Q3 2016 Market Update: Watch and Wait as Economic Growth Continues

Over the last few years, our quarterly reports held a reassuringly simple theme: if you properly set your risk tolerance and remain invested in the markets through its ups and downs, you will be rewarded.

 

This advice was undoubtedly challenging to follow over the last twelve months, especially while the U.S. stock market experienced an intraday drop of 7% last August and a 14% decline in February. Throughout the period, though, we have stressed that investors are wise to remain invested as the fundamentals of our present economic growth have not changed.

 

Most recently, in the wake of the British decision to leave the European Union or “Brexit” vote, we wrote that “markets will adjust and recalibrate.” Though the vote to leave was unexpected, we did not see fundamental economic changes, though we anticipated increased volatiltiy and a short-term decline. In the months since, international and domestic markets have bounced back and then some; in fact, US markets are at all-time highs.

 

As the accompanying chart of the S&P 500 shows, the U.S. markets have experienced significant ups and downs since 2014, but the patient investor who ignored most of the news and remained focused on the long-term is up a total of 18.6%, or approximately 6.7% per year.

sp500since2014

The U.S. economy has plenty of positive indicators: restaurants and shopping malls are filling up;  unemployment is down to 4.9%, and inflation of 0.8% remains well below the Fed’s 2.0% target. Meanwhile, wages are increasing faster than inflation, meaning that workers have more real dollars to spend, save, and invest. Oil prices rebounded to $50 per barrel after sinking below $30 in the winter, with varying impacts on consumers and different industries; for example, energy companies are typically more profitable with higher oil prices, while airlines fare worse given their reliance on fuel. We expect the Federal Reserve will continue its patient approach to interest rate hikes, though that could nonetheless include an additional quarter point hike before the end of the year.

 

Internationally, developed economies continue to search for solid economic footing. Though interest rates in several major developed countries are negative, Japanese and European stock markets have bounced back from the spike immediately following the British EU exit vote. There are also bright spots; emerging markets have bounced back on renewed strength of commodities and currencies, as this chart of the FTSE Emerging Market Index ETF, VWO, illustrates.

VWO(Chart illustrates the price history of the Vanguard FTSE Emerging Markets Index ETF, VWO; source: Google Finance)

 

Our guidance remains constant: continue to stay steady over the near term. Confirm your portfolio’s risk is well matched to your investment horizon. (Retake our risk questionnaire to make sure your risk tolerance is set correctly!) Uncertainty will always be a part of investing; we watch some predictable events with interest, though we also remain alert for the unexpected. As election season progresses here in the United States and we move into the fall, we anticipate investors will price in expectations about the election’s outcome while the economy continues its steady growth. At SigFig, we remain committed to delivering a globally diversified, strategic portfolio that provides exposure to many asset classes.

Aaron Gubin

Aaron Gubin leads research for SigFig’s Wealth Management team. He holds a Ph.D. in Finance and taught investments and portfolio management to graduate and undergraduate students before coming to SigFig. His research focuses on asset allocation, behavioral finance, and investment management.

The Impact of Brexit on Global Markets and Your Portfolio

Last night, the British voted “Leave” on their referendum to exit the European Union (EU). This result is poised to increase uncertainty and weakness within the union of 28 countries.

SigFig’s Investment Team expects increased volatility in global markets, as investors assess the impact of the vote. Though there are likely to be few immediate economic consequences, many European economies, and especially the British, are likely to suffer from weaker connections to the Continent, with global impact.

What should you do?

Focus on the long-term and ignore the short-term market fluctuations.

Markets will adjust to the Brexit result and recalibrate. Meanwhile, it’s important to recognize that a globally diversified, asset-class diversified, time-horizon appropriate portfolio will weather this storm. Your SigFig portfolio is designed to invest your capital wisely to endure the ups and downs of market volatility.

With the uncertainty about global economic growth caused by the Brexit result, international markets are likely to decline. Meanwhile, U.S. Treasuries are likely to be a source of safety and could rise as investors seek to relocate their capital to more stable assets.

SigFig portfolios deploy assets in all major markets, including the U.S., Europe, Asia, and points in between. Moreover, the portfolios contain U.S. Treasuries, investment-grade bonds, and other sovereign debts for asset-class diversification, while accommodating different risk levels and different investment horizons.

If in doubt about whether your portfolio is matched to your time horizon, retake our risk tolerance questionnaire.
 

P.S. With the British pound falling in value relative to the U.S. dollar, now is a great time to visit England!

Aaron Gubin

Aaron Gubin leads research for SigFig’s Wealth Management team. He holds a Ph.D. in Finance and taught investments and portfolio management to graduate and undergraduate students before coming to SigFig. His research focuses on asset allocation, behavioral finance, and investment management.

SigFig App Wins “Editors’ Choice” Award

Earlier this week, Google Play selected SigFig as an “Editors’ Choice” app — and we couldn’t be more thrilled. Judged by Google’s editorial staff to be one of “the best Android apps of all time,” SigFig Wealth Management is among the few finance apps ever to earn this distinction. The Editor’s Choice designation is reserved for trusted apps of the highest quality.

The SigFig Android app makes it easy for anyone to get access to high-quality, long-term investment management with low fees and low account minimums. Download it here for free.

Android Screens (1)

We’re always looking for new ways to make it easier for people to reach their financial goals, and our app plays a big part in that. In selecting which apps to award its coveted Editor’s Choice badge, Google Play looks at everything from app quality and material design aesthetic to integrated Android features and user experience.

Editors' Choice Badge

By awarding SigFig this honor, Google Play recognizes our commitment to providing our Investors with a great product. We’re incredibly proud of our team and the work they do to deliver the best app experience possible.
 
Looking for an exciting challenge? Want to solve big problems, shape the future of an industry and make a real impact on the lives of millions of people? Join our award-winning team here.

Yair Levin

Yair is Director of Mobile at SigFig. Prior to joining SigFig, he founded Slim, a cross-platform app that filtered social media news. Before that, he ran the asset management sales team for Israel’s largest investment bank. Yair served as a Tank Commander in the Israel Defense Forces and studied marketing and finance at IDC.

2016 Q2 Market Update — Markets Are Volatile, but We Remain in the Midst of a Good Bull Run

It’s hard to love a good bull market—if you’re out of the market, invested in cash or other assets, it’s frustrating to wait on the sidelines for better buying opportunities. You see the neighbors enjoying the gains, but you’re stuck in place. Meanwhile, if you’re fully invested, you’re always on edge that the bull market will give up the ghost. Should we stay in, should we get out?

Prior to the current run, dating back to 1932, there were eleven bull markets, lasting an average of five years. But we’re nowhere close to the longest yet; the run from December 1987 to March 2000 lasted more than 12 years.

Our view is that you should ignore all of this. If you think appropriately about your investment time horizon, you should invest your assets in a mix of stocks & bonds and ignore the intra- or inter-year fluctuations in the market.

If you’re out of the market because you’re afraid or you have a shorter horizon, you should invest in a healthy mix of investment-grade bonds (fixed income), with a smaller but still meaningful allocation to globally diversified stocks. If you have a short horizon, make sure you’re taking sufficient and appropriate risks.

 

Where do U.S. markets stand today?

The US stock market remains on a tremendous seven-year run from the depths of early 2009. Equities wobbled for the first six weeks of 2016, down nearly 10%, but rebounded completely by the end of March.

image02

S&P 500 performance from January 4, 2016 to April 6, 2016

Even with this volatility, it has continued to prove very hard to be a good stock picker. Fewer than 20% of large-cap active managers beat the S&P 500 in the first three months of the year. The experts do not reliably beat their benchmarks, and even acknowledging that they win sometimes, they on average do not do so by sufficiently large margins over the long-run to justify paying their high management fees.

As a result, we recommend a more strategic approach: buy low-cost index funds, diversify your investments across many asset classes, and patiently take the long-view. This is the SigFig approach: we invest our clients’ assets in diversified portfolios that make sense for their financial goals and time horizon.

 

International markets: slow growth, choppy markets

On the international front, developed economies are still growing, albeit very slowly. Weakness in these economies has been met with European and Japanese versions of quantitative easing as central banks attempt to stave off recession. Though they have not yet completely rebounded from the early 2016 swoon, developed international markets cut their losses over the last several weeks.

Meanwhile, emerging markets hit hard by declines in commodity prices have stabilized. The skid in oil prices has stopped, but low commodities prices have kept a lid on economic growth. Nonetheless, emerging markets stock performance bounced back after falling off more than 10% to start the year.

image00

(Chart illustrates the price return of VWO and VEA. VWO is the Vanguard Emerging Markets Equities Index ETF; VEA is the Vanguard Developed Markets Equities Index ETF; measured from January 4 to April 6, 2016.)

The future is unpredictable, so it’s wise to have exposure to many different markets. The SigFig strategy is to diversify its clients’ assets across the globe, with exposure to both developed and emerging markets.

 

Fixed Income: interest rates are going to rise, but possibly slower than you think.

At the end of 2015, the Federal Reserve announced its first rate hike in seven years. Since then, the question remains how quickly the Fed will continue to raise rates to bring them in line with historical norms.

image01

(This chart illustrates the price return of AGG, the iShares Investment Grade Fixed Income Index ETF from January 4 to April 6, 2016.)

Fed Chairwoman Janet Yellen indicated in her February congressional testimony that the Fed will increase rates slowly, but it appears reluctant to push too hard on interest rate hikes at the risk of stalling out the US economy. Related to these muted expectations about rate increases, investment grade fixed income prices continue to creep up, as market observers temper their expectations about future rate changes.

 

Stay appropriately diversified; focus on the right time-horizon

As we have consistently stated, the SigFig approach is to stay committed to a diversified portfolio whose risk is appropriate to your investment horizon. Identify the right mix of asset classes to deliver the right amount of return to meet your investment goals while not too risky for your personal comfort. (Retake our risk questionnaire to make sure your risk tolerance is set correctly!) Then invest in low-cost index funds that give the exposure to a broad set of securities within an asset class. This is the research-backed way to build your investment portfolio.

Aaron Gubin

Aaron Gubin leads research for SigFig’s Wealth Management team. He holds a Ph.D. in Finance and taught investments and portfolio management to graduate and undergraduate students before coming to SigFig. His research focuses on asset allocation, behavioral finance, and investment management.

For Retirement Investing, Putting Customers First Is Now the Law

Tara Siegel Bernard of the New York Times reports:

The Labor Department, after years of battling Wall Street and the insurance industry, issued new regulations on Wednesday that will require financial advisers and brokers handling individual retirement and 401(k) accounts to act in the best interests of their clients.

“The marketing material that I see from many firms is, ‘We put our customers first,’” Thomas E. Perez, the secretary of labor, said in an interview. “This is no longer a marketing slogan. It’s the law.”

As we wrote in April 2015, we are strongly in favor of the Department of Labor’s effort to expand the fiduciary standard to all financial advisors.
 
Clients should have no doubt that their advisor is placing their best interests ahead of his or her own.
 
 
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In a Market Downturn, Think and Act for the Long Term

Worldwide, stocks have fallen significantly and volatility has increased in the early weeks of 2016.

The hardest part about being a disciplined investor is maintaining a patient, thoughtful approach in the face of market headwinds. It’s tempting to sell your portfolio and wait out the storm, at least until things seem to have settled down.

Some investors hit the panic button, liquidate everything, and wait. When people make investment decisions based on fear, however, they abandon the smart, calm approach that should guide their rational long-term planning.

This is a good chance to consider the opportunities available to long-term investors. Modern portfolio theory suggests that the smart, long-term approach is to stay the course.

Though the S&P 500 has had a correction of approximately 10% in the last month and international markets are off 10% to 20%, diversified portfolios with stocks and bonds have been less impacted than concentrated portfolios. This presents excellent opportunities to invest (and reinvest) in a globally diversified portfolio.

Though it’s natural to want to pull out when the market gets volatile, it is impossible to know where the bottom is. Frequently, market timers withdraw at the bottom, already absorbing all of the losses. Other times, they attempt to buy back in at what they think is the bottom, only to see the market fall further — what is known as “catching a falling knife.” Then, once the fear factor has been initiated, it is hard to anticipate the market’s upswing, building the courage to reinvest while getting the re-entry timing correct. In fact, research shows that market timing generally underperforms a buy-and-hold, disciplined approach. Simply riding the swings, even the volatile ones, outperforms active investing and market timing.

As an example, the chart below shows the S&P 500 over the one-month period from July to August 2011. The S&P 500 fell almost 15% in the month. The market had been on a tear through mid July, up 50% from its 2009 lows.

sp500_1

If you jumped out of the boat in August 2011, nervous that stocks were overvalued, you’d have missed a big chunk of a great market rally. Over the next three years, the market was up 66%.

sp500_2

The research says stay the course. Don’t try to time the market. Invest in a diversified portfolio, reconfirm your risk tolerance, and harvest available tax losses.

  • Don’t try to time the market. Attempts to time the market, by jumping out at initial signs of market tops, or jumping in at signs of market bottoms, underperform a disciplined, buy-and-hold, stay-the-course approach. Most finance research indicates it is nearly impossible to figure out where the market is going (minutes, days, weeks, months, or years from now). It is impossible to know if the markets will move higher in the coming days or continue with volatility. Even the so-called experts do not beat the market reliably. Still, markets historically reward smart, disciplined risk-taking over the long-term: investors take on risk by investing in companies and are rewarded with capital gains and dividends.
  • Invest. We strongly advocate setting up regular, recurring deposits. These serve several purposes. First, they build your account value, getting more of your assets to work for you. Second, deposits enable a simple rebalancing of your portfolio to pick up small relative under-valuations between asset classes. Finally, they enable you to invest when the market has experienced a larger decline. These factors combine to lower your portfolio volatility and your overall risk.
  • Confirm your risk tolerance. If you’re watching the market downturn nervously, it’s a signal to rethink your risk exposure. Visit our Managed Accounts page to retake your questionnaire and see if your portfolio’s risk level matches your current comfort with market volatility. Your portfolio should be aggressive enough to achieve the long-term returns you want, while still enabling you to be comfortable living through short-term market pullbacks.
  • Harvest tax losses. Our investment team carefully reviews market conditions for opportunities to reduce your taxes. We automatically look for conditions to lock in a lower cost-basis and capture tax losses for our clients, who can use that loss to offset other gains (and even income) to reduce their taxes. We purchase a similar asset class ETFs so our clients remain fully invested for a market rebound. If you haven’t turned on Tax Loss Harvesting, you can do it now by clicking here. If you want to learn more about Tax Loss Harvesting, visit our FAQ.

At SigFig we work to deliver the optimal investing tools and asset management services for our clients and their portfolios in any market conditions. Volatile markets can frighten even the most seasoned investors, but with the right tools and investment partners, even a market downturn can be an opportunity to invest better.

Aaron Gubin

Aaron Gubin leads research for SigFig’s Wealth Management team. He holds a Ph.D. in Finance and taught investments and portfolio management to graduate and undergraduate students before coming to SigFig. His research focuses on asset allocation, behavioral finance, and investment management.