Safe Harbor Asset Management Services
4013 East Baker Avenue. ¨ Abingdon, MD 21009 ¨(410) 538-6800
January 15, 2015
Happy New Year! Now that 2014 is in our rear view mirror, we need to prepare for the future. 2014 confused many investors who underestimated the strength of the United States equity markets and incorrectly predicted that the interest rates would rise. Interest rates are once again at historic lows and the S&P 500 is flirting with historic highs.
This dichotomy of high valued markets and historically low interest rates are unusual. Interest rates fell sharply after the 2008 meltdown in order to help jump start our economy. The fact that interest rates have once again fallen to historic lows while the U.S Market is at historic highs is troubling. I ask, why are some investors willing to invest in 30 year US Treasuries paying under 2.5% and other investors are willing to buy stocks at historically high valuations? Something has to give, either the economy is going to continue to grow in order to support the high stock valuations and interest rates will begin to rise or the economy will falter and interest rates will continue to stay low. I have recently studied how Ray Dalio, the world's largest hedge fund manager, invests his all season's strategy which is designed to reduce the portfolio risk no matter what the economic environment happens. He admits that he cannot predict the future, but he prepares his portfolios to weather whatever the future may bring. Ray's strategy attempts to provide a positive return during each of the following economic environments:
1. Higher than expected economic growth
2. Lower than expected economic growth
3. Higher than expected inflation
4. Lower than expected inflation
After studying Ray's approach, I have decided to add a commodities fund, and increase our allocation into the gold fund. Funds in your portfolio have already been allocated to the TBF 20 Year Inverse Treasury Fund. This investment will go up in value if interest rates rise. This fund, along with your current allocation of Real Estate Investments, should increase in value if inflation goes higher than expected. A portion of your assets have been allocated to the VIXY, which generally goes up during higher volatility in periods when there is lower than expected growth.
I still feel strongly that you should have a portion of your money invested into a principle protected investment. The fixed indexed annuity is a great example of a principle protected investment. Since interest rates are so low, I think the majority of the fixed income portion of your asset allocation should be invested into the fixed indexed annuity or a similar alterative. Warrant Buffet says "There are two rules to investing. Rule #1 is do not lose money. Rule #2 is do not forget Rule #1." Using this strategy should help reduce volatility for any economic climate that lies ahead.
I have enclosed the 2014 mid year research report produced by the S&P Dow Jones Indices. This report continually provides evidence that active mutual fund managers do not consistently provide above average returns. According to the 5th paragraph of the report, the percent of large and mid-cap fund managers who have been able to remain in the top 50% for five consecutive years have been dismal. Fewer managers provided consistent returns than would be expected if stocks were chosen purely at random.
Our approach to investing is to be globally allocated using passive low cost funds. We occasionally rebalance the portfolio back to its original allocation in order to sell the gainers and buy the lower performers. As of the end of 2014, our core global allocation has consistently beat its comparative index the Dow Jones Developed Markets Total Stock Market (Price Return) Index, as indicated in the chart below.
AMS Core Global Equity Dow Jones Developed Markets Total Stock Market
2 year 3.96% 2.48%
3 year 45.26% 44.84%
5 year 56.69% 48.06%
Each of our clients has a portion of their money invested into the Core Global Equity Strategy. We are very proud of our consistent returns. These returns along with our planning strategies have allowed us to keep our clients safely retired through two major market melt downs. Because of our extensive research and diversified strategies, we have been able to weather the challenging conditions over the last 15 years. Unfortunately, new potential clients have not been as fortunate. They are very fearful of more bad advice as many of them have lost significant amounts of money and then made moves that drastically hurt their performance. We have recently met with a few prospective clients who are afraid of all advisors because of their poor past experience. I personally think this is a sad reality, not uncommon amongst many investors using traditional advisors. Please let your friends know of your positive experience with Safe Harbor Asset Management Services. We truly appreciate referrals from our clients.
As always, if you would like to review your accounts in more detail or if you have had a significant life change which could affect your financial situation, please contact us to set a time to meet.
Gregory K. Bowser, CFP®