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Financial Advisors Are Losing Confidence In The Slowing Market (Wealth Management.com)
The Advisor Confidence Index dropped 1% — to 115.69 — in September, which continues “the slow erosion of advisor optimism in the markets and the economy,” according to Wealthmanagement.com. Although numbers above 100 signify “overall optimism,” the continued downwards trend is worrying.
Since the beginning of the year, confidence has fallen 7% from a high of 123.02.
Advisors believe that geopolitical uncertainty, the end of quantitative easing, and mid-term elections are the forces behind equity volatility. Many advisors believe that the market is due for a correction, according to Wealthmanagement.com
“The expected correction still has not arrived,” said Edward Kohlhepp Sr. of Kohlhepp Investment Advisors. “The train is late to the station, but it still might arrive.”
Convertible bonds have generated a year-to-date total return of 7.8% through September 26, compared to 8.9% for the S&P 500 Index. Last year, the convertible bond index returns 24.4%, compared to a loss of 2% for the aggregate bond index.
“But don’t let that strong performance fool you — convertible bonds are very susceptible to sell-offs, just like stocks. In 2008 the total return of the Barclays US Convertibles Composite Index was -34.7% — even worse than the return of the Barclays Corporate High-Yield Bond Index,” warns Collin Martin.
Overall, convertible bonds have lower yields than traditional corporate bonds. But if stock prices rise, then they have the potential to generate higher returns. “We think investors looking for higher yields are generally better off in non-convertible corporate bonds. And if investors are looking at convertible bonds because of the potential for higher returns from rising stock prices, we think this should come from the equity allocation of an investor’s overall portfolio, not the fixed income allocation,” writes Martin.
Avoid Sales Of Appreciated Stocks To Reduce Tax On Investment Income (AllianceBernstein)
In order to reduce tax on investment income, investors should avoid selling appreciated stocks held less than one year, writes Tara Thopmson Popernik.
“Capital gains on the sale of stocks held for more than a year are taxed at a lower, long-term capital gains rate than gains on the sale of stocks held a year or less. By waiting to sell a position at a gain until it has been held for more than year, a top-bracket taxpayer can reduce the tax bit from 43.4% to 23.8%. Investors in lower tax brackets who wait sometimes can entirely eliminate the tax on a capital gain,” Popernik writes.
Even if the stock starts to decline, it pays to wait on selling. The amount by which a stock declines could be less than the tax amount for stocks held less than one year.
To Keep Clients, Avoid Acting Like A Narcissist (Advisor Perspectives)
“It’s quite easy for investment advisors (especially male advisors) to be perceived as narcissists, whether or not they actually meet the clinical critera. For example, they have expertise, which may cause them to feel superior to prospects and clients. If an advisor has achieved success, this may reinforce his or her belief that he or she is unique,” writes Dan Solin.
“When dealing with prospects, these advisors can exhibit behaviour that is typically associated with narcissism. They dominate conversations, believing that what they are saying is vastly more important than the views of the prospect. They impatiently wait for opportunities to interrupt the prospect so they can reassert their role. They believe they can charm their way into sales, because of their innate charisma,” writes Solin.
Unfortunately, this behaviour is off-putting to clients. Instead of constantly lecturing from a dominant position, advisors should try to have a conversation with their client. Additionally, some “narcissistic” advisors believe that clients are “insulting them” when they ask questions, but clients are simply worried about their financial futures.
The market is slowing down and volatility is increasing, which could make hedge funds an interesting option for advisors. However the long/short returns are “especially unpredictable” because these funds greatly vary their strategies. Advisors should look at the specific hedge funds to understand their strategies before copying their moves.
One thing to look at is the role of cash at each specific hedge fund. “A large cash position in a long/short strategy that holds futures may indicate an aggressive portfolio strategy. The fund’s investor information will disclose if cash is held as collateral against futures positions,” writes Margo Eprecht.
Other mangers use cash to control market exposure. For example, AllianceBernstein’s ASLAX held “almost a third of its assets in cash at the end of July. The fund was up a little more than 1% through August.”
“If we don’t see a lot of opportunity on the short side, we carry cash instead,” said Alliance’s lead portfolio manager Kurt Feuerman.
Each fund has its own strategy and goals, so blindly copying them could have adverse effects on a portfolio.
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