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THE PRIMARY THEME OF SPRING 2016’S INVESTMENT ADVISORY
MEETING: NAVIGATING BIZARRO WORLD
Unfortunately for investors here on Earth, things are beginning to look a lot like
Bizarro World!
Introduced in the early 60’s, Bizarro World (also known as htraE, or “Earth” spelled backwards) was a cube-shaped
planet that was home to Bizarro versions of Superman, Lois Lane and friends. The Bizarro code stated, “Us do opposite
of all Earthly things!”, and in one episode, “Bizarro Bonds” are sold that are “Guaranteed To Lose Money For You!”
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FROM ZIRP TO NIRP…
SAVERS ARE PAYING A BIG TOLL IN AN EFFORT TO SPARK GLOBAL GROWTH
The past year has marked the return of volatility to capital markets, and perhaps more importantly, an end to the
“bullishness in complacency” that we have seen throughout most of the current bull market. Investors today are faced
with a greater deal of uncertainty, and for better or worse, unprecedented global monetary policy continues to be the
main driver of markets around the world.
In an effort to stimulate global economies, ZIRP (Zero-Interest-Rate-Policy) has been replaced by NIRP (Negative
Interest Rate Policy) in many parts of the world, and more than $7 trillion in government bonds around the world now
offer yields below zero percent.i
That’s right. Governments and private investors around the world are now paying for bonds that are guaranteed to lose
money for them if held to maturity; Bizarro World indeed!
IFP’s Spring 2016 Investment Advisory Committee brought together a group of exceptional investment talents from
across the country to discuss the current market landscape and the broader implications for our clients.
We also offer three steps for clients to consider as they look to successfully navigate through “Bizarro World”.
STEP # 1: CALIBRATE YOUR COMPASS…
TALK TO YOUR ADVISOR ABOUT RISK AND WHAT IT MEANS TO YOU.
In the asset management business, the academic definition of
risk is, volatility associated with a particular expected return.
Here at IFP research, we believe that while volatility can be a
symptom of risk, it falls short of matching the catch-all definition
of risk. After all, an apple is a fruit, but apples do not define fruit.
“Volatility is an overworked
concept… you shouldn’t be
imprisoned by volatility.”
We believe this is a great way for our clients to think about
market volatility. Fluctuations, by definition, are temporary, and
- Charlie Munger
a temporary downturn does not present a problem if an investor
can hold on and come out the other side. In fact, a rational understanding of volatility can be a significant advantage for
investors with longer time horizons, as some of the best opportunities often present themselves during the most
volatile times.
Risk can mean different things to different people, and the academic definition of investment risk does not typically
take into account the hard- to- measure assets that may be more important to an investor.
IFP’s research team believes that investors should take time to consider the risk, and how it affects them. An honest
conversation between yourself and the client about the client’s interpretation of risk and how it’s best managed, can
help calibrate your compass as you begin your journey through Bizarro World.
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STEP #2: KEEP AN EYE ON YOUR
LANDMARKS…UNDERSTAND WHERE
YOU’VE BEEN, WHERE YOU ARE, AND
WHERE YOU’RE HEADED.
We have come a long way since the depths of the
Great Recession in March 2009. In fact, the end of
April marked the second longest bull market in
American historyii:
While it’s anyone’s guess as to how long this bull
market will ultimately last, IFP research believes
that “where we are” is in an investment
environment, potentially marked by lower returns
and greater volatility. We’ve seen variation in
returns across individual securities, in many
asset classes, reach it’s highest level in many
years, which gives high quality active managers
the opportunity to show off their skills.iii
Investors should no longer rely on a rising market
lifting all boats. While out of favor for some time
now, active management may begin to show its
value in an increasingly choppy market.
As for where we are going, the business drivers
of returns may be shifting as we potentially
enter an investment landscape unlike any
we’ve seen in the last 30 years. Interest rates
and inflation, which have been on a steady
decline since the 1980’s, may begin to rise as
economies improve. Productivity, a key driver
of long term growth, may be slowing, and
corporate profits may face increased pressure
from overseas competition.
IFP research believes that it is a great time for
investors to take a step back and reflect on
where they’ve been, where they are currently,
and where they want to go with respect to their
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financial future. Reviewing things like risk tolerance, savings rates and portfolio goals and objectives can make a big
difference as we move towards the latter stage of the current business cycle.
STEP #3: STAY DISCIPLINED AND USE YOUR MAP…PROCESS MATTERS
Another topic that our committee spent some time discussing was the importance of process, especially during
challenging times. Emotions can wreak havoc on long term plans, which is why serving as behavioral coaches is one
of the highest value adds that an Adviser can provide to their clients.
“By failing to prepare, you
are preparing to fail.”
In fact, a Vanguard report showed that over time, good advice
can potentially add about 3% in overall returns. iv Things like
cost-effective plan implementation, dynamic spending
strategies, withdrawal order in retirement, and intelligent asset
allocation, as well as asset location are all value added
- Benjamin Franklin
components that a good Adviser can implement regardless of
what the market is doing.
When used within a comprehensive, goals-based wealth management framework, the “Adviser Alpha” is a concept
one that we very much believe in here at IFP Research. As passive investing continues to gain momentum, investors
are thinking more and more about portfolio construction and the costs they pay for certain exposures. Where to use
active vs. where to use passive is of critical importance, and can go a long way in terms of cost effective portfolio
implementation. IFP research truly believes that an intelligent blend of passive and active management, where active
management is used for less efficient asset classes such as Emerging Markets and U.S Small Caps for example, can
add tremendous value in the long term.
For many investors, separating a portfolio into a series of smaller “Buckets”, each of which has a specific role in the
overall portfolio, can make for a better understanding of the drivers that affect underlying returns.
If this method is implemented: What you end up with is a “Conservative” bucket, used to fund short term expenses and
create portfolio stability, “Core” bucket comprised of passive index funds for that low cost exposure to more efficient
parts of the market, and a “Growth” bucket, focused on active management in areas where such a style has the best
potential to succeed. While there are many variations of the bucket strategy, the overall concept tends to be the same;
breaking down a portfolio into smaller building blocks with different objectives in a goals-based wealth management
process makes the most sense.
CONCLUSION
Volatility has returned to markets over the past year, and the second half of 2016 seems destined for that trend to
continue. A contentious presidential cycle here in the U.S., a potential “Brexit” as the British consider their role in the
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E.U., and a few more potential FED rate hikes are just some events that could continue to drive volatility in the market.
All of this against the backdrop of slowing global growth and historically unconventional monetary policy should make
for an interesting second half of the year.
IFP research encourage investors to make sure they remember the three steps for navigating “Bizarro World” , and
prepare for an investment landscape that may be more difficult than anything we’ve seen since the start of this bull
market.
The information contained in this newsletter is not intended as tax, legal or financial advice, and it may not be relied on
for the purpose of avoiding any federal tax penalties. You are encouraged to seek such advice from your professional
advisors. The content is derived from sources believed to be accurate. Neither the information presented nor any
opinion expressed constitutes a solicitation for the purchase or sale of any security.
Securities and Investment Advisory Services offered through Signator Investors, Inc., Member FINRA, SIPC, a Registered
Investment Adviser. OSJ address and phone. SMAR #121-20160525-296418
i
Source: http://www.bloomberg.com/quicktake/negative-interest-rates
Source: http://money.cnn.com/2016/04/29/investing/stocks-2nd-longest-bull-market-ever/
iii
Source: https://www.blackrock.com/investing/insights/blackrock-investment-institute/outlook
ii
iv
Important: The projections or other information generated by the Vanguard Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in
nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time. These hypothetical data do not
represent the returns on any particular investment.
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