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Investing

Fundamental Analysis and Technical Analysis

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Fundamental and Technical Analysis

At Sharkey, Howes & Javer our investment department uses a wide range of tools when constructing and rebalancing client portfolios. With so much data and analytic tools available today, it is easy to be overwhelmed and overthink things as an investor. That is why our investment department uses a balanced approach when making investment decisions. In this article, we will define a few basic tools which help our firm make thoughtful decisions when investing. 

Fundamental vs Technical Analysis

These are the two perspectives investors choose to consider when evaluating an investment decision. Fundamental analysis consists of looking at the value of a given company and determining if it’s overvalued, undervalued, or a fair price. The fundamental lens looks at the financial well-being of a company by examining items such as assets, liabilities, expenses, earnings, and management of the company. Technical analysis assumes most of the fundamental metrics are already accounted for in the stock’s current price. Therefore, the technical lens will try to identify trends or patterns to predict what the stock will do next.

Fundamental Analysis – Price to Earnings

One of the most popular fundamental analysis metrics is the price to earnings ratio. This is simply evaluating the price of a company’s stock compared to the earnings. This can be a useful measure in determining which company is a better buy in the same industry. Inherently, investors cannot rely on past earnings to predict the future and earnings guidance given by the company can be over or understated due to multiple unknown variables. That is why we look at many fundamental metrics. The takeaway is P/E ratios are used to help investors determine if a company is overvalued or undervalued when comparing the stock price to the company’s earnings and then comparing that ratio to other similar companies. In some cases, a high P/E may suggest an overvalued company and a low P/E may suggest an undervalued company. 

Technical Analysis – Moving Averages

Moving averages is one of the most common technical analysis tools. Moving averages takes the historical average of the price for a given period of time. For example, a 200-day moving average will average the last 200 days of the stock’s price and create a trend line. When the price of a stock falls below the 200-day moving average, it can be interpreted as a bearish or negative sign. If the stock’s price is below the 200-day moving average and breaks through above it, this can be a bullish or positive sign for the stock price. Moving averages can help determine when a trend may be breaking or a new trend is forming. The most common timeframes are the 20 day, 50 day, and 200 day moving averages. 

Conclusion

Fundamental and technical analysis are often used together to help formulate an opinion and make a final decision when investing. There are numerous metrics when evaluating stocks and aiming to forecast the markets. At Sharkey, Howes & Javer our investment department uses a multitude of both fundamental and technical analysis to make investment decisions for clients. If you have questions about investing or want a free consultation with one of our CERTIFIED FINANCIAL PLANNERS, do not hesitate to reach out.

Does a Roth IRA Conversion Make Sense for you in 2020?

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The Roth conversion has been a tool available to financial professionals for a long time to help clients minimize future tax liability. Conversions are helpful in specific instances, but many times are not applicable to every client situation. What about the culmination of events in 2020 has made the Roth conversion more relevant than years past?

What is a Roth Conversion?

Most employees will contribute to a tax-deferred retirement plan while they are working. This comes in many forms: a traditional IRA, a 401(k), a 403(b), etc. These retirement plans provide you with a tax deduction in the year a contribution is made. The funds then grow tax-deferred until it becomes time to make withdrawals. The IRS requires these account types to withdraw a Required Minimum Distribution at age 72 (changed in 2020 from 70 ½). This means you will pay taxes on the original contributions and the investment growth that has accrued over the years.

A Roth conversion is the transferring of retirement funds from a tax-deferred IRA account into a Roth IRA. Roth IRAs differ from the previous listed account types because taxes are paid in the year in that the contribution or conversion takes place. On top of that, the growth on the contributions/conversions is exempt from taxes and there are no mandatory withdrawals during retirement. 

What is the purpose of a Roth Conversion?

There are a few reasons why Roth conversions are a popular financial planning tool. One of the most common reasonings for converting tax-deferred funds to a Roth is to create a tax-free bucket for withdrawals during retirement. Having both tax-deferred and tax-free assets during retirement provides more flexibility when it comes to tax planning and client portfolio distributions for spending.  Roth conversions can also be appealing if you expect to be in a higher marginal tax bracket in retirement than the year you make the conversion. This is rare, but plausible especially in unique circumstances like this year. By strategizing, you may be able to use this tool to make a series of smaller conversions during years with lower tax implications to minimize taxes paid over the long run. 

If you have time on your side, compounding returns on the conversions could benefit you over a long period of investing. On traditional IRA assets, investors pay taxes on investment gains when they withdraw money but with Roth assets, the gains grow tax-free. It is also a tool for investors who would like to leave tax-free assets to their heirs. If that is the case, a Roth conversion may make sense for your situation. 

Why is this a relevant topic in 2020?

This year has been filled with trials and tribulations and we still have half a year ahead of us. From a global pandemic to world-wide protests and heightened discussions regarding race discrimination, the world has seen a great deal of challenges and change in 6 short months. What about this year makes the conversation regarding Roth conversions more relevant than years past? First off, many Americans are going to see less income this year in comparison to prior years. This could be due to losing a job or seeing less customers during the government stay-in-place order. This could also be due to The Cares Act allowing those who are required to take Required Minimum Distributions to skip it for the year 2020, creating less taxable income this year. We are also living during a time of historically low-income tax brackets. With the increase in government spending, unemployment benefits and use of federal resources, we will most likely see increased tax rates in our future. If that is the case, it may make sense to pay taxes this year before they are raised. 

Our team at Sharkey, Howes & Javer is here to help you explore all your financial options. Contact Sharkey, Howes & Javer today to speak with a CERTIFIED FINANCIAL PLANNER™ to see if a Roth conversion makes sense for you in 2020.

Retirement Checklist

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Many of us spend our entire working life preparing for retirement. Whether it’s contributing to retirement accounts, paying down mortgages and debt, acquiring pension years, or paying into Social Security.

As retirement approaches, what steps can you take for a smooth transition?

Take Inventory of your Assets

While you are in the working world, it can be difficult to keep track of all your investments, savings vehicles and bills that you have acquired over time. As you prepare for retirement, it is important to take the time and track down all bank accounts, retirement and brokerage accounts, along with all outstanding debts. Once you have taken a full inventory, create a safe place to store all username and passwords. Potentially share this location with a trusted family member or friend in case of a future emergency. Next, consider consolidating as much as possible. Reduce the number of bank accounts, create a plan for your outstanding 401(k) or 403(b) with work, and minimize debt. This will create a simpler and streamlined transition into retirement.

 

Prepare Finances

Build a Budget

Do you know how much you are spending on a monthly basis? As you leave the workforce, it is extremely important to have a handle on expenses. Will you spend more on travel during retirement? Will the mortgage be paid off? Creating a monthly budget for retirement will allow you to monitor spending and reduce the risk of spending through your savings.

Social Security

Identify Income Sources

What is your plan for Social Security? Do you have a pension? Do you have annuities? Do you plan on working part time? By determining income sources that will be available, you and your advisor will be able to create a plan for your retirement savings. Between your monthly budget and income sources, you are then able to determine how much you may need each month from your retirement assets in order to make ends meet.

Practice Retirement

This is the fun part! Retirement is a major life transition. You now have plenty of free time which was once filled with commutes, hours at work and mingling with colleagues. So, as you prepare for retirement, start practicing for it! Set lunch dates with old friends, try out different hobbies, start learning how to enjoy free time again and shaping the retirement that you have worked so hard for.

Know Your Health Insurance Plan

It is important to have a health insurance plan in place before retirement. Can you continue a health care plan through a past employer? Have you signed up for Medicare? Which supplements may be beneficial to your situation? If you are retiring before age 65, how do you plan to cover health care insurance before Medicare kicks in? These are all important questions to answer as you create your retirement plan.

Review Estate Plans

Retirement is a great time to evaluate estate plans and make sure they are in line with your current wishes. Provide copies to a trusted family member and/or your financial advisor so that others have access to them, just in case. Also, check in on your investment account and outstanding life insurance policies to make sure beneficiaries are up to date.

Real Estate Strategy

Do you plan to stay in your home long-term? Would a retirement community be more conducive to the lifestyle you would like to live? Do you need to refinance or acquire a Home Equity Line of Credit (HELOC)? Refinancing and nailing down a HELOC are easier to do while you still have an income, so this is a great time to talk about your options with your financial advisor. 

Establish Retirement Investment Allocation

The transition into retirement comes with a great deal of changes. One of these changes is moving from the accumulation phase or saving for retirement to the distribution phase or pulling from your retirement savings. This is a huge shift in mindset. During this time, your risk tolerance may not change, but you may see an increased need for cash or liquidity. That is why it is important to talk with your financial advisor and develop a transition plan for your investments.

Real Estate

Get Excited!

Take a deep breath! You are almost there! Many people work hard their whole life to make it to retirement. Congratulations!

Our team at Sharkey, Howes & Javer is here to help you every step of the way on the road to retirement and beyond. Contact Sharkey, Howes & Javer today to speak with a CERTIFIED FINANCIAL PLANNER™ about your own retirement journey.

ETFs vs Mutual Funds | Why one over the other?

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History of Funds

Humans have been investing for thousands of years, but the idea of “diversification” and pooling resources to spread risk is relatively new. The first modern day mutual fund in the U.S. was created in the 1920s. It was a way for investors to diversify their investment holdings with little capital. However, it wasn’t until the 1950s and 1960s that the mutual fund industry started to take off.

Prior to 1971, all mutual funds were “active”, meaning the investment manager could choose whatever stocks and bonds he or she saw fit. In 1971, Wells Fargo established the first index fund, which was built to replicate a certain index, not outperform it. It was a revolutionary concept that John Bogle mastered to build the largest mutual fund company of all time, Vanguard.

investment chart review

As indexing gained popularity, the first Exchange Traded Fund (ETF) was created in the late 1980s. The first ETFs were low-cost index funds that gave investors the ability to access cheap market exposure. The ETF industry has seen exponential growth since the Great Financial Crisis in 2008. Currently, there are over 5,000 ETFs that investors can trade, compared to roughly 1,000 ETFs in 2009. One of the most well-known ETFs, the S&P 500 Trust ETF (SPY), was created in 1993 and now has over $260 billion in assets.

Differences between ETFs and Mutual Funds

Why would someone invest in an ETF vs a mutual fund or vice versa? While there are many similarities between the two investment vehicles, there are a few key differences.

One of the key differences is how they trade. ETFs trade intra-day, just like a stock. This means that if you put in an order to buy an ETF, you have possession of the ETF as soon as the trade executes. A mutual fund trade will execute at the end of the day. At the end of the trading day, all the underlying holdings are priced, which then allows the mutual fund to be accurately priced. Therefore, you can only buy or sell a mutual fund at the end of the day, once the price is known. 

The vast majority of mutual funds are actively managed, meaning there is a manager making buy and sell decisions. Their goal is to purchase investments that may outperform the index in that asset class. Active management can be beneficial in inefficient markets, like bonds and international stocks, because a manager can identify opportunities and weaknesses. Most ETFs are passive index funds. Because mutual funds are more active, they typically have higher internal expense ratios than ETFs. ETFs are generally more tax efficient as well. If an ETF is an index fund, the turnover of the underlying funds is usually less than an actively managed mutual fund. This can cause ETFs to generate less capital gains distributions compared to a mutual fund.

At Sharkey, Howes, & Javer, we use a combination of mutual funds and ETFs. In certain markets, such as international stocks and bonds, we believe an active mutual fund manager can at times add value above and beyond the benchmark index. In more efficient markets like U.S. large companies, we think investing in ETFs provides a lower cost of entry to the stock market. Learn more about mutual funds and ETFs and how to implement them in your portfolio by getting in touch with us today for a complimentary consultation with a CERTIFIED FINANCIAL PLANNER™.  

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Q&A with Jacci Geiger, Realtor with Kentwood Cherry Creek

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Denver Real Estate Market Update

Q&A with Jacci Geiger, Realtor with Kentwood Cherry Creek

The influx of people moving to Denver over the last 10 years coupled with the diverse, local economy has created one of the most robust housing markets in the nation. Today, we interview one of the top real estate agents in the Denver area, Jacci Geiger. She will provide insight into Denver’s housing market during a time of historically low interest rates and uncertainties surrounding COVID-19.

Question: What is your outlook for the Denver Real Estate Market? 

Answer: Great question. To address it pre COVID-19, we started the season with a bang. As agents, we noticed the market “turned on” much earlier in the year than normal. We like to think our market is controlled by the weather and the school calendar, but if you recall, we had one of the wettest Februarys on record, and from January 1, 2020 until the present we have closed 13,619 houses. That is a fantastic first quarter!  Depending on the price range, we are seeing the market start to level off, which is healthy. I have written many contracts in the mid $500,000’s that are still seeing multiple offers. The luxury market, $1 million and above, is seeing more of a balanced market with less bidding competition.

Denver
Denver Real Estate

Question: What impact will Covid-19 have on the real estate market? Will it change the way sellers, buyers and agents interact going forward?

Answer: This is a tricky question at the moment. We have to adjust our way of doing business day-by-day, just like everyone else. Currently, real estate does fall under the critical category. People do need to move and that involves many other industries, such as inspectors, appraisers, movers, contractors, lenders, and title companies. I have been following many of the leading economists lately and they are all echoing the same sentiment: We came into this crisis with a very strong real estate market, the shorter the crisis, which they believe it will be, the more likely we will have a very robust 3rd quarter. This virus spread fast and made a big impact but may be gone before an actual financial recession, like in 2008. This was not caused by subprime loans, this is a pandemic. Yes, there will be some fall out, but no one at this moment has lost 30% of their home value. Home prices are holding strong. We are still in an active market here in Colorado.  

In regard to how doing business will change, like anything we are adjusting. I had three closings last week where the sellers were able to sign their documents by e-signature or at the windows of their own cars. I am hearing lenders are working towards remote signatures, as well. The title companies are asking agents not to attend closings and are only allowing two or three people in a room (of course with Purell on the table, a new pen and sitting 6 feet away from each other). Photographers are asking that we do not meet them at the property, but to leave all lights on because they will not touch the light switches. Many of these changes are good. It is about time we have all documents available online and signed via the internet.  It saves a lot of paper and time.  

As far as physical showings, we have seen a slowdown. A lot of them are now “Virtual Showings”. Vacant homes are much easier and more comfortable to show.  At my office, Kentwood Cherry Creek, we have put kits in each home with hand sanitizer, booties and have asked people not to touch doorknobs, handles, etc. There are now addendums we are attaching to contracts which allows more flexibility because dates might need to be adjusted based on the current circumstances. It is a new world and we are all adjusting. I do believe some of the changes will stick after this crisis is over and for good reason.

Question: In the greater Denver area, are there any neighborhoods or areas quickly developing?

Answer: Yes, as always there are the “up and coming” areas.  The first one is actually my neighborhood, Holly Hills. This is located off of Yale and I-25 and has homes built in the 1960’s, Cherry Creek schools, great lots, plenty of trees and the accessibility is amazing. I’ll run down a few more that readers can look into. A main factor is an easy commute to downtown or DTC, as those areas are getting too expensive to live in for some. People also look for walkability to restaurants, bars, retail, work out facilities, parks, etc. Some neighborhoods that are on the up and up are Villa Park, Elyria-Swansea, West Barnum, Sun Valley, River North, Globeville, East Colfax, Hampden, Walnut hills, Ruby Hill and Marlee.

Denver Market
Downtown Denver

Question: Is Denver a buyer’s or sellers’ market right now? In addition, what is your outlook for interest rates going forward?

Answer: Experts say to figure out if we are in a buyer’s or seller’s market, it is based on a 6 month inventory. In other words, if no more homes come on the market, how long would it take to sell the inventory? As of this minute there are 8,700 homes, single family, condos, etc. on the market and in the last 3 months we’ve sold over 13,000 homes and that was dead of winter! Therefore, it is likely we would have the 8,700 homes sold in no time, which makes it very much a seller’s market. 

Regarding interest rates, they are incredible right now. They have been all over the board, but that is starting to calm down. The CARES act was just passed and that should help that effort. I have closed several loans in the last month in the 3.25%-3.75%. These are great rates and they allow people much more buying power.

Jacci’s Final Thoughts:

The bottom line is, we came into this crisis with a very strong market and we will come out even stronger. I mean this metaphorically and financially. People are realizing how much their home means to them. Of course, this pandemic has created uncertainty and you should not put yourself in a risky position. However, if you are secure in your job, it is a great time to buy with great rates, less buyers to compete with and sellers that are ready to move. We are also realizing what matters to us most and are learning how to adjust our sails in a different direction with the new winds. Maybe this will be our finest hour. I know everyone in the real estate industry that I have worked with has been professional, careful and extremely optimistic that this too shall pass.

Market Insights & Commentary – March 2020

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Market Insights & Commentary – March 2020

The last three months have been a roller coaster ride of emotions for investors. At the beginning of the year, you could hear the ticking of the coaster’s wheels being pushed upward by positive GDP numbers, unemployment at a 50-year low and strong end-of-year earnings. Most market outlooks delayed a chance of recession to 2021 or beyond. Nothing could impede the slow, steady growth the economy was seeing—until COVID-19.

Wuhan, China reported its first case of Coronavirus in December of 2019. The markets seemed to stay stable and even climb to new heights as whispers of Coronavirus were heard around the world and cases started to spread to new countries. The roller coaster then hit its peak on February 19th and the downward track was steeper than expected. This is where rational thoughts began to be overpowered by fear and uncertainty.

In sharp market corrections, it’s difficult not to get weighed down by the great uncertainties during this unprecedented time. Many people’s daily commutes and hours spent with coworkers have been replaced with eerie streets and stressful grocery store visits. The endless news cycle about the Coronavirus makes it easy to lose sight of the “big picture”. However, investing is and always has been about your portfolio needs for the long-term. We know it’s difficult to maintain a long-term perspective during times like these, but we must remember that this too shall pass, and brighter times are ahead.

Our goal is to highlight some key questions we have been facing and re-center focus during this time of heightened emotions.

coronavirus investment chart
stock market crash chart

What Does This Mean for You?

Although sometimes it may feel like it, this market pullback will not last forever. The term recession has been tossed around a lot lately. By definition, a recession entails two consecutive quarters of negative Gross Domestic Product (GDP). We likely won’t know if this period of time will be classified as a recession until October of this year—and by that point we may have seen the worst of it. That is because on average, recessions span 11 months. We will continue to see volatility in the markets until the Coronavirus curve begins to flatten and the markets begin to regain confidence. We will not understand the true economic impact of COVID-19 until we know the severity and length of the outbreak.

Timing the markets is seemingly impossible but as history shows, once the markets rebound from the “bottom”, we can witness dramatic returns. The chart below illustrates the length and severity of several bear markets, followed by their 1, 3 and 5-year market returns.

SDJ investment chart

Source: A Wealth of Common Sense

That is why it is important to keep the focus on your long-term investment goals and try not to let emotions take control.

hundred dollar bill corona mask

What is SH&J Doing?

Heading into 2020, there were two investing themes: we were entering into the eleventh year of the longest running bull market and the U.S. has an upcoming election. Knowing election years tend to experience increased volatility, our Investment Committee worked to rebalance portfolios to be more defensive. All portfolios are unique and constructed to fit each client’s specific circumstances, however, one example of a defensive strategy that we have utilized is minimizing exposure to high-yield bonds, which tend to move like stocks in time of volatility. In the last few weeks, as uncertainty increased, another strategy has included decreasing exposure to small and mid-sized companies and international equities in portfolios when appropriate. In times of prolonged market drawdowns, these asset classes are usually hit the hardest and slower to recover. We will be looking for opportunities with the cash we raised as markets begin to stabilize.

What Should You be Doing?

The welfare, health and safety of our clients, employees and families are of the utmost importance to us here at SH&J. Please, take this time to embrace social distancing and prioritize you and your family’s health. We want to say a special thanks to our clients and their family members who are medical professionals, store clerks, and all those providing essential care to others in this time of need. Know that we are continually monitoring client portfolios so that you can focus on you and your family’s health and well-being.

Rest assured, our team is here for you during these uncertain times. We will be conducting business as usual, monitoring the markets and your portfolios closely. Our goal is to provide continued and uninterrupted service to our clients, while maintaining the safety and well-being of our clients, employees and families. We cannot wait to meet with you face-to-face again soon.

Market Insights & Commentary – December 2019

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Market Insights & Commentary – December 2019

2019 was an anomaly because almost all asset classes delivered returns above their 10-year averages. Historically, stocks perform better when the economy is expanding and bonds perform better when the economy is contracting. Despite the lack of drama in the U.S. equity markets, behind the scenes many factors shifted the trajectory of the global economy.

Global Economy:

The Trade War, Brexit, and global monetary policy ruled the headlines in 2019. The tensions between China and the U.S. caused a slowdown in the Chinese economy and a great deal of uncertainty in the U.S. stock market over the last 18 months. As of December 13th, President Trump has agreed to the first phase of a trade deal with China, which will roll back some existing tariffs. The deal is only the first phase, but it could help ease tensions and alleviate China’s struggling economy.
Britain has officially voted to leave the European Union. Brexit has been the center of many debates since the original referendum in 2016, but has now reached an answer. Britain must now navigate leaving the E.U., while also balancing a fragile economy.
Interest rates have dropped below zero in many European countries, as well as Japan, in efforts to encourage people to spend their hard-earned money and support their individual economies. Unfortunately, this strategy hasn’t been able to push the economies out of the later stage of the cycle and the E.U. continues to slow.

The U.S. Economy:

You wouldn’t know it by looking at the stock market, but the U.S. economy is cooling off. The economy is near the end of the business cycle, but it is still being supported by consumer spending and low unemployment rates. Corporate earnings have continued to grow, but at a slower rate. The Federal Reserve joined the international trend of lowering interest rates throughout 2019, after raising rates four times in 2018. Lowering rates boosted bond prices and created an environment where U.S. bonds and stocks were both positive for the year. The interest rate movements also created an inverted yield curve. An inverted yield curve happens when shorter term rates are higher than longer term rates. For example, the yield on a 10-year Treasury dropped below the yield of a 3-month Treasury. Monitoring the yield curve is important because it can be a sign of a weakening economy and a future recession. The yield curve has since rebounded and is no longer inverted.

What to Expect for 2020:

The markets always come with their fair share of unknowns, but investors can expect a few changes in 2020. The Federal Reserve will most likely be less active than what we have seen in the last 2 years. After 4 rate hikes in 2018 and 3 rate cuts in 2019, the Fed will probably take a back seat in 2020. The U.S. is currently in the slowdown phase of the business cycle which tends to be when we see increased volatility in the stock market. The Presidential Election of 2020 will only add to the expected volatility. On a global scale, international stocks are priced below historical averages, but will be impacted by Brexit, the Trade War and the much needed reacceleration of economic growth (or lack thereof). To conclude, 2019 was an anomaly both for stocks and bonds. Recession fears for 2020 have faded, tensions with China have eased and The Federal Reserve may have an uneventful year. Regardless of what’s happened and what’s yet to come, we believe portfolio diversification, understanding your risk tolerance, and talking to your financial advisor should be on your list of things to do in the New Year.

Value vs Growth Investing

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Value vs Growth

When it comes to investing in stocks, there are many different approaches. Two popular styles are value and growth investing. While both styles seek to take advantage of capital appreciation over time, they go about finding which stocks to buy in a very different manner.

There are many methods to determine the fair price of a particular stock. When you buy a stock, you are buying a share of the future earnings of that particular company. One metric that is often used to analyze stocks is called the Price-to-Earnings (P/E) ratio. This ratio tells us how much a shareholder is willing to pay per dollar or earnings for a company. A higher PE ratio means a more expensive stock, and a lower PE ratio signals a cheaper stock.

Growth stocks typically have higher PE ratios than their peers. The reason is they have exhibited higher-than-average earnings growth, and are expected to continue on this high growth trend. Growth investors believe these stocks have higher earnings potential, and are willing to pay more for them. Growth stocks are more volatile than the broader market, meaning they are more sensitive to market shocks.

Value stocks typically have lower PE ratios than their peers. Value investors seek stocks that have experienced poor price performance, but still have strong fundamentals. The goal of value investing is to buy stocks cheaper than the broader market, and experience capital appreciation once the market realizes the fair value of the stock is higher than when it was originally purchased. Value stocks are typically less volatile than the broad market.

Which is Better?

Whether you are a value investor or growth investor, you can always find a timeframe where your particular strategy is advantageous. Since the Great Financial Crisis in 2008 and 2009, however, growth has been king. In the 10 years prior to September 2019, the Russell 1000 Growth index gained 14.72% per year, compared to 11.26% per year for the Russell 1000 Value index. The reason for the outperformance of growth has to do with being in the longest economic expansion in U.S. history, as well as one of the longest bull markets. Value investing tends to outperform when the economy starts to contract and enter into a recession.

At Sharkey, Howes & Javer we implement both styles of stock investing. If you want to learn more about these types of equity investing, please get in touch with us today for a complimentary consultation with a CERTIFIED FINANCIAL PLANNER™.

ESG Investing 101

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What is ESG Investing

Many people think that ESG investing is simply investing in companies that are more environmentally friendly than a typical company. ESG actually represents more than just sustainable environmental factors. ESG is short for Environmental, Social, and Governance. Companies are assigned scores based on how well they implement policies that excel in these three areas. 

The environmental factor is straightforward. A company with a high environmental rating will display sustainability practices as to not harm the environment, as well as being proactive on issues such as climate change. A company that scores well in the Social factor would exhibit diversity throughout the company, as well as be outspoken on social issues such as human rights and animal welfare. Corporate governance is probably the least well-known factor of the three. Corporate governance reflects how a company is structured. A company that scores well on this factor would exemplify responsible executive compensation and/or above average employee compensation.

Socially Responsible Investing; How do they Differ?

Many people often think ESG and SRI investing are synonymous, but there are some key differences between the two investing styles. First, ESG is a scoring system. Companies are graded on how well they embody the three factors that were discussed in the prior paragraph. SRI uses screens to filter out companies that exhibit certain qualities. For example, if you wanted to own a fund that didn’t own any companies that relied on fossil fuels, this would be an SRI fund. SRI funds can also screen-in companies that engage in a variety of ESG and SRI factors, such as environmental sustainability.,

 How to Invest in an ESG Portfolio

According to the 2018 Report on U.S. Sustainable, Responsible and Impact Investing Trends, there was over $12 trillion invested in SRI and ESG strategies in the U.S. alone. This number is only expected to grow over the next decade. The easiest way to implement an ESG portfolio is by using mutual funds and ETFs. Mutual funds that are dedicated to ESG investing have an ESG mandate, meaning they can only select companies that score highly on the ESG scale. These ESG mutual funds typically have higher expense ratios than non-ESG funds due to the extensive screening process. ETFs are a more cost-effective way to invest, as they track various indices. There are now over 1,000 unique ESG indices. 

Sharkey, Howes, Javer has ESG portfolios available to clients. If you would like to learn more about ESG investing and how you can implement a socially-conscious portfolio, please contact us or call 303-639-5100

Market Insights & Commentary

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The summer months are a historically dull time in the stock markets. This is a time when many of the powerful fund managers and traders take their vacations and there isn’t a whole lot of activity going on. The summer of 2019 has been different, however, as there have been a multitude of headlines that have moved the markets in both directions.

The topic that has ruled the headlines this summer has been the continuing trade talks with China. All year long there has been constant back and forth between President Trump and President Xi threatening each other’s economies with tariffs. This uncertainty is putting a strain on the global supply chain, causing stock market investors to be weary. The U.S. and China are still in discussions on what a trade deal could look like, but until that comes to fruition expect more ups and downs in global stock markets.

International stocks saw a nice rebound the first 5 months of the year, as the EAFE index (tracks large company stocks in Europe, Australia, Asia, and the Far East) was closely tracking the performance of U.S. markets. There has been a divergence over the past 3 months, however, mainly due to the bleak economic data coming out of the European Union. Europe may already be in a minor recession.

All the chatter surrounding tariffs and a global economic slowdown has seen investors flee for safety this past summer. When investors get spooked by the stock markets, they put their money in long-dated bonds. This demand for longer maturity bonds drives bond prices up, thus lowering the yield. When shorter term bonds are yielding more than longer term bonds, it’s called a yield curve inversion. This inversion has historically been a recessionary signal.

So where do we go from here? When you peel back all of the headlines surrounding the stock market and look at the fundamentals of the U.S. economy, there seems to be no sign of a recession in the near term for the U.S. 75% of S&P 500 companies beat their Q2 earnings estimates, unemployment remains around 4%, and the U.S. Consumer Confidence index remains high. A recession may take up to two years to manifest after an inversion, and on average the stock market advances another 13% before the recession. Going into an election year, these next 3 months are sure to be another bumpy ride in the stock market. As long as investors know how much risk they are taking in their portfolios, no outcome should come as a surprise. Contact Sharkey, Howes & Javer