Volatility Returns in Historic Fashion

By the end of 1932, official unemployment had reached 25.2% and Real Gross Domestic Product (GDP), an indication of a country’s economic output to be distributed to citizens, had fallen by -12.9%. By comparison, the highest official unemployment rate during the 2008-2009 Financial Crisis was 9.9% and the loss to Real GDP was a fraction of that in 1932 at -0.29% in 2008 and -2.78% in 2009. On March 3, 1933, during his inaugural speech, President Franklin D. Roosevelt stated, “So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” It is with an understanding of that nameless, unreasoning, and potentially unjustified fear, that Watch Guard Capital (WGC) constructed a modern investing philosophy and developed hedged Dynamic Portfolios with Non-Emotional Quantitative Tactical Shift Signals (WGC Investment Primer, pp 13-14). This investing philosophy adopts the position that a wise strategy mitigates the possibility of investor paralysis by developing and employing contingency plans that allows for the acquisition of additional assets after known market selloffs. In doing so, volatility was incorporated into investors’ strategies to allow market “retreats” to become potential wealth “advances.”

The CBOE Volatility Index (VIX) is known as the “Fear Index” and gauges market uncertainty and the willingness of investors to purchase insurance against investments to reduce risk. The VIX averaged an annual volatility or “fear” level of 19.68 between 1990 and 2016. In 2017, the stock market was abnormally calm and the VIX had an average annual trading level of 11.09; not necessarily a positive condition for strategies that were built to adapt to increased volatility. In doing so, a new “no fear” risk environment was introduced and WGC models evolved accordingly. Specifically, a small exposure of an investment that increases in value if investor fear remains subdued was incorporated into models. The portfolio risk vs. return characteristics improved after modeling all the historic movements between 1990 to 2016 (6,565 observable daily movements). There were only ten days during the 6,565-day period that the VIX or fear jumped more than 40% in a single day with the highest recorded daily movement occurring on Tuesday, February 27, 2007, when it increased 64.22%. On Monday, February 5, 2018, the VIX or “Fear Index” set a new record when it increased 115.60% in a single day. WGC is constantly monitoring portfolio performance, has removed the low-VIX hedge, and welcomes a return to normal volatility conditions as we remind investors that with a proper plan, "the only thing we have to fear is fear itself.”

SEC Shuts Down $1.2 Billion “Hard Money” Ponzi Scheme

The Securities and Exchange Commission (SEC) announced charges and an asset freeze against a $1.2 billion Ponzi scheme operated by Robert H. Shapiro, owner of Woodbridge Group of Companies LLC, on December 21st, 2017. Woodbridge represented itself as a company that made 11-15% short-term “hard money” loans to commercial real estate owners and redistributed 5-10% of the interest to investors. Woodbridge claimed that “clients keep coming back to us because time and experience have proven results. Over 90% national renewal rate!” Turns out a majority of the commercial real estate companies Woodbridge was making loans to were shell companies owned by Shapiro with no revenue and no intent of paying back the loans. Interest paid to existing investors came only from deposits made by new investors. Woodbridge “consultants” were unregistered agents and collected $64.5 million in commissions to pitch unregistered investments as “low risk” and “conservative” to thousands of retirees. The Ponzi scheme crashed when Woodbridge failed to acquire new clients, stopped paying existing investors, and filed for Chapter 11 bankruptcy in December. What could the 8,400 investors caught in this Ponzi scheme have done differently to protect themselves? In my recently published book, “The Most Important Finance Book Ever Drawn,” I provide a list of questions to ask any Financial Advisor. Here are a few questions from that list that may have helped investors realize they were dealing with Brokers selling products and not Investment Advisors.

This is an actual image from "Our Team" section of Woodbridge website

1. Do you consider yourself a fiduciary? If not, why?

2. Are you willing to act as a fiduciary solely on my behalf?

3. Are you willing to disclose any conflicts of interest?

4. How are you compensated?

5. Will you earn a higher fee or compensation if I invest in certain products?

6. Will you provide a list of the fees and commissions you receive either directly from me or from other sources in writing?

Watch Guard Capital believes that a strong investment plan has robust safeguards. A knowledgable independent Investment Advisor to translate your needs into a financial plan, a non-affiliated and nationally recognized custodian to house your investments, and unaffiliated investments are all key components to protect your wealth. Avoiding illiquid private equities, Business Development Companies (BDC), non-publicly traded Real Estate Investment Trusts (REIT), and unregistered investment pools are just as important as researching your advisor’s background through sources such as brokercheck.finra.org and adviserinfo.sec.gov. Still need help? Contact Watch Guard Capital today to discuss a discrete and independent review of your advisor and investment safeguards.

Slick Mick Signals 2008 Financial Crisis Officially Forgotten

In 2008, the Financial Sector brought the country to its knees with insufficient regulation, over-leveraged balance sheets, and predatory lending practices developed to take advantaged of Americans and our non-existent financial education system. The leverage imploded, billion-dollar firms were acquired or disappeared in the middle of the night, and Americans were charged with picking up the pieces and the tab. The country healed and out of the rubble grew the Consumer Financial Protection Bureau (CFPB) to ensure it never happened again. The CFPB’s mission is to empower consumers making financial decisions, take action against predatory companies breaking the law, and educate Americans on finance from childhood through retirement; help we desperately need!

2017 CFPB accomplishments include suing Navient Corp. and Citibank for systematic student loan failures that harmed borrowers, taking actions against Prospect Mortgage, LLC for illegal kickbacks on mortgage referrals, filing complaints against Corinthian College for predatory lending schemes, and suing Federal Debt Assistance Association, LLC for illegally posing as federal government debt-relief. A complete review of CFPB’s enforcement actions indicate it is successfully carrying out its mission objectives, which is why it is incomprehensible that Mick Mulvaney who called the bureau "a joke, in a sick, sad way” earlier this year and supported eliminating it was just named the Director. His appointment is a blatant attack on consumer financial protection and an indication that the 2008 Financial Crisis has been officially forgotten by politicians, and thus may be repeated.