Q3 2017 Newsletter

Volume 8, Issue 3 - October 2017

Global equity markets continued their march higher over the course of Q3, which is the exact opening line of our newsletter last quarter. Financial, technology, healthcare, industrial and materials sectors led the way pushing major market indices to all-time highs yet again.  

Continued accommodative monetary policy around the globe coupled with low inflation and steady economic expansion overseas fueled gains over the course of the quarter. Emerging markets in particular outpaced their developed and domestic counterparts in part due to dollar weakness here in the states. Domestically a healthy labor market led to wage growth bolstering the consumer which accounts for roughly 70% of GDP. Fiscal policy remains pro-growth and coupled with the potential corporate benefits of proposed major domestic tax reform the overall trend may very well continue.

Potential speed bumps looking ahead include ‘artificial demand’ of central banks padding their balance sheets with equities and corporate bonds in search of higher returns, deleveraging of negative credit balances or failed tax reform. In addition, liquidity issues could arise in the wake of the Federal Reserve’s plan to start reducing its $4.5 trillion dollar

balance sheet towards the end of this year. And while we are not here to speculate as to the cause and effect we are anxious to see how all of the above plays out. 

In terms of the Tactical Allocation Portfolio (TAP) the quarter saw a continued commitment to risk on the equity side dating back to shortly after the presidential election cycle this time last year. Financials, technology and healthcare remained strong performers. The addition of small cap and emerging market equities illustrates the versatility our screening process employs to adapt to current conditions. The fixed-income portfolio did not change from its broad based, diversified, medium level credit quality, low level interest rate sensitivity posture. Despite the risk-on approach we continually monitor for signs of weakness and will adjust accordingly if and when the time comes.

Separately, if you have not already, we encourage you to engage us in both the planning and risk assessment process that has become so integral to our offerings in recent years. We have invested time and capital in new and exciting tools to help you reach your near and long term goals… Let us help you get there!



You might be familiar with the risk-reward concept, which states that the higher the risk of a particular investment, the higher the possible return. But many investors do not understand how to determine the risk level their individual portfolios should bear. This article provides a general framework that any investor can use to assess his or her personal risk level and how this level relates to different investments.

Risk-Reward Concept
This is a general concept underlying anything by which a return can be expected. Anytime you invest money into something, there is a risk, whether large or small, that you might not get your money back. In turn, you expect a return, which compensates you for bearing this risk. In theory the higher the risk, the more you should receive for holding the investment, and the lower the risk, the less you should receive.

For investment securities, we can create a chart with the different types of securities and their associated risk/reward profiles.

Although this chart is by no means scientific, it provides a guideline that investors can use when picking different investments. Located on the upper portion of this chart are investments that have higher risks but might offer investors a higher potential for above-average returns. On the lower portion are much safer investments, but these investments have a lower potential for high returns.



The Bottom Line
Not all investors are created equally. While others prefer less risk, some investors prefer even more risk than others who have a larger net worth. This diversity leads to the beauty of the investment pyramid. Those who want more risk in their portfolios can increase the size of the summit by decreasing the other two sections, and those wanting less risk can increase the size of the base. The pyramid representing your portfolio should be customized to your risk preference.

It is important for investors to understand the idea of risk and how it applies to them. Making informed investment decisions entails not only researching individual securities but also understanding your own finances and risk profile. To get an estimate of the securities suitable for certain levels of risk tolerance and to maximize returns, investors should have an idea of how much time and money they have to invest and the returns they are seeking.

Still unsure? We have a number of tools to measure both your comfort level with risk as well as that withing your household's portfolio.

*Source: http://www.investopedia.com/

trump promises 'no change to your 401k'


WASHINGTON — President Trump said early on Monday that his proposed tax plan would not prompt any changes to Americans’ tax-deferred retirement plans, pushing back against reports that the Republicans are weighing a proposal that would significantly reduce the income workers can save in these popular programs.

Mr. Trump’s shutdown of the proposal is the first of what many Republicans privately fear could be a presidential pattern that disrupts their efforts to pass a sweeping overhaul of the tax code. In it, Mr. Trump appeared to rule out a politically difficult idea, which, if enacted, would have provided some revenue to help pay for the tax plan.

Republicans’ ability to win passage of a tax package hinges on its ability to survive a complex set of legislative restrictions in the Senate. Republicans are attempting to cut business tax rates deeply, and also to cut individual tax rates, using a legislative route that allows them to bypass a Democratic filibuster and pass a bill with a simple Senate majority. To do that, they will need to make some tough political choices, eliminating some popular tax breaks, or employing some budgetary accounting tricks, in order to offset lost revenues from rate cuts.

Mr. Trump’s tweet concerned one of those accounting maneuvers, which would have allowed Republicans to effectively borrow tax revenues from the future to offset some rate cuts today. Reducing 401(k) contribution limits would force retirement savers to pay more in taxes today, as they sock away money, but less in the future, when they began withdrawing retirement funds tax-free.

Republicans had not decided whether to include a reduced cap on contributions in their final version of the tax bill even before Mr. Trump’s tweet.

Details of the Republicans’ tax bill have been closely held, and they would not comment on Friday about possible changes to 401(k) policies. It was not clear from Mr. Trump’s Twitter post on Monday whether he meant that he would not support a bill including alterations to 401(k) limits or that he knew the Republicans’ draft bill did not include such changes. Several sources said last week that such changes were under consideration as House Republicans prepare to release a tax bill in the coming weeks.

Democrats and other critics of Mr. Trump’s tax plan have said it would not help middle-class Americans, despite White House and Republican promises. “Tax cuts for corporations and the wealthiest Americans should not be paid for by increasing taxes on middle class Americans saving for retirement,” a group of Democratic senators, led by Senator Sherrod Brown of Ohio, wrote to the administration in September.

Any plan to cap 401(k) savings could bolster those arguments.

Republicans are discussing proposals that would potentially cap worker contributions at $2,400 annually for 401(k) retirement accounts, lobbyists and consultants have said. Currently, workers can put away $18,000 a year in tax-deferred plans; workers who are over 50 years old can save up to $24,000.

Advocacy groups have sprung up in Washington to fight any proposed change to those limits. One of those groups, the Save our Savings Coalition, said in a statement on Monday that it was “thrilled to see the President’s statement today, though we will continue to fight to ensure lawmakers do right by the middle class by preserving and expanding our retirement system as tax reform moves through Congress.”

*Source: NY Times

DOL Fiduciary Update

If confirmed, Preston Rutledge would serve as assistant secretary of Labor and head of the Employee Benefits Security Administration

A senior Senate aide has been tapped to head the Labor Department's office with direct authority over the agency's fiduciary rule.

The White House announced Thursday night that Preston Rutledge, senior tax and benefits counsel on the Senate Finance Committee, had been nominated to be an assistant secretary of Labor and head of the Employee Benefits Security Administration.

If confirmed by the Senate, Mr. Rutledge would serve in the same role that Phyllis Borzi, known as the "mother of the fiduciary rule," held in the Obama administration when the regulation was finalized. The EBSA is responsible for administering and enforcing the Employee Retirement Income Security Act, the federal law that regulates retirement benefits.

As EBSA director, Mr. Rutledge would be influential in shaping the agency's review of the fiduciary rule, which would require brokers to act in the best interests of their clients in retirement accounts and partially went into effect in June. The re-assessment of the rule's enforcement mechanisms, order by President Donald J. Trump, could lead to revisions. The agency is seeking to delay the remainder of the rule for 18 months during the review.

Mr. Rutledge has served on the Senate panel since 2011. Before that, he was a senior tax law specialist at the Internal Revenue Service. Congressional aides generally work behind the scenes, and his own views on fiduciary duty aren't clear.

Sen. Orrin Hatch, R-Utah, chairman of the Senate Finance Committee, said Mr. Rutledge helped bring Republicans and Democrats together on policies before the panel.

"He's put forward innovative ideas to effectively tackle our nation's pension issues and worked to update the tax code to help ensure more Americans are financially equipped to pay for their health care or save for retirement," Mr. Hatch said in a statement. "Even more, Preston understands the importance of working across [the] aisle to advance policies."

*Source: http://www.investopedia.com/


*The interpretations and organizations of these ideas are the confidential thoughts of 1st & Main Investment Advisors and do not represent the opinions of Berthel Fisher & Co. Financial Services, Inc. nor Berthel Planning, Inc.