2016 was a volatile year across the global geo-political landscape and the inherently connected financial markets. Seemingly unlikely events, Brexit and the election of Trump, shook the world. 2017 too will be filled with unknowns and volatility. Here are a few tips for protecting your wealth and navigating the market’s ups and downs.
Diversify Your Investments
Diversification has always been the key to distributing and managing risks inherent in investing. What does it mean to be diversified? Let’s start with an example: Imagine a portfolio that was entirely comprised of holdings in just two stocks, Facebook (FB:NASDAQ) and Twitter (TWTR:NYSE). This is called a “concentrated” portfolio; if Facebook has a bad quarter in terms of earnings, or one of its core products like Instagram loses market share to a competitor like Snapchat, or any number of things goes wrong, our concentrated portfolio will be very sensitive to any downward move in the stock price. Beyond just owning two stocks, both Twitter and Facebook are technology sector stocks; if President Trump were to announce policy unfavorable to this sector, the portfolio would be incredibly sensitive. Alternatively, a diversified portfolio has a balanced mix of holdings across assets classes – stocks across different sectors (International, Emerging markets, Tech, Consumer, Telecom, Industrial, Energy), bonds, precious metals, real-estate, and cash. The more diverse the holdings, the less reliant a portfolio is on the success or failure of any one asset class, sector, or stock. At Catamount, we construct appropriately diversified portfolios based on the risk appetite and goals of our clients.
Over the long run, the stock market has a long-term tendency to rise – this simple fact is something to remember through the market’s day-to-day and even year-to-year volatility. The key to growing a portfolio is to stay put and patiently ride through the market’s turbulent peaks and valleys. If you can do this, you will take advantage of market’s long-term rising trend. However, studies show that most people often do the exact opposite and instead of staying put they can’t resist the natural urge sell their positions during market corrections, set-backs, and crashes. These people are in effect buying high and selling low, or buying low and selling low, when the ultimate goal is to buy low and sell high. In fact, a market correction often presents a great opportunity to be investing in the stock market instead of selling. This idea is summarized well in this tweet from macro-investor Cullen Roche:
Do you have a 360 degree all-encompassing view of your assets? Are they are working cohesively under the same risk parameters and growth thesis? We often come across potential clients and clients who are working with several different wealth advisors, tax-advisors, or estate-planners. This can lead to a redundancy in positions, unnecessary fees, and a confluence of different philosophies, yielding a less effective approach to growing and protecting wealth. One of the first things we advocate across our clients is a consolidated and simplified approach. At a minimum, it is important to make sure that there is communication between different moving parts so that you have a well-defined and universal approach to market volatility and market corrections.
With a mix of new features, businesses, and opportunities, we expect Facebook to have a great year in 2017. Here is why we are bullish:
- Cheap Valuation based revenue growth (56% in 3rd quarter year over year[i]) (will add specifics and elaborate on P/E when we are going to actually post this so that the #s current)
- Facebook has the potential to be a dynamic and large player across the e-commerce landscape. Over the past year, FB has made had strong entrance into several e-commerce markets via partnerships with companies like Uber, Domino’s, Kayak.com, and more.[ii] These partnerships enable Facebook users to communicate and transact with these brands within Facebook Messenger. Additionally, FB has created its own version of Craigslist, a marketplace native to Facebook where users can buy or sell items with each-other. FB will take market share across the e-commerce landscape over the coming years and ultimately increase its revenues.
- Instagram’s “Stories” feature is both an attack on Snapchat’s market share in the teen demographic and a significant addition to Facebook’s advertising inventory. In 2016, Instagram effectively copied the Snapchat stories feature and did well incorporating it into the Instagram interface. Stories enables users to broadcast photos & video clips to their followers; these photos & videos expire 24 hours after they have been posted. Stories also enables users to live stream video content. Instagram has been incredibly successful in driving users to this new feature, and, having demonstrated strong engagement, Instagram is partnering with large brands such as Nike (NYSE:NKE) to distribute branded video content and ads.
Coming off a strong 4th Quarter in 2016, where EPS (earnings per share) registered $0.40, Bank of America should to continue to do well in 2017. In particular, BAC stands to benefit from President Trump’s promise of deregulation and the FED’s intent to raise interest rates.
- The Dodd-Frank Act and post financial crisis stress tests, both intended to safeguard the broader economy, have limited Bank of America and its banking peers in their ability to generate returns on capital. These regulations prohibit the banks form being illiquid, which effectively means that they need to keep lots of cash on hand and limits the assets that can be tied up in illiquid things like loans. Currently, BAC has ~$500 billion of cash on hand. If Trump is able to relax or even dismantle Dodd-Frank, BAC will be able to allocate a portion of that cash to its loan portfolio which yields ~4% annually – this redistribution of cash would boost BAC earnings significantly.[iii]
- Almost half of BAC revenues are tied to interest rates and a 100 basis point (1%) upward move in interest rates would yield an additional ~$5 billion in revenues. Of the big banks, BAC most benefits from rate hikes because it has the largest portion of its earnings tied to interest rates. If rates rise and are coupled with a cash redistribution into its loan portfolio, BAC would dramatically increase its annual earnings.
“The information contained within this blog is provided for informational purposes only and is not intended to substitute for obtaining professional financial advice. Please thoroughly research everything you read here and seek professional representation before acting on any information you may have found in this blog.”