Stay the Course

Sandra Moeller |
By Scott Schaeffer, Integrity Advisory Intern 

Over the course of the past few months at Integrity Advisory, a consistent theme has prevailed in my interactions with many different types of people. Although nearly everyone is working and investing in an effort to accumulate wealth over time and live off that wealth in their retirement, humans generally have a very difficult time looking past the short-term.  

A tendency to be short-term focused is evidenced by many things I've come across this summer. Integrity's initiative to utilize the new tool called Riskalyze for all clients relies on gaging how much risk they are willing to take in a six-month period. Performance reporting is done semiannually, even though six-month reports can be misleading due to a number of circumstances. Even outside of the office, my performance in the classroom is graded in four-month increments. Having the ability to look past short-term results while working toward long-term goals is a challenge that transcends generations. 

A tunnel vision focused on short-term performance can affect one's emotions, and subsequently the way one invests in some cases. I experienced many cases involving short-term emotions and their effect on how clients wanted to invest their money going forward. A telling experience occurred when a client came in and wanted to raise risk in their portfolio based on the recent trends in the market since the election last fall. After hearing this request, Tony brought up a chart (below) which shows the emotions typically experienced by investors. At the point this particular client was at, Tony pointed out the need to refrain from reacting due to a recency bias. Although this particular investor was reacting to a recent positive trend in the market, many investors also tend to reduce risk or go to cash at the pit of a market trend and miss out on the rebound. At both peak and trough, it is important to resist the urge to react too quickly to trends in order to allow a portfolio to perform as it is designed to accumulate wealth over time. 

 

Investing, as is the case with almost any long-term proposition, requires discipline. Working at Integrity has taught me many things, but maybe none more valuable than the effect short-term lapses in judgment can have on long-term goals. Your personal portfolio is built with your long-term financial goals in mind, and is meant to endure both highs and lows to help you achieve those goals. If you had a goal to lose 20 pounds in the next year, taking a month off a diet plan to indulge in fast food and watch television would undoubtedly affect your results. In the same light, impulsively reacting to recent trends will certainly have an impact on whether or not you achieve your long-term financial goals. 

At the age of 22, my financial goals are clearly longer-term than most. I would like to thank anyone who allowed me to sit in and learn from your unique experiences in investing, retirement planning and otherwise. Drawing on the lessons and experiences I have learned working with the staff and clients at Integrity this summer will help me as I transition into a career in finance. Just as importantly, these lessons will be crucial in achieving my own financial goals.     

Trigger Happy 

By Matt Ahrens,CIMA®  

The world has been here before. When world leaders appear trigger happy the markets immediately start feeling sick, and it’s only natural that you might be starting to feel the same way. On Thursday, the S&P 500 finished its 11th day of losses in the previous 14 trading days. Even with that track record we’re only 1.63% off the high of 2490. So far, the bark has been more painful than the bite, although an actual nuclear strike would certainly cause losses to accelerate. 

So, what are we doing? Our investment models already deploy investments that do not strongly correlate to the equity markets. Treasury yields have fallen as investors look to bonds for safety. Many of you are in our tactical models which have been sitting at around 20% cash for a couple of months now. If things continue to deteriorate two of those tactical models will start shorting the market where we can make money as the market loses it. 

We also added funds like the JP Morgan Hedged Equity fund. This fund tracks an index of large cap stocks similar to the S&P 500, but at the start of every calendar quarter they buy puts at 5% down. To help offset the cost, they sell puts at 20% down. These options allow an investor to only experience the first 5% in losses of the index, and then not experience any more pain unless the index drops below 20% for the quarter.   

 

If the index drops 18% in a calendar quarter the investor loses just 5%. If the index drops 25% for the calendar quarter, the investor loses 10% (the first 5% and the last 5%). These types of investments allow us to capture some upside (which is also capped at 5% per quarter), but avoid the large drawdowns that we expect to see. 

Just because it feels like world leaders are getting trigger happy does not mean that we should be trigger happy as well. As companies have been reporting their quarterly results, many continue to beat expectations. We continue to have an expanding economy which means that the fundamentals are still in place for continued growth in equities. As such, short term fears over North Korea will eventually subside, and we would expect to see the market snap back very quickly. If you have any questions or concerns please do not hesitate to call or email our office. 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any investment or strategy. A risk of loss is involved with investments in the stock and bond markets.  

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