Green, Yellow or Red?

US stock markets have gone nearly straight upwards since the November 8th Presidential election.

In the last 3 1/2 months, there have not been any significant declines of major US stock indices. There has rarely even been a day when markets were down 1%.

Thus, you should be prepared for some YELLOW territory, or proceed with caution.

We are not making any stock market predictions, just pointing out that you should be mentally prepared for more volatility than we have had recently.

Down periods are normal, even in the midst of generally rising markets. Declines can occur quickly, without warning.

Dips or declines may come from economic news, unexpected events or missed expectations, such as if there was a significant delay in the Trump tax reform package, which the new Treasury Secretary hopes will be passed by Congress prior to Labor Day.

For the long term, we remain rationally optimistic, so GREEN is appropriate. For long term investors, you should maintain your appropriate allocation to stocks.

As markets have increased, we have rebalanced your portfolio, where applicable, so that you do not take on unnecessary stock risk. This is how we implement our discipline of buying low and doing some selling high.

We do not believe in RED. We do not recommend trying to time the markets, by getting completely out of the markets because they have increased and then trying to buy back in at a lower price. This is a loser’s game.

While US and international developed country stock markets have performed well so far in 2017, emerging stock markets (those of lesser developed countries) have more than doubled the returns of the larger countries’ stock markets.

This is why we believe in holding globally diversified portfolios and why we recommend allocations to emerging market stocks. These markets can be quite volatile but have higher expected long term returns.

As you proceed on your financial road, maintaining an appropriate stock allocation will lead to GREEN rewards, as long as you can handle the periods of YELLOW, when caution and good judgement are necessary.

We will advise and guide you, as you navigate the financial path of your future.

Investments Like No Other

In 2006, Warren Buffett pledged and began donating billions of dollars of his Berkshire Hathaway stock to the Bill and Melinda Gates Foundation.

On the 10th anniversary of Buffett’s initial gift, the Gates Foundation 2017 Annual Report describes the incredible accomplishments their investments are making.

Gates stresses his optimism and the progress that the world is making in the area of global health and extreme poverty. He concludes that “we’re confident of one thing: The future will surprise the pessimists.”

I strongly recommend reading the Gates Foundation Annual Letter.  The 5 minutes you spend will be eye opening and informative. It clearly explains and illustrates the progress, discoveries and challenges which the Foundation is working on.

Gates states that “extreme poverty has been cut in half over the last 25 years. That’s a big accomplishment that ought to make everyone more optimistic. But almost no one knows about it. In a recent survey, just 1 percent knew we had cut poverty in half, and 99 percent underestimated the progress.” In the survey, 70% of the respondents thought poverty had increased by 25% or more since 1990.

The Gates Foundation focuses on improving health and alleviating extreme poverty in the developing world. In the US, the Foundation supports programs related to education and low income families. The Foundation makes grants in all 50 states and supports work in more than 100 countries.

The Gates Foundation Report is relevant to our firm’s long term investment approach and philosophy because of our message of rational optimism as well as the importance of the global economy. As the world becomes healthier, life expectancy increases and poverty decreases, the middle class and economies throughout the world will grow.

The Foundation measures their success in many ways, but they watch certain numbers to guide their work and measure their progress. They don’t take credit for all of these trends, as the report begins by acknowledging that the “vast majority of global health and development funding” comes from contributions by donor nations and other philanthropists.

In the introduction to the Annual Letter, Bill and Melinda Gates stress the importance of foreign aid and the priority to lift up the poorest. This is “…one of the greatest…values (of our nations) is the belief that the best investment any of us can ever make is in the lives of others…the returns are tremendous.”

122 million: per UN figures, 122 million children’s lives have been saved since 1990, as tracked by the reduction of the number of childhood deaths under the age of five. The number of childhood deaths per year has been cut in half since 1990. More children survived in 2015 than in 2014, more in 2014 than in 2013, etc.

The Gates’ started the Foundation to save children’s lives. They learned other lessons as they addressed this goal. “If parents believe their children will survive-and if they have the power to time and space their pregnancies-they choose to have fewer children.” They learned the link between healthier children, better nourishment and increased mental capacities, which leads to parents having more time and money to spend on health and education.

This begins the process of how families and countries get out of poverty. Thus, as Melinda says, “reducing childhood mortality is the heart of the work for us. Virtually all advances in society – nutrition, education, access to contraceptives, gender equality, economic growth – show up as gains in the childhood mortality chart, and every gain in this chart shows up in gains for society.”

86%: Vaccine coverage is the highest it has ever been, 86% for the basic childhood vaccine package. This is one of the biggest reasons for the decrease in childhood death. And the gap between richest and poorest countries is the lowest it’s ever been.

350,000 to 37: In 1988, the global campaign to end polio was launched. At that time, in 1988, 350,000 new cases of polio were reported annually. The last cases in Europe and India were reported in 1998 and 2014, respectively. Worldwide, in 2016 only 37 new polio cases were reported in 3 countries, which are each affected by war and conflicts. These conflicts are inhibiting the distribution of the polio vaccine. The vaccine is close to eliminating polio. This should spur momentum for eradication of other diseases in the future.

However, “nutrition is the biggest missed opportunity in global health.” Bill says “malnutrition destroys the most human potential on the planet.”

I learned from reading this report how the Gates Foundation is continuously learning what the major challenges are for each issue and how they are working to find solutions to these major issues. Read the report. Learn for yourself. You will be moved.

The Gates Foundation has two important assets: optimism and huge amounts of money to address these challenges. As Melinda states, “Optimism is a huge asset. We can always use more of it. But optimism isn’t a belief that things will automatically get better; it’s a conviction that we can make things better.”

Massive assets: Huge resources, along with passion and intensity, are reasons for continued optimism that progress will be made in the Gates Foundation’s areas of focus.
* In 2015 and 2014, the Foundation spent $4.2 billion and $3.9 billion, respectively, on direct grantee support.
* Warren Buffett is donating over $2 billion per year to the Gates Foundation, which is likely to continue at even higher levels as Berkshire Hathaway stock has increased. His annual gifts to the Gates Foundation have to be spent.
* Buffett has donated $17.2 billion between 2006 and July, 2015.
* As of 12/31/15, the Foundation’s assets were almost $40 billion.

Bill cites Steven Pinker’s book The Better Angels of Our Nature. It shows that “violence has dropped dramatically over time…global poverty is going down, childhood deaths are dropping, literacy is rising, the status of women and minorities around the world is improving.” Most people do not realize these things.

Bill and Melinda end the report optimistically, yet recognizing the challenges they are trying to solve. “As hard as polio is, malaria is harder. As hard as reproductive health is, nutrition is harder than that. As hard as it is to save children under five, saving newborns is the hardest test of all.”

But remember their message: “The future will surprise the pessimists.”

We agree with them.

If you would like to assist in furthering the Gates’ and Buffett’s efforts, they recommend making a donation to UNICEF, “as an organization that is successful at serving families and children worldwide.”

Sources: Gates Foundation 2017 Annual letter and other information from the Gates Foundation website,

Money, Family and Love

Money can be a source of happiness as well as challenges.

How you handle money and financial issues with your spouse and family members is a matter of great responsibility.

We encourage you to talk with your family members openly, in an age appropriate manner, about financial matters and investing lessons you have learned. We can assist you with these discussions, if you would like.

These conversations are an important part of any relationship. Conversations about money are vital to good relationships, whether it is within a marriage or between generations. These conversations can represent real love and caring.

For couples, we strongly recommend that both of you be involved in your financial planning and attend meetings with us. Even if one of you is less interested, it is still valuable that both of you be informed, aware and involved in the decision making of your family’s finances.

For emotional and personal reasons, as it is financially and age appropriate, we recommend to grandparents to leave some inheritance directly to their grandchildren. This can have a significant impact beyond just the dollars, to both the giving generation as well as the younger recipients.

How you pass on your assets to children and grandchildren is vital. For parents with significant assets (which is defined by each situation), we recommend that assets be passed to children via trusts, not directly to the children without a trust. This is vital in the event of a subsequent divorce by one of your children. You can discuss this with us, as well as an estate planning attorney.

For parents, teaching your children solid financial values can be a great challenge. If you are fortunate to pass down good financial values, you will have succeeded at something quite important.

We strongly encourage you to tell stories about your early experiences with money, jobs and financial decisions with your children and grandchildren.

Talk about the jobs you had when you were young. You will be amazed at how interesting younger generations will find your past. Have these meaningful conversations now, while you can.

I share with my kids (ages 19-25) how I worked in high school, during college and the summers while I attended college, to pay for my own college education.

I share with my kids how I diligently paid my students loans every month for 10 years until they were fully repaid.

I share with them why our firm invests in the manner we do. I share with them the importance of establishing good credit, how to use credit cards responsibly and why they should start saving for retirement as soon as they start working after college.

Regardless of what ages your children or grandchildren are, once they understand the concept of money, they can be taught valuable lessons that hopefully will last them their lifetimes. Give them an allowance and tell them about the financial choices you are making, such as to save for their college education.

Talk about financial matters. Have conversations about money.

It may not be easy. You just need to take the initiative to start the conversation. It will be very worthwhile.

We are always available to discuss any of these financial matters with you and your extended family members.

Standing the Test of Time

We do not give advice just for today. Our advice must be successful over many years.

Over five years ago, in June, 2011, I wrote the following essay, in response to a prompt to provide advice to myself that I should give for the next five years.

I still think all of the following is just as applicable today as when I wrote this 5 1/2 years ago.

In June 2011: What advice would I give now, to myself, for 2016?

Provide financial advice to your clients that is always in their best interest.

Be sure that your clients have well diversified portfolios, based on their personal need, ability and willingness to take risk.

A portfolio of stocks should be globally diversified, which means that there should be a significant allocation to international stocks, emerging markets, small company stocks, as well as real estate. A diversified portfolio is not just the S&P 500 index fund.

Remember that over time, the vast majority of mutual funds and money managers do not beat their benchmarks.

Do not take risk with bonds. Only buy very high quality. Reaching for higher yielding, but less quality bonds, is not a good practice. Fixed income is the place to be very safe.

Expect the unexpected, and plan for it. Talk to your clients about bad markets as well as good markets.

Assist your clients in remaining disciplined, especially during down markets. If they do this, they will be well rewarded, after a market downturn, when the market rebounds.

It is impossible to accurately time the market. It is almost impossible to be right twice, as to when to sell (get out of the market) and then again (when to buy back into the market).

Rebalancing is crucial to long term success. When an asset class does well, sell some of it. Use the money to buy an asset class that has not done as well. This leads to buying low and selling high.

Plan with your clients (and have a simple written document), so your clients can achieve a sense of financial comfort and security.

Buy individual bonds or CDs of very high quality, only, which will work well if interest rates rise or fall. Bond mutual funds will not do well if interest rates rise.

Conclusion, today: We have utilized a rational and consistent investment philosophy since we formed our firm in 2003. What I wrote above in 2011 is still valid and applicable today, despite the constantly changing financial markets and the ups and downs the markets have experienced.

It should provide you comfort and confidence that our advice does stand up to the test of time.