V E S T M E N T S . . . F I N A N C E . . . R E T I R E M E N T. . . C U R R E N T E V E N T S . . . I N S U R A N C E . . . S T O C K S . . . I N V E S T M E N T S . . . F I N A N C E . . . R E T
MONEY MATTERS Chief Client Advocate Wilmington Trust Company
PRUDENT RISK ALLOCATION STILL WORKS BEST IN TODAY’S ECONOMY THE EFFECT OF TECHNOLOGY
What differentiates the wealth management market as it has evolved over the past 70 years? Pure and simple: technology. We have immediate access to so much information that we react too quickly. A client called me from Asia during the financial meltdown in 2008 saying the world was coming to an end and that he had become obsessed with following the financial news on his T. V., his phone, and his iPad. Every time he left home, he was bombarded with screens of financial information everywhere he went. We advised him to simply turn off the devices. He sold out his portfolio and went to cash at 6,600, missing the entire Dow rally back to 15,553, where it stands today. Another result of the changing technology is the instant access to information about companies and the markets and the ability of hedge funds to digest that information to then execute their trades in quant models via high-frequency trading. In 2013, it’s estimated that less than 20 percent of the total worldwide equity market is owned by individuals. So how do self-directed investors compete with a gigantic portfolio manager, whether a bank, an investment firm, or a hedge fund? They don’t. They have waved the 106 QUEST
flag and (especially in the large-cap space) have created the need for billions of dollars in passive investment vehicles, such as exchange traded funds. CRITICAL NEED FOR LEADERSHIP
One of the most exciting developments for our country in 2013-14, and similar to the 1940s, is the return of our soldiers from war—in today’s case, the Afghan war. Recognizing a global lack of leadership, two banks in America have committed to hiring 25,000 veterans. With the plethora of small businesses created every day in America, their next step to success depends on finding someone to manage and provide leadership for growth for their companies going forward. The United States will now have the advantage of deploying thousands of leaders retiring from the military into our workforce and fledgling economy. WHERE ARE WE TODAY?
The financial markets of late have celebrated a good rally in the stock market as a result of the Fed consistently replenishing the punch bowl. And yes, you may lose money in fixed income primarily from a rise in long-anticipated interest rates, but a typical high-net-worth inves-
tor is not so concerned about the value of his or her bond portfolio; they are more interested in maintaining the asset’s credit rating and yield. He or she expects PAR back at maturity, so if bonds are up or down by 2 percent, that’s not much of a surprize or concern. While “cash is trash” with barely any yield, emerging markets have also taken a hit, primarily from a projected reduction in GDP in China and the failing of government structure in many countries across the world. Gold and commodities have been down due to a lack of projected inflation. Private equity and real estate have benefitted from continued low interest rates. ASSET ALLOCATION IS STILL KEY
There has been an adage in the wealth management market for years: Subtract your age from 100 and that will define your risk allocation. For example: 100 minus an age of 65 equals 35 percent allocation to stocks, 65 percent to bonds. Why? Because retirees don’t have their salaries any longer and they need yield (bonds) in retirement. The opposite: 100 minus age of 35 equals 65 percent in stocks. Why? At 35, we are all in the process of building our wealth and obtain yield from our salaries to pay the bills. The biggest issue out there is, “Is this time different? Will my asset allocation provide me the desired growth and income I need for the future, but still protect my risk profile?” With many new financial instruments being created every day, some may try to sell you the latest fad. Take a deep breath. Realize that no, this time still isn’t different; stick to a longterm investment strategy, and please turn off your phone, laptop, and T.V. X For more information visit www.wilmingtontrust.com.
L I B R A RY O F CO N G R E S S ; W I L M I N G TO N T RU S T
PETER E. (TONY) GUERNSEY, JR