Good News: It will all be over next week.
In general, a market trending upwards favors the current party for President and a market trailing downwards favors the competing party. A month ago it seemed a Clinton victory was already baked into the market. Now, with less than a week to go before the election, Trump seems to be gaining steam. Many prognosticators we follow feel the market would be trending south if a Trump win were in the cards, even though most of the electorate dislikes both candidates.
Trump represents an uncertain factor and, as we know, the market reacts negatively to uncertainty. As flawed as both Clinton and Trump are, Clinton is a known quantity. Just a month ago Clinton was an overwhelming favorite with odds makers giving her an 84% chance of winning versus 15% for Trump. Clinton has been a heavy favorite for several months. One recent projection has Clinton winning 358 electoral votes versus 180 for Trump. A Trump victory seems unlikely to most at this time but we've been shocked by elections already this year. It would be a real shock to the markets as well, if he were to win.
Many of us may remember a few months back when the electorate of the United Kingdom voted to leave the European Union. Most were shocked at the results when the votes were tabulated and the markets, especially those in Europe, sold off immediately. A shocking result will almost immediately lead to an over-reaction. Those who were able to look at the situation rationally saw the selloff as a great buying opportunity.
In our view a Trump or Clinton presidency will have very little impact on what happens in the markets as a whole over the next few months and years. Many feel that if Trump is elected that we will have an immediate selloff. Our thoughts are that if this happens, you should remember the Brexit vote and what was the best action to take or not take at that time. As we wrote a few months ago:
No one has any idea how "Brexit" will affect the markets and that’s a problem for short-term focused investors. It’s anyone's guess what is going to happen. To me it looks like a good time to put long-term cash to work if you have been waiting for an opportunity.
If you are already fully invested, I say you have to hold what you’ve got and ask yourself if this situation has made you nervous. If so, is it because you need money soon? You should fix that. Don’t wait for anxiety to prompt action. That usually signals a lack of planning.
Diversification is starting to work again.
For the last few years until the last few months, we have seen US large company investments outperform everything else. The last few months we have started to see other types of investments hold up better. Last year especially, investments in high yield bonds, emerging markets, energy and commodities in general hurt investors who were taking the long view in holding a diversified portfolio. This year these types of investments have rewarded those of us who held through and stuck with a long term plan of diversification.
Remember the 2000s
When comparing portfolios against the S&P 500 or the Dow, investors would do well to remember the late 1990s and 2000s, otherwise known as the “lost decade” for S&P 500 investors. Those who over-concentrated their portfolios during this period did not enjoy the end results.
The chart above shows how a more diversified all equity index portfolio would have performed in the decade of the 2000s and every other decade back to the 1950s. It is interesting to note that this portfolio owning small US and non-US companies, large US and non-US companies, REITS and other equity holdings outperformed in all decades except for the 1990s and the last five years ending in 2015. Those who have only considered investing in the S&P 500 index may be doing themselves a favor by studying this chart.
Dramatic Landscape Changes in Financial Advice
Many of you who subscribe to Kiplingers have been asking about how the new Fiduciary rule is going to impact the way we interact with clients. For the most part we see these changes as a great development for investors. Unfortunately, it may add additional paperwork for some and additional regulations for many.
Kiplinger Article: 8 Things You Must Know About the New Broker Rule
Anyone advising investors on any type of retirement plan is now required to act as a fiduciary, which means we are required to put the client’s interest first. Certified Financial Planners were already required to adhere to this standard but now everyone is required to no longer just recommend what is suitable. We need to know enough about our clients and have the expertise to know what is best for our clients.
Simplicity and Savings
Most of our clients already work with us on a non-commission basis. For those few who do not, we may want to look at our options before the April 2017 deadline.
For all that we work with on a non-commission basis, we have been able to work with LPL to improve things in several ways:
1) We have been able to negotiate the elimination of transaction charges in client accounts.
2) We can now buy funds and ETFs with lower internal expenses without being concerned about additional costs.
3) We can now include all accounts in automatically figuring tiered schedules, reducing costs automatically when new levels are achieved.
In the next couple of months we can go through these updates in detail on a one on one basis. We should be able to detail how internal expenses can now be reduced for all core strategies and detail the economics of these improvements.
We continue to believe that clients should primarily adhere to core strategies and consider other strategies to add diversification:
Core strategies - Passive ETF and Bond portfolios
– low cost solution
Mutual Fund Strategies
– active / tactical solution
Non-Core Strategies - Stock & ETF strategies to complement the core.
A few firms are in the process of implementing sweeping changes for all clients that limits flexibility somewhat. We still want to allow flexibility for our clients if they wish to own specific types of products. We believe the changes will finally force some hidden fees into the forefront and most clients will be better off.
Two articles on this can be found below:
Joe D. Franklin, CFP is Founder and President of Franklin Wealth Management, a registered investment advisory firm in Hixson, Tennessee. A 20+year industry veteran, he contributes guest articles for Money Magazine and authors the Franklin Backstage Pass blog. Joe has also been featured in the Wall Street Journal, Kiplinger's Magazine, USA Today and other publications.
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Please remember that past performance may not be indicative of future results. Indexes are unmanaged and cannot be invested into directly. Index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investments. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Franklin Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Franklin Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Franklin Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Franklin Wealth Management’s current written disclosure statement discussing our advisory services and fees is available for review upon request.