Weekly Market RecapThis week saw US GDP estimates revised up for Q1, and some very strong US housing data. US housing has been mixed in recent years, but may now be starting to gain momentum. Internationally, Greece continues to dominate headlines, but remember that Greece accounts for less than 0.5% of the global economy. This week, we want to discuss the value of emerging markets for your investment returns. At FutureAdvisor, we currently see good prospects for emerging market stocks within a diversified portfolio. The term emerging markets refers to foreign countries that are typically less mature in their institutions and processes but may experience faster growth than the global economy. Examples of emerging markets include China, India and Brazil. One reason we view emerging markets as attractive is because their stock markets generally trade at a discount to the global markets. For example, emerging markets currently have a dividend yield of 3.0% relative to 1.9% for the US market. This considerable price discount means that emerging markets have the potential to deliver a healthy return. Our research suggests that markets with higher dividends see higher than average returns. Secondly, emerging markets can offer the prospect of higher growth, due to both economic and demographic trends. For example, China has grown at or above 7% for recent years, which is double or triple the growth in many advanced economies. Of course, buying individual stocks in emerging market can be complex, but Exchange Traded Funds (ETFs) offer an attractive way to gain diversified emerging market exposure at low cost with minimal complexity, in our view. So, we believe emerging markets can help your portfolio grow for the long term, especially when they are part of our diversified portfolio model to help level your returns over time. For example, this year so far China is the best performing stock market of the major economies up 12% in dollar terms, and last year India grew approximately 30% making another emerging market the top performer of major countries. Of course, this growth can come with volatility, and this year Brazil has been weak, just as Russia was in 2014, but overall so far this year emerging market funds are generally growing ahead of their broad US market equivalents. This growth can come with larger short term ups and downs over time, but that can provide opportunities for the tax loss harvesting we offer Premium customers, and for a long-term investor with a diversified portfolio, we believe emerging markets are an important portfolio component to help growth, which is why they form a significant portion of our recommended equity allocation. Reminder: Disclaimer: Your Portfolio Summary
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Saturday, June 27, 2015
Your Weekly Update - US GDP Estimates Improve
Sunday, June 21, 2015
Your Weekly Update - Fed Sees US Economy On Track
Weekly Market RecapThe Federal Reserve held their June meeting this week. They reaffirmed that the US economy hit a temporary soft patch in the first quarter, but that the economy appears on a positive trajectory with improving employment and subdued inflation. The Fed said that they expect to raise rates in the second half of 2015, assuming the economy stays on its current course. In Europe, Greece continues to make headlines with speculation about a possible Euro exit and potential default at the end of June, but private negotiations continue. As we've mentioned previously, rising US interest rates may get more attention than they deserve. History shows that both stocks and bonds generally rise during periods of rising rates. It is important to remember that typically interest rates rise in response to a strong economy, and a strong economy is generally good for stocks. In addition, we have taken action over the last couple of years to reduce the overall duration of our recommended diversified bond portfolio which we expect to help preserve the principal value of your bond investments, even as rates rise. Also, a quick reminder on how bonds help your portfolio. Bonds have generally been a valuable way to manage the shorter term risks of holding equities. Often, when the stock market is weak, bonds can perform well and this is useful in smoothing the returns in your portfolio. Bonds are generally regarded as the most useful asset class for this role, and also provide a return through interest payments. Smoother returns means less volatility in your portfolio, which has shown time after time to encourage people to stick to their long-term plan. Without bonds, we believe your portfolio is more susceptible to bigger ups and downs, which can create fear and ultimately a desire to changes one's strategy - usually at the wrong time. Additionally, bonds have historically been less risky than stocks. US Treasuries have only seen an annual fall of more than 10% only once since 1928; in that year they fell just under 12%. As we mentioned last week, stocks have offered greater historical returns, but can move up and down significantly over fairly short periods. In contrast, bond returns have historically been lower, but more stable. Years of negative returns for bonds are infrequent. Finally, remember that our recommended fixed income exposure is well-diversified. US bonds are part of our fixed income portfolio, but the funds we use are diversified across thousands of bonds with different durations and credit risks. In addition, inflation protected securities and international debt are also a large part of our recommended fixed income exposure. See our recent piece in Forbes for more information on how bonds help your portfolio: Disclaimer: Your Portfolio Summary
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Saturday, June 13, 2015
Your Weekly Update - US Consumer Spending Improves
Weekly Market RecapThis week saw strong US data on employment and consumer spending. In Europe, the focus was on Greece, and its negotiations over debt payments with creditors. Greece represents less than 2% of the Eurozone economy, but continues to get a lot of headlines. Elections in Turkey late last week saw the ruling AK Party unexpectedly lose power, which may mark an important shift for the country. However, the brightest spot for the markets so far this year remain in Asia, where Japan and China among the best performing markets in dollar terms. The global markets have been relatively weak over the past month. We understand that volatility in the markets is never pleasant. Even so, current volatility is actually well below historical norms. What does this mean for your portfolio? It means that volatility could rise in the future if history is used as a guide. Though we have seen some market declines in the past months, these are a normal part of investing, and they have been relatively small compared with history. We ask that to you remain disciplined and patient should volatility increase, since our research shows that's what helps your portfolio to grow. The last significant decline we saw in the global markets was an almost 20% drop in the second half of 2011. Clearly, it can be tempting to change course in the face of such declines, but those who sold missed out on markets rebounding to new highs the very next year. Similarly, in 2008-9 which was one of the largest declines in a century, the global markets were once again back growing strongly over the subsequent years. However, those who panicked and sold during 2008-9 not only may have reduced the value of their savings, they also missed out on the global stock markets moving up 73% in 12 months off the lows. We don't know that the market will always rebound with the same vigor from declines as they have in recent history. However, researchers at the London Business School have compiled data across 23 countries going back as far as 1900 and found that the global markets have grown 5.2% a year on average, after adjusting for inflation. At that rate of growth your money doubles in 14 years. However, researchers from DALBAR have found that unfortunately, the average individual investor earns a far lower return, the biggest reason for that is panicking and moving to cash when the markets decline. So the academic evidence is clear that equity investing has offered impressive returns historically, but it also shows that in order to capture those returns patience and consistency is needed. If you are concerned about your ability to manage your portfolio in a down market, you may want to consider automatic rebalancing. With our sophisticated threshold-based rebalancing we'll keep your portfolio balanced for its strategic goals without you having to lift a finger. This is one of our Premium service benefits. Disclaimer: Your Portfolio Summary
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Sunday, June 7, 2015
Your Weekly Update - European prospects improve
Weekly Market RecapIn the past few weeks, we've seen improving European economic prospects and mediocre US data. US GDP numbers were revised down to a 0.7% decline for the first three months of the year, though many view this as a temporary blip. In Europe, signs that inflation is picking up slightly and the risks of deflation have receded were viewed positively by the markets. This is a useful reminder of the risks in short term forecasts. Last year, the story was of a robust US and a sick Europe, but now, only half way through 2015, those trends appear to be changing as European prospects improve relative to the US. We want to take a moment this week to discuss the appropriate risk tolerance for your portfolio. We automatically construct a retirement portfolio for you that reflects your time to retirement among other factors. For most people, we expect that a "moderate" risk tolerance is a good fit. For example, some people believe they need an "aggressive" risk tolerance because they are younger, but that's not necessarily the case. The glidepath we use automatically gives you greater risk and return exposure when you are young and then tapers it down as retirement gets closer. Another crucial concept to understand with respect to risk tolerance is the behavioral bias known as overconfidence. Simply put, overconfidence is the human tendency to believe too strongly in the accuracy of our own beliefs. When surveyed, 93% of American drivers rate themselves above the median. 60% of Americans believe they are better looking than the average person. Overconfidence leads us to take on more risk in our portfolios than we are actually willing to tolerate. For example, an investor may think he or she has the ability to stomach a 40% decline in their portfolio, but when that drop occurs, that same investor sells and moves to cash. During the last big market correction in 2008, more than half of "aggressive" investors moved out of equities. When stocks rebounded, they missed out on the returns. Studies show that overconfidence in investing tends tends to affect men and those under 35 the most. To combat overconfidence, recall how you behaved during the last market decline. If you haven't lived through a market decline yet, try to picture your portfolio with only 60% of it's value. Better yet, write a committment to yourself that you will not change your risk tolerance when markets are volatile. The most important thing about your risk tolerance is stick with it at all times, in good and in poor markets. It should reflect your own ability to tolerate risk through the ups and downs of the markets, not greed in the short-term. When the markets are doing well, it's tempting to be aggressive, and when markets fall, it feels better to be cautious. These types of behaviors destroy portfolio value over the long-term. Pick a risk tolerance that works for you whatever the markets are doing. When you change your risk tolerance, please note that it does result in trades that slightly drag performance due to the costs of trading. This is another reason to set your risk tolerance for the long term. Disclaimer: Your Portfolio Summary
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