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Market Commentary January 2016

Stock Markets

In 2015, domestic large cap stocks (S&P 500) and REITs were up while other markets were down – emerging markets were off big!  The positive results in the S&P 500 were driven by just two stocks – Amazon and Google.  Otherwise it would have looked like other market indices.  These results, I think, reflect ongoing economic uncertainty throughout 2015, much of which is still unresolved.  Examples include:  (1) Where is the bottom for commodity prices?  (2) What is the strength of the dollar as Europe eases its monetary policy and U.S. tightens it?  (3) Are interest rates withering?  The lack of resolution of much of this uncertainty will contribute to continued stock price volatility, which has certainly been the case so far in 2016.  The first week in January has the feel of panic – we’ll see.

Daily volatility of stock prices was up in 2015. This is especially apparent over the last couple of months and into the beginning of 2016.  Yet, the 2015 experience was pretty much in line with how stock markets have behaved historically.  We have become used to above-average returns with less volatility from the widely followed domestic markets in the recent past.  The 2015 story was different – below-average returns with greater volatility.

Bond Markets

After keeping us in suspense most of the year, the Fed voted to increase the rate on Fed Funds (rate at which banks lend excess reserves to one another overnight) by 0.25%.  This much anticipated change was met with a loud ho-hum – surprises are what move markets.  The accompanying Yield Curves chart, which shows yield to maturity from U.S. Treasury securities Yield Curves 12 2015of different maturities, depicts increases at the short end with slight increases at longer maturities.  Yet, not much of a change overall.

While the impact of changes in the Fed’s policies on bond markets and where we go from here continues to provide uncertainty, I think a little less distortion of capital markets from the Fed’s activities is welcomed.

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The Problem With Diversification – Emerging Markets

One of the tenets of successful long-term investing is the practice of portfolio diversification.  Through diversification, investors can increase their expected long-term return for a given level of risk (volatility).  This is accomplished by investing in assets that are not perfectly correlated to one another, but each asset individually has a positive expected return.  This theory is the basis of Modern Portfolio Theory (MPT).  Because underlying assets in diversified portfolios are not perfectly correlated, one problem with diversification is that there will always be something investors wish they didn’t own.

Emerging markets was one of the worst performing asset classes in 2015, returning a negative 14.6% for the year (as evidenced by the MSCI Emerging Markets Index).  If foresight were 20/20 at the beginning of the year, we clearly would have avoided a commitment to this asset class.

On the other hand, at the start of 2015, the best data source we had available for predictive purposes was the past behavior of the asset class.  Over the 15 years prior, the MSCI Emerging Markets Index returned approximately 10% annually and exhibited a standard deviation (risk) of 23% (based on monthly returns).  As important as its risk/return behavior, this asset class has not been perfectly correlated with other assets in which we invest, so it was expected to offer diversification benefits.  (Note this time period was used because it was the earliest data available for this Emerging Markets Index.)

Interestingly, the most similar asset class, with respect to risk and return over the same time period, was U.S. real estate (as evidenced by the Dow Jones U.S. Select REIT Index).  This asset class returned approximately 12% and exhibited a standard deviation of 23% as of 2014 (compared emerging market returns and risk of 10% and 23%, respectively).

Given the similarities between the asset classes at the end of 2014, an argument could be made that the 2015 returns might be expected to be similar.  Interestingly, they behaved extremely different in 2015.  U.S. real estate exhibited the best returns of the underlying asset classes, with the Dow Jones REIT Index returning a positive 4.5% for the year (versus the negative14.6% for emerging markets).  This return difference is more attributable to the lack of correlation between the two assets, in addition to their exhibited risk.

Since there is no evidence of investors being able to consistently outperform the market or predict the best asset classes (prior to outperformance), diversification continues to be the best alternative for successful long-term investing.

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What’s Happening At Rockbridge

2015 was an exciting year of growth and change at Rockbridge.  Market returns were less than ideal for the year, but we continue to see growth in our fee-only business model as prospective clients seek out unbiased advice and professional investment management.

We are the leading fee-only investment management firm in Central New York, managing $491 million in client assets, a 14% increase over last year.  We have also added staff to meet the demand of taking on more clients.

Firm Ownership Growth

Ownership of the firm expanded in 2015.  Craig Buckhout and I are the managing members of Rockbridge, providing leadership to a growing group of talented professionals.  Last year, Patrick Rohe and Ed Barno became partners in the firm.  This year, Doug Burns and Geoff Wells will also become equity partners in Rockbridge.  Expanding ownership of the firm is one of  our primary goals as we grow to serve more clients.  The addition of more owners provides for an enduring business over the long haul, ensuring continuity for our clients.

The People of Rockbridge

New faces at Rockbridge include Claire Ariglio and Lisa Cellucci.

Both Claire and Lisa will be supporting our financial planning efforts with new and existing clients.  Additionally, Dave Carroll completed his first full year at Rockbridge.  All three of these new advisors are studying for the Certified Financial Planner™ designation in 2016.

Sadly, we say goodbye to long-term Rockbridge employees Ted Scallon and Keri Morrison.  Ted is relocating to New Jersey to spend more time with his family.  Keri will be spending her time working with the Live Like Jake Foundation (http://livelikejake.com), which she and her husband, Roarke, founded in memory of their son, Jake. The work of the foundation is extremely important to Keri, and we look forward to supporting her and the foundation in its mission to raise awareness for drowning prevention.

Awareness Campaign

The top two reasons new clients land at Rockbridge are referrals from existing clients and our website.  More people are searching for fee-only advisors and financial planners, and we continue to maintain our #1 rank in those searches.

Many of our new clients said they had never heard about us prior to their search.  So in an effort to raise our profile in the community, we embarked on an awareness campaign in 2015.  You may have seen or heard our ads on Time Warner Cable, FIOS, or the radio.  We have received very good feedback from existing and new clients, so we will continue to advertise in various media outlets in the future.

We continue to remain focused on providing the best experience for our clients, and we sincerely thank you for your trust and confidence.

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Investing and Action Movies

When we go to a good action flick, we enjoy the suspense and surprises, but no one wants that experience when investing.  James Bond and Mission Impossible would not be box office hits without some interesting plot twists, and an occasional victory by the villain, and yet the end result is usually something we expect – the good guy wins.

Unfortunately, investing can be a lot like a good action movie, and it is important to remember that 2015 was just one scene, where the villains had some success, but it is not the whole story.  While we have experienced 9%-10% returns from the stock market over time, we usually get something different.  Those expected returns only emerge over long periods of time.  Like the plot of an action movie unfolding, it requires some patience, and tolerating our hero experiencing some setbacks.

The S&P 500 has produced an annualized return of 9.7% over the past 50 years, but looking at those 50 separate one-year periods, we see something very different.  In 11 of those years the return was negative; 2015 is not one of those years as total returns with dividends were 1.4%.  Still, with a long-term return of 9.7% we might expect most years to have returns close to that, say a range of 5%-15%.  Surprisingly, 40 of the 50 one-year returns were outside that range, either less than 5% or greater than 15%.  So what we expect for the average is quite different than what we experience year to year.

One of the problems we have as investors is our tendency to overemphasize near-term performance.  Behavioral economists have labeled this the recency effect.  It explains why people want to buy what just went up, and sell what just went down (usually a bad strategy), and it can also explain why it is so hard for investors to maintain a long-term perspective.  This is one reason we recommend investing based on decades of performance data, not months or even years.

The markets are starting the new year with plenty of volatility and negativity.  Perhaps if we think of it as the unfolding plot of a good action movie, we will be more comfortable enduring the inevitable ups and downs, which must be endured to achieve our long-term expectations.

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Road to Rockbridge

Our Rockbridge team is continuing to grow, and as a new member, I would like to take a moment to introduce myself.

My name is Lisa Cellucci.  I was born, raised, and educated right here in Syracuse.  Even as a little girl, I always loved math and numbers.  But maybe even more than math and numbers, I have always loved people.  Whether a person is three, ninety-three, or anywhere in between, I can always find something to talk about with them.  This meant that I was going to have to answer the following question – “What kind of job can you find where you are working with numbers but also communicating with people?”

In high school, business classes were by far my favorite type of classes.  I could say for certain that someday, I wanted to be a businesswoman with some type of business degree, but couldn’t quite pinpoint exactly what I wanted to be doing.  I found myself at Le Moyne College after receiving the Presidential Scholarship, a merit based scholarship that the school offered.  To get the most out of my time at Le Moyne, I double majored in Finance and Business Analytics.  I ended up completing my required coursework early in 2012, and decided I could never have enough education, nor was I ready to be done with college, so I decided to stay at Le Moyne College and earned my MBA in 2014. This allowed me to couple the knowledge I had in finance with a strong business background.

I worked all throughout high school and college.  My first job was at Wegmans, where I worked for six years. I worked my way up through several positions: cashier, service desk, cashier trainer, and service team leader.  As a company, Wegmans is highly focused on customer service, and I think that provided a strong foundation for the rest of my life.  Now, each and every time I come in contact with a client, I want to be sure that they feel their needs are met quickly, efficiently, and pleasantly.  During my undergraduate studies, I interned at a local financial advisor to school districts and municipalities.  I found that I enjoyed what I was doing during the internship, and accepted a job as a financial analyst immediately upon my graduation.  Although I liked what I was doing, after three years, I felt as if there was little room for career growth and wanted to dig deeper in the world of finance by learning new things, gaining experience, and new education.

Lucky for me, I found out that Rockbridge was looking to hire additional financial planners.  After my first interview, I knew Rockbridge was the company for me – I just hoped they liked me as much as I liked them!  One of the most important values that Rockbridge follows is our fiduciary duty to our clients.  No matter what the situation is, we always act in the best interest of our clients.  Because of this, we can stay true to our investment philosophy and help people take the emotions out of their investment decisions.  I am thrilled to be working with individuals as I feel that this type of work is very rewarding. I am hopeful that we bring peace of mind to clients that their money is managed well whether they are young and just starting out or enjoying their golden years – and most of all that we are helping others.

This year, one of my biggest goals here at Rockbridge is to complete my Certified Financial Planner™ certification, which I am currently studying for. Plus, I look forward to working with each of you!

P.S. – My interests outside of work include spending time with family, friends, my dog, Lexi, and my two fur nieces, Mila and Zoey.  I also enjoy volunteering in the community (I teach church school to second graders), supporting our beloved Syracuse Basketball team, and fitness training.

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