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Financial News and Portfolio Management Discussion through July 22nd

All the news you need to stay informed about what’s currently driving the market – courtesy of Raffa Wealth Management, LLC.

US stocks reached new record highs during the week on strong corporate earnings. The S&P 500 rose 0.5%, but the Dow eased 0.3% for the week. Internationally, Europe sank 1.7% and Japan ticked down 0.1% for the week. The yield on the 10 year Treasury fell to 2.23% posting its largest two week decline since March.  Article

Japan’s central bank pushed back its estimate on when it will reach 2% inflation and kept its current policy on hold.

The ECB delayed discussion on whether it should wind down its bod buying program over weakening global inflation.

Firms posting strong earnings include Netflix, United, Johnson and Johnson, UnitedHealth, American Express and Microsoft. All six of the biggest US banks topped expectations.

 

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

 

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Getting What You Don’t Pay For

We have a guest blog post this month from Dimensional Fund Advisors addressing the issues of mutual fund and trading costs and their impact on performance.

Costs matter. Whether you’re buying a car or selecting an investment strategy, the costs you expect to pay are likely to be an important factor in making any major financial decision.  People rely on a lot of different information about costs to help inform these decisions. When you buy a car, for example, the sticker price tells you approximately how much you can expect to pay for the car itself. But the sticker price is only one part of the overall cost of owning a car. Other things like sales tax, the cost of insurance, expected routine maintenance costs, and the potential cost of unexpected repairs are also important to understand. Some of these costs are easily observed, and others are more difficult to assess. Similarly, when investing in mutual funds, different variables need to be considered to evaluate how cost‑effective a strategy may be for a particular investor.

Expense Ratios

Many types of costs lower the net return available to investors. One important cost is the expense ratio. Similar to the sticker price of a car, the expense ratio tells you a lot about what you can expect to pay for an investment strategy. Exhibit 1 helps illustrate why expense ratios are important and shows how hefty expense ratios can impact performance.

Exp Ratios

(Click to enlarge)

*See footnote

This data shows that funds with higher average expense ratios had lower rates of outperformance. For the 15-year period through 2016, only 9% of the highest-cost equity funds outperformed their benchmarks. This data indicates that a high expense ratio is often a challenging hurdle for funds to overcome, especially over longer horizons. From the investor’s point of view, an expense ratio of 0.25% vs. 0.75% means savings of $5,000 per year on a $1 million account. As Exhibit 2 helps to illustrate, those dollars can really add up over longer periods.

Exp Ratio over time

(Click to enlarge)

**See footnote

While the expense ratio is an important piece of information for an investor to evaluate, what matters most when gauging the true cost‑effectiveness of an investment strategy is the “total cost of ownership.” Similar to the car example, total cost of ownership is more holistic than any one figure. It looks at things that are readily observable, like expense ratios, but also at things that are more difficult to assess, like trading costs and tax impact. It is important for investors to be aware of these and other costs and to realize that an expense ratio, while useful, is not an all‑inclusive metric for total cost of ownership.

Trading Costs

For example, while an expense ratio includes the fund’s investment management fee and expenses for fund accounting and shareholder reporting (among other items), it doesn’t include the potentially substantial cost of trading securities within the fund. Overall trading costs are a function of the amount of trading, or turnover, and the cost of each trade. If a manager trades excessively, costs like commissions and the price impact from trading can eat away at returns. Viewed through the lens of our car analogy, this impact is similar to excessively jamming your brakes or accelerating quickly. By regularly demanding immediacy like this when it may not be necessary, the more wear and tear your car is likely to experience and the more fuel you will end up using. These actions can increase your total cost of ownership. Additionally, excessive trading can also lead to negative tax consequences for the fund, which can increase the cost of ownership for investors holding funds in taxable accounts. The best way to try to decrease the impact of trading costs is for funds to avoid trading excessively and pay close attention to effectively minimizing cost per trade. Employing a flexible investment approach that reduces the need for immediacy, thereby enabling opportunistic execution, is one way to potentially help accomplish this goal. Keeping turnover low, remaining flexible, and transacting only when the potential benefits of a trade outweigh the costs can help keep overall trading costs down and help reduce the total cost of ownership.

Conclusion

The total cost of ownership of a mutual fund can be difficult to assess and requires a thorough understanding of costs beyond what an expense ratio can tell investors on its own. A good advisor can help investors look beyond any one cost metric and instead evaluate the total cost of ownership of an investment program—and ultimately help clients decide if a given strategy is right for them.

 

 

 

 

*The sample includes funds at the beginning of the 15-year period ending December 31, 2016. Funds are sorted into quartiles within their category based on average expense ratio over the sample period. The chart shows the percentage of winner and loser funds by expense ratio quartile; winners are funds that survived and outperformed their respective Morningstar category benchmark, and losers are funds that either did not survive or did not outperform their respective Morningstar category benchmark. US-domiciled open-end mutual fund data is from Morningstar and Center for Research in Security Prices (CRSP) from the University of Chicago. Equity fund sample includes the Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Value, Miscellaneous Region, Pacific/Asia ex-Japan Stock, Small Blend, Small Growth, Small Value, and World Stock. For additional information regarding the Morningstar historical categories, please see “The Morningstar Category Classifications” at morningstardirect.morningstar.com/clientcomm/Morningstar_Categories_US_April_2016.pdf. Index funds and fund-of-funds are excluded from the sample. The return, expense ratio, and turnover for funds with multiple share classes are taken as the asset-weighted average of the individual share class observations. For additional methodology, please refer to Dimensional Fund Advisor’s brochure, The 2017 Mutual Fund Landscape. Past performance is no guarantee of future results.

**For illustrative purposes only and not representative of an actual investment. This hypothetical illustration is intended to show the potential impact of higher expense ratios and does not represent any investor’s actual experience. Assumes a starting account balance of $1,000,000 and a 6% compound annual growth rate less expense ratios of 0.25% and 0.75% applied over a 15-year time horizon. Taxes and other potential costs are not reflected. Actual results may vary significantly. Changing the assumptions would result in different outcomes. For example, the savings and difference between the ending account balances would be lower if the starting investment amount was lower.

There is no guarantee that any investment strategy, including those described here, will be successful. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results.  You should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management, LLC.  This information was gathered from reliable sources but we cannot guarantee accuracy.  Indexes do not reflect the fees associated with actual investments and such fees would reduce the performance illustrated.

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Financial News and Portfolio Management Discussion through July 8th

All the news you need to stay informed about what’s currently driving the market – courtesy of Raffa Wealth Management, LLC.

US stocks edged up over the week aided by bank stocks. The S&P 500 ticked up just under 0.1% and the Dow gained 0.3% for the week. Internationally, Europe rose 0.2%, while Japan was down 0.5% for the week. The yield on the 10 year Treasury bond continued its recent rise ending the week at 2.39%. Oil prices sagged with a barrel ending the week at $44.23 down 3.9% on the week.  Article

US employers added 222,000 workers in June well ahead of expectations. The unemployment rate rose to 4.4% as more people entered the workforce. Average hourly earnings rose 2.5% in June much lower than historical levels. In addition, April and May were revised higher.  Article

US auto sales fell 2% over the first half of the year and 3% in June.

At the Fed’s June meeting they began planning for reducing their balance sheet and the debate moved to when that process would begin. September was considered likely.

QVC and the Home Shopping Network are merging in a $2.1 billion deal.

Berkshire Hathaway is buying Energy Future Holdings, one of the largest power transmission companies in the US, for $9 billion.

 

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

 

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Financial News and Portfolio Management Discussion through July 1st

All the news you need to stay informed about what’s currently driving the market – courtesy of Raffa Wealth Management, LLC.

US stocks ended the first half of the year on a down note as stocks declined on hawkish comments from global central bankers. The S&P 500 fell 0.6% and the Dow ticked down 0.2% for the week. Abroad, Japan sank 0.5% and Europe dropped 2.1% for the week. The yield on the 10 year Treasury rose over the week to 2.30% posting its largest weekly yield increase since March. Oil prices recovered to a degree rising 7% to finish at $46.04 a barrel.  Article

ECB president Draghi alluded to the ECB cutting back its stimulus in response to improving growth in Europe.   On the news the euro surged 1.4%, its largest one day gain against the dollar and eurozone bonds fell.  Article

The chiefs of the Bank of England and the Bank of Canada said they would be pairing back stimulus in the future.

Italy said it was prepared to spend as much as $19 billion to shut down two regional banks.

Durable goods orders fell in May for the second straight monthly declining 1.1%, more than expected. However for the year to date orders have gained over 2016.

National US banks all passed the Fed stress tests and their capital plans were approved by the Fed. As a result, big banks will increase share repurchases and dividend payouts to their highest levels in years.  Article

The US grew at a 1.4% rate in the first quarter, in the final revision to GDP growth.

Economic confidence in the Eurozone reached its highest level since 2007.

Inflation eased for the third consecutive month in May to 1.4% from a year earlier. It’s the lowest level in six months and well below the fed’s target of 2%.

The EU gave Google a record fine of $2.7 billion saying the search engine favored its own online shopping service over others.  Article

Office supply store Staples was bought by private equity fund Sycamore for $6.9 billion.

 

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

 

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Financial News and Portfolio Management Discussion through June 24th

All the news you need to stay informed about what’s currently driving the market – courtesy of Raffa Wealth Management, LLC.

US stocks edged up over the week aided by healthcare and pharmaceutical stocks. The S&P 500 rose 0.2% and the Dow ticked up less than 0.1% for the week. Abroad, Japan gained 1.0% and Europe declined 0.3% for the week. Oil fell 4.4% for the week to $43.01 a barrel entering bear market territory. The yield on the 10 year Treasury fell slightly to finish the week at 2.15%.  Article

The largest US banks passed the Fed’s stress tests providing more ammunition for calls of reduced regulations.

New home sales rose 2.9% in May and prices hit a record high.

Travis Kalanick, the embattled founder and CEO of Uber was forced to resign.  Article

Oracle posted earnings that well outpaced expectations.

 

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

 

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Financial News and Portfolio Management Discussion through June 17th

All the news you need to stay informed about what’s currently driving the market – courtesy of Raffa Wealth Management, LLC.

US stocks rose slightly over the week as the outcome of the Fed meeting was in line with expectations. The S&P 500 edged up 0.1% and the Dow rose 0.5% for the week. Internationally, Japan ticked down 0.3% and Europe eased 0.5% for the week. The yield on the 10 Year Treasury edged up to 2.16% near its lowest level of the year. Oil prices fell to $44.73 a barrel its lowest level of 2017 on news of still high levels of inventory. For the year oil is down 17%. The price decline show the limitations of OPEC production cuts.  Article

At the Fed’s June meeting, as expected, it raised the Fed Funds rate a quarter percent to a range between 1% and 1.25%. They still expect to raise interest rates one more time this year. It also spelled out how it would begin to unwind its $4.5 trillion bond portfolio later this year. It will start by letting $6 billion in Treasury securities and $4 billion in mortgage bonds mature without being reinvested and let that increase until a maximum of $30 billion in Treasuries and $20 billion in mortgages a month mature.  Article

Amazon agreed to buy Whole Foods for $13.7 billion upending the grocery business.  Article

 

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

 

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Financial News and Portfolio Management Discussion through June 10th

US Stocks were mixed over several market moving events and a sharp drop in tech company shares to end the week. The S&P 500 eased 0.3% and the Dow rose 0.3% for the week. Internationally, Europe was off 0.6% and Japan fell 1.3% for the week. The yield on the 10 Year Treasury edged up to 2.20%. Oil prices have continued to slide ending the week at $45.83 a barrel down 3.8% for the week.  Article

The World Bank estimates that global growth will reach a seven year high of 2.9% next year.

The UK election surprised pundits again with the ruling Conservative Party losing its majority. The election was called to strengthen the Theresa May and her parties hand, but instead weakened it heading into negotiations to exit the EU.

US worked productivity was revised upwards to be flat in the first quarter. Compared to a year ago it gained 1.2%.

After an ECB meeting President Draghi revealed a more upbeat outlook and stated they probably would not need to cut rates again, but did not reduce any of the simulative actions its taking.

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Financial News and Portfolio Management Discussion through June 3rd

All the news you need to stay informed about what’s currently driving the market – courtesy of Raffa Wealth Management, LLC.

Global stocks hit fresh record highs to end a strong week for world markets. Stock price gains were driven by corporate profits and signs of economic strength. The US, South Korea and Germany all posted records on Friday. The S&P 500 gained 1.0% and the Dow rose 0.6% for the week. Internationally, Japan jumped 2.5% and Europe edged up 0.3% for the week. The yield on the 10 year Treasury fell to 2.16% the lowest level since just after the presidential election as investors believe the Fed will take a slow and steady pace with interest rate increases.   Article

The US added 138,000 jobs in May, well below estimates. Hiring numbers were revised down for the previous two months by 66,000. The unemployment rate fell to 4.3% its lowest level in 16 years.   Article

US manufacturing remained in expansion territory in May and picked up pace form April.

Illinois was downgraded by both S&P and Moody’s and is now on the verge of being the first US state with junk rated bonds.

ECB President Draghi said that despite the improving economic picture in Europe the bank is not ready to cut back on its stimulus.

Personal consumption expenditures rose 0.4% in April the largest one month increase since December.

The Fed’s preferred measure of inflation ticked up 0.2% in April, but year over year prices rose 1.7% compared to 1.9% in March.

 

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

 

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Combating a Potential Trump Slump

Over the month it became increasingly apparent that the Trump administration may run into several challenges that could hamper its agenda. Markets reacted particularly strong mid month when anonymous sources claimed that the President asked that FBI Chief James Comey end the FBI’s inquiry into Trump’s former national security adviser, Michael Flynn, and his interactions with Russia.  US stocks sank 1.8% when the news broke and foreign stocks sank 1.2%.  Investors grew concerned that a Russia cloud would hang over the administration and greatly slow or bring to a halt the President’s agenda.  If the tax breaks, reduced regulation and increased infrastructure spending that the market has factored into stock prices are delayed, or never materialize, it would likely send US stocks down.

It is anyone’s guess how the various investigations and inquiries play out, but there will likely be significant volatility over the coming months as new stories break. How much the President is slowed and what actually gets passed will have a significant impact on markets.

How does an investor handle the potential volatility driven by these political issues? The best course of action is to be diversified beyond US stocks.  Having stock exposure outside of the US could help limit any administration related market shocks.  For the year to date, foreign stocks have outpaced those in the US, but foreign stocks remain much less expensive with a price to earnings ratio that is 20% lower than their US counterparts.  In addition, maintaining a diversified high quality fixed income exposure provides a likely hedge to any drops in equity.  In times of severe market stress it’s been shown time and again that high quality fixed income, like US Treasuries, holds up very well.  In 2008, when the US stock market was collapsing, US treasuries rose over 11% for the year.  If there are any significant down swings in US stocks we do not recommend moving out of the asset class.  Instead we recommend waiting until your US stock allocation hits its predetermined minimum threshold and buying in to bring it back to its target allocation.  Other areas of the portfolio, like fixed income and potentially foreign stocks, could be up.  Thus investments that are up can be sold and reinvested in what is down.

By remaining disciplined to your target asset allocation, maintaining a very high-quality fixed-income allocation, and by diversifying broadly you can reduce the potential negative impact of any political drags on the market and remain focused on achieving your long term investment goals.

 

Index Performance      May  YTD Trl 1 Yr
US Stock (Russell 3000) 1.02% 7.96% 17.69%
Foreign Stock (FTSE AW ex US) 3.26% 13.89% 18.80%
Total US Bond Mkt. (BarCap Aggregate) 0.77% 2.38% 1.58%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) 0.23% 0.95% 0.58%
Municipal Bonds (BarCap 1-10yr Muni) 1.09% 3.32% 1.50%
Cash (ML 3Month T-Bill)  0.05% 0.22% 0.44%

 

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

 

There is no guarantee that any investment strategy, including those described here, will be successful. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results.  You should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management, LLC.  This information was gathered from reliable sources but we cannot guarantee accuracy.  Indexes do not reflect the fees associated with actual investments and such fees would reduce the performance illustrated.

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Financial News and Portfolio Management Discussion through May 27th

All the news you need to stay informed about what’s currently driving the market – courtesy of Raffa Wealth Management, LLC.

US stocks ended the week at fresh all time highs driven by the Fed meeting minutes and strong corporate earnings. The S&P 500 rose 1.4% and the Dow gained 1.3% for the week.  Internationally, Japan was up 0.5% and Europe was flat for the week.  The yield on the 10 year Treasury bond was flat for the week ending at 2.25%.  Oil prices fell 1.7% over the week on disappointment from the results of the OPEC meeting.

China’s credit rating was downgraded by Moody’s who cited concerns over the countries financial strength over the coming years. It downgraded it from Aa3 to A1.  Article

Minutes from the Fed’s May meeting were released and showed that the Fed felt it would “soon be appropriate” to raise short term interest rates. The statement confirmed investors’ expectations that an interest rate increase at the June meeting was on the table.  Article

US GDP rose 1.2% in the first quarter. It was revised up from the 0.7% originally estimated.

Huntsman Corp and Clariant are close to an agreement to merge that would create a chemicals giant worth approximately $14 billion.

Jim Hackett was tapped to replace Mark fields as CEO of Ford.

Earnings in the first quarter grew at the fastest pace in six years. Earnings of firms in the S&P 500 grew 13.6% from the year earlier period.

 

 

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

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