resources

Summer 2019

Sell in May, … and then What?

April was an outstanding month in the stock market. The S&P 500 was up almost 4 ½ % in that month alone. As we began May, the market started to lose some steam and guess what? We heard the drumbeat on financial media to “SELL IN MAY AND GO AWAY”. The folk wisdom behind this slogan is that the markets tend to sell off over the summer. So, you are better off to exit the market and consider buying in mid-October. However, the slogan is built on a myth. The summer months do not display any bias for gains or losses historically.

So, what about this year? If you sold in early May, you would have avoided a decline of about 3 ½% in the month. However, you would have been out of the market in June when the market went up 7 ½%! The lesson is that there are no market timing rules that are supported by facts. The next time a talking head suggests some market folk wisdom, chalk it up to their need to fill up air time.

Investing for You!

We want to share an overview of how we invest your money. Here are a few critical things to know about how Compass Rose sets investment rules:

  • Investing in stocks, bonds and other fixed income instruments provides protection by diversifying your assets. Diversification reduces risk. Note that
  • we usually have forty or more positions in our portfolios to strive for proper diversification.
  • For stocks, we tend to have no more than 2% of your account assets in any one position. (There are a few exceptions, such as Amazon which has a 3% position in some portfolios.)Having only a 2% to 3% in one position guards against a large loss if a company reports poor results.
  • Our evaluation of an individual stock involves examining the revenue and earnings growth potential of the company. It also involves plotting the relative strength of the stock versus the overall market. We look at the track record of management as measured by return on equity. And, we try to identify the extent that major institutions (mutual funds, hedge funds, pension funds and endowments) are accumulating shares of the stock.
  • Our assessment of a stock also entails looking for indications that the stock is about to break out to new highs. Perhaps this is the most difficult judgement for portfolio managers. But there are tools available to identify buy-points in a stock’s chart that have historically shown to be a trigger for significant price growth. We find that this analysis is reliable in most cases. If the rally in the stock fizzles or the stock reverses in price, we sell.
  • Our investment management discipline dictates that we sell a stock if it loses 8% in value. This stop loss rule is in effect for individual positions. However, there are circumstances where we would keep the position. The most common circumstance is when the overall stock market is declining across all sectors. In that circumstance, we may hold stocks that are down 8% or more. If we simply applied the rule uniformly, we would be selling the entire portfolio during a normal correction. This would create large capital gains and therefore tax liabilities in taxable accounts. In addition, we may be out of the market at a point where a quick rebound occurs, missing out on the opportunity for significant gains.
  • We engage in “offensive selling”. This occurs when a stock has a strong run and gains are over 25%. We sell part or the entire position, depending on whether we think that the investment still has upside potential.
  • We also engage in “defensive selling”. This occurs when we see market conditions that suggest we are in for a prolonged slide in value. We sell to preserve gains, raise cash, and realize capital losses (to offset capital gains in taxable accounts). An example of defensive selling was last November/December when the market sold off sharply and we sold to create and hold 30% to 40% cash in most portfolios.
  • In sustained market downturns, we may “short the market”. This strategy may result in making money as stocks decline in value. You may want to think of this as “pumping the brakes” to slow the loss of value in a bear market.

Outperformance… Rare, Hard to Do, and Great for You!

Our long-term mission is to provide growth in your investment assets to offset inflation (preserve your purchasing power) and to help you to attain your life goals. Our short-term practice to support this mission is to monitor your investment performance versus the markets. We do this every single day.

In good markets, we strive to outperform the market benchmarks. In poor markets, we want to see less severe losses than the market benchmarks. If we succeed in outperforming in up markets and limiting losses in down markets, it is possible to have outperformance over time.

So, how do you track our performance to see if we are outperforming? The best avenue is to go to your Client Communications Portal on our website, log-in, and download your quarterly performance reports (on the Documents tab). All performance reports are at the account level (not the Household level and have appropriate benchmarks for your portfolio. In July, you will have two full years of performance data on these reports (assuming your account(s) have been active for the past two years). We strongly encourage you to periodically review the performance for each of your accounts.

One final note on outperformance. Historically, no more than 25% to 30% of portfolio managers outperform the markets. So, if your accounts are outperforming the index/benchmarks, that is a relatively rare occurrence as an investor. Any degree of outperformance in your portfolio fortifies your life/retirement plan and protects you against the corrosive effect of inflation. So, let’s all celebrate when the portfolios are doing better than the markets!

Charitable Giving, is it for You?

We often hear from clients that the 2017 tax cut legislation did not result in a lower federal tax bill for their families. If fact, many clients reported tax increases.

If you are interested in potentially lowering taxes, it may make sense to consider charitable giving. Charitable giving is one of the few remaining write offs that can lower your tax bill. And, we can help. Later this summer, we will offer Donor Advised Funds, that provide an immediate tax benefit. A Donor Advised Fund allows you to set up an account, contribute $5,000 or more, invest the funds for income and/or growth, and then make charitable grants whenever you want (limited to 501(c)(3) organizations only). It is a simple process to set up the account. We can explain the investment choices available at Charles Schwab. And, making a grant to a charity is a snap. So, if you have an interest in charitable giving, please give us a call.

Overwhelmed? There’s an App for that!

One of the most difficult tasks at Compass Rose is to set up annual client review meetings in a timely and efficient way. Most clients have experienced the back and forth of multiple phone calls and emails to set a time and collect the data necessary to update your Money Guide Pro Plan. There must be a better way!

We want to make this process simpler for you and us. We want to eliminate the headaches and streamline the process down to a few minutes of your time. To do this, we are in the process of purchasing scheduling software that is….magical.

The scheduling software will allow us to send you an email (alerting you that it is time for your meeting) with a link to our calendar to schedule the meeting. You click on the link, select a time that works for you, and submit. You will then get a form to update your financial/retirement plan information (yes, we have streamlined the forms too). You can submit the form, as well, by email. And, you are done! A few days before your appointment, you will receive a reminder of the appointment date and time. We plan to implement this new system the next few months.

Need to contact Compass Rose, call Jason Duckless!

Thank you all for giving us such positive feedback on Bill Corvene! As you know, Bill worked for Compass Rose for five years, during which time he spent considerable time commuting to Portsmouth from Melrose, Massachusetts. Bill now has a great job closer to home and he gets to commute with his wife to Boston every day. We are very happy for him. We don’t know how Bill’s wife feels about the new arrangement (just kidding!).

In April, we were very happy to hire Jason Duckless to perform most of the duties that Bill handled so well. If you have a client request, need to talk to Karen or Jim, or have a question, please call Compass Rose and ask for Jason. He is a very experienced client service rep who has quickly endeared himself to everyone he has contacted. Just call Jason if you need something. He will not disappoint.

Summer Wishes

Let’s all forget that Spring was monsoon season in New England. Summer is here, sunny days are appearing, trees and flowers are blooming, and life is great! It is OK to smile again!

Our hope for all clients (and prospective clients) is that this is a season of hope and renewal. It is a time to hit the beaches, get an ice cream with the kids, and enjoy a leisurely dinner on the patio or deck. Our summers are short, so enjoy while you can. Please consider coming to Portsmouth, a great summer destination just for the fun of it. And, if you do, stop in…just to say hello. We would love it! Have a wonderful Summer, our friends!