As the markets continue to increase, investor expectations are on the rise. This isn’t necessarily a positive trend as it is important for our long term investment results that we need to keep our expectations realistic.

In June 2017, Legg Mason released the Global Investor Survey that captured the expectations of 900 investors. The survey reveals that income investors seek an overall average rate of return of 8.64 percent. Those who are working expect 9.27 percent returns, while those who are retired are counting on a 6.22 percent. But in reality, U.S. respondents say they achieve a 7.44 percent average rate of return on their income-producing investments.^[1]

This expectation is certainly better than the 14.1 percent that investors expected in 2005, reported by the Securities Industry Association. And it’s definitely closer to being realistic than expectations consumers had in 2000 of above 30 percent.

What History Has Taught Us

Having an unrealistic expectation of your return can be problematic. For one thing, an overly optimistic outlook can translate into losing sight of lessons learned during recent years. With rising interest rates and a stock market that is highly valued in historical terms, returns that are somewhat lower than the S&P 500’s historical average, which was approximately 10.4 percent for the period from 1926 through 2003, are realistic.

Since 1950, returns on a traditional U.S. portfolio of 60 percent for stocks and 40 percent for bonds generated an average annual return of 9.5 percent over rolling five-year periods.

But to earn this return, portfolio values were enhanced by exposure to bonds that were paying yields significantly higher (4–6 percent) than those now available in 2017. With the 10-year U.S. Treasury paying a paltry 1.5 percent, global bonds providing negative yields and predictions of continued slow global economic growth, it is important for investors to lower their expectations for returns from those earned historically.

As the saying goes, “If all else fails, lower your expectations!”

Focus on What You Can Control

Market fluctuations are beyond our control. So if you’re an investor, it’s important for you to focus on the two things you can control: savings and spending. As your investment consultant, in this environment of lower return expectations, we will remain disciplined by employing the appropriate risk-adjusted investment strategy to help meet your goals and objectives. And we will work with you to identify appropriate savings and spending plans.

Strive for Long-Term Performance

You also must look beyond quarterly and yearly investment results and instead establish time horizons of five years or more. This can help ensure that your portfolio meets your longer-term investment objectives. Study after study proves that some investors can make very poor decisions when trying to guess the direction of financial markets.

We provide added value by rebalancing your portfolio strategically based on our review of your needs, your investment status and our assessment of your individual level of risk tolerance.

Every investment class will fluctuate. Some investors attempt to time the markets in search of the greatest returns in a given environment. For many investors, making small adjustments according to prevailing market conditions is part of an overall investment strategy. But in our opinion,  the best course of action is usually adhering to a long-term plan in which you allocate your assets according to your individual goals, tolerance for risk and time horizon.

Diversify Your Investment Classes

Also, by creating a mix of different investment classes within a portfolio, you can better mitigate the inherent risks in all categories. When one asset class underperforms, other investment choices may remain stable or appreciate, potentially lessening overall losses. In fact, studies have shown that asset allocation can be even more significant than individual investment selection in determining portfolio performance as a whole.

The Difference Between Asset Allocation and Investment Selection

There are two important aspects of your long-term investing strategy. The difference between them can be confusing, and sometimes advisors don’t explain these concepts well.

Basically, asset allocation is the process of putting your money to work in the most suitable place, in the types of investments that make the most sense for your unique situation. Instead of moving in and out of various investment classes, which is the tendency for many investors, it is typically wiser to simply rebalance your allocation. Rotate your investment in the various classes periodically.

Asset allocation can be your strategy for long-term performance in our opinion. Asset allocation is so important that even some researchers say it is responsible for 90 percent of observed returns.

Now, investment selection is the process of identifying individual securities or investments within a certain asset class that will make up your portfolio. You will select investments that can help you achieve your overall strategy.

The turnaround in the markets and economy is currently positive, and the outlook for the future is more optimistic than in recent years. Having reasonable expectations and allocating your assets wisely should remain at the forefront of your long-term plans.

If you have any questions about your personal asset allocation or the possible outlook for the markets, please contact your financial advisor. He or she will help you create and maintain a course of action that best fits your needs, regardless of the market environment.

The information contained in this blog does not purport to be a complete description of the securities,markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Randy Carver and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.  There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Past performance is not a guarantee of future results.  Investing involves risk and you may incur a profit or loss regardless of strategy selected.

[1]. Karen DeMasters, “Investors Expect Too Much from Their Portfolios, Study Says,” June 20, 2017, Financial Advisor magazine website, http://www.fa-mag.com/news/investors-are-expecting-to-much-from-their-portfolios-33329.html.

Intuitively it makes sense that the lower the cost of investing the more one should make.  As with many things the reality is more complicated as a lower expense does not necessarily mean better returns.  The bigger issue is that asking what something costs may be the wrong question.  The question is not how much something costs but how much one earns over time net of expense and tax.  An even more important question is whether you are meeting your personal needs and goals.  While expense does play a part in determining net return, there are other factors to consider.  Focusing merely on expense can lead to under-performance and not achieving one’s personal goals and objectives.  There are several reasons for this.

1. The largest issue facing most investors is that they miss opportunities by trying to time markets.  Numerous studies have shown that investors generally lag broader indices because they are not invested when markets move up.  A trusted advisor can help you stay invested.  Consider that if an investor stayed fully invested in the S&P 500 from 1995 through 2014, they would’ve had a 9.85% annualized return.   If they missed just the ten best days during that same period or one per year on average,  then those annualized returns collapse to 6.1%.  If the investor missed the forty best days, or just four days per year on average, they had a negative return of 0.45% per year and a 10,000 investment after twenty years was worth only $9,140.  (see chart below, please remember that direct investment in an index is not possible.)                                         

2. It’s not what you make but what you keep net of income tax that is important. Your advisor can help you minimize taxes based on your situation and therefore can potentially provide you with a higher return with less risk than a portfolio that does not consider a tax strategy.  Portfolio models that use only low-cost index shares with an active trading strategy, or actively managed mutual funds,  may have a higher income tax and therefore a lower net return.  We take a very proactive approach to minimizing taxes and work with your CPA as a team.  An individual who earns 9% and then pays 40% in income tax nets less than someone who makes 6% tax-free.

3. The trusted advisor can help in developing, monitoring and updating an asset allocation that meets both your needs and objectives. Numerous studies have shown that asset allocation is far more important than investment selection with regard to long-term¹

Since 2001 The Annual Vanguard study has indicated that a trusted advisor can add a net return for investors. The Vanguard Study from June 2016 (vanguard.com/pdf/ISGAA.pdf) states in part:  “Rather than placing its major focus on investment capabilities, the advisor’s alpha (value)  relies on the experience and stewardship that the advisor can provide in the relationship.  Left alone, investors often make choices that impair their returns and jeopardize their ability to fund their long-term objectives.  The conclusion is that ‘Paying a fee for advice and guidance to a professional can add meaningful value compared to the average investor experience, currently advised or not.’ “

Having an experienced, objective and independent advisor can help you achieve higher net returns than a do it yourself approach even if you are an experienced investor.  A trusted advisor can provide perspective, help minimize emotional responses and assist with holistic planning.  For the same reason that lawyers do not represent themselves but see another lawyer and doctors go to another doctor, we believe that most investors should work with an experienced professional or team. Ultimately this can help provide better long-term returns, make life easier and help you meet your personal goals.  Please feel free to contact us without cost or obligation for a second opinion on your current portfolio or if we can otherwise be of service.

1. http://seekingalpha.com/article/3021756-asset-allocation-vs-security-selection; http://www.cfapubs.org/doi/pdf/10.2469/faj.v47.n3.40

This information has been obtained from sources considered to be reliable, but we do not guarantee that this material is accurate or complete. Opinions expressed are those of Randy Carver and are not necessarily those of RJFS or Raymond James. Raymond James Financial Services, Inc. and its advisors do not provide advice on tax issues, these matters should be discussed with a tax professional. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Asset allocation and diversification do not ensure a profit or guarantee against loss. Working with a financial professional does not ensure a favorable outcome.

The recent election had a lot of rhetoric about manufacturing jobs that had been lost overseas and America’s growing trade deficit with various countries.  If we listen to many of the politicians,  and mainstream media,  jobs and companies are abandoning the US and other countries to manufacture overseas.  Moreover, China and other countries are said to be out producing us.   While this may make for a good soundbite, this is not factually correct.   While we have seen companies move overseas both for tax reasons and other factors such as less regulation; the fact is that the United States remains the largest producer of goods and services in the world both in absolute terms and on a per capita basis.    China is often mentioned as a prime culprit in taking manufacturing the facts suggest otherwise.

Americans produce about 20% of all the stuff in the world with 4.5% of the world’s population,

China makes 17% of the stuff with 19% population (source: Unleashing the Second American Century: Four Forces for Economic Dominance by Joel Kurtzman)   America’s productivity, measured on a per capita basis, remains the world standard.   Even more significant is that while the 20% of the world’s goods are produced in the United States, American companies collectively produce between 30% and 40% of everything in the world.  A lot of that money comes from overseas operations and up until now most of that cash stays overseas.   With an expected reduction in corporate tax rates and/or on repatriated funds much of this cash may come back into the United States.

Despite the high relative tax rates the number of jobs coming back to the United States – so called  Re-Shoring – continues to increase.  We believe that with lower tax rates and less regulation this number will continue to grow.

For the first time in at least 20 years U.S. manufacturing showed a net gain in jobs created domestically in 2015 – the most recent year to report. That’s according to a study published by Reshoring Initiative, a Chicago-based firm, that found the net gain on reshoring (also called onshoring) and foreign investment in the U.S. was 67,000 jobs nationwide in 2015.  Foreign companies are also investing hundreds of millions in the United States.  A case in point is Nox, a leading Asian manufacturer that opened a state-of-the-art manufacturing facility in Fostoria, Ohio, in 2015.  Nox is investing tens of millions of dollars into modifying the space, which spans a little over 300,000 square feet. The plant will supplement the company’s primary manufacturing facility in South Korea.

Harry Moser, founder and president of Reshoring Initiative, said the trend in manufacturing in the U.S. is to source domestically. “With 3 million to 4 million manufacturing jobs still offshore, we see huge potential for growth.”  While there are several factors at play here, Moser—as well as others—said one big influencer is escalating wages in traditionally lower-cost countries, including China, have pushed companies to reconsider sourcing strategies.

As mentioned in our last blog we believe that  the Republican sweep in the U.S. Congress means we will see a focus on areas where President Trump has common ground with the Republican establishment in the first 100 days of the new  administration.  This should include lower tax rates for companies and an attempt to reduce regulation- both of which would bode well for increasing jobs and investment in the U.S.

It remains to be seen what actual policy the new administration puts forward and how successful they are in getting it passed. Furthermore, we believe that a push for more protectionism is not necessarily  a good thing for the United States in the long run and not consistent with the standard Republican policy.  While we are very optimistic about the longer term growth of the broad equity markets we believe that we will see rising interest rates, federal debt and inflation.  This may have a large negative impact on bonds and other so called ‘safe investments’.  A proactive diversified approach will be crucial to help achieve investment  success in this environment.   Those who are properly allocated and maintain reasonable expectations for return and withdrawals while ignoring short term swings, and don’t get caught up in the negative hype, can potentially benefit from the opportunity.

Our team is here for you and your family and looks forward to discussing any questions or concerns you may have.  As we look to 2017 and beyond we continue to take a customized holistic approach to planning and wealth management that is based on your personal vision.  A proactive holistic approach will, in our opinion, become even more important as we see increased volatility and regulatory complexity.  Please contact us with questions or whenever we may be of service.  randy.carver@raymondjames.com  or (440) 974-0808.

This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Opinions expressed are those of Randy Carver and are not necessarily those of RJFS or Raymond James and as of 1/2/17.   Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Asset allocation and diversification do not ensure a profit or guarantee against loss. Re-balancing a non-retirement account could be a taxable event that may increase your tax liability. Past performance does not guarantee future results  The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Expressions of opinion are as of this date and are subject to change without notice.  There is no guarantee that these statements, opinions or forecast provided herein will prove to be correct.