"Helping You Navigate the Course to Financial Freedom"
 January 2016
A Volatile Year Ends with a Whimper

Many financial professionals are happy to see the end of 2015.

While the S&P 500 made significant advances in 2013 and 2014, this past year action in stocks felt more like 2011, when overseas tremors (Japanese earthquake, Eurozone bankruptcies, Middle East turmoil) reached our shores. In both years, the benchmark index ended the year pretty much where it started.  And while 2015's ride was not as volatile as that of 2011, in 2015 the S&P 500 did experience its first 10%+ decline in four years (St. Louis Federal Reserve)
But that doesn't mean we didn't have winners and losers. Technology, health care, and consumer-driven issues posted modest gains (Bloomberg), led by the FANG group (Facebook, Amazon, Netflix and Google), all of which had double digit gains for the year.  In the opposite corner we had the relentless drop in commodity prices hit the mining and energy sectors hard, large companies beat smaller companies, and U.S. stocks generally topped international.
In hindsight, our own move into energy was way too early, and we held onto some high yielding energy limited partnerships for too long, never anticipating that crude oil would lose more than half its value since June 2014 (Investing.com).  Going forward, we believe it will be some time before the energy/commodity sectors recover, and with it those economies heavily dependent on them. 
  Meanwhile, despite the first increase in the Federal Funds rate since 2006, longer-term Treasuries yields continued to hold near historic lows, defying expectations of higher interest rates going forward.
We did, however, see a modest rise in bond yields among investment grade issues (St. Louis Federal Reserve) and bigger problems in high-yield bonds, sometimes called junk bonds.  Expectations of an eventual Fed rate hike probably influenced yields in investment grade issues. But the sharp increase in junk bond yields, especially those with the lowest credit ratings were tied mostly to problems in the energy and mining sectors.  This affected the price of many corporate bond and income-oriented mutual funds as well, driving some to losses exceeding 7% for the year.

In This Issue

2016 Tax Tips

Due to the celebration of Emancipation Day in Washington D.C. on April 15th, taxpayers nationwide will have until Monday, April 18th to file their returns.  And because April 18th is Patriots' Day in Maine and Massachusetts, taxpayers there have until April 19th to file!

Form 1099's will be mailed beginning January 31 for non-mutual fund holding accounts.  Mailings will be phased based on account holdings - all 1099's should be mailed by March 17th.

Cost basis information can be found on your December 2015 statements.  Call us with any questions.

Table 1: Key Index Returns
Dec 2015 %
Full Yr  2015 %
3-year* %
Dow Jones Industrial Average
NASDAQ Composite
S&P 500 Index
Russell 2000 Index
MSCI World ex-USA**
MSCI Emerging Markets**
  Source: Wall Street Journal, MSCI.com
    MTD returns: Nov. 30, 2015-Dec. 31, 2015
    2015 returns: Dec. 31, 2014-Dec. 31, 2015

Emotional vs. disciplined investing

I'll touch on some of the issues affecting high-yield shortly, but last year's lackluster performance in key stock and fixed income sectors is a perfect segue into why long-term goals and sticking with a carefully crafted investment plan have historically been the best way of managing risk and reaching your financial goals.
First, as I've discussed many times, your personal situation, goals, and risk tolerance influence your portfolio asset allocation (which is the wonky way of saying your financial plan). If your personal situation has changed, we may want to make a mid-course adjustment to your investment portfolio. 
But for many investors, the plan that was designed specifically for you remains the best long-term roadmap.
Let me explain by highlighting a study published last year by DALBAR, one of the nation's leading financial research firms and one with a 40-year track record.
The study found that over a 20-year period ending December 31, 2014, the average equity stock fund investor posted an average annual return of 5.19%, which compares unfavorably to the average annual return for the S&P 500 Index of 9.85%.
Going back 30-years, DALBAR paints an even gloomier picture, with the average equity stock fund investor earning 3.79% annually versus the S&P 500's average annual gain of 11.06%.
As the study underscores, "Investor underperformance is present in all investment classes, therefore proving (the word it used in the study) that the failure is not primarily one of poor asset allocation."
Let me be clear. Our goal has never been to match or outperform the S&P 500 Index. 
An all-stock portfolio, even one that is fully diversified, is too risky for most investors. I typically recommend a blended allocation that not only reduces overall volatility but can provide a steady stream of income.
So what may be the causes of such woeful underperformance? 
Some of it simply has to do with everyday cash needs and unplanned expenses. But the study concluded that the largest contributor came under what it called "voluntary investor behavior," which generally represents "panic selling, excessively exuberant buying, and attempts at market timing."
Prudential took the study one step further and analyzed equity cash inflows and outflows over the last 20 years ending December 31, 2014.
Not surprisingly, investor inflows were the highest when shares peaked in 2000 and outflows were largest when prices approached the market bottoms in 2002 and 2009.
It's what happens when emotions get in the way of a disciplined approach. 
Honestly, I get it - I have to fight those feelings myself sometimes. There is always a temptation to sell when stocks are in downdraft, as we briefly saw last year. And we may re-evaluate our overall market risk assessment, leading to changes in a recommended asset allocation. But as I have repeatedly stressed, your financial plan takes into account those hard-to-time downturns.
A look ahead
Last year, international events played a role in hampering sentiment at home. A slowing economy in China provided just the right excuse for late summer's correction and the one we are currently experiencing in early January 2016.   
But keep in mind that U.S. exports to China account for less than 1% of the total U.S. economy (U.S. Bureau of Economic Analysis). Hence, it's hard to imagine a scenario where weakness in China pulls the U.S. into a recession.  
Emerging markets, dependent on natural resource exports and hurt by a strong US dollar, continued to struggle, while political uncertainty in Europe and continuing unrest in the Middle East, along with a wave of displaced immigrants, are creating additional challenges that must be addressed in 2016.  So while we may begin to nibble at international exposure, we believe it will be some time before international markets, especially emerging economies, begin to recover.
Manufacturing woes and oil
Closer to home, the U.S. service sector has continued to expand at a moderate pace, but manufacturing remains in the doldrums.   
As we enter the New Year, two stiff headwinds remain-oil and a stronger dollar that is contributing to weakness in exports.  
Many of us are being treated to the lowest gasoline prices in years - it's been quite awhile since we saw $1.71 gas in New Jersey!  But consumers are benefiting at the expense of producers, and not just the big oil companies.    
Sharp cutbacks in capital spending in the energy and commodities sectors, coupled with layoffs, are hampering manufacturing overall.   Yes, low oil and commodity prices help keep inflation in check, but again, that's creating big problems in the energy and mining sectors.  
Junk gets junkier  
The well-documented problems in energy and mining have spilled over into high-yield bonds in general. The riskiest bonds, or those which sport the lowest ratings, have seen the largest jump in bond yields.
Rattle the bond market and you can rattle the stock market. Yet, measures of credit conditions used by the Federal Reserve indicate financial stresses in the economy remain muted as the New Year begins (St. Louis Federal Reserve).
If oil and the commodity sector begin to bottom and the economy continues to expand at a modest pace, historical analysis suggests that much of the damage in junk bonds is probably behind us.
However, a lack of liquidity in the sector, the outside potential for a broader economic slowdown, and continued problems in mining and energy may generate additional uncertainty, so we remain cautious here.
Seeking clarity in earnings
Finally, let's end on a more upbeat note.
Corporate earnings are probably the most important variable in determining the direction of stocks over the medium and long term. Yes, other factors can create volatility shorter term, but profits are the lifeblood of stocks.
According to Thomson Reuters, earnings for S&P 500 firms collectively fell by 0.8% in Q3 and are forecast to decline 3.7% in Q4. Much of the weakness can be pinned on a steep drop in earnings among energy companies.
Pull out the energy sector and Q3 profits would have been about seven percentage points higher, according to FactSet Research.
The rise in the dollar has also weighed on profits of multinationals, as they translate sales abroad back into the stronger greenback.
But Thomson Reuters is projecting that earnings will begin rising again in the first quarter of 2016 and accelerate in Q2 and Q3.
Of course, what happens to energy, the dollar, and the economy will ultimately determine the path of corporate earnings. But the forecast for an improving profit outlook, which I don't believe is fully priced into stocks, gives rise to cautious optimism as 2016 begins to unfold. 
The wild card will be future increases in interest rates.  I expect the Federal Reserve to remain extremely cautious when raising rates, and would not be surprised if we saw no additional rate increases in 2016.
Bottom line
I always stress the importance of being comfortable with your portfolio. As we've talked about in our meetings, one of my goals is to help you accumulate wealth without taking on undue risk.
Stick to the plan. Markets rise and market fall, but unless there have been changes in your circumstances or you've hit milestones in your life such as retirement, stay with the plan.
But you must be comfortable with the level of risk you're taking as we set out to meet your objectives. If you are not, let's talk and recalibrate.
Rebalance. Changes in value in various asset classes may have knocked you out of alignment with your target stock and bond allocations. Now may be the time to reassess your allocation.

Let me end with this comment from Warren Buffett. "Someone is sitting in the shade today because someone planted a tree a long time ago." For many, we have already planted that tree, so I encourage you to stay with the plan that nurtures and grows your tree.
As we enter 2016, I want to say once again that I'm honored and humbled that you have given me the opportunity to serve as your financial guide.

I hope you've found this review to be educational and helpful. Let me emphasize, it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me a call at 201-933-1790.

New Year's Resolutions - An Easier Way?

The New Year has traditionally been a time for reflection on the year gone by, as well as an opportunity to identify areas we can improve on going forward.

While resolutions are usually made with good intention, they often quickly fall by the wayside.  Why do we so frequently fail at accomplishing things we so fervently want?

Much of the fault can be laid on our biology - how we are wired.   Our evolutionary upbringing required a brain that worked quickly (think sabre-toothed tiger), while conserving energy (think scavenging for berries).  The result is a natural thinking process heavily reliant on impulse, emotion, and habit.

For example, a study in the Journal of Economic Psychology reports that unhappy people tend to save less and spend more, while happy people are just the opposite (WSJ-Nov. 2 2015).  Happy people are more future-oriented and more likely to pursue longer term goals.

There is an entire field - Behavioral Economics - dedicated to uncovering our mental biases when it comes to making decisions, not only financial but in many aspects of our day to day lives.

However, once we're aware of these "wiring faults" we can use some techniques to make our resolutions more attainable.  Here are a few:
  1. Break It Down - while there is a lot to applaud about big, hairy goals, they can also be intimidating and overwhelming (and thus easy to abandon!).   If you have a big goal you'd like to accomplish, begin by breaking it down into smaller steps or components.  For example, a resolution to lose 10 pounds would be transformed into a first step of tracking what you eat for a week.  This could then be followed by changing one habit, such as eating a healthy breakfast every day, packing a low cal lunch, etc.  Break the goal into steps, with each step becoming its own resolution.
  2. Share It/Write It Down - like a financial plan, a resolution not written down is more aspiration than perspiration!  Putting it on paper (or in a blog or a post) makes it more real.  Ideally, the resolution should also be shared with supportive individuals who will help keep you accountable (gently!).
  3. Use Design Thinking - a recent NY Times article (Jan. 4 2016) describes using a technique developed by Silicon Valley engineers to help get "unstuck" and create new habits.  Start by asking what you want to accomplish, then what accomplishing that goal would do for you.  Your answers may result in a reframing of the goal.  For example, a goal of finding a life partner would bring companionship.   A goal of companionship has many more facets than just finding a life partner, some much easier to accomplish! 
  4. Don't Dwell on Change - a recent segment on the CBS show "Sunday Morning" got me thinking.  The commentator went through a number of resolutions on behaviors he was NOT going to change in the New Year, either because they were good ones, or they were ones that brought pleasure to him and his family.  So examine those good behaviors too, pat yourself on the back, and resolve to maintain them.

Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA), Member FINRA, SIPC. Supervising office at 678-954-4000. Financial planning offered by Compass Wealth Management LLC. Leslie Beck and Martin Siesta are registered representatives and investment advisor representatives of SFA, which is otherwise unaffiliated with Compass Wealth Management. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please note that individual situations can vary.  Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.  For more information visit www.compasswealthmanagement.net