Testing 1,2,3

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“The Market Is Up and I Am Not”

The S&P 500 is 500 companies/stocks. The Dow is comprised of 30 large publicly owned companies based in the United States. That is it. This is hardly indicative of “the market.” The market as I see it includes domestic and international equities. It consists of large cap, small cap, micro cap; value and growth; emerging markets, emerging small and emerging value. Additionally, let us not forget about fixed income (short term to be prudently explicit).

Your portfolios hold multiple asset classes. More specifically, asset classes that have some historically validated. They are engineered so as to not be dependent on any specific asset class. This lack of dependency is designed to attempt to maximize return for a given level of risk. The goal here is to get an overall market return.

This approach, in conjunction with adding fixed income, is designed around risk mitigation and insulating you from the downside risk associated with holding one [or just a few] asset classes. The consequences of this more prudent strategy are that you should not see returns that are associated with the lowest performing asset classes. To the contrary, it would be an unreasonable expectation of investors to be hitting “home runs” associated with consistently being in the highest performing asset classes. What is a reasonable expectation is a return commensurate with that of the asset classes with which we invest.

Generally this strategy is rather unassuming and extremely palatable. Unless of course the highest performing asset class is the S&P 500 or Dow, both of which are remarkably in investor’s face on a daily basis courtesy of the media and their friends at cocktail parties. This is what we are dealing with now.

It is worth remembering that there will always be an asset class that is out performing all of the others (as well as one underperforming). When it is the S&P though, everyone notices. They notice due to media spotlight, it makes up a disproportionate percentage allocation of many poorly diversified portfolios, thus making the news sadly relevant.

While some may be inclined to get onto this train of seemingly skyrocketing returns the S&P has offered this year, the wise know that volatility works both ways. The risk is two-fold. Now that the S&P has appreciated, there is a legitimate risk that this ride is over, and that any material change to shift resources in this direction may be poorly timed. In other words, the ship may have sailed. This is the risk of market timing at its very core and the reason actual investors returns frequently do not match fund performance (as evidenced year after year in Dalbar’s Quantitative Analysis of Investor Behavior studies). Investors see an asset appreciate and then buy [too late]. Once in, they frequently get the luxury of the ride down and then sell for a loss. Then, they look around for another hot asset, lather, rinse, and repeat.

Discipline is not for the weak, but success is the long term reward for its maintenance.


Bill Riley

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Happy Thanksgiving

As we all prepare for the coming holiday I would like to thank all of our clients for the opportunity to be of service to them and the business they have provided us.

The market has been an interesting this year; setting new highs some 46 times, the end of quantitative easing, and interest rates still at historical lows. We are in uncharted waters since history does not show us similar conditions. I am still bullish and even though I see volatility coming back, any corrections should be muted.

I don’t predict markets but I think normal returns of 8 to 10 percent are expected next year. There is always the chance of a “black swan” upsetting the apple cart but proper allocation and diversification will mitigate the effects if it arrives.

In closing, we all should be thankful for the opportunity to live in this country. There will always be challenges and events that will concern us but all things considered I would think of nowhere else would I pledge my allegiance to.

Have a great holiday


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Lesson Learned

Last Wednesday the market went through one of the most volatile days since 2008. Many people decided to go to cash and pull their investments from the market and hide. I continually preach against trying to time the market (going to cash when the news gets scary).  However, I have come to the sad conclusion that it will always exist.

Since last Wednesday the S&P is up 6% and now trying to take out the all-time highs. Selling at the bottom is the biggest mistake I see investors make and it is what I always hear that causes people to stay out of the market. Volatility is back so we must adjust to it. Investors love volatility on the up side but run for the hills on the down side. I have never made money buying at the top but most individual investors will always try. Remember, it is not the portfolio 90% of the time that causes failure but the investors mentioned earlier.

Once the Federal Reserve finishes their meeting this afternoon we will probably see another round of volatility. I will admit this is concerning but we need to take advantage of the decision and adjust accordingly. My observation is there are a lot more positive results from this decision than negatives.


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Energy: Update

While Riley Wealth Management, LLC no longer has a custodial affiliation with Raymond James I have maintained a relationship with their energy research department and regularly read their industry updates.

Recently Raymond James Energy lowered their price targets on a few companies to incorporate a slightly higher risk premium given the depressed oil price environment. Specifically, they lowered their price targets on Legacy Reserves (from $32 to $28).

Several fundamental oil drivers have deteriorated over the past couple of months including: increased production from Libya and Nigeria, lower global oil demand growth assumptions and Saudi Arabia’s apparent willingness to allow global oil prices below $90 per barrel. In English that means their longer-term oil price outlook is modestly worse than before.

If you have any questions about how the price of oil may affect positions in your account please don’t hesitate to call.

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Easy Money Is Over

Over the last four weeks we have been reminded that volatility and corrections still exist. Back in 2009, you could buy anything and it would make money, but now the rules have changed.  The bull market is not over; in fact with this pullback, valuations now are very attractive. Everyone loves volatility when the market goes up but when it goes down fear looms its ugly head. Ebola, ISLE, and oil going down cause some unfounded selling. In fact, I had one client on Wednesday go to cash even though he was only down 2% with the market touching 8%. That was my first indication a bottom was forming.

I have written several times in the past that corrections are part of investing and this most recent was normal very orderly. However, after 40 years of investing I realize that there are people that just don’t belong investing in equities. In the back of my book I have my catch 22 list. The first question is “Do you understand how markets work”. Obviously, even with all my coaching; that client didn’t.

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Isn’t Halloween on the 31st?

October 15 was quite a scary day for Wall Street with the index opened lower and plunged to its -3.04% in the early afternoon. The deepest intraday low since the -3.86% since the nosedive in November 2011. A buy the dip strategy subsequently kicked in with the index closed with a greatly trimmed -0.81% decline.

I hate to blame this on external factors but animal spirits rose with the Ebola scare exacerbating the fear. Economic and earnings reports are positive, in fact on the jobs reports unemployment claims came in with the lowest number since 2000.

You have heard me use the “history may not repeat itself but it sure can rhyme” saying many times, so looking back at march 2009 the S&P was down -7.40.  All of you should know what happened since then. If you don’t then you need to call me and I will give you a quick review.

Corrections happen but discipline investing will always overcome and profit from them. There are a lot of things to buy now and these events like Ebola will become old news very soon. I have never made money buying at the high but buying at the low has worked pretty well.


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