1st Quarter 2014
March 31. 2014

Spring has finally arrived! The first quarter of 2014 was dominated by the weather in many parts of the country and especially in the financial markets, with the term “polar vortex”. This weather condition is when polar air drives straight down the center of the country and keeps the south and east in a cold weather pattern. The slowdown in the economic activity from items such as car sales, home sales and manufacturing have all been blamed on the polar vortex. Markets struggled at the beginning of the quarter, but eventually shrugged off any negative news and set an all-time high. This overly optimistic sentiment continues to overcome the proverbial “wall of worries” such as Ukraine and the Fed’s tapering. We do believe the tapering will eventually allow us to better understand how the economy is performing, but we might not see a clear picture until later this year.

How are we working through this period at Waterway? We still think it is prudent to keep a well-diversified portfolio. We believe interest rates will rise this year and have removed long term bonds from all portfolios. For the bond funds we continue to hold, the duration (measure of average maturity) is kept short so values are not eroded by an increasing interest rate environment. One change we made during the quarter was the removal of Spartan Bond Index which we replaced with Calamos Market Neutral, a convertible bond fund that should hold up during interest rate volatility and still provide a nice buffer when stocks are not performing as well. On the equity portion, values are reasonably to slightly overpriced, so we are managing to our target allocation and will trim when necessary.

Tax season is in full swing, and for many clients, the biggest issue at hand is higher income taxes. We have been routinely talking about this increase since January of 2013 when the tax legislation passed that increased tax brackets and reinstated phase outs of itemized deductions and personal exemptions. The pendulum has moved us into a higher tax environment forcing some people to withdrawal money out of retirement accounts at a higher rate than they were previously in during their working years. The old saying “you will be in a lower tax rate in retirement” has been turned upside down for many. During our review meetings this fall, we will focus on tax planning to ensure you are taking full advantage of every deduction and utilizing a long-term strategy to pay the lowest possible rate for your situation.

We hope you enjoy the spring weather and look forward to seeing you in your next review meeting!

Dan Michalk, CFP®, ChFC