequent drop in price for bonds, there were still plenty of strong returns to be found across the fixed income market in 2016. After 35 years, though, we believe the bull market for bonds has finally come to an end, meaning that going forward, successful bond investing may require more skill to attain the kind of returns investors are used to seeing.

    Looking to the future, will the upward trend that started on November 9th continue into 2017? On the one hand, history suggests that markets aren’t good at judging presidents. A recent Wall Street Journal article discussed market returns between election and inauguration for the past 13 presidents, from 1928 through 2008. Seven out of thirteen time periods saw election-to-inauguration returns that starkly differed from the overall direction of the market during each president’s term. This held true across both Democratic and Republican administrations, including that of one of Trump’s most lauded predecessors, Ronald Reagan. After Reagan was elected, stocks rose by about 10%, nearly identical to the gains heralded by Trump’s win. Yet while Reagan’s presidency was characterized by tremendous economic success, the initial rally didn’t hold and stocks lost those early gains over the next couple of years. Here history would suggest that the recent market rally may not be a good indicator of what 2017 has in store.

    That said, when one considers our nation’s already-improving corporate environment combined with a perceived ‘pro-business’ attitude within the new administration, it seems possible that the US market may have legs to continue its run. Investment managers point to Trump’s call for substantial corporate and individual tax cuts, job creation and infrastructure projects, and the rolling back of regulation as policies that may have a positive impact on market performance. Trump has promised to put more investment into job creation projects such as transportation, clean water, telecommunications, security and energy infrastructure. Of course, as with any presidency, it is difficult to know which initiatives will actually be implemented. With the Republican majority in congress, the proposed tax cuts may well be achievable. Whether the other initiatives, many of them carrying enormous costs, will be successfully navigated through Congress is less clear. Yet if the new president can build on the current environment with a combination of fiscal and other policy decisions, we may continue to see stock market strength in the US.

    While US corporate earnings and the economic environment is in generally good shape, there are still significant hurdles to overcome. Market valuation remains one big concern. Investors should question whether corporate earnings will grow enough to support stock valuations, which are higher than their historical averages. Of concern, too, is the fact that many of Trump’s proposed investments in infrastructure would likely come at the cost of increasing the budget deficit. Inflation could become an issue if government spending on infrastructure starts to drive prices up. The current inflation rate is in line with the Federal Reserve target and is low by historical standards but, if it rises rapidly, could put a damper on market growth. Lastly, the diverging policies of the Fed and central banks around the world have caused a strong dollar relative to many foreign currencies, including the Euro, at its lowest level to the dollar since 2003. A further strengthening of US currency could threaten the recovery in US corporate earnings by making US exports more expensive to foreign buyers and reducing the value of companies’ overseas revenue.

    As we enter 2017, there are reasons to be optimistic. Yet whether early gains will translate into long-term results remains to be seen. New forces at work in our markets, such as the rise of inflation and an increasing populist sentiment, will affect investors now and going forward. We may or may not agree with the direction of these winds of change, but we shouldn’t disregard them. We believe that we have entered a new phase of the market cycle that will require more care in selecting investments here and across the globe. Valuations are not cheap overall, but our belief is that opportunities remain. We will continue to be vigilant in finding opportunities that help our clients achieve their goals.

    We look forward to working with you to achieve your goals in the years ahead.

    Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
    Asset Manager                                                            Asset Manager


    JP Morgan Guide to the Markets 1Q 2017; Forester Value Fund Quarterly Update, January 2017; Charles Schwab, Luminous Times: Looking Ahead with Optimism about 2017, January 2017; Raymond James, Investment Strategy Quarterly, January 2017; Weitz Investment Partners, Value Matters, January 3, 2017; Wall Street Journal, Dow Ends Strong After Poor Start, December 31, 2016; Wall Street Journal, Can All the Markets be Wrong on Trump?, November 29, 2016

    Market Commentary 09/30/2016

    USA! USA! USA!

    Earlier this month, those were the patriotic chants heard around Hazeltine, the Chaska MN golf course that hosted the 41st Ryder Cup. The premier golf tournament, which pits Team USA against Team Europe, saw veteran captains Davis Love III and Darren Clark select their dream teams of a dozen of the world’s best players from each country or continent. On American soil with galleries nearing 50,000 fans, the US team reclaimed the cup for the first time since 2008 with a decisive 17-11 win.

    Investors may also be chanting USA! as they review their portfolio statements. After disappointing returns in 2015, US stocks provided a nice win for both the quarter and 2016 to date. Small and medium-sized companies showed double digit year-to-date returns of 11.5% and 10.3% respectively while large US companies produced 7.8%. By contrast, the European and other developed international stocks did little to help overall performance as they only eked out 2.2% over the same time period.

    Just as not all of the US team members won their rounds, not all of the S&P 500 sectors positively contributed to the quarter’s return. A number of the more defensive sectors that had strong growth in the first half of the year saw a retracement of their earlier gains. Consumer staples and real estate had losses of -2.6% and -2.1% for the quarter but still maintained solid year-to-date returns. The telecom and utility sectors each had even greater quarterly losses of -5.6% and -5.9% but still managed double-digit year-to-date returns. The greatest contributor to US stock quarterly performance was the technology sector up 12.9% helped by a successful Apple product launch. Overall the S&P 500 gained 3.9% for the quarter and a respectable 7.8% for the year.

    The strength in the bond market also came as a surprise to many as our Federal Reserve again declined to raise rates. Central banks around the world maintained low or even negative interest rate policies which in turn drove prices even higher in many areas of the bond market. Thanks to these policies, the “safe” part of investor portfolios scored again. It’s difficult to know how long this trend will continue, but this fall marks the 35th anniversary of a bull market in US treasuries. It’s been a good run, giving bond investors very healthy returns over the years.

    Navigating the course through the rest of the year will not be without challenges. The uncertainty of the approaching presidential election is weighing on many, as is the direction and timing of Fed policy. Globally there is an overall sense of geopolitical instability and ongoing challenges to economic growth. After all, while the Ryder Cup brought the British and their European brethren together for a harmonious weekend, we still have to consider the long-term impact of Brexit. The rapid decline and volatility of the British Pound Sterling is reflecting this uncertainty.

    It was 8 years ago that Warren Buffet wrote his “Buy American, I Am” op-ed article in the New York Times. Buffett encouraged investors to be “be fearful when others are greedy and be greedy when others are fearful.”  This letter was released less than 5 months before the US stock market bottomed on March 9, 2009, ending a 57% decline of the S&P 500. Since that time, US markets have seen a more than 200% increase, with passive indices producing very solid results. But we believe we have entered a new phase of the market cycle that will require more care in selecting investments here and across the globe. Valuations are not cheap overall, but there is more fear in the market than there is greed and our belief is that opportunities remain. However, just as the Ryder captains were able to select their best players to compete, we believe that the challenges ahead warrant active managers who can select the best investments to carry the distance and navigate the hazards inherent to securing your financial future.

    We appreciate the trust you have placed in us.

    Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
    Asset Manager                                                            Asset Manager
    JP Morgan 4Q 2016 Guide to the Markets; Forester Value Fund Quarterly Update, October 2016; Schwab “With a Whimper Instead of A Bang: Is the Great Bond Bull Market Over?” September 2016; Goldman Sachs Asset Management “Market Know How- Insights and Implementation Q4 2016”; MFS “By the Numbers,” October 2016.

    Market Commentary 06/30/2016

    Fiduciary Responsibility in a World of Uncertainty

    Uncertainty may be an understatement in today’s environment. Political and societal turmoil, terror threats and a pervasive sense of anxiety have become the mainstays of our media’s reporting. Events such as Brexit highlight the discontent many feel the world over. The long-term implications of Britain’s vote to leave the European Union may not be known for years, but when the results were tallied, global markets reeled. Only days later, though, much, if not all, of the market loss had been recouped. The market gyrations were a reaction that lasted mere days, leaving investors to wonder what they’d just experienced.

    Why markets react the way they do has long been a subject of study for financial advisors. One theory states that as soon as information relevant to a stock is made public, the stock’s price will immediately and accurately adjust to reflect this new data. But even this past quarter, the market’s efficiency, or the degree to which stock prices reflect all available information, has been hotly debated. A newer field of study called behavioral finance argues instead that investors don’t always make decisions that are well thought out or rational. Decisions can be irrational or based on emotion, leading to prices that deviate from the market’s actual value. We believe that there is truth in both ideas. Experience has shown us that short term market movement can be erratic and volatile, but markets over longer time periods are generally efficient.

    Already this year, we’ve had significant volatility with steep market declines followed by strong rallies. Fear during these market drops has driven investors to stockpile record levels of cash, in sums now topping $12 trillion. Cash sitting in money market funds and bank accounts is earning a fraction of a percent, far below even the level of inflation. This reveals that while cash may seem like a safe haven, it’s not a long term investment strategy. The surprise of the quarter may be how well equities and fixed income performed given the up and down environment. On June 23, the day we got Britain’s vote results, the S&P 500 lost a whopping 3.6% but in a fashion similar to the first quarter’s reversal, losses were brought positive by quarter end to post 2.5%. For the year, the S&P 500 is up 3.8% with the turnaround in energy being a big contributor. The energy sector lead the quarter with an 11.6% return. While cash paid virtually nothing, longer term fixed income remained safe ground for investors and provided a nice return. High quality corporate bonds returned 7.7% for the year and US Treasuries were up 5.4%. International markets continued to struggle with sluggish growth, fluctuating currencies and political uncertainties. Overall, developed overseas markets saw a negative 1.46% for the quarter and a loss of 4.42% year to date.

    As advisors, we watch markets and report returns, but our primary responsibility is to help our clients reach their goals without letting emotion interfere with results. This quarter the US Department of Labor addressed this responsibility by finalizing the definition of “investment advice fiduciary.” At the most basic level, this regulation simply requires that financial advisors manage assets in ways that demonstrably put clients first. At Legacy Financial Advisors, we have long operated under this standard and have always believed in offering objective guidance. We know, too, that this high level of care is even more important during uncertain and volatile times when emotions can prevail. Compliance with the DOL’s regulation may mean some modest changes in forms and reporting that Legacy provides, but you can be assured we will continue to work in your interests toward your financial goals.

    As we look toward the second half of 2016 we see some bright spots as well as challenges. We appreciate the trust you have placed in us and welcome your questions and concerns as we navigate the times ahead.

    Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
    Asset Manager                                                            Asset Manager

    JP Morgan 3Q 2016 Guide to the Markets; Forester Value Fund Quarterly Update, July 2016; Schwab 2016 Midyear Market Outlook, July 2016; Lazard Asset Management, July 2016; The Finance Professional’s Post “Whither Efficient Market? Efficient Market Theory and Behavioral Finance”, May 19, 2010; Investment News, “Figuring Out Fiduciary: Now Comes the Hard Part”, May 9, 2016; Morningstar.com, Fund Category Returns.


    Market Commentary 03/31/2016

    Happy Birthday Bull Market!

    It happened without much fanfare – no party, no balloons, no cake, but the bull market that started March 9, 2009 turned seven years old this past quarter. The bull will remain alive until we see a 20% drop from the previous peak, but that doesn’t mean this bull isn’t showing its age. By February 11th, the S&P 500 had a year-to-date loss of 10.5% and a peak to trough decline of 15%. This made for a rocky start to the year that left few celebrating.

    The current seven-year stretch is about two years longer than the average bull market and the third longest in US market history. Over the past seven years, the S&P 500 has gained 204% with its greatest advances coming in year one, bouncing up 68.6% off of the March 2009 bottom. Many weary investors missed the early years of the bull after throwing in the towel long before the rebound.  In the same way but on a much smaller scale, the steep drop in January and February of this year, along with the heightened volatility, tried investors’ endurance.  A double digit decline before the end of February turned investor sentiment to levels of fear usually seen at major lows.  Few investors foresaw the turnaround that would erase those losses.   Nevertheless, by the end of March, the S&P 500 had staged one of the largest quarterly reversals since the Great Depression.

    With the exception of healthcare and financial stocks, all sectors of the S&P 500 were positive for the quarter. Utilities and telecom stocks were the stellar performers driving up 15.6% and 16.6% respectively. Overall US stocks turned a double digit loss into a 1.3% gain for the first quarter.  Where value stocks lagged most of last year, they held an edge over growth stocks for the first quarter that was consistent across small, mid and large companies. REITs turned in another solid performance with a 5.8% return for the quarter, but the biggest surprise was the strength that came out of the emerging markets.  After three years of annual losses, the emerging market barometer, the MSCI Emerging Markets Index, gained nearly 6% for the quarter.  This growth has been attributed to investors scooping up bargains as commodity prices improved and the dollar slid. Developed overseas markets did not perform as well.  Europe continues to muddle through a sluggish economy, yet reasonable valuations and a very accommodative central bank are starting to have a positive impact.

    The US economy officially entered ‘recovery’ seven years ago, and investors have expected to enjoy robust economic growth during this time. Unfortunately, as Janet Yellen and her predecessor Ben Bernanke have commented, growth has been frustratingly slow. In fact, the rate of recovery across this bull market has been more glacial than any since the 1930s. US stock prices have moved at a faster pace than the underlying earnings, making valuations for the broad market relatively expensive. The torpid recovery also brings out the naysayers in full force. Charles Schwab’s chief investment guru Liz Ann Sonders recently wrote about this lingering doubt in a piece titled, “Recession: Your Time is Gonna Come…But Not Yet”. She points out that economic expansions, like bull markets, don’t die of old age.  They die of excess.  We haven’t seen excess in the usual suspects such as growth, inflation or monetary policy.  If there is one benefit to sluggish expansion, it’s that excesses haven’t formed.  Even US market valuations, while not cheap, are far from being excessively rich.

    So where does the aging bull go from here? Can it make another new high and avoid a 20% top-to-bottom decline by the end of May, surpassing the second longest-running bull, which ended back in August 1956?  The market often reminds us that we won’t know in advance.  There will be bumps ahead and we continue to prepare for them but “time in” the market versus “timing” the market will reward the patient investor. As always, we use diversification as a tool to reduce the bumps along the way. Staying the course is hard, but we hope that our help will make it easier for you.  We look forward to guiding you through these times.

    Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
    Asset Manager                                                            Asset Manager
    JP Morgan 2Q 2016 Guide to the Markets; Charles Schwab & Co “Recession: Your Time is Gonna Come…But Not Yet” April 11, 2016; Schwab Market Perspective, “What a Quarter, What’s Next” April 1, 2016; Neuberger Berman “Market to Investors: It’s ‘Time In’, Not ‘Timing’” April 4, 2016; Money.cnn.com “America’s 7 Year bull Market: Can It Last?”, March 9, 2016; USAToday.com “Aging Bull Celebrates 7th Birthday: How Much Longer Can It Last?” March 9, 2016

    Market Commentary 12/31/2015

    Back to the Future

    This past year marked the thirtieth anniversary of the Michael J Fox movie, Back to the Future. The characters in the film use a DeLorean sports car as a time machine to go into the past to change the future. As financial planners and investors, we wish it were this easy. If it were, we wouldn’t go through the process of diversifying a portfolio; we’d simply pick the top performing stock. We would be able to perfectly model how much clients need to save early on and we would only insure against events that we knew would happen. Unfortunately we can’t know the future. However, we do think there are important lessons we can learn by looking at the past so before we review the most recent quarter and outlook for investors, we’re going to travel back in time.

    Back when Marty and Doc Brown were beginning their time travel experiment, the US economy was just returning to solid footing after a deep recession that gripped the US. Little did anyone know at that time that markets were in the very early stages of the greatest bull market in a hundred years. During the 1970s and early ‘80s, many had grown weary of the investment markets. The US had an energy crisis, unemployment was high and inflation was staggering. The economy was moving so slowly that the combination of high inflation and stagnant growth was coined “stagflation.”  Even the high rates earned on bonds and bank accounts were offset by the high inflation levels and double digit financing costs of mortgages and other loans. Investors had little to get excited about.

    We can now look at that period as ‘lost.’  The S&P 500 essentially ended where it started with a lot of ups and downs along the way. However ‘lost’ is a relative term. During the period from 1970 to 1979 investors saw an average annual return of 5.9%. This was what investors received on average after reinvested dividends and capital growth. It was still a far cry from the double digit returns averaged over the prior 20 years, and investors expecting consistent double digits were disappointed. Even as the market exited the recession and was on its journey upward, there was always something to worry about. Naysayers continually called for market collapses, the Cold War was still going, wars were being waged in the Middle East and a Savings and Loan crisis threatened a large part of our country’s financial sector. Ultimately, though, the modest returns of the ‘70s set the stage for the tremendous returns that were the ‘80s and ‘90s.

    Fast forward to 2015. Even though the year ended with volatility and a lot of things to be concerned about, returns for the quarter were respectable. The large US companies in the S&P 500 generated a positive return of 7% and medium and small size US company sectors were both up 3.6%. For the year, returns reflected the global concerns of a Chinese slowdown and the European debt crisis. The S&P 500 eked out a positive 1.4% in 2015 while the smaller companies did not fare as well. Medium size companies were down 2.4% and small companies lost 4.4%. International markets that should have held so much promise had dollar-denominated investor returns wiped out due to a rising US currency. The broad international markets as measured by the MSCI EAFE lost 0.4% for US investors. The emerging markets were hit particularly hard as they were impacted by the slowing Chinese economy. Emerging markets lost 14.6% in dollar-denominated returns.

    When we look at the world and the markets, there doesn’t appear to be much to cheer about in 2016. US equities are now nearly 7 years off their 2009 lows and stock prices have moved at a much faster pace than the underlying earnings. This makes valuations for the broad market stocks relatively expensive, bringing out the naysayers in full force. However the volatile markets have also created new opportunities. We’ve seen this is in several areas of the bond markets including municipal and high yield bonds. Great opportunities also remain overseas as valuations are still far from stretched in many developing and emerging countries. Combine that with a European Central Bank that remains committed to stimulating European growth, and the prospects are favorable. While the energy sector has been devastated due to low oil prices, we will also see beneficiaries from that as well.

    Many investors that came of age during the great bull market of the ‘80s and ‘90s maintain a belief that markets should consistently return double digits. They have largely been disappointed with the mid single digit return of 6.5% over the last ten years. Other investors have only experienced the low returns and wild volatility of the markets since 2000 and have become disillusioned. Both types of investors need to reset their expectations.

    At the November Schwab conference we heard portfolio managers, economists and retirement planning experts explain that at best, investors should expect 6% average annual returns in the foreseeable future. This is in line with the returns averaged over the past decade. Historically, though, long-term bonds have yielded about 5% and long-term equity markets have averaged around 10%. However, it might be some time before we see these averages again. Dr. David Kelly, Chief Global Strategist and Head of Global Markets for J.P. Morgan recently summarized 2015 as the year of distractions, divergence and distortions. It will take patience on the part of investors as the Federal Reserve raises interest rates to reset to normal. However, we believe that the markets still provide the best opportunity for long-term appreciation, even if returns may be muted in the short term.

    Since we can’t predict the future, diversification remains our most powerful tool. As investors we should continue to look at what we can realistically expect in returns from our balanced portfolios. It is never easy to wait to get paid, but when we look back, it always has been the well-diversified portfolio that has made money for investors over the long term. Staying the course is hard, but we hope that our help will make it easier for you. As we start 2016, the global markets have reminded all investors that risks remain. However, we have learned from the past that downturns should be expected and they set the stage for future opportunities. We welcome any questions or concerns that you have. We look forward to guiding you through these times that are difficult for all investors.

    Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
    Asset Manager                                                            Asset Manager
    JP Morgan 1Q 2016 Guide to the Markets; www.MarketWatch.com “8 Lessons from 80 years of Market History” Dec 29, 2014; Wall Street Journal, “What to Expect in 2016” January 2-3, 2016; Morningstar.com, Fund Category Returns

    Market Commentary 09/30/2015

    Investor Fatigue amidst Uncertainty

    After several years of strong average returns and low volatility, investors took a step back this quarter with broad markets having their weakest performance since 2011. A slow drip of conflicting economic reports and poor performance has started to wear on some investors. For many the reaction can be to get rid of their “risky” investments and flood into the “safe” ones. We see some individuals showing early signs of investor fatigue, which essentially is the opposite of investor enthusiasm. As investors, this behavior tends to work against us, so the recent volatility serves as a timely reminder that markets rarely move in a straight line and opportunities come out of markets like this.

    It may not feel like it, but this latest market correction is a typical and even welcome event in a bull market that has lasted nearly six years. Many market watchers had been saying it was time for a correction—not necessarily because economic fundamentals warranted it, but rather because we hadn’t seen a 10% correction since 2011.According to S&P Capital IQ, a correction of 10% typically happens once every year and a half. After the market bottom of March 9, 2009, the S&P 500 propelled upward more than 200% and international markets were up 110% at their peak this year. However the S&P 500 has retraced 6.4% since July in large part due to heavy declines in energy and material stocks. The international markets fared even worse as the MSCI EAFE dropped 10.23% and the MSCI Emerging Markets were down 17.9%. Nevertheless, according to Citigroup research, the current market correction is in line with the median annual peak to trough declines that we’ve seen in global equities since 1970. Going back even further to 1946, corrections have caused average declines of 14% but it has typically taken only 3.6 months for investors to make back their losses. So before getting depressed about short-term numbers, we must remember that corrections in bull markets are an inevitable and recurring event.

    So why now? A pause in the market’s upward trend was inevitable and the headlines of the quarter provided the catalyst. We started the quarter with the Greek debt crisis and ended with Hurricane Joaquin but the most significant news items came from China’s economic forecast and the Fed’s rate hike decision. The China growth story has been the engine driving many economies around the globe, so when reports came out showing the Chinese economy was decelerating, people got concerned. The slowdown has had a dramatic effect on Asian markets and commodities. Reports of a slowing Chinese economy in turn influenced Yellen and company to once again postpone their rate hike, which left many wondering what that meant for the US and global economy. As even the Federal Reserve has had a hard time deciding if the economy is moving too fast, too slow or just right, volatility has followed. Investors reacted to these events by selling risky assets as uncertainty muddied the investing waters.

    In his book, Securities Analysis, Benjamin Graham wrote that “in the short run, the market is a voting machine but in the long run, it is a weighing machine.” Fundamentals of the global economy still seem reasonably healthy, though stronger in some areas than others. When we look at a slowdown in China, we expect it will have a more direct impact on their neighboring emerging markets than developed economies and may even provide some benefits to developed nations through lower commodity prices. For this quarter, investors have voted but we believe that patience will reward investors who maintain a long term approach.


    Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
    Asset Manager                                                            Asset Manager

    Market Commentary 06/30/2015

    It’s a Small World After All

    The world indeed feels like a small, interconnected place after all. The simple chorus of the iconic theme park ride, which celebrated its fiftieth anniversary last year, seems as true now as ever. Like long-suffering parents on a Disneyland vacation, investors can’t escape the news from across the globe, hearing practically non-stop about what’s going on in Greece, China and Puerto Rico. Many ask why the finances of a country the size of Alabama with an economy smaller than Miami even matter to their portfolios.

    When we look at the volatility over the quarter we see that the markets gyrated each time Greece was mentioned in the news. The quarterly numbers reflect a market that started strong then pulled back from record levels set in May. Overall the S&P 500 gained just .3% during the quarter while the Russell 2000, a measure of small company stocks, eked out .4%. Beginning the year, European markets were far ahead of the US but their markets too were tested as fears of a potential Greek tragedy loomed at quarter end. Even with an aggressive stimulus program, improving business sentiment and strengthening activity in manufacturing, European markets generally posted negative returns for the quarter. Looking beyond the quarterly numbers, European markets year to date were still up 6.40% due to the European Central Bank (ECB) monetary stimulus, which overshadowed the Greece news. More broadly though, the international markets were modestly higher with the MSCI EAFE (world index) posting a 1.5% gain for the quarter.

    What about Greece made the markets so afraid? After all, financial problems are nothing new to the Greek government, which has been in default 46% of the time since its independence from the Ottoman Empire in 1829. The answer to this question may be surprising given the news coverage, but the goings-on in Greece have little direct impact on any of the stocks in our portfolios. Though Greece was the headline, the market’s reaction centered less on Greece itself and more on the uncertainty of what could happen if other heavily indebted European nations would miss or stop making payments on their debt. Speculation on the part of investors or media sources always spools volatility. The Greek economy represents less than 2% of the Eurozone’s total output, yet many market watchers see Greece as the canary in the coal mine. In 2012 Greece’s private sector debt was restructured with the value reduced by 75%. As a result, 80% of Greece’s government debt is now held by European institutions, with the European Financial Stability Fund (EFSF) holding the majority. Though Greece’s debt totaled a whopping 177% of their GDP in 2014, the greater issue is not how much debt they have but how they and the other countries in the Eurozone handle the debt. This, and not the Greek debt itself, is the primary challenge facing the Eurozone nations. Greece and other nations with very high debt loads such as Portugal, Italy and Ireland are married to relatively strong economies such as Germany. Traditional options for managing debt become limited with none being particularly attractive—as the Greeks have found out with their austerity programs. While many expect these issues will eventually be resolved without a “Grexit”, the European Union is also working on procedures for nations to exit the Eurozone as no such process has been concretized today. For now, though, Greece has been given another lifeline.

    The news from Europe overshadowed a considerable amount of other market shaping news, both positive and negative, throughout the quarter. We saw a sharp plunge in Chinese stocks and a near default in Puerto Rico’s municipal debt, events which have significant potential consequences for investors. The Chinese market, after years of strong stock gains on the back of double digit economic growth, is paring returns as the robust growth in China slows to mere single digit levels. The sharp decline in Chinese stock prices has also been worsened by margin calls, which have forced investors to sell shares at declining prices. What we are seeing with Puerto Rico’s debt crisis, meanwhile, has some similarities to Greece: the government has gotten extended far beyond what it can support. Puerto Rico is a relatively small economy but has municipal debt issued that represents nearly 2% of the overall US municipal debt market. As an investor, it can be hard to limit exposure to these areas, but it is not impossible. We believe these two examples, among others, strengthen the case for ongoing active investment management.

    Despite the negative headlines there was also plenty of good news that came from around the globe this quarter. Energy prices, while volatile, remain substantially lower than they were last summer. US unemployment is down to 5.3% suggesting full employment, interest rates remain at decade low levels and wages are starting to rise. This all goes a long way to boost our consumer-driven economy and continues to drive a US recovery. European and Asian stocks have been very volatile but we see the ECB is now in the very early stages of their version of quantitative easing. In January 2015, the ECB announced a huge expansion of its asset purchase program committing to spend an average of 60Billion Euro per month, which is expected to boost investment and consumer spending, further underscoring the ECB’s commitment to driving growth.

    We believe portfolio managers that focus on quality and are selective in their investments will be positioned to outperform their respective indices over time. A balanced asset allocation, when in line with an investor’s overall objectives, is proven to help weather the volatility. We live in a globalized economy where we see that the financial fate of one country may be felt by others. Ripples will be felt in many sectors and volatility should be expected as we go into the next half of 2015. More importantly, this means there are opportunities that are not constrained by borders.

    We are constantly looking for ways to take advantage of these opportunities through the tactical changes that we make from time to time. We appreciate your continued trust and confidence. We always look forward to your questions and strive to help minimize your concerns. Enjoy the remainder of your summer with friends and family.


    Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
    Asset Manager                                                            Asset Manager





    JP Morgan 3Q 2015 Guide to the Markets; Charles Schwab, “8 Things You Need to Know About the Greek Debt Crisis” June 30, 2015; Wall Street Journal, “No Easy Way Forward for Uncertain Markets” July 1, 2015; Deutsche Asset & Wealth Management “Xpert Insights” July 8, 2015; Charles Schwab, “Market Perspective: Not Too Hot…” June 26, 2015; Morningstar.com, Fund Category Returns

    Market Commentary 03/31/2015

    360 Degree Focus: Learning from the Great Ones

    Studying the best of the best is a time-tested approach for anyone trying to reach their highest levels, whether we are talking about sports, business or investing. In the sport of hockey, Wayne Gretzky is “The Great One”. Gretzky described himself growing up as an underdog, being smaller than many of the other players. He came to greatness not by his size and speed but by his smart style of play. Gretzky developed a sense for where the players were on the ice and thought steps ahead what it was going to take for his team to score. A 360 degree view of the ice helped him find teammates for goal scoring, but it also helped him avoid being body checked by often bigger players.

    “Skate to where the puck is going, not to where it’s been”
    – Wayne Gretzky

    Sportswriters described Gretzky as having superb peripheral vision but Gretzky himself would say it was less about his vision and more about what he focused on: “where the puck is going.” He played a high level of offense but did a good job defending against his risks as well. Gretzky’s smart play on the ice can also translate to smart investing. Too many investors don’t think enough about risk and miss their goals by focusing on one quarter or one sector’s recent returns. They can react to this information by selling recent underperformers and buying last quarter’s winners. Great investors follow principles similar to what Gretzky described by reminding themselves of their overall goals rather than getting distracted by where the markets have been.

    One of those great investors is Howard Marks, whose record has put him on par with the best investors in the world and who is known for his ability to see opportunity ahead of others. For years he has written letters to clients and recently compiled them into a book titled “The Most Important Thing-Uncommon Sense for the Thoughtful Investor.” His “most important thing” is really a list of things to which investors must pay simultaneous attention, such as where they are relative to their goals and how to select and manage investments in the portfolio that will contribute to reaching that goal. Marks highlights the importance of good defense in a portfolio through balancing risk and reward.

    Balancing risk and reward is essential to successful long-term investing. Mr. Marks was a very successful investor who kept a simple fact in mind: if something in your portfolio can go up significantly, it can also go down. In designing our portfolios, we balance a strong offensive and defensive strategy to meet the needs and objectives of our clients. We view each fund as a player that brings a specific strength to the overall portfolio. The defense doesn’t always get accolades but they have an important role offsetting risk or being positioned for future opportunities. We will often use a conservative fund to complement another fund that takes a more aggressive approach, allowing us to reduce the risk exposure created by owning an investment that is concentrated in fewer stocks or in a specific sector. This is a primary reason we maintain fixed income exposure in our portfolios even during periods when we expect modest returns. Preparing for declining markets is equally important to participating in upward trending markets.

    Each quarter we report returns and often provide a bit of commentary on the markets as well as our thoughts for what’s ahead. By researching investments and monitoring the performance of our positions, we strive to find the best pieces for our client’s portfolio without losing sight of the goal. When we look at the last quarter we saw the momentum for large cap US stocks slow from its pace in 2013 and 2014, while the lagging European markets started the year very strong. The S&P 500 returned 1% for the first quarter of 2015 and the developed markets of Europe returned 5%. The best performing sectors of the US were led by healthcare, which continued to generate strong growth with a quarterly return of 6.5%. It was not a surprise, given the decline in oil prices, to see energy stocks and utilities underperform for the quarter with returns of -2.9% and -5.2% respectively.

    As we look to the rest of the year, we see the potential for continued strength in the European economies. As a region, the Eurozone is the largest economy in the world. It has been a drag on global growth but economists are seeing a turn for the better as confidence is improving, borrowing is picking up and interest rates are very low. A Bloomberg consensus of economists expects the Eurozone second quarter GDP to grow at 1.3%, the fastest pace since the third quarter of 2011. We are also encouraged to hear the constructive tone of the European Central Bank (ECB) and its stance on Eurozone growth. The recent injection of money into the European economy by the ECB, similar to the strategy the Federal Reserve implemented for almost five years, could be a contributing factor to the advancing European markets. The markets here in the United States have a number of headwinds to get through including a strengthening dollar and soft economic data, but there are still more positives than negatives. The Federal Reserve will be watching the data closely to determine when things have improved enough to start increasing short-term interest rates. This will no doubt create some market volatility in itself. Overall we would expect to see the trend continuing with stronger returns coming from overseas and positive but modest US growth.

    To defend against risk in our clients’ portfolios, we have taken profits to fund cash flow needs while we are ahead and have begun building up fixed income in anticipation of where the market is heading. Seeing opportunities in Europe, we have implemented an offensive strategy to add or shift holdings in the international component of the portfolios. Since markets run in cycles, we are always planning for what can go wrong as they are rising, while preparing for the next upswing when they are declining. Focusing on short intervals of one month, one quarter, one year or even three years does not provide a full picture of performance for a full market cycle. No one knows when the next downturn will occur, however having the awareness that it will and a diversified portfolio to absorb the volatility gives investors an opportunity to see through the tough times. Defining real and attainable goals is the basis of any plan. Following the plan is what makes it successful. Once the building blocks of defining goals and balancing portfolio risk with reward are in place, investors must maintain a 360 degree view. The focus is on the future with an awareness of the past. We welcome your calls if you have any questions or concerns. Thank you for allowing us to guide you going forward.

    Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
    Asset Manager                                                            Asset Manager
    JP Morgan 2Q 2015 Guide to the Markets; “Gretzky’s Vision”, Keith Harrison, SportsVision Magazine; “Wayne Gretzky Would Have Been a Great Investor as Well”, Pender Funds; “The Most Important Thing: Uncommon Sense for the Thoughtful Investor”, Howard Marks; “Survival of the Focused: How to Succeed in the Second Half of this Critical Decade” BNY Mellon Wealth Management;

    Market Commentary 12/31/2014

    The Value of Advice: Managing Assets (and Expectations) amidst the Noise

    Each quarter we sift through pages of statistics and reams of economic and investment commentary in preparation for our letter.  The amount of information that we receive and have available is staggering.  This truly is the information age!  Whether you are an investor or investment advisor, you are being inundated with messages that relate to money; some coming from investment firms and investment providers, some coming from our trusted news sources and some from touted experts happily dispensing their financial viewpoint to the masses.  It has reached a point where the everyday smartphone delivers much of the financial information that the highly prized and very pricey Bloomberg terminals delivered just a decade ago to the Wall Street professional.  While we have access like never before, it’s also become more difficult than ever to discern what’s relevant and what is ‘noise’ in making a good investment decision.

    A decade or two earlier the stockbroker was a primary resource for most of the investing public.  Brokers provided research to their clients, recommended suitable investments and then brokered the transactions.  It was also a time when the transaction costs were much higher, transparency was limited and access to quality information was through the investment firm.  Since then the world of investing has drastically evolved and continues to evolve toward even more access to information, lower costs of transactions and greater transparency.  These trends should make the investment process simpler and returns to the average investor even greater.  However in this evolved world, there is a surprising find: the average investor has not seen an improvement in their relative returns.  Morningstar, the large investment research firm, has compiled a performance figure for funds called the “Investor Return™.”  What they found overall is that investors suffered from poor timing and poor planning when buying and selling funds.  The barrage of information today compounds the problem for many investors more so than in years past.

    With all of the noise that the investor faces, it is difficult to determine what information is relevant.  Certainly investors can’t put their heads in the sand, but it is critical to have a process to sift through the information so that one doesn’t become whipsawed by irrelevant noise.  Just as our old radios required us to adjust the dial to get past the static, our most successful and tenured investment managers have a process that helps them focus on the signals that matter most to the investor.  Benjamin Graham, the great value investor and mentor to Warren Buffett famously reminds us, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”  The broad economic numbers that get reported daily relating to inflation, jobs, the condition of Greece, even energy prices may have a short term impact on the broad market but in the long run the prices will reflect the fundamentals of the individual companies in the portfolio.

    Recently we’ve seen a renewed interest by the financial press promoting low cost index investing especially highlighting the S&P 500 index.  It makes sense and it’s not hard to understand if you look at the performance figures for the last year.  The S&P 500 trounced nearly all other major markets and sectors in the US and around the globe.  This past year the S&P 500 returned 13.7% to investors only to be surpassed by the REIT index.  This was a world away from the -4.5% that the developed European markets delivered or the -1.8% generated by the emerging market index.  However all of the attention toward a single benchmark misses a key point:  No one market, sector or stock consistently goes up in a straight line.  Simply looking at the returns of the various asset classes over the past decade or even longer shines a spotlight on the importance of maintaining a diversified portfolio.  The S&P 500 has had two solid years, but it spent most of the past decade in the middle of the pack.  Over the past ten years, average returns for emerging market stocks, real estate and small company US stocks all posted better annualized returns than the S&P 500.  No one knows what will be the next leading sector, stock or geographic market to invest in.  As Warren Buffet said, “Investing is simple, but not easy.”  Unfortunately, promoting one asset class or low cost indexing strategy as the best way to invest because it did well this time is misleading to investors.  Investors have fallen into this trap over and over again.

    The importance of asset allocation and diversification was highlighted by Vanguard earlier this year.  They published research quantifying the value financial advisors bring to their clients.  They broke the components of what we do as investment advisors into modules each with an annualized benefit to the client’s return.  Vanguard confirmed previous research stating that portfolio allocation is the greatest determinant of long term performance.  For Legacy Financial Advisors clients, the allocations are uniquely designed with the client’s individual financial objectives and level of risk tolerance in mind.  While each of the modules researched had a positive impact on overall investor return, after asset allocation the largest contributor to client’s return was what they coined “behavioral coaching.”  Their research reinforced findings by Morningstar saying that individual investors often buy or sell at the wrong time with decisions influenced by noise that has little to do with the long term prospects for the investment or the investor’s objectives.  Vanguard found that helping clients resist the urge to react to the noise and stick to the plan adds significant value.  Their research suggested that this alone added one and a half percent per year to the client’s bottom line return.

    Market performance and headlines change far more often than our clients’ objectives.  Investors have to filter through the noise that often makes them feel that they will be penalized if they do not make changes based on the constant flow of information they receive.  We know that what moves markets on any given day, week or quarter has little to do with determining whether a client will reach their financial goals.  We have prepared our clients’ portfolios in advance of sudden volatility through the use of diversification.  This allows our clients the ability to withstand those most difficult times when the market declines.  Understanding the balance between how much is exposed to market volatility and how much is protected has attributed to our clients success over the past 30 years.  As your advisor we will continue to guide you through the noise and help you to attain or maintain your goals.

    As always, we appreciate the trust you have in us and welcome any thoughts or questions

    Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
    Asset Manager                                                            Asset Manager
    JP Morgan 1Q 2015 Guide to the Markets; Rick Ferri, “Investment Noise and How to Deal with It” September 19, 2013; ASX “Don’t be Seduced by ‘Market Noise’” April 2014; Vanguard Pressroom “Vanguard Research Quantifies the Value of Advice” March 10, 2014; Fact Sheet: Morningstar Investor Return July 2006; Star Tribune “Home is Where the Best Investments Are” December 28, 2014

    Market Commentary 09/30/2014


    This quarter we saw markets, economies and central bank behavior move in distinctly diverging directions. While the average stock fund posted a negative return for the first time in nine quarters, there were a few sectors that defied the average, showing positive returns. Generally, we have seen an increase in volatility across the sectors, with levels reaching their highest since a spike earlier this year. After enjoying several years of muted volatility in investments around the globe and having many stock markets near their record highs, the increased volatility shouldn’t come as a tremendous surprise. For the last year we’ve been talking about, and preparing portfolios for, a period when markets aren’t uniformly moving up.

    At Legacy, one of our core principles is diversification. It is one of the best ways to reduce the risks that come from any one investment, whether it is an individual stock, bond, sector, region or fund. However, diversification is less appreciated and more difficult to achieve when asset classes move together. As we look at the performance of individual portfolio holdings since the beginning of the year, we examine the movement of the different investments that are moving out of step with one another. After a considerable period where economies and markets tended to be highly correlated, we are now seeing strong divergence that is also filtering down to regions and sectors.

    While it may not feel robust, the US economy has been showing signs of improvement at the same time that much of the rest of the developed world has been struggling. This is causing the Federal Reserve to consider raising rates as the US economy is arguably reaching an “escape velocity,” at which point it will no longer need the extra boost from Fed policy. The healthy growth path of the US economy, however, is starkly different from the outlooks in Europe and Asia. Europe has experienced two recessions over the last decade and now their biggest economies look to be sliding toward a new phase of stagnation. Japan is showing some modest signs of life after aggressive stimulus programs but took a step backward after the country’s April tax hike. When we look at China, we see their role as a global growth engine threatened by rapidly decelerating growth. In August the country recorded the worst industrial production growth in over five years.

    Among US companies, there has also been a considerable divergence in performance. Since reaching their highs in recent months, US large caps have maintained modest growth while US small caps have entered correction territory. This difference is evident in the quarter’s returns as large companies (represented by the S&P 500) returned a modest but positive 1.1% contrasted with a loss of 7.4% for small cap stocks measured by the Russell 2000 index. The difference is even larger on a year-to-date basis with the large company stocks up 8.3% and small company stocks down 4.4%. Generally, the large cap US equities were driven by strong gains in Health Care, Technology and Utilities which posted 16.6%, 14.1% and 13.9% respective returns through the first three quarters.

    Similarly we are seeing emerging market economies and their returns moving in completely different directions. Countries such as India have had a resurgence as a wave of investor and business optimism has swept through following the election of Narendra Modi. Brazil in contrast has seen its economy dip into recession. Even after a national spending spree for this summer’s World Cup and in preparation for the 2016 Olympics, the situation is dire. The rating agency Standard and Poor’s recently downgraded the country’s credit rating from BBB to BBB-, the lowest investment grade rung.

    Much of the strong performance in large US stocks can be attributed to the accommodative stance of our Federal Reserve. In a developed world saddled by debt and emerging markets beset by decelerating growth, investors have increasingly come to view the US economy as a refuge, which explains a large share of the money that has flowed here.

    Does this recent outperformance of S&P 500 stocks suggest that investors should give up on diversification? Some investors might be asking that question, but there remains a strong case for not putting all of your investment eggs in one basket. Prominent investment strategists such as Liz Ann Sonders from Charles Schwab and Dr. David Kelly of JP Morgan would say that in the near term the US should continue to show strength based on our economy but that the level of volatility in stocks will also continue to increase. Uncertainty around the globe has become the norm not the exception of late. Global conflicts, geopolitical concerns, and the end of the Fed’s QE program all increase the level of market volatility.

    As volatility increases and concerns shift, the sector leaders will ultimately rotate making diversification the key to long term success. Looking at historical performance shows us that past winners rarely stay on top for long. US stocks have been on top recently, but there’s no guarantee that they will stay there over longer stretches. These switchbacks, which have been a hallmark of markets through time, are one of the key reasons we diversify across multiple asset classes in the first place.

    Volatility can also work in the investor’s favor. Many portfolio managers have been increasing cash over the last year by selling some of their winning stocks. The above-average levels of cash are available for opportunities they find for new investments both here and abroad. In the accumulation phase of life, market volatility provides opportunities to invest at lower prices.

    Legacy views this current market volatility as an opportunity. We have implemented a tactical strategy over the past 12 months of taking profits and building up fixed allocations in order to create a buffer to some of the downside. This benefits investors that are currently drawing from their portfolio or have a risk averse outlook. Long-term investors make money over time, not over night. As investors, we never like to see the negative aspect of investing in our own portfolios, but the use of diversification, taking profits when they exist, and understanding the investment cycles that come in the form of volatility is what ultimately adds value to all of our portfolios. Legendary investor, and founder of Davis Investment Discipline, Shelby Cullom Davis said it best:

    “There is always something to worry about and a hundred reasons not to invest. Those who abandon stocks because of fear or uncertainty may pay a tremendous price. History has shown that a diversified portfolio of equities held for the long term has been the best way to build real wealth.”

    There have been a lot of events around the world creating uncertainty. The next few months may be a test for the markets, but we believe that with patience, opportunities will be created to buy great companies at discounted prices.

    As always, we appreciate the trust you have in us and welcome any thoughts or questions.

    Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
    Asset Manager                                                            Asset Manager
    JP Morgan 4Q 2014 Guide to the Markets; Is Volatility Ushering in a New Market Phase?, Chuck Royce on 3Q14: The Fed in the (Market) Driver’s Seat?, BlackRock Weekly Investment Commentary , October 6, 2014; Clear Sailing…or Choppy Seas?, Schwab Market Perspective; Talking Point 10 2014, Morningstar; Quarterly Monitor, WSJ October 6, 2014; Stocks Could Use Some Separation Anxiety. WSJ September 30, 2014; Growth Fear Sink Markets, WSJ October 8, 2014; Investors See Reasons to Jump In, WSJ October 1, 2014; Stock Valuations Go Under the Lens, WSJ September 29, 2014

    Market Commentary 06/30/2014

    On Success

    The second quarter tends to be a busy time for us as we attend conferences and meet with fund management.  These conferences are where many of the top investment fund managers congregate, giving advisors the opportunity to speak with them about their best investment ideas, their thoughts on the economy, the impact of rising rates and geopolitical tensions, among other subjects.  Every year we strive to gather new information from these conferences to help our clients achieve their goals, yet we know that defining success can be difficult. 

    Investment managers are often called successful if they outperform certain benchmarks, usually one index or another.  For individuals trying to meet their goals, though, relative performance to an index rarely has much value.  The goals of our clients are broad and varied and the only people that can define success are the clients themselves.  As financial advisors, we often talk about investments, but ultimately, they are just tools we use to help you reach your goals.  As we end another quarter, we will talk about investments and their indices but remind clients that the best benchmark to gauge success is whether you are able to meet your objectives.

    This sentiment hit home when we had the unique opportunity to travel to Omaha and visit with one of the investment managers we have used off and on for more than a decade, an invitation which coincided with the Berkshire Hathaway shareholder meeting.  We enjoyed seeing Warren Buffet and his long time business partner Charlie Munger answer questions from analysts, financial media and most importantly, investors.  While there were lots of questions about individual holdings and future strategy, Mr. Buffett made sure to address the issue of performance.  Over the past decades he has talked about measuring the portfolio against a benchmark, with a goal of outperforming the S&P 500 over a 5 year period.  Indeed, the Berkshire conglomerate has only underperformed in one five year period since Buffett took control in 1965.  Yet over the past 30 years, the Berkshire stock portfolio has underperformed nearly a third of the time if looking only at single years.

    Buffett is arguably the best investor on the planet and while even he hasn’t always met his short-term performance goals, his history of success is undeniable.  Buffett and Munger have spent a lot of time defining what success means for them and the managers of Berkshire Hathaway.  Charlie Munger has become quite well known in his own right for his musings on success.  He has frequently spoken on college campuses, and a number of his commencement speeches have been compiled in a book On Success.  It may be telling that there is little talk of finance or investing in these speeches.  His equation for success in life has much more to do with setting sights on where we want to be and resisting the many temptations that can derail us.

    We all define success differently and strive for different personal and professional goals.  Beating a benchmark is certainly a professional goal for investment managers like Buffett and Munger.  As your investment advisor, we benchmark your investments against their appropriate indices and make changes as we see appropriate, keeping in mind the overall objectives of each individual.  That being said, professionals in our industry, as well as the media, have become fast to praise or criticize an investment for short term relative performance that may have little to do with meeting an investor’s overall goals.  At times our most important role as your financial planner is to make sure that your goals don’t get derailed by these distractions.  It is human nature to want to sell investments that haven’t done well in a recent period but experience has shown us that many of the best managers have periods of underperformance.  A critical part of our investment process is to select managers that have been successful over rolling five year periods of time and generate total returns net of expenses in the top quartile of their peers.  Our philosophy has always focused on the total return of a well-diversified portfolio, not whether the individual managers have beaten their benchmark index in the short-term.  We continue to look at the asset allocation relative to your lifestyle needs, keeping in mind the risks associated with your goals. Our experience has shown that the clients that weathered the markets of 2008-2009 in a diversified portfolio, with a mix of fixed income and equity investments, have done quite well.

    We are constantly monitoring your investments, but our philosophy is not to make extensive changes in anticipation of market corrections.  When profits present themselves, as they have in the past 18 months, we reposition those profits into less volatile asset classes and keep the diversified asset allocation aligned with your objectives.  When underperformance occurs, we stop and examine the reason.  If there has been a fundamental change in the management team or the team’s philosophy, we will replace the investment with another one in our lineup.  However, these individual investments are just pieces of the overall portfolio customized to you and your goals.  The real question is whether your overall net returns are meeting your established objectives.  Success may simply be measured by whether or not your cash flow or accumulation needs are met. 

    Looking to the second half of the year we feel the portfolios have been positioned well to meet the investment objectives of our clients but we expect volatility.  We are currently seeing active portfolio managers build up more cash in anticipation of a market decline.  This will allow them to buy more of what they currently hold at more attractive prices and acquire new investments for the portfolio that have become significantly discounted.  Even though broad market valuations are in line with historical averages, the economy remains vulnerable to shocks here and abroad.  We believe that clients with long term growth objectives should be aware of this.  Volatility should be expected and is not a reason to change course.  Portfolios designed around cash flow, having a greater emphasis on preservation, may also see volatility but our strategy is to ensure that cash flow needs will be met for years into the future without having to sell assets that have declined.

    While we spend a lot of time on the research of individual investments, we never forget our priority is to help you meet your objectives.  Whether or not an investment beats a benchmark may factor into your success, it is rarely the sole factor.  We define success by your success! 

    Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA   
    Asset Manager                                                            Asset Manager
    Market Insight-Quarterly Perspectives, JP Morgan 3Q 2014; Munger, Charles T., On Success (Tucson, AZ: Davis Distributors, LLC, 2009).

    Market Commentary 03/31/2014

    The Beginning of the End of QE3

    As we conclude the first quarter of 2014, we want to take this opportunity to address the significance of the Federal Reserve System, the effects of QE3 tapering, and the appointment of Janet Yellen as the new Federal Reserve Chairwoman.  The Federal Reserve System was established after a series of financial panics and bank runs that threatened the financial system in the United States in the early part of the 1900s.  The Federal Reserve Bank (Fed) of the United States operates with a dual mandate: to maintain both stable prices and full employment.  Historically, its main tool has been the purchase and sale of US treasuries and federal agency securities to impact interest rates, specifically the federal fund target rate.

    Generally, the formula for the Fed stipulates that interest rates should be raised when inflation or employment rates are high and lowered under opposite conditions.  When this tactic did not have enough of an impact on the 2008 recession, for the first time in history the Fed employed the Quantitative Easing (QE) strategy, which provided a much broader and more aggressive approach than the traditional open market operations.  QE allows the Fed to purchase longer duration treasuries as well as other assets such as mortgage backed securities (MBS).  In November 2008 the Fed announced it would buy $800 billion in bank debt, MBS and Treasury notes to stimulate the struggling economy.  It ended up doing much more than this through their three rounds of quantitative easing, the last of which, QE3, was implemented in September of 2012.

    Did the Fed’s QE programs accomplish what this unconventional strategy was intended to do?  Is the economy now able to stand on its own?  The QE programs were specifically designed to lower long term interest rates, increase investment and boost job growth.  To a large degree, the program accomplished those goals.  We see that the unemployment rate climbed from below 5% in 2007 to a peak of 10% in 2009 but then fell back to its current 6.7%.  While we are still far from maximum employment, the US continues to see modest improvement in job growth.  The long term interest rates have also remained low, which is a very important factor for home buyers as well as businesses that are investing in larger scale projects.  This clearly has had a positive impact on the rising home prices over the last few years.  Banks as well as businesses have continued to hold onto cash to a greater degree than hoped, but with rising consumer confidence, we expect that banks will increase their lending and businesses will again start capital spending for plants and equipment.

    This quarter Janet Yellen, an accomplished economist familiar with the QE strategy, stepped into the top spot at the Federal Reserve Bank.  As one of her first acts, she started the planned tapering of the well-publicized QE3.  While a reduced need for stimulus should be a positive sign that the economy is improving, any hint of this policy reversal creates more volatility in the overall markets.  One of the markets’ worst fears is that the Fed will cut back on its easy money policies at a time when the economy is just not growing fast enough to counterbalance it.  So not surprisingly, when Yellen announced that this year was the beginning of the end of QE, the markets reacted.  The markets’ response to the January announcement was swift with the US markets hitting their lows of the quarter by early February.  The Federal Open Market Committee (FOMC) tapered back another $10 billion at its March meeting, while slightly downgrading its economic forecast to growth of 2.8 to 3 percent this year, down from 2.8 to 3.2 percent.  When we look at the overall results of the quarter, they were positive, but they came with volatility.  The S&P 500 returned just 1.8% for the first quarter.  The closing low for the first quarter was 1741.89 and the closing high was 1878.04, a range of nearly 8%.

    As it appears, the Fed has accomplished its goals to a degree but the economy needs to improve further before they call their strategy a complete success.  The Fed has been very clear that its actions will be gradual and deliberate both in its reduction of quantitative easing and their ultimate decision to increase short term interest rates.  It will continue with a slow reduction of stimulus to the economy, reducing its monthly bond buyback program by $10 billion a month.  It currently stands at $55 billion.  The FOMC also stated that asset purchases are not on a preset course, an indication that the central bank is prepared to slow or speed up the pace of its tapering if necessary and that its unemployment rate target is flexible. 

    What does all this mean for you and your investments going forward?  We believe that US companies are going to continue to improve.  Even with major US stock indices hitting record levels, the price increases have come with an improving economic backdrop and healthy corporate balance sheets.  Stronger global growth has also led to record profits.  Inflation has remained a non-factor to this point but is another reason to hold stocks for the long term.  We expect volatility to increase from the very low levels we became used to last year but overall we continue to believe equities will lead other asset classes.

     In June of 2013, after four months of research we analyzed two aspects of the overall bond market.  Rates in our opinion could do two things:  Stay flat or increase.  We restructured the portfolios to reflect both of these outcomes.  We focused on duration, yield, credit spread and types of bonds that perform in a flat or increasing interest rate period.  Our goal was to maintain the everyday need for funding monthly cash flow, protecting the allocation within a diversified portfolio and to prepare for the next phase of adjustment within the bond market no matter how the changes take place.  The bond market is every bit as diverse as the equity market and we have a universe to consider for your portfolio.

    We continue to monitor these changes.  We believe they will require more work.  However, even if rates go up in the next year, we would expect to see price declines in some areas of the bond market while others will have much less impact.  There has been much written about how bonds should be avoided in anticipation of the Fed’s tapering and concerns of higher interest rates to come.  We believe rates will eventually rise.  However, we disagree with the blanket statement particularly to avoid bonds.  Bonds continue to serve a purpose within a diversified allocation.  As investors you need to own the appropriate bonds based on the economic environment that exist.  Since we are in a historically low interest rate time period brought on by the Federal Reserve policy, we need to identify what works today and where are we heading. 

    As we go into the second quarter of the year, we want to make sure we talk to you about the potential upside as well as the downside volatility going forward.  Diversification remains key in our perspective as well as positioning your portfolio for your needs- both now and in the future.

    Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA    
    Asset Manager                                                            Asset Manager
     Lauricella, Tom, “Markets Review and Outlook: Moneybeat’s Quarterly Quota” The Wall Street Journal, 1 April  2014; “US Fed Cuts Monthly Bond Buying to $55B a Month” MSN.com, 19 March 2014; HFI Weekly Commentary, HFI Wealth, March 31, 2014; Market  Insight-Quarterly Perspectives, JP Morgan 2Q 2014; Alessi, Christopher and Mohammed Aly Sergie, “The Role of the US Federal Reserve” Council on Foreign Relations, 23 December 2013.

    Market Commentary 12/31/2013

    Faces of a Market

    We have just completed the best year for US stocks since 1995.  This puts the S&P 500 up 126% over the past five years leaving some people feeling extremely optimistic about the new year’s prospects.  Others, however, are looking at the same figures and drawing a completely different conclusion.  We are hearing so many different opinions, from market pros to market participants, we think it makes sense to step back a bit.

    Acclaimed author Stephen Covey wrote a book, “7 Habits of Highly Effective People,” where he talks about how our perception of things is influenced and shaped internally.  He argues that sometimes we need to shift ‘paradigms’ or the perspective from where we look to see the whole picture.  He illustrates how each of us can look at the same thing but come away with a very different impression.  Our paradigm influences our view.  The picture below is a classic example.  Most people will look at it and see either a young lady or an old woman.


    Which one you see depends on many things and it can take some time for a person to see both.  Often, each of us will see a different thing based on the place we come from, or as Covey would say, our paradigm.  Covey also describes paradigms as maps.  Each of us has many, many maps in our head that have been drawn from experiences, influences, etc.  These maps can be divided into two main categories.  The first category is actual reality or the way things are, the second is the way we think things should be.  We interpret everything through these mental maps.  When we view the picture, our interpretation is based more on our psychological view than a logical view.

    As we enter a new year, investors are viewing the market through the lens of their own experience.  Many are feeling good again about their investments, especially when looking at the equity returns of the last few years.  Other investors still have the declines of 2008 fresh in their minds.  In addition to how good or bad we perceive our returns to be, we are also influenced by a lifetime of experiences.  When Covey makes a case for shifting our paradigm, he also suggests that we reflect on the conditioning that has shaped our perceptions.  The shaping of these views can come from experiences as broad as childhood memories of watching our parents handle money, to how we spent our first paycheck, to what we expect for our retirement.  The more aware we become of what influences us, the more we can examine our paradigms, and test them against reality.  This is the first step in shifting our investment paradigm.

    While none of Covey’s writing is specifically geared to investing, we think his approach is well suited for today’s investor.  He explains that while paradigms may need to shift to see a whole picture, there are principles that are immovable.  Investing principles are sometimes forgotten, but that doesn’t make them less constant.  Here are several that we’d like to highlight:

    1. Know yourself- This is critical to investing and relates to the above discussion.  As financial advisors, we will ask many questions to better understand your objectives as well as what emotions will impact your investing.
    2. Focus on the fundamentals- In this age of instant information, fundamentals can be overshadowed by sound bites.  Each investment has to be analyzed on its fundamentals, including but not limited to valuation and growth prospects.  In the short run, stocks can move on emotion, but in the long run fundamentals always win.
    3. Build a diversified portfolio- This is a time-tested approach that balances risk and reward.  Investors often resist diversification when they look back at historical returns and want to buy what has been successful.  Our job is to find the best investments across the spectrum and use our tools to maintain diversification inside of an allocation customized for you.

    With this in mind, the full picture or perspective will differ for each client and will revolve around each client’s needs.  We realize that your expectations will be set by these perspectives.  Our years of experience have taught us that your expectations will determine how you view volatility as it relates to your situation.  Therefore, understanding your perspective helps us to guide you in accomplishing your objectives.  It is our role to take your views and beliefs and incorporate them into the philosophies we use on long-term investing.

    We continue to believe the market holds opportunities and we realize that investments don’t move in straight lines forever.  In 2014, we expect some volatility in the U.S. as the economy finds its legs with less Fed support.  Even in this positive market environment we need to take defensive action to prepare for the next downturn.  In 2013, we shifted some of the gains to safer investments for clients that used the portfolio for current and future funding needs.  This is one of the strategies we’ve used for many years.  We may also begin to shift another round of profits to fixed/cash as we begin the year to allow for the volatility that will come in the future.  We have learned, as many of you have, that the market moves in all directions—without warning in most cases.  We believe that the diversified approach that we apply to all our clients’ portfolios is well positioned for the next cycle.  We also don’t want to be myopic.  Few regions around the world participated in the recovery the way the US did.  Value investors are finding select opportunities overseas.  In fixed income, we face a low interest rate environment that makes some of the traditional approaches challenging.

    There will always be many distractions to derail your thoughts, just keep in mind that having the right portfolio allocation allows you to stay the course.  Selling into an up market makes more sense than selling after the market declines.  We like profits.  We will continue to evaluate all asset categories to find opportunities that should be incorporated into a diversified portfolio.  As with the two faces in the picture, investors sometimes only see what they can see.  We as advisors will help you understand what applies to your situation to help you through all types of market conditions.

    We are honored to be working with so many wonderful individuals and look forward to speaking with you throughout the year.

    Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA     
    Asset Manager                                                            Asset Manager
    “Turn the Page: Outlook for Economy/Stocks in 2014” Charles Schwab, January 2014; “Ten Principles of Investing” Charles Schwab, 2008; “The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change”, Stephen R. Covey, 1989

    Market Commentary 09/30/2013

    Reflecting on a Five Year Anniversary

    The debt ceiling, QE tapering and political stalemates have dominated recent headlines.  They’ve become such recurring themes that it’s hard to resist recycling them here.  However, we are now five years past one of the largest financial crises our country has ever faced and this is a good time to look back.  If we reflect on the causes of the crisis, the impact emotion had on investors’ returns and the actions taken since, we realize this was a defining moment we will be able to learn from for years.

    There has been much finger pointing as to the single cause of the crisis but it was certainly far more complex than any single factor and, in essence, was a perfect storm.  It was fueled by massive levels of greed as well as the unintended consequences of good intentions.  History will paint a portrait of Americans living the good life…until it stopped.

    We started hearing about cracks in the financial system as early as the summer of 2007.  At that time, it was difficult to foresee the huge ripple effect that crumbling financial institutions would have on the markets and the economy.  Leading up to that summer, personal spending was at all time highs and savings rates were hovering near zero.  Even with low savings, household net worth figures still looked good, augmented by booming home prices and a strong stock market.  Consumers were taking advantage of low interest rates, easy access to loans and increasing home values.  Banks were eager to lend and were lending liberally.

    The traditional bank model of paying customers interest on deposits then lending those deposits at a marginally higher rate had largely been abandoned.  In this new world, banks didn’t hold their loans but instead packaged them up as investments.  It was more profitable to ‘sell’ a loan than to own it, making underwriting much less important.  Many investment banks and financial institutions had also found it very profitable to create and sell high-risk investments such as mortgage-backed derivatives.  On top of that, roughly half the mortgages in America were guaranteed by the government-sponsored entities Fannie Mae and Freddie Mac.  This created even less reason to worry about the ability of homeowners to actually afford their mortgages.

    The system began to deteriorate when it came to light that a large percentage of this packaged debt was not as creditworthy as investors were led to believe.  It was no longer good as collateral and lending between institutions froze up.  Levered products, such as mortgage-backed derivatives, magnified the losses.

    Some of the most memorable events of the crisis occurred between September 10 and October 10, 2008.   The government permitted Lehman Brothers Holdings to fail, while The Federal Reserve Bank of NY authorized an $85 billion loan to save AIG.  Merrill Lynch and Co was acquired by Bank of America to avoid demise, and shares of the Reserve Primary Money Fund fell below $1, ‘breaking the buck’ for investors.  These events had a dramatic impact on the economy.  The US GDP dropped by 8.3% in the 4th quarter 2008 and home prices plummeted.  At the worst point, 26% of homes were worth less than what was owed.  The unemployment rate hit 10%, not taking into account the many underemployed workers or those that had stopped looking for work, making it the highest unemployment rate since 1982.  This period is referred to as the Great Recession.

    In 2008 and early 2009, it was difficult to see the light at the end of the tunnel.  The worry and fear that many Americans faced was heightened by the barrage of media reports every time there was negative news.  Greed certainly was a large part of creating the bubble, but then fear took center stage.  Warren Buffet summarized this concept well in 2001 when he argued:

    “Occasional outbreaks of those two super-contagious diseases, fear and
    greed, will forever occur in the investment community. The timing of these
    epidemics is equally unpredictable, both as to duration and degree.
    Therefore we never try to anticipate the arrival or departure of either. We
    simply attempt to be fearful when others are greedy and to be greedy only
    when others are fearful.”

    In the paper, “Behavioral Finance in the Financial Crisis: Market Efficiency, Minsky and Keynes”, Hersh Shefrin and Meir Statman conclude that even with hindsight in our favor, financial crises are far too common to think we won’t experience them again in the future. They cite the crisis of 1974-75, which was almost as long and severe as the Great Recession of 2007-2009.  They discuss the twin Reagan-era recessions of the 1980s, which brought high unemployment and were followed by a sovereign debt crisis and a Savings and Loan crisis.  Shefrin and Statman also address the foreign currency crisis of the 1990s in regards to the action required to prevent the disposal of Long Term Capital Management from breaking the global financial system.

    We know the world is uncertain and psychology plays a large part in creating booms and busts in the financial markets and economies.  The key is how we apply this knowledge, understanding that it will be different based on our own circumstances and objectives.  As financial advisors, our role is to create portfolios based on those very individual needs and objectives.  At times, we make tactical decisions about deploying capital but always keep the overall objective in mind.  When markets are volatile, our goal for each client is to have the portfolio positioned to meet income needs for a number of years while staying within the context of the client’s ability to sleep at night.

    Some individuals have lost confidence in the investing process.  However, we believe five years after the financial crisis, our financial system is stronger than ever.  Our government has overhauled financial regulation in a scope that hasn’t been attempted since the Great Depression.  Regulation, oversight and enforcement are vital to markets and much of the recent regulation is positive.  Businesses have also become stronger and we welcome a renaissance in American manufacturing.

    It’s important not to forget the lessons we learn from each of these crises, even though as humans we tend to have short memories.  As 2008 returns no longer appear on five year performance histories, we need to be reminded of the trade-off between risk and return.  Diversification remains a key tool both to being opportunistic and reducing portfolio risk.  History will repeat itself, though hopefully not for a long time.  We appreciate your confidence in our philosophy and look forward to addressing any questions or concerns you might have.

    Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA      
    Asset Manager                                                            Asset Manager


    “After Market Rebound, Clients Remain Skeptical” Investment News, September 2013; “Five Years from the Brink” Bloomberg BusinessWeek, September 2013; “Buffett’s Crisis Lending Haul Reaches $10 billion” Wall Street Journal, October 7, 2013; “US Unemployment Rate Hits 10.2%, Highest in 26 Years” NY Times, November  6, 2009; “Behavioral Finance in the Financial Crisis: Market Efficiency, Minsky, and Keynes” Hersh Shefrin and Meir Statman, Santa Clara University, November 2011.