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TD Ameritrade’s JJ Kinahan on How Investors Can Start the New Year Right

"One of the things that separates more experienced investors from new investors is..."

Investors are heading into 2017 with a bit of unfinished business. Dow 20,000 was all but certain heading into the holidays, but oddly enough, bulls were ultimately unable to overtake the key level before the start of the New Year. But key psychological levels aren’t the only lingering themes to carry over into 2017 as investors actually have some major issues to contend with this year. With the incoming Trump administration and additional rate hikes on the way, investors will need to shore up their portfolios early to successfully navigate a potentially unfamiliar market environment this year.

To help, spoke with JJ Kinahan, Chief Market Strategist of TD Ameritrade and frequent commentator on CNBC, Bloomberg, etc., to figure out what the best things investors can do for themselves and their portfolios as 2017 kicks off.

EQ: The market was fixated on Dow 20,000 during the weeks leading up to the New Year. It didn’t happen. Why do you think bulls ran out of steam so close to the milestone mark?

Kinahan: Well, I think first of all the Dow 20,000 was more of the fact that we are in a 24-hour news cycle and people need to talk about something. I think the true professionals are more concerned with S&P 500, and S&P 500 2300 would have been a much bigger news story than Dow 20,000, to be honest with you. I think the reason we kind of ran out of steam there at the end of the year is we had such an incredible rally since the election and the market was just perhaps due for a little bit of capitulation.

There is also some people thinking perhaps the year was just sort of a so-so year. So during the last few weeks they maybe asked themselves, “Why not take some profits and call it a pretty nice year?” Now they can regroup with the new administration, new policies, and new legislation coming next year. So I think you’re seeing some of that. Plus, you look at the Financials and how amazingly they’ve performed these last few weeks. So, that’s really one area that I won’t say that they completely ran out of gas, but I just think the buying pressure sort of stopped. It’s not necessarily because selling pressure is coming in.

EQ: January has quickly become a month of uncertainty for investors, as 10 of the last 17 Januarys have experienced market declines. Why has a historically reliable month for bulls become such a coin flip in recent years?

Kinahan: I think this year particularly was just because it’s been such a year of the unusual, so I’ll chalk it up a little bit to the fact that we’ve just performed differently than other years. If you look at the past few years, there has been some selling pressure, because every year it seems like there is a little bit of a fear of tax policy changes. So, people have been sort of anxious to take their gains in those years rather than roll out some positions with an uncertain tax policy going forward. That’s also part of it.

The last few years has just been a lot of legislation. I think legislation will continue to be a big factor, but I think the legislation that’s happened over the last few years has been more on regulation, etc., rather than the expected legislation, which is supposed to be more pro-business. Of course, who really knows what the regulation will be? We can only go off what we have heard on these campaign trails.

EQ: Speaking of the election, the “Trump trade” has been the dominant narrative since the election. Do you think this will carry over into the first quarter of 2017?

Kinahan: Well, I think that there is certainly some optimism in a way that we haven’t seen in a while. We’ll see, but I think that Mr. Trump will – like many presidents – enjoy the honeymoon period of the first hundred days. It seems to me that there was a honeymoon right after the election. So that may be difficult to keep that momentum as we head into the administration actually taking office. A lot of it is going to depend on how the process goes for getting his cabinet members in place. If that goes fairly smoothly, I think that you will see a positive note from the market

If that is just mired down constantly, then I think the market may follow with that, because I think that’s kind of his first big test to see if can he get some things done. Because even if he only accomplishes some of the tax reform he talked about, and particularly if he can get some of the money that the US entities like the Apples (AAPL) of the world are holding overseas to be repatriated in a fashion that is beneficial to all, I think that would be the greatest thing that he could do in his first year in office.

EQ: It’s safe to assume that the market environment to which investors have grown accustomed during this bull market may be changing in significant ways come January. Interest rates are going up and the new administration are just two of the major catalysts for that change. What do investors need to understand and how should they factor this into their investment thesis going forward?

Kinahan: I think that you have hit on something really important. One of the big reasons for the rally is the two biggest unknowns that we’ve had for the past year – the election and the Fed – have been answered. Now, the Fed doesn’t go away, but they become sort of a 1B rather than a 1A from now until at least May, which is where we see 44% profitability of a rate hike. So they’ve kind of been pushed back a bit in terms of what everybody is looking at. But the biggest issue I see for retail investors is so many of them, they hear about Dow 20,000, and they feel like they are missing out. What people have to understand is that there is never a time when you can say, “Oh my God, I can’t get into the market,” and one of the issues many people have is they go all in at that level.

So, the biggest thing I would say to people in all market environments; particularly one where we are near all-time highs, if you’re getting in for the first time, please get in in an iterative fashion. Just get in a little bit of your investable assets right now, so that if there is more capitulation, you can use those moments as an opportunity rather than a time of panic.

On a bigger scale, I think the things that have to be understood is how legislation can affect some of these companies, and don’t expect that we’re going to have a panacea for everything in the economy with one piece of legislation. As I said, the tax policy is great, and I think if it gets through, longer term it would be really good for the economy, but it doesn’t mean that if it goes through, the next day, everything is great. Too often, in a 24/7 news cycle, people have sort of that attitude, and then they can’t believe that the market doesn’t react the way that they expected.

EQ: You noted recently that quiet periods in the market—like what we’re experiencing right now—are a good time for investors to review their portfolios and risk profile. What are some basic check marks investors can use to make sure they’re well positioned to start the new year?

Kinahan: The biggest thing they need to check out is that their size is appropriate, and what I mean by that is if they have a $50,000 portfolio, that one stock isn’t $35,000 of it. That’s just too much exposure to one company or one industry. People talk about being diversified, and I think the bigger mistake people have is that they are not diversified in the amount of money they have in their investments. They are usually oversized in one or two big investments. So even if we have a rally, but their stock didn’t participate, then they didn’t participate in the rally very much. That’s the biggest thing for people to look at.

Second, look at what industries you believe are going to be the next beneficiary of the new administration. If you believe that there is going to be an industry that’s going to be a great beneficiary, does your portfolio reflect that? Its interesting to me that a lot of times, people will talk about one thing but their investments don’t reflect it. And the last thing is to invest in things you understand. Just because you heard at a cocktail party about some company that you’ve never heard of before, and just because some friend says it’s great, it’s probably not a smart thing to do to blindly invest in it. Understand how the company makes money. The example I always give is GM (GM). I think that there are people who have held GM forever and they don’t realize that on our thinkorswim platform “Company Profile” you can see that more than than 45% of GM’s revenue actually comes from China. So, you should be understanding this if you own that company.

EQ: You mentioned the fear of missing out, especially with the Dow close to 20,000 and S&P 500 close to 2300. On the flip side, this bull market for the most part has been dominated by this fear of an impending correction or bear market. For investors, how do they manage this kind of psychological balance of taking profits or investing more into the market?

Kinahan: Well, I think that one of the things that people should probably do a better job of is defining their time periods before they get into an investment. I’ll use a stock like Apple as an example since it’s our most widely held stock at TD Ameritrade. If I go and buy Apple, is my time frame a day, a month, three months or three years? If you don’t understand what it is, then you’re going to find yourself in trouble. That’s number one.

Number two is that you should be reviewing your portfolio at the very minimum every quarter. Nothing is more irritating than people who spend more time planning their vacation than planning their retirement. But it really should be something that every quarter you should be reassessing. Ask yourself what your time period is now on your investments and what you’re feeling about it.

The last thing I’ll say is, regarding the all-in, all-out mentality, if you have a few hundred shares in something and it’s going your way and you’re not sure if you should stay in, you can always sell half the investment and stay in the other half. Take some profits and stay with half. I think one of the things that separates more experienced investors from new investors is experienced investors really think in parts. “I’ll do a little bit here, a little bit there”, rather than “I’m all in and I’m all out.” That mentality will help a lot of newer investors as they think about things because movement again starts to become more of a friend than an enemy.

EQ: Passive investing increased in popularity tremendously in 2016. A lot of things that we’ve talked about are more for active investors and traders that keep a closer eye on their portfolio. With a growing portion of the investment community moving towards basically set-and-forget approach, what advice do you have for them?

Kinahan: Absolutely. No matter what your investing style, you should be checking in on it. Passive investing may be fine for some people and for some of their portfolios, but once you let things become lazy, then you are making a big mistake. If there was anything that the Financial Crisis of 2008 should have taught people, it’s that if you don’t take responsibility for your own investments, nobody else will. So I think passive investing sometimes, when done properly, can be great. Unfortunately, too many people use it as a lazy investment where they don’t want to spend the time to keep track of what’s going on with their own money.

EQ: What are the market opportunities that you’re bullish on? What are some you’re bearish on?

Kinahan: Longer term, I would have to be bullish on Financials, even though they have had an incredible move. We’ll get some confirmation here within a few weeks with earnings, but I just feel like all the momentum in the market right now favors them, and not only from an interest rate point of view. There seems to be optimism traditional banking functions are returning, and we haven’t seen that in a long time. In the meantime, they’ve become incredible at trimming expenses and finding other ways to collect fees. So I am pretty bullish on the bigger banks and financials.

The area that concerns me the most are those businesses that still have a lot of brick-and-mortar space in terms of retail. One of the things that we are seeing, particularly from this holiday season, is that that’s become a very, very difficult game, and those that are sitting on a lot of property continue to be a big concern. Some of them have in the last year announced ways to sort of cut back. Some of the REITs that hold a lot of malls may also be a bit of a concern. You have to figure that if the brick-and-mortar stores are going away, how valuable is the mall space?

The saying that there is no such thing as a free lunch is very much true for Robinhood.