Chappaqua’s Scott Kahan: 2016 Investment Outlook

Chappaqua’s Scott Kahan: 2016 Investment Outlook: With the recent volatility in the market we thought it would be a good time to chat with Scott Kahan of Financial Asset Management Corporation of Chappaqua to remind us how to take the emotions out of investing. If you need a little financial therapy or investment advice read on.

It’s been a tough start to the new year for the stock market.

We’re clearly going through a volatile time in the market. Right now the market wants to go down and even though nothing has really changed in the past few months there are no shortage of narratives to drive the volatility we are seeing. The question for investors is how to navigate through the fears in the market. How do you maintain confidence that in the long term markets are rational even though they may act irrationally in the short term?

What are the big story lines?

The China story is one of them. But, again, what has changed in China in the past two or three weeks? We all know their economy is slowing but they’re still growing at 6.8%. The Fed raised their target rate a quarter point and is planning another one in early spring but we think it will hold off because of the current environment. Again, this was no surprise. We’ve all been expecting this.

But oil prices are down. Doesn’t that boost the economy?

Oil is a big factor in all this and to answer your question when gas prices drop, yes that puts more money in peoples pockets that they can spend on other things. Low oil prices historically are associated with economic slow downs so this story is working as a negative in the market. But this down cycle in oil prices is driven by overproduction not a lack of demand.

But what about the economic fundamentals?

At the end of the day, the US economy is in a protracted slow growth recovery. Nothing has changed really. On the bright side, the unemployment rate keeps dropping and that’s a boost that will filter itself into the economy and drive earnings growth.

So you don’t think this is the beginning of a bear market?

I don’t think so. I still think we see more growth and that this is just a correction. Since 1950 US markets have experienced a decline of between 5-10% in 35% of all calendar years. One in five years we have experienced a downturn of 10-15%. 17% of the time we have seen downturns of over 20%. So this is normal. Last Wednesday the market traded intra-day down 566 points and finished the day down 249. Some people saw that as the inflection point, the capitulation the market needed. This doesn’t mean that the volatility is over.

Warren Buffet famously said, “Be fearful when others are greedy and greedy when others are fearful” Is it time to be greedy?

If you are a long-term investor and you have money to invest this may be a good time to buy. If you’re putting money into your 401K each month and your time horizon is five to ten years or more don’t wait. You want to buy when things are on sale. If you need your money in six months than you shouldn’t be in the market no matter which way the momentum is going.

On the other hand … “Don’t try to catch a falling knife!”

If you buy and the market drops and you have new money going into your 401K next month you will be buying at lower prices. If you don’t have new money look at your allocations. With equities down you may be underweight in equities so it may be time to move money from fixed income to equities.

But do it only if your allocations have moved significantly from your targets. Your target allocations should be based on your financial goals, which brings us back to the financial planning aspect. In other words, you shouldn’t be buying because you think you can time the market, but because your allocations need to be rebalanced based on your financial goals and objectives. Sometimes when the market goes down even 10% this won’t unbalance your allocations very much so you may not have to do anything.

That’s how you take the emotions out of investing

That’s how you take the emotions out of investing. It’s important to have the discipline to stick to your allocations on both ends. If the market is up and your equity allocations are out of balance you should be selling and rebalancing. Buying low and selling high is not a timing exercise, it’s an exercise in disciplined financial planning and rebalancing.

Okay so what to buy?

Look at the sectors that have been beaten up and start there. That’s small cap, international and emerging markets. I’m not saying I’m bullish on emerging markets but you should have some exposure. That said large caps are getting beaten up too. With this sell off there’s probably opportunity in many sectors.

I wouldn’t overweight these sectors or take money out of large cap US stocks to get in but I would look for some exposure with either new money or money coming out of fixed income that you are using to rebalance your portfolio. Anytime you have new money or are reallocating current investments the rule of thumb is if it’s down that’s where you look for upside.

Well oil stocks are down …

I would not be in a rush to jump in to oil. I don’t see oil prices going up to $100 a barrel anytime soon. If you’re looking to invest for the next ten years oil may make sense. But first take a look at what’s inside your funds. You may already own this sector. See what percentage of your portfolio is there. That’s one of the things we do as advisers. If you are already covered, jumping in won’t help your diversification.

What should income investors be doing?  

Income investors have to be diversified in their portfolios as well. Retirees should have 12-18 months of cash so you are not forced to sell assets when they are down. And remember you still need growth. We tend to look at total return. We are at the early stages of a long-term uptick in interest rates. As we’ve discussed before interest rate cycles on average last 30 years.

We stay away from long-term bonds. Stay short or intermediate. High tax brackets should look at tax frees. Municipals have done okay. In 2008-9 you saw high rated bonds go under. So make sure you have diversification in your bond portfolio. If you don’t have enough to diversify in bonds, look to funds or ETFs that are already diversified. Build your ladders to generate cash through maturing assets to buy new debt as rates rise.

Last words …

Stick to your plan and don’t pay attention to the headlines. In 1987 the stock market crashed. Nobody knew what was going to happen. One year later it was apparent that it was a crash in a bull market. Take a look back at your portfolio. Even with the recent correction we are all better off than we were two years ago. Most forecasters are still expecting the year to end above where it started and I see no reason to disagree. We eventually will have a rally and it will come when no one expects it.

Financial Asset Management Corporation has provided fee-only financial planning and wealth management services for individuals and small businesses in the Tri-State area since 1986. They serve 140 clients and manage over 160 million dollars in assets. FAM Corp. President Scott Kahan is a Certified Financial Planner professional. (Financial Asset Management Corp., 26 South Greeley Avenue, Chappaqua, NY, (914) 238-8900; www.famcorporation.com)