Will Trump's Tax Package be a Turkey?

Happy Thanksgiving Everyone !

As we look at the events of the past 60 days or so it seems like the motto is “hurry up and wait“. 

Tax Reform, Healthcare, the stock market is going to crash...name your flavor.

It seems evident that the markets are banking on considerable events.  Which, if they do not occur, may have some very difficult consequences for the markets next year.  We do believe and remain somewhat constructively positive on the fact that something will get done before the end of this year.  Although the final tax plan may not end up giving individuals much hope of a break, the question remains...Who out there in the Senate is willing to stick their neck out and go against tax reform that stimulates business and the economy?  On Thursday, Goldman Sachs came out with a research note suggesting that there is an 80% likelihood of tax reform passage by the end of this year.  Treasury Secretary Mnuchin just said on Friday that we will get a tax package before Christmas. 

Now on to the markets and investments...

We are hopeful that with some cooperation among our country's leaders, we can get tax reform approved and that will lead to some additional near-term upside in markets. It seems as though the path of least resistance is up. However, we want to be very constructive and selective and maintain a margin of safety.

One thing is for sure...The markets do not like uncertainty.  All this uncertainty has created a good number of opportunities in the markets recently.  You may have noticed some changes and shifting within your portfolio as a result of those opportunities.  We recently made a new entrance into high-yield bonds and energy in what we believe to be a very creative way.  We saw a sizable deterioration that we felt created a good risk to reward tradeoff. 

Members of the Financial Services Committee recently voted 58-2 to adopt H.R. 4267, the Small Business Credit Availability Act.  The legislation would provide relief to Business Development Companies (BDCs) by amending the Investment Company Act of 1940 for the first time since the 1980s. If enacted, the bill would allow BDCs to deploy more capital as well as streamline burdensome Securities and Exchange Commission offering and registration processes.  We are optimistic that this will be a positive event for one of our holdings that we have owned for many years.  Although we anticipate this act to pass, we must be patient because full House and Senate votes are still required.  Stay tuned. 

We still remain positive on banks and low volatility exchange traded funds...we will discuss low volatility funds further below.  We are also very pleased with our convertible bond investment.  Convertible bonds have just about matched the return of the S&P 500 over the past year with much less inherent risks. 

We exited our trade in medical device companies this week up 22% since January 31st. 

Lastly, we want to encourage everyone to be prepared for a possible drop in the stock market.  It is perfectly normal to have corrections and bear markets.  The key to success it how you prepare and react.  Rest assured that we are here to help you through any market conditions.

RAA Investment Philosophy

We wanted to take this opportunity to rehash the philosophy we utilize when managing our client's accounts.  First and foremost, we approach the process as if we are managing our own money while always putting your best interests first.  We know how hard you all have saved and how much dedication you have put into your financial plans.  We work hard to ensure that we are implementing prudent strategies that offer growth and income opportunities to match each and every client's stated goals and objectives.

Here is a quick rundown:

At RAA, we believe in the long-term benefits of a Core and Satellite approach. 

The Core of your portfolio is built with low cost investments likely to be held for the long term and designed to mirror the markets.  Much of the implementation is based on research we follow from Industry leaders like BlackRock, JP Morgan and State Street.  Further, we take an approach within a portion of the core of your portfolio that attempts to provide a large portion of the upside of the market with less downside exposure.  Of the world most storied investors, Benjamin Graham, taught us that the first principle of investing is to "Always Invest with a Margin of Safety".  We also believe that is critical.  We strive to do this through iShares Minimum Volatility funds.  Most accounts have some allocation to these funds.  We have highlighted one example, USMV, below.

The Satellite portion of your portfolio is more tactical and typically not designed to be held for the long term.  We look for sectors and other areas of the markets that may be dislocated or oversold...creating opportunities for those in a position to act swiftly.  Our recent high yield and energy trades would fit into this portion of the portfolio.

As the markets move up and down, we constantly review research, charts, news and other statistical data to find investments that we believe will provide superior results in our portfolios.

Below is an example of why we feel so strongly that low volatility ETFs serve such an important role in the core of our portfolios.  In the past year, USMV has provided 94% of the upside of the S&P 500 with 64% of the risk.  Over 3 years, those numbers are 109% and 76% respectively.  Over 5 years, USMV captured 94% of the upside of SPY...that is tough to beat! 

Please note below that Alpha is a measurement of excess return and Beta is a measure of risk.  Higher Alpha is better and lower Beta is better.  Take a look for yourself.

USMV, iShares Edge MSCI Minimum Volatility US, a core RAA holding

SPY, a proxy for the S&P 500

Financial Planning Tip of the Month

How much did you contribute to your employer sponsored retirement plan this year?  If you did not contribute the maximum amount of $18,000 ($24,000 if you are over 50) we bet you could afford to do a little more.  Consider increasing your contribution by at least 1% each year until you are able to hit the max.  It's benefits enrollment season so this is a perfect time to make the change.