Financial

In thinking about this blog post I considered writing about “investment containers.”  People will often say “I have mutual funds”, “I have an IRA”, “I have a 401(k)”.  Which is like saying “I have a brown box with stocks and bonds in it”, “I have a yellow box with stocks and bonds in it”, or “I have a green box with stocks and bonds in it.”

These are all really containers for your investments, and each has different rules for how you put money in and take money out.  Let’s look at the famous mutual fund, and a great alternative.

Mutual Funds

Mutual funds, as we know them today, really began in the 1940’s.  For a long time if you wanted to diversify, the basic choices were: buy a mutual fund, or allow a broker to maintain a portfolio for you.  If your choices were to pool money with a large mutual fund run by the best and brightest in the industry, or allow the twenty something broker to make these decisions, the answer was pretty clear.

Over the decades mutual fund companies flourished and became massive, and most brokerages essentially became the sales arm of the fund companies.  While brokerages were still happy to trade stocks for you, they were just as happy to sell you mutual funds.  As you can imagine, a lot of people need to be paid for all of this.  The mutual fund company and it’s operations, the brokerage and it’s back office, etc…  And, the broker has to make what would have otherwise been earned trading stocks for you.

As a result, mutual funds can be a very expensive way to invest.  For example, most clients of a large broker or advisor may be placed into “loaded funds” with a variety of sales charges and ongoing annual fees.  For example, a 5% sales charge is not uncommon, which means it takes a 5% return just to get back to your initial investment.  Ongoing management fees can run between 0.5% and 2%, these last forever.  And then there is a thing called a 12b-1 fee (named after a rule) where the fund can charge you a separate fee to advertise itself, seriously.

Along the way, mutual funds realized they could sell “no-load” funds.  These have no sales charge, and generally cater to the “do it yourself” investor.  While the ongoing fees can still be high it was a big leap for people who didn’t need the “advice” of a broker.  Over the years firms like Vanguard have been able to make “no-load” funds quite inexpensive.

The Exchange Traded Fund

In the late 1990’s a new option began to appear.  The exchange traded fund is a portfolio of stocks that trades on the open market as a trust.  The trusts are created by issuers, and cover just about every asset class an individual investor would ever need.  The great thing about ETFs is that they can be very inexpensive.  The most popular ETF that owns the S&P 500 charges a mere 0.09%.  Why would you pay a 5% sales charge and ongoing annual fees pushing 1% to a mutual fund company when you can own the same exact stocks for 0.09%?

The Catch

If you’re thinking most brokerages are putting clients into mutual funds instead of ETFs because it makes them more money, you would be absolutely correct.  They will have a lot of answers as to why the mutual fund in better, and these can sound very convincing.

For example, a mutual fund can be “active,” which means trading a lot while trying to beat the market, or “passive,” which means they’re happy to take the long term returns of a stock index, like the S&P 500.  Your broker or advisor may highlight how a mutual fund “always beats the market.” Statistically, this can sometimes be true for one or two years, but it’s been proven that over the long run, they have a 50% chance, meaning they’ll do worse 50% of the time.

Most of the time these active managers “hug” the index, meaning they basically own the index, but make a few active choices to justify the fee and try to beat the index.  Often, you’re just paying a lot to basically own the index.

Another way around this is where a firm will bundle low cost ETFs into portfolios they sell as a “managed account”. They purchase a bunch of ETFs, and then slap their own management fee on top of the portfolio of ETFs. Seriously.

Avoiding the Fees

The ETFs are out there waiting for you with lots of choices: super conservative, super risky, very boring, highly exotic, and everywhere in between.  I look at them as tools in a tool box.  If you’re comfortable managing your own investments you might want to consider moving into ETFs if you haven’t already.

If you’re someone who likes to engage a professional to help manage your financial life, you can work with a truly independent investment advisor, like Buoyant Financial, where we build portfolios using ETFs to save our clients’ money, and because it’s the right thing to do.

Retirement dreams, retirement planning, and retirement saving are all related, but this mental crossroads is challenging and often compartmentalized. You may love to dream about being retired, but the planning and saving parts cause anxiety. You may be highly focused on the saving and investing, but have no idea what you’ll do once retired, and the very idea of stopping seems stressful. Or like many, your head space may be somewhere in the middle.

And we’re continually intersecting it with savings and investing. For some this is a continuous mental calculation that’s usually not rooted in fact. The stock market slumps, and there goes the trip to Tokyo. The stock market is screaming, and all of a sudden, we decide to pile on some new dreams wondering if investments will fall victim to a trade war, a real war, or a war with the spouse. We suddenly have to back off on the 401(k) to fund college, and with one simple change, all of the dreams are pulled into question by our crazy mental math, creating stress.

This is often our mental reality. It seems manic because it is. We carry almost all of the weight when it comes to creating our financial post-work life.

So, we probably need some help with this, and that help can come in a variety of forms. Let’s not stir up any additional anxiety about the types, structures, and packaging that financial advice can take. Let’s assume you go to a reputable investment advisor or planner. Someone who is good will be using sophisticated software that is very helpful, and very complex, bringing everything to the table.

Your advisor and the software will do what they are told (if you don’t feel that’s the case, run!). But now you have to begin quantifying all of these dreams, wants, and fears. You have to put numbers on the intangible. Some advisors use software that is goal based and others use software that is cash flow based. So, planning for the RV, or the trip, versus, just planning to replace a certain amount of your current income in retirement. This is not a software judgement, most of this software can do a little bit of both just fine.

You are part of the input for all of this, and so you answer the advisor’s questions, the advisor gives you the plan, and now all of that stuff seems more concrete. Now you worry about the plan and what’s in the plan, or did you leave something you might want out because the computer said you’ll run out of money? If it seems like we have come full circle it’s because we have.

The retirement picture is something that evolves over time. You can and should dream, and allow yourself to have options knowing that circumstances can change, and your wants and needs will change. Your retirement dreams at 35 are probably very different than your retirement dreams at 45 or 55. You will have spent decades working hard, and when you actually stop, you may find a different mindset yet again. After a year or so in retirement with some time to breath and reflect, you may have a new view about what you want and what’s important.

All of the basic habits of planning for a successful retirement are very similar, and your probably already doing those things. When we intersect dreams, and numbers, and investments it can bring up a lot of stress that we create in our mind. Cut yourself some slack, and be patient with yourself. It’s a long and changing game with very few things set in stone.

A good financial advisor will work with you to update and refresh your plan every year.

At Buoyant Financial we enjoy working with people and understand that these feelings can be complex, stressful, and changing. We have the fancy software, but we also have the mindfulness and patience to work with you as a human with hopes, dreams, and fears.

We’re half way through 2018, which is a great time to take a look at where we are and where the rest of the year may take us. As you’ll see, between the noise of the “trade wars,” and where things stand with the broad markets, this really is an interesting point in the overall cycle.

Stock Market

The S&P 500 is close to where it was at the beginning of year. A key metric related to stock prices is the price-to-earnings ratio. This essentially tells you how much it costs to buy what a company earns. For large companies this number historically averages around 17, and right now that number is around 24. In order to return to a long-term average corporate earning need to go up, stock prices need to come down, or some combination of the two would need to occur.

Fortunately, corporate earnings have been strong, which has helped keep the market hovering where it has been all year, and this trend is expected to continue for the time being. However, there doesn’t appear to be much room for prices to move up given that these strong earnings simply have the market treading water. Many companies have been buying back their own shares, which has also helped support the market.

Bond Market

In the world of bonds, the Fed has been getting much of the attention. The Fed’s job is typically seen as trying to keep unemployment down while also keeping inflation under control. Unemployment is extraordinarily low right now, and inflation is finally increasing after years of sitting stubbornly low. The Fed’s natural response has been to increase interest rates to keep inflation in check, higher rates increase the cost of doing business acting like a brake on the economy.

In January the Fed was expected to increase interest rates three times in 2018, and now that expectation has moved to four increases. It’s important to note that the price of bonds drop as interest rates go up, which means bond portfolios could lose some value. While this is typically not as dramatic as the ups and downs of the stock market, it’s important to be aware of this relationship.

Yes, Things are Interesting Right Now

The stock market is expensive based on historical values, and moving sideways during a period of strong corporate earnings. The bond market is under the natural pressures created by increasing rates and inflation. And, we have the “trade wars” that don’t seem to be going away any time soon. At this point there seems to be some consensus among big banks and economists that the next recession will occur in 2020, but this is a moving target and estimates are likely to change.

Things are very interesting right now. We always feel that the best way to navigate any environment is through careful planning and allocating between stocks and bonds in a way that is appropriate for your age and risk tolerance.

Even if you’re not a client, we are happy to answer questions about the markets in general, or related to your personal financial situation. We love questions, never hesitate to reach out!

When we talk about investments we usually focus on the stock or bond markets, and how things like our retirement accounts are doing. The money that often gets overlooked is the 6 – 12 months of easily accessible “emergency” savings we should all have. People often think this means the money should be in a bank account, not realizing they may steadily losing money in the long term with this approach.

Banks offer a lot of services that are critical to our financial life. They offer easy access to things like mortgages and car loans, and most of us would never want to return to life before bill pay. When it comes to protection it’s hard to beat FDIC insurance, guaranteed! But that protection comes at a steep price in the long term.

The Fed generally like to see this rate over 2%, which means just to break even over time on any investment you need to earn over 2%, and assuming you pay taxes, you’ll need a bit more.

Bank Rates

The nice thing about most bank accounts is they seem free. While there may be no up-front fees, real cost comes in the form of low rates on checking, savings, CDs, and FDIC insured IRAs. For example, today’s Wall Street Journal (5/9/18) quotes the annual yield for a five-year CD at 1.68%, and 0.45% for money markets for the banks they sample. Either way these will offer negative returns in the long run since both are lower than 2% and right now the most common measure of inflation is closer to 2.5%.

The punch line is that they are likely to always be less than inflation because of how these types of accounts are priced, they don’t “catch up.”

Risk is Relative

Beating inflation for long periods of time does require a bit more risk. The first place we look is US Treasury bonds and bills. US Treasury bonds are considered to have no risk of a principal loss because they are backed by the US government (just like your bank deposits). Prices do move on these, but if you hold one to maturity you will always receive 100% of your principal. Today the US 5 year note is yielding about 2.8%, good luck finding a five year CD at that rate. The best part, you can buy these inexpensively directly from the Treasury. They also offer inflation protected securities that will keep your principal amount current with inflation.

Is There an Easier Way?

Wouldn’t it be easier if we could just buy a portfolio of these bonds? Yes, and they are out there. There are exchange traded funds (ETFs) that hold portfolios of these bonds, and simply pay out the interest as dividends each month. As bonds mature they buy new ones. The risk here is that the prices do move with the bond market, but the investments themselves are simply US Treasury bonds.

For example, there is an ETF that holds US Treasury bonds that mature in 1 – 3 years currently yielding 2.38% at a very low fee. I assist many of my clients with managing their short term or emergency savings with this type of solution.

Conclusion

There are reasonable options that can help you overcome inflation, and still maintain an easily accessible emergency fund. Although we hope you don’t have emergencies and these funds can grow over time; in the event that you do, you’ll have funds available to cover your needs that have at least kept pace with inflation if not added to your bottom line.

At Buoyant we’re concerned about your entire financial picture, and helping you get the most you can out of your assets, even the mundane rainy-day fund.

If you have any questions about this or would like to learn more about short term savings option please shoot us a note or give us a call. We can point you in the right direction and may be able to offer some assistance with your entire financial picture.

Last month the president announced tariffs on steel and aluminum, and this caught the markets by surprise (and it’s wasn’t the good kind of surprise). Let’s take a look at what’s going on, why trade wars are bad, why the markets reacted so negatively, and what may come.

The tariffs on steel and aluminum (and about 1,300 other products) were largely aimed at China, and China didn’t appreciate these tariffs at all. So as with any war, the country that was attacked responded in kind with a list of new tariffs. A big threat that got attention was soybeans. China consumes a lot of US soy beans (think tofu), so now US farming, which was minding it’s own business, is suddenly pulled into the fray. A recent NY Times article points out that the goal is probably an attempt to hit the administration in “red states.”

Without going into the weeds on economics we can quickly see how this begins to play out, including real impacts to average consumers who buy products, and business owners like farmers. As we’ve seen before the markets hate uncertainty, and this has created a lot of uncertainty.

The Markets Don’t Like This

The price of a stock represents it’s future value, always looking forward. The point where sellers are willing to sell and buyers are willing to buy is the stock price we see quoted. There are a lot of assumptions baked into these prices.

When the price of a basic item like steel comes into play, it’s very hard to predict how it will impact lots of companies. US companies that make raw steel may be OK, or even do quite well. US companies that buy steel in the global market to make things will feel pain, and consumers may end up paying more for finished products. When you spread that kind of thinking across all companies that just use steel it’s hard to justify the current stock price and hard to figure out what the new price should be.

This is what spooked the markets, and caused the animal instinct to sell, and push prices down until there is more information. This example was just steel, so the same thinking would apply to aluminum, soy beans, and every other item in play. So now we’re affecting the price of stocks, products, and things that impact the broader economy like disposable income, employment, etc.

This leaves us with much uncertainty and helps paint the picture of why trade wars are bad.

A Hope for Peace

While the steel and aluminum tariffs are already in place, the new lists remain only threats. There is an opportunity to negotiate and take a giant step back. A recent article in The Economist points out that the US stepped away from tariffs on European steel when a retaliation was threated on oranges, among other things.

What began as an attempt to help US steel, which was already in a long natural decline, is turning into a full-blown trade war that is already impacting stock prices and may ultimately impact ordinary citizens. The good news is that the threat to political careers may inspire some to get serious about negotiating us out of this mess.

The stock market is likely to remain sensitive to any and all news about this issue, which will only calm down when we know more about what will actually happen, and the uncertainly is removed.

If you have any questions about this blog post, investing, or your personal financial situation please feel free to reach out!

Over the course of a few short weeks the stock and bond markets went from a period of quiet, uninterrupted bliss to what now feels like complete chaos for investors. Many realized the day would come, and felt mentally prepared, until it really happened. Now it seems the harsh swings may be here to stay for a while, and some of these swings are normal and some are not so normal. Let’s take a look at what’s going on, what might come, and why some old adages are relevant.

Hedge funds trade funky things that track how much the market bounces around. They bet big there would be no volatility, and when it came, some think these trades led to even more selling. Now the market seems likely to react to anything. For example, when the new Fed chair, Jerome Powell, gave routine testimony reiterating that the Fed expected three rate hikes this year, the market dropped again. Either they didn’t get the message the first couple of times, or everyone is nervous and will use any excuse to sell. There is some drama here.

Essentially you have the president and congress attempting to crank up the economy at a time when the Fed is doing the opposite by trying to keep it from overheating since they think the economy is in fine shape. It will be interesting to see how that tug of war plays out. And as if that wasn’t enough, the president announces tariffs on steel and aluminum to everyone’s surprise. The market doesn’t like surprises, see above where things happening as expected was freaking people out. Why tariffs are bad is a blog post unto itself, but it’s not good news, and the markets indicated they were none too happy. So, the days of a gently increasing stock market seem behind us for now, and with rates increasing bond investors will feel some pain too.

What Now?

There is still a lot to play out this year, the markets will be looking closely at how much corporations make this year in order to justify stock prices, which are still historically high. You can guess by now what happens if those numbers aren’t perfect. Then we have the midterm elections this year, and the stock market usually doesn’t like Democrats running congress, so as the drama of primaries and polling plays out we can expect to see more ups and downs.

We have short memories, during the Great Recession (think 2008ish) we quickly became numb to these kinds of wild movements, and investors who stayed the course and didn’t panic survived and did quite well in the years that followed. There is power in the law of averages, and over the long term we see that markets generally return to historical averages. The market may have gotten ahead of itself as the economy grew, and now as interest rates return to long term averages, they cause a very natural drag on stocks.

Hold the Course

What do we do? We hold the course. A proper asset allocation will carry you through this. And if you have questions, concerns, are losing sleep, or feel like you’re getting mixed messages from those who manage investments for you, then you get help.

We’re here to help, and always happy to offer perspective. Please don’t hesitate to reach out.

To set the stage, a rising market is often called a bull market. This comes from the idea that an attacking bull starts low and moves upward. A bear market is declining, reflecting a bear attacking downward. These vicious characters often battle it out in the financial media as the bulls versus the bears.

We are beginning to enter familiar territory where the media will soon comment on taxi drivers offering stock tips, I read somewhere that this cliché actually began with elevator operators or shoe shine boys back in the day.

As the excitement of the bull market becomes inescapable in the media the lay person begins buying stocks. These retail investors are average Americans who get caught up in the buzz and decide to “play” the market.

The great recession of ’08 is disappearing into the foggy rear-view mirror of memory, and besides, wasn’t that about mortgages anyway? A recent Bloomberg article notes: “retail investors in the U.S. are showing the most enthusiasm for stocks since the nine-year bull market began, another signal of growing optimism as financial markets hit new highs.”

The trouble is, these investors are arriving very late in the game, the brokerages are more than happy to sell them stocks, and the brokerage is happy to provide free research reports that say things like “company ABC is a strong buy.” It can be quite convincing in the moment.

Bear & bull cycle after bear & bull cycle there are always individuals who are late to the party, and when the party is over they are left with losses. Large institutions spend tons of money studying market cycles, and can read the tea leaves early. When they leave the party, they move the markets by selling tremendous amounts of stock in droves. The $300 billion-dollar pension fund just called Uber, and didn’t say goodbye! These institutions will return to the protections noted earlier, and will buy things that profit from the very drop itself.

The individual who arrived late is enjoying their first glass of punch only to notice everyone has left and the DJ is packing up. They hadn’t been thinking about selling, are left wondering what happened, and begin making comments about how it’s a sham and just like gambling.

This is not a forecast that the bull market is over right this minute, and that everyone should run to the exits. The stock market is not something a retail investor should use to make a quick buck, or try to time. Speculation is best left to the professionals who do that for a living and typically have the bottles of antacid to prove it.

Investing in stocks for most people is best done with a very long view and as part of a diversified portfolio that holds things like bonds and cash as well. The long-term investor knows there will be ups and downs, expects them, and is prepared to weather those storms. The long-term investor owns stocks for decades, investing, and reinvesting, regardless of market prices. The savvy long term investor will want to buy stocks when the market is low, and the headlines begin to comment on the death of stocks. This is when our burned party guest is swearing off stocks, “forever this time.”

A famous Warren Buffet quote summarizes this mentality perfectly: “I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep.”

If you own a diversified portfolio and rebalance on a regular basis, you are engaging in this very practice, you will be selling stocks as they rise and buying stocks as they fall. Yes, there will be short term losses on paper from time to time, but history speaks for itself, and the disciplined long-term investor typically succeeds with the right tools.

With this kind of approach, you’ll never be late to the party. You’ll enjoy the punch, take a spin on the dance floor, make it home safely, and not spend any time worrying about the stock market.

We believe your investments are more than a slew of numbers and graphs; they are an extension of you. They are part of a broader portfolio: a life portfolio.

If you’ve talked with other financial planners or advisors, you’ll see quite a few differences at Buoyant. We offer personal, customized solutions to help prepare you for your financial needs now and in the future. Our approach allows for the creation of a healthy, dynamic, flexible plan for your financial management and retirement plans based on your individual situation.

Interest rates remain stubbornly low, which has been great news for borrowers, and bad news for savers. Many of us fall into both categories; we love the low rates for mortgages and car loans, and loath them because of the drag on savings and investments. This all started during the Great Recession, but the persistence has some confused and frustrated.

Typically, when lots of newly “printed” money comes into the economy and the economy recovers, which it did some time ago, inflation begins to surge. This leads the Fed to begin selling the bonds it had purchased, which soaks up the printed money by replacing the cash with the bonds, undoing what it did essentially. When the Fed sells a bond, the cash it receives from the buyer is effectively destroyed.

Now we are in a period of low unemployment, the stock market has recovered (and then some), but inflation remains low. This stubborn and unexpectedly low inflation is where we are today. And so, the Fed has not been able to sell those bonds and soak up all of the money “printed” during the crisis.

At this point the continued low rates are confusing many people, and the subject of much debate. Some feel it reflects poor expectations of long-term growth, while some blame it on Europe, as they buy U.S. bonds because rates there are even lower, and some blame it on the Fed itself. What will happen and what does this mean for most people?

“This time it’s different” is attributed to John Templeton as the four most dangerous or expensive words in the English language. However long it takes, markets tend to return to long term averages.

When this occurs, it will affect different markets in different ways. As rates rise, mortgage and loan rates will increase, the price of bonds will decrease, and stock prices will experience downward pressure. Home prices will not rise as quickly because it costs more to borrow money, but rates on savings accounts and CDs will go up. However, it doesn’t have to be all bad news.

If you have recently refinanced your home, then you should be locked in for a long time. The rates on bank accounts will improve. And with a disciplined, consistent approach to long-term investing, portfolios should weather the storm.

After all, if interest rates are increasing they keep inflation under control, and nobody likes inflation! That also means the U.S. economy is gaining strength, which is always good news.

The bitcoin is getting a lot of attention these days, mainly due to its surging value. It has attracted many speculators as a way to make a fast buck, but few people understand what this “crypto currency” represents and how it functions. Let’s take a quick look at crypto currencies overall, the technology, the bitcoin, and how similar technology may be used in a very different way.

How bitcoins are created and how these ledgers are managed is highly technical, but the important thing is that it does work. The more interesting aspect, and what will be more useful in the future is this concept of the blockchain and distributed ledger.

The technology can be used for a variety of purposes outside of creating currencies. One example is validating ownership and provenance of digital texts, art, and images. Another example is the Smart Contract where a blockchain is used to release funds as terms of a contract are met, eliminating certain trust issues when two parties don’t know each other – the new escrow of the digital age. This will be a game changer as we plow forward into an evolving shared economy. Uber, Airbnb, and eBay are just the tip of the iceberg. In practice, this technology will happen behind the scenes, but it opens up many new possibilities with an answer that is less complex than what would be needed today.

The bitcoin itself may ultimately not be as important as the doors the technology is opening, but what about the bitcoin? People are buying them because the price has been increasing, and the price has been increasing because people are buying them. At the moment, we are looking at a huge speculative surge. What is the basis for the value of the bitcoin? I was hoping you’d know, and if you do, please let me know.

If we are buying anything for speculative purposes the underlying assumption is that the current price is wrong, and we think that thing is worth some higher price. The problem is we don’t know enough to know how the bitcoin should be priced, and to make matters worse, people aren’t just trading in their dollars for bitcoins, they are also trading yen, euros, pounds, francs, etc. This means you would also be engaging in complex foreign currency trading at the same time (even if it doesn’t seem like it) when simply “investing” in bitcoin.

If you want to buy something, and the only payment accepted is bitcoin, then you would have to buy bitcoins, but hopefully you would only own the bitcoin itself for a short time, which isn’t very risky. Then again, if you are buying things only sold in bitcoin, you lead a much more interesting life than most of us.

While the bitcoin is fascinating, and is made out to be very sexy and sophisticated in the media, it is just about as risky as it gets in the world of investing. That said, as we have seen here, the technology making it possible could lead to very cool things in the future.