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This Economy Won't Let Hurricanes Blow it Off Course

October 16, 2017

By Darren P. Wurz, MSFP

Global stock markets have re-accelerated their march to new highs, despite tensions with North Korea, gradually rising interest rates, hurricanes and uncertainty with US government policy. While emerging markets and large cap growth stocks have been the main leaders this year, small caps finally rallied after a lackluster 2017 so far.

The recent hurricanes have had a mixed effect on the economy. While unemployment is up in hurricane hit regions, recovery efforts have given a boost in some areas. Retail sales were up 1.6% for the month of September, partly due to increased sales of cars and building and material supplies. Strong growth in other spending categories has certainly helped buoy any temporary hurricane effects as well. Rising incomes and strong job growth may lead to stronger consumer spending yet.

At the same time, the low-inflation saga continues. While headline inflation rose at a 2.2% year over year pace, much of this was caused by increases in gasoline prices following the hurricanes. Core inflation (which excludes food and energy prices), remains at 1.7% year over year. While the Fed seems intent on continuing its gradual increase in interest rates, inflation stubbornness may weigh on their decision making process. However, the consensus among analysts is still for a rate hike this coming December.

Altogether, economic growth in the US and other regions appears robust. This growth trend may be supporting stock prices. According to the IMF, though, there continue to be considerable risks to the global economy's slow recovery. We continue to monitor global economic events for our clients and will keep you informed. Call or email me if you have questions or concerns.



TD Ameritrade


Retirement Birthday Milestones

The 5-10 years before retirement are often referred to as the “retirement red-zone” because they are so critical. Doing the right things at the right time can mean the difference between retirement success and disaster. As you get closer to retirement, here are some milestones to keep on your radar:

  • Age 50: Earliest age to make catch-up contributions to IRAs and employer-sponsored retirement plans
  • Age 55: Earliest age to make “catch-up” contributions to a health savings account
  • Age 55: Earliest age to take distributions from your 401(k) without penalty
  • Age 59-1/1: Earliest age to withdraw money from IRAs and most tax-deferred retirement plans without penalty
  • Age 62: Earliest eligibility to begin collecting Social Security benefits
  • Age 65: Eligible to enroll in Medicare     
  • Age 66: Eligible for full Social Security benefits for those born between 1943 and 1954
  • Age 67: Eligible for full Social Security benefits for those born in 1960 or later

the information above Does not constitute investment advice or a recommendation of any kind, financial or otherwise. 

Why Target Date Funds Fail Investors

October 6, 2017

By Darren P. Wurz, MSFP

One of the most popular investment strategies for investors is the “target-date fund.” Often part of 401k offerings, these funds offer an easy way to put your retirement savings on auto pilot. However, they have some important drawbacks to be aware of. Target date funds vary widely in their approach. They are only as good as the underlying investments they are made of. And they may expose investors to greater risk than they are aware of.

To start, what is a target date fund? Target date funds are mutual funds that are designed with a particular retirement year in mind. They adjust their portfolio over time as that date draws near, becoming gradually more conservative. For example, if you want to retire in 2040, you might buy a 2040 target date retirement fund. This fund will start off more aggressive (i.e. with a greater percentage in equities or stock) and slowly become more conservative, reducing exposure to equities and shifting to bonds over time. While this may seem like a prudent way to manage retirement funds, there are some important things to consider.

“It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”—Robert Kiyosaki


First of all, target date retirement funds are not all created equal. Even though they have similar objectives, target date funds vary widely in their composition and strategy. For example, 2020 target date retirement funds exhibit extreme variation in their exposure to equities, with the most conservative having as little as 12% in US equities and the most aggressive having as much as 41% in US equities. They also vary widely in their approach to bonds, with bond allocations ranging from 29% to 77%! Clearly, there is little agreement in the field as to what approach is best and some are riskier than others.

This variety makes it difficult to compare and evaluate target date funds. Because of the differences in their portfolio composition and strategic approach, these funds may also vary widely in their performance from year to year. It is usually not best to select a fund based on it's performance alone and this is especially true for target date funds. Differences in performance between target date funds might be caused by differences in their composition and exposure to particular asset classes.

In addition to have such wide variety, target date funds do not know you personally. They do not know how much risk you are comfortable with. They do not know how much risk you are personally and financially capable of handling, if you have other assets to take into consideration or how risk may affect your long term retirement outlook. More importantly, they do not take into consideration your life expectancy or time horizon. A 50 year old retiring in 2020 has a different time horizon and different needs than a 70 year old retiring in 2020. But target date funds do not know this—they simply follow a prescribed formula as time marches on.

Many companies construct their target date funds using a mix of their own funds, making the target date fund a “fund of funds” This has two downsides. First, you may only get the funds that particular fund company has. If the fund company has less than desirable funds, so will your portfolio. If the fund company does not offer a fund in a particular asset class, you will not get exposure in that asset class.

There are other downsides to the structure of target date funds. As time marches on, target date funds maintain their desired percentages of stock and bonds and other investments through what is called rebalancing—selling assets that are larger than their targets and buying assets that are smaller than their targets. While this approach is consistent with the goal of target date funds, which is to provide diversification and an allocation appropriate for your age and time horizon, this prevents the fund from being able to react to market events to either take advantage of opportunities or mitigate risk when needed. 

And mitigating risk is what I am really getting at in this article. Even though target date funds may position themselves more conservatively over time, they fail to protect investors from market risk. In 2008, many target date funds declined more than their investors were expecting or were prepared for. For example, investment research company Morningstar found that the average 2010 target date fund, designed for people retiring in 2010 and which by 2008 should be fairly conservative, had a negative 23% year in 2008. Remember how we said target date funds vary widely in their composition? In 2008, 2010 target date funds ranged from as much as 65% in stocks to as little as 26% in stocks. More aggressive funds suffered much worse performance in 2008. The worst among them was down 41%. If you are approaching retirement in two years, can you afford for your portfolio to decline by this much?

To make matters worse, it took nearly 3 years for most funds to fully recover. On Dec. 31, 2009, the average target date retirement fund's 3 year annualized return was -0.97% according to a report by Morningstar.

Was 2008 an anomaly? Perhaps. But steep drops in the market are a lot more common than we would like to admit. And the markets are a lot more risky than investors are oftentimes aware. 2008 showed us that a traditional stocks and bonds portfolio may not be able to sufficiently mitigate risk for retirees. The markets will go through bad times. A bear market will probably return at some point. Target date retirement funds may not be able to provide adequate risk management for retirees.

Do target date funds have a place at all? Target date funds do have benefits and may be suitable for some investors. For smaller portfolios, they are an easy and inexpensive way to achieve diversification. However, for a large nest egg for someone near retirement, they may not be ideal. Want to review your portfolio to see if it is positioned appropriately to mitigate risk as you near retirement? Call me today! I'd be happy to talk with you.

Prestbo, John. “Opinion: Target-date retirement funds may miss the mark for investors.” Jan 11, 2016. Retrieved from
Morningstar. “Target-date series research paper: 2010 industry survey.” 2010. Retrieved from
Powell, Robert. “Target-date funds missed the target in 2008.” Feb 4, 2009. Retrieved from

This article does not constitute investment advice or a recommendation of any kind. Past performance is not indicative of future results. Opinions given in this article are not necessarily those of Fortune Financial Services, Inc. or Prosperity Wealth Management, Inc.


Market Snapshot: August 2017

August 15, 2017

By: Darren P. Wurz, MSFP

So much for low volatility. The last few weeks have shown us how quickly the markets can change. Let's start with North Korea. The ramped up rhetoric between the US and North Korea was blamed for rattling the markets recently. The thing to remember here is that North Korea has threatened Gaum many times in the past and backed down. However, the media attention and new capabilities North Korea is boasting about has made some investors uneasy.

In other news, there's been chaos in Venezuela. The Constituent Assembly in Venezuela declared itself supreme. In response, the US sanctioned 8 individuals. Venezuela is the third largest exporter of crude to the US. There could be some effects in oil markets from this, which might put some much needed upward pressure on the price of crude.

In Europe, the UK is beginning its negotiations for leaving the EU. EU officials have suggested this would come at a price tag of 50 to 100 billion euros. Get ready for the fight over how much the UK ends up forking over. Was Brexit really a great idea?

In the US, earnings are growing. Earnings for the S&P are expected to rise 11.9% compared with the same quarter last year—9.2% if you exclude the energy industry. Earnings for the energy industry are expected to rise somewhat faster than the S&P overall. And energy companies are hitting rock bottom in terms of valuation right now.

Also, the Fed is talking about reducing the size of its balance sheet—or in other words allowing some of the trillions of dollars' worth of debt it acquired in the financial crisis to mature. They've said they expect to begin this process soon, possibly this year. However, at the same time—are you ready for this?—the government needs to raise the debt ceiling again. We could see some turmoil in the markets if a fight over the debt ceiling unfolds. The Fed may delay reducing its balance sheet if this doesn't happen to avoid upsetting the markets.

Inflation is still stubbornly low, running below the Fed's 2% goal. The consensus among analysts is only  50% chance of further rate hikes—potentially good news for bondholders. The Fed may also want to pause rate hikes while it reduces the balance sheet.

Interest rates remain historically low. The long term outlook for growth and inflation is weak, owing to several headwinds facing developed economies: global debt, aging populations and the disinflationary effects of globalization and technological advances.

We continue to monitor events in the global economy as they relate to our clients' portfolios and we'll alert you if any changes are needed. In any environment, we believe it is important to stay diversified and stick to a long term strategy. 




The Calm Before the Storm?

July 28, 2017

By: Darren P. Wurz, MSFP

The buzzword on Wall Street lately has been “volatility,” or more specifically the lack thereof. Volatility describes the ups and downs in the stock market over a period of time. Volatility can change. The markets can experience periods of high volatility and periods of low volatility. A period of high volatility would be characterized by extreme price swings—markets going up and down by large percentages from day to day. A period of low volatility would be characterized by just the opposite. Lately, traders have been complaining about how unusually low volatility has been. An eerie calm seems to have come over the market. Indeed, volatility is at lows not seen since at least 2007, just before the financial meltdown. That fact alone immediately puts people on edge. Is this the calm before the storm? Is this an omen of choppy waters to come?

"Fragility is the quality of things that are vulnerable to volatility." --Nassim Nicholas Taleb

The Chicago Board Options Exchange created the Volatility Index (VIX) in 1993 to measure and track stock market volatility. The VIX measures the market's expectations of volatility by averaging the weighted prices of options on the S&P 500. Options are instruments that traders use to speculate on price swings or to hedge their positions against price swings. Basically, the more expensive these options are, the more the “market” (i.e. traders) expect the market to swing. This index has become the standard for measuring market volatility and has become known as the “fear” index. The higher the VIX, the more fearful investors are thought to be and vice versa. To illustrate, the VIX reached an all time high on October 24, 2008, at 89.53—during the height of the financial crisis. The long term average for the VIX is around 18.  On the other hand, the all time low for the VIX was 9.31 on December 22, 1993. It hit the 9's in May.

This period of low volatility might suggest that investors are feeling pretty good right now. The US indices are at all-time highs, corporate earnings are strong, the economy continues to expand and there don't seem to be any imminent threats to our economic welfare.

But is investor emotion and behavior the root cause of volatility? While it is likely that volatility can be induced by investor behavior, as in the case of the financial meltdown, there are other possible causes.

First, volatility can be random. In Robert Haugen's book, Beast On Wall Street, he reports most of the largest one day price moves in the market cannot be linked to any significant world events, i.e. they are random. This isn't the kind of randomness you might expect though. Periods of elevated volatility tend to occur in random clusters instead of being scattered about. Famed mathematician and scientist Benoit Mandelbrot discovered this. This is not what we would expect if we are following modern portfolio theory—the theory that gave rise to passive or index investing. Modern portfolio theory would suggest that big market moves are rare and shouldn't occur in clusters.  But what we actually find is that big one-day moves are a lot more common than they should be.

Another cause of low volatility might be passive investing itself. More and more money is flowing out of actively managed funds into passively managed index funds and exchange-traded funds. An increasingly large amount of capital in our market is being invested in companies without any evaluation of the underlying risk. According to Bloomberg's Dean Curnutt, this could result in a dangerous circularity. This sounds similar to what happened with collateralized mortgage obligations during the financial crisis—mortgages being packaged up and sold as high quality debt investments without any consideration of the risk of the underlying mortgages.

So what is wrong with low volatility? The real risk of low volatility is how it affects investor behavior. During periods when stock markets are rising and volatility is low, investors become more willing to take risks. They make the mistake of assuming the markets are less risky than they actually are. They become less risk averse. They shift more money to stocks and away from bonds or cash. They fail to hedge against potential loss.

The graph below is TD Ameritrade's IMX index. When this index rises, it indicates that retail investors are increasing their exposure to stocks. The index has been around since 2013 and recently hit its all-time high. Clearly, investors are holding much more stock in their portfolios than in recent years.

This is dangerous for the markets as a whole, because it increases the likelihood of panic-selling caused by herd mentality during times of crisis. Dean Curnutt writes, “The result [of low volatility] is an inability to appreciate how quickly the market conditions can change, especially as trading strategies that capitalize on quiet markets become vulnerable to unwind, serving to amplify a risk-off event.”

Investors need to be careful. Higher volatility will likely be back at some point in the future. And those who have been careless in risk taking will pay the price. In the meantime, don't let this period of low volatility cause you to make the mistake of taking more risk than you should in your portfolio. If current market conditions are making you think you should make a change, be careful! Stick to your long-term investing strategy and an allocation that is appropriate for your risk tolerance and time frame.  If you would like to discuss how volatility affects your portfolio, I would be happy to talk with you.

TD Ameritrade
Chicago Board Options Exchange
Curnutt, D. (2017, May 26). Low volatility is market's most significant danger. Retrieved from


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