To say the market went through some “ups and downs” last week would be quite the understatement! During that time there was an article in the Wall Street Journal titled, “5 Tougher Questions to Ask Your Advisor” by Karen Damato. These were some great questions that a savvy investor should be asking their advisor, so we wanted to take this opportunity to answer those questions for our clients. Below are the answers to those questions from the advisors at Sound Financial Strategies Group.
1.) Is it time to rebalance? If not, why?
Possibly, at Sound we use a rules based approach to determine if we need to rebalance. Our rule utilizes a 365-day relative returns model of US stocks vs. US bonds. At the writing of this, our rule is very close to going either direction on the last day of the month. This can indicate if market direction has shifted from stocks to bonds. Can this create a whipsaw effect? Yes, it is possible, however, this is one part of a disciplined rules based approach to investing for the long term. The goal is not to “time the market” (as we feel that is impossible) but to invest with the overall market direction. Of course, rebalancing should be based on an individual’s risk tolerance.
2.) Are ETFs really better than mutual funds?
Yes and no, ETFs can be low cost alternatives to mutual funds and in certain markets can give an investor more liquidity because they can be bought and sold at intraday prices. However, that liquidity can come at a high price because the market and floor trader set the price and the spread on that ETF. Another item to consider with an ETF is tracking error, which is the difference between the market price and the actual value of the underlying asset.
There are times that investing with an ETF instead of a mutual fund is the right decision. At Sound, we like ETFs when the underlying value of the asset is a “known” market such as Large Cap US stocks. Also, we like to use them when we are comfortable with the company that has issued the ETF, either because they are a big name company or because of our business or personal relationship with that company. We always try to save our clients fees with our investment choices but temper that with the danger of “unknown costs” associated with the markets.
3.) Do you use limit orders to limit risk? Which type?
At Sound, we do very little trading in individual stocks and bonds. Therefore the traditional limit order typically does not apply to our models. However, some of our investments have a built in rules based approach to hedging with cash. For example, in some of our stock positions there is a “floor” that if the value of the security is below that percentage “floor” on a certain date, typically the last day of the month, then a certain amount of that investment is sold. Again, this is not the traditional use of a limit order and is not designed to time the market. Rather, it is designed to limit loss and risk with a specific exit strategy. We also incorporate a rules based reinvestment strategy that mirrors the exit strategy. It is often easy to make a decision to sell an investment and get out of the market. The hardest decision can be when to get back in.
4.) What might cause you to alter your asset mix?
In short, changes in an individual’s risk, goals, and market direction can cause them to alter their asset mix. We take an active rules based approach to asset allocation. Yes, we study markets and economies, to make small decisions based the perceived direction of a position, for example buying or selling emerging markets, which are currently getting hit pretty hard in the most recent shake up. However, overall we build diverse rules based models based on the objectives of our clients and the risks they are will to take. The assets in these models are diversified based on the risk of those assets compared to the model and are then managed using the excess returns rule described above.
5.) What is on your shopping list?
At Sound, we do not subscribe to a “shopping list” approach. While that approach can work for someone trading or investing for the short term, it is often based on the opinion of that particular investment manager. All of us are human; no one’s opinion is correct 100% of the time. If an investment manager is using a highly researched, yet opinion driven approach, it can be costly if they are wrong. Therefore, we take a diversified rules based approach. However, there may be times when we will invest in small outlier positions based on our opinion and research. The goal of these positions is to attempt to hit a “homerun”, yet we know, and communicate to our clients, that a “strikeout” is possible too. As a basic rule though, we stick mostly with our diverse rules based asset allocation to invest for the long term.
We understand that the market has been tumultuous in recent days and what you hear on the evening news may not put your mind at ease. We would encourage you to reach out to your advisor at Sound Financial Strategies Group so we can speak to you about YOUR situation and how these market fluctuations are impacting your investments. If you do not currently have a financial advisor, we would love the opportunity visit with you and provide a free consultation to see how we can help you Navigate Retirement. Give us a call today!
Investment Advisory Services offered through Sound Financial Strategies Group, Inc. (“SFSG”), a Registered Investment Adviser. Certain representatives of SFSG are also Registered Representatives offering securities through APW Capital, Inc., Member FINRA/SIPC, 100 Enterprise Drive, Suite 504, Rockaway, NJ 07866 (800)637-3211. SFSG and APW Capital are separate and unrelated companies.
The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by APW Capital.
Damato, Karen. '5 Tougher Questions To Ask Your Advisor'. Wall Street Journal 2015. Web. 26 Aug. 2015.
Posted on Wed, September 2, 2015
by Sound Financial Strategies Group