Deferred Comp Asset Allocation Models

NOVEMBER UPDATE 2017

Aggressive Allocation Update

Balanced Allocation Update

There are many observations regarding the current market environment for US equities that contribute to a bullish outlook. Among them, 76% of S&P 500 members are in a positive trend and the US equity asset class remains ranked #1 within DALI. But is the market strength so far this year also reason for optimism in December specifically?

Halfway through November and nearly 11-months into 2017, the S&P 500 Index SPX has accumulated returns of 15% on the year.  The S&P 600 (Small Cap) Index SML is well behind that pace (+7% YTD) while the Nasdaq Composite NASD is well ahead of it (+25%), but all major US equity benchmarks are comfortably ahead of where they began the year.  This is the time of year when advisors will often begin thinking more actively about the potential for portfolio changes that can reduce a client’s tax impact for the year.  It is also the point in the year where questions arise as to whether the market will more likely forfeit some of its gains, or instead end on a high note as year-end positioning takes place across the financial landscape.

We will address some of the opportunities for tax loss harvesting in the coming weeks, but today we will share a little perspective on historic market trends at year-end.  In short, strong markets to this point in the year tend to propagate stronger finishes.  This is more of a bias than a rule, but the data below supports an optimistic outlook based upon historic investor behavior following strong 11-month returns.  If the market is down at the end of November, for instance, the average returns in the month of December are hardly impressive (+0.19%).  On the other hand, a positive year heading into December yields average returns nearly 2% higher to finish the year.

Using S&P 500 Index SPX data since 1928, the average returns for the month of December are +1.4%, which we know to be the best avera ge return for any month.  However, as averages often go, the December returns rather infrequently land conveniently in the +1-2% range.  In fact, more than 80% of the time they lie outside of that concise little band.  A bias that has existed though is that lousy years tend to produce lousy Decembers, and strong markets tend to foster better December returns. Of the “Worst 5 December Returns” on record, all came with the market showing double-digit losses heading into the final month of the year.  Meanwhile, of the “Best 5 December Returns” since 1928, all but one occurred with the market showing positive returns on the year before it rolled into December (the exception coming in 1987).

The graph below is illustrated by order of 11-month return (Jan. thru Nov.) for the S&P 500 Index.  That return is depicted by the orange bars, while the corresponding return for the month of December in that year is shown via the blue lines and gray markers.  The negative outliers for December clearly tend to be clustered among the lousy 11-month return years, while December outcomes become a bit more confined as market returns heading into the final month strengthen a bit.  There are exceptions to every average, but out of the 55 instances where the market entered December with positive YTD returns, only 12 (or 22%) resulted in a negative December return.

Heading toward the final month of the year, the 15% YTD return for the S&P 500 Index provides the basis for some optimism in December.  Of course, there are many other observations regarding the current market environment for US equities that contribute to a bullish outlook.  Among them, 76% of S&P 500 members are in a positive trend and the US equity asset class remains ranked #1 within DALI.   These speak to a time horizon farther out than next month, and so we hope the perspective provided by some of today’s research is specifically useful in client conversations near year-end.

Please Note:  It is my recommendation that all city employees participate in the City of Philadelphia Deferred Comp Plan.  This gives all employees the ability to save for their future as well as help to reduce their taxable income.  Due to to the fact that the funds for investments in the City of Philadelphia’s Deferred Comp plan are correlated to the stock and bond markets, it is my recommendation that once you have separated your service from the City of Philadelphia you take your money out of the plan.   My office will help you allocate your monies while you are employed (as I have been doing since 1999) and then help you to make suitable, appropriate investment decisions in your own self-directed IRA.

My office is now receiving calls from police and fire commands asking us to speak to their members.  If a member in your command does not understand the contents of this e-mail, we would be more than happy to set up a meeting to review their individual Deferred Comp allocations.  You do not have to wait until you are in the DROP to begin planning for your retirement — instead call our office now and let us help you today!

Click Here For Aggressive Allocation Update

*DEFINITION of ‘Aggressive Investment Strategy’

A portfolio management strategy that attempts to maximize returns by taking a relatively higher degree of risk. An aggressive investment strategy emphasizes capital appreciation as a primary investment objective, rather than income or safety of principal. Such a strategy would therefore have an asset allocation with a substantial weighting in stocks, and a much smaller allocation to fixed income and cash. Aggressive investment strategies are especially suitable for young adults because their lengthy investment horizon enables them to ride out market fluctuations better than investors with a short investment horizon. Regardless of the investor’s age, however, a high tolerance for risk is an absolute prerequisite for an aggressive investment strategy.

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Click Here For Balanced Allocation Update

**DEFINITION of ‘Balanced Investment Strategy’

A portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.

INVESTOPEDIA EXPLAINS ‘Balanced Investment Strategy’

Although the balanced investment strategy aims to balance risk and return it does carry more risk than those strategies aiming at capital preservation or current income. In other words, the balanced investment strategy is a somewhat aggressive strategy, and is suitable for those investors with a longer time horizon (generally over five years), and have some risk tolerance.

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