Why Bond Fluctuations Should be Ignored

Interest rates have risen this year, with a decline this week from their peak levels.

When interest rates rise, the price of bonds decline. You should not be concerned by these decreases. If rates drop, you should not get too excited by the bond price increase.

We generally purchase fixed income securities, such as bonds or certificates of deposit, for our clients to hold until maturity.

We view the fluctuation of bond prices, whether they go up or down while you hold them, as temporary.

If you hold a bond to maturity, the fluctuation should be ignored. You are not holding a bond or CD to profit from a price increase. As a bond nears maturity, the interim fluctuation gradually disappears.

You are holding a fixed income investment to earn interest and get your principal returned at maturity, which is why we purchase only high quality bonds, Treasury securities and CDs.

As interest rates have increased, when your bonds or CDs mature we will be able to reinvest the proceeds into other bonds which will pay you more interest.

While it may be natural to be concerned about the temporary decrease in the prices of your fixed income holdings, we recommend that you focus on something else.

Like something more interesting.

Timeless Advice

In June 2011, I wrote a blog post that was advice to myself as a financial advisor, based on the prompt: What would you say to the person you were 5 years ago? What will you say to the person you’ll be in five years?

This post is a variation of those questions, written to you, as our clients and other investors.

What investment advice should you know that will be applicable and helpful to you today, in 5 years, 10 years and many years into the future….

  • You should rely on a financial advisor and firm that only have your best interest in mind when providing any advice or recommendations. This means they must meet a fiduciary standard. Large brokerage firms and banks generally do not meet this standard. You should ask and understand the real difference.
  • Have a well diversified portfolio, based on your personal need, ability and willingness to take risk.
  • Your portfolio of stocks should be globally diversified, which means there should be allocations 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 active mutual funds and money managers do not beat their respective benchmarks. Thus, using low cost mutual funds with a buy and hold strategy is the best way to be rewarded by the stock market over the long term.
  • Your investment goal should not be to beat the S&P 500 every year. You should be focused on making progress towards your long term financial goals. While a globally diversified portfolio should outperform the S&P 500 over the long term, it should make your portfolio less volatile….a smoother and better investment experience.
  • Do not take risk with bonds or fixed income investments. 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. Be prepared for down markets, which are the norm and not unexpected. Be prepared emotionally for down markets, as they occur regularly. Since 1945, the S&P 500 has declined 27 times between 10-20%. That is a significant decline about once in every 3 years. Sometimes the declines are far worse. However, the market has always come back and made new highs. Talk to your advisor about bad markets as well as good markets.
  • Do your best to remain disciplined, during down and up markets. If you do this during a down market, you will be well rewarded when the market rebounds. If you are disciplined during up markets, you may avoid fads and some excesses.
  • Be fearful when you are greedy, and be greedy when you are fearful.*
  • If you bought stocks during the last financial crisis (2007-09) or allowed us to do so on your behalf, you added rocket fuel to your financial future.*
  • Know that 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 when to buy back into the market.
  • Rebalancing is crucial to your long term success. When an asset class does well, allow your advisor to sell some of it. Your advisor will use that money to buy another stock asset class that has not done as well, which leads to buying low and selling high. Or the advisor may use the money to add to your fixed income allocation, which is your long term safety net.
  • Plan with your financial advisor and have a simple written document which includes the firm’s investment philosophy and your personal allocation plan. It may be called an “Investment Policy Statement.” This will help you achieve a greater sense of financial comfort and security. Do not work with a firm that does not use this kind of written plan.
  • Be patient. Save early. Focus on the long term.  Avoid fads and what is “hot” today. Accept that the future is uncertain. Do not trust others that “predict” the future.
  • Do not get caught up in products and alternative investments that are hard to understand. Sometimes simple may be better, almost always far cheaper and often more successful.
  • Use a financial advisor that encourages your questions on a variety of financially related topics, listens to you and explains things to you with clarity, so you can understand them.



Let’s Talk

*These concepts are similar to those written by Jason Zweig, an excellent financial journalist, in a blog post he wrote on May 20, 2018.

Longevity and Retirement planning for the long term

As I write this, I am looking forward to spending the weekend with my two sons in Washington DC. Next week, I turn 55.

As a financial advisor, one of the key roles we play is to help people plan for their retirement and then assist them while they live and (hopefully) enjoy their retirement.

How much will you need to save?

What age should you begin to take Social Security?

When will you and / or your spouse be able to retire?

How much can you withdraw each year so you don’t run out of money?

For some people, how much can you live on and still leave a legacy to your children or others?

How much of our assets should be in stocks and how much allocated to fixed income?

These are all questions and issues we discuss with clients of all ages. These are some of the most important discussions and guidance that we can provide.

The future is unknown. Thus, there are many variables to deal with, most of which are undefined.

Yet, in 15 years as financial advisors and many years providing financial advice before that, we have been able to successfully provide answers to these questions which provide clarity, a sense of comfort and security to our clients.

As we discussed last week, A Formula for Investing Success, having a consistent overall investment philosophy as a firm is extremely helpful to us, and our clients, as we evaluate and provide advice to answer these questions.

Based on academic and our real world experience, a 4-5% withdrawal rate from your invested assets is considered a safe withdrawal rate.  As the future is unknown, this can’t be guaranteed, but we are confident this will work over the long term for disciplined clients.  This means you should not run out of money during your lifetime and hopefully, not come anywhere near that.

If you save $2 million, the safe withdrawal rate means you would be able to withdraw $100,000 per year, in addition to Social Security or other income sources you may have.

We have seen over the past 15 years, even with great stock market volatility, accounts have actually increased or remained about the same, even after annual retirement distributions. They are not rapidly declining towards zero.

We discuss these concepts with clients of all ages so we can help them determine savings plans to meet their retirement goals. If we analyze their assets, withdrawal and spending expectations and the calculated withdraw rate is much higher than 4-5% range, say a 8-10% withdraw rate, then changes would be required. You would need to work longer or part time, invest more in stocks to generate greater expected returns (and be able to emotionally deal with the greater volatility and risk), save more or spend less in the future.

For most, this is an ongoing process. Clients often want to review and discuss this many times. For some couples, one spouse is confident and the other is concerned. We encourage them to talk to us whenever their concerns arise. This is normal and expected, as their ability to live the life they desire is dependent on the outcome of these financial and lifestyle decisions.

One thing is certain, in general, is that longevity, or life expectancy, is increasing.Americans, on average, are expected to live longer than in prior generations. And joint life expectancy is increasing even more. How long do your assets need to last to provide for a meaningful life, and cover whatever health or special care you may need for yourself, and your spouse?

While we all know people who have died far too young, we must still plan for longer lives. Planning for the joint life expectancy of a couple takes priority over that of either individual in a relationship. You want to provide for both of you, knowing that one will outlive the other. You want to be comforted to know that whomever lives longer, they will be OK financially.

For someone born in 1940, who is 78 now, men are expected to live on average an additional 10 years and women an additional 12 years. The average life expectancy is to age 88 and 90, respectively. Keep in mind these are averages, meaning some will live longer and some live less. For anyone in their 50s or 60s, they should assume a life expectancy well into their 80s, and even longer.**

There is another major factor in life expectancy, which is the correlation to education. There is a link between those who are more educated, who tend to have greater incomes, eat healthier and have access to better health care than the overall population. The more educated population has longer life expectancies. Thus, we must plan so that your assets will last even longer than the statistical averages.

A major implication for us as financial advisors is to change the traditional thinking towards dramatically increasing ones asset allocation towards fixed income as someone ages. There used to be a rule of thumb that your stock allocation should be 100 – your age. If you were 60, this logic would lead to a 40% stock allocation. However, as we discussed earlier, this person could have a 30 year joint life expectancy.

Given longer life expectancies and inflation, which rarely disappears, it is important for nearly all clients to maintain a “healthy” allocation in a globally diversified portfolio of stocks. By maintaining a reasonable stock allocation, above what the old rule of thumb would recommend, you will have a much greater chance of your assets continuing to grow over the longer term, to offset the creep of inflation.

It is now common for our clients in their 70s and 80s, depending on their specific situations, to have 40-50% of their assets invested in stocks. This is reasonable because of inflation and longevity. If something costs $100 and increased 3% per year, in 30 years it would cost $243. Wow!! The only way to keep pace with inflation over the long term is to invest in stocks, with the proper guidance, counsel and education of an advisor.

As the disclaimer states, past performance is no guarantee of future results.

However, good planning along with discussions and a solid, consistent investment strategy should provide for a secure future. We can guarantee we will do our best to provide that!

Let’s Talk

A Formula for Investing Success

You want to have a successful investment experience. Otherwise you would not be reading this.

One of the key components of being successful at anything is to focus on your reaction to an event, not on the event itself.

I am no scientist and don’t like formulas, but this one will make sense to you.

One way to look at this is: e + r = o (Event + Response = Outcome)

The formula means the Outcome, either positive or negative, is the result of how you respond to an event, not just the result of the event itself.

In terms of investing and your financial future, a critical factor in how we respond to events and the world is to have a consistent philosophy. As David Booth, Founder and Executive Chairman of Dimensional Fund Advisors says, it is important to have an investment philosophy you can stick with, one that can help you stay the course.

As investing is a very long term endeavor, lasting for decades and fraught with down markets, up markets, constant analysis with varying opinions and predictions, political changes and unexpected crises….this simple but important belief in having a consistent investment philosophy can provide you with greater sense of confidence and financial security, as well as increase your odds of having a positive financial experience.

What does this mean in the real world?

When President Obama was first elected, many thought interest rates and inflation would increase significantly due to high deficit spending. If you believed this, your non-stock investments would have been in very short term bonds or other investments geared to your expectations of higher future inflation.

If you had viewed Obama’s decisions and policies, the (e) Event, and made predictions and investment decisions as described above, your (r) Response, then your (o) Outcome would have not been good, as interest rates and inflation remained far lower and longer than anyone predicted at the time.

Our Response (investment recommendations) and the Outcome for our clients was quite different. We did not purchase only very short term bonds and did not recommend inflation hedges. This was the right strategy, but not because we made the correct prediction. We followed our investment principles that we cannot accurately and consistently predict the future of interest rates and inflation. This led us to focus on what we can control, which was to invest in safe bonds of varying maturities that would return their principal and not bet on the direction of inflation and interest rates.

When the stock markets dropped drastically in 2008-2009 (the Event), we worked with our clients to remain disciplined and adhere to their defined investment plan, the Response. For some, they rebalanced and purchased more stocks at bargain prices. With discipline, our experience and counsel, our clients benefited from the subsequent significant market recovery, a much better Outcome.

If you respond to events like this with panic or allow your response to be controlled by emotion, you may sell or get out of the markets. Along with potentially missing the recovery, you may suffer from anxiety about when, or if, to get back in, leading to suboptimal returns (a bad Outcome).

This is why it is so critical to have an investment philosophy that is backed by decades of academic evidence and real life experience.
* We recognize the difference between investing and speculation
* We rely on the power of diversification to manage risk and increase the reliability of outcomes
* We monitor your progress against your long term investment goals.

This is another way we can be valuable to you and your family. We can simplify the complex financial world for you. We separate the emotion from investment decisions. We are objective and rational.  We provide financial, tax and estate planning expertise. We know that investing can be scary and at other times rewarding. We can help you stay the course through challenging times and develop a plan for your financial goals.

We strive to educate, communicate clearly (this weekly blog is one form of that), and plan with you. We will help you deal with and to Respond to even the most extreme market conditions. Our many years of investment experience, combined with the foundation of a consistent and proven investment philosophy, can be invaluable to you in responding to Events.

In the spirit of the e + r = o formula, good advice, driven by a sound philosophy, can help increase your probability of having a successful financial outcome.

Let’s talk.

The Power of Investing In……

I am writing this on my way back from a meaningful and extremely worthwhile BAM Alliance learning group session.

It was thought provoking. It was memorable.

It has the potential to be transformative.

I made new connections and relationships. I strengthened and renewed others.

It is the power of investing in moments.

U.S.S Yorktown, Charleston, South Carolina

My three days in Charleston were successful because of the talented staff at BAM, our back office firm, who invested significant time and energy to create moments and experiences.  Additionally, I was intentional to take the time to plan for the session in advance.

One of the valuable additions to this meeting were two, 30 minute book review sessions. One of the books was The Power of Moments, by Chip and Dan Heath, which I highly recommend.

As financial advisors, we focus on investing, viewed financially. This book advocates investing time to plan and create more memorable and elevated experiences in all aspects of your life. 

The authors of this very readable book feel that “life and work are full of moments that are ripe for investment.” They cover many aspects of life and settings, such as schools and education, families, businesses and organizations.

The Heath brothers feel “we must learn to think in moments, to spot the occasions that are worthy of investment….The “occasionally remarkable” moments shouldn’t be left to chance! They should be planned for, invested in. They are peaks that should be built. And if we fail to do that, look at what we’re left with: mostly forgettable.” (Emphasis added)

Invest time in advance to plan peak moments and be intentional and creative about it. Make an effort to elevate the experience. For certain life moments and experiences like a trip, invest time to end the experiences with peak moments.

The authors write “when people assess an experience, they tend to forget or ignore its length-a phenomenon called “duration neglect.” Instead, they seem to rate the experience based on two key moments: (1) the best or worst moment, known as the “peak”; and (2) the ending.” This is called the “peak-end rule.” It is not the length of the vacation or experience which counts, it is about the peak moment during the experience and what happens at the end of the experience that creates the memory impact.

This is particularly true with vacations, as we remember the peak moments of a trip and the ending. I can attest to this from my vacation to Florida in March. It was good, but not the best. My memory of this Florida vacation was negatively impacted because during the last two days it rained and my wife was sick. We had a bad ending, in the authors’ terms.

These were things beyond our control. However, I assume that if the rain and Felicia getting sick had occurred at the beginning of the trip, rather than at the end of our vacation, I’m pretty sure the authors would be correct and I would have a more favorable memory of this trip.

I accomplished a number of objectives during these few days at the BAM Masters Forum event because I was intentional. I wrote out goals before arriving, people I wanted to connect with and talk to about certain matters. Other discussions occurred spontaneously and without any prior planning.

For this 12th annual gathering of fellow advisors from across the country and a number of BAM staff members and executives, BAM requested that we bring “wedding attire” for one dinner, so I brought a sport coat and nice slacks, rather than the normal resort attire. They asked us to participate in a southern bow tie competition, so I borrowed a bow tie and wore one for the first time. It made the evening quite fun and special. It elevated the evening. We took group pictures and admired the diverse collection of bow ties. The early planning resulted in a more memorable evening for all.

My learning group session ended with another memorable dinner on Tuesday night. My flight home was Wednesday at 2 pm.

Wednesday morning, I could have slept in, packed and gone to the airport. I did things differently, with great results.

Wednesday at 9 am I toured the World War II aircraft carrier U.S.S. Yorktown, originally commissioned in 1942 that was docked near my hotel. This was incredible experience. As I walked up and down the ship’s steep stairs, it’s 6 levels and the enormous flight deck filled with planes of different decades, I was filled with gratitude and appreciation for those who served on these ships, flew the planes that took off and landed, those who lost their lives on missions and the hard work and ability of those who designed and built these behemoths.

After visiting the ship, instead of eating hotel food for lunch, I took an Uber into downtown Charleston for some great southern fried chicken at Leon’s Fine Poultry and Oyster Shop (well worth it!!). Even though I was rushed to arrive at the airport, the last minute stress will not be my memory a year from now. My positive memory of the end of this trip will be of the incredible aircraft carrier and the delicious fried chicken. 

I read most of The Power of Moments. There are many more valuable insights to be gained from this book than just the few I highlighted. I plan to apply some of these concepts within our firm and in my life. This will take effort, as the authors note, but it would be well worth the investment and time to implement some of these concepts and ideas.

Who should read this book: Almost everyone. Those who want to have a more impactful and enriching life, or help others to have one. Certainly parents, business and non-profit leaders, teachers, coaches and medical professionals.