Legacy and Change

What kind of legacy will you leave?

What kind of legacy will you leave your children and grandchildren? Will it be different than today? In what way?

Legacy can mean a gift you give to family members, people or organizations, for their future benefit. It is generally thought of as financial, but it can be much more than just financial. A legacy is anything passed from one generation to the next. Your ideas, stories, beliefs and life lessons can be an important form of your legacy.

All of these begin with conversations.

Will you talk to your family members about your own legacy? Share your stories?

Will you share your values and ideals with your descendants, your family members?

Will you talk to family members and friends about the good and bad financial decisions you made? There are troves of lessons to be shared. Future generations need to hear your stories, experiences and advice.

Will you tell your family members how a coach, friend, teacher or financial advisor had a huge, positive impact on your life….which may also result in having a major impact on theirs?

For example, if we as your financial advisory firm have had a vital impact in your financial well-being, should you share this with the next generations of your family?

If you will be passing down a significant financial legacy to your heirs, are they prepared to handle these funds? Should you take the steps now to work with us….to begin working with your heirs?

If you have conversations with your family members or next generations, would you leave a stronger legacy? We think so.

Would it make a difference in their lives, as well as yours?

Yes, it would.

And if you are younger, will you ask your older relatives some of these questions? You will be amazed by the discussions you will have. We can’t wait to hear about them.

Try it. What do you have to lose by starting a conversation about something important….past or future?

This is how we learn, evolve and change for the better.

How did you do?

The volatility of the global financial markets over the past few weeks was an important test of your ability as a long term investor.

It was a gut check for many, as there has not been a sharp decline like this for a long time.

How did you do? How did you handle it?

Did you react calmly or with great concern?

We hope that you remained calm. Among our clients, we did not sense significant feelings of panic or desires to make major portfolio changes.

That is encouraging to us, as we strive to provide you with education (like these blog posts) so you will be prepared for temporary market declines.

A few of you called with questions, which is what we want you to do, if you had any questions or concerns.

In early February, global stock markets declined over 10% and interest rates have risen a bit.

However, since the intra-day low on February 9th, U.S. and International stock markets have recouped some of their losses from the January peak. Many asset classes are slightly positive for the year, as of February 15th, 2018.

These are some of our key takeaways from these recent events and our thoughts on the future:

  • The US and global economies remain strong. Earning reports continue to be very solid. There are no signs of a recession or major economic collapse.
  • This type of pullback or correction was long overdue.
  • Interest rates and inflation are increasing, which we view as positive. This is a sign of a strengthening economy. Interest rates will likely continue to rise, gradually, over the next year or more.
  • As interest rates rise, this may cause occasional choppiness in the stock market. You should think of this as turbulence that an airplane experiences as it flies through a storm. The plane will make it through, but the ride is a bit bumpier. At the end of the flight, you have safely landed.
  • As long as interest rates and inflation do not increase too quickly or go too high, we do not view this as a problem.
    • The 10 year US Treasury Note is yielding around 2.9%, which is still historically very low.
    • Mortgage rates are around 4-4.5%, depending on the length and amount of the mortgage. Again, this is historically very low and should not dampen the housing market. For example, my first mortgage in 1990 was at 10%. Current mortgage rates are still a bargain compared to that.
    • Even if interest rates increase 1/2%-1% over the next year, we don’t think people will stop buying cars, trucks, technology and houses. Companies will not discontinue investing in their businesses.

Remember, risk and returns are related. To receive the long term benefit of greater expected stock market returns, you need to endure some down periods of holding stocks.

We invest and structure your portfolio for the long term. That should be your focus.

I made this baseball analogy with a client last week.  We invest successfully by enabling you to hit singles and doubles so you can stay in the game for a long time. Those who swing for home runs tend to strike out much more frequently. Those who look for quick, big gains in the stock market also tend to incur more significant losses over the long term.

Like a successful hitter with a good, solid batting average, we want you to be patient, disciplined and confident regarding your investments.

Return to Volatility and Normality

The US and Global stock markets declined significantly and rapidly over the past week. From its peak the prior week on January 26th, the S&P 500 Index (a broad measure of 500 US large companies) declined almost 7% through Thursday morning, February 8th.

Let’s put this in perspective and share our thoughts. What should you be focusing on?

While no one can perfectly anticipate when a market drop will occur (in advance, accurately and all the time), this decline was long overdue, given the nearly straight up gains over the past 2 years.

The market action was swift and seemingly unexpected, but that is normal at times. Global stock markets have been extremely calm and lacking in volatility for more than 18 months, with few big down days at all. That is not normal. Volatility, or market moves either down or up, are normal and should be expected, as we have repeatedly emphasized.

If you look at the 3 month S&P 500 chart below, as of February 8th AM, you will see that the recent decline takes the Index back to the level it was at near the end of December, 2017. While the markets had big gains in January, 2018, those are temporarily gone.

An even more illustrative chart is the 2 year S&P 500 chart, as of February 8th AM, below. This shows the significant rise over the past 24 months and puts the decline of the past week or two in even better perspective. Stock investments are still solidly positive over the longer term.

There will be many “experts” who will provide all kinds of reasons and explanations for what caused this sudden decline. Some will be considered “gurus” for calling a market top prior to last Friday. None of this really matters in the long run. What matters is your portfolio and how that impacts you and your family’s goals.

The fundamentals of what drives the stock market are still strong. The stock market is highly correlated to expected corporate earnings and reported corporate earnings. Nothing changed in the past week or two regarding earnings. If anything, corporate earnings reports have been very strong, with most major companies meeting or exceeding their earnings expectations.

The stock market and the economy can diverge at times. The stock market may have gotten a bit ahead of itself, as January’s gains for one month were 60-70% of the historical annual average return for the US stock market for an entire year.

It is unlikely that investors can successfully time the market. Further complicating the prospect of trying to time the market is the fact that a substantial portion of the total return of stocks over long periods comes from just a handful of days, which of course can’t be predicted in advance.

As you can see from this chart below, the impact of missing out on a few days is very significant. The chart shows the annualized compound return of the S&P 500 Index from 1990-2017. The bars represent the hypothetical growth of $1,000 over the period and shows what happened if you missed the single best day and a handful of the best days. Missing only a handful of days would have resulted in substantially lower returns than the total period had to offer.

Thus, the prudent strategy is to remain invested during periods of volatility, at the appropriate allocation of stocks for your personal situation. We have helped our clients manage that. If you are not a client, this is a discussion you should be having with us.


Things are changing in the financial world, which the financial markets are adjusting to. As the economy is strong, job growth is good. That puts pressure on employers to pay more, which causes inflation. The Federal Reserve wants 2% inflation, which has not existed for a decade. As the economy continues to do well, this leads to the Federal Reserve raising short-term interest rates. The Fed has raised rates and may increase them by 3-4 times more this year, at 0.25% increments.

As interest rates rise, and the Federal deficit continues to rapidly increase, this potentially causes competition for the stock market. However, the cause of increasing interest rates is the strong economy, which translates into good corporate earnings, which is generally good for global stock markets, over the long term.

Another factor which must be added into this mix is the huge increase in US oil production. On Wednesday, the US Energy Information Administration (EIA) reported that US oil production soared to 10.251 million barrels a day last week. That was an increase of 332,000 barrels from the prior week. The EIA now expects US output to average almost 10.6 million barrels a day in 2018 and 11.2 million barrels a day in 2019. Prior to 2017, US energy production had never been near 10 million barrels per day and 5 years ago was 6-7 million barrels per day. In May, 2017, it was around 9.3 million barrels per day.**

Though global demand for oil has pushed worldwide oil prices higher, the US production will mitigate US gas price increases and puts somewhat of a cap on global energy costs. This helps to reduce inflation and the cost of raw material prices.

With all these conflicting factors, this is why we invest for the long term and structure the portfolios we manage to be broadly diversified. Reacting to short term declines can be more harmful than helpful. By working together with us in advance, we hope that you may be better able to handle uncertainty and volatility.


This Week’s Takeway: Declines are normal and in the long-term, temporary. US and International stock markets have risen dramatically over the past years. With that perspective, the impact of the decline for a diversified portfolio from the past week or two should take your portfolio back to December, 2017 values.



** Source: Wall Street Journal, “Oil Prices Tumble as US Output Surges,” print edition, February 8, 2018 and WWM blog post dated May 25, 2017 and its sources.


Disclosure: We recommend stock investments in a globally diversified portfolio, which is quite different from just owning the US based S&P 500 Index. The S&P 500 Index is used above for illustrative and educational purposes only.



A Life Changing Decision

Austin, TX

I was seated at the far end of the counter at the Counter Cafe in Austin, Texas. The small restaurant was busy, as to be expected on a beautiful Sunday morning.

The gentleman next to me and I started talking, as he was midway through his great looking “house special,” and I was contemplating my order (one incredible and very large blueberry pancake, if you’re interested).

Eventually, he asked why I was in Austin. I told him I was here for a number of meetings, including a learning group seminar with other financial advisors, which Keith was also attending, to be held at the offices of Dimensional Fund Advisors’ (DFA).

He had actually heard of DFA, which is rare, as they don’t advertise, even though at $600 billion in assets, they are the 7th largest mutual fund firm in the US. I told him DFA was the primary mutual fund company we use for our stock investments.

We talked further and in response to a question, I told him that “deciding to work with DFA 15 years ago was one of the best decisions of my life. It has changed my life, the life of my family, my clients and the future generations of my clients.”

How could this be true?

When we founded our firm, we were searching for an investment philosophy and strategy that was different and better than others were using. The investment philosophy that DFA utilizes provided the consistent foundation for the stock investment advice we have given and implemented over the past 15 years.

Our firm has adhered to this core investment philosophy through good markets and very difficult downturns. This discipline has been rewarding for our clients.

Clients decide to work with us to help them solve their financial issues and concerns. They expect good investment performance. They want advice from advisors whom they can trust and rely on for the long term. They want excellent service and reliability.

For us, DFA has provided one manner of how to provide investment implementation. DFA’s funds have provided solid performance over the long term. They offer very tax efficient mutual funds for those with taxable accounts and the internal costs of their funds are far below industry averages. They rely on academic data and evidence, not guess work and forecasting. They are strong advocates of diversification at many levels. Their funds stick to what they are intended to do. This means that a small company fund does not have large company stocks in it. They do not rely on a few star portfolio managers. Their funds are managed by teams. All of these are important factors in successful long term investing.

While DFA has been a critical part of our success and to the benefit of our clients, we are continually monitoring their performance. We are always challenging ourselves to ensure that we are looking at other alternatives and ideas which are consistent with our principles and your best interest.

We are fortunate for the strong relationships we have developed with our clients. We have worked hard to earn your trust, through good and bad financial markets. We spend time to educate you about financial markets and to have realistic expectations about downturns and market corrections.

We are fortunate that many of you have involved us in important discussions in your lives, including estate planning and major life decisions.

While we are totally independent of DFA and not compensated by them, we are thankful that we made the decision to use some of their funds years ago.

Regardless of how or why you became a client of our firm, we have tried to provide you with a greater sense of financial security and peace of mind about your financial future. DFA has played a role in this. For this we are thankful.