How has the Recent Market Drop Impacted FormulaFolios?


An excellent perspective from FormulaFolios Chief Investment Strategist.
This week’s market drop may have caught your attention, if you would like to learn more about how this investment process could benefit you, contact Calandra Financial Group…

Here at FormulaFolios we’re having a great year of firm growth. As a result, we have many new clients that are getting their first experience with our investment philosophy.

Any time you’re doing something new with your portfolio, it’s perfectly natural to pay special attention, and even feel a little bit anxious. Especially if the first month is less than you expected. For many of our new clients, this might be exactly how you feel. And it’s okay, we completely understand!

The Past 6 Years Have Been Great

The past few years have been very good to investors, with many growth oriented asset classes up more than 100%. There has been minimal volatility too, with the largest drawdowns in US Stocks mostly less than 5%. This has probably gotten a lot of us to forget what a real correction feels like – as it is fairly normal for US Stocks to have intra-year drawdowns greater than 10%.

The past 30 days have been interesting. Stocks have mostly been flat to slightly down, with every few percent rally seeming to be followed by a few percent drawdown. Bonds have also been down, real estate down a lot, as well as non-US stocks. In a nutshell, every major asset class is either flat, slightly down, or down a few percent.

As this relates to FormulaFolios, we believe in following non-emotional formulas to help us make sound investment decisions. Part of our formulaic process is using well defined asset allocation for each client. This ensures we properly spread risk amongst many asset classes, while emphasizing the asset classes our models calculate to be the most desirable for current market conditions.

It’s a sound philosophy that has served us well for many years. But, it’s not without flaws and certainly doesn’t mean we’ll avoid all short term market downturns.

Case in point would be the last 30 days.

There’s More to the Market than Just the Dow and S&P 500

Below is a chart that shows my (Jason Wenk – FormulaFolios Chief Investment Strategist) SEP IRA. This is invested in what we call an MM80 portfolio.  The MM80 invests 80% for growth and 20% for income (hence the 80), and uses Multiple Managers (hence the MM) in the allocation. Since I’m 20+ years from retirement and have a moderately aggressive personal risk tolerance, I feel it’s appropriate for my financial goals.

FFI vs the markets

Along with the last 30 days of performance for my personal investment account, I’ve also mapped the results of quite a few major investment asset classes. This helps us see visually how my account compares to the general volatility of financial markets.

For those not familiar with all the market proxies in my chart, this might help a little:

– Orange represents Small Cap US Stocks

– Yellow represents the Total Bond Market

– Green represents International Stocks

– Light Blue represents Commodities

– Dark Blue represents Real Estate

– Pink represents the S&P 500 (Large Cap US Stocks)

When we look at how all these market proxies have done over the past 30 days, we realize that our portfolios are doing just fine. We’re behind just Large Cap US Stocks and the Total Bond Market, but equal or better than all other major asset classes. Since my particular account is down just less than 2%, I’m not worried at all.

Avoid the Big Drops, Ride Through the Small Ones

FormulaFolios are designed to help us avoid “The Big” losses, not necessarily the small ones. A 2% decline isn’t fun, but it’s a far cry from losing 10%, 20%, or more. As investors, we always need to do our best to remain emotionally strong, in spite of the natural fears we experience when it comes to seeing the value of our money go down (even if just a small percentage).

This patience is really important to investor’s long term success because more often than not, small losses are recovered easily by patient investors. In just the past 12 months, for example, the S&P 500 has dropped 2% or more 9 times (including twice in the past 30 days). Over that 12 month time period the S&P 500 is up approximately 12%, and has reached a new all time high 8 times after these 2% or greater declines.

When our models see major market risk on the horizon they’re designed to move to safer asset classes. It’s not always a perfect science, and no investment model can guarantee against experiencing some risk. At this time the models are cautious about the future, with many parts already moving to more defensive asset classes. Overall though, a few percent correction after years of booming markets, is perfectly natural and nothing to panic about.

Hopefully this post helps all our clients and friends, and especially helps those that are new to our firm feel confident and comfortable with your decision.

Best Regards,

Jason Wenk
Chief Investment Strategist
FormulaFolio Investments, LLC

Protecting Your Retirement Nest Egg


This article will be featured in an upcoming issue of Fortune Magazine!

As we cruise into the second half of the second decade of the new millennium, American investors in or approaching retirement, find themselves in a pickle. The real threat of future inflation and a faulty economy with a bubble in the markets, will make it increasingly difficult for this generation to live out their freedom years with peace of mind.

In working with clients, the question that should be on everyone’s mind and should be asked of all financial advisors, is “what are you doing to protect my money”. Why are the so called financial professionals telling clients to “hang in there”… “buy this hot fund or that hot fund”. How quickly we forget. We are only a handful of years past the financial crisis that sank markets by nearly 50%. The Great Recession and crisis is behind us, but the slow abnormal economy is lingering. But the stock market, oh no, that is all good. The individual investor has come roaring back and is making money again. Beware! Is the market going to go up forever? Is volatility going to remain low and confidence high forever? NO! The easy money policy of the Fed and the massive quantitative easing programs have put equity prices on a rocket. And the average retiree is falling for the Wall Street lure with no regard to potential consequences.

4 Ideas to Grow and Protect Your Nest Egg

  1. Make steady performance your goal. The goal to investing for retirement should be steady, long-term growth with minimal disruption to a smooth existence. The process of the professional money manager is vastly different than the individual investor when pursuing this goal. The professional automatically makes smart decisions by using a mechanical, rules based approach. The professional know, through experience, that emotion must be avoided.
  1. Use active management and true diversification. It has been proven, time and again, that asset allocation creates investing performance. True diversification does not mean owning 20-25 different mutual funds. It is also not owning 15 stocks instead of 3. Successful diversification is created with a focus on asset class management. Simply, use your mechanical, rules based approach to be in strong asset classes, while avoiding weak asset classes. Active management implies a rebalance when necessary and the avoidance of the “just hang in there” buy and hold mantra. Strive to be active with minimal trading, by managing the asset class mix. The asset class mix should be developed using multiple world-class, institutional style money managers.
  1. Keep it simple. It seems that over the decades the Wall Street Gang has intentionally made the investing landscape more difficult. Retirement investing and accumulation of wealth are simple. It is just not easy. There is a difference. Building a solid investment strategy, at any age, needs to be simple. In a properly built portfolio, with a goal of steady performance, that is truly diversified, need only have 10-20 holdings. Adding more funds, or stocks, or ETFs does not necessarily improve performance and it is certainly not simple. If you keep it simple you will be able to answer two simple questions at any time: 1). What do I have? And 2). How am I doing? In fact, we all live in the technology age and you can implement several automated tools to give you 24/7 information about your financial life. 
  1. Keep costs low (fair). As consumers, we all want good value. I hate being overcharged for anything. But, I also appreciate and want the highest quality, for the fairest price I can find in the marketplace. No matter if you utilize the services of a professional advisor or you do it yourself, you must keep an eye on cost. Competition is fierce and in many instances, the absolute lowest cost may not be the best value. Keep costs fair and expect high value.

So, how well are you doing in these key areas? I know it’s a very forward question, but the truth is many investors are not doing well at all. Sure, the market is roaring and everyone feels elated and excited when they open their account statement. Be careful here.

One tool that we use in our practice is the revolutionary monitoring software, called AssetLock. You probably have not heard of it, as only a select few independent advisory firms across the country have licenses to use it. AssetLock is a proprietary monitoring system that places a floor under your account values and moves higher as your account reaches every new high level. For example, you don’t want, nor can you, afford to lose more the 10% in your IRA. Establish your AssetLock Value 10% below your deposit amount. As the account grows, the value goes up, just like the account value. Thus, protecting gains each and every day. This is not a stop loss or hedging strategy. It is a stop losing strategy, a tool that keeps you emotionally strong by allowing you the peace of mind that a major downward move in the market will not wipe out years of gains.

Get serious about growing and protecting your assets. You worked hard and earned the money, now look for smart ways to keep it.