In our role as investment advisors, discussions often revolve around a recurring theme: Diversification. This term prompts questions about its necessity and overall benefits.
In finance, diversification serves the purpose of mitigating portfolio exposure to specific risks, primarily market (systemic) risk and company or industry-specific risk. Systemic risk can also be referred to as volatility risk, the risk that the market may have a negative return in a given year, specifically a year that you need to make a withdrawal.
Forecasting the stock market and interest rates is a pursuit that has captivated investors for centuries.
A huge cohort of Wall Street brain cells surrounds the prediction business of markets, interest rates and other economic forecasts.
However, the reality is that predicting the future movements of these financial indicators is an exercise in futility.
If you’ve been an investor in 2022, you don’t need us to tell you how tough things are. In order to tamp down inflation, the Federal Reserve is deliberately trying to make stock prices go down, crash the housing market, and slow down the overall economy.
For the most part, it’s worked. The stock market is officially in a bear market. The housing market has dried up, and it is almost certain that we are either in, or entering, a recession.
Here are the returns for the stated indices through November 7th:
With the baseball lockout finally at an end, we can actually feel Spring in the air. Aside from being the great American pastime, baseball allows advisors to abuse sports clichés to the fullest. From “make sure all your bases are covered”, to the great, “Singles and doubles as opposed to homers”, and finally, the ultimate, “we’re in the seventh inning of the bull market”, baseball clichés make for useful tools. Using these clichés may help clients stay on track and make sure nothing comes out of left field. They also provide a great lesson, shared by Warren Buffet via Red Sox great Ted Williams.
It’s been two years since “patient zero” was officially diagnosed in the United States, and times have been trying, to put it mildly.
While the virus was wandering in China, even before it hit our shores, the market and the economy jittered around. A combination of the quickest 30% drop in stock market history, government-imposed closures of world commerce, and governments setting their money-printing presses on overdrive, has created a volatile backdrop for the financial system.
The 2022 new year started with three consecutive weeks of downhill stock prices followed by a brief lapse into correction territory – as defined by a drop of 10% or more. This comes after the S&P notched 70 all-time highs last year – a record only second to 1995. Over the past two years, growth stocks have had all the fun, with large-cap and mid-cap growth stocks close to doubling the performance of their value stock counterparts.
As 2021 draws to a close, reflecting on some of its events can go a long way.
As we scrambled into lockdown in 2020, everyone became a trader. From teens attending Zoom classes to elders during senior center Bingo games, everyone wanted in on the fun. The stock market crash in March and its astronomical ascent thereafter “created” the perfect conditions for this storm.
It’s been another phenomenal year for U.S. equity markets. While all you hear from the media is news about supply chain disruptions, empty shelves and inflation, the S&P 500 has quietly gone up about 25%. Though their activity is not as strong as their American cousins, international developed indices have also seen a double-digit rise.
It’s always fun to arrive at the office early in the morning and see that a client has already emailed with questions about the market. One day last week, the email went like this:
“I’m worried today about the stock futures…and the selloff that’s happening now around the world… I know you’ve prepared us for volatility, but this morning worldly selloff is huge. PERHAPS IT IS TIME TO SELL?!”
After trekking steadily upwards, the equity markets in the U.S. and around the world have hit some turbulence. While the larger indices like the S&P 500 and the Dow are only a couple of percentage points off their highs, some notable high-flyers have been taken out to the woodshed.
“Money doesn’t grow on trees,” roared Papa Bear in The Berenstain Bears’ Trouble with Money.
Though ‘cancel culture’ may not have criticized the Berenstain Bears for their gender stereotypes, they ought to call them out them for their misconception about finances. Because apparently, money does grow on trees.
“History doesn’t repeat itself, but it often rhymes,” asserted Mark Twain two centuries ago. And it seems that as time goes on, the more rhymes we add, creating what is now a long and complex poem.
Stock market bubbles are one of these rhyming moments.
In March of 2020, we were all forced into isolation in our homes. There were no live sports, no casinos and no live entertainment. As a result, millions of people turned to the stock market for their gambling and entertainment. The bonus income supplied by federal stimulus checks bolstered this trend as many people used those funds to speculate in the stock market.
2020 has been a particularly trying year. The lockdowns, school cancelations, unemployment, and of course, the health crisis, have had an impact on even the strongest-minded people. To top it all off, it’s an election year. And not just any election year – one of the most divisive and heated ones in recent memory.
If you’re still around at this point of 2020, you’re probably expecting something crazy to happen. Will there be a release of a new and improved COVID-20? Will there be a civil war when half the country doesn’t like the election outcome? Are we in for a zombie apocalypse, perhaps?
While we do know that crazy stuff can happen, we can never predict it.
Financial media on the other hand, lives on predictors and prognosticators.
What a year 2020 is turning out to be. We had President Trump’s impeachment trial (yep, it was in 2020), a 75-day Coronavirus lockdown, 40 million unemployed Americans, a violent stock market, looted stores and police stations all over the country, major calls to defund the police and Conor McGregor’s fourth and non-final retirement. And we're not even halfway through.
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The Chartered Financial Analyst (CFA) charter is a globally respected, graduate-level investment credential established in 1962 and awarded by CFA Institute — the largest global association of investment professionals.
There are currently more than 138,000 CFA charterholders working in 134 countries. To earn the CFA charter, candidates must: 1) pass three sequential, six-hour examinations; 2) have at least four years of qualified professional investment experience; 3) join CFA Institute as members; and 4) commit to abide by, and annually reaffirm, their adherence to the CFA Institute Code of Ethics and Standards of Professional Conduct.
High Ethical Standards
The CFA Institute Code of Ethics and Standards of Professional Conduct, enforced through an active professional conduct program, require CFA charterholders to:
• Place their clients’ interests ahead of their own
• Maintain independence and objectivity
• Act with integrity
• Maintain and improve their professional competence
• Disclose conflicts of interest and legal matters
Passing the three CFA exams is a difficult feat that requires extensive study (successful candidates report spending an average of 300 hours of study per level). Earning the CFA charter demonstrates mastery of many of the advanced skills needed for investment analysis and decision making in today’s quickly evolving global financial industry. As a result, employers and clients are increasingly seeking CFA charterholders—often making the charter a prerequisite for employment.
Additionally, regulatory bodies in over 30 countries and territories recognize the CFA charter as a proxy for meeting certain licensing requirements, and more than 125 colleges and universities around the world have incorporated a majority of the CFA Program curriculum into their own finance courses.
Comprehensive and Current Knowledge
The CFA Program curriculum provides a comprehensive framework of knowledge for investment decision making and is firmly grounded in the knowledge and skills used every day in the investment profession. The three levels of the CFA Program test a proficiency with a wide range of fundamental and advanced investment topics, including ethical and professional standards, fixed-income and equity analysis, alternative and derivative investments, economics, financial reporting standards, portfolio management, and wealth planning.
The CFA Program curriculum is updated every year by experts from around the world to ensure that candidates learn the most relevant and practical new tools, ideas, and investment and wealth management skills to reflect the dynamic and complex nature of the profession.
To learn more about the CFA charter, visit www.cfainstitute.org.