Falling Down the Rabbit Hole–Don’t!

Many investors might be feeling a bit like Alice in Wonderland as they relate the feeling of fantastical events in today’s investment environment.  Similar to Alice, the boredom associated with the hum drum of market cycles often lull investors into ignoring signals of reality around them.  Like Alice, investors might find themselves succumbing to the “BUY ME” and “SELL ME” signs that pepper today’s investment landscape.  So, what is the answer?  My opinion is to face reality and save adventurism to romantic vacations and to leave it out of your investment portfolio.  In other words, don’t get too cute!

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.  – Charlie Munger

Are US stocks near a top or poised to go much higher?

For regular readers, you know my answer to this already–no.  There are a lot of reasons I think this is the case but I’ll try to focus on a couple I’ve not mentionedbefore.  Here they are:  US dollar strength and US corporate earnings.  With the US set to raise interest rates (however slow or quick) and other major economies set to lower interest rates (e.g. Europe, Japan, China, etc.), this differential causes inevitable currency wars.  Consumption and demand for goods and services drive the economic engine of all economies and ultimately each country wants to gain an advantage (usually through trading) in that equation.  Typically speaking, higher interest rate economies will attract capital thereby driving the value of a particular currency higher.  Speaking for the US, this makes the dollar relatively expensive to other currencies causing less goods and services to be demanded which affect US companies looking to make profits.  Stressed profit margins lead to layoffs and economic slowdown.  Investors should be focused on monitoring this cycle and how corporate earnings fare in the interim.   Here is a chart of the US Dollar Index (DXY), since the recession.  (courtesy of BigCharts)

What asset classes are still reasonably priced?

I will have to be very careful here since the operative word is “reasonably”.  I will confess though, that experienced investors that have had some semblance of victory in several market cycles agree that everything is not expensive–just most things.  I’ll be upfront and just give away the secret–focus on total return.  Ultimately, you want every dollar you invest to return more than that dollar.  One of the simplest ways to do that is to find investments that pay a dividend or an interest payment.  Naturally, this would turn your focus to dividend-paying stocks, real estate investment trusts, fixed income, or funds that invest in one or all of the previous categories.  Within that universe, you can begin to identify asset classes that are historically cheap.  “Historically cheap” would be defined as something that hasn’t been seen in at least one market cycle (e.g. 7-10 years).  A good example (and much publicized lately) are high yield bonds.  Because of the energy crisis that began in late 2014, yields (inversely related to prices) on this asset class started to rise during 2015 and peaked in mid-February 2016.  Although these levels sometimes signal default-like risk, for some investors it presented an opportunity to invest in a basket of securities (paying current income) in hopes that a few deeply discounted investments would handsomely reward their courage and patience.  Here is a chart of the iShares iBoxx High Yield Corporate bond ETF (HYG) since the recession. (courtesy of BigCharts)

As my grandmother liked to say, “Baby, keep the main thing, the main thing”.  I think these are words to live by, because as an investor your main goal is to grow your capital.  It often doesn’t pay to try new things and fall down the rabbit hole like Alice.  What makes more sense is to stick to what you know and understand, to focus on total return, and to exemplify patience and discipline.

Invest wisely!

Answering the Questions Your Advisor Won’t

If you work with a professional money manager or advisor it’s possible that you have some things that you would like to know but you probably feel are “weird” to ask.  It’s not that many of the things that you may want to know are secrets as much as much of the financial services world still lives by the code “don’t ask, don’t tell”.  Even without increased regulation, demographic changes are causing this once sacred barrier to be broken down.  I’m sure much of the mystique may have been related to an advisor’s inability to fully explain an investment or his compensation at one point in time.  Regardless of why and how, it seems only natural that over time the barrier that has been erected prevents transparency from reigning in the relationship with clients.  This week, I’ll attempt to correct some, although validly drawn, misplaced notions about advisors that I’ve heard clients mention before.  So for the sake of investors working with financial professionals all over the globe, let’s delve into some things you may want to know.

Q. What licenses do you need to practice and how are you regulated?

A. Hopefully this was one of the first questions you asked your guy or gal before you began a relationship.  Impersonating a financial professional is possible, just ask Bernie Madoff’s victims.  This has the potential to be a long answer so I’ll be brief.  There are two main regulatory agencies for financial services professionals:  the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC).  The former largely regulates broker-dealers (e.g. individuals that charge “commissions” for products and services they deliver), whereas the latter regulates registered investment advisers (or RIAs)–individuals that charge “fees for services”.  The main difference is the standard by which FINRA and SEC regulate.  FINRA uses what most industry experts believe to be a lesser standard by determination if a product or service is “suitable” for a client, whereas the SEC imposes the “fiduciary” standard.  Fiduciaries are charged to operate in the best interest of the client.  FINRA has several licenses that professionals can obtain with the most common being the Series 6, 7, 66–these allow financial professionals to use virtually any product to construct an investment portfolio.  IMPORTANT:  No licensure is required if an individual just wanted to hang a shingle and call himself a financial advisor.  However, he would be hard pressed to put you in a mutual fund or stock without being affiliated with one of those two organizations.

Q. How are you better than a robo-advisor? Can’t I save on fees by using one?

A. The quintessential subject of fees is something that deserves some attention.  So I will attempt to be thorough without being wordy.  First, robo-advisors are platforms that allow investors to set an investment mix and leave it alone.  Usually a periodic contribution can be made to the account for systematic investment.  These platforms usually allow for investments as little as $1000 to get started and waive the first several thousand in fees for assets under management. The caveat is that in exchange for a more efficient investing mechanism with lesser fees, you also get less personal attention.  In almost twenty years in the industry, I’ve met few clients that want less personal attention.  Typically as assets grow, the more attention that is needed as choices become more numerous along with wealth consequences like taxes and estate planning.  So, robo-advising seems appropriate for a certain type of client up to a certain point in life.  Advisory fees should be treated like anything else.  They should be negotiated upfront and discussed fully so each party (client and advisor) understands what benefit is being received.  Advisors conduct difficult analysis and draw on years of experience in order to deliver consistent, meaningful solutions for their clients.  Clients work hard for many years to accumulate enough savings to live a dignified lifestyle after earnings from work stop.  Each should understand the benefit being received by the relationship.

Q. How often are you reviewing my investment plan?

A. I’ve somewhat covered this in a previous post, but I’ll add a bit more detail.  At the relationship’s inception, each advisor should construct a guiding document for how the portfolio will be constructed and investment objectives.  Length is not as important as agreement by client and advisor as to the plan’s contents.  A review of this document (or at least what it expressed) should happen regularly.  The frequency should be mutually agreed also, but semi-annually for individual investors and annually for institutional investors is probably the bare minimum.  With everyone living more complex lives, investment plans need to be dynamic, fluid documents instead of static.

There are obviously other questions that I cannot cover in just one post.  However, feel free to inbox me if you have one that you are afraid to ask!

Invest Wisely!

Dow 18,000…What Now?

You don’t have to be a genius to realize it will be hard to find growth for a while.  Stagnant global economic growth may be a theme for some time.  Major central banks have used unorthodox methods like monetary policy stimulus to urge consumers to buy goods with cash or credit (mostly the latter) to produce economic activity.  The latest remedy to this chronic sickness of global stagnation?  Negative interest rates.  As an aside, I was just told by the firm that custodies our client assets that they will be passing on the charge to any account holding foreign currency positions.  This just means that with negative interest rates, you now pay the bank to hold your funds.  With all of this, it could be quite compelling to just sit in cash or worse, stick your head in the sand and wait for all the madness to end.  However, I have a better plan…

With the Dow Jones approaching all-time highs once again, investor anxiety is likely correlated with the upward motion.  Let’s look at the last 5 Dow milestones:

-Dow 14000 happened on June 19, 2007
-Dow 15000 happened on May 7, 2013
-Dow 16,000 happened on November 21, 2013
-Dow 17,000 happened on July 3, 2014
-Dow 18,000 happened on December 23, 2014

It seems strange that the Dow has made such highs so rapidly.  Especially considering additionally that, Dow 10,000 happened in 1999, while 14,000 happened 8 years later.Yet, it has increased at a much more increased rate since then (remember the Dow hit a low of 7,000 in February 2009).  I think this is why many feel a crash (or at least a decent pullback) is imminent.  However, successful investors like BuffettTempleton, and Swensen have one thing in common in their success (besides financial genius!)  They all have used the discipline of patience to exploit the concept of total return.  I truly believe that total return is a concept that is lost on many investors today.  Capital appreciation is desired, but having a myopic focus on just this metric under-utilizes the concept of total return and stifles portfolio growth.  Last December, I covered this but I feel it is worth a refresher in light of what we face in the markets.  When I was taking undergraduate finance courses at Prairie View A&M (go Panthers!), my professor called it the “magic of compounding interest”.  It was the concept that your original investment earned a return and that return earned a return, so on and so on.  But if you think about how powerful that principle is for a minute, it will really revolutionize your investment strategy.  Using the rule of 72, if you found an investment paying 10% interest (and there are some out there) you could use the interest payment to buy more shares paying 10% interest and repeat until you ran out of money, you would double your money in just over 7 years.  For someone starting this discipline at age 25 with consistency, they would receive 6 doubles before full retirement age.  Now, they would probably have difficulty in finding such a high paying investment during the whole time, but I think you get where I’m coming from.  Successful investors have not waited as much for the Dow to go up in value as they have simply waited on the passage of time!    Come to find out, the most valuable thing isn’t money…it’s just time.

Check out this graph illustrating the power of compounding interest (courtesy of JP Morgan Asset Management):

This most important element in executing a portfolio strategy that exploits this power is consistent investment.  Making monthly or quarterly deposits into high income generating assets and re-investing the subsequent income payments has benefited many investors throughout time.  Do you think you can let time work for you (instead of against you) for a change?  If so, you are well on your way to outstanding portfolio returns.

Invest Wisely!


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