High yield dividend stocks: good or bad?

Blog post #411

With interest rates so low, clients and others have asked us about buying high yielding dividend stocks.

Their logic goes….wouldn’t it be a good idea to buy a stock that has a dividend yield of 4-5%, since this pays more than the interest rate on a CD? They could earn more income by owning the stock and receiving the dividend payments.

This sounds like a good idea, but, it does not always work out so well. The primary risk in this strategy is that the price of the stock could drop, which negates some or all of the higher dividend yield benefit. The other risk is that the company may not be able to continue paying the dividend at the same rate in the future…that the company would be forced to cut their dividend.

Currently, the companies in the S&P 500 Index, the largest companies based in the US, pay a dividend yield of around 1.85%. For example, if a company pays a dividend of $2.00 per share and has a stock price of $100, its dividend yield would be 2%. This would be pretty typical of a large US company in today’s market. If a stock is paying dividend yield that is far higher than 2%, say 4% or more, we would consider that to be a high yielding dividend stock.

Some examples of currently high yielding dividend stocks are: IBM, 4.47%; ATT, 5.27%; ExxonMobil, 4.83%; Verizon, 4.12%; Ford, 6.37%; Wells Fargo, 4.22%; Macy’s 8.83%.**

Examples of other companies with lower dividend yields would be: Apple, 1.42%; Wal-Mart, 1.83%; Microsoft 1.34%; and Costco, .88%.**

We are focused on your total return when we manage your money. This means we are focused on what happens to your principal (the amount of money you have invested and what happens to that balance over time), as well as the income (interest and dividends) which are generated from that money.

If you are focused primarily on the dividend or interest yield, you are not focusing on the total return.

Stocks that have a very high dividend yield have a high yield for reasons which are usually not good. You should view high dividend yielding stocks with the following guideline: risk equals reward. If a stock has a very high dividend yield, it usually means there is extra risk involved. The higher the dividend yield, the more cautious you should be about the stock. Remember this!

ABC stock may have had a 2% yield and a $100 share price. But if the stock price drops significantly, say to $50 per share, and still pays $2 per share a year in dividends, ABC Company now has a 4% dividend yield ($2 dividend/$50 per share stock price). This stock just became a high paying dividend stock.

This scenario is the usual case, as other than utility companies and REITs (real estate investment trusts), most companies don’t strive to pay 4-6%, or more, as a dividend yield. They get into that position usually because their stock price has dropped. The company has run into problems. Strong competition. Falling earnings and revenue. Debt problems. And their future earning forecasts would typically be going down.

For companies like this, which pay a far higher dividend yield than the norm, you should also consider the potential that the dividend may not be sustainable in the future. One prime example of this is GE, which due to serious financial problems had to drastically cut their dividend from 96 cents per year in 2017 (which was a 4% dividend yield at the time in September, 2017) to 4 cents per share per year in late 2018. GE stock went from $50 per share on January 1, 2000 to range over the last six months of around $9-11 per share. GE’s dividend yield is now approximately .44%. This is a very low dividend yield, but it is not a positive sign, as the company cannot afford to pay out more in dividends, due to the major business issues it faces.

While high yielding dividend stocks can pay good income, their stock performance may not be as good over the longer term, especially when compared to other indices or benchmarks. This is why we emphasize focusing on total return (the growth of your overall invested money), and not only on the dividend yield.

To provide an illustration, we researched many large companies with currently high dividend yields and compared their stock performance over the past 10 years. As the chart below shows, the performance of these high dividend yielding stocks were dramatically less than the performance of a globally diversified stock portfolio, such as we recommend.

The chart below shows how 3 of these stocks, IBM, ExxonMobil and ATT, performed over the last 10 years (from September 14, 2009 – September 11,2019), as compared to a globally diversified asset class mutual fund, DFA Global Equity Portfolio,*** which is invested in 70% US stocks, 30% International and Emerging Market stocks, with exposure to small companies and real estate stocks, with significant exposure to value stocks.

We clearly recognize that this is an illustration of only three companies, so it is not intended to be considered as definitive financial research. There may be high yielding dividend stocks which outperformed various benchmarks over the past 10 years. The point we are making is that by owning a globally diversified portfolio of asset class funds, we strive to provide you with better overall returns, than by just focusing on stocks with greater dividend yields.

As we reviewed a number of companies in researching this blog post, we noted the same pattern over and over. Companies that have high dividend yields now, had poor stock performance over the past 5-10 years. We do not know how these stocks will perform in the future, but we would not recommend that you build a portfolio of a few of these stocks as the core, significant portion of your investment portfolio.

All stocks come with risk. Stocks with much higher than average dividend yields come with much greater risk to your principal, your investment capital. We don’t think that is a risk that is worthwhile for the core part of your investment portfolio.

We hope that this is helpful and informative to you and your family. Sometimes our role is to provide you with guidance, and other times it is to help prevent you from making financial mistakes.

If you are considering purchasing high yielding dividend stocks, maybe you should talk to us first.

 

** Dividend yields as of September 11,2019, per Yahoo Finance.

***DFA Global Equity is presented to be representative of WWM’s globally diversified investment portfolio. It is not a representation of any client’s specific portfolio and is presented only for illustrative purposes. The chart does not reflect WWM’s annual investment advisory fee, but that would not materially change the outcome which the chart shows. For more information on DFA Global Equity, please see Dimensional Investments, ticker symbol DGEIX.

 

Dealing with Change

Blog post #410

Change can take many forms.

Change can be positive.

Change can be negative.

Change can be something you have control over, such as a decision you make to buy a new house.

Change can be something you have no control over, such as the death of a loved one, changes in the tax law, or stock market increases or decreases.

One of our roles as your financial advisor is to help you cope with change, and to help you make better decisions with many of the issues that usually accompany change.

Along with change usually comes choices and decisions. Often, during times of change, you are faced with many decisions which need to be made. The decisions can be overwhelming, and they frequently need to be made quickly. You benefit from having a financial advisory firm that can and does help you handle these changes and decisions.

As financial advisors, we are always dealing with change, as the financial markets never stay the same. We make decisions and provide advice; we deal with uncertainty and strive to be rational.

However, changes that affect your life frequently begin as some type of personal change. You may be going through a life transition, job change or some other sudden event, whether it is good or bad. And in addition to whatever the change is, it is often accompanied by decisions of all types, forms and paperwork….and usually when you are already overwhelmed with many issues, there may be financial decisions that are related to the change. It’s when change affects you and your family that we can often be the most helpful.

Over recent weeks, we have helped numerous clients deal with all types of decisions that come with change.

We have assisted clients with decisions about moving, housing transactions and relocating.

We have helped, and will continue to help, clients who are dealing with changes caused by new or ongoing health problems in their family. This may require emotional support, answers to questions, and retirement planning earlier than expected.

The financial markets have brought changes to people’s assets, so they have met with us to review if they are on target toward their financial goals, as well as to review if their asset allocation is now appropriate for their family.

Due to the sudden drop in interest rates, we have advised numerous clients with issues regarding mortgages and refinancing. These can be confusing and overwhelming and we have helped clients sort out the process.

We are regularly helping clients and their families deal with the changes caused by aging.

We have provided advice to clients regarding long term care insurance, when to begin taking Social Security, as well as their employer-based retirement accounts such as 401(k)s and rollovers.

We have helped clients deal with the death of parents or loved ones.  We have helped clients handle the settling of their parents’ estates and the inheritances which they have received.

We can be a source of stability, who our clients know they can rely on to help them in times of need, as well as with decisions brought upon by good events in their lives.

When you are faced with changes and decisions, we are here for you.  Let us know how we can help you.

If you have friends or other family members who are experiencing some type of change, and could benefit from our advice, please put them in contact with us.

Long Term v. Short Term

Blog post #409

When we provide investment advice and write in these blog posts, we recommend to focus on the long term, especially with regard to investments in the stock market.

A client recently asked me how that “long-term” perspective applies to him, as he is “older” and feels that his time horizon is not as long as he once perceived it.

This is a valid question, so I thought it would make sense to address it.

Let’s start with a basic premise, that if you invest in the stock market, including a globally diversified portfolio as we recommend, you must be prepared for a significant loss of your money over a relatively short period, which could be anywhere from months to a year or two. Stock markets can and do drop quickly and significantly. In order to reap the benefits and gains of stocks, you must be willing to endure the down periods.

In real terms, you could see a decline (loss) of 10-20-30-40% or even more, of whatever money you invest in the stock market, at any point in time. This has happened before and it will happen again.

This is where your time perspective and the reality of the stock market come together. We encourage you to view stock market losses as temporary, and not permanent losses. If you don’t sell at the bottom or during down periods, you should be able to recover from the temporary losses in the stock market, depending on your situation and your timeframe.

As you can see from the following chart, each major loss of greater than 20% of the S&P 500 since 1926 was fully recouped within a few years. For each period, for down and up markets, the chart shows the number of months and the percentage loss and gain over the respective time period. For example, the tech meltdown that started in 2000 resulted in a downturn of 45% in the S&P 500 and occurred over 25 months. Over the next 61 months, the S&P 500 gained 108%.

Please note that this chart is presented for illustrative purposes, to help you understand that stock market losses are temporary and not permanent. We recommend portfolios that are much more diversified than just the S&P 500 (which includes US based large companies only and the companies in the Index have changed significantly over time) so the performance of a portfolio that we recommend may have done better or worse during these specific time periods, but the concept would still be valid. Losses are temporary, not permanent, if you can be disciplined and patient.

The client who posed this question asked me how we factor his “shorter” time perspective into his planning.

When we determine the allocation of a portfolio – how much is invested in stocks v. how much is invested in fixed income (bonds, CDs and cash, which are considered safer and not as volatile as stocks), we focus on your need, ability and willingness to take risk.

And this is where the time perspective begins to take part in the planning and advice that we provide. This is very personal and may be different for each person. For someone such as this person, he may feel he does not have the willingness to take on as much risk, due to his or her age. But we also have to factor in the need for growth in the portfolio, which can really only come from the stock allocation. We also consider his ability to handle the risk, which is likely a factor of age, as well as each persons’ emotional ability to handle volatility. Thus, we would hope that we can recommend a portfolio that has an allocation to stocks that will enable each client and their family to be able to meet their lifetime financial goals and desired cash flow, as well as be at a level of stocks that they can handle emotionally.

Since any money invested in the stock market is subject to loss, we account for someone’s shorter time perspective by adjusting (reducing) the percentage of the portfolio that is invested in stocks.

As we said above, a key part of our philosophy is that stock market losses are temporary, not permanent. But you have to remain invested in stocks, in order for them to recover….and you can’t know how long the recovery will take, especially in the midst of a market crash, such as occurred in 2008-09, or even last fall and through December, 2018.

For most people, this type of analysis and planning is in respect to their retirement portfolio. In this case, your life expectancy is what should drive your time perspective. Based on Social Security life expectancy data, for which 2016 is the most recent published, someone at the respective ages in 2016 should live, on average, to the following ages:**

Male Female
60 Year Old 82 85
70 Year Old 84 87
80 Year Old 88
90

Also, keep in mind, that this means that half of the population is expected to live longer than the above figures and half will live less. These are the mid-points. Further, it is clear that for people who are better educated, wealthier, and presumably have better access to good health care, they would be expected to live longer than the average. However, as we all know, the only statistic that counts are yours, and the ones you love, not the averages.

But for planning purposes, unless you have a specific medical condition that you have shared with us, we would rely on this type of data. Thus, for someone who is around 60, we would view them as having at least a 20-30 year time perspective. For someone who is 70, we would want to plan for a 15-25 year time perspective.

This is really important. You may be in your mid-60s and not feel that you can think long-term as it relates to stocks. But we encourage you to think long term, as we view it. We have many clients who are well into their 80s and 90s. I’m sure that each of you know people like that. We need to plan so that your money can last for a very long time while you live in retirement.

There are other situations, such as college savings plans or certain employer incentive programs, which have specific timeframes or ending periods, where the money will or should be distributed. In these cases, we would plan very differently than for someone’s retirement funds, as these situations may really have only a 5 or 15 year ending point. In these cases, we would recommend that the closer one gets to the end of the time period, or closer to the college years, the money in this type of account should get much more conservative, reducing the stock allocation to 10-20% or even less, in the final year or two.

As your advisor and guide, we can help you deal with these varying, emotional and financial issues.

  • All aspects of investing and financial planning should include discussing your emotional ability to handle risk.
  • It should include evaluating what is the appropriate time frame for your investments. You may have differing bucket of assets with varying time perspectives.
  • We encourage you to think long term, especially in light of longer life expectancies. You may live into your 80s or 90s and we need to plan for that.
  • Based on this, if you have a 20-30 year life expectancy, you should have a long term time perspective to be able to recover from temporary stock market losses.

We hope this information is valuable and helpful to you.

If it is, please share this email with your friends and family members. We would be pleased to add others so they can receive these blog posts weekly, with their permission.

We hope you have a safe and good holiday weekend.

Source:

**”Life Expectancy Table,” https://www.ssa.gov/oact/STATS/table4c6.html, webpage as of 08/29/2019

 

Market update: August 2019

Blog post #408

The past 4 weeks have been full of financial news and events….
  • Stock markets have dropped and risen,
  • Interest rates have dropped significantly
  • Trade war tensions have continued to escalate
  • There is more talk of a potential future recession in the US.

Despite all this financial volatility, US large company stock market indexes are still within approximately 5% of their all-time highs.

If you are concerned about the news, these financial changes or market volatility, please contact us so we can talk. We can discuss these events with you and review how they may impact your financial goals, objectives and your portfolio.

Before we review some of the economic details, it is important to remember some investment principles that we believe are in your financial best interest:

  • You should focus on what you can control.
  • You should not panic or make reactive decisions. You should make financial changes and important decisions for the correct reasons, such as changes in your life or financial circumstances, not in reaction to short term events.
  • Not making major portfolio changes is a decision. Sometimes, inaction is actually a rational decision.

There has been more talk recently about recessions, either in the US or on a global basis. A recession is two quarters (6 months) where the economy declines, or fails to grow. A recession is a normal part of long-term economic cycles. There has not been a recession in the US in over ten years. 

We do not feel that the US is on the cusp of a recession right now. There could be one soon….or the next one could be years away. We know there will be another recession at some point in the future, we just do not know when. We know this just as we know that the stock market will reach new highs, but will also go down as well. We just can’t time when recessions will occur, just as it is extremely difficult to predict stock market tops and bottoms.

Based on actual, empirical economic data, the US is not in a recession today. Based on recent sales and earnings reports, it is clear that US consumer is still very strong. Retailers like Wal-Mart, Home Depot, Lowe’s and Target reported over the past 7 days that customers are spending more, not less. If we were in a recession, or heading that way, the reports would not have been anywhere as strong as they were.

The tariff and trade tensions between the US and China may be impacting US corporate spending and investment, as well as affecting the purchases of US products by companies based in other countries, but there is not clear evidence that a global recession is ongoing.

Normally, in a healthy economy, interest rates on bonds and other fixed income investments go up as their maturity’s lengthen. This is called a rising yield curve. For example….

  • a one year bond would pay 2%
  • a 5 year bond would pay 3%
  • a 10 year bond would pay 5%

After the Federal Reserve lowered short interest rates on July 31st, President Trump reheated the trade war with China. Since then, various economic moves have been made by central banks worldwide, as well as increasing purchases of US government bonds by foreigners, has resulted in very fast and significant drops in US interest rates.

The yield on the 10 year US Treasury Note dropped by almost 25%, from above 2% in late July, 2019 to around 1.55-1.60% in the past two weeks. In stark contrast, during late October, 2018, less than 9 months ago, the yield was above 3.2%.

As a result of these dramatic drops in interest rates over the past month, parts of the US government bond yield curve is inverted, meaning it is not steadily sloping upwards, parts are now sloping down.

As of Wednesday, August 21, 2019, the yield curve reflected:*

As a result of these interest rate movements, and the partial inversion of the yield curve, some feel that the bond market is signaling an oncoming recession. There is past evidence that an inversion of the yield curve has preceded all post-war recessions, but not all inversions signal imminent recessions.** And, sometimes these recessions took 18-24 months following the initial yield curve inversion to occur, so it is not like a flashing light that something will automatically occur in exactly 4 weeks. It is a blurry, potential signal, at best.

Global interest rates are very low and in many foreign countries interest rates are negative, in an effort to support their economies. This may be causing even more demand for US government bonds, which still pay positive interest yields. This increased demand for US government debt may be a significant factor in what is causing US interest rates to go even lower over the last month.

These may be some of the global causes of the inversion of the US yield curve. As interest rates are already so low and the yield curve so flat, the inversion may not necessarily be an imminent sign of an upcoming recession.

We do not think the US or the global economy is currently facing a serious economic event, such as what occurred around 2008-2009. However we cannot predict the future. We can just try to review the data, read and listen as much as we can, and try to provide you with guidance, clarity and explanations.

The other critical element that must be remembered is that economies and stock markets are not directly tied to each other. Both are hard to predict. Even if you could predict a recession’s beginning and ending, it would not necessarily make you a more successful long term investor.

You will be much better off focusing on your long-term goals, remaining disciplined and adhering to your financial plan (Investment Policy Statement), than trying to predict or worry about the next recession or trying to time the stock market.

Sources:

*“US Yield Curve,” WSJ.com, as of August 21, 2019 and as viewed on August 22, 2019.

**“Recession Fears Are Overblown,” Wall Street Journal, page A15, Andy Puzder and Jon Hartley, August 21, 2019 (Opinion page)

It’s that time of year……again

Blog post #406

Over the next few weeks, students will be going back to school. 

Two of my nieces will be leaving for college soon, starting in 10 days. Other children of the members of our firm will be returning to college, high school, elementary and middle schools shortly.

It used to be that nearly all schools, colleges or K-12, started after Labor Day.

Times have changed. Schools start earlier now.

And that is one of the key lessons for saving for college….start saving early.

We all know college is quite expensive and over past decades, costs have generally risen much more than inflation. College debt is now a major national issue for many young people.

If you have children or grandchildren, we recommend that you begin starting to save for college as soon as you are able to. Depending on what fits your financial ability, we recommend a regular savings plan.

Generally, the most optimal way to save for college education is using a 529 savings plan. These plans, offered by nearly all states, allow the money that is invested in the plan to grow tax-free, as long as the money is used for college-related expenses when withdrawn.

By using a 529 plan, you will avoid having to pay taxes on any dividends, interest or capital gains. Thus, it is advantageous to move funds intended for college savings into one of these plans, rather than incur taxes in a taxable account.

These plans allow for the money to be used at nearly any college or university, and permit families to use funds for other siblings, so there is built-in flexibility.

The 529 plans offered by each state will be different than those offered by other states.Some states provide a tax deduction for deposits made by residents of their states, but these are usually minor and probably should not be a major factor when selecting which state 529 plan to use.

Each state 529 plan uses different investments or mutual funds. Each plan will have different asset allocations and varying costs. 529 plans usually offer various investment options, such as 100% stock, 100% fixed income and age-specific choices. Within these choices, there may be vast differences between how the money is invested, such as how much large v. small stocks or how much International exposure the plan provides. The key is that you should review and understand how the money is invested, or have us review this for you.

Many people choose the age appropriate option, as a default option. It is simplest. As a child gets older, every few years the age based plans decrease the stock allocation and the fixed income allocation increases. Age based plans offer diversification, automatic re-balancing and the investment becomes more conservative as college gets closer.

This concept makes sense. We have found that many age based plans may be appropriately allocated between stocks and fixed income for younger children. However, many age based plans may get much too conservative for many of our clients’ children well before they near college age. It is important to gradually reduce the stock allocation as a child gets closer to college age, say by age 15-16, which is 3-4 years before you would initially need the money, but some plans may have stock allocations of well below 50% even before high school. As college lasts 4 years, and many students take longer, and some people save more money for graduate school, your actual time horizon for using/needing the money may be longer than the perspective of many age based college 529 plan asset allocations.

Thus, it is important that you review the asset allocation of the 529 plan at various ages to determine if the asset allocation makes sense as part of your family’s overall financial portfolio. We can provide valuable advice by reviewing this for you.

By starting at a young age, you should benefit from compounding. The opposite applies if you start to save if your child is older. The later you begin to save, you will likely need to save much more each month or each year. We can help you determine how much you should begin to save based on the age of your children or grandchildren, the projected cost of the colleges that you think may fit for your child and family, and prepare projections to assist you in developing a college savings plan for your family.

If grandparents have the financial resources and it fits into their financial plan, providing money for college savings for their grandchildren can be a wonderful legacy and certainly helps their children and grandchildren. Grandparents can fund 529 plans as well as parents. If you think this may be applicable to you, please contact us.

College is expensive. Saving in the most tax efficient manner, choosing the most optimal 529 plan and monitoring how you should invest the funds are all services which we can provide to you, our clients and your families.

We can provide you with clarity in helping to save for college.

We can help you overcome confusing choices and overwhelming options.

Talk to us. 

And we would be pleased to talk to your friends and relatives about this or other topics.

Fed Lowers Interest Rates, Needed or Not

Blog post #405

After raising short-term interest rates from 2016-2018, the Federal Reserve voted to lower short term interest rates by .25% on Wednesday, to 2-2.25%. At least temporarily, this ends the Fed’s efforts to return short-term rates to more normal levels. Short term interest rates were around 5% in late 2007.

As we have explained before, the Federal Reserve has a dual mandate to foster maximum employment and price stability, which they define as inflation of around 2%.

Jobs gains have been solid in recent months and the unemployment rate is low, at a 50 year low in fact. Consumer spending is solid and growing, but the “growth of business fixed investment has been soft.”*

The Fed feels that inflation, other than for food and energy, are running below 2%. They feel this is not good enough, as if an economy was expanding and doing even better, market forces have historically caused inflation to grow at 2% or above. By cutting short term interest rates to stimulate the economy, they want to slightly increase inflation to 2% or above.

The Federal Reserve in their statement Wednesday cited “implications of global developments for the economic outlook as well as muted inflation pressures” as reasons for the rate cut.* We feel this means concerns about economies outside of the US, as well as negative effects of the ongoing trade tensions.

We are not sure if these actions were completely warranted by the Fed at this time, but they can be viewed as a preventative step to keep the economy strong and possibly to avoid any further weakening. I had written that sentence after the Fed’s written statement was released and later, in his press conference, Chairman Powell said “there is definitely an insurance aspect” to the rate cut.**

The Fed also said that “uncertainties about this outlook remain.”* This does not surprise us, as we feel there always will be uncertainties of some type. No one, including the Fed, can anticipate the future or what unpredicted events could occur that will impact the future of the US or global economy.

As the Fed’s outlook was uncertain, it caused them not to clarify or signal their future moves. What the Fed did not clarify, which the financial markets may find troubling, is guidance regarding future interest rate moves. Chairman Powell was not ready to confirm that more cuts are imminent, as if this was the beginning of a multiple rate cutting cycle. He said “that’s not our perspective now” in his press conference after the statement was released. This does not mean that there will not be future cuts, it means they don’t know yet if there will be more or how many. Powell viewed the Fed actions as a “mid-cycle adjustment” to monetary policy to help the economy perform as the Fed desires.**

In a technical move, the Fed will also stop reducing the bonds which they hold, two months earlier than they previously stated, which is also a loosening of credit policy.

US interest rates are quite low now, and longer term rates have been dropping. For example, 30 year fixed mortgage rates, which at one point neared 5% in the past year, are now around 3.75%.*** You should consider refinancing if you have a mortgage that is above these levels.

The US faces the challenge of lower interest rates throughout the rest of the world, as there are now at least $13 trillion of dollars of bonds issued outside of the US that have negative yields.**** This is one factor, though not stated, that may have impacted the Federal Reserve’s decision to lower short-term interest rates.

It is important to note that the Federal Reserve is supposed to act independently of any political pressure and make their decisions based on data they observe and their economic training. They are to act in the best interest of the US economy, to achieve their dual mandate stated above. Powell reiterated in his afternoon press conference that this move was not politically influenced.

We do not anticipate or recommend any changes to your investments or Investment Policy Statements as a result of these actions.

We hope this analysis is helpful to you, and provides you with clarity and information that is understandable and timely.

If you would like to discuss your specific situation, in lieu of this news, please contact us. That’s what we are here for!

Sources:

*Federal Reserve Policy Statement, Federalreserve.gov, July 31, 2019
**”Federal Reserve Interest-Rate Decision-Live Analysis,” wsj.com, July 31, 2019
***”Rates Already Cut-For Mortgages,” wsj.com, July 31, 2019 p. A8
****”The World Now Has $13 Trillion of Debt With Below-Zero Yields,” Bloomberg, June 20, 2019

Why can’t I watch CBS on my TV?

Blog post #404

Starting this past Saturday, my home TVs show the following message when my wife or I try to watch CBS:

Due to a fee dispute between CBS and ATT, CBS decided Friday night to discontinue providing their content to ATT’s TV services. We get our television service from ATT’s satellite service, DirecTV.

This is certainly not the most important or pressing issue to me right now, but my curiosity drove me to research the issue. There are a number of interesting points and lessons to be learned, as I delved into this matter.

The major dispute is how much ATT should pay CBS each month, per subscriber, for their content. Currently, and since 2012, CBS receives $2 per subscriber, per month from ATT. CBS wants to increase the fee from $2 to $3 per subscriber, per month.***

As the two sides could not reach an agreement, CBS took the action of withdrawing their television feed to ATT’s 6.5 million customers in many large metropolitan cities, including metro Detroit, LA, NY and San Francisco who have U-Verse landline cable TV or DirecTV.

I reviewed my cable bill. We pay over $100 per month for cable TV, without any extra premium channels. And then ATT/DirecTV charges another $7 per month for each TV that is used. That is all pure profit, after the minor cost of the cable box.

The lesson from my shockingly large cable bill is that these two companies should be doing everything they can to keep me happy, not upset me…. and potentially cause me to consider doing what my kids and so many others are doing, which is to cut the cable cord and get the TV channels/networks we want in another, cheaper manner.

Then I read this week that ATT lost almost 1 million pay TV customers in the last 3 months alone.**** That is a lot of customers and a lot of money. This industry is undergoing major change, and has been for years. I’m not sure these companies are effectively dealing with the rapidly changing environment they face.

So what are the financial lessons from this?

Change. Business and technological evolution have caused incredible change in certain industries, which are difficult to predict and anticipate.

If you go back 10 or 15 years, would you have thought that TV and cell/telephone phone providers would be profitable and great stocks to own? Likely most of us would have said yes.

You would have thought 10-15 years ago that everyone would have both a home phone and a cell phone, so the revenues and profits would be terrific going forward. Cell phone services were growing rapidly. The iPhone had just been introduced.

Except something which was NOT anticipated 15 or 20 years ago happened…..most of us stopped having home phones, or highly profitable landlines. This has had a major impact on the stocks of the companies in this industry.

A decade or two ago, who could have envisioned that millions of people would be watching TV without cable service? On their phones and other small devices? Netflix was something that existed as a mail order or drop off service. Dial up Internet was slow. You couldn’t download a movie or TV show via the Internet, at least not very quickly. Of course, all this has changed quite dramatically.

Let’s look at a few stocks in these related industries and see how they have performed over the long term, as compared to other large US stocks (as measured by the S&P 500 Index).

These are the average annual returns over the past 5, 10 and 15 years:*

5 Years
10 Years
15 Years
ATT
3.11
7.38
6.16
CBS
(1.95)
21.63
2.33
Verizon
5.63
10.03
6.32
Dish
(8.04)
11.01
4.12
S&P 500**
10.74
14.10
9.13

What you see is that over the past 5, 10 and 15 years, all of these companies have vastly underperformed over every time period, other than CBS over the 10 year period. ATT, which is in the phone and cable/internet business (and just recently became a content provider as well); CBS, which is a content provider; Verizon, which is a phone and cable/internet provider; and Dish, which is a satellite TV provider, all have been lackluster performers compared to other large US-based companies.

Our firm’s objective is to provide advice to you to help you reach your financial goals, through understanding your goals, assets, income, time frame and level of risk that you can handle. Then we develop a financial portfolio and make investment recommendations for you.

What we don’t do is try to pick individual stock winners, and the stocks above are an excellent example of why we do not try to play the stock picking game. It is very hard. As we discussed last week, What does our crystal ball show?, we cannot accurately and consistently predict the future….and neither can anyone else.

Instead of the companies above, let’s say you had purchased Comcast stock many years ago. How would that have worked out? As you can see below, Comcast has outperformed the benchmark over each time period and far outperformed the other companies discussed.*

5 Years
10 Years
15 Years
Comcast
11.62
21.02
11.70
S&P 500**
10.74
14.10
9.13

How could someone have known 15 years ago that Comcast stock would do so much better than ATT, CBS, Verizon or Dish?

Going forward, do you know whether Comcast will continue to be the best or most successful stock of these companies? As we have all heard and read….past performance is no guarantee of future results.

This is why we focus on structuring your portfolio based on what financial and academic data indicates will provide you with the best expected future returns over the long term, not based on what we or other financial analysts think may do best in the future.

  • We cannot know which asset class, industry or geographic region will do best in the future, so we recommend having exposure to all of them by being broadly globally diversified.
  • We don’t think the US will always outperform other countries in the world. Historically, the US has had years of outperforming other countries, and then there are other periods where investing Internationally has outperformed US based portfolios. Thus, we invest globally, to have exposure to both.
  • Over the very long term, we know that value stocks have outperformed growth company stocks. Similarly, we know that over the very long term, small company stocks have outperformed large company stocks.
  • However, we know that during some periods (which can be for many years) these “premiums” do not appear, and growth stocks outperform value stocks, and large stocks outperform small company stocks.
  • During these time periods, like in down markets, is when investors are tested and challenged to remain disciplined and adhere to the Investment Policy and portfolio allocation that is designed for many years, not just 6 months or 1-3 years.

Our goal is to provide you with excellent financial guidance. We want to be available and for you to talk with us when you have financial questions or issues in your life. We want to help you, and members of your family, including future generations, plan and make good financial decisions.

We want to structure financial portfolios that you are comfortable with and which provide good financial returns over the long term, so that you can stick with them through volatility and change.

We know change will happen. We want to help you deal effectively with future changes, with the markets, economic swings, tax matters, as well as technology.

What we don’t plan to do is cut off your service. We will not be your CBS, and pull the plug over $1 per month. In fact, our office did not have electricity for a few days this week, due to storms that hit the Detroit area over the weekend. With planning, technology and providers we work with, we were fully functional working remotely from our houses. And I was not distracted by any CBS televisions shows!

Sources:

Morningstar.com as of 7/24/19

**S&P 500 Index represented by Vanguard 500 Index fund, VFINX, per Morningstar as of 7/24/19. Does include deduction of the mutual fund management fee. Does not include deduction of any advisory fees.

***“CBS is Blacked Out for 6.5 Million AT&T Customers. Here’s Why” NY Times by Edmund Lee, 07/20/2019

****“Cord-Cutting Hits AT&T Again While Wireless, Media” WSJ by Drew Fitzgerald, 07/24/2019

Note: As the portfolios that we recommend are broadly diversified, the stocks discussed above may be held in one or more of the mutual funds that we may recommend.

What does our crystal ball show?

Blog post #403

This is a question that clients and prospects frequently ask.

They want our opinions, predictions and insights about the future.

They want to know what we think will happen to the stock market in the next few months or the next year.

They want to know what the financial implication will be of various political and economic matters, such as the trade war issue or what will happen if so and so is elected or not elected.

These are all valid questions.

However, our crystal ball is almost always cloudy and murky.

The reality is that like everyone else, we cannot accurately predict the future.

Unlike some other forecasters and market analysts, we accept the reality that we cannot accurately predict the future. Even though other investment professionals may do lots of research and analysis, they still cannot reliably predict the future.

What does this mean for you, as clients and prospects?

We want you to ask whatever questions that you may have. Even if we cannot predict the future….about the stock market, specific companies, interest rates or future political events, we try to provide insights or perspectives that may be helpful to you.

In other words, we want to understand the background or concerns that your questions may represent and address those issues with you. If you have concerns about the future, we should talk about it. Even without a clear crystal ball, these can be valuable and worthwhile conversations.

Accepting that we cannot predict the future is an important element of the investment philosophy that we adhere to.

This concept may be new for people who have not worked with us.  This may go against what people traditionally thought about their financial advisors and money managers. Ideally, you want to meet with an advisor who has all the answers and will be able to tell you when the markets will be going down, when they will rebound, which stocks will do best and which areas to avoid.

That sounds great, except that we should all realize that no one can accurately and consistently predict the future. Yes, there have been a few very successful money managers who have beaten the market over the long term, but they are hard to identify in advance.

If you think another investment manager/advisor/broker can predict the future, or do detailed analytical work and research to try to accurately predict which company stocks will do better than others over the long term, that is called “active management.” Active management generally costs more, but over the long term, active managers’ performance in all (or nearly all) asset classes have been below their respective benchmarks.

We believe it does not make sense to pay higher costs for investment managers to try to beat a benchmark, based on trying to predict the future, when tons of academic and financial data shows that most of these efforts are not successful. Why pay more and generally get less?

If the Federal Reserve members cannot consistently and accurately predict the future of interest rates, even 3-6 months in the future, let alone 1-2 years into the future, how do you expect an active bond manager to consistently be able to predict the future of interest rates?

It may sound contradictory, but accepting that we cannot predict the future can be a source of comfort for you and enable you to have greater confidence in us, as your financial advisor.

  • We are up front with you and tell you that we are investing your money based on financial and academic data, not based on predictions of what may do best.
  • We are not continually calling our clients with our latest and greatest ideas, and not frequently changing our mutual funds because they are underperforming.

We want you to understand why we invest in the manner that we do.

We want you to understand your asset allocation and be comfortable with it.

We want you to be comfortable with the amount of risk that you are taking.

We want you to know that we will answer your questions as clearly as we can, in English, not in technical jargon.

We want you to know that we will adjust your portfolio and your asset allocation for reasons generally specific to you, not based on what we think may occur in some region, company or election. Changes to your portfolio are generally based on changes in your personal financial situation, your age, your health and your need and willingness to take risk, with a focus on reaching and maintaining your financial goals and and desired lifestyle.

We want you to know that we will provide you with analysis and insights about the financial markets, tax and estate law changes, but we will not make investment decisions based on what we think may happen in the the future.

Our investment philosophy and strategy is logical and rationale. It can be successful for the long term. It can provide you with financial comfort and security.

We can provide you with advice, guidance, excellent personalized service and clarity.

However, we cannot provide you with a clear crystal ball.

If this makes sense to you, we would be pleased to talk with you.

If you are a client and you have friends or family who could benefit from our approach, we would be pleased to talk with them.

Enough

Blog post #402

How much is enough?

How much money do you need, to have “enough”?

How much money do you need to support your standard of living?

How much money do you need to maintain your lifestyle, shop, travel, enjoy yourself, pay for medical expenses, support charitable causes you value….as well as provide financial support to children, grandchildren or relatives?

These answers are obviously very personal and will be different for each of us. One of the roles that we play as financial advisors is to help you, if you need it, to quantify how much money you will need in the future, to support the lifestyle that you desire.

In developing your investment plan, how you define “enough” is vital, as it defines your need to take risk. The more wants and needs that you desire, the larger the portfolio you will need to support your lifestyle. The more financial assets that you need, the more financial risk that you may need to take, and for how long, depending on what assets you already have and your ability to save.

If you already have adequate resources to support your lifestyle, then you would have less need to take financial risks. We would work with you to focus on maintaining your assets, taking intelligent steps to reduce your risks, such as being broadly diversified and determine an appropriate exposure to stocks. If you have already “won” the financial game, meaning you have adequate assets to meet all of your needs, your plan and strategy should be developed so that you don’t permanently lose a significant portion of your financial assets.

If you already have significant assets, then you should consider whether your portfolio has excess risk. Is the risk you are taking to reap potential stock market gains worth it, versus the potential negative outcome of financial losses?

A few things to consider. As your wealth and portfolio grow, some people convert what were once desires into needs or wants. Desires become expectations and reality. A vacation or trip that once seemed unattainable becomes an annual part of your life. You go from one home to wanting a vacation home. The nice car becomes a luxury car. These are all choices each of us make. Myself included.

These changes, which can occur gradually over time, can increase the need to take risk (and to save more), to cover the additional expenses as your lifestyle changes. If you need to take on more risk, you would need to increase your equity allocation. And that can lead to problems when risks appear, such as in 2000-2002 and 2007-08, and other time periods. While these losses were not permanent, they can be emotionally difficult without proper guidance, planning and your emotional ability to handle the risks and market volatility.

We advise clients when developing their investment plan and asset allocation. It is generally important to have some exposure to stocks, so your portfolio has some opportunity for growth which exceeds the rate of inflation, so you don’t lose your spending power over the long-term. But this may mean that if you have adequate (enough) resources for your needs, you likely don’t need to have more than 50% (and maybe even less than that) invested in stocks.

Some risks are worth taking. Sometimes you need to take long-term, rational financial risks, especially if you need to accumulate and grow your financial resources over a long time period.

However, some risks are not worth taking, or risks should be reduced. Prudent investors should not take on more risk than they have the ability, willingness or need to take.

The important question to ask yourself, and discuss with your financial advisor, is where are you in this financial game? What inning are you in? Are you winning, losing or still have a long way to play? How much risk do you really need to take?

If you have already won the financial game, are you only taking the financial risks which need to be taken, and not excess risk?

We would be pleased to discuss this important topic with you, or with others close to you, who could benefit from such a discussion or portfolio review. 

Talk with us.

This blog post was inspired by “Enough,” an essay in Appendix E of the book Reducing the Risks of Black Swans, by Larry Swedroe and Kevin Grogan, 2018 Edition.

Freedom and opportunity

Blog post #401

As we celebrate the long 4th of July weekend, we should be thankful for the freedom and opportunities which we have in our country.

We should be proud about many aspects of the US and our history.  However, like most other countries, companies, institutions and individuals, our country has room for improvement. We can all strive to be better.

We should be grateful for the incredible innovations and thoughtfulness that the our country has as core, guiding principles based in the Constitution and Bill of Rights.

We should celebrate capitalism and the opportunity that it has provided to so many of us.

We should celebrate innovators, as well as the people who protect and serve our nation, both past and present.

We should celebrate the freedom of the many choices that we have, including the freedom to get an education, choose a career (or a few of them), earn, save, spend, take risks and invest money freely, without the government controlling all of our actions.

We hope that you celebrate and reflect upon the vast freedoms, choices and opportunities which our country enables us to have.

If you are sometimes overwhelmed by all these financial choices, you know that you can rely upon our firm to help guide and advise you in making sound financial decisions.

We hope you enjoy the 4th of July holiday weekend with your family and friends!