April 2020 – Quarterly Update: Covid-19 Edition

This will be the quarter that we look back on and never forget.  It was the time that a virus spread with a silent vengeance, and the world came to a screeching halt.  You may be feeling quite disoriented, fearful or even anxious as you read this note since ‘normal’ for all of us has been shaken to its core due to Covid-19. You are likely hunkering down at home, which is what you should do, with little of your regular activities to keep you busy.  If you are like me, it literally feels like the earth has stopped spinning on its axis.  Up is down, and right is left.  Trust me when I say that it is completely normal to feel this way in the context of what we are dealing with as a human species.

I do not come to you with answers or any conclusions that will change the world…there are people that are much smarter than me working on that now, and I have confidence that they will figure it out.  But I can bring some encouragement and suggest some small actions that might, just maybe, help us feel like planet earth is starting to rotate once again.

What can you do?

The spread of Covid-19 has impacted the global economy with a speed and impact that is unlike anything seen in our lifetime.  This does not mean that happiness and contentment are totally out of your control, however.  Mindset is key…start by realizing that the sun still rises every morning like the picture at the top of the article.  There is new hope with each new day.  I am sure you have found, as have I, that there is now more time to watch movies, read a book, take a distance-appropriate walk to enjoy the spring weather or call someone (yes, actually call them rather than text) to see how they are doing.

If you are sheltering at home with loved ones, you have probably seen them more in the last two weeks than you have for months.  We should all continue to do more of these things, and the more we do, the more connected we will stay.  I am not a loquacious extrovert, but I have thoroughly enjoyed being around and talking with the ones I care most about.  And the more connected we stay, the more human we will feel.  This is where happiness and contentment hide, not in your investment portfolio or the latest round of news.

What are we doing?

Actions taken during times of fear in the markets will have implications for years to come.  The question is whether they will be positive or negative.  For the long-term investors, which are clients that we serve, volatility creates opportunity.  We have taken advantage of this opportunity by tax loss harvesting, which allows us to realize the losses for tax savings, but then invest the proceeds right back in something else so the money is never out of the market.  The tax savings for our clients this year will be significant.  We have also looked to strategically rebalance portfolios.  Because some of the fixed income assets have gains over the last year, we have sold those gains to go buy equity funds that are now at a discount.  It rebalances the ship and holds to the strategy of selling high and buying low.

What is next?

The fact is, I don’t know.  No one does, but that’s OK.  We are still waiting on the details of the massive Stimulus bill that was signed into law on March 27th.  There are too many details for me to summarize here.  If you want a deep dive in to the details, you can find that here.  I plan to write more on this soon, but if you have any questions about this, please do not hesitate to call our office.  We are all working remotely, but the extensions still ring right to us.  Know that we are here to help in this time of uncertainty.  Your well-being is of greatest concern to us, and not just financially.  Be safe, be smart, and be part of the global solution for everyone by staying home.

We will see you soon,

 

Josh, Mike, Matt and Sandra

A Covid-19 update from your PLC Wealth team

To say the last couple of weeks have been unexpected, unparalleled and dizzying would still be understating exactly what we have lived through in the last few weeks.  Based on further news today (specifically, the Stay at Home Orders issued by Wake County, NC for our local clients), most of us will be sheltering in place for the coming weeks, as we should.  I have listened intently, as I am sure you have, to all sides of the discussion that has carried on since the beginning of the outbreak.  At this point, the experts are making the case for the seriousness of the virus as it spreads exponentially, and that it is likely that the healthy and optimistic among us could be putting our most vulnerable at risk.  Slowing down our movement even further, whether by choice or by requirement, seems to be inevitable for a while longer to give us all the best opportunity to get through this.  While we do not know how long this Covid-19 virus will last, I want to take a few moments to speak to you directly about what we are doing as a firm and how you can continue to reach us during these times.

We have implemented many changes in the last couple of weeks as part of our Business Continuity Plan due to Covid-19.  Thankfully, we were prepared for a remote working environment, and hopefully you have seen no interruption in the normal service from our team.  We have all set up our home workspace.  This give us access to our email, phone calls, and client files just as easily as we have them in the office.  Our phone service is fully digital which means we can take it with us wherever we go.  If you call the office and dial my extension, it will ring my mobile phone.  If I call you from my mobile phone, I will be doing so from my office line.  We also have a fully digital and secure document management system for our firm which means we can safely access all your files at any time of day from any location in the world.  Additionally, all our portfolio management, financial planning and client relationship software is cloud-based and accessible from any location.  Believe it or not, it really did not take much time for PLC Wealth to convert to a virtual firm with the same capabilities as when physically in the office.

Now, obviously, there are some challenges.  It is impossible to fully replace the face-to-face relationship, both for our internal operations and for our client relationships.  We are utilizing a secure and compliant messaging tool for internal communications.   While there may be times that we need to access the office, we are attempting to have only a 1-person max in the office at any time.  We will also plan to continue with client meetings moving forward through virtual meeting technologies such as Zoom.  If you do not have access to a computer for such a meeting, we can still have a conversation the old school way…over the phone…in order to make sure that we do not fall behind in our relationship with each of you.  Again, if you need us in the meantime, we are an email or phone call away, just as we have always been.

There are a few logistical items to cover: First, mail will be checked regularly, but maybe not every day.  Additionally, we have always made the effort to suggest linking your personal bank account to your brokerage accounts to allow for quick money movements back and forth, should they be necessary.  Since we are no longer at the office, a time like this makes it necessary.  So, if you need to make an IRA contribution or want to add funds to your brokerage account, we can still do that by an electronic transfer.  Getting money from your accounts is just as easy, or we can have a check mailed to you.  The bottom line is that getting money from your accounts or to your accounts is just as easy as always.  Finally, if you have actual stock certificates, those must be mailed directly to TD for deposit in your account, so just let us know if you need the mailing address.

Unfortunately, times of crisis create opportunities for bad actors.  There are already stories of scams coming to the surface, so be prepared and know what to look for:

 

  1. – There are no miracle drugs or remedies for Covid-19 at this time so don’t fall for this one.  And do not click on any links that may be in an email stating such things, as the link may be another way to inject a virus on your computer.
  2. – Be very skeptical of any investment ‘opportunities’ with research claims that are no supportable.  People will make wild claims to prey on other’s hopes and inability to use the rational brain in times of stress.
  3. – Never, never, never disclose your social security number, account numbers, or any other piece of Personally Identifiable Information (PII).  There are rumors that spam calls and emails are already going out claiming that thsi information is needed to get your piece of the Stimulus bill or a tax refund.  Hold on to your PII like you (financial) life depends on it.
  4. – Generally, just be skeptical in these times of anything that seems too good to be true.  If you are not sure, get in touch with us to talk through it.

 

Let me leave you with a little encouragement in the midst of Covid-19 .  Take this time to do something that many of us no longer do naturally on our own…slow down, exercise (by yourself), rest, re-energize, call someone you haven’t spoken with in a while, or binge watch movies with your family that you never have the time for…but mostly, just look around you to see all of the blessings that you inevitably still enjoy.  Sometimes, when we are not able or willing to do that which is in our best interest, it is necessary for it to be forced upon us.  We find ourselves in one of those times in history.  We are a creative and adaptive species so I look forward to hearing about some of the ways that you will get through this…because you will get through this.  I will leave you with three pieces of advice that I am confident will be good for you in the long run…Wash your hands, don’t touch your face, and don’t touch your stocks.  Know that we are committed to continuing to serve you and your family. We will strive to provide you with an even higher level of service than that which you have come to expect from us.  If you need anything at all, even if it is just to have a conversation about the events of the day, please let us know.  We are here to help.

Carpe diem,

Josh and the PLC Wealth Team

January 2019 – Quarterly Review: “Average returns” are rare

What if Charles Dickens had begun his classic “Tale of Two Cities” as follows: It wasn’t the best of times, it wasn’t the worst of times, it was the usual mixed bag.

While the statement may reflect reality, it doesn’t grab your attention half as well as Dickens’ actual opening sentence describing the French Revolution. As he concluded about the period, “some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”

Thus, we’ve long known about our infatuation with extremes – Best! Worst! Delight! Despair! These are the sentiments that fuel our dreams and inspire our works of art. But you do yourself a disservice if you allow superlatives to rule your investing. In capital markets, if you get caught up in extremes and devalue the sweeping tides of time, you risk giving up your greatest edge: a clear-eyed understanding of what’s really going on.

As we reflect on the events of 2018, here are two evidence-based points worth repeating:

1. “Average” annual investment returns aren’t typical; in fact, they’re rare.

To quote a more contemporary source than Dickens, Cliff Asness of fund manager AQR recently observed: “This world is pretty much designed to convince us that we’re always at DEFCON 1, when 5 is the mode and 4.5 the mean.”

Other year-end analyses concluded that market volatility for 2018 remained on the low side. Even the wilder swings toward year-end were not that remarkable in the grand scheme of things.

And yet, many “noisiest authorities” have been quick to play up the superlatives, while downplaying how these sorts of best of times, worst of times conditions have long been more the norm than the exception in capital markets. As expressed in this Forbes column, “when you take the long view – and if you’re a long-term investor, then you should – you’ll see that what feels jarring right now is actually just a return to normal levels of short-term volatility.”

This brings us to our second point.

2. You are human; you are susceptible to recency bias.

While there are many behavioral biases that trick us into sabotaging our best financial interests, we’re especially interested in the damage recency bias could cause in current conditions.

Recency bias can trick your brain into downplaying decades of robust market performance data, while magnifying the run of unusually calm market conditions we’ve been enjoying relatively recently – essentially since March 2009. This in turn may lead you to lend more weight than is warranted to current volatility.

That’s not to say the ride will be fun if we encounter more turbulence ahead. But by remembering extremes are actually the norm in your quest to generate durable long-term returns, you stand a much better chance of preserving your objective perspective and your portfolio, come what may.

We are grateful for the opportunity to remain at your side, ever eager to advise your course through whatever the markets have in store for us in 2019 and beyond. How can we help? Let us know!

Good advice is simple – but not easy!

Here in North Carolina, we cope with hurricanes from time to time, and like the storms, financial markets can bring bumpy weather to our investment portfolios.

However, unlike with hurricanes, which are typically in the forecast for several days at least,  no one can truly see over the horizon to know when bad times – a big drop in asset values – may affect our investments.  When that happens, it is more important than ever to have, and to follow, a solid financial plan.

Sometimes the best, most rigorously developed financial advice is so obvious, it’s become cliché. And yet, investors often end up abandoning this same advice when market turbulence is on the rise. Why the disconnect? Let’s take a look at five of the most familiar financial adages, and why they’re often much easier said than done.

  1. If you fail to plan, you plan to fail.
  2. No risk, no reward.
  3. Don’t put all your eggs in one basket.
  4. Buy low, sell high.
  5. Stay the course.

We’ll explore each in turn, how we implement them, and why helping people stick with these evidence-based basics remains among our most important and challenging roles.

  1. If You Fail to Plan, You Plan to Fail.

Almost everyone would agree: It makes sense to plan how and why you want to invest before you actually do it. And yet, few investors come to us with robust plans already in place. That’s why deep, extensive and multilayered planning is one of the first things we do when welcoming a new client, including:

  • A Discovery Meeting – To understand everything about you, including your goals and interests, your personal and professional relationships, your values and beliefs, how you’d prefer to work with us … and anything else that may be on your mind.
  • “Traditional” Financial Planning – To organize your existing assets and liabilities, define your near-, mid-, and long-range goals, and ensure your financial means align as effectively as possible with your most meaningful aspirations.
  • An Investment Policy Statement (IPS) – To bring order to your investment universe. Your IPS is both your plan and your pledge to yourself on how your investments will be structured to best align with your greater goals. It describes your preferred asset allocations (such as your percentage of stocks vs. bonds), and is further shaped by your willingness, ability, and need to tolerate market risks in pursuit of desired returns.
  • Integrated Wealth Management – To chart a course for aligning your range of wealth interests with your financial logistics: insurance, estate planning, tax planning, business succession, philanthropic intent and more.

As we’ll explore further, even solid planning doesn’t guarantee success. But we believe the only way we can accurately assess how you’re doing is if we’ve first identified what you’re trying to achieve, and how we expect to accomplish it.

  1. No Risk, No Reward.

In many respects, the relationship between risk and reward serves as the wellspring from which a steady stream of financial economic theory has flowed ever since. Simply put, exposing your portfolio to market risk is expected to generate higher returns over time. Reduce your exposure to market risk, and you also lower expected returns.

We typically build a measure of stock market exposure into our clients’ portfolios accordingly, with specific allocations guided by individual goals and risk tolerances. But here’s the thing: Once you have accepted the evidence describing how market risks and expected returns are related, it’s critical that you remain invested as planned.

There’s ample evidence that periodic market downturns ranging from “ripples” to “rapids” are part of the ride. As a February 2018 Vanguard report described, from 1980–2017, the MSCI World Index recorded 11 market corrections of 10% or more, and 8 bear markets with at least 20% declines lasting at least 2 months. Such risks ultimately shape the stream that is expected to carry you to your desired destination. Consider them part of your journey.

  1. Don’t Put All Your Eggs in One Basket.

At the same time, “risk” is not a mythical unicorn. It’s real. If it rears up, it can trample your dreams. So, just because you might need to include riskier sources of expected returns in your portfolio, it does not mean you must give them free rein.

This is where diversification comes in. Diversification is nothing new. In 1990, Harry Markowitz was co-recipient of a Nobel prize for his work on what became known as Modern Portfolio Theory. Markowitz analyzed (emphasis ours) “how wealth can be optimally invested in assets which differ in regard to their expected return and risk, and thereby also how risks can be reduced.” In other words, according to Markowitz’s work, first published in 1952, investors should employ diversification to manage portfolio risks.

This leads to an intriguing, evidence-based understanding. By combining widely diverse sources of risk, it’s possible to build more efficient portfolios. You can:

  • EITHER lower a portfolio’s overall risk exposure while maintaining similar expected returns
  • OR maintain similar levels of portfolio risk exposure while improving overall expected returns

Rarely, evolving evidence helps us identify additional or shifting sources of expected return worth blending into your existing plans. When this occurs, and only after extensive due diligence, we may advise you to do so, if practical (and cost-effective) solutions exist.

The details of how these risk/return “levers” work is beyond the scope of this article. But come what may, the desire and necessity to DIVERSIFY your portfolio remains as important as ever – not only between stocks and bonds, but across multiple, global sources of expected returns.

  1. Buy Low, Sell High.

Of course, every investor hopes to sell their investments for more than they paid for them. Here are two best practices to help you succeed where so many fall short: time and rebalancing.

Time

By building a low-cost, broadly diversified portfolio, and letting it ride the waves of time, all evidence suggests you can expect to earn long-term returns that roughly reflect your built-in risk exposure. But “success” often takes a great deal more time than most investors allow for.

In a recent article, financial author Larry Swedroe looked at performance persistence among six different sources of expected return as well as three model portfolios built from them. He found, “In each case, the longer the horizon, the lower the odds of underperformance.” However, he also observed, “one of the greatest problems preventing investors from achieving their financial goals is that, when it comes to judging the performance of an investment strategy, they believe that three years is a long time, five years is a very long time and 10 years is an eternity.”

In the market, 10 years is not long. You must be prepared to remain true to your carefully structured portfolio for years if not decades, so we typically ensure that an appropriate portion is sheltered from market risks and is relatively accessible (liquid). The riskier portion can then be left to ebb, flow and expectedly grow over expanses of time, without the need to tap into it in the near-term. In short, time is only expected to be your friend if you give it room to run.

Portfolio Rebalancing

Another way to buy low and sell high is through disciplined portfolio rebalancing. As we create a new portfolio, we prescribe how much weight to allocate to each holding. Over time, these holdings tend to stray from their original allocations, until the portfolio is no longer invested according to plan. By periodically selling some of the holdings that have overshot their ideal allocation, and buying more of the ones that have become underrepresented, we can accomplish two goals: Returning the portfolio closer to its intended allocations, AND naturally buying low (recent underperformers) and selling high (recent outperformers).

  1. Stay the Course.

So, yes, planning and maintaining an evidence-based investment portfolio is important. But even the best-laid plans will fail you, if you fail to follow them. Here, we get to the heart of why even “obvious” advice is often easier said than done. Our rational self may know better – but our instincts, emotions and behavioral biases get in the way.

Three particularly important biases to be aware of in volatile markets include tracking-error regret, recency bias, and outcome bias.

Tracking-Error Regret

When we build your portfolio, we typically structure it to reflect your goals and risk tolerances, by diversifying across different sources of expected risks and returns. Each part is expected to contribute to the portfolio’s unique whole by performing differently from its counterparts during different market conditions. Each portfolio may perform very differently from popular “norms” or benchmarks like the S&P 500 … for better or worse.

When “worse” occurs, and especially if it lingers, you are likely to feel tracking-error regret – a gnawing doubt that comes from comparing your own portfolio’s returns to popular benchmarks, and wishing yours were more like theirs.

Remember this: By design, your factor-based, globally diversified portfolio is highly likely to march out of tune with typical headline returns. It can be deeply damaging to your plans if you compare your own performance to benchmarks such as the general market, the latest popular trends, or your neighbor’s seemingly greener financial grass.

Recency

Recency causes us to pay more attention to our latest experiences, and to downplay the significance of long-term conditions. When an expected source of return fails to deliver, especially if the disappointment lasts for a while, you may start to second-guess the long-term evidence. This can trigger what Nobel laureate and behavioral economist Daniel Kahneman describes as “what you see is all there is” mistakes.

Again, buying high and selling low is exactly the opposite of your goals. And yet, recency causes droves of investors to chase hot, high-priced holdings and sell low during declines. Irrational choices based on recency may still turn out okay if you happen to get lucky. But they detour you from the most rational, evidence-based course toward your goals.

Outcome Bias

Sometimes, even the most rational plans don’t turn out as hoped for. If you let outcome bias creep in, you end up blaming the plan itself, even if it was simply bad luck. This, in turn, causes you to abandon your plan. Unfortunately, it’s rarely replaced with a better plan, which brings us back to our first adage about those who fail to plan.

To illustrate, let’s say, several years ago, we created a solid investment plan and IPS for you. At the time, you felt confident about them. Since then, we’ve periodically refreshed your plan, based on your evolving personal goals, perhaps a few new academic insights, and any new resources now available for further optimizing your portfolio.

Now, let’s say the markets disappoint us over the next few years. Ugly red numbers take over your reports, seemingly forever. Before you conclude your underlying strategy is wrong, remember: It’s far more likely you’re experiencing outcome bias (with a recency-bias chaser).

Investing will always contain an element of random luck. From that perspective, in largely efficient markets, your best course remains – you guessed it – to stay the course with your existing, carefully crafted plans. While even evidence-based investing doesn’t guarantee success, it continues to offer your best odds moving forward. Don’t lose faith in it.

 Simple, But Not Easy

Let’s wrap with a telling anecdote. Merton Miller was another co-recipient of the aforementioned 1990 Nobel prize. Miller’s portion was in recognition of his “fundamental contributions to the theory of corporate finance.” While his findings were deep and far-reaching, he once summarized them as follows:

[I]f you take money out of your left pocket and put it in your right pocket, you’re no richer. Reporters would say, ‘you mean they gave you guys a Nobel Prize for something as obvious as that?’ … And I’d add, ‘Yes, but remember, we proved it rigorously.’”

Like Miller’s light take on his heavy-duty findings, some of what we feel is our best advice seems so simple. And yet, in our experience, it’s very hard to adhere to this same, “obvious” advice in the face of market turbulence.

Blame your behavioral biases. They make simple advice deceptively difficult to follow. We all have them, including blind spot bias. That is, we can easily tell when someone else is succumbing to a behavioral bias, but we routinely fail to recognize when it’s happening to us.

This is one reason it’s essential to have an objective, professional advisor (along with your network of informal advisors) who is willing and able to let you know when you’re falling victim to a bias you cannot see in the mirror. At PLC Wealth, that is exactly what we are here for! Let us know if we can help you reflect on these or any other challenges that stand between you and your greatest financial goals.

Global Diversification is Your Investment Antacid

Let’s be clear: We did not wish for, nor in any way cause a tumble in the markets, especially among tech stocks. That said, we could not have come up with a more telling illustration to underscore the perennial value of building – and maintaining – a globally diversified investment portfolio for achieving your greatest financial goals.

Global diversification is such a powerful antacid for when (not if!) we experience market turbulence, it’s why we’ve long recommended spreading your market risks:

  • According to your personal goals and risk tolerances
  • Between stock and bond markets
  • Among evidence-based sources of expected long-term returns
  • Around the world

In short, broad, global diversification never goes out of style.

Breaking news shows us why.

Just a few short days ago, third quarter market performance numbers were rolling in, and we were fielding questions about the wisdom of continuing to participate in worldwide stock and bond markets. Some globally diversified investors were beginning to question their resolve after comparing their year-to-date returns to the U.S. stock market’s seemingly interminable ability to whistle past the graveyards of disappointing, portfolio-dampening performance found elsewhere.

Some were asking: “Should we dump diversification, and head for the ‘obviously’ greener pastures watered by U.S. stocks?”

We aren’t the only ones advising investors against reacting to hot runs by turning a cold shoulder to their well-structured portfolio. In his timely September 28 column, Wall Street Journal personal finance columnist Jason Zweig commented: “Looking back in time from today, U.S. stocks seem to have dominated over the long run only because they have done so extraordinarily well over the past few years.”

As current conditions starkly show, there’s a reason for the expression, “Things can turn on a dime.” Whether it’s U.S. stocks, international bonds, emerging markets or any other sources of expected return, the evidence is clear: Trends rise and fall among them all. This we know. But precisely when, where, how much, and why is anybody’s guess. As Zweig suggests in his piece, “Markets tend to lose their dominance right around the time it seems most irresistible.”

What’s next?

We’re drafting this message to you Wednesday evening, October 10, in advance of what may be a wild ride for the next little while. By the time you’re reading this, prices may still be tumbling, or they may already have recovered their footing. We can’t say.

Come what may, we hope we can be particularly helpful to you at this time.

Have current conditions left you troubled, unsure of where you stand?

Let’s talk. We’ll explore whether you’re able to sit tight with your existing strategy, or whether we can help you think through any next steps you may be considering. Most of all, know you are not alone! We are here as your sounding board and fiduciary advisor. Your best interests remain our top priority.

Are you reflecting calmly on current events, recognizing that market volatility happens?

Allow us to applaud you for your stamina, and remind you: Current conditions likely represent a time for continued quietude, along with ongoing attention to managing your tailored portfolio.

Regardless of your temperament, we’d like to share a sentiment from Behavior Gap author Carl Richards’ 2015 New York Times column.  His point remains as relevant as ever:

“On a scale of 1-10, with 10 being abject misery, I’m willing to bet your unhappiness with a diversified portfolio comes in at about a 5, maybe a 6. But your unhappiness if you guess wrong on your one and only investment for the year? That goes to 11.”

Let’s be in touch if we can answer any questions or scale down any angst you may be experiencing.

Regards,

Your PLC Wealth Team

Q3 2018 Client Letter – Is this bull getting long in the tooth?

October 2018

As of August 21, the longest-running S&P 500 rally (by some counts) was born out of “the ashes of the financial crisis.”  As of quarter-end, as reported by Morningstar, “Following a flattish first half, global equities enjoyed a fairly strong third quarter, with the Morningstar Global Markets Index now up 4.5% year to date.”

And yet … you may fret. Tariffs and trade war threats remain wild cards in the financial deck. A Brexit looms nearer and scarier. Emerging markets struggle while global leaders squabble. And, historically, many of the worst days in the markets have arrived in the fall.

When it comes to market forecasts, will the sky be falling soon, or are we set to soar some more? Have you been tempted to get out of “high-priced” markets while the getting seems good? Here are three compelling reasons to avoid trying to time the market in this manner.

  1. Markets (Still) Aren’t Predictable

Before you decide you’d like to stay one step ahead of a market that seems certain to rise, fall or head sideways, consider this quote from The Wall Street Journal personal finance columnist Jason Zweig: “Yes, 2018 is full of uncertainty and teeming with hazards that might make the stock market crash. So was 2017. So were 2016, 2015, 2014 – and every year since stockbrokers first gathered in New York in the early 1790s.”

  1. Economists Aren’t Wizards

A day rarely goes by when you can’t find one respected economist suggest we’re headed for a financial fall, while another opines that we’re going to keep going like gangbusters. Which is it this time? As one Bloomberg columnist reports, “a 2014 study by Prakash Loungani of the International Monetary Fund found that not one of the 49 recessions suffered around the world in 2009 had been predicted by a consensus of economists a year earlier. Further back, he discovered only two of the 60 recessions of the 1990s were anticipated a year in advance” (with “recession” defined in the referenced paper as “a year when output growth was negative”). 

  1. You Can’t Depend on Your Instincts

Still thinking of trying to sell ahead of a fall? For this, and any other investment “hunch” you may have, your best bet is to assume it’s a bad bet, driven by your behavioral biases instead of rational reasoning. For example, loss aversion can trick you into letting the potential for future market losses frighten you away from the likelihood of long-term returns. Couple that with our oversized bias for seeing predictive patterns, even where none exist, and it’s all too easy to talk yourself right out of any carefully laid plans you’ve established for your wealth.

For these reasons and more, we’re here to advise you: Your plans aren’t there to eliminate uncertainty. They’re there to counter the temptation to succumb to it, so please be in touch with us personally if we can help you review your plans.

Protecting Your Child from Identity Theft

In September 2017, about a year ago, a massive Equifax security breach became public knowledge. If there was a silver lining to this infamous event, it likely spurred more consumers to take more measures to protect their identities. Perhaps you’ve frozen your lines of credit, or you’re at least checking your credit reports more regularly these days.

 

All well and good. But what about your kids? As distasteful as the idea may be, child identity theft is a serious and growing concern, for several reasons:

 

It happens more often than you might think. In a 2018 Child Identity Fraud report, Javelin Strategy & Research found more than a million children were identity fraud victims in 2017, costing families more than $540 million in out-of-pocket expenses.

 

Your kid’s identity is a tempting target. Identity thieves especially love your child’s Social Security Number, since it usually offers them a clean slate, devoid of credit history. If they can get ahold of it, they can create all sorts of havoc, such as racking up debt, filing bogus tax returns or applying for public aid – all under your child’s identity.

 

It’s easy pickings. Kids may not be as careful with their identity, and new technologies expose them to added risks. Javelin’s report also connected kids’ susceptibility to being bullied with a higher likelihood they’ll end up giving out personal information – online or to people they know.

The theft often goes undetected. While we may be vigilant about monitoring our own credit reports, many parents don’t realize they should be doing the same for their children. As described in this Wall Street Journal piece, lax oversight “often allows theft to go unnoticed for years, until the victims reach college age and start applying for credit cards and student loans.”

Fortunately, a few basic steps can go a long way toward protecting your child from identity theft.

 

Know the early warning signs, and take them seriously. Is your seven-year-old receiving credit card offers in the mail? Has a collection agency called and asked to speak to your toddler? Don’t laugh it off. It could mean your child’s identity has been compromised.

 

Check your child’s credit history regularly. Use AnnualCreditReport.com to check in with the three major credit agencies, to see if your child has a credit history. Unless you’ve opened a file in your child’s name, they shouldn’t have one; if they do, this is a big red flag.

 

Consider establishing and freezing your child’s credit file. For added protection, you may choose to create credit files for your children, and then freeze them until needed. This makes it much harder for an identity thief to successfully use any stolen information to establish a fake line of credit. Note: Effective September 21, 2018, a new Federal law makes it easier to freeze your own and your minor children’s credit files.

 

Educate your child. As soon as your children are old enough to understand, recruit them to assist. The Federal Trade Commission offers this handy information on how to talk to your children about computer security. Also assure them, they should never be afraid to tell you if they feel they’re being bullied by anyone – under any circumstances.

 

Just as it is second nature to help your children apply sunscreen when the sun is shining or to bundle them up on a winter day, protecting them from identity theft should be part of your regular, all-weather routine these days. A few sensible and regularly applied defenses could ward off years of damage done from an “overexposure” to identity theft.  If you have questions or concerns about identity theft for yourself or your child, or if you’d like guidance on implementing any of these recommendations, the team at PLC Wealth Management is ready to help.

What Is the Yield Curve?

August 27, 2018
By Josh Self

The yield curve is flattening (or growing steeper)! … Yield curve spreads are widening (or narrowing)! … The yield curve has inverted (or normalized)!

Headline-grabbing yield curve commentary somehow sounds important, doesn’t it? But what is a yield curve to begin with, and what does it have to do with you and your investments?

A Tour Around the Curve

Yield curves typically depict the various yields across the range of maturities for a particular bond class. For example, Figure 1 would inform us that a U.S. Treasury bond with a 5-year maturity was yielding 2.4% annually, while a 30-year Treasury bond was yielding 3.4%.

Bond class – A bond class or type is typically defined by its credit quality. Backed by the full faith of the U.S. government, U.S. Treasury yield curves are among the most frequently referenced, and often the high-quality benchmark against which other bond types are compared – such as municipal bonds, corporate bonds, or other government instruments.

Term/Maturity – The data points along the bottom X axis of a yield curve represent various terms available for a bond class. The term is the length of time you’d need to hold a bond before your loan matures and you should receive your initial investment back.

Yield – The data points along the vertical Y axis represent the interest rate, or yield to maturity currently being offered – such as 2% per year, 3% per year, and so on. The yield curve for any given bond class changes every time its yields change … which can be frequently.

Spread – The spread is the difference between the annual yields on two bond maturities. So, in Figure 1, there’s a 1% spread between 5-year (2.4%) and 30-year (3.4%) Treasury bond yields.

Define “Normal”

Next, let’s look at the curve itself – i.e., the line that connects the data points just discussed.

The shape of the yield curve helps us see the relationship between various term/yield combinations available for any given bond class at any given point in time.

Just as our body temperature is optimal around 98.6°F (37°C), there’s a preferred equilibrium between bond market terms and yields. “Normal” occurs when short-term bonds are yielding less than their longer-term counterparts. Under normal economic conditions, investors expect to be compensated with a term premium for taking the incremental risk of owning longer maturities. They’re accepting more uncertainty about how current prices will compare to future possibilities. Conversely, they’ll accept lower rates for shorter-term instruments, offering greater certainty.

At the same time, evidence suggests there’s often a law of diminishing returns at play. Typically, the further out you go on the yield curve, the less extra yield is available. Thus, Figure 1 depicts a relatively normal yield curve, with a bigger jump to higher returns early in the curve (a steeper spread) and a more gradual ascent (narrower spread) as you move outward in time.

Variations on the Curve

If Figure 1 depicts a normal yield curve, what happens when things aren’t so normal, which is so often the case in our fast-moving markets?

The shape of the yield curve essentially reflects evolving investor sentiments about unfolding economic conditions.

In short, expectations theory suggests that the yield curve reflects investor expectations of future interest rates at any given point in time. Thus, if investors in aggregate expect rates to rise (fall), the yield curve will slope upward (downward). If they expect rates to remain unchanged, it will be flat. Figure 2 depicts three different curve shapes that can result.

You, the Yield Curve and Your Investments

It’s rare for the yield curve to invert, with long-term yields dropping lower than short-term. But it happens. This happens when the Federal Reserve (or another country’s central bank) tightens monetary policy.  The result of tightening monetary policy is to drive up short-term rates to fight inflation. An inverted yield curve is often followed by a recession – although not always, and not always universally.

Does this mean you should head for the hills if the yield curve inverts or takes on other “abnormal” shapes? Probably not. At least not in reaction to this single economic indicator.

As with any other data source, bond yield curves are best employed to inform and sustain your durable, evidence-based investment plans, rather than to tempt you into abandoning those plans every time bond rates make a move. This typically means investing in bonds that offer the highest yield for the least amount of term, credit and call risk. (Call risk is realized if the bond issuer “calls” or pays off their bond before it matures, which usually forces the bond’s investors to accept lower rates if they want to remain invested in the bond market.)

The yield curve is an important tool for determining how to efficiently execute this greater goal. It helps explain why we typically recommend holding only high-quality bonds, minimizing call risk.  We seek to strike a middle ground between short-term versus long-term bonds. Similar principles apply, whether investing directly in individual bonds or via bond funds.

In short, it’s good to understand the yield curve, and then to look past it – toward your long-term financial goals. Please contact us at PLC Wealth if you’d like to talk about how fixed income/bond investing best fits into your investment plan.

How much do I need to save to retire?

July 17, 2018

We recently read a Wall Street Journal article called “Five Ways to Improve 401(k)s”, and thought one part of the article, “Raise the default savings rate,” was important enough to justify an entire blog post.  In the article, the author discusses the possibility of the federal government encouraging employers to set employees’ default savings rates higher in 401(k)s.  WSJ notes that many plans “set initial contribution rates under automatic enrollment at 3% [and]… gradually raise the level to 10%.”  The article then says that if instead, contribution rates began at 6% and rose to 15% over time, employees would be in much better shape at retirement.

An obvious question is, is this amount too much, too little, or just right?  Like most answers, it depends.  How many years do you have until you retire?  How much of your previous earnings were you spending?

Another important question to ask is, “What will it take to get there?”  Said another way, this question could be phrased, “How much do I need to save to retire?”  If you don’t know where the finish line is, you will never know when you cross it.

Introducing the Savings Rate

The good-news answer to this question is, regardless of whatever the federal government does with 401(k) rules, the largest single variable in this equation is under your control.  How much you save, as a percentage of your income, is the biggest contributor to the success or failure of your retirement plan.  The impact of your savings rate on your retirement plan outweighs the impact of higher returns.  And increasing your savings rate is much simpler and more reliable than chasing exceptional returns.

Of course, we can offer endless caveats to this insight.  The timing of your savings going into your retirement accounts, when the “good” return years happen, and what the returns environment is like when you begin to take distributions all figure into the probability of success or failure of the plan – basically whether you, the investor, ever run out of money or not.  When we run goal-projections for PLC Wealth’s clients, we will use a Monte Carlo simulation software to model the probabilities of various outcomes, but those results cannot be easily shown here.  For this article, we will make simplifying assumptions to illustrate the impact of savings rate.

Basic Assumptions

  1. The only variable we change is savings rate.
  2. We ignore inflation for salary and expenses, but apply it to the portfolio. All dollar-figures shown are 2018 dollars, and we use a 5% post-inflation rate of return for the portfolio.
  3. We ignore taxes in the distribution phase.
  4. We assume the investor can access his or her own or spousal accounts to save this much money in qualified accounts. Even if this last assumption was invalid, the impact of the higher savings rates is still valid even if the savings is done in taxable brokerage accounts.
  5. We assume 4% is a safe withdrawal rate in perpetuity (we know this assumption is debatable, but we believe this is a helpful jumping-off point).

The Data

Looking at these numbers, we can see where planners get their “save 10% – 15%” mantra.  Investors who set aside this amount of money, and receive Social Security, stand a very good chance of retiring successfully at age 65.  Additionally, if reported statistics are to be believed, a 10% – 15% savings rate is much higher than the national average.

Notice too that as you raise your savings rate in retirement accounts, the taxing authorities become your partners in growing your wealth.  Part of your increased savings is coming directly from tax savings, a fact most investors enjoy.

Raising the Savings Rate

Once families begin hitting savings rates of 20% or more, they put themselves in the position to retire early.  Or to downshift at some point in their career.  Or to make meaningful gifts to people and organizations they love.  Saving 30% of their income, this family lives on $36,851 per year.  After thirty-five years, they will have investments capable of supporting annual spending of $85,353 per year – a $48,502 annual income buffer!

In the 5% savings-rate analysis, increasing nominal portfolio returns to 12% results in a portfolio value of $881,718.  This portfolio should support about $35,269 in annual withdrawals.  A 12% expected return is unrealistic for financial planning projections.  And $35,269 per year is considerably lower than the $53,069 this family has been spending.  Investors are better served to increase their savings rate to 15% or 20% of your income (or even more), and to anticipate more realistic returns from your portfolio.  Then, if your investments do better than expected, you’ll have some extra money to enjoy or give away.

The Benefits of Raising the Savings Rate

As lifespans extend, “spending down” a portfolio until some anticipated terminal date is daunting.  With large enough investments and flexible consumption needs, a portfolio becomes a perpetual-motion machine.  With sufficient assets and flexible budgeting, your portfolio should continually generate returns that exceed your annual needs in perpetuity.  This is a very comfortable position as an investor or retiree.

When you consider your own situation, you may think, “But I don’t have thirty-five years left in my career!”, or, “I don’t have access to employer-sponsored retirement accounts!”  Nevertheless, the message to take to heart is: Increasing savings rate increases retirement security.  At PLC Wealth, we can help you work through the unique details of your personal situation.  In an article like this one, our goal is to raise awareness among investors of tools at their disposal to tilt the odds of retirement success in their favor.

In our experience, increasing your savings rate is the fuel for the fire of achieving and maintaining financial independence.  Savings rate rises when you invest more, pay off debt, or grow assets in a private business.  No matter where you put the money, it’s this elevated savings rate that can power you to financial independence.  It’s a rewarding journey and a worthwhile destination.  Happy Investing!

Donor Advised Funds – Doing good, wisely

July 10, 2018

By Josh Self

No matter how the 2017 Tax Cuts and Jobs Act (TCJA) may alter your tax planning, we’d like to believe one thing will remain the same: With or without a tax write-off, many Americans will still want to give generously to the charities of their choice. After all, financial incentives aren’t usually your main motivation for giving. We give to support the causes we cherish. We give because we’re grateful for the good fortune we’ve enjoyed. We give because generosity is something we value. Good giving feels great – for donor and recipient alike.

That said, a tax break can feel good too, and it may help you give more than you otherwise could. Enter the donor-advised fund (DAF) as a potential tool for continuing to give meaningfully and tax-efficiently under the new tax law.

What’s Changed About Charitable Giving?

To be clear, the TCJA has not eliminated the charitable deduction. You can still take it when you itemize your deductions. But the law has limited or eliminated several other itemized deductions, and it’s roughly doubled the standard deduction (now $12,000 for single and $24,000 for joint filers). With these changes, there will be far fewer times it will make sense to itemize your deductions instead of just taking the now-higher standard allowance, though we believe that with a generally-lower tax burden, many of our clients will have the capacity to give more, not less, due to these tax changes.

This introduces a new incentive to consider batching up your deductible expenses, so they can periodically “count” toward reducing your taxes due – at least in the years you’ve got enough itemized deductions to exceed your standard deduction.

For example, if you usually donate $8,000 annually to charity, you could instead donate $40,000 once every five years. Combined with other deductibles, you might then be able to take a nice tax write-off that year, which may generate (or be generated by) other tax-planning possibilities.

What Can a DAF Do for You?

DAFs are not new; they’ve been around since the 1930s. But they’ve been garnering more attention as a potentially appropriate tax-planning tool under the TCJA. Here’s how they work:

  1. Make a sizeable donation to a DAF. Donating to a DAF, which acts like a “charitable bank,” is one way to batch up your deductions for tax-wise giving. But remember: DAF contributions are irrevocable. You cannot change your mind and later reclaim the funds.
  2. Deduct the full amount in the year you fund the DAF. DAFs are established by nonprofit sponsoring organizations, so your entire contribution is available for the maximum allowable deduction in the year you make it. Plus, once you’ve funded a DAF, the sponsor typically invests the assets, and any returns they earn are tax-free. This can give your initial donation more giving-power over time.
  3. Participate in granting DAF assets to your charities of choice. Over time, and as the name “donor-advised fund” suggests, you get to advise the DAF’s sponsoring organization on when to grant assets, and where those grants will go.

Thus, donating through a DAF may be preferred if you want to make a relatively sizeable donation for tax-planning or other purposes; you’d like to retain a say over what happens next to those assets; and you’re not yet ready to allocate all the money to your favorite causes.

Another common reason people turn to a DAF is to donate appreciated assets, such as real estate or stocks in kind (without selling them first), when your intended recipients can only accept cash/liquid donations. The American Endowment Foundation offers this 2015 “Donor Advised Fund Summary for Donors,” with additional reasons a DAF may appeal – with or without its newest potential tax benefits.

Beyond DAFs

A DAF isn’t for everyone. Along the spectrum of charitable giving choices, they’re relatively easy and affordable to establish, while still offering some of the benefits of a planned giving vehicle. As such, they fall somewhere between simply writing a check, versus taking on the time, costs and complexities of a charitable remainder trust, charitable lead trust, or private foundation.  If it is appropriate for your situation, we are happy to discuss planned giving vehicles with you too.

How Do You Differentiate DAFs?

If you decide a DAF would be useful to your cause, and might be a helpful part of your financial plan, the next step is to select an organization to sponsor your contribution. Sponsors typically fall into three types:

  1. Public charities established by financial providers, like Fidelity, Schwab and Vanguard
  2. Independent national organizations, like the American Endowment Foundation and National Philanthropic Trust
  3. “Single issue” entities, like religious, educational or emergency aid organizations

Within and among these categories, DAFs are not entirely interchangeable. Whether you’re being guided by a professional advisor or you’re managing the selection process on your own, it’s worth doing some due diligence before you fund a DAF. Here are some key considerations:

Minimums – Different DAFs have different minimums for opening an account. For example, one sponsor may require $5,000 to get started, while another may have a higher threshold.

Fees – As with any investment account, expect administration fees. Just make sure they’re fair and transparent, so they don’t eat up all the benefits of having a DAF to begin with.

Acceptable Assets – Most DAFs will let you donate cash as well as stocks. Some may also accept other types of assets, such as real estate, private equity or insurance.

Grant-Giving Policies – Some grant-giving policies are more flexible than others. For example, single-entity organizations may require that a percentage of your grants go to their cause, or only to local or certain kinds of causes. Some may be more specific than others on the minimum size and/or maximum frequency of your grant requests. Some have simplified the grant-making process through online automation; others have not.

Investment Policies – DAF assets are typically invested in the market, so they can grow tax-free over time. But some investments are far more advisable than others for building long-term giving power! How much say will you have on investment selections? If you’re already working with a wealth advisor, it can make good sense to choose a DAF that lets your advisor manage these account assets in a prudent, fiduciary manner.  PLC Wealth employs an evidence-based investment strategy for all our managed assets.

Transfer and Liquidation Policies – What happens to your DAF account when you die? Some sponsors allow you to name successors if you’d like to continue the account in perpetuity. Some allow you to name charitable organizations as beneficiaries. Some have a formula for distributing assets to past grant recipients. Some will roll the assets into their own endowment. (Most will at least do this as a last resort if there are no successors or past grant recipients.) Also, what if you decide you’d like to transfer your DAF to a different sponsoring organization during your lifetime? Find out if the organization you have in mind permits it.

Deciding on Your Definitive DAF

Selecting an ideal DAF sponsor for your tax planning and charitable intent usually involves a process of elimination. To narrow the field, decide which DAF features matter the most to you, and which ones may be deal breakers.

If you’re working with a wealth advisor such as PLC Wealth Management, we hope you’ll lean on us to help you make a final selection, and meld it into your greater personal and financial goals. As Wharton Professor and “Give and Take” author Adam Grant has observed, “The most meaningful way to succeed is to help others succeed.” That’s one reason we’re here: to help you successfully incorporate the things that last – like generosity – into your lifestyle.