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!

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

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!

Reflections on 2018 and the stock markets renewed volatility…

If you were a member of the popular press, you’d probably be happy with 2018’s first quarter performance. At last – some volatility fueling news1 in early February, with plenty of enticing “largest,” “fastest,” and “worst” market superlatives to savor after a long, languid lull.

As usual, there are plenty of potential culprits to point to among current events: global trade wars heating up, the arrival of quantitative tightening (rising interest rates), troubles in tech-land over data privacy concerns, ongoing Brexit talks, and some interesting events over in the Koreas. At quarter-end, one hopeful journalist asked, “Is the Bear Market Here Yet?”2 Another observed: “[T]he number of [Dow Jones Industrial Average] sessions with a 1% move so far in 2018 are more than double 2017’s tally, and it isn’t even April.”3

Has the coverage left you wondering about your investments? Most markets have been steaming ahead so well for so long, even a modest misstep may have you questioning whether you should “do something,” in case the ride gets rougher still.

If we’ve done our job of preparing clients and their portfolio for market jitters, clients may might be able to cite back to us why they’ve already done all they can do to manage the volatility, and why it’s ultimately expected to be good news for evidence-based investors anyway. Remember, if there were never any real market risk, you couldn’t expect extra returns for your risk tolerance.

That said, you may have forgotten – or never experienced – how awful the last round of extreme volatility felt during the Great Recession. Insights from behavioral finance tell us that our brain’s ingrained biases cause us to gloss over those painful times, and panic all over again when they recur, long before our rational resolve has time to kick in.

If you noticed the news, but you’re okay with where you’re at, that’s great. If the volatility is bothering you, talk to a CFP® professional or other qualified financial professional; it may help ease your angst. If you continue to struggle with whether you made the right decisions during quieter markets, plan a rational shift to better reflect your real risk tolerances and cash-flow requirements. Not only is your peace of mind at least as important as the dollars in your account, you could end up worse off if you’ve taken on more risk than you can bear in pursuit of higher expected returns.

As Wall Street Journal columnist Jason Zweig said during the February dip: “A happy few investors … may have long-term thinking built into them by nature. The rest of us have to cultivate it by nurture.”  We couldn’t agree more, and we consider it our duty and privilege to advise you accordingly, through every market hiccup.

The Vital Role of Strategic Rebalancing

If there is a universal investment ideal, it is this: Every investor wants to buy low and sell high. What if we told you there is a disciplined process for doing just that, and staying on track toward your personal goals while you’re at it? Guess what? There is. It’s called strategic rebalancing.

Strategic Rebalancing: How It Works

Imagine it’s the first day of your investment experience. As you create your new portfolio, it’s best if you do so according to a personalized plan that prescribes how much weight you want to give to each asset class. So much to stocks, so much to bonds … and so on. Assigning these weights is called asset allocation.

Then time passes. As the markets shift around, your investments stray from their original allocations. That means you’re no longer invested according to plan, even if you’ve done nothing at all; you’re now taking on higher or lower market risks and expected rewards than you originally intended. Unless your plans have changed, your portfolio needs some attention.

This is what rebalancing is for: to shift your assets back to their intended, long-term allocations.  In fact, this is part of the best practices suggested in my recent blog post for the New Year.

A Rebalancing Illustration

To illustrate, imagine you (or your advisor) has planned for your portfolio to be exposed to the stock and bond markets in a 50/50 mix. If stocks outperform bonds, you end up with too many stocks relative to bonds, until you’re no longer at your intended, balanced blend. To rebalance your portfolio, you can sell some of the now-overweight stocks, and use the proceeds to buy bonds that have become underrepresented, until you’re back at or near your desired mix. Another strategy is to use any new money you are adding to your portfolio anyway, to buy more of whatever is underweight at the time.

Either way, did you catch what just happened? Not only are you keeping your portfolio on track toward your goals, but you’re buying low (underweight holdings) and selling high (overweight holdings). Better yet, the trades are not a matter of random guesswork or emotional reactions. The feat is accomplished according to your carefully crafted, customized plan.

Portfolio Balancing: A Closer Look

We’ve now shared a simple rebalancing illustration. In reality, rebalancing is more complicated, because asset allocation is completed on several levels. First, we suggest balancing your stocks versus bonds, reflecting your need to take on market risk in exchange for expected returns. Then we typically divide these assets among stock and bond subcategories, again according to your unique financial goals. For example, you can assign percentages of your stocks to small- vs. large-company and value vs. growth firms, and further divide these among international, U.S., and/or emerging markets.

One reason for these relatively precise allocations is to maximize your exposure to the right amount of expected market premiums for your personal goals, while minimizing the market risks involved by diversifying those risks around the globe and across sources of returns that don’t always move in tandem with one another. We, and the fund managers we typically turn to for building our portfolios are guided by these tenets of evidence-based investing.

Striking a Rebalancing Balance

Rebalancing using evidence-based investment strategies is integral to helping you succeed as an investor. But like any power tool, it should be used with care and understanding.

It’s scary to do in real time. Everyone understands the logic of buying low and selling high. But when it’s time to rebalance, your emotions make it easier said than done. To illustrate, consider these real-life scenarios.

  • When markets are down: Bad times in the market can represent good times for rebalancing. But that means you must sell some of your assets that have been doing okay and buy the unpopular ones. The Great Recession of 2007–2009 is a good example. To rebalance then, you had to sell some of your safe-harbor holdings and buy stocks, even as popular opinion was screaming that stocks were dead. Of course, history has shown otherwise; those who did rebalance were best positioned to capture available returns during the subsequent recovery. But at the time, it represented a huge leap of faith in the academic evidence indicating that our capital markets would probably prevail.
  • When markets are up. An exuberant market can be another rebalancing opportunity – and another challenge – as you must sell some of your high flyers (selling high) and rebalance into the lonesome losers (buying low). At the time, this can feel counter-intuitive. But disciplined rebalancing offers a rational approach to securing some of your past gains, managing your future risk exposure, and remaining invested as planned, for capturing future expected gains over the long-run.

Costs must be considered. Besides combatting your emotions, there are practical concerns. If trading were free, you could rebalance your portfolio daily with precision. In reality, trading incurs fees and potential tax liabilities. To achieve a reasonable middle ground, it’s best to have guidelines for when and how to cost-effectively rebalance. If you’d like to know more, we’re happy to discuss the guidelines we employ for our own rebalancing strategies.

The Rebalancing Take-Home

Strategic rebalancing using evidence-based investment strategies makes a great deal of sense once you understand the basics. It offers objective guidelines and a clear process to help you remain on course toward your personal goals in rocky markets. It ensures you are buying low and selling high along the way. What’s not to like about that?

At the same time, rebalancing your globally diversified portfolio requires informed management, to ensure it’s being integrated consistently and cost effectively. An objective advisor also can help prevent your emotions from interfering with your reason as you implement a rebalancing plan. Helping clients periodically employ efficient portfolio rebalancing is another way that PLC Wealth Management seeks to add value to the investment experience.

Cryptocurrency…what’s all the buzz about?

Have you caught cryptocurrency fever, or are you at least wondering what it’s all about? Odds are, you hadn’t even heard the term until recently. Now, it seems as if everybody and their cousin are getting in on it.

 

Psychologists have assigned a term to the angst you might be feeling in the heat of the moment. It’s called “FoMO” or Fear of Missing Out. Education is the best first step toward facing FoMO and making informed financial choices that are right for you. So before you make any leaps, let’s take a closer look.

 

What is cryptocurrency?

Crytpocurrency is essentially a kind of money – or currency. Thanks to electronic security – or encryption – it exists in a presumably secure, sound and limited supply. Pair the “encryption” with the “currency,” and you’ve got a new kind of digital asset, or electronic exchange.

 

Well, sort of new. Cryptocurrency was introduced in 2009, supposedly by a fellow named Satoshi Nakamoto. His Wikipedia entry suggests he may not actually be who he says he is, but minor mysteries aside, he (or possibly “they”) is credited with designing and implementing

bitcoin as the first and most familiar cryptocurrency. Ethereum is currently its second-closest competitor, with plenty of others vying for space as well (more than 1,300 as of early December 2017), and plenty more likely to come.

 

Unlike a dollar bill or your pocket change, cryptocurrency exists strictly as computer code. You can’t touch it or feel it. You can’t flip it, heads or tails. But increasingly, holders are receiving, saving and spending their cryptocurrency in ways that emulate the things you can do with “regular” money.

 

How does cryptocurrency differ from “regular” money?

In comparing cryptocurrency to regulated fiat currency – or most countries’ legal tender – there are a few observations of note.

First, since neither fiat nor cryptocurrency are still directly connected to the value of an underlying commodity like gold or silver, both must have another way to maintain their spending power in the face of inflation.

 

For legal tender, most countries’ central banks keep their currency’s spending power relatively stable. For cryptocurrency, there is no central bank, or any other centralized repository or regulator. Its stability is essentially backed by the strength of its underlying ledger, or blockchain, where balances and transactions are verified and then publicly reported.

 

The notion of limited supply factors in as well. Obviously, if everyone had an endless supply of money, it would cease to have any value to anyone. That’s why central banks (such as the U.S. Federal Reserve, the Bank of Canada, and the Bank of England) are in charge of stabilizing the value of their nation’s legal tender, regularly seeking to limit supply without strangling demand.

 

While cryptocurrency fans offer explanations for how its supply and demand will be managed, it’s not yet known how effective the processes will be in sustaining this delicate balance, especially when exuberance- or panic-driven runs might outpace otherwise orderly procedures. (If you’re technically inclined and you’d like to take a deep dive into how the financial technology operates, here’s one source to start with.)

 

Why would anyone want to use cryptocurrency instead of legal tender?  

For anyone who may not be a big fan of government oversight, the processes are essentially driven “by and for the people” as direct peer-to-peer exchanges with no central authorities in charge. At least in theory, this is supposed to allow the currency to flow more freely, with less regulation, restriction, taxation, fee extraction, limitations and similar machinations. Moreover, cryptocurrency transactions are anonymous.

 

If the world were filled with only good, honest people, cryptocurrency and its related technologies could represent a better, more “boundary-less” system for more freely doing business with one another, with fewer of the hassles associated with international commerce.

Unfortunately, in real life, this sort of unchecked exchange can also be used for all sorts of mischief – like dodging taxes, laundering money or funding terrorism, to name a few.

 

In short, cryptocurrency, blockchain technology, and/or their next-generations could evolve into universal tools with far wider application. Indeed, such explorations already are under way. In December 2017, Vanguard announced collaborative efforts to harness blockchain technology for improved index data sharing.

 

That said, many equally promising prospects have ended up discarded in the dustbin of interesting ideas that might have been. Time will tell which of the many possibilities that might happen actually do.

 

Even if I don’t plan to use cryptocurrency, should I hold some as an investment? 

If you do jump in at this time, know you are more likely speculating than investing.

 

Bubble or not, consider these two points. First, there are a lot of risks inherent to the cryptocurrency craze. Second, cryptocurrency simply doesn’t fit into our principles of evidence-based investing … at least not yet.

 

Let’s take a look at the risks.

 

Regulatory Risks – First, there’s the very real possibility that governments may decide to pile mountains of regulatory road blocks in front of this currently free-wheeling freight train. Some countries have already banned cryptocurrency. Others may require extra reporting or onerous taxes. These and other regulations could severely impact the liquidity and value of your coinage.

 

Security Risks – There’s also the ever-present threat of being pickpocketed by cyberthieves. It’s already happened several times, with millions of dollars of value swiped into thin air. Granted, the same thing can happen to your legal tender, but there is typically far more government protection and insurance coverage in place for your regulated accounts.

 

Technological Risks – As we touched on above, a system that was working pretty well in its development days has been facing some serious scaling challenges. As demand races ahead of supply, the human, technical and electric capital required to keep everything humming along is under stress. One recent post estimated that if bitcoin technology alone continues to grow apace, by February 2020, it will suck away more electricity than the entire world uses today.

 

That’s a lot of potential buzzkill for your happily-ever-after bitcoin holdings, and one reason you might want to think twice before you pile your life’s savings into them.

 

Then again, every investment carries some risk. If there were no risk, there’d be no expected return. That’s why we also need to address what evidence-based investing looks like. It begins with how investors (versus speculators) evaluate the markets.

 

What’s a bitcoin worth? A dollar? $100? $100,000? The answer to that has been one of the most volatile bouncing balls the market has seen since tulip mania in the 1600s.

 

In his ETF.com column “Bitcoin & Its Risks,” financial author Larry Swedroe summarizes how market valuations occur. “With stocks,” he says, “we can look at valuation metrics, like earnings yield. With bonds, we can use the current yield-to-maturity. And with assets like reinsurance or lending … we have historical evidence to make the appropriate estimates.”

 

You can’t do any of these things with cryptocurrency. Swedroe explains: “There simply is no tangible relationship between any economic or financial parameters and bitcoin prices.” Instead, there are several ways buying cryptocurrency differs from investing:

 

  • Evidence-based investing calls for estimating an asset’s expected return, based on these kinds of informed fundamentals.
  • Evidence-based investing also calls for us to factor in how different asset classes interact with one another. This helps us fit each piece into a unified portfolio that we can manage according to individual goals and risk tolerances.
  • Evidence-based investing calls for a long-term, buy, hold and rebalance strategy.

 

Cryptocurrency simply doesn’t yet synch well with these parameters. It does have a price, but it can’t be effectively valued for planning purposes, especially amidst the extreme price swings we’re seeing of late.

 

What if I decide to buy some cryptocurrency anyway?

We get it. Even if it’s far more of a speculative than investment endeavor, you may still decide to give cryptocurrency a go, for fun or potential profit. If you do, here are some tips to consider:

 

  • Think of it as being on par with an entertaining trip to the casino. Nothing ventured, nothing gained – but don’t venture any more than you can readily afford to lose!
  • Use only “fun money,” outside the investments you’re managing to fund your ongoing lifestyle.
  • Educate yourself first, and try to pick a reputable platform from which to play. (CoinDesk offers a pretty good bitcoin primer.)
  • If you do strike it rich, regularly remove a good chunk of the gains off the table to invest in your managed portfolio. That way, if the bubble bursts, you won’t lose everything you’ve “won.” (Also set aside enough to pay any taxes that may be incurred.)

 

Last but not least, good luck. Whether you win or lose a little or a lot with cryptocurrency – or you choose to only watch it from afar for now – we remain available to assist with your total wealth, come what may.

 

 

10 Practices for the New Year

Happy New Year! Now that 2017 is a wrap, one of the best presents you can bestow on yourself and your loved ones is the gift of proper preparation for rest of the year. Want to get a jump-start on it? Here are 10 financial best practices to energize your wealth management efforts.

  1. Save today for a better retirement tomorrow. Are you maxing out pre-tax contributions to your company retirement plan? Taking full advantage of your and your spouse’s company retirement plans is an important, tax-advantaged way to save for retirement, especially if your employer matches some of your contributions with “extra” money. And, by the way, if you are 50 or older, you may be able to make additional “catch-up contributions” to your plan, to further accelerate your retirement-ready investing.
  2. Verify your valuables are still covered. Most households have insurance: home, auto, life … maybe disability and/or umbrella. But when is the last time you’ve checked to see if these policies remain right for you? Over time, it’s easy to end up with gaps or overlaps, like too much or not enough coverage, deductibles that warrant a fresh take, or beneficiaries who need to be added or removed. If you’ve not performed an insurance “audit” recently, there’s no time like the present to cross this one off your list.
  3. Get a grip on your debt load. Investment returns will only take you so far if excessive debt is weighing you down. Prioritize paying down high-interest credit cards and similar high-cost debt first, and at least meeting minimums on the rest. You may also want to revisit whether you still hold the best credit cards for your circumstances. Do the interest rates, incentives, protections and other perks still reflect your needs? Ditto on that for your home loan.
  4. Check up on your credit reports. Speaking of those credit cards, have you been periodically requesting your free annual credit report from each of the three primary credit reporting agencies? Be sure to use annualcreditreport.com for this purpose, as it’s the only federally authorized source for doing so. By staggering your requests – submitting to one agency every fourth months – you can keep an ongoing eye on your credit, which seems especially important in the wake of last summer’s Equifax breach.
  5. Get a bead on your budget. How much did you spend in 2017? How much do you intend to spend in the year ahead? After current spending, can you still afford to fund your future plans? Do you have enough set aside in a rainy day fund to cover the inevitable emergencies? These days, there are apps available to help you answer these important questions. Mint.com is one such popular app.
  6. Get ready for tax time … with a twist. While income tax reform looms large in the U.S., the changes won’t apply to 2017 taxes (due by April 17, 2018). There now may be tax planning opportunities or challenges to consider as the new laws take effect in 2018. You may want to fire up those tax-planning engines on the early side this time around.
  7. Give your investments a good inspection. Where do you stand with your personal wealth? Have you got an investment strategy to see you through? Does your portfolio reflect your personal goals and risk tolerances? If you experienced strong growth in 2017, is it time to lock in some of those gains by rebalancing your portfolio to its original mix? While investment management is a marathon of patient perspective rather than a short-sighted sprint of mad dashes, a new year makes this as good a time as any to review the terrain.
  8. Ensure your estate plans are current. Do you have wills and/or trusts in place for you and your loved ones? If so, when is the last time you took a look at them? Your family may have experienced births, deaths, marriagies or divorces. Dependants may have matured. You may have acquired or sold business interests, and added new assets or let go of old ones. Your original intentions may have changed, or government regulations may have changed them for you. For all these reasons and more, it’s worth revisiting your estate plans annually.
  9. Have a look at your healthcare directives. As healthcare becomes increasingly complex, advance directives (living wills) play an increasingly vital role in ensuring your healthcare wishes are met should you be unable to express them when the need arises. Don’t leave your loved ones unaware of and/or unable to act on your critical-care or end-of-life preferences. If you don’t already have a strong living will in place, Aging with Dignity’s Five Wishes is one helpful place to learn more.
  10. Give your newly adult children the gift of continued care. Have any of your children turned 18 recently? You may send them off to college or a career, assuming you can still be there for them should an emergency arise. Be forewarned! If you don’t have the legal paperwork in place, healthcare providers and others may be unable to respond to your requests or even discuss your adult child’s personal information with you. To remain involved in their healthcare interests, you’ll want to have a healthcare power of attorney, durable power of attorney and HIPAA authorization in place. It may also be prudent to establish education record release authorizations while you’re at it.

Next Steps in the New Year

We get it. Life never stops. The holiday season can be a busy time that often spills right into the new year. Don’t despair if you can’t get to all ten of these tidbits at once. Take on one each month, and you’ll still have a couple of months to spare before we’re ringing in 2019.

Better yet, don’t go it alone. Let us know if we can help you turn your financial planning jump-start into a mighty wealth management leap. It begins with an exploratory conversation.

What do the tea leaves say today?

If you’ve taken our past advice about ignoring the onslaught of breaking market news, you probably didn’t read Russell Investments’ recent “2017 Global Market Outlook Q4 Update.”

I’m not prone to pore over these relatively unremarkable analyses ourselves, but I do read a lot of ‘industry speak’ as part of our due diligence. More times than not, it for purely entertainment purposes to see what the tea leaves say on that particular day.  This is how I came across this intriguing statement in Russell Investments’ wrap-up:

“Our main message for the close of 2017 isn’t much different from our opening one: we maintain our ‘buy the dips and sell the rallies’ mantra.”

Great idea, but a little weak on practical application. It’s akin to suggesting that lottery players can score big … as long as they consistently pick the winning numbers!

Immediately following Russell Investments’ mantra, you’ll find this disclosure:

“These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.”

In all seriousness, I feel these sorts of reports speak inadvertent volumes about the evidence-based mantra to which we adhere.  If you are not familiar with this term evidence-based investing, be on the lookout as I will be writing more about this soon. It is a main tenant to the way we view and implement investment strategies.  By depending on practical evidence instead of fanciful forecasts, our views are rarely subject to change – especially not in hurried reaction to current market conditions.

Instead, we continue to believe the best way to manage your personal wealth is to:

  • Stay laser focused on your bigger picture…are you on track to achieve your goals. Buy, sell and rebalance your portfolio according to your own carefully crafted plans.
  • Focus on an efficient, evidence-based approach to capturing the market’s durable returns while managing its related risks.
  • Ignore the market’s daily distractions, especially its fleeting dips and rallies; they’re far more likely to block the view toward your higher goals than to yield big wins through the chase.

This is our mantra, and so it shall remain – regardless of the date at the top of the page.