We’d like to welcome you to the inaugural issue of our quarterly eNewsletter. In each issue, you can expect to read insightful articles, helpful hints, and other relevant, timely items that we feel would be of interest to our valued clients and friends of the firm.
In this issue, we’re highlighting an important new portfolio protection approach that we helped develop with a leading financial institution. We’ve also launched ourselves head first into the sphere of social media, starting with the refresh of our business website, adding a blog, creating LinkedIn profiles for our team members, recording the first in a series of educational podcasts, and planning a webinar.
Even though we’ve been in business for more than 20 years, we still consider ourselves a young and growing organization, with a lot more to offer. Stay tuned.
As always, we welcome your feedback. Let us know what you think of this first issue and the kind of information you’d like to read about in future editions.
Enjoy Spring,
Bob DiQuollo
President, Principal, and Senior Financial Advisor
Brinton Eaton Wealth Insight: Protecting Your Portfolio against Extreme Loss
By Jerry Miccolis, Chief Investment Officer, Principal and Senior Financial Advisor
What If “2008” Happened Again? New Techniques Offer Promise to Minimize Downside.
The holy grail of investing is a portfolio that doesn’t go down when markets plummet, but goes fully along for the ride when markets soar.
There are still no magic bullets, but some new investing strategies are emerging that can help protect a portfolio from major losses and still offer plenty of upside.
Our research on market crises offers these lessons:
Use alternatives more. We now invest up to 35 percent of our clients’ assets in “alternative” investments, which include managed futures, market neutral, and absolute return strategies, in addition to real estate and commodities. Managed futures generally go up when commodities either have a strong bull market or a strong bear market. Market neutral strategies attempt to provide equity-like returns, but with low correlation to equity markets themselves, which make them great diversifiers. Absolute return strategies attempt to provide positive returns regardless of what the markets are doing.
Diversify mainstream investments more than ever. We have increased our allocations to small-cap international and emerging market stocks, as well as investments in timberland, agribusiness, and global infrastructure.
Use new kinds of investment to hedge against extreme drops. The ideal portfolio hedge is one that kicks in when you most need it, but doesn’t represent a drain on your portfolio in normal times. Until recently, nothing did that at a reasonable cost — i.e., without requiring a sizeable capital outlay that would divert too much of your portfolio from productive purposes.
However, after working intensely with a number of leading financial institutions, we are pleased to announce a new approach designed to directly respond to our clients’ needs. A product developed by Deutsche Bank, called EMERALD, works by exploiting a clearly observable phenomenon about the equity market’s behavior. The S&P 500 index moves quite a bit from day to day, but rarely goes in the same direction for very many days in a row. In other words, its movement from week to week is typically less than its daily movements would imply. There are usually intra-week reversions — even during market collapses. EMERALD exploits this behavior by betting on this phenomenon each day. In the long run, it’s a winning strategy. But the principal feature of EMERALD relevant to our clients’ portfolios is its expected behavior when markets go into a tailspin, as they did in the fourth quarter of 2008. In those situations, it is expected that EMERALD would dramatically appreciate — and, importantly, remain at that elevated level after the markets recover — offering close-to-ideal portfolio protection.
The way we are investing in EMERALD is through a custom-designed ”structured note” — a promissory note issued by Deutsche Bank. The note contains two components. One is the S&P 500 Stock Index, and the other is EMERALD — you get exposure to the S&P 500, with EMERALD attached to it. The cost built into the note is less than the expected growth in the EMERALD part of the note. As a result, the protection is expected to essentially pay for itself. It may not, but we believe that chance is small.
There are some risks associated with this structured note, and the protection is not perfect; but we believe that the risks are commensurate with the expected benefit, and it is the best form of protection we have seen so far.
As ever, we continue to research and develop strategies that will protect our clients when the markets don’t cooperate.
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Brinton Eaton has produced a podcast (i.e., an audio file) on the topic of portfolio protection. To listen to it, visit brintoneaton.com/resources.
Jerry Miccolis, CFA®, CFP®, FCAS, MAAA, is one of America’s leading authorities on asset allocation. Jerry is also the co-author of Asset Allocation For Dummies® (Wiley 2009) and one of the originators of Enterprise Risk Management.
Did You Know:
A recent Associated Press article describes the economy’s impressive growth of 5.7% in Q4. However, in Q4 consumer spending lost energy, increasing only at a pace of 1.7%, weaker than first thought, and actually down from a 2.8% growth rate in Q3.
The Commerce Department recently reported that after-tax profits in Q3 jumped 12.7% from the prior period, up significantly, but well below the peak of 2006. At the same time, Deutsche Bank calculated that profits per worker in Q3 were $12,500 versus $9,900 in Q4 of 2008.
Roth IRA conversions have been extensively written about, however, a lot of personal evaluation needs to take place before you decide if a Roth IRA conversion is right for you. Even for professional financial planners, there is no single tool that exists to evaluate an investor’s suitability for a Roth IRA. For example in our practice, we use a combination of comprehensive tax projection software, retirement and estate planning/projection software and proprietary financial planning models to gain a holistic view of the individual’s present and future financial situation to determine — on a client by client basis – if a Roth IRA conversion is the right decision.
News & Noteworthy:
Open-end Mutual Funds:
We want to take this opportunity to discuss the open-end mutual funds we use in our client portfolios. While we attempt to use no-load mutual funds whenever possible, there are situations where there are no suitable no-load mutual funds available in an asset class/sector/sub-sector that we feel strongly needs to be present in the portfolios. In these cases, we have negotiated directly with the mutual fund company to have those loads waived for our clients. This is currently the case with the CMG Absolute Return Strategies Fund and the Oppenheimer Commodity Strategy Total Return Fund. While the prospectuses you may receive for these investments will show the load applicable to these funds, these charges are not assessed. This will be documented in the transaction confirmations you receive directly from Fidelity for all transactions in your accounts.
Statement on Healthcare:
The most conclusive statement we can make at this time on the recently passed health insurance legislation is that taxes will increase in 2011. Since the negotiations surrounding the legislation have only just begun we do not have any more definitive news, but will be monitoring the situation and will communicate with you in the form of a Special Client Bulletin as more information becomes available.
Webinar:
Brinton Eaton will be conducting a webinar on April 21 on “The Science of Securing Your Financial Future”. In this free webinar, you’ll learn the answers to these questions:
• Is the typical portfolio, with a nice mix of stocks and bonds, diversified enough?
• Do you know how to tame market volatility while exploiting it for your benefit?
• Are your investments really helping you reach your long-term goals? Or are they hurting?
• Are your emotions getting in the way of your financial and mental well-being?
To register, click here.
We’re also pleased to announce the recent launch of our blog — brintoneaton.com/blog. We hope you will participate in the conversations by commenting on the articles and we encourage you to either bookmark our blog or subscribe via the RSS feed icon at the top to receive blog posts automatically as they’re added as well as share our blog with your friends.
BE In the News:
In the past several months, our experts have been quoted in the Wall Street Journal, Barron’s, BusinessWeek, Bloomberg News, Associated Press, Kiplinger’s, Family Wealth Report, and the Financial Planning Association website, among others.
To read a few of the recent editorial placements, click here.
The Brinton Eaton Team:
- We are extremely proud to report that Colleen Betzler gave birth to a healthy baby girl on March 8th. Bevin Madeline Betzler is at home with Mom. Both are doing fine.
- We wish Nick Laverghetta well in his new business
Brinton Eaton helps affluent clients protect, grow, administer and ultimately transfer their legacy. We aim to provide a worry-free state of mind that enables you to continue to lead a financially independent and deeply rewarding life as well as leave a legacy for generations.
If you are not already a Brinton Eaton client, and are interested, contact us for a no-obligation consultation.
Volume 1, Issue 1
