FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors.
BlackRock: Stick With Stocks Despite The ‘Grand Reversal’ (BlackRock Blog)
Last year stocks had a strong run even as bonds struggled. Now we’re seeing volatility in stocks that are just up modestly year-to-date, while U.S. bond yields have fallen. “Given the sharp and ‘Grand Reversal’ from 2013, many investors are wondering: “How should I be positioning for the long term?” writes BlackRock’s Russ Koesterich.
“My answer: Stick with stocks. Despite the strong performance of bonds year-to-date, I remain cautious toward fixed income and advocate maintaining a long-term overweight to stocks. To be sure, stocks are no longer cheap — and I would continue to avoid the more expensive areas of the market such as small caps and social media — but they still look inexpensive relative to bonds, particularly given the recent drop in yields.” Koesterich warns that even a modest rise in interest rates (and he expects they will in 2014) will cause recent bond gains to “quickly evaporate.”
Investors Should Ask Their Advisors Three Key Questions About Alternative Investments (Advisor Perspectives)
Alternative investment strategies have become more widely accepted and available to investors. But before diving in, investors should ask their advisors three key things, writes Donna Chapman Wilson of Invesco Blog.
1. “What is the strategy’s directionality? One key risk measure to consider is directionality — the degree of exposure the strategy has to movements in the equity and fixed income markets. Whether a strategy has a high or a low degree of market exposure will impact how it’s used in a portfolio.”
2. “How has the strategy performed in different market cycles? Another way to look at risk is to analyse a strategy’s performance during different economic regimes or market cycles — such as growth, recession and inflation, for example — paying particular attention to strategies that performed well when the equity markets overall were not.”
3. “Has the strategy experienced extreme outcomes, and when? In addition to standard risk measures, it is also important to investigate a strategy’s historical pattern of major losses or extreme outcomes, as event risk can be high.”
The S&P 500 has averaged 27 1% down days in any year since 1969. But in the last 12 months, the S&P 500 has seen just 16 1% down days. And it has been 468 days since a correction of 10% or more, points out Societe Generale’s Andrew Lapthorne. “The point of all these figures is to illustrate a potentially risky build up of investor complacency,” Lapthorne writes. “The longer equities (and other risk assets) go without a typical period of losses, then the more these assets may be seen as one-way upward plays. Encouraging for new investors who may not have the capacity to absorb normal equity volatility and losses. Downplaying risk serves no one in the long term and we think policy makers should be more vocal about the potential downside.”
How Advisors Can Help Clients When Disaster Strikes (The Wall Street Journal)
A natural disaster or another unexpected event could leave clients making bad financial decisions during difficult times. It’s important for the advisors to make sure that they don’t writes Brian Heyes, CEO of Hayes Advisory Group in a WSJ column. “Having safety-net funds built into your client’s plan is key to managing these situations, especially if the client lives in an area that is highly susceptible to natural disasters,” writes Heyes.
“The common rule is that clients should have enough funds to live on for six months without income. However, I believe that everyone should have an even larger safety net to protect themselves and their families. For example, perhaps your clients have relatives that live in other states, and when those relatives get hit with an emergency or natural disaster, they may want to financially help them.” Heyes writes that advisors should also look at portfolios for “exposure to areas or investments that could be affected by a natural disaster.”
GMO’s James Montier and John Hussman of Hussman Funds argue that profit margins which are at record-highs are unsustainable and will have to fall to their long-term average. Both argue that the record high profit margins are attributable to huge government deficits and low household savings, and that as deficits shrink and savings rise, profits margins will tumble. Deutsche Bank’s David Bianco however disagrees with this thesis.
“S&P profit margins are high from structural reasons, not because of the deficit,” writes Bianco. “…Simply said, the notion that savings reduces investment is a bold claim that runs contrary to basic macro economics. The continued extension of this misguided framework to the view that government deficits add to profits overlooks that someone’s borrowing (for temporarily higher consumption or investment expenditure) is someone’s savings (temporarily lower consumption or less direct investment expenditure, ie real assets, for indirect investment instead, ie financial assets)… In our view, profits are not a function of the degree to which households give back their wages as expenditures on consumption. This is a very flawed concept. This framework suggests zero sum economic terms and that savings are unproductive.”
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