Reflections on the Week

Risk and return.

Uncertainty.

Climbing Mt. Everest.

How to be better investment advisors.

These were some of the topics of the 2018 BAM National Conference which I attended, along with Michelle Graham of our firm, over the past few days.

We heard from Alison Levine, who in 2002 was the captain of the first American Women’s Mt. Everest Expedition.  Her presentation was filled with many leadership and life lessons, which can also be applied to investing.

In building her team, Levine said the members’ techniques and ability were important, but willpower was the most important factor. To be a successful long-term investor, you will need to have willpower to endure down markets (such as we are experiencing right now), willpower to ignore the constant noise and financial predictions and willpower to stick with your financial plan (investments), even when they temporarily underperform some other stocks or asset classes.

Levine stressed the importance of confidence. She had to know that each of her individual climbers were confident of their ability to have a truly confident team. As your advisors, we are confident about our consistent investment philosophy. As a client, we want you to be confident in our investment strategy and philosophy, so you can adhere to it for years and decades.

To make this attempt to climb Everest, the American Women’s Mt. Everest Expedition required extensive planning, training and financial support. This was not a one person effort. The Women’s trip was sponsored by the Ford Expedition and not the Chevrolet Avalanche (get it?) …as both wanted to sponsor the venture.

We learned that before an Everest climber can attempt to reach the ultimate peak, they spend two months having to go up and down the mountain. (See the picture) They go from the base camp up to base camp 1, then back down to the base camp. Then up to base camp 2 and back down to the base camp. Then up and down to base camps 3 and then 4….before they are finally able to climb all the way and try to get to the peak. They are forced to endure this up and down process so their bodies can get safely acclimated to the thin mountainous air.

The climbers had to go backwards many times, so they could eventually go forward. Even when going backwards, they were making progress towards their goal. As in investing, sometimes the markets force you to go backwards (when the markets decline), before you can go forward (when the markets go higher, and then eventually reach new highs).

Various speakers discussed how risk and return are related, which of course we know.

Levine’s 2002 attempt did not make it all the way to the final summit. She was 28,704 feet above sea level, but due to storms that quickly developed, they were unable to trek the final 331 feet up to the peak. Did they fail? No! They had to make smart decisions. It was better not to take extra risk, in order to return …and live. That is the ultimate risk and return!

She returned to Mt. Everest in 2010 and finally made it all the way to the summit. She said she could not have done it without an extensive support team and the crucial experience she gained from her 2002 venture. We are part of your support and advice team. We have extensive experience, rely on market and academic data, and behind us, we have extensive resources that we can rely on, as needed.

We agree that risk and return are related. We discuss this with you, as we develop and evaluate your portfolio over time. One speaker expressed that due to US S&P 500 valuations as of September, 2018, the future expected returns for this asset class are quite low going forward, well below the historic average of 8-10% per year. He may be right, but there is no way to know. None of us has a clear crystal ball about the future. However, we disagree with his recommendation to invest in alternative investments which we find hard to understand, use leverage and make bets by shorting certain stocks (betting they are over priced and will go down). Some speakers advocated adding alternative investments to try to reduce the overall risk of a portfolio or to increase the expected returns. As of now, we are not in agreement that the risk of these alternative investments are worth the potential return. We are open to new concepts and ideas, but we must be confident in them before we invest our money and recommend them to you.

We also heard from another speaker, who spoke from the view of an investor.** He shared how years ago, it was difficult for him to deal with uncertainty, noise and the constant barrage of media predictions and warnings. This was before he began using his current advisory firm (not WWM) and investment philosophy, which is likely similar to ours.

He talked about how important it is for us as advisors to be good listeners. He stressed values that are similar to ours, such as “doing the right thing” and “doing it the right way.”  He discussed the importance of treating each client as an individual and understanding your personal emotions and feelings about money, as well as sharing our personal money stories. I plan to write about these topics in future blog posts and we will discuss them in client meetings.

He said that by working with his advisor, he became more comfortable with the uncertainty of the financial world. He began to tune out the noises. He worked with his advisor to make better financial choices. He realized that he can only control what he can control. He now knows that as a long-term investor, the investments and decisions he makes today will compound over time for great future benefits. He doesn’t know exactly how this will work out, but is confident that over the long term, he feels this is the correct philosophy to have.

We strive to provide the type of guidance and advice that the speaker described, so that our clients can also feel this way.

The speaker feels transformed by the relationship he has with his financial advisor. He refers to himself as a transformed investor. As a result of his new mindset, he is much more willing to refer his friends to his advisory firm, so his friends can be helped by his advisor and feel the way he does.

If you are a client, we hope that you feel this way about our firm, so when the situation arises, you can help your friends and relatives by referring them to us.

If you are not a current client, but want to have this type of investor experience and relationship, let’s talk.

 

**The speaker is not a client of our firm or BAM Advisor Services (our back office firm), so this is not intended as any form of client testimonial.

Cites:

2019 Social Security Benefit and Payroll Tax Increases

Social Security recipients will be receiving a 2.8% increase in 2019 benefits. Unlike in 2018, this benefit increase should not be offset by higher Medicare health premiums in 2019, so these should be higher net monthly benefits.

The increase in gross benefits would be the largest annual COLA change (cost of living allowance) since 2012, as inflation has been very low over the past years. Recent changes have been: 2018-2%, 2017-.3% and 2016-no increase.

The earnings limit for those who claim Social Security benefits before their full retirement age will increase from $17,040 to $17,640 in 2019. If this applies to you, you lose $1 benefit for every $2 earned in wages or earned income over $17,640.

In 2019, the maximum wage base subject to Social Security and Medicare taxes will increase $4,500, from $128,400 to $132,900, a 3.5% increase. This will cost employees and employers each $344.25 in 2019. Additionally, all earnings, even above the $132,900 Social Security maximum, are subject to a 1.45% Medicare tax. Plus, individuals with earned income above $200,000 and married filers with earned income above $250,000 pay an additional .9% in Medicare taxes.

 

This week’s Takeaway: Social Security is still vital for nearly all Americans. Annual payments can be $20-40,000, which is the equivalent of withdrawing 4% per year from an account value of $500,000-$1,000,000.

 

Source: “Social Security to get 2.7% COLA,” Investment News, Mary Beth Franklin, October 15, 2018.

Market commentary, October 2018

US and global stock markets market declined on Wednesday. Major US indices dropped by more than 3% and International markets by a bit less, depending on the specific asset class.  They are down again mid-day Thursday, as I complete this.

Whenever there are sudden or steep declines that appear out of the ordinary, investors and analysts try to analyze and determine the cause and effects.

In the context of longer term stock market activity, which generally has been positive for a number of years, this decrease should not be overly worrisome.

The drop may be attributed to a number of factors, which work in a circuitous cycle. Corporate earnings and the economy have been strong. Unemployment is down. It is hard to find good job candidates. Interest rates since 2008 have been historically low. Inflation has been moderate at around 2%.

The Federal Reserve has raised short term rates, which we feel is quite appropriate, in response to the strong economy. The increase in interest rates will benefit many of our clients, as the returns on your fixed income investments will be rising. However, higher short term rates potentially slow the economy. Higher interest rates make it more expensive to borrow to purchase a home, finance a new or used vehicle, or obtain business financing.

While the 10 year US Treasury note yield had risen to over 3.25% early Wednesday, it declined to around 3.15% on Thursday morning. This is the circuitous impact and how various financial markets adjust and self-correct. Concerns about rising interest rates caused growth expectations to be reduced, which then caused the decline in stock prices and in the 10 year interest rate, as well as a drop in the price of oil, due to reduced demand expectations. All in one day, or in a few hours.

We don’t feel anything has significantly changed this week, from the last few months, regarding the economy. Corporate earnings are the key driver for the stock market in the long term. If current earnings and future earnings expectations are good, in general, that drives stock prices higher.

Corporate earnings for the third calendar quarter of 2018 are beginning to be released this week. Thursday morning Delta and Walgreens, for example, announced solid earnings and good future guidance. More results will be released Friday and over the next few weeks. We think these earnings announcements will strongly influence the market’s near term direction.

There are certainly still concerns about trade issues with China. The US budget deficit continues to grow and that cost will be exacerbated by the increase in interest rates, as the US Treasury will continue to need to borrow more money. Tax reform has increased corporate earnings but the impact has yet to appear in US Treasury receipts.

Warren Buffet frequently cites his mentor, Benjamin Graham, for stating that “in the short run, the (stock) market is a voting machine but in the long run, it is a weighing machine.” We agree with this quote.

In the short term, the stock market can be volatile and unpredictable. However, investors who are focused on the long-term, who remain disciplined, patient and diversified, have been amply rewarded.

Nothing has changed our view and future long-term perspective.

As always, if you have questions about market activity or it’s impact on you, please contact our firm. That is what we are here for.

Let’s Talk

A Tribute to a Special Person

Art Sweet, who was one of the nicest people I have had the privilege of knowing and working with, died last week at the age of 93. We worked together as partners at a prior CPA firm for 18 years, from 1990 until 2008. 

Art had merged his two person CPA and bookkeeping practice into this other CPA firm a number of years before I joined that firm in 1990. Originally, Art intended to gradually transition his clients and retire a few years later. Art exceeded the firm’s “mandatory” retirement age of 65 or 70 by quite a bit, as he continued working until last December….finally retiring at age 93.

I really mean it when I say I had the privilege of working with Art. At a funeral or when someone dies, you sometimes hear people say that everyone liked him or her, or they never heard a bad word about that person. Art Sweet was truly one of these people. He was kind. He was liked by everyone he came in contact with. Although I’m sure he had his private moments, I cannot remember him ever getting angry or raising his voice at anyone.

Art and his wife Gladys, when they were both younger and healthy, were world travelers. They loved music and dancing, as well as their many friends and family. We would frequently drive to one of his favorite lunch places, the former Georgio’s on Greenfield Road, always splitting a Caesar salad and huge bowl of pasta. We would have great conversations about his travels, his last trip or the one he was planning, as well as all types of cultural activities, such as a concert he attended, a movie he had seen or a book he was reading. I felt like I was living vicariously through him. Now, I am able to do some of the things we had talked about at those lunches.

Decades ago, I was in awe of Art for his ability to adapt to all the technology changes he encountered. He started as an accountant and CPA way before personal computers. He did tax returns by hand in pencil. He learned how to use computers, as well as handle the continuous avalanche of tax changes that a CPA faces. It is one thing for someone in their 30s or 40s to learn new technology, but imagine the challenges he faced and overcame to keep current with technology in his 70s, 80s and even in his 90s.

People leave a legacy. Art left me a huge legacy. Many years ago, I read a concept by a consultant, Alan Weiss, that when you look back on your career or firm, you will find that it is very likely that a handful of key people will have had a huge impact on your business.

I am very fortunate that Art had many wonderful clients, as many of Art’s clients transitioned through the years at the CPA firm to become my clients. As I transitioned from a full-time CPA to a financial advisor, many of these clients, and their families, became clients of our financial advisory firm, and are still valued clients and cherished friends.

Art had a love of life and a passion for culture and travel. Art cherished his family, his children, grandchildren and numerous great-grandchildren. For many years, he cared for his wife as she had Alzheimer’s.

Arthur M. Sweet was a special person. The world lost a very kind and gentle person last week.

I am grateful that he was a part of my life.