Investing Mid-Year Review with Chappaqua’s Scott Kahan

Investing Mid-Year Review with Chappaqua’s Scott Kahan: Six months into the age of Trump, Russia-gate and celebrity Tweeting contests, there’s still investing to do. Here’s our mid-year investment gut-check with Scott Kahan, Certified Financial Planner and President of Financial Asset Management Corp. in Chappaqua and NYC. Scott talks about how to keep your emotions in check when investing in the age of Trump-onomics!

How are we looking six months into Trumponomics?

The market is doing fine. But on the macro level nothing much has changed. We’re still continuing the slow growth we saw in the past year or two.

The ideas behind Trump’s growth agenda are tax cuts, deregulation and infrastructure spending. As we know the tax cuts and infrastructure are on hold, as are most things, in Washington. What he has been able to do is deregulation through executive orders and that has contributed to business confidence that has aided in driving up the stock market up.

Looking ahead, what does that mean for investors?

The real question for investors is at what point do we have a pull back. We’re due for a normal correction that can be ten percent or more. That would probably be good for the market overall and would enable new money to buy at discounts.

Investors with new money to commit may want to consider that the domestic markets have had a good run up. So it may be wise to look at international and at emerging markets for the next run.

Can you elaborate on that?

The international markets have not had as much of a run up so we’re looking at the levels of international exposure in our client’s portfolio. A lot of people tend to be underweighted on foreign stocks and this would be a good time to address that.

We don’t analyze country by country but with the election of Macron in France, the French markets could be interesting. Again, we don’t fixate on stock picking or country picking but prefer international funds, managed or index funds, that are focused on Europe and emerging markets, as well.

 Domestically?

We’re not saying people should avoid the US because we will have a correction and that will open up new opportunities. Just be careful when you hear the talking heads on TV.

Don’t try to time the market because it may run up another ten percent before the bear’s look prescient. Or it may turn down next week making the bulls look bad. Rather we stay focused on our client’s financial goals, the allocation strategies they have defined for their portfolios, and we adjust asset allocations (stocks and bonds, domestic and international) when their allocations deviate a certain amount from the model portfolio.

Are any of the deregulations creating sector opportunities?

Will the coal market return? That’s hard to say. There are a lot of other energy sources that need to be developed. As for steel, if we are rebuilding our military using American produced steel that can have a positive impact on the steel industry here at home.

But we’re not jumping into sectors related to Trump’s agenda. Some of those markets are overbought already. And while the deregulations may boost overall business confidence they don’t always translate into clear sector specific investment opportunities.

So we keep an eye on the longer-term trends, and in the case of energy, that’s still alternative sources of energy. That’s where the growth is going to come, long term, both for investors and in terms of jobs.

What about health care?

In terms of health care, it doesn’t look like anything is going to happen. Remember what John Boehner said, “Republicans never, ever one time agreed on what a healthcare proposal should look like. Not once”

Both parties are going to have to sit down to fix Obamacare and until they do the tax agenda becomes very hard to do.

As an investor, health care is not an area we look at as a sector to increase allocations. The big health care investing is in pharmaceuticals and if the Republicans can find a way to curb drug prices that doesn’t necessarily help investors looking at a sector strategy here. Not saying you shouldn’t be in health care or pharmaceuticals. You should be for diversification.

Where are we now with the Fed and future rate increases?

We’ve heard different talk. Ranging from a few more increases to not as many as expected. Just remember that we’re in the beginning of a long-term trend in rising rates. But they don’t go straight up. The reason to raise rates is to fight inflation but as long as we’re in a slow growth economy there’s no real reason to raise rates. We may see another increase this year but until we see wage inflation the incentive for the Fed to raise rates is not strong.

What’s the landscape for income investors?

As long as the economy maintains it’s slow growth trend, the outlook has not really changed for income investors. We’re more diversified in our bond portfolios than ever. It’s important to have international bonds in your portfolio. Because of where we are in the rate cycle we don’t look at long-term bonds.

Louise Yamadas Historical Interest Rates

We try to stay short to intermediate – leaning towards the short where investors have to sacrifice some income to minimize risk. For tax-deferred accounts we use Dimensional Funds Five Year Global Fixed Income (DFGBX) for short-term investment grade bonds with a global exposure. As always you have to make sure the funds are diversified and that you trust the fund’s management.

Any advice for yield hungry investors?

We’re also investing into short-term high yield bond funds. This increases the income but reduces the risk using shorter-term maturities. We use Osterweis Strategic Income (OSTIX) that has an average effective bond maturity of less than three years and it’s yielding close to 4.3%. Depending on how conservative or aggressive you are we recommend keeping high yields in the 5 to 8% range of your entire portfolio. And that includes any preferred stock funds you may have.

How about growth investors?

Once you know your equity/fixed income allocations, be patient. Don’t panic in a downturn. That’s always our model. Use the downturns to re-balance your portfolio. This forces you to buy low and sell high. It “takes the emotions out of investing,” as we like to say. If your stock prices are up, your equity allocations will exceed your original model. That’s when you sell and reallocate to bonds. If the market corrects, as we expect it will, that’s when you reallocate to buy more equities – now at lower prices.

And drilling down this goes not just for stocks and bonds. But within each asset class, you have to look at small caps vs. large caps, domestic vs. international. The market fluctuations will take your portfolio out of balance and that will tell you what to buy and when.

Some parting advice for investors?

One of the things we see is that when markets are doing well people are much more tolerant to taking risks. The key is to maintain your risk tolerance levels through market fluctuations. Don’t fall prey to thinking that when the markets are doing well you can take on more risk or when markets are doing poorly you should take on less. That’s when you wind up buying high and selling low. So try to keep things in check regarding risk appetites.

Try to keep day-to-day politics out of your thinking. Look at the long-term trends and the basic economy. Don’t take sides against yourself. Know your risk tolerance and don’t let the talking heads cloud your thoughts whether they are saying ‘blue skies ahead’ or ‘the sky is falling.’

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 150 clients and manage over 200 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)