“Your Vision, Our Expertise: Your Peace of Mind” ®


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;

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 it 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.