Emergency Planning

Are you prepared for an emergency?

We don’t want to think about these things, but we have a responsibility to plan. As financial advisors, as well as family members, our firm has planned and prepared for events which we hope don’t occur anytime soon.emergency prepardness

By sharing the planning that we have done, we want to re-assure you as our clients. We also think sharing this information with you may be helpful, in the hopes that you consider steps that you may want to take to be better prepared.

As a registered advisory firm, we have a fiduciary duty to always act in our clients’ best interest, as well as to meet various compliance rules. One of these requirements is that we have disaster recovery plans and have done contingency planning in the event of various emergencies. The following are some of the business and contingency steps that we have taken, which could be helpful in various situations.

A few years ago, we switched from having a server stored in a closet in our office to a “cloud” or “hosted” environment, with a Troy, Michigan based firm. By switching to this cloud environment, we can access all of our computer systems via the Internet from anywhere with an Internet connection. If our building was damaged or there was a power outage which affected the office location, we can work remotely and be functional. There are also significant security benefits by using this outside computer firm, which has full-time computer and security specialists. Additionally, they have multiple back-up plans and locations themselves.

For documents, notes and paperwork that are not already saved in our computer system, we are taking significant steps to scan in these items, as an additional backup measure. All client applications, forms and trade documents are stored redundantly on our system, by BAM, as well as by Fidelity, as the custodian (for applicable items). We have other detailed steps and plans, which are in our firm’s Disaster Recovery Plan document, which is reviewed and updated annually.

If something were to occur simultaneously to Keith and myself, we have entered into an agreement with the advisory firm related to our back-office firm, BAM Advisor Services. Buckingham Asset Management is one of the largest independent advisory firms in the country. If something was to occur to both of us, Buckingham would immediately run our firm, be in contact with our clients and be able to provide advice. There are legal steps involved in this potential transition, but the major point is that we have taken steps to handle this worst case scenario. We were the first firm to enter into such an agreement with BAM, which many others of their 150+ client firms have subsequently done.

In the event that either Keith or I was to die prior to retiring, we have a buy-sell agreement, which is funded with life insurance. This would provide funds both to the firm, to assist in handling a transition period, as well as provide funds to the respective family.

Let’s talk tech now. What if Brad suddenly went into the hospital or had an emergency? What if Brad could not access his phone or iPad, or lost all his technology devices? Keep in mind, all of my mobile devices and desktop computer have passwords to gain access to them, for security purposes. Other than the obvious health concerns, I want to have a way that others who needed to would be able to access business and personal information, as appropriate. Again, I have a responsibility to my family, my clients and Keith, my business partner.

This scenario could happen and is something that each of us should plan for. In this emergency scenario, I would not be able to provide the login information to access my phone, iPad or desktop computer, and potentially all of these devices may be gone or inaccessible to the people who need this critical data, due to my condition or other circumstances.

How would bank accounts be accessed? How would business records be accessed? I have stored all of my computer login and passwords in a password manager program called 1Password. By using this program, all this critical data is stored in one place, which is very secure and I have used different and complex passwords. Additionally, I have stored many important business documents (not client data) in a separate cloud-based program, as an additional backup measure. But how would someone else be able to get to all this information?

To access this important information in an emergency situation, 1Password has recently created an “Emergency Kit,” which is a one page form that has special data to enable someone else to access my 1Password account via the Internet from anywhere. I have provided this Emergency Kit page in a sealed envelope with specific instructions to close and trusted individuals, my wife, Keith, as well as two others with business relationships to our firm. In an emergency situation, one or more of these individuals would be able to remotely access 1Password. This would allow them to access other critical data, as needed.

By using 1Password, I have created very secure and different passwords for my many business and personal logins. By going the next step and1pw preparing this Emergency page, I am confident that others would be able to access my devices and login data, in the event that I was incapacitated.

I truly hope this 1Password Emergency Kit is not necessary. However, I feel much more confident and secure that if there was an emergency situation that my family, clients and firm will be able to effectively handle important matters.

I hope providing this information is helpful to you, to inform you of the planning that our firm and I have done and to assist you in thinking about how you can better prepare yourself and your family.

Just like in the financial markets, no one knows when an “unexpected” event will occur.

If you are a client of our firm, I hope you appreciate the planning we have done to keep your data secure, but accessible, in various situations.

If you are not a client of our firm, are you comfortable with the planning for these types of scenarios that your advisor has done? Is it adequate? Is this a discussion you should be having?

The Brexit Aftermath

The unexpected happened. Again. This time it was the Brexit vote.

The reality is that “unexpected” events happen. They can occur at least annually and sometimes a few times in a year. And sometimes, as in this case, the financial markets can also unexpectedly quickly rebound.

The reality is that the future is uncertain. Uncertainty means that there will be events which cause sharp movements in the financial markets. An unexpected event can be positive or negative. We recognize that the most worrisome and disconcerting unexpected events are those which cause a fast and broad downturn in stocks. However, these “unexpected” types of events are really normal and should be expected.

Your goals and the Brexit aftermath

We focus on long-term investing, so that our clients can have a greater sense of financial security for themselves and their family. We work with you to understand your objectives, which usually include college savings, retirement planning and ensuring a financially secure future for your family and future generations.

While global stock markets have been volatile during the last week, being well diversified has meant that the Brexit aftermath has not had a significant financial impact on your lifestyle or your ability to reach your financial goals. This is what you should be focusing on.AR-160519949

While the Brexit vote caused declines in US and global stocks last Friday and this Monday, a slightly broader perspective is needed. Most global markets increased during the week leading up to the Brexit vote, so the immediate reactive declines on Friday and Monday were partially just erasing the increases which had just occurred in the preceding days.

After Monday, global stocks markets have rallied, so a large portion of the losses that were incurred on Friday and Monday have already been recouped.  As of Wednesday’s close, most US and global asset classes were slightly down for the month and the 2nd quarter, but the losses are in low single digit percentages.

Is our investment philosophy beneficial, in light of “unexpected” events?

We know that unexpected things will occur in the future and these events often cause major stock and interest rate movements. Having a broadly diversified global portfolio is very beneficial to you, especially in terms of “unexpected” events. If we don’t know what the future will bring, the more that you are diversified, the better off you will be, as contrasted with a concentrated portfolio that could be severely damaged by an isolated event. By being well diversified, we are pro-actively helping to prevent a large financial mistake, which could have a long-term impact on your financial well-being.

For example, if you worked with an advisor who made industry or geographic bets (predictions), these can pay off or be huge disasters. If your advisor thought energy prices were going to increase over the past two years, and had increased your allocation in oil and commodity stocks, you would have been severely hurt. If an advisor thought the Brexit vote was going to be “Remain,” and loaded up on UK financial stocks, you would have incurred 1/3 losses in the two days after the Brexit vote in a number of top UK financial institutions and banks.

This does not mean that diversification can prevent losses, which it does not. It means that being well diversified gives you the best chance to be financially successful over the long-term. Since the future is always unknown, being broadly diversified mitigates the unnecessary risk of being concentrated in one market sector, geographic region or a handful of stocks.

The Brexit vote is a perfect example of why we do not make investment decisions based on predictions or forecasting the future.

* At the beginning of the year, with the 10 year US Treasury Note yielding 2.25%, Goldman Sachs predicted the yield would be 3% by December, 2016.
* During this winter, Goldman changed their prediction to 2.75%.
* A month ago, Goldman again revised their forecast down to 2.4% by December, 2016.
* On Monday, they again changed their forecast for the yield to be 2% by year-end.
* The 10 year US Treasury bill is currently yielding around 1.5%.

What investment philosophy and strategy are in your best long-term financial interest?

What we think now….Investing, Brexit and the Federal Reserve Highway

flat roadThink of interest rates like a highway and an exit ramp….except this exit ramp is unlike any other you have ever seen.

Since 2008, short-term interest rates have been near zero and there has been no exit ramp in sight. The short-term interest freeway has been as flat as can be, like driving through the cornfields of Iowa or Nebraska.

In December, the Federal Reserve finally added an exit ramp, but it was a very slight upward slope, with a .25% increase in short-term interest rates. Their projections were for a very gradual upwards slant in the exit ramp, over the next two years, or two miles in my highway exit analogy.

Over the last six months, the slope and length of this exit ramp has continued to change. The Federal Reserve provides occasional interest rate projections. Their projected slope is now expected to ascend even more gradually and has lengthened. To use my road analogy, the highway ramp has been extended from two to three miles. It is a long road with a very mild incline. From December to last week, their average forecast for the end of 2017 has gone from a range of 2.00 – 2.50% to 1.625%. By the end of 2018, they project short term rates of 2.375%, versus a median forecast of 3.3% in December, 2015.

As a result of the Brexit vote last night, it is very unlikely that the US Federal Reserve will increase interest rates in the next few months. The Brexit action likely will keep interest rates lower for longer than their predictions published just last week, cited in the paragraph above.

So if the economic data continues to show improvements, short-term interest rates will rise, but very gradually and over a period of many years.

What are the implications of these interest rate changes to you?Exit ramp

The Federal Reserve has been reluctant to raise interest rates during 2016 due to various factors, including slower growth in employment and corporate profits, as well as overseas concerns. We agree with Fed Chair Yellen, that we do not expect a recession in the US this year. We think slow growth will continue to be the economic story, maybe for a while.

We view holding fixed income investments, like high grade bonds, CDs and municipal bonds, as the safe foundation to your investment portfolio. For this foundation, we do not recommend securities that may cause unnecessary risk of your principal. We do not think it makes sense to “reach for higher yields” by buying low quality “junk bonds” or high yielding preferred stocks. These investments have much greater risk for loss of principal to get a few extra percentage points of interest or dividend income. It is not worth it to reach for higher yield, if the risk is far greater.

What are our initial thoughts about the Brexit vote, and its implications?

The Remain outcome was widely predicted by pollsters and financial forecasters, rather than the UK leaving the European Union. This again reflects the great difficulty of predicting the future and relying on this type of “guidance” for financial strategy. Pollsters have been consistently wrong thuCluH8NSWEAAV-jHs far in 2016.

In the long-term, corporate profits and earnings, as well as valuation measures, drives stock prices. The Brexit action will have localized impact in the UK, but we think after the initial surprise has been digested, the long-term impact to companies and their earnings will be less than the reaction seems this morning.

In terms of fixed income investments, this is again a reminder of the importance of good credit quality. Financial markets in Spain and Italy are particularly weak today, as they are considered weaker EU economies. We will continue to emphasize investing in strong, high quality fixed income debt.

What do we recommend going forward?

For fixed income investments, we continue to recommend holding a ladder of solid, high quality fixed income securities, with maturities of 3-8 years, depending on your specific situation. We would not place bets on specific maturities, as we believe in diversifying by investments, as well as by holding various years of maturities. If you were to use a bond fund, be sure that it is holding high quality bonds and the maturities are not long-term.

Consider the downside risk of someone investing in a preferred stock that yields 5.5% versus a good quality bond which pays 3.5%. Five years from now, let’s assume the bond is sold at maturity. You received a little less interest each year, but your original principal was paid back in full. Your objectives were met. During the same time period, if that preferred stock has declined by 10%, which is a very realistic possibility, reaching for higher yield would have resulted in a loss of money. That is not a risk we recommend for our clients.

If you want to take additional risk, we would review your allocation to stocks or increase your allocation to certain asset classes with higher expected returns (and additional volatility/risk).

If your mortgage rate is greater than 4%, you should consider refinancing, as mortgage rates are very low. As a result of the Brexit vote, US interest rates may go even lower, so refinance considerations should be more immediate. If you have a mortgage of longer than 10 years, we would generally not recommend pre-paying the mortgage.

For the stock market, we do not have a crystal ball. However, we continue to be optimistic that investors will be rewarded for their patience and owning a globally diversified portfolio. Although International markets have underperformed US markets in recent years, International and Emerging markets are statistically much cheaper than US stock markets and got even cheaper due to the Brexit vote, based on a number of valuation measures. Thus, we remain confident in our long-term investment philosophy, particularly the importance of broad global diversification, versus just owning US large company stocks.

 

Conclusion:

Investing can be compared to driving.

You need to take an appropriate amount of risk to get to your intended destination and to meet your financial objectives.

While driving, you should take the necessary precautions, such as wearing a seat belt.

In investing, you should do the appropriate planning to determine an investment allocation of stocks and fixed income investments that you are comfortable with, which allow you to sleep well at night and be able to reach your goals.

We can assist you along this financial highway.

How to give yourself the best chance

How do you deal with the unknown?

How do you deal with the future, if you cannot predict it?

Those are realistic questions when it comes to financial planning and your future financial security.

We have an investment philosophy that we think gives you the best chance and opportunity to succeed, given the future is unknown.

First, you have to focus on what you can control.

In investing, this means using low cost investments which provide solid returns. Past performance does not guarantee future results, but there are proven correlations between lower costs and better long-term performance. When we review prospective clients accounts, we almost always see expenses ratios that are far higher than the funds we recommend.

We focus on tax minimization. We utilize very tax efficient mutual funds and actively make trades to save you taxes, throughout the year, not just at year end.

To invest successfully, you have to predict which funds or money managers will be top performers in an unpredictable future. This is hard to do, as the accompanying video clearly shows. We encourage you to watch this short, but very powerful video. Selecting a successful mutual Fund.

We believe in evaluating real evidence and academic research about investing, then applying it for our clients benefit. We don’t believe in crystal balls and chasing the most recent hot performing funds. That is not a winning strategy. Very few mutual funds or money mangers consistently beat their benchmarks, as the accompanying video clearly explains.

The funds we recommend have outperformed most of their competitors in their respective categories, over the long-term. This where our firm differentiates itself from many others, particularly traditional brokerage firm advisors.

We cannot predict the future, but we can develop a personalized investment plan that will give you and your family the best opportunity for financial success, in an unpredictable world.

If you are not already working with our firm, our strategy should provide you with a more secure future than watching your advisor continually moving from fund to fund, with their hopes of being correct “next time.” We have the right strategy for your future, now.

Ten financial tips for graduates (and everyone else!)

As this is graduation season, here are some important financial lessons which graduates and everyone else can benefit from.graduation_cap_gown_diploma_postcard-p239275434123408938z85wg_400

Spend less than you earn. This is a key factor in building a financially secure life. Develop good spending habits.

Use credit cards and debt wisely. Buy a house that you can afford. Don’t be house poor. Monitor your FICO score, as it is a key factor in the interest rate you will pay when you need a mortgage or buy/lease a car. Check your credit report for free at least once a year. See my blog post,  Annual Reminder:  How to Verify Your Credit Information. If you get married, make sure to always have at least one or two credit cards that are only in your name, and not in joint name with your spouse.

Save early and regularly, regardless of your income. If your job offers a 401(k) or similar retirement plan, start participating and saving as soon as you are eligible. Increase your savings each time your income increases.

Treat both small and big purchases as important. They all add up. Spending $4.50 three times at week at Starbucks is over $700 per year. That could be part of a trip! The cost of your car, the house that you buy or apartment you rent will affect your financial future more than you realize. If you choose a car or house/apartment that saves you $100 less than per month for 50 years is a difference of $60,000. But wait….

Understand the incredible value of compound interest. If you save $100 per month by getting a cheaper car or smaller mortgage payment and it grows at 5% per year, the $60,000 saved turns into $266,877, with compounding. That is why you should start to save as early as possible for retirement and college for your kids. Even starting to save $50 or $100 per month can grow into thousands over time.

Use a financial advisor who you can trust or has been recommended to you. Would you be operated on by a friend or do it yourself? Your financial life is too important. The financial advisor should not charge commissions or use investments with back end loads. You should be able to understand them, their investment philosophy and how they are paid. Talk to them about financial issues all throughout your life.

Be grateful. Be grateful for the organizations that have played a big part in your life. Give back generously, with your time and your money, to the schools, camps, hospitals or other institutions that are important to you and your family. Your checkbook and credit card statements reflect your personal values. Do not be resentful about paying taxes. See my blog post, A different perspective on taxes, and my blog post, Giving Thanks, regarding the lottery you actually won the day you were born in the US, with all the opportunities you have.

Talk to those you trust about money and financial decisions. Talk to your parents, grandparents and others that you respect. Ask them about what they did right and what mistakes they made financially. Learn from their experiences, so you can avoid similar mistakes.

Invest for the long term by using low cost, globally diversified portfolio of mutual funds, which are not actively managed. Do not try to time the stock market. That is a losers game. Avoid hedge funds and investments you can’t understand. If it sounds too good, it probably is. If you want to buy some individual stocks, that should only be a very small portion of your investments. Do not be afraid of market drops, even large ones. The long term trend is up and has been for almost a century. It will continue that way, with bumps along the way.

Invest in yourself. It is the best investment that you can make. Be a life-long learner. Attend conferences. Buy books and read them. Create great experiences for yourself and your family.

If these ideas resonate with you, and you think others would benefit from them, please forward this email to your friends, family, kids or grandchildren.

Purely personal.…I am very proud and thrilled that my daughter graduated from high school last night and will attend Kalamazoo College next fall. My son graduated from Michigan State University in May and is starting his own video marketing firm in Metro Detroit. They have each accomplished a lot, grown and challenged themselves. They each left a lasting mark on their schools and other institutions which they were involved in. I wish them both continued success!

 

 

 

 

 

 

 

Jim Cramer had one good idea

Recently, I saw a CNBC advertisement where Jim Cramer stated something that is important and accurate: discipline is more important than conviction.

Jim Cramer can be entertaining, but we recommend that you ignore most of his stock recommendations and opinions. This one you should follow.

You will be financially more successful if you have an investment plan and have the discipline to stick to it. You should not make investment decisions based on your emotions and predictions about the future.

A conviction is an opinion, view or strongly held belief. Convictions are usually emotions and reactions to current or past events or beliefs about the future. Financially, following your convictions or emotions is not always in your best long term financial interest.

You may have felt very strongly that the stock market decline of 2008-09 was never going to end. You may have thought that it would take forever to recoup your money, so you may have wanted to get out of the stock market.

However, because we are disciplined investment advisors, we recommended that it was in your best financial interest to stick to your investment plan.

We recommended buying stocks during that downturn, as part of rebalancing back to the desired stock allocation of your investment plan.

For those that followed our recommendation, that was a very profitable move. That took discipline. Since then, many of those purchases have doubled.

Your emotions would probably not have convinced you to buy while the stock market was crashing.

But having a financial advisor who provides discipline and an investment plan can help you to make smarter long term investment decisions.

Being disciplined is more likely to lead you to good investment decisions. It will help you to buy low and sell high. It will help you to stick with underperforming asset classes in the short term, which will likely be financially rewarding in the long term.

You have to trust your emotions and instincts to select a good investment advisor. And then work with them so they can provide you with the discipline to help you make better decisions for the rest of your life.