Have you checked these recently?

The following are some ideas and reminders of things you should consider, which may prompt some good next steps.

Beneficiaries for your retirement accounts and life insurance policies: Are the actual designations on the forms what you intend? Have you reviewed them recently?

  • It is a good idea to review your beneficiary designation forms every few years, to ensure they reflect your current intent.
  • If you want to provide for charitable bequests upon your death and you have retirement accounts, these gifts should be reflected on retirement account designations, not as part of your will/estate planning documents.

Have you enabled the emergency function on iPhones and other devices?

  • For iPhone users, if you enable the emergency function within the Health app (which comes with the iPhone) and you are in an accident or incapacitated, a first responder can access critical information from your phone, even if your phone has security codes or Touch ID.
  • After going into the Health app, continue to “Medical ID.” Input your name, emergency contacts, and basic health information.
  • The Medical ID feature can be accessed without unlocking any other information on your phone. (Thanks to my kids for this recommendation, which I just did).

Do you know whether your financial advisor is a fiduciary?

  • We highly recommend that your financial advisor be a fiduciary, which means that all of their advice and recommendations must be in your best interest (even if it is not in theirs or their company’s best interest).
  • We are fiduciaries. Most brokers or financial consultants with major brokerage firms and banks are not fiduciaries. The interest of their company can come before your interests. For more information, see this blog post.


  • Are you using complex and different passwords?
  • Have you recently changed the passwords for some of the websites you use most and for banks and credit cards?
  • We highly recommend using an application like 1Password or a comparable password manager, which stores passwords and can automatically enter your passwords and user names for you. For more information, see this blog post, How to Securely and Efficiently Manage Your Passwords.

What is one thing which you are procrastinating on, that if you dealt with it, would enable you to move forward?

  • Think about this. We hope this helps you resolve something or move an issue forward. Procrastination can mean it’s important, but you just need to focus on it and determine the next step.

Have you checked your FICO score or your Social Security information?

  • FICO scores are important for interest rates on loans and applying for credit. You can get this for free from many credit cards. Email me for more information.
  • If you are not yet receiving Social Security, you should go to ssa.gov at least every few years, review your earnings history for accuracy and see a projection of your future benefits. Their website is quite secure and they have now added a second level of verifying your identification.


We hope these are helpful and practical for you and your family.

Investing for dividends or total return?

We are often asked about investment style and strategies.

One question we are asked is: whether we focus on high dividend paying stocks?

Or, do we invest for total return? Investing for total return means investing for a combination of growth and income from stocks, but not putting the primary emphasis on the dividend yield.

We recommend investing for total return. While dividends are an important component of a portfolio’s long term overall return, we do not recommend that you invest primarily in high dividend paying stocks.

While each client and investor is unique and has their own personal goals, a common goal is for your assets to grow over time. Thus, our focus is on what strategy will provide the long-term investment growth that you desire.

Some clients, particularly those in retirement, want income from their portfolio to provide for their living expenses, as well as other goals, such as charitable giving or gifts to family members. We view the optimal way to get this income is from the total portfolio, regardless of whether it is from the actual dividends of the mutual funds that we recommend or stocks that you may own. The income (withdrawals) that you desire do not necessarily need to come from only the interest and dividends that the portfolio earns, the withdrawals can come from the principal, particularly if the principal is growing over time.

We recommend focusing on the amount of your capital and its growth over time, rather than the annual dividend yield of the portfolio. If the stocks within the portfolio grow at a greater pace than the dividend yield, then you will be much further ahead.

Let’s look at a hypothetical example based on a sample of 6 large US company stocks which have greater than average dividend yields and compare them to the S & P 500 over the past 5 years. The dividend yield of these companies (dividend payout/stock price) is around 4%, whereas the S&P 500 dividend yield is around 1.90%.

If you had invested $500,000 in each of the 6 companies (GE, IBM, Pfizer, Verizon, Wal-Mart and Enterprise Products Partners, a large energy company) five years ago, you would have the following:


As you can see, the growth of the diversified portfolio did much better, increasing $2 million more than the 6 high dividend paying stocks. This means that you would have much more capital to withdraw from the diversified portfolio, regardless of whether it came from dividend income or the principal, even after accounting for capital gains taxes.

But what about the dividends? For the high yielding stocks, they would be paying about $161,000 annually, based oeir current value.

The S&P 500 is currently paying a dividend yield of 1.87%, or approximately $111,700 per year.

While this is $49,000 less than the 6 companies are paying in dividends per year, you would have $2 million more in investable assets from which to draw cash, if you needed it. We think most investors would rather have the more significant growth of their investable capital than the higher annual dividend income, as that amount is a fraction of the growth in the capital.

This is only an example, and a rather small one, but we feel it is very illustrative. If other stocks and different time periods were tested, the figures would certainly be different. However, I think the general conclusion would be the same, which is that a broadly diversified portfolio of companies will provide you greater investment capital over the long term than a collection of high dividend paying stocks. For example, over the past 10 years, 5 of the 6 stocks significantly trailed the S&P 500, so the conclusion would be the same over that longer time period, for these companies.

In the actual portfolios which we manage, we stress global diversification across many industries, geographic sectors and sizes of companies (large and small, growth and value). We do not recommend just investing in US Large companies, such as the S&P 500. This was used for only for comparative purposes in this post.

High dividend paying stocks tend to be companies which are having difficulty. They are often companies which are growing slower than the overall stock market, or even declining as a business.

  • IBM just announced their 21st consecutive quarter of declining revenue.
  • So while IBM’s stock pays a 3.73% dividend yield, which is double the S&P 500’s dividend yield, IBM’s stock performance has greatly lagged the S&P 500 over the past 5 years, losing almost 1% per year versus growth of almost 15% per year by the S&P 500.

One theme that I have noticed in recent years is the concept of legacy stocks, which many of these high dividend paying stocks are. These are companies which were in their prime in past decades, are in industries which have gone through significant changes or are quickly evolving now. In general, they are not the companies that are growing and providing the returns which have been driving world-wide stock markets.  We would recommend modifying your portfolio for the future if it now consists heavily of individual legacy stocks.

  • Wal-Mart is facing tough competition from Amazon and online retailing.
  • EPD is facing challenges due to the significant decline in energy prices.
  • IBM is struggling to compete against numerous technology companies.
  • Verizon is facing wireless competition which is causing revenue/subscriber to drop, as well as issues with content and keeping subscribers to their various businesses.
  • Pfizer is quite profitable, but large pharmaceutical companies are always looking for the next major drug.
  • GE has struggled as a company over the past 10+ years. It has undergone a significant transformation, purchased new subsidiaries and sold off other segments of their business.

Each of these companies may succeed in the future. That is not the key issue for us, as investment advisors

Our role is to provide you with the optimal investment strategy that will be durable and successful over the next 5, 10 and 20 years. We are confident that a globally diversified strategy of stock mutual funds will far outperform a portfolio consisting of high dividend paying stocks in the long run.


Notes: The above example is for illustrative purposes only. The mutual funds which we recommend own each of the above individual stocks, as a small percentage of certain funds. The illustration does not include the impact of advisor fees and taxes, which would affect actual investment results, but would not change the conclusion of the illustration.

The five year annualized return for the stocks cited above, which is the basis of the calculations in the illustration, are:

This means that the average return per year, over the past 5 years, for WMT (Wal-Mart) was 3.29%. During that same time period, the S&P 500 fund returned an average of 14.77% per year, over the past 5 years.

Warren Buffett: The Rest of the Story

The announcement sounded routine: Warren Buffett’s Berkshire Hathaway offered last week to purchase a Texas utility, Oncor, for $9 billion. Berkshire would also assume Oncor’s debt, so the deal has a value of about $18 billion.*

But the interesting story is not this announcement. The interesting story is what has occurred over the past 10 years, leading up to this. This is where the real investment lessons are.

In 2007, three of the biggest and seemingly smartest financial firms purchased Oncor’s predecessor firm, TXU, for $45 billion.

Goldman Sachs’ private equity arm, along with KKR and TPG (huge private equity firms) bought TXU in October 2007. TXU, the energy firm, relied on coal-fired plants to produce its electric power. The investment firms based this huge transaction on their prediction that natural gas prices would rise. The investment firms predicted that as natural gas prices rose, TXU would have a competitive advantage over other power companies.

At the time of the 2007 purchase by these top private equity firms, this $45 billion deal was the largest leveraged buyout (LBO) on record. The 3 firms invested $8 billion of their own money and they borrowed the remainder from others, by issuing bonds. It was reported that in 2007, after the leveraged buyout, the renamed Energy Future Holdings had more than $40 billion in debt.

Enter Warren Buffett….in late 2007. Berkshire Hathaway purchased $2.1 billion of these Energy Future Holdings bonds that were needed to finance the TXU leveraged buyout. The bonds were called “high-yielding,” which means they were risky and below investment grade. Buffett must have agreed with the investment thesis that natural gas prices would increase.

Some of Wall Street’s best and brightest were very wrong. In 2007, natural gas prices were around $7-8 per BTU (British Thermal Unit). After a brief spike upward in 2007-08, the price of natural gas has plummeted ever since. Natural gas has traded in a range of $2-$5 per BTU from 2008 to today.

Due to the significant decrease in natural gas prices, Energy Future Holdings struggled financially and was unable to handle its huge debt burden. By April 2013, KKR, TPG and Goldman Sachs had written down the value of their $8 billion investment to zero (a 100% loss).

In 2013, Berkshire sold its $2.1 billion of bonds at a loss of $873 million (a 41.6% loss). In one of his annual shareholder letters before 2013, Buffett wrote that he had “totally miscalculated the gain/loss probabilities when I purchased the bonds.”*

Energy Future filed for bankruptcy protection in 2014. It was the biggest bankruptcy of a private equity-backed company since the 2007-2009 financial crisis.

In 2007, Energy Future was valued at $45 billion.

Berkshire is offering approximately $18 billion for Energy Future’s remaining operating unit, Oncor. It is unclear whether Berkshire’s offer will be successful, as it requires regulatory and creditor approvals and another entity may submit a competing offer.

So what is the learning? What are the lessons from this experience?

  • Making a prediction about the direction of something like the price of natural gas (or oil, gold or an individual stock) can be very costly, if you are wrong.
    • This is why we do not rely on making predictions as the basis of our investment strategy.
    • Not making predictions may seem counter-intuitive,  especially if you are new to our firm, but we focus on things which we control. As we cannot accurately and consistently predict the future, we do not attempt to base our investment recommendations on predictions.
  • We do not recommend purchasing high-yielding “junk” bonds.
    • Berkshire Hathaway is a huge conglomerate and can afford to lose huge sums of money. They are fine and survived, despite the huge bond losses from these junk bonds. o Berkshire Hathaway is a huge conglomerate and can afford to lose huge sums of money. They are fine and survived, despite the huge bond losses from these junk bonds.
    • We purchase investment-grade corporate bonds in certain industries on behalf of our clients, as we feel the risk/benefit is worthwhile, versus only government bonds or CDs, for most clients.
    • We would not have purchased these types of junk bonds, as the risk-reward is inadequate. The higher interest rates may seem appealing, but the underlying risk of the company’s ability to repay the bond is the primary objective.
    • Our primary concern when purchasing bonds on behalf of our clients is that there should be a very good expectation of getting the bond principal repaid. Risk will always exist, but junk bonds have a much higher rate of default, so buying them is not worth the risk.

A few weeks ago, I wrote a blog post about a book titled The American Spirit by historian David McCullough. He emphasized over and over throughout his brilliant collection of speeches the importance of reading, understanding history and learning the lessons from history. He said you never know where your reading and research will take you and what you will learn.

When I read last week that Buffett and Berkshire was offering to purchase this utility, I had no idea that Buffett had previously lost almost a billion dollars related to the same entity. I did further research and learned about the background of this company. This further reinforced the strength and rational of many of our investment principles.

I hope that my extensive reading about all kinds of topics is of great benefit to our clients, in all kinds of ways.

*Source: WSJ, “Warren Buffett’s Oncor Play Shows Berkshire’s Energy Ambitions,” July 7, 2017
Other sources available upon request.

Mid-Year 2017 Financial Update

As July, 2017 has begun; one-half of 2017 has already past. And for the financial markets, 2017 has been good so far.

We emphasize that you should focus on the long-term, not the day-day or month-month financial market moves. However, an update at this point can be informative.

If you are a client of our firm, your accounts would have increased in the first half of 2017, so you are making progress toward your financial goals.

Diversification is always working….as 2017 has shown.

As we recommend a globally diversified portfolio, with an appropriate allocation of fixed income (based on your need, desire and willingness for risk), your portfolio’s gains were helped by very strong International and Emerging Market gains. Increases in US Large company stocks were strong. US small value, a top performer in 2016, had very small losses for the first 6 months of 2017.


There has been a lack of volatility in US markets for over a year. There have been very few days over the past year when the S&P 500 (an index of the 500 largest US based stocks) declined more than 1%. The S&P 500 went 110 days without a decline of more than 1% prior to March 21, 2017. This is the longest period without a 1% daily decline of the S&P 500 since May, 1995.

Why is this relevant? Because intra-year declines of around 10-14% are normal within most calendar years….and there has not been a decline of this nature in over a year.

Over the past 70 years, there have been 57 “corrections” of the S&P 500, where the S&P 500 index has declined more than 10%. That is an average of one every 15 months.

Other updates:

  • The price of crude oil has dropped significantly from January 1, from $57 per barrel to the mid-$40s per barrel, a decline of over 20%. Oil company stocks and energy master limited partnerships are again significantly trailing major market indexes and most have lost value in 2017.
  • Interest rates have increased over the past year.
    • The 10 year US Treasury Note has increased from 1.37% to 2.33% over the past 12 months, but is actually slightly lower than when the year began.
    • The 2 year US Treasury Note has increased from .6% to 1.4% over the past 12 months and slightly increased from 1.2% in January.
  • There has been no significant or measurable progress on corporate or personal income tax reform. The goal is still for legislation to be enacted by the end of 2017, but that may be dependent on passing health care reform.

You should focus on things that matter to you and things which you can control.

Most of what is discussed above is beyond your control, with the major exception of your decision to work with our firm and to adopt our rational investment philosophy, which is to invest in stocks using a very low-cost, globally diversified investment strategy.