The Best Performing Asset Class of 2017...

Will be known on December 31st, and probably not a day before.

Now, there is a big difference between knowing for sure what will happen and making forecasts and projections to help determine what is likely to happen. The problem is that it can be hard to tell what an article, story or sales pitch is really saying.

As everyone is well aware, there is no shortage of opinions these days and the investment world is no different. We see everything from full blown uninformed speculation on how unfolding economic and political events may impact the markets, to thoughtful and careful analysis to gain insights and build expectations to which asset classes we think will likely perform better than others. As with many things, some predictions are better than others, and at the end of the day, the market speaks and often moves in unexpected and unanticipated ways.

That unpredictability and inability to precisely determine the direction of the market is one of the strongest cases for diversification. Buy a little of everything and you'll get a nice blended average in the long run. Many mutual funds and exchange traded funds use this exact strategy. It is a very reasonable approach.

There have been many attempts to determine patterns in asset class returns over time, but few predictable reliable patterns emerge. Here is a grid of returns of some popular asset classes over the past 16 years. Do you see a pattern? Please let me know if you do. :-)

The point is that even though we can be fairly confident about some aspects of the economy and markets – such as interest rates rising in the short to medium term, we can't be 100% sure. We also don't know the magnitude or the impact of other factors, such as inflation.

So what do you do?

For our money and our client's money, we use our best judgment about what is most likely to happen and then align your investments with your willingness and ability to take risk. We invest for the long term. The process we use is personalized and updated periodically. Once you've built a diversified portfolio aligned to your risk tolerance, you can generally expect less volatility and you can confidently say that you've participated in that hot sector, whatever it may be and whenever it may be.

PLEASE REMEMBER:

- INVESTING AND INVESTMENT MANAGEMENT INVOLVES RISK, INCLUDING THE LOSS OF YOUR INITIAL INVESTMENT OR ANY INVESTMENT GAINS.

- PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

- THIS GENERIC INFORMATION IS PROVIDED FOR EDUCATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION FOR ANY INDIVIDUAL TO TAKE A SPECIFIC ACTION.

- PLEASE INVEST PRUDENTLY AND SEEK PROFESSIONAL HELP FROM A FINANCIAL ADVISOR, INVESTMENT MANAGER, ACCOUNTANT, LAWYER OR OTHER PROFESSIONAL ON MATTERS THAT YOU ARE UNSURE OF OR THAT ARE UNIQUE TO YOUR PERSONAL CIRCUMSTANCES.

- FINANCIAL PLANNING AND INVESTMENT MANAGEMENT SERVICES PROVIDED BY J. BRADFORD INVESTMENT MANAGEMENT, NASHUA NH.

What's Going on in the World, Economically.

Periodically, J. Bradford Investment Management publishes updated commentary, research, analysis and economic viewpoints. This work represents the views, insights and analysis of Jason Haviland, President and Chief Investment Officer at J. Bradford Investment Management.

We'll dig into all the details below, but here is a summary:

The disclosures at the bottom of this blog post are particularly relevant for this material. Let us know if you have any questions.

O.K. Let's jump in!

First, let's look at our domestic stock markets. The Dow Jones Industrial Average, the S&P 500 and the NASDAQ are all at or near record highs and have generally been on an upward trend for nearly eight years.

Assuming no major swings, March 9th 2017 will be the eighth year anniversary of this bull market. If you have a 401(k) and have been invested for the last decade, it’s been quite a ride. If you stayed the course, you saw your balance take quite a hit in 2008, but then it very likely came back rather nicely with the upswing in markets across the globe.

And if you're relatively young and started investing anytime after the Spring of 2009, you've only ever seen your balance climb steadily upward. Markets have been very positive for many years, but markets do not move forever upward.

So the big question on everyone’s mind is: Will the U.S. stock market climb higher yet? It might. And if it does, it will likely be driven by some combination of:

1.   The health of the U.S. economy

2.   A continued rise in corporate earnings

3.   Continued historically low interest rates

4.   The attractiveness of the U.S. market compared to other developed markets.

Let's look at how these factors may impact the market and the likelihood that their impact will be a positive one.

Let’s start with the first two factors, the U.S. economy as measured by GDP and corporate earnings. These two elements have been very impactful historically in driving stock market performance.

I can absolutely envision a scenario where the U.S. economy continues to grow and potentially even breaks out of the slow growth cycle that it has been in for many years. Some combination of the momentum already underway in the economy and pro growth policies in Washington could set the stage for this to happen.

But the other side of that coin, limits on growth (such as restrictions to selling in international markets) and weakness or very tepid growth in the U.S. economy, are not unrealistic outcomes either. There is some risk that the incoming administration may take an action with unintended consequences that negatively impacts growth and earnings in certain sectors or even across the board.

Investment markets are often driven by expectations of what will happen in the future, and so far, the stock market believes that the grass is greener and that a negative, economic contraction scenario won't happen, which is probably a good thing. We'll be watching this closely.

And it's also possible that we could see more of what we've seen for the last several years. That is, things are generally pretty good for most, but some sectors that don’t perform well, particularly those in political cross hairs. Overall, we may see conditions not really deteriorating, but not really improving either. Things are just good.

Whatever happens, we believe that it is important to assess if there is a commensurate and appropriate reaction and absorption of that information in the stock market, which gets reflected in pricing. If the market is priced as if we are on a high growth path (which you could argue that it is now), but we are actually on a slow growth, neutral or downward path, that could be problematic. We're watching that balance closely.

Next, item #3, our low interest rate environment. We have had low, very low, zero and in some parts of the world, negative interest rates for an extended period of time. Such a long period in this low interest rate environment is relatively unprecedented in financial history. So, when we look at historical valuation measures for insight, the interest rate regime at the time of the analysis is an important factor for comparison. One problem we have now is that we don't have many equivalent historicalperiods like the one we are in now to analyze for comparison.

So how might this low interest rate environment be distorting prices? One simple explanation of the increased inflow of capital to the stock market over the last several years is that because interest rates are so low it just doesn't make any sense to earn half or a quarter of a percent in a CD or 1% on a bond, so investors are investing in stocks instead. Instead of bonds, they are buying stocks that are perceived to be safer (such as utilities) and that generate income (such as dividend stocks). I believe that there is some truth to that assertation and that if interest rates remain abnormally low, the stock market will be seen as an alternative, even if it is a quite imperfect and much, much more risky one.

Lastly, #4, our relative position to the rest of the developed world. In some sense, all stock markets worldwide compete for investment dollars, with investors making determinations as to where they can achieve the best return. If the world economy remains generally stagnant or certain key areas such as Europe start to experience contraction or even just very slow growth without full-blown recessions, it might be the case that the U.S. benefits from simply being the most attractive choice against a backdrop of mediocre choices.

Similar to individual winners and losers in the U.S. markets, there will be individual winners and losers in international markets as well. Most immediately, we’ll face the implications of Brexit, OPEC price controls, the delicate Chinese economy and potential fall-out from the financially troubled members of the Eurozone. As those implications unfold, international investors may judge the U.S. markets to be a better option in the short to medium term.

I believe that all four of these factors have been contributors to our current sustained bull market and some combination of them may drive the market higher, but it's not entirely clear that they will all be pushing upwards as they have been recently, especially interest rates.

So let’s dive a little deeper into interest rates. The Federal Reserve has recently signaled a willingness to raise interest rates. In addition, economic conditions also support increasing rates. As such, interest rate increases from the Federal Reserve in the short to medium term seems very, very likely.

Since bond prices move inversely to bond rates, that means that the prices and values of all our bond holdings in mutual funds and ETFs will likely decrease.

We are likely entering a tough stretch for bonds. However, we should not lose sight of the strategic reasons we hold bonds in the first place – income, diversification, reduced volatility and over the long term -- better risk adjusted portfolio returns. In this environment, individual bonds and bullet maturity shares have some advantages. Here too, we will be monitoring the markets closely.

We would be remiss if we didn’t also consider the political implications of the recent election.

In this area we have a tempered and measured view. Until we get back into the full legislative session, the market is reacting to what it thinks the current administration will do. Ultimately the market will move based on what the administration actually does vs. what they’ve said they would do during the campaign.

Yes, they have a legislative plan, but legislation is complicated and special interests are as powerful as ever in DC, so we’ll know a lot more in the Spring once we see how all the competing interests line-up and after the early executive orders actually get issued. That is, we’ll see what actually happens.

Whew, that was a lot. Or maybe you just jumped here to the bottom line...fair enough. So what does all that mean for our investment portfolios?

Here are our five key takeaways:

• U.S. stock market performance and portfolio performance may be mixed and even diversified portfolios may see more volatility than usual. However, we still believe that it will be more important than ever to hold a diversified portfolio that is periodically rebalanced and potentially tilted towards investments that will perform well in the more likely scenarios.

• We believe that an increased cash holding is warranted. We believe that the market forces discussed here will push and pull against each other over the course of 2017, more so than in 2016, and when combined with potential for geo political instability and less ability to use bonds as a cushion, we’ll want higher cash holdings.

• Sector, smart beta and individual security selection will be important investment lenses for 2017, which we intend to use and pursue.

• We expect increased volatility for the short to medium term that may create opportunities for long-term value buys.

• Interest rates will likely rise in the short to medium term and inflation may follow. Investments that move inversely to rates will be under pressure in the short to medium term and investments that rise during periods of inflation may be warranted.

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PLEASE REMEMBER:

- This material is provided as of December 2nd, 2016 and readers should bear in mind that investment and economic conditions can change very rapidly and that changes or developments subsequent to that date may drastically alter the validity of this analysis.

- There are forward looking statements in this analysis and these statements should not be construed as a prediction or guarantee of what will happen.

- Investing and investment management involves risk, including the loss of your initial investment or any investment gains.

- Past performance is no guarantee of future results.

- This generic information is provided for educational purposes only and should not be construed as a recommendation for any individual to take a specific action.

- Please invest prudently and seek professional help from a financial advisor, investment manager, accountant, lawyer or other professional on matters that you are unsure of or that are unique to your personal circumstances.

- Financial planning and investment management services provided by J. Bradford Investment Management, Nashua NH.

What do you mean they don't have to have to act in my best interests?!?!

Many people who I talk to about finances are surprised to learn that the person giving you financial advice does not necessarily have to act in your best interest when giving you that financial advice or performing investment management services. That is, they are only held to a “suitable” or “legal” standard and not the fiduciary standard. 

You might be thinking, "OK, I can read that Investopedia link you just provided, but what exactly does fiduciary mean?"

Well, two recent high profile stories help illustrate the point:

The first example relates to a sales contest run by Morgan Stanley where the advisors were allegedly pressuring their clients to buy a product and service that they didn't necessarily need. Sales contests and account opening pressure (like the recent Wells Fargo case) can be common in non fiduciary environments and customers can end up getting put in high commission products with better alternatives.

“Massachusetts charged the wirehouse with conducting an unethical, high-pressure sales contest among its financial advisers to encourage clients to borrow money against their brokerage accounts. The contest was run despite an internal Morgan Stanley prohibition on such initiatives.”

A simple internet search of sales contests in financial services or unfair commissions in financial services will bring up a long list of violations and abuses by the financial services industry. And we're not talking about Bernie Madoff type of stuff, we're talking about the kinds of brokers and advisors many ordinary people are using.

The second example relates to Fidelity Investments and the potential conflicts that arise when both the Johnson family and Fidelity fund managers both see a private equity investment that they believe is a good investment. According to Reuters:

“The company’s tradition of putting clients’ interests 'before our own is a big part of what makes Fidelity special,' the fund firm says in its mission statement. In at least one lucrative field, however, the Johnson family’s interests come first. A private venture capital arm run on behalf of the Johnsons, F-Prime Capital Partners, competes directly with the stable of Fidelity mutual funds in which the public invests. It’s an arrangement that securities lawyers say poses an unusual conflict of interest.”

So while it is absolutely possible to get great financial services from advisors and companies that are not fiduciaries, the investment lines of “suitable” advice are often gray and potential conflicts can arise even in well-intentioned firms. You should ask your advisor or firm about any potential conflicts they have and be sure you are satisfied with their answer.

But why not work with someone who is bound to work exclusively for your best interests? Helping you holistically with your dreams and goals? You probably should. Whether it is with J. Bradford or another fiduciary, I absolutely recommend that everyone looking for financial advice ask if the person they are working with is a fiduciary and if not, why not. Maybe you'll be satisfied with the answer, maybe you won't.

Some clients and prospects do occasionally ask about the fiduciary standard and if we operate to the fiduciary standard when giving investment and financial advice. I love answering that question. The answer is unequivocally yes and it is part of the reason why I founded J. Bradford Investment Management as an independent RIA (Registered Investment Advisory) firm. We put our clients first and you get our unbiased, conflict free advice about all your financial matters.

If you'd like to have a contest, let's raise some money for charity.

PLEASE REMEMBER:

- Investing and investment management involves risk, including the loss of your initial investment or any investment gains.

- Past performance is no guarantee of future results.

- This generic information is provided for educational purposes only and should not be construed as a recommendation for any individual to take a specific action.

- Please invest prudently and seek professional help from a financial advisor, investment manager, accountant, lawyer or other professional on matters that you are unsure of or that are unique to your personal circumstances.

- Financial Planning and Investment Management Services provided by J. Bradford Investment Management, Nashua NH.

If You've Been Procrastinating All Summer, CLICK HERE

Labor Day weekend is upon us. It’s the unofficial end of summer and a great time to fire up the BBQ one last time, have one more gathering with the crew and squeeze in those final items from the summer to-do list. We crossed off surfing last weekend, which was the last item on our family list, so we’re good!

Other signs that summer is over will be all too evident. The kids will be back in school if they aren’t already. When we drive into work on Tuesday the roads will be jam-packed as if everyone is suddenly working again and life will return to its normal, hectic pace.

The "it’s summer, I'm relaxing, I'll get to it in September" excuse ends this weekend. We've all been procrastinating something, but now is the time for all of us to get on it!

Investment Managers and Financial Planners typically see a spike in the fall as all those life tasks that are so easy to put off for a few weeks during the summer finally come back to the forefront. And for good reason. The fall is an excellent time to engage with your financial planner and investment manager because:

•   There’s still time in the year to make beneficial tax moves in your investment accounts and make tax saving contributions to your IRAs.
•   There’s still time to make beneficial moves in your 401(k) or 403(b) to ensure you maximize your benefits and have made investment choices appropriate for your level of risk.
•   If you have kids in college or nearing college, this is a great time to revisit, enhance, update or even make a college funding plan. It’s expensive.
•   A good investment manager and financial advisor can help you significantly reduce your investment expenses so you have more money for other priorities.

No one knows for sure where the stock market is headed or what the next interest rate move will be or how some international crisis will impact the markets, but things are relatively calm right now and it’s always better to have an investment strategy BEFORE any market turmoil starts to unfold, rather than being reactive once it starts.

Navigating you through uncertain and tumultuous times is one of the most important roles an investment manager can play for you.

So if you’ve been procrastinating, this is the week to get after it. Everyone deserves a great financial plan and taking the time to work through a holistic and comprehensive financial plan can help address issues across all of those dimensions, plus any other unique or individual circumstances you may face.

Enjoy this Labor Day weekend with family and friends and remember that if your don’t have a great plan for what you want your hard earned money to do for you, it very well may do something else...

Get over your procrastination and book a free consultation now (after Labor Day weekend of course)

Or at the very least, bookmark this page :-)

PLEASE REMEMBER:

- Investing and investment management involves risk, including the loss of your initial investment or any investment gains.

- Past performance is no guarantee of future results.

- This generic information is provided for educational purposes only and should not be construed as a recommendation for any individual to take a specific action.

- Please invest prudently and seek professional help from a financial advisor, investment manager, accountant, lawyer or other professional on matters that you are unsure of or that are unique to your personal circumstances.

- Financial Planning and Investment Management Services provided by J. Bradford Investment Management, Nashua NH.