5 Minute Market Commentary – July 24, 2015

formulafoliosAfter many requests I am happy to roll out this inaugural weekly market commentary from FormulaFolio Investments. The goal is to give our clients and friends a simple way to see everything they need to know about the financial markets on a weekly basis, in 5 minutes or less.  After all, finances should be simple, not complicated.




If you have any questions or concerns, please contact the office!


Phil Calandra

Investment Strategies for Real People

Trust Dale CFGI hope you are having a wonderful summer and life is good!  This blog post contains commentary and data from portfolio manager, Brian Caruthers of BCA Managed Income.  Included are a couple articles that may be of interest.  Also, included is an update on the Greek Crisis and the almost 4 hour NYSE closure last Wednesday.  the New York Stock Exchange closure was a software updating issue, and not a cyber breach.  Today, 75% of NYSE trades occur off Wall Street anyway at several other competing stock exchanges.  The NASDAQ market was unaffected and it was business as usual.

The Greek crisis is causing some market volatility on a day-by-day basis as fresh news surfaces.  Our portfolios have been in a defensive posture for about a month now.  It’s a time for caution in the markets while we wait for a low risk entry point in the next market rally higher.  Please let me know if you should have any questions.

Recently, it seems there’s no shortage of buy-and-hold investment advice from the news media and financial pundits. In fact, the advice usually begins by berating individuals for failing to buy and hold and then moves on to show how holding an index fund for 20, 30 or 50 years outperformed the average investor. The problem with this advice is that market risk is very real. The S&P 500 index took 13 years to regain its high in 2000. That’s a long time to live with the memory that you no longer feel financially secure. The market decline in 2008 added to the insecurity of investors and the feeling that they had little if any control over their investments.

For real people, losses hurt. In fact, studies show that losses hurt a lot more than the pleasure one might get from making money. When your account is down 25% or much worse 50%, it isn’t a theoretical loss. The loss may be three or more years of your net salary, or 10 years of savings. Yes, so far the market has always recovered over time, but there’s never a guarantee that next recovery will happen fast enough, or for that matter happen at all.

Uncertainty is the greatest hazard of investing. 2014 was a good year for equities. 2015 is looking a lot shakier and there are plenty of predictions that the market is headed for a fall whether from rising interest rates, economic doldrums or political uncertainty. At the same time, history tells us that the 3rd year of president’s term is best for stocks.

Active investment strategies that strive to limit losses when the market turns down are designed for real people. Who do we consider a “real person”? It’s the person who buys fire insurance. The family who saves for emergencies and for retirement because they don’t want to be at the mercy of fate. Real people realize that bad things can happen and they don’t want to have their lives destroyed by an event beyond their control. Real people work to add some measure of risk management to their lives. Leaving their life savings to the mercy of the market is not risk management.

When active management can remove at least some of the uncertainty that comes with investing by having a carefully designed strategy for moving in and out of the financial markets in response to perceived risk and opportunity, it helps people stay invested for the long term with less risk. And that is the most important element of successful investing. Investors have a very good reason to be scared onto the sidelines by bear markets. But they have to have a plan to get out early in the decline and back into the market, or back into investments with more upside opportunity, when the correction is over.

My firm was founded based on the belief that recognizing and managing risk is the smart way to invest. We have invested years in studying the financial markets through technical analysis; looking for clues that tell us when risk is greater than the perceived return we might achieve by staying in the market. Is our system perfect? No. Will it outperform a buy and hold investment in an index? Rarely in rising markets. But can it provide investors with a better long-term return? We believe the answer will prove to be yes over the investment lives of our clients. In part, this will be the result of the mathematics of gains and losses. Any time an investment approach limits losses, the investor gains leverage to profit from rising markets.

The chart below was taken from a presentation by Greg Morris, former mutual fund executive, technical analyst, consultant and author of prominent active management books, including his latest, Investing with the Trend.  Which portfolio would you be more comfortable owning?

Investment Option A Investment Option B
Year 1 +10% +36%
Year 2 +6% +8%
Year 3 +8% -20%
Growth of $100 $126 $117
Compounded Annual Return +8% +5.4%

Naturally there can be no guarantee that results of a client’s investment account would look like this or that active management will meet its goal of minimizing losses and participating in the majority of the market’s up move. All investing has the potential for loss as well as gain. But we sleep much better at night knowing that we have a plan in place with the potential to manage the risk of investing.

Despite an official unemployment rate of 5.5%, virtually every age cohort’s participation in the labor market has declined. Not so for the over-65 bracket. Their participation in the labor force has actually increased to the highest level since the Federal Reserve began to track the data in June of 2008. What’s happening?


According to surveys by AARP and other experts, the primary economic force behind the return to work is the growing fear among older Americans that they lack the means to support their retirement needs.

With the shift away from company pensions to 401(k) plans and other personal savings for retirement income, individuals took on the responsibility of financing their retirements. Even those who thought they had adequate savings have had their confidence rattled and account balances impacted by market declines in 2000-2002 and 2008. Near zero returns on bank deposits haven’t helped retirees, either. Frank Barbera, CMT, of Sierra Investment Management, Inc., maintains the current Zero Interest Rate Policy has resulted in a $7 trillion transfer from individual savings to the banks since 2001, taking discretionary spending out of the economy along with it.

­­The result is that millions of Americans are rejoining the work force or staying in it longer than they might have intended.  According to the Federal Reserve’s 2014 Survey of Household Economics and Decisionmaking, 31% of non-retirees have no retirement savings or pension, including nearly a quarter of those older than 45. While the intent to keep working is higher among lower income respondents, even in the higher income brackets the Fed’s data shows an inclination to keep working in retirement with only 28% of individuals with a household income greater than $100,000 indicating they intend to stop working altogether.

Which of the following best describes your plans for retirement (by household income) Less than $40,000 $40,000 – $100,000 Greater than $100,000 Overall
I do not plan to retire 17.0% 1.3% 7.5% 11.5%
Work fewer hours as I get close to retirement 9.4 10.4 7.6 9.3
Retire from my current career, but then find a different full-time job 2.5 2.5 3.0 2.6
Retire from my current career, but then find a different part-time job 8.6 12.2 15.8 12.5
Retire from my current career, but then work for myself 4.9 7.6 11.3 8.1
Work full-time until I retire then stop working altogether 11.2 23.1 28.1 21.6
Keep working as long as possible 37.8 24.6 19.9 26.5
Other 7.2 6.4 5.3 6.3
Total number of respondents – 3894

SOURCE:  Table 18: Federal Reserve’s 2014 Survey of Household Economics and Decisionmaking – among respondents who are not currently retired or out of work due to a disability.

On the positive side, there is clearly a market for experienced workers. With increased longevity and less physically taxing careers, the new retirement may include work if simply to keep one busy. But for those looking forward to the traditional retirement in their early to mid 60s, the importance of saving now cannot be overstated.  Otherwise, the shift in retirement financing, combined with the slow economy, may reshape how you ride out the latter part of your life.

If you are concerned that you may not be ready for retirement, give our offices a call and let’s talk about where you are today and where you would like to be, or need to be, to retire.




Portfolio and Market Recap for June 2015

Stock Market  RollercoasterI hope this Blog Post finds you enjoying the HOT Summer!

In this recap, we cover the prior month and YTD performance, touch on current asset allocation of our tactical models, as well as the most up to date economic analysis of our proprietary economic model – the Recession Probability Index.

Please click on the button below to watch this month’s video.

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Phil Calandra