Prophets and Profits: Beware Those Cloudy Crystal Balls

A friend of mine tells about a former colleague, a stockbroker, who was famous around the office for his frequent, dire financial predictions. “He successfully predicted five of the last two bear markets,” my friend remarked.

On the other side, there are those who seem to be constantly touting the next can’t-miss breakout on the upside. These supposed gurus are usually selling something: a book, a subscription to their newsletter, or even an investment product.

It’s easy to understand the attraction of both types of “prophets”; their messages, both positive and negative, play directly into the fear-greed cycle that preoccupies many investors’ attentions. As the human central nervous system evolved over millennia, it became extremely efficient at two tasks: helping us avoid threats and urging us to capitalize on opportunities. These basic emotional behaviors are on vivid display in the financial markets, and both the doomsayers and the evangelists of prosperity are skilled at manipulating them in the most advantageous direction.

In this connection, Harry Dent often comes to mind. Mr. Dent made his first major mark with the 1993 publication of his book, The Great Boom Ahead: Your Comprehensive Guide to Personal and Business Profit in the New Era of Prosperity. Dent’s rather wordy title proved fortunate in its timing; stocks and the economy enjoyed one of the longest peacetime expansions in history during the remainder of the 1990s. Hailed as the financial seer of the age, Dent’s book sales certainly demonstrated a bullish trend.

Dent’s next offering was The Roaring 2000s: Building the Wealth and Lifestyle You Desire in the Greatest Boom in History, released in late 1999 just before the dot-com bubble burst, helping the stock market into a downward slide that would eventually cut its value in half. His next four titles proved similarly ill-timed, with the first predicting a boom that never came and the next three auguring crashes or other economic calamities that failed to materialize–and all, of course, aiming to show readers how to profit from the scenarios forecast by Dent.

What’s an investor to do? When so many “experts” offer such differing predictions, who is to be believed?

We believe the proper response is usually, “None of the above.” Rather than trying to chase the economic or market theory du jour, we counsel our clients to develop a sound investment strategy that takes into account their goals, their resources, and their anticipated needs. We help them diversify their holdings in ways that mitigate market volatility and prudently distribute risk. We base our recommendations on reason and research, not on emotion, and we coach our clients to pay more attention to long-term strategy and proven investment principles than to the latest headlines or the prognostications of pundits.

Of course, this approach fails to offer the thrills or drama that feature prominently in the advice of Harry Dent and his colleagues. But we have also found, over the years, in good markets and bad, that it provides what our clients most desire: dependable performance.

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Risks & Rewards of International Investing: Part II

In our last article, we noted that international factors are very much on investors’ minds as they look toward 2017. According to a recent Morgan Stanley survey, four of investors’ top five concerns for this year arise from global trends. We took a brief look at some of the chief risks that US investors must consider when they invest internationally.

So . . . should investors in the United States even bother with global markets, given the various uncertainties? At Bernhardt Wealth Management, we strongly believe that the answer, for most investors, is “Yes.”20170306 InternationalInvesting Pt2

Why do we take this position? Let’s take a look at some of the principal rewards of carefully selected global investments.

Reward #1: Greater Diversification. Remember, the US market represents only about half of the global opportunity. Ignoring such a large proportion of the investment universe means giving up tremendous opportunities to broaden the financial foundation of a portfolio. Often, when domestic stocks are under pressure, investments in other parts of the world can be enjoying a bull market. International investing, as part of a well-conceived diversification strategy, can provide important downside protection for times when our own national economy is flagging.

Reward #2: Growth Potential. Everyone knows that buying low and selling high is the market ideal. For that reason, analysts often look to emerging markets–rapidly developing economies in places like Vietnam, Indonesia, or India–because of their potential for higher returns than in more mature, settled markets. According to a January 2017 report from Dimensional Fund Advisors, global equity markets advanced at a significantly higher rate than US markets (2.63% vs. 1.9%). Additionally, emerging markets (places like China, Indonesia, Brazil, and India) outperformed both US and other developed markets, with an aggregate return of 5.02%, compared with 3.01% and 1.90%, respectively.

Reward #3: Reduced Volatility. This benefit may sound surprising to some, especially in light of concerns about emerging markets and the risks inherent to them (see our previous article). But it actually makes sense when we consider the benefits of greater diversification, as outlined above. We often use the Callan Periodic Table of Investments as a key visual aid to demonstrate to our clients that no single asset class–including US stocks–is always the top performer. Various types of assets will produce better or worse yields at any given time, and often the sectors represented by these assets move in uncorrelated ways. For this reason, owning investments in less-related areas–including different global market sectors–distributes an investor’s risk of being harmed by a downturn in any single sector, thus reducing overall volatility. Recent studies have shown that investing as little as 10 percent of a portfolio in global equities can have a significant long-term “smoothing” effect on swings in portfolio value.

As with any investment strategy, international investing should be undertaken only after careful consideration of the risks and assessment of your financial goals. You should especially discuss with your financial advisor ways that you can limit the transaction costs associated with foreign investment. An experienced and qualified professional advisor can help you decide how and when international investing should figure in your overall investment strategy.

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Risks & Rewards of International Investing: Part I

A December 2016 article on Marketwatch.com reported on a Morgan Stanley survey of investors that listed respondents’ top five financial worries for 2017. In order from greatest to least, these were:

  1. The breakup of the European Union;
  2. A recession in the United States;
  3. A “hard landing” for the Chinese markets and economy;
  4. Terrorism;
  5. War with Russia.

Because four of the five top worries for investors for 2017 involve international economic or political aspects, it seems like a good time to reconsider some basics of international investing, both the risks and the rewards.20170306 InternationalInvesting Pt1

In fact, it might be worth asking: Should you even risk international investing in the first place? After all, in addition to the usual market uncertainties, international investing also exposes you to currency fluctuation risk, often-unpredictable political risk, and sometimes–especially in emerging markets–liquidity risks. Given all that, shouldn’t you just keep your investments within the borders of the good old USA?

If you are interested in total return and reduced volatility, the surprising answer is, “Not necessarily.” Investment professionals and portfolio managers have known for years that adding an international component to your portfolio is a key to good diversification and reduction of overall portfolio volatility.

With that in mind, let’s take a look at some key risks of international investing. In a later article, we’ll review some of the potential rewards.

Risk #1: Transaction Costs. Investors are often surprised to learn that one of the biggest downsides of investing in foreign markets is the simple cost of doing the trades. In addition to brokerage commissions, international investment transactions can be subjected to stamp duties, trading fees, and transaction levies that can add significantly to costs, over and above the brokerage commission. Keeping transaction costs in check is a key to smart international investing.

Risk #2: Currency Risk. When you are purchasing your investments in one currency but their value is assessed in a different currency, it is always possible that unfavorable movements in currency valuation can have an adverse effect on your investment. For example, let’s say you bought shares in an Italian company when the Euro was strong, relative to the dollar. Next, let’s suppose that when you got ready to sell your stock, the Euro was very weak. Even though the price of the stock may have gone up in Euros, the number of dollars you would receive from the sale is reduced because of unfavorable currency fluctuation.

Risk #3: Liquidity Risks. Though emerging world markets can be quite enticing because of their rapid growth potential, the other side of the coin is that when markets are new and developing, they can be more susceptible to financial, political, or even military emergencies that can obstruct market liquidity. In other words, you might not be able to sell your investment quickly, if you decided you needed to.

These are some of the principal risks of investing internationally. Before you make global investing a part of your portfolio, you should consult with a qualified and trusted advisor who can help you devise a plan that takes these risks into account, in light of your individual financial goals and strategy.

In our next article, we’ll look at some reasons why risks like those discussed here should not necessarily scare investors away from the opportunities to be found outside the borders of the United States.

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One of My Favorite Days

Several years ago one of my sisters sent me the following poem. It meant a lot to me, and I wanted to share it with you today:

One of My Favorite Days

(March Fourth)

We all love Christmas. Halloween is scary sweet.
I’m thankful for Thanksgiving, boy how we eat!
Then there’s our birthday which is really fun.
New Year’s Eve is festive but we’re a little tired come January One.

Easter is delightful! Fourth of July fireworks are great!
There is St. Patrick’s, Presidents, Valentines, Veterans, Labor,
Columbus, Flag, Father’s, Mother’s, Martin Luther King, . . .
How do we keep track of all of these darn dates?

When I look at my one year calendar,
March Fourth is one of my favorite days.
Nothing much happened in history.
It’s just what the day has to say!

When you have problems, March Forth!
When things don’t work out, March Forth!
When bad things happen, March Forth!
When you lose, March Forth!

When anything can happen, March Fourth says it all.
When something does happen,
Get up, Brush off, and March Forth,
Because we’re all bound to fall.

–Anders Rasmussen

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Improving One’s Financial Health

A December survey by the National Endowment for Financial Education (NEFE) finds more than two thirds (68 percent) of U.S. adults will make a financial New Year’s resolution for 2017. Saving money (53 percent) tops the list, followed by managing debt (44 percent). Sadly, one in three (31 percent) rate the current quality of their financial life as worse than they expect it to be and more than three quarters (78 percent) say they wrestle with financial stress.

The survey also finds that nearly half (48 percent) of Americans admit that they are living paycheck to paycheck. More women than men live paycheck to paycheck: 51 percent versus 45 percent. 20170227 FinancialHealthThe main reasons people believe they are living paycheck to paycheck are due to credit card debt (24 percent), employment struggles (22 percent), and mortgage/rent payments (18 percent). Americans cited the most significant financial setbacks they experienced in 2016 as transportation issues (23 percent), housing repairs/maintenance (20 percent), and medical care for an injury/illness (18 percent).

NEFE found higher income provides little protection. While 85 percent of adults earning under $50,000 per year report being stressed, the percentages don’t improve much for people earning $50,000 to $74,900 (80 percent are stressed) and $75,000 to $99,999 (79 percent).

NEFE offers the following advice for those hoping to improve their financial lives:

“Get debt under control. Set a goal to reduce your debt load next year by five to 10 percent. That might mean reducing impulse shopping. Six in 10 people admit they purchase on impulse and 80 percent of those regret purchases afterwards. When you face temptation, walk away for at least 30 minutes and see if you still want it and it’s a good idea.

Start saving now and do so often. Common advice tells us we should have six to nine months of income set aside. Again, set a goal–start with as little as $500. Of course, more is better, but by starting small you gain a sense of security, a sense of goal achievement, and you reduce stress.

Shop for better services. Where can you come up with $500 for an emergency fund? Make a game out of shopping providers to find the best value in the services you use. How long has it been since you shopped your insurance policies? Any chance you can save money on your cell phone plan, internet or utilities?

Understand what’s behind your financial decisions. Ever wonder why you feel good about spending money on vacations, but avoid saving for retirement? Why you buy new golf clubs, but procrastinate when it comes to giving your kids an allowance? The answer may lie in your unique life values and how they influence your financial decision making. Take the LifeValues Quiz to better understand your values and attitudes about money.

Of course, you may also want to consider talking to a financial advisor or mentor when it comes to setting goals and creating a plan.

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There’s an ETF for That — or Not

Morningstar’s annual ETF report finds that as of December 6, 2016, 220 new exchange-traded products (ETP) (inclusive of exchange-traded funds and exchange-traded notes) were launched in the U.S. market in 2016. This places 2016 fourth behind 2007, 2015 and 2011 in terms of total number of new ETP launches in a given calendar year. There are now a total of 1,957 ETPs available to investors.

Since the SPDR S&P 500 ETF (SPY) was launched in 1993, 2,531 ETPs have been brought to market. Nearly 23% of these products have been closed. Generally, as Morningstar’s “Worst of 2016” list indicates, ETPs that perform poorly, fail to gather assets and ultimately close. They tend to be trendy products tied closely to current headlines rather than designed for the long-term.

Morningstar’s pick for 2016’s least successful ETF is the VelocityShares Leveraged Crude Oil ETN, closely followed by the VelocityShares 3x Inverse Crude Oil Fund. These VelocityShares products give you three times the daily movements of the price of oil on the global markets. The first delivers three times the amount that the price changes in the same direction, while the second offers three times the movement in the opposite direction. I’m not sure who would want to introduce three times the volatility.

Morningstar also dissed the Whiskey & Spirits ETF (WSKY). According to ETF Trends, WSKY seeks to reflect the performance of the Spirited Funds/ETFMG Whiskey & Spirits Index, which is comprised of companies that are whiskey and/or spirit distilleries, breweries, and vintners and related luxury goods companies engaged in the sale of whiskey or the production and sale of mixers for use with premium spirits, according to a prospectus sheet.

However, WSKY is not as diversified as it sounds. Not only is this portfolio concentrated on a small component of a much larger business sector, it is highly concentrated within the small realm of alcoholic beverages. That is, a single stock accounts for 23 percent of the portfolio, and its top 10 holdings comprise 79 percent of the total portfolio. What’s more, investors pay up to invest in something trendy; the ETF has a high expense ratio of 75 basis points a year.

The rest of the 2016 worst-performers list features an eclectic mix of funds, several of which are single-country ETFs. The Global X MSCI Nigeria ETF lost 33.3% on a year-to-date basis, the worst performance among any single-country fund.

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Social Security Changes in 2017

Do you know your full retirement age for purposes of determining your Social Security retirement benefits? Full retirement age is the age at which a person first becomes entitled to full (unreduced) retirement benefits. For years, that age was 65. However, that age has been gradually increasing until it reaches 67 for people born in 1960 and later. You can, however, apply for benefits earlier at age 62, although your monthly benefit amount will be reduced nearly 26 percent compared to the benefit for your full retirement age.

Full retirement age is 66 and two months for people born 01/02/1955 through 01/01/1956. And these folks are eligible to receive permanently reduced retirement benefits when they turn 62 in 2017. You can find your full retirement age, along with other important information, on the Social Security Administration’s website.

The Social Security Administration recently shared these changes that are applicable in the year ahead:

  • Social Security’s 60 million beneficiaries will get 0.3 percent more in monthly benefits. Retired workers will see a $5 bump on average to $1,360.
  • The most a worker retiring at full retirement age in 2017 will receive is $2,687 per month, up $48 from 2016.
    The amount of earnings subject to Social Security tax in 2017 will increase to $127,200, up from $118,500 this year. This tax hike will affect about 12 million of the 173 million people paying into the system.
  • In 2017, for every $2 you earn above $16,920, one dollar of benefits will be withheld. In the year you reach your full retirement age, $1 of your benefits will be withheld for every $3 earned above $44,880. Once you reach full retirement age, Social Security will recalculate your benefits to give you credit for those withholdings.
  • Previously, you could use a technique called “file and suspend” to claim your retirement benefit and then suspend it, allowing your spouse to receive benefits based on your record while your benefit continued to accrue. Some people were still able to do this for part of 2016, but no one can use this strategy in 2017.

You can learn more about the important decision of when to claim your Social Security benefit by reading Social Security’s publication, When to Start Receiving Benefits. Or better yet, you should consult your financial advisor if you are approaching the time to make that decision.

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To Halt or Not to Halt? The Fiduciary Rule Is the Question

At last week’s TD Ameritrade conference, the halls were abuzz with news that an executive order signed by President Trump on February 3, 2017, would halt implementation of the Department of Labor’s fiduciary rule. This became a major topic of discussion at the conference, since eliminating this regulation, scheduled for implementation beginning in April 2017, has been a cherished goal of many large financial firms that are in the business of providing advice to people with IRAs and other retirement investment accounts.20170206 Fiduciary

Simply put, the fiduciary rule would require any financial professional who provides investment or retirement planning advice to people with retirement accounts to be held to the fiduciary standard, which requires such advisors to always act “in the client’s best interest.” That sounds perfectly reasonable, right? Wouldn’t you want anyone who is handling your retirement investments to be required to act in your best interest?

But here’s the rub: Many advisors who work for brokerage firms or insurance companies–the majority of whom are compensated by collecting commissions on the products they sell and charging fees–are not presently required to meet this standard. Instead, the existing standard for such advisors is that the products they recommend for their clients must be “suitable.” This is not the same as requiring that advice always be in the client’s best interest. Perhaps it’s not surprising, then, that when the fiduciary rule was proposed, many segments of the financial industry–including many of the largest firms on Wall Street–complained loudly and bitterly about the extra levels of regulation that would be imposed, the expense of compliance, and even the harm that might be done to smaller investors because of reduced access to professional investment advice.

It is not completely clear that President Trump’s executive order will halt implementation of the fiduciary rule. According to Skip Schweiss, Managing Director for Advisor Advocacy and Industry Affairs for TD Ameritrade Institutional, the order actually calls only for delaying the phased-in implementation of the rule for 180 days, to allow time for further study and “economic and legal analysis” by the Department of Labor. Nevertheless, in the opinion of many observers, the president’s announced goal of rolling back regulation in the financial industry encourages the view of the ultimate demise of the fiduciary rule.

The most important point in all of this–and a point that bears directly on Bernhardt Wealth Management–is that, because we are a Registered Investment Advisory firm, it makes no difference to us whether the rule is implemented or not. Why? Because we have always been and will always be subject to the rule’s requirement to act in our client’s best interest. We think it is vitally important for any investor to work with a fiduciary, and it is absolutely essential to us that we do what is right for our clients 100 percent of the time. We don’t need a government regulation to tell us to do the right thing; it is part of our culture and why we exist to serve our clients.

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Should Market Highs Influence Investment Decisions?

Given recent headlines about indices like the Dow Jones Industrial Average and the S&P 500 Index hitting all-time highs, I thought I would share a piece I received this month from Dimensional Fund Advisors (Dimensional). Dimensional poses this essential question: When markets hit new highs, is that an indication that it’s time for investors to cash out?20170130 MarketHigh

Dimensional’s historical evidence suggests that a market index being at an all-time high should not signal it’s time to sell. For example, returns for the S&P 500 from 1926 through the end of 2016 show the proportion of positive annual returns after a new monthly high is similar to positive returns following any index level. In fact, almost a third of the monthly observations were new closing highs for the index. So, new index highs have historically not been a useful sell signal.

Rather than using past performance to predict future performance, Dimensional stresses that it is more useful for investors to understand what drives stock returns. Here’s their helpful explanation: “One way to compute the current value of an investment is to estimate the future cash flows the investment is expected to deliver and discount them back into today’s dollars. For an investment in a firm’s stock, this type of valuation method allows expectations about a firm’s future profits to be linked to its current stock price through a discount rate. The discount rate equals an investor’s expected return. A simple, but important, insight we glean from this is that the expected return from holding a stock is driven by the price paid for it and what its investors expect to receive.”

This way, fundamentals, not emotions drive your investment decisions.

What is Dimensional’s bottom line to this analysis? “While positive realized returns are never guaranteed, equity investments have positive expected returns regardless of index levels or prior short-term market returns.”

And, given that history shows us that over longer time horizons the odds of realized stock returns being positive increase, it is wise to maintain a long-term investment view.

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Financial Stress Rings in the New Year

A December survey by the National Endowment for Financial Education® (NEFE) finds more than two thirds (68 percent) of U.S. adults will make a financial New Year’s resolution for 2017. Saving money (53 percent) tops the list, followed by managing debt (44 percent). Sadly, one in three (31 percent) rate the current quality of their financial life as worse than they expect it to be and more than three quarters (78 percent) say they wrestle with financial stress.

The survey also finds that nearly half (48 percent) of Americans admit that they are living paycheck to paycheck. More women than men live paycheck to paycheck: 51 percent versus 45 percent. The main reasons people believe they are living paycheck to paycheck are due to credit card debt (24 percent), employment struggles (22 percent), and mortgage/rent payments (18 percent). Americans cited the most significant financial setbacks they experienced in 2016 as transportation issues (23 percent), housing repairs/maintenance (20 percent), and medical care for an injury/illness (18 percent).

NEFE found higher income provides little protection. While 85 percent of adults earning under $50,000 per year report being stressed, the percentages didn’t improve much for people earning $50,000 to $74,900 (80 percent are stressed) and $75,000 to $99,999 (79 percent).

NEFE offers the following advice for those hoping to improve their financial lives:

Get debt under control. Set a goal to reduce your debt load next year by 5 to 10 percent. That might mean reducing impulse shopping. Six in 10 people admit they purchase on impulse and 80 percent of those regret purchases afterwards. When you face temptation, walk away for at least 30 minutes and see if you still want it and it’s a good idea.

Start saving now and do so often. Common advice tells us we should have six to nine months of income set aside in an emergency fund. Again, set a goal–start with as little as $500. Of course, more is better, but by starting small you gain a sense of security, a sense of goal achievement, and you reduce stress.

Shop for better services. Where can you come up with $500 for an emergency fund? Make a game out of shopping providers to find the best value in the services you use. How long has it been since you shopped your insurance policies? Any chance you can save money on your cell phone plan, internet or utilities?

Understand what’s behind your financial decisions. Ever wonder why you feel good about spending money on vacations, but avoid saving for retirement? Why you buy new golf clubs, but procrastinate when it comes to giving your kids an allowance? The answer may lie in your unique life values and how they influence your financial decision making. Consider taking the LifeValues Quiz and answer the 20 questions noted at this website.

Posted in Debt, Financial Planning | No Comments