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COVID-19 is here. now how do you invest in the wake of the 2020 Crash?
I’ve looked at hundreds of investment portfolios, and I’ve gone through the materials most advisors have used to create them (speaking generally of course). Occasionally, I’ll see an account statement or a portfolio model that stands out, but most of the time, they all look about the same. While I take a different approach than most, I feel the need to share some important information that will help your portfolio recover. If you’re already a client of mine, this won’t apply, but if you’re in the 90% of people with the same general allocation… Go get your statements… Listen up.
One of the biggest mistakes financial advisors make is assuming that the quality of your investments doesn’t matter as long as the portfolio as a whole seems ok. We can get into how Modern Portfolio Theory and the Efficient Market Hypothesis became twisted around since their development in the 1950’s & 60’s, but that would take a book (if you have questions, We would be happy to talk with you). Financial Advisors have been taught that the only risk that matters is the volatility of your portfolio. There are other, more severe, risks to which you’ve probably been exposed—all in the name of diversification.[1]
Look at your statement: You’ll likely find several investments with the terms: “high yield,” or “high income.” (on occasion, they will label these as income “opportunities”). These are called “junk bonds,” officially. They are “below investment grade” loans made to governments, corporations, and municipalities with particularly poor credit. They pay a high interest rate because they have more significant default risks. In good times, it’s an unwise financial decision to lend money to someone who can’t pay it back. Why do we do this in our investment portfolios? (FYI, because their price moves differently that “stocks” is a dumb answer.) You don’t need these to be diversified, and the times of crisis, in which bonds might help stabilize your portfolio, will certainly increase the risks that your borrowers won’t make their loan payments. If they don’t, you lose 100% instead of the 10, 20, of 30% you were trying to avoid.
Highlight these on your statements, sell them, and NEVER buy them back.
By “walking tall,” I mean get rid of your “short” funds. These are investments that make money when the stock market declines. These are generally a gamble and are among the rare investments that have unlimited losses when the market goes up in value. It’s well established fact that the stock market increases over time, so these are poor long-term investments. If you have them, they served you well in the recent drop, but as we approach the end of the decline, you’ll want to trade them out.
The impact of the COVID-19 outbreak will hit developing nations much harder that it will the United States (and a few other countries with highly developed economies). Most people own “emerging markets” mutual funds, ETFs, or even index funds. These are higher “risk” investments (read: more volatile), and actually have much higher risks (political risks, stability of the business themselves, Currency & Trade risks, etc.). Advisors keep these in your portfolio to be open to the opportunity that could arise if one country experiences rapid economic growth. Most people, however have a few funds that just own other funds focused on every country around the globe. These have been hard hit in the midst of COVID-19, and they will continue to lose value longer then that United States, and won’t recover quickly.
I’ve always believed with conviction, that if you have a significantly high probability of losing money on a given investment, it’s best not to own it. Like Junk Bonds, these don’t add much of anything to your diversification and they certainly won’t help your portfolio in the coming months, perhaps years. It’s time to move to investments primarily based in the United States.
Most people have a number of “index” funds in their portfolio. An “index” is just a fancy way of making an average. Indexes include a defined set of investments, usually weighted by size. They became commonplace in the 1960s when William Sharpe decided that they would be an effective way to measure covariance (at the time, measuring covariance of individual investments would have been impossible to consistently do by hand). They were never intended to be an investment, but became a staple in the 1990s and early 2000s. As quickly as they became popular, it became clear that indexes were anything but efficient and simple adjustments could almost ensure superior results. There are dozens of approaches, but they all perform a similar function: eliminate the investments that are clearly below average. Owning the index creates reasonably good returns, especially when times are good, but exposes your portfolio to the below-average investments you would probably never choose to own. For example, the Russel 3000 contains approximately 90% of publicly traded US companies. Owning the Russel 3000, you’ll undoubtedly own a number of small, poorly-run companies that will struggle to recover from the impact of COVID-19.
Instead of owning indexes, focus your portfolio around high-quality investments that have been resilient for many years, and have done well though other difficult times. Most of these will be mature, dividend-paying companies with long track-records of increasing their payouts. I would encourage you to work with your advisor to determine appropriate investments.
While staying within the bounds of your investment policy, you should reallocate from your expensive investments to those that you can buy for a bargain. At present, interest rates are almost impossibly low, which means the price of fixed income investments has risen, or at least has declined less than stock investments during the recent crash.
Let’s say you are invested in a portfolio that is 60% equity (stock), and 40% fixed income. If stocks stand to gain 40% in their recovery and bonds stay about the same (or decline as a result of rising interest rates), it is the perfect time to capture more of the recovery by shifting some or all of you fixed income investments into equity. By doing so, you would add a significant amount to the total return of your portfolio.
In doing so, it is important that you maintain the diversification of your portfolio. This means identifying investments that don’t move in similar fashion to one another. We’ve generally, and wrongly, assumed that bonds diversify stocks. Often times, they do. They also frequently don’t. Consider the following example: You own 100 shares of stock in the fictitious company CRP. They also owe you money because you own CRP bonds. If CRP loses revenue, the stock value declines. CRP will also have a harder time paying its debt, so your bond will lose value as well. Owning a stock and a bond make sense when the two have low “covariance” (their price movements are unrelated). This is a question of how closely related their price movements are, not whether it is a stock or a bond.
At the time of my writing, it appears that the S&P 500 is near the end of its decline. Its price dropped about 35%, factoring in an economic decline for the quarter of apocalyptic proportions. We would have to see a 80% slowdown in corporate profits over the next 4 months to justify the drop. While the reaction to COVID-19 has been extreme, it will not cause this level of catastrophe. Investments could continue to lose value, but are already at historic bargains. Now is the perfect time to begin preparing yourself to take advantage of the recovery.
We strongly advise working with a qualified investment
professional when evaluating your investment decisions. A CoCreate Financial advisor is prepared to
help you make the right adjustments to your portfolio in times of crisis and
have solutions designed specifically to make the most out of the COVID-19
recovery.
[1] Note: Diversification should have never been translated into “owning everything.” Being diversified means owning enough investments whose prices fluctuate independently (low “covariance”) of one another in such a way that the short term price changes in a single security will have a minimal effect on the overall value of the portfolio.
Investing involves risk in any market conditions. Your investments cannot be guaranteed and may lose value. The recommendations made above should always be considered in consultation with a qualified professional and account for your individual circumstances. These recommendations are given generally and should not be interpreted as individual investment advice.
We will be updating this post with a lot of relevant information including other businesses, experts, and community leaders partnering with us in this endeavor.
Register now:
https://attendee.gotowebinar.com/register/6573095321343961355
I believe that our economy is strong. I believe it is remarkably flexible and resilient. A couple of weeks ago I shared our thoughts in verse about economics considering COVID-19 and the “Oil Price War.” You also got a glimpse of my love for Mexican food. As we have watched the story unfold, we have revised our assumptions. The discipline of economics often feels like a luxury when it is growing and healthy, but we can’t forget the close relationship the discipline has with public welfare and social justice. I believe our response at local levels has caused significant economic damage (threatening small businesses and putting the vulnerable out of work and at risk), and will fail to protect our communities from COVID-19. WE MUST FOLLOW CDC GUIDANCE, but in fear, we have not. The future is in our hands.
You can download our in-depth study of what has been going on. The data shows a very different reality from the rumors that are circulating. If you know anyone in local or state government, please consider passing the study along to them.
As far as the Economy is concerned, The S&P 500 has priced in somewhere around twice as much economic castastrophe as seems likely to occur here. Furthermore, I have consistently been amazed by the fortitude and adaptation American businesses have shown in times of crisis. We will see this even more this year. We care about our employees, their families, and the people in our communities. We are likely at the bottom and will begin to recover soon.
WHAT YOU CAN DO: Small Businesses built our great nation. Even the largest businesses were once a kitchen table conversation. Our small businesses have carried us through “the best of times, and the worst of times.” We will continue to do so if we band together and refuse to give up. If you own a business, you’re our lifeline. You are our strength. Stay strong, and be the courageous entrepreneur God created you to be. Let’s carry our community through this. Never give up. Never give in.
Over the last couple of weeks, we’ve watched Coronavirus stir panic across the United States. This past weekend, OPEC met to negotiate oil pricing for participating countries. When Russia wouldn’t agree to reduce production, Saudi Arabia slashed their prices in retribution (this isn’t atypical OPEC behavior). The American people saw this as even more reason to panic and the stock market continued to drop.
As a professional investment manager and financial planner, I want to tell you a few things I absolutely love about the situation in which we find ourselves this morning.
I wrote about the economic implications of CV last week… for those who missed the article, they are extremely minimal. As of this morning the spread of the virus through mainland China has slowed to a near halt and, while the virus is slowly making its way around the globe, the number of recoveries (62.4k) are massively outpacing the number of new cases (30.6k). The end result, the CV outbreak is subsiding. Sure, we’ll have a quarter or two of earnings reductions for a few companies, but we should play catch up throughout the remainder of the year.
| Q1 | Q2 | Q3 | Q4 | 2020 |
| 2.1% | 0.25% | 3.0% | 3.8% | 2.3% |
Projecting the year’s economic growth (by GDP Growth) with coronavirus we will still have GDP growth for the year of about 2.3%. While this is lower than I would hope to see, it is still growing at a reasonable pace.
What Coronavirus did accomplish for our financial system (the part I’m excited about), was create an opportunity to purchase stable sources of income at discounted prices and to strategically generate tax savings. Of course, this only works if you’re making business-minded investments (for stock traders and index fund investors, the recent volatility just hurts).
I find it fascinating that OPEC decisions like this one often lead to short-term declines in the stock market. The S&P 500, essentially an average for the 500 largest US companies that are traded on the stock exchanges, dropped in price substantially. What’s fascinating, is that the companies the average represents actually received a boost to their financials.
If I owned a taco truck
and parked it down the street,
I’d spend money on beans and beef
and pork and lots of things to eat.
If costs are high, when people buy
themselves a tasty treat,
I’d find that I have less at times
to keep for me and mine.
But when beans go on sale…
I have plenty room for profits to avail
and money to put food on my own table.
If I owned a taco truck
and could drive it down the street
I’d need more supply to feed new customers of mine
and another truck to park on their street.
So I’m no Robert Frost… But I can tell you that if I owned a taco truck, it might cost $2.00 to make my lunch special that I sell for $4.50. At the end of the day, I get to keep $2.50 of profit to support my family. IF beans and meat and cheese go down in price and I can make my lunch special for $1.50, I now have $3.00 in profit. That’s 50¢/taco that I can use however I want. I can pay down debt, pay for my kid’s education, buy a boat, or I can use it to grow my business. This results in more profit for me over time.
Lower oil prices are like discounted beans. Every business has energy costs, so lower oil (or other energy) prices mean more profits. If my taco truck makes more money, its value goes up proportionally. This is true for our stock market. The sudden drop in oil prices actually increase the value of every business in America that is not dependent on the sale of oil for their profit.
The “markets,” however, have never been rational. Instead of looking at a business’ value, people are selling out in mindless panic. SO there are bargains to be had in which you can buy the same dividend cashflows for less than you could a few weeks ago, and if a company’s profit is resilient, then their dividend payouts should be as well.
As I contemplate our situation, I recall a figure from my research a few years ago when oil prices declined: a $0.01 drop in gas price puts around $1 BILLION back into the pockets of the American Consumer. I can’t confirm this number is precise for today, but it gives you an idea of how much we stand to gain from cheap energy. EVEN MORE IMPORTANTLY, the United States became a net-exporter of oil to OPEC nations back in 2015, and we have, in each of the past 5 months, sold more oil to them than they have to us. Because the U.S. is energy independent, we have the freedom to choose how we are affected by a small, focused trade scuffle between Saudi Arabia and Russia.
The recent decline in oil price is good for our portfolios, and the unnecessary panic can help give us a nice discount.
There are many more reasons to believe that the economy is going to continue to accelerate. We are experiencing the dawn of a new age in manufacturing, data processing, machine learning, data storage, communication (5G), Genetic-based treatments for disease. It’s all coming together at the right time, and the technological revolution, which was in its infancy when we all purchased our first iPhone, is now entering adolescence and we will soon feel its impact more than ever.
| I remember when... | Now... |
| I looked up phone numbers from a book | I use voice control and the internet |
| We typed commands into a computer that took up the whole desk. | I don’t even have to type |
| We had to unplug the fax machine to connect to the internet… | I’m never disconnected and can download at 2 Gbps/second (soon to be 100) on my phone. |
| We managed & stored paper files | AI manages our storage & document security and we can access them around the globe. |
| When work was location based | we work from wherever it is most efficient. |
| I remember learning about the assembly line | Kids are learning to print parts and make robots in school |
| We watched worn out Video-Cassettes we rented from blockbuster. | “What’s Blockbuster?” You can watch anything anywhere as long as you have your phone… in HD. |
Technology has developed to the point that we have complete mobile systems that can produce with extreme efficiency and automation. They reduce costs while increasing output, customization to consumer, and flexibility of service/product delivery. Now that these systems exist, they are beginning to integrate seamlessly with one another. 3 years ago, remote employees were a viable option at select positions in the service sector, particularly for tech-savvy businesses. Now as all of these technologies mature into their adolescence, we are starting to see comprehensive solutions that make normal businesses location agnostic.
The growth we’ve seen in the last ten years is only the beginning. Sure, there will be ups and downs in the market, and we will certainly experience some growing pains. We’re at beginning of one of the greatest opportunities investors will have in our lifetimes.
Be patient with the markets, and take advantage of good opportunities. This is part of how we create a future… together.
Coronavirus has dominated headlines for most of the year so far, and it’s become the most frequently asked question we’ve received from clients in regard to the security of their portfolios. For most of the year, the markets mostly ignored CV and have been growing rapidly because the investing public finally accepted that recent economic strength was much more than an illusion. Over the past several days, however, the S&P 500 has declined about 7.8%. I expect that it will decline tomorrow again by about 3% and settle in the range of $3025 - $3040 (which is significantly undervalue by several valuation methods other than over-used PE ratio). I believe we’ll sit there for a week or two and then the markets will begin to recover. In this article, I’ll attempt to highlight a few points about the Coronavirus and its impact on the economy and address a few ways in which we’ve set our client portfolios up to be insulated from the impacts of the virus. I’ll also provide links to a few good outside resources.
First, it’s important to remember that if you’re a client of ours, your portfolio is NOT the S&P 500 and, regardless of the specific investments you have, we have designed your account to lose less than the market in moments like this one. A quick napkin-scratch calculation at the close of the market today showed that most accounts are presently down about 3.5%.[1] That’s a lot less than what you’re hearing about in the headlines. A “market index,” like the S&P 500 is just a form of average, so while it is blown by the wind, our portfolios have a specific focus on eliminating specific risks as much as is possible. One of the specific risks we had prepared for before the CV headlines, was trade risk with China as a result of tariffs. That means that, on an investment-by-investment basis, we evaluated the companies our clients own to make sure they would be resilient in a trade slowdown with China. Because we were prepared and designed the portfolios with stability and dividends top-of-mind, the portfolios have the ability to grow with the markets and have the potential to mitigate the types of losses we are seeing in today’s news.
Coronavirus infected humans, most famously in China, quite recently. Strangely enough, other forms of CV are very common, for example most housecats have a form of CV that doesn’t affect humans. The outbreak has affected a significant number of people and has been fatal for about 2% of those who have had the virus, though that number may be decreasing to 1% of those infected outside of China. Early on, the symptoms resemble those of the Flu, but become more severe as the virus progresses. The biggest challenge with CV, is that treatment and vaccination has not had time to develop. It has also been difficult to diagnose when specialized kits aren’t available to test.
While CV has been a tragedy, it has had a much smaller impact globally that the Flu has in the US alone, and immunologists and drug researchers are making significant headway in treating the illness. It is a relatively safe assumption that we will have ways to contain this virus and hopefully treat it effectively in the very near future.
Here is a link to a video on the virus from the World Health Organization: https://www.who.int/emergencies/diseases/novel-coronavirus-2019
Assuming that the disease continues on the path it has been on, not really. The Chinese government has been working to control the spread of CV and it has impacted production. While this could lead to a short-term slowing of imported goods from China, it won’t bring them to a complete halt. The aggressive response in China will ultimately yield a better long-term result than a hands-off “come to work sick” approach. Even if we do have a more rapid slow-down in China, the effects on the US economy will be minimal as net imports for China represent less than 1% of GDP. The virus will have significant impact on specific companies whose products are dependent on Chinese manufacturers who face temporary shut-downs. Even these effects will be short term.
Here is an article from Brian Wesbury, who I believe to be one of the most reliable economists I follow: https://www.ftportfolios.com/blogs/EconBlog/2020/2/25/time-to-fear-the-coronavirus
In summary, even though coronavirus is making a lot of noise in the headlines and the market indices are down as a result, but we don’t see any reason to be concerned about your CoCreate Financial Portfolio or the US Economy in general.
[1] Disclosures: Note that this performance is not the performance of a specific investment, portfolio, or account, but is instead the rate of change for all firm assets. This may or may not accurately reflect the performance of your portfolio. Furthermore, past performance does not guarantee future results. While CoCreate Financial portfolios are designed to mitigate risks, they may not reduce losses in every imaginable circumstance.
When I sit down with people who are preparing for retirement, one of the most significant topics we end up wading through is their potential healthcare cost. Many have significant concerns that they will bankrupt themselves paying for their medical expenses. Even curriculum required by groups like the Certified Financial Planner Board of Standards™ have been designed to prepare us for a world in which healthcare costs could be the largest expense in retirement.
Despite the above average inflation we’ve seen affect healthcare costs and the illustrations pre-programmed into your advisor’s financial planning software, you may find that visiting your doctor is more affordable than we like to think. Let’s take a look at some actual numbers.
In 2018, the Employee Benefits Research Association published a study exploring the out-of-pocket healthcare expenses for retirees (click here to access the study). The study uses actual data reported by participants, all of whom were over 70. Interestingly, most of the conclusions we’ve drawn has used a substantial amount of hypothetical modeling as opposed to real world data.
The results are actually quite shocking. The data results essentially make a bell-curve in terms of cost. Most people spend a relatively small amount on healthcare. From age 70 until death (post age 95), the median out-of-pocket cost was a mere $27,000. That’s only about $1,000 PER YEAR! What’s more, half of the population spends less than that.
This becomes challenging because half the population spends more than $27,000. If you’re in the top 10% of people with expensive medical care, you’ll spend more than $96,000 from age 70 until you pass away sometime after your 95th birthday. Based on these numbers, healthcare probably won’t be the challenge we anticipated since 89% of us spend less than $320/month on these expenses.
The study showed that for those who are the most expensive (the top 10%) nursing care can add more than $175,000 over the course of your lifetime. While women proved to be about 28% more than men, and were much more likely to enter into nursing care, most people spent very little or no money on these services. A surprising 54% of those who passed away after age 95 never used nursing care at all.
As with most statistical studies, we need to filter out some of the noise so that we can make practical sense of these numbers. Fortunately, the EBRA did some of the work for us. When you adjust for skewness in the data-set and accounted for the participants receiving Medicaid for their assisted living costs. The average person spends about $2,000 per year on healthcare (including nursing care). If you’re in that top 10%, you’ll be spending $11,000 or more each year.Financial planning for healthcare costs should be a “prepare for the worst, but plan on the average” type of scenario. Your financial plan should prepare you for the higher costs you could encounter by maintaining flexibility in both objective and quantity of capital, but shouldn’t excessively constrain you from pursuing your passion in life. If you’re preparing for retirement, reach out to Co|Create Financial. Let’s begin creating a future together today!
Major market indices (S&P 500, Dow Jones Industrial Index, et al) have declined today, and have done so in a way that will make headlines. What do we really need to know? How should we react?
The chart at the top of the page illustrates the price movements of the S&P 500 over the last 12 months. Most people are referencing this index when they are talking about "The Market." It's actually a geometric average of the 500 largest publicly traded, American companies weighted by the total size. This means that the biggest companies make up most of the S&P 500 (As of September 30, Microsoft, Apple & Amazon were just over 11% of the index). Given these weightings, we know that most of "The Market" returns come from just a few companies. The S&P 500 is really more of a focused portfolio than it is a representation of the stock market.
None the less, the headlines, and an overwhelming amount of public opinion stems from it's movement, so we would be remiss to ignore it entirely. The first headline you'll hear about will probably be looking what the chart is doing. Gleaning information from the charts is a discipline called "technical Analysis." It's focus is to look at patterns of buying and selling behavior to predict upcoming price movements. Technical analysis isn't particularly useful except for short-term speculation, but many people think it is the only way to invest. While we should rarely make investment decisions based on technical analysis, knowing how it works can give us some short-term insight.
In the chart, you'll see that the S&P 500 has dropped below the Orange line (the moving average of the last 50 days), and also a flat red line. According to Technical Analysis, this was a support level, and the act of dropping below it means that the market should be looking to find the next level of support. The pink line is the moving average of the last 200 days. It's a significant point of support. The red lines that sit close to it provide some reinforcement too. "The market" is almost at that point, and we can expect (according to technical analysis) people to stop selling and start buying again.
In good times and in turbulent ones, portfolio construction is important. Different risks impact different businesses differently, so investment in each of those companies needs to be made on a one-on-one basis. Concepts such as passive index investing have worked in the past decade in which almost all of the largest companies have seen steady or rapid growth in share price, but in a more turbulent environment, it can actually amplify declines in a portfolio. We need to go back to the foundations of our investment theory and consider each investment as an individual part of the whole and also look deeper than that mathematical shortcuts we begun to rely on (i.e. alpha, beta, CAPM) and evaluate our diversification on that same basis.
As I write this part, I'm realizing that I need to write an article translating that into plain English. I'll do that soon. What's important, is that your advisor is carefully constructing your portfolio so that your exposure to risk is as minimal as possible rather than exposing you to every risk knowing only some of them will hurt you.
If you're a current client of mine, your portfolio is already designed like this. It's created for situations like we're seeing today. If you're not a client yet, book an appointment on my website or give me a call.
More than anything, this is just a frustrating headline in terms of the stock markets. Whether or not Trump should be impeached is a question to be handled in a different forum, and is really quite distinct from our economic conditions.
Remember the Clinton Era? I remember learning about impeachment. It isn't removal from office. It's really just a black mark on the president's record. Sure, congress could decide to pursue a removal afterward, but that's a very unlikely scenario, largely due to the time left on Trump's term.
If Trump is impeached, he still has all of the same powers of office and he still has similar challenges in uniting Washington D.C. (and the country) behind him. The largest impact will be on the next election, which is the reason Democrats are pursuing impeachment with such vigor. That isn't to slight those on the left; if we're really honest with ourselves, election is what drives both sides in Washington.
The President is captaining our trade negotiations and has some impact on fiscal policy and legislation, but he isn't a primary driver of the US economy. Aside from massive actions, like engaging our troops in war (which requires congress after 90 days, by the way), the President is more of an economic cheerleader — a figurehead for the rest of the system. Impeachment of Trump has a net effect on the economy of very little, but it makes for a very loud headline.
I've been working to address this issue at length for a long time. The issue is really short and sweet. We've been in an economic cold war with China since before the end of the Cold War. China made some very aggressive moves during President Obama's administration. As an example, Consider their One Road One Belt initiative that was designed to open trade for China across Eurasia. The program, financed by China, is poised to create insurmountable indebtedness for these new trade partners. China's program is about more than opening trade routes. It gives them the economic leverage they need to command trade supremacy over half the globe.
For the Unites States, our risks in a trade conflict with China remain small. If we stop buying steel from China, or if it becomes overpriced due to tariffs, Another country will be excited to fill the gap. That country's economy will grow, and we can hope their political ties to the U.S. will do the same. The short term effect: a small slowing of GDP growth for the long term benefits of increased global economic and political stability. There are a number of ways we can misstep, but at this point, we should be losing any sleep.
Nestled quietly on page 5 of whatever newspaper you read, you'll read about the economic data released for September. You'll read about slow-downs in share buy-backs, and some other miscellaneous data-points. These are the most important things we should be watching to see if the continues to slow down.
This morning, the Federal Reserve stated their confidence in the US economy's strength. Frankly, I agree with the sentiment, and believe we can look at history to see that one or two months of lackluster economic data doesn't indicate we will begin a recession. It's certainly true that every recession starts with declining economic data (it's required by the definition of recession), but there are many months in which these numbers are less than ideal in the midst of robust economic growth. This morning, Brian Wesbury, Chief Economist of First Trust Advisors, wrote a fantastic article looking at the ISM Manufacturing data making this point [Read it].
The conversation about share buybacks could get a bit of attention as many will say that the companies themselves don't believe in their own value. I see it differently for now. In order to adapt to changing trade situations, large companies need their cash, and shouldn't be willing to part with it in exchange for company stock until some of the trade tensions play out. Additionally, companies have engaged in record-setting buybacks and mergers for a number of years now, using capital they set on the sidelines during and after the Great Recession. To me, this feels more like a return to normal than the beginning of crisis.
Like going to the doctor for your regular check-ups, it's important to keep your finger on the pulse of your financial plan. Usually this happens in conversations with your Financial Advisor, but occasionally you'll want to do a thorough review.
Refinancing your home or purchasing a new piece of property is the perfect time for an in-depth financial consultation.
July is the season when economists and investment advisors reflect upon the first half of the year and give ink to their thoughts about the year to come. These are some of my mid-year musings, which will guide portfolios, investment decisions, and conversations over the coming months.
Overall, it’s been a year in which the economy experienced moderately good performance, despite a few challenges stemming from Washington D.C. and from our social media accounts. This is truly a testament to the strength of the U.S. economy at this point in time. Find out what you need to know about the past six months and what the rest of the year has in store.
Understanding your mutual fund costs begins with understanding the underlying mechanics of your investment. In almost all circumstances, you own individual companies, loans (bonds) made to individuals, business and governments, and sometimes a few alternative securities types such as an option or commodity. These investments compensate you for your ownership (indirectly through the fund) and can increase or decrease in value over time. For discussion’s sake, let’s assume these investments increased 10% over the last year.
When you own a mutual fund, you don’t own these investments directly. Instead, you indirectly share in the ownership of these investments, mutually, with many other people. Your mutual fund manager decides when to buy and sell these investments and is responsible for ensuring there is enough liquidity available to provide cash to people who need to sell shares. The Fund also reports its taxable gains and losses to you as the fund’s owner (a potential impact of about 1.1% according to Morningstar[1]). Let’s take a deeper look.
Let’s say you own the fictitious Basic Blue-Chip Fund. The fund’s manager is responsible for the selection of the investments you own vicariously through the fund. The manager and staff need to feed their families, so they charge an annual fee to each person who owns the fund: the expense ratio. The expense ratio is an annual fee disclosed clearly in the prospectus and appears on most materials presenting the fund. Several academic studies have been published in recent years finding the average expense ratio is between 0.90% and 1.19%.[2] Let’s call it an even 1% for ease of conversation. The fund company also clearly discloses distribution fees, called 12b-1 fees, which generally range between 0.00% and 0.75%. If you’re paying a 0% 12b-1 fee, most of the time, you make up for the discounted cost in another method, such as a fee-based account, a retirement plan advisory fee, or in transaction fees if you DIY.
The manager must now run the business of investing the money you entrusted to the fund, the costs of which don’t show up in your expense ratio. The management team calls upon their colleagues around the industry for help. They ask the financial firm “Bond Co.” to research the government bonds they should use in the fund. In return, they pay Bond Co. a commission when they purchase the bonds. In many cases, they also ask Bond Co. to house the bonds for them at their firm using what is called an omnibus account, a service for which they will pay an additional fee. These are disclosed (generally in dollar values) in a document called the Statement of Additional Information which is available on request from the fund. Funds also experience a phenomenon called “price impact” when they engage in these transactions (which is a little more technical than we want to get in this article). These costs average approximately 1.44%.[3]
SO if you have the basket of investments that earned 10%, and you own them in the form of a mutual fund,
The assets earn 10% in the fund
The Fund pays its management team about 1%
The fund pays its distributors .75%
The Fund experiences 1.44% of internal costs relating to the acquisition and
disposition of the assets
So in total, you actually experience a cost of 3.19%. You don’t see this on a bill, but instead it shows up as a reduction in the Mutual Fund’s return so you would see a return on your statement of 6.81% instead of the original 10%.
We don’t believe that these fees and costs are necessarily a
bad thing; In fact, recent data published by George Mason University suggests
that, on average, a 0.02% increase in expense ratio provides an average
increase in performance of 0.13%.[4] But we do think it’s important to understand
your fee structure so you can make the most informed decisions possible.
[1] http://news.morningstar.com/articlenet/article.aspx?id=373782. More recent studies by Morningstar show that fees have declined on average since the 2011 study, showing an arithmetic average of 1.10%. The decline of geometric average is primarily attributed to the increased popularity of passive mutual funds which generally have expense ratios of about 20bps.
[2] Cf. Kinnel, Russel. "Mutual Fund Expense Ratios See Biggest Spike Since 2000." 19 April 2010. Morningstar Advisor. 31 January 2011.; Edelen, Rodger, Evans, Richard, Kadelec, Gregory. “Shedding Light on “Invisible” Costs: Trading Costs and Mutual Fund Performance” Financial Analysts Journal Vol 69 No. 1. ©2013.
[3] Edelen, Rodger, Evans, Richard, Kadelec, Gregory. “Shedding Light on “Invisible” Costs: Trading Costs and Mutual Fund Performance” Financial Analysts Journal Vol 69 No. 1. ©2013.
[4] Horan, Stephen M and D. Bruce Johnsen. "Does Soft Dollar Brokerage Benefit Portfolio Investors: Agency Problem or Solution?" George Mason University School of Law (2004): 4
I believe every one of us is searching for significance and satisfaction in life. My work as a financial advisor has put me in contact with a lot of different people at differing levels of wealth and poverty, and I’ve become convinced of a simple truth:
Success, satisfaction and significance aren’t born out of your account balance or income, but are achieved by the way you engage life in the present
In the first part of this series, we discussed talked conceptually about engaging life. This article is about practical ways to begin more effectively engaging each moment. I would encourage you to choose one or two habits to start practicing and then come back when you begin to see how these are changing your life.
People are really important. Though the statement should be somewhat ubiquitous, we live in a lightning-fast, “connected,” culture that demands immediate responsiveness and determines personal worth based upon output. To preserve our position in society, the pressure is on each of us to do more, stay in our lanes, and give into the constant barrage of push-notifications, texts, emails, and tweets, all-the-while staying in our own lane just to keep up with social and professional expectations.
While we can’t completely eschew cultural or professional standards, we can choose to embrace our inner-contrarian and foster relationships with others instead of our Facebook addictions (I realize the irony of posting this article on Facebook… and yes, I would love for you to share it). Here are three easy things you can put into practice here.
When you do these things, you’re fostering real relationship instead of fostering your technology and productivity addictions. You’ll also find that everyone around you will begin to see that they matter to you. Your relationships will deepen, your impact will grow, and you’ll become more satisfied in the way you’re engaging life.
It’s not always easy to see everything we’re called to do or be, but it’s usually easy to identify things that are counterproductive. If you identify something that gets in the way of engaging life the way you should be, make a change. Write down the activity or distraction you would like to eliminate from your life, create a plan for how you are going to avoid the old habit and replace it with something better. If you’re really ambitious, try doing making this a monthly practice.
You’ll need to take some time to be mindful in order to accomplish this. I like to take regular pauses during my day just 2 or 3 minutes every couple of hours to ponder. Others like to journal, or take ten or fifteen minutes to visualize their day and then time to reflect in the evening. Try some different things. You might want to set a reminder on your phone to remind you to be introspective.
I believe gratitude begins to grow as we begin to serve others. That’s another post for another day, but if you really want to grow your gratitude, there are three key things you need to do giving and serving being the most important. VOLUNTEER and DONATE!
There’s a third habit that is simply learning to express your gratitude over and above complaining. If you’re anything like me, you’ve probably found that complaining is the easiest form of communication. It’s taken me years of practicing gratitude only to find that I have a lot more to do. To be successful at being a grateful person, you need to respond to frustration with thanks. When you catch yourself wanting to grip about something ask yourself, “how might I be blessed and not realize it?” Enlist your spouse and your friends to help with this by encouraging them to respond to you when you complain with questions that will help you search for blessings in the midst of your frustration.
When you do these things, you’ll have better relationships, connect with your purpose, and you’ll begin to find that some of the dreams, goals, and plans you’ve had were really distractions from engaging life in a way that will bring you true satisfaction. At the same time, I believe you will be able to pursue your passion and create the best future you didn’t even know you wanted!
I believe every one of us is searching for significance and satisfaction in life. My work as a financial advisor has put me in contact with a lot of different people at differing levels of wealth and poverty, and I’ve become convinced of a simple truth:
Success, satisfaction and significance aren’t born out of your account balance or income, but are achieved by the way you engage life in the present.
We are constantly making significant decisions. They don’t always look like life-changing opportunities, but they are always in front of us. They’re choices that build on one another—like the times you’re in a rush to get something done and you decide to break from your frenzied routine and tell your spouse how much the matter to you. We make little choices everyday that we don’t think about. We choose to watch show after show on Netflix instead of reaching out to a friend. We walk by friends and acquaintances asking them if they are well, decidedly content not to engage in their response. (What if we did?)
We make choices all the time. Some of them are smaller while some are larger. some of them are financial, some of them spiritual, and other are relational. As a financial advisor, I generally see people when they are thinking about financial decisions. In reality, there are a few different types of capital we need to think about spending, investing, and growing.
Here’s the thing about these small decisions that create this kind of eternal significance. Every moment in which we act, we take a step forward on one path or another. Even indecision, or inaction is a step forward in the timeline of our lives. We create futures with these steps, building them into a masterpiece, or we leave them weathered, worn and underdeveloped. We pursue our passions, or we let them fade.
The hard truth in this is that we make choices that don’t lead us to this kind of significance and success all the time. When our priorities are misaligned, we find ourselves on facebook instead of face-to-face with the people who are right there. At other times, we do things that insulate us, from communities and our own fears. We choose to be disengaged or to build up walls to protect us from our fears or even from self-understanding. Decisions like these are often ones of apathy because it can seem easier to continue on the path of a disengaged life.
The fantastic news is that each of these moments is new. You can live in a way that makes each moment significant, STARTING NOW. Every day, we encounter opportunities to engage life in such a way that we will make an eternal impact, creating a future for ourselves, our families, and our communities.
I encourage you to start engaging life on purpose. Though there is no set path to follow, I’ll be writing about a few simple ways get started in my next post “Engage Life – living on purpose.”
This three part series of articles was originally written by Christa Hudak in November of 2016.
Budgeting documents my financial growth. It is helpful to periodically evaluate where you are, where you have been and where you are going. If you don’t have a record, it is very hard to make this evaluation. It can be incredibly encouraging and motivating to recognize your progress. On the flip side, if your evaluation shows that you have not been making progress toward your goals it may help you realize it is time to start making some changes.
It is important to celebrate your wins and recognize what you have achieved. It fuels your motivation to keep pushing toward your goals and challenging yourself.
Budgeting allows me to live larger. When you are in control of where your money goes you can put incredible focus on the things that are important to you and accomplish more than you ever dreamed was possible. Truth be told, there a lot of areas in which I am very frugal, sometimes to a shocking degree. In other areas, we spend very freely. This practice is quite purposeful and it allows us to have a much greater impact in the things that are important to us than our income would generally allow. Are your finances a hurdle to overcome or are they propelling you toward your goals? Is money a stress and a worry, or is it a tool accomplish things of true significance? No matter your financial situation, you can begin the process of priorities-based budgeting and you will be amazed at what becomes possible.
This three part series of articles was originally written by Christa Hudak in November of 2017.
Budgeting relieves financial stress. A big source of stress is uncertainty. Simply not knowing where your money goes or what you will be able to afford is stressful. If you run a budget and track your expenses you know what is going on with your money and you have a good sense of what you can and cannot afford. This in turn will enable you to make appropriate choices in how you commit your money.
When was the last time you applied for a home loan? If you have at any point and you kept a budget at that time you were probably shocked at what the bank was willing to lend you. However, if you did not have a handle on your finances you may have said something like, “great, I didn’t know I could afford so much!” But what you can afford and what you qualify for are two very different questions.
Let me make one thing clear: It is not the bank’s job to determine how much you can reasonably afford in your situation. The bank’s job is to give you as many options as possible (as their customer) and not expose themselves to too much risk. Only you can make the determination of how much is reasonable for you to afford given your specific situation and priorities.
This is true of a lot more than mortgages. We live in a society bursting with payment plans, leases and longer and longer-term car loans. It is not wrong to utilize these tools in the appropriate circumstances, but you need to be able to evaluate them appropriately. Saying to yourself, I could probably scrounge together another $137 per month while you sign on the dotted line for your new car stereo is not really evaluating your budget. Making financial decisions in this manner will lead you down a path stress, worry and often financial hardship.
However, if you have a written budget in which you track your expenses you would easily be able to determine if there is surplus income or an area you are willing and able to cut back in so that you may buy the car stereo. If you determine that it is feasible and valuable enough you can move forward with the purchase stress free.
Budgeting shows me my priorities. You show me how you spend your money and I will tell you what your priorities are. I don’t mean your theoretical, sky high priorities, but your priorities in reality. Your functional priorities are the things on which you spend your time, energy and money. Looking at your budget can be a great opportunity to ensure that your functional and espoused priorities align as you want.
It is probably safe to say that we all prioritize a safe and stable home for ourselves and our family, which is why a large portion of most budgets are housing expenses. On the flip side, it is not accurate to say you value helping those less fortunate than yourself if you never expend any of your time or financial resources doing so.
Not only does budgeting help you see your functional priorities, it can be a tool to align your priorities with what you want them to be. If you recognize that you want to do something that you have not been, creating a place for it in your budget can make a big difference. For example, if you want to work on developing your relationships with your friends you can create a specific category for doing activities with, hosting and eating out with other people. Not only does the category give you the permission to do these things, if you are part way through the month and realize you haven’t spent that money you know it is time to pick up the phone and invest in your relationships.
Remember, your time and money are both limited resources, which means saying yes to one thing means saying no to something else. Take the time to consider if you are saying yes to the right things and you are comfortable with what you are saying no to as a result. Budgeting is not just about making sure that you spend less than you bring in, it is an opportunity to evaluate that your money is going to the things you want it to and accomplishing your goals.
This three part series of articles was originally written by Christa Hudak in November of 2017.
Truth be told, I am kind of an odd duck. I actually like to budget and I always have. There have been times when I did not like what I saw, but I have always liked to budget. However, I know this is not the case for most people. In fact, for a lot of people the idea of budgeting or reviewing your finances brings with it emotions of fear, anxiety, embarrassment and even sheer panic.
I understand that not everyone is wired to be a neurotic budgeter like myself, but I do believe it is critical for everyone align themselves with a basic budget. I want to share with you why I love budgeting.
I know that this seems backwards to so many who struggle to live by a budget or who never have, but I feel I have freedom in my finances because I budget. Sometimes I wonder if budget has become a dirty word and it may be helpful to think of it as a monthly financial plan. Frequently, people start to budget because they recognize they need to spend less and so the budget becomes about spending as little as possible in each category. Sometimes that is the reality of life, but it is a problem if you are never able to graduate from this perspective.
To help you understand how budgeting gives you freedom, I want to lay out a scenario for you. You and your spouse both work, you have decent incomes but there never seems to be enough money at the end of the month and you have fallen into the habit of carrying a balance on your credit card. Your major expenses seem reasonable but you know all the little things are adding up in a big way. Your vice (because it is a budgeting stereotype) is coffee. You grab at least one latte every day, sometimes a second if it has been a rough day or you feel like you need a pick me up. The problem is, as your finances have started to get out of control you have started to feel guilty about this habit.
If you able to actually develop a budget with your spouse you line out all your general expenses and make some categories that make sense for how you live and your priorities. All of your expenses will be allocated into one of your budget categories. One of the categories you decide is that you and your spouse each get a “Fun/Discretionary” category, which is for each of you to spend on whatever you want. After thinking about it, you decide this is where the money for your lattes comes from. By having this category, it gives you the freedom to enjoy the pleasures in life, but also a cap on what you have decided is reasonable. You may or may not be able to get a latte every day, or you might decide to skip the lattes for a week so you can go out to lunch instead. You are now able to be in control and make these choices guilt free.
