INVESTOR NEWSLETTER Armbruster Capital Management, Inc. 3RD QUARTER 2014 The ACM Journal stylin’ What to do if the One of my least favorite things is Stock Market Corrects getting my hair cut. I think it stems from when I was a kid and I would Lately, volatility seems to have Selling to stop the pain may feel come out of the barber with my returned to the stock market. It good at the time, but in order to be bangs uneven, my cowlick sticking is impossible to tell if this is just successful at timing market peaks up, and looking like a cross between normal, short-term jitters over world and troughs, you not only have to The Beaver and Alfalfa. events, or if we are on the verge of get out of the market at the right a more significant downturn. There time, but you also have to get back Even now as an adult, I’m not are certainly those arguing that stocks in before it rebounds. There isn’t thrilled with the whole haircut are overdue for a fall, but I’m not much evidence that investors, or experience. These days, everyone sure I agree with those sentiments. investment advisors, have employed wants you to make an appointment. However, even if the stock market this strategy profitably over time. I don’t know when does take a turn I’m going to have in this issue for the worse, As stocks fall, it is likely that your time, and when I Stylin’ .................................... 1 there are strategies portfolio will need to be rebalanced, do, more important we employ to since severe market swings will Portfolio Review ................... 2 things almost ease the pain probably skew your portfolio away certainly come up. Firm News ............................. 4 somewhat. Below from its allocation targets. For So, I generally put Financial Planning ................ 5 is an excerpt of a example, a portfolio that targets 60% off my haircuts for a recent article we in stocks and 40% in bonds would very long time. Thus was the case wrote for the Rochester Business be roughly only 45% in stocks and recently, when my wife grew fed Journal that addresses what we do if 55% in bonds after a 40% decline up with my increasingly ragged and when stocks turn down. in stocks and a 5% rise in bonds, locks, and told me that she and my similar to what happened in 2008. kids were going to the salon, and First off, don’t panic. Selling at Clearly, this is a different, and more that she had made an appointment the bottom may cause damage that conservative risk profile than you for me as well. your portfolio will never be able to started with. recoup. It can be painful to watch I remember a conversation with your portfolio decline in value, It may seem that being more my colleague Bill from several particularly if you are relying on it conservative during periods of years ago, when he summed up to meet living expenses. However, market extremes is a good thing, but his expectations of the barber ask yourself what has changed as a really the opposite is true. When experience as such: he wants to sit result of the market’s decline. Are stocks trade at low valuations, that is down, get a brush cut, not have to people still going to work? Are the time to have a full allocation to talk to anyone, and leave. Such companies still trying to earn profits? stocks, as future returns often prove has been my experience in mostly Is the economy still functioning? If lucrative. Indeed, Warren Buffett smaller and inexpensive barber so, there probably is no reason to aggressively invested in financial shops, but this is not what I found expect Armageddon. During times company stocks back in 2008. He at the salon. Indeed, I had to talk of market extremes it may seem like invested $5 billion in Goldman with everyone. The entire staff stocks are never going to rebound, Sachs shortly after the collapse but in over 200 years of history, they of Lehman Brothers, when the continued on page 6 always have. continued on page 2 INVESTOR NEWSLETTER Armbruster Capital Management, Inc. 3RD QUARTER 2014 What to do if the Stock Market Corrects continued from page 1 there are usually plenty of losses the loss for tax purposes, and then outlook for financial companies was in your portfolio, if only on paper. immediately reinvest the proceeds in at its worst. The Wall Street Journal “Realized” capital losses, meaning another large-cap stock fund. This estimated last year that Buffett likely losses on investments that have been would allow you to realize the tax earned profits of more than $10 billion sold in the current tax year, can result benefits of the loss, but also remain from the investments he made during in a tax benefit. Capital losses may fully invested. The one caveat is that the depths of the stock market crash be used to offset capital gains in the you can’t sell an investment for a in 2008. current year, may be used to offset a loss and then repurchase it within 30 modest amount of ordinary income days, or the loss will be disqualified So, while it may seem counterintuitive in the current year, or may be carried by the IRS. But, you could buy to buy stocks when the world appears forward indefinitely to offset capital another investment with very similar on the verge of collapse, that is gains and income in future years. So, characteristics, allowing you to keep exactly what you should do in order aggressively realizing losses during the integrity of your portfolio intact, to maximize long-term earnings. In a bear market could offset capital but still optimizing your tax situation. the asset allocation example above, gains for years to come, thus making your stock portfolio would sink from your portfolio very tax efficient. This While stock market downturns can be a 60% target to an allocation of 45%. helps ensure you keep as much of downright scary, they also represent To get back to the target allocation, your return as possible, rather than significant opportunity. Rational steps you would need to sell bonds, which surrendering gains to Uncle Sam. to improve your portfolio when stock in this example have outperformed, market valuations are low allow you and reinvest the proceeds in stocks, Just because we sell stocks for tax not only to rebalance without paying which have underperformed and are purposes, it doesn’t mean we have taxes, but also may help “bank” likely relatively cheap. You would to be out of the market. In fact, it is enough losses that you won’t have to buy stocks “on sale”, and set your best to marry a tax-loss harvesting pay capital gains taxes for years into portfolio up for significant gains when program with the rebalancing strategy the future. With intelligent decisions, the subsequent rebound arrives. discussed above. For example, a little patience, and a focus on the long assume you have a large-cap stock term, you could end up turning a bad Next, we will be tax-loss harvesting. mutual fund that declines in value by situation into a profitable opportunity When the stock market really falls, 20%. You could sell this fund, realize for the future. Portfolio Review It has generally been a good run for year period. As stocks continued to the biggest damper on smaller stocks. stocks since early 2009, but the third climb this year, investors became Smaller companies have a harder quarter of 2014 did not continue nervous that the cycle may be getting time getting financing, which can be that trend. The stock market was up long in the tooth. Since small-cap particularly onerous when interest marginally, as measured by the S&P stocks tend not to weather bear rates are rising, which can weigh on 500, but that masks the weakness in market storms as well as large-cap future growth prospects. every other segment of the global stocks, investors have pulled out of stock market. smaller stocks as a way to position The bright side is that as small-cap their portfolios more conservatively. stocks have fallen, their valuations Mid-cap and small-cap stocks were Geopolitical concerns in Europe and have become more attractive, down fairly significantly in the third the Middle East have not helped build particularly for small-cap value quarter, and small-cap stocks are confidence, but fears that the Fed will stocks. While the S&P 500 trades even showing losses for the full- raise interest rates have likely been at a price/earnings ratio of around continued on page 3 2 INVESTOR NEWSLETTER Armbruster Capital Management, Inc. 3RD QUARTER 2014 Portfolio Review continued from page 2 diversification benefits they bring. reasonable valuations, especially 17 times its past twelve months of We’ve generally been underweight in the emerging markets, but fear earnings, small-cap value stocks trade in REITs, but will be watching for may trump greed for some time as at a P/E ratio of 16. Valuation is not opportunities to get back in. investors focus on the possibility of a great market timing tool, and there escalating tensions. could be more volatility for smaller International stocks lost almost as stocks, particularly if the overall much as small-cap stock over the While returns for alternative market starts to turn down. However, past three months. However, all of investments are still preliminary the more reasonable valuations auger that is attributable to strength in the (not all data was available as of this well for long-run returns.