ADVISOR
THE
MONTHLY NEWSLETTER
Greetings:
Capital Financial Management NC, Inc.
As I write this note for our newsletter this month, the Dow is at
19,207. This may be tapered down a bit as the Feds raise interest rates
in December however, with Mr. Trump in the White House, he will
be lowering Corporate tax rates and that will keep money and jobs
here at home. He also plans on lower tax rates for middle America as
well. We look for the market to hit the 20,000 level by the middle of
next year. All good for portfolio's that maintain good diversification
on growth stocks. As also, managing risk within your portfolio is
crucial. Please feel free to call our office for a review of your
portfolio.
Don strives to be an advocate for retirees,
those still working and people just like you.
He is committed to helping them address the
issues that are important to their financial
well-being. Don has completed studies in
investment and finance at NCSU. He is a
licensed investment advisor and is held to a
fiduciary standard.
How interest rates can
affect the bond market
With the constant gyrations of the stock market,
and the concurrent news that speculates about an
interest rate rise and its impact on the stock
market, little is said about the bond market in
comparison. There are still millions of investors
who invest in bonds or bond funds, but it seems
to be less news-worthy, despite the fact that any
Fed actions, can affect the bond market as well.
The relationship between bonds, interest rates and
inflation can be a little confusing for the average
person. It isn't quite as straight forward as
understanding that a share of common stock can
go up when a company is doing well and
investors like what they see.
With bonds, there is an inverse relationship
between price and yield, and that is just one
characteristic of bonds that leaves some people as
confused as reading the tax code. When interest
rates go up, existing bond values are reduced and
falling interest rates increase existing bond values.
With bonds, there is also interest rate risk and
credit risk to consider. Bonds are rated from safest
Copyright 2016 Capital Financial Management NC, Inc.
to very risky. A lower-rated bond might offer a
little more return, but there is an accompanying
risk increase as well.
Bonds and Rising Interest Rates
There has been a lot of speculation about how
many times the Federal Reserve would raise
interest rates during 2016. The adjusted estimate,
late last year, was four times. Now, in November,
we have seen that wasn't the case. The Fed's chair,
Janet Yellen, has said that she wanted to see better
job numbers before raising the rates and those
haven't materialized. Also, raising interest rates is
a way to slow down an economy that might be
growing too fast. The U.S. economy has been
largely stagnant in recent years.
Bond buyers have had to be content with low
yields and this won't be helped if, and when, the
Federal Reserve raises rates.
In general, bonds with shorter maturities are not
impacted by changes in interest rates as much as
longer term bonds. Bonds with a longer maturity
have greater price volatility. Some corporate
bonds offer a floating rate feature that offers some
protection from fluctuating rates. The
government also offers a two-year note with this
feature. Some bond holders incorporate a strategy
of "bond laddering," where the maturities of the
individual bonds held are spaced out over regular
intervals.
Don and Patti have been married for 34
years, with two great sons.
It should also be pointed out that in any
discussion of bonds, there are many factors that
influence any individual bond, such as the
coupon rate and length to maturity. Those with a
lower coupon rate — the periodic interest
payment paid by the issuer — and a longer
maturity, have the most price volatility.
For bond investors, who are nervous about any
impending interest rate hikes, or who are just
adverse to volatility, they might want to consider
bond funds, or individual bonds, that offer
maturities less than five years. Also, if interest
rates do go up, those bonds that are lower-rated,
will fall faster in price. This would not be the case
with a U.S. government bond.
This is just one more reason that a diversified
portfolio can address more changes in the
investment environment than investing in just
one type of security or just one sector.
CAPITAL FINANCIAL MANAGEMENT NC, INC. - MONTHLY NEWSLETTER
Why the S&P might
not be the best
benchmark
Keeping up with the Joneses has been an
American social phenomenon as long as the
idiom has been a part of the American lexicon.
The habit of comparing one's own social standing
with friends and neighbors is just a part of living
within a country of opportunity and owning
things.
Of course, keeping up with the Joneses isn't all it's
cracked up to be. Maybe your neighbors are listed
on the Forbes 400 and they can own whatever
they want. It may be fruitless to pursue any
substantial comparative lifestyle. This may be the
case with investing also; what index should you
rely on as the most reasonable basis for
comparison to your own performance? If you
have a diversified portfolio, what is the best
benchmark to use to determine how well you are
doing?
Most American investors compare the
performance of their investments to one of the
two leading indices; the S & P 500 or the Dow
Jones Industrial Average. The S & P is made up of
500 of the largest publicly traded companies in
the U.S. based on market capitalization.
The problem is that if you have a well-diversified
portfolio, comparing it to a group of large cap
U.S. stocks is not exactly an apples to apples
comparison. When an investor also owns
precious metals or smaller capitalization foreign
stocks or bonds, they are wasting their time
watching the S & P as a benchmark.
index, but also about acheiving a lower volatility
than the benchmark. To determine the best
benchmark, or several benchmarks, to compare
your portfolio to, it might be instructive to ask
your advisor. There are many index funds and
many diverse managed funds out there that might
more accurately resemble your holdings.
On the other hand, if an investor's portfolio is not
well-diversified, and they invest in only large
capitalization domestic stocks, then the S & P is
still a better choice than the Dow Jones, which
only contains the stocks of 30 companies. For
holders of portfolios comprised of small cap
stocks, the Russell 2000 is the better choice.
Another choice, although not as broad, is the
Standard & Poor's Small Cap 600 Index.
Keep your comparison apples to apples and you
won't be scratching your head when comparisons
seem futile.
A Diversified Portfolio
About three-quarters of investors believe they can
outperform the market. Many believe that by
using actively managed funds, they can achieve
this goal. But, the costs associated with actively
managed funds can offset gains. Thankfully, the
average costs associated with actively managed
funds has been coming down, but even a smaller
fee can add up over time. This might have as
much to do with matching, or falling behind, the
S & P benchmark as anything else.
Remember, with a diversified portfolio, the goal
isn't just about beating or equaling an benchmark
Closing:
Please enjoy this months newsletter and feel free to contact our office
with any questions or concerns.
Please review our coming events for seminars in our area. Beginning
Dec 14,2016 our office will be doing a twelve week financial
segment on Good Morning America and we invite all of you to tune
in.
Thanks
Don Delaria
Disclaimer: Donald Delaria is a Investment Advisor Representative (IAR) with Capital Financial Management NC, Inc.(CFM) Investment Advisory Services offered through Capital Financial
Management NC, Inc. A Registered Investment Advisor (RIA). Investing involves risk including the potential loss of principle. No investment strategy can guarantee a profit or protect against loss
in periods in periods of declining values. Past performance does not guarantee future results.
Any comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products They do not in any way refer to securities or investment advisory
services or products. Fixed Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company are not offered by Capital Financial Management NC, Inc.
Copyright 2016 Capital Financial Management NC, Inc.