D3 Business Update:

Your portfolio performance reports are either loaded on your client portal or have been mailed to you. Please compare the “Required Rate of Return” in your updated plan to your portfolio’s performance. Patty will be calling you to set up a time so that we can review your portfolio’s performance to make sure your investments are in sync with your financial planning goals and your tolerance for risk.

As a reminder, August 17th at noon is the date of our family and friends get together this Summer.  You should all have received a postcard invitation. We are going to have it at Pinstripes, near the Oakbrook Mall.  We are hoping all of our clients can take time out on a Saturday to have lunch on D3, play some bocce ball, network with D3 staff and other clients.  Family members are encouraged to come as well as friends you would like to introduce to us. Please RSVP to Patty by August 10th.

 

Investment Outlook:

As we have been describing in our last two monthly newsletters, due to the U.S. economy improving and the Federal Reserve warning the markets that they will slow quantitative easing, bond and stock market volatility has increased. Returns for domestic stock, foreign stocks and the bond market were as follows.

The negative performance of the bond market is a natural reaction to the perspective that the longer term strength of the U.S. economy will result in higher interest rates.

 

Fixed Income’s Purpose in Portfolio Construction:

Given the potential shock people may have to negative bond returns, we thought it would be timely to remind everyone, from a financial planning perspective, why fixed income is important to include in a portfolio. For clients needing cash flow to maintain their lifestyle needs, fixed income products are the most consistent provider of cash flow.  From a diversification standpoint, fixed income products are the least correlated to equities and when added to a portfolio, lower volatility and increase the overall risk/reward characteristics of a portfolio.  These facts were readily apparent during the financial crisis, where bonds were the best performing asset class in 2008.

An important factor we keep in mind when investing in bonds (especially treasury bonds), is that the best predictor of future 10 year returns for 10 year bonds is the current yield on the 10 year bond.  The current yield is approximately 2.50% on 10 year treasury bonds and based on history, that implies the total rate of return over the next 10 years will be 2.50% (only satisfactory for capital preservation purposes).

We have not eliminated bonds from client portfolios for the reasons we talked about above (cash flow and diversification);  but, to the extent we can, we have eliminated exposure to treasury bonds by investing in strategic income funds, floating rate bond funds, real estate investment trusts, and both corporate  and municipal shorter duration bond funds.  Additionally over the past 3 years we have reduced our asset allocation models exposure to fixed income by approximately 5% per year.

 

Fixed Income’s Purpose in Financial Planning:

As you review your financial plans and your performance reports, if you are concerned about short term volatility, we will recommend changes to account for that concern.  If you are concerned about the impact of rising rates, we can shorten duration even further, but only at the expense of reducing the cash flow generated from your portfolio.  This is why it is important to understand the long term “required rate of return” identified in your recent financial plan update and to incorporate that into the longer term risk and volatility of your portfolio.

 

Investment Strategy:

We have finished our second quarter formal review of our client investments.  For our municipal bond funds we confirmed that none had any significant exposure to Detroit (the city filed for bankruptcy yesterday).  As a result of our review, we will be making some minor changes over the next couple months.  Additionally, we will be reviewing opportunities to minimize the tax impact on portfolios starting in August.

Also it is worthwhile to repeat that “for all of our client’s we have exposure to the stock, bond and international markets to diversify risk and generate positive long term rates of return.  We have diversified across sectors in the bond market to help shield client portfolios from rising rates. One thing we have not done is make wholesale moves into or out of the markets.  History has taught us it is a lot better to be a little right versus 100% wrong.  If we see an economic downturn or a liquidity event, we will raise money market positions to fund your cash flow needs.”

As always, we thank you for your confidence in D3 Financial Counselors and we ask that you to keep us in mind when your friends or relatives have financial questions or face some financial uncertainty.  We serve our clients by providing Integrity, Trust, Wisdom and Confidence.

 

 

Don Duncan MBA CPA CFA™ CFP®                        Michael Meyers MBA CFP®

Adam Glassberg CFP® CIMA®                                  Patty Shipinski, Office Manager

Ryan Pace CFP®