Fed Continues Interest Rate Increases and Spain (Part 2)

On Wednesday, the Federal Reserve raised short term interest rates by another .25% point. They increased the benchmark rate to a range between 2-2.25%. This is the 8th .25% increase since late 2015 and the third such increase this year.

Based on Fed officials’ projections, they expect to increase rates by another .25% later in 2018, 1% in 2019 and at least one more .25% increase for 2020. This indicates the short term benchmark rate would be slightly higher than 3.25%.

This will mean that for the first time in a decade that short term interest rates will be higher than the rate of inflation, which is currently around 2%.

Fed Chairman Powell said in a news conference that “these rates remain low. This gradual return to normal is helping to sustain this strong economy for the longer-run benefit of all Americans.”

The Fed eliminated the term “accommodative” from the statement they issue after each of their meetings. This and similar terms have been a part of Fed statements since the financial crisis in 2008. Going forward, the Fed will continue to balance their dual obligations to maintain an inflation rate of approximately 2% and the level of unemployment, which is currently low.

The impact on you and your investments

  • Short term interest rates have increased quite significantly over the past year. This will benefit you as the interest income you will be earning on the fixed income portion of your portfolio will gradually increase over the next years, as older investments mature.
    • For example, the 2 year US Treasury Bill yields 2.83% today, whereas it was only 1.48% a year ago.
  • Longer term rates have increased, but to a lesser extent than shorter term rates. Thus, we will continue to invest fixed income portfolios over various years, but in shorter maturities.
    • The 10 year US Treasury Note increased from 2.31% a year ago to just over 3% today.
  • You should make sure that you do not have excess cash in bank accounts that are still earning hardly anything, as even interest rates on very short term investments are beneficial.
  • We remain positive about the economy, as well as both US and global stock markets. While increases in short term interest rates may slow down certain aspects of the economy, the Fed appears to be working towards managing the economy so that it does not overheat and cause inflation to be much greater than 2%.


Felicia and I completed our spectacular trip to Spain on Tuesday.  We visited Barcelona, San Sebastián, Bilbao and Madrid.


 In Madrid, we visited the world’s oldest documented restaurant, Botin, established in 1725.
Our tour guide took us to the central point of Spain, near the middle of Madrid.  It is traditional to place your feet on the marker, to safely return for a future visit.
 We enjoyed great food throughout our trip.  One highlight was very fresh and great tasting produce, meat and seafood.
We are very fortunate to have taken this trip and look forward to more travels in the future!

Discipline and Spain travelogue

My wife and I are in the midst of enjoying our first trip in Spain, as well as our first trip to Europe.  See pictures below.

On the plane here and between cities, I read a lengthy white paper** by a fund manager whose investing style is causing their firm’s “liquid alternative mutual funds” to be currently underperforming most US and International asset classes. Note….we have not recommended or are invested in these funds.

As part of his discussion (23 pages), a quote stood out to me.

“There are two pains in life: there’s the pain of discipline, and then there’s the pain of regret. You choose which one.”

The quote appears to originate from a power weight lifter, not an investment professional.

As a weight lifter, I assume the athlete is saying the regular pain of his or her disciplined exercise regimen must be endured in order to succeed. If the athlete is not disciplined or does not feel the pain, they will not be successful and thus face performance regret.

This is also true with investing.  To be successful, we must be disciplined.

In regards to our firm’s investment strategy, we intentionally design your portfolio to be quite different than the major US benchmark, the S & P 500, which is comprised of 500 US based companies, which change over time.

We design your portfolio to be different than this benchmark with the expectation that you will have greater expected future returns and also have a smoother, better long term investment experience.

However, in order to accomplish these goals, we as your advisor and you as our clients will have to endure periods of “pain” when our disciplined approach may not perform as well as other benchmarks.

We recommend a portfolio that tilts towards more small and value stocks than the S & P 500, as well as include global diversification to our clients’ portfolios.

We add these components based on strong academic evidence that these premiums exist, over the long term, to add small, value and International stocks to a US large stock portfolio. By doing so, you must be disciplined to reap the greater expected future returns.

While this may be true over the long term, just like the weight lifter, there are times when we feel the pain, as these strategies and components may not perform as well as a non-diversified or US large only portfolio. At times, your portfolio may grow, but not as much as the S&P 500. During other periods, your portfolio may decrease in value while the S & P 500 is increasing.

This is when the pain is felt. This is when we will talk to you about remaining disciplined for the long-term, as we feel strongly that the academic evidence still supports these concepts. We may each feel regret, for the opportunity cost of not following other strategies (going with the herd). However, we know that remaining disciplined may be painful in the short term, it has proven to be rewarding in the past and we expect this to continue in the future.

We cannot know in advance when these strategies or premiums will occur. Many times they are unexpected and quickly rewarding, such as with US small company value stocks in late 2016. Other times, investing globally has been very rewarding after trailing US stocks for many years.

So, remain disciplined. At times it may be challenging. 

In the long run, we expect it to be rewarding.

I’ve also included a few pictures from our trip to Spain.

The first is La Sagrada Familia, an unfinished Roman Catholic Cathedral in Barcelona, Spain, designed by famed architect Antonio Gaudi, who worked on this project from the late 1880s until his death in 1926. After decades of no work on this complex through the 1950s, it expected to be completed in approximately 10 years. It was well worth seeing and will be even more incredible when completed.


The second picture is my wife and I after an evening of pinxtos, which is small portions of food enjoyed at bars or small restaurants in the Basque, or northern part of Spain. We were in San Sebastián and had a guided tour of great pinxtos restaurants. We could not believe the crowds in the streets and bars on a Monday evening in this relatively small town!










**Liquid Alt Ragnarok? by Cliff Asness, 09/07/2018 www.AQR.com/insights/Perspectives



What do you want to hear?

“When will this bull market end?”

“When will the next recession hit?”

“When will the next stock market crash occur?”

“What happens if…….insert your political/economic/future crisis/concern of the day?”

These are all questions that we get asked as financial advisors.

Unlike car salesmen or time share sellers who tell you what you want to hear, we feel it is our obligation to tell you what you need to hear.

It would be terrific if we knew the exact timing of when the bull market will end, when the next recession will occur and when the next stock market crash will occur, but unfortunately, we don’t have perfect crystal balls readily available!

We can not accurately, successfully and consistently predict the future.

Unlike others who may try to forecast, research and try to predict the answers to questions like these, we prefer to be honest and straight forward.  We will educate you, based on facts.  We will give you guidance and our thoughts.  But we will not pretend to tell you things we do not know and cannot predict.

Before we answer these questions, we want to provide some historical data on possibly why you should be a little less concerned about future financial downturns.

As the chart* below shows, a globally diversified and balanced portfolio of 60% stocks and 40% fixed income bounced back and recovered quite well from selected financial and world events which occurred between 1987- 2011, within the following 1-3-5 years.

Data shows that regardless of whether these events could have been predicted or foreseen, within a number of years, a globally diversified and balanced portfolio in nearly all cases had strong returns in the succeeding 3 years and very strong returns in the following 5 year periods.

Since we know that we cannot predict the future, historical financial evidence like this provides guidance to us as your advisor not to try and time the financial markets. As stock markets go up way more years than they go down, trying to make predictions and getting out of the market would likely do greater damage to your financial future.

This is why we work with you to develop a rational investment policy for your specific situation that allocates your assets between stocks and fixed income, so you can handle the future financial downturns that will inevitably occur. This type of financial planning is far more helpful to you than trying to make predictions and financial moves based on forecasts.

“When will this bull market end?”

We don’t know. But we do know that since World War II, there has generally been a 20% decline in large US company stocks once every 5 years. And then the stock market recovers and reaches new highs.

The key concept is that in the future, there will be more declines. There will also be greater new highs. This is why we recommend viewing your investments over long term periods and why, if you will be needing money from your investment portfolio to live off of in the near term, we would allocate a significant part of your portfolio to fixed income investments.

“When will the next recession hit?”

We don’t know. Economists are terrible at predicting recessions, which are technically defined as two consecutive quarters of declining economic activity, as measured by gross national product. Many times recessions are actually over and the economy has resumed growing before economists can declare that a recession has occurred, based on lagging economic data.

There will be future recessions, but they are not directly correlated with ups and downs in the stock market. Stock markets are more correlated to corporate earnings and future earnings expectations.

“When will the next stock market crash occur?”

We don’t know. And neither do others, reliably and consistently.

As we have a disciplined investment philosophy and we adhere to your personal investment policy (plan), as markets increase, we would be gradually selling stocks and increasing your fixed income base.

We would not allow your stock allocation to grow from a 50% target (for example) to 60% or 70% of your total portfolio. We would be re-balancing back to 50% as your portfolio grew, due to market increases.

Not re-balancing and allowing the stock allocation to grow and grow was a key mistake that many investors made in the years before the tech bubble of 2000, and at other times. I witnessed this many times as a CPA in the late 1990s and this was one of the factors that heavily influenced us to start this firm. This was a preventable mistake.

While we can’t predict a future crash, we do have the ability to evaluate how much risk you need to take to reach your financial goals. If you don’t need to take as much near term stock market risk and still have adequate resources, then we would reduce your stock market allocation. Then, when the next crash or significant decline occurs, you will not be impacted as much.

While we don’t have all the answers you may want to hear, we have strategies and knowledge that are helpful for you to hear and follow for a secure financial future.




*In US dollars.
Represents cumulative total returns of a balanced strategy invested on the first day of the following calendar month of the event noted. Balanced Strategy:12% S&P 500 Index,12% Dimensional US Large Cap Value Index, 6% Dow Jones US Select REIT Index, 6% Dimensional International Value Index, 6% Dimensional US Small Cap Index, 6% Dimensional US Small Cap Value Index, 3% Dimensional International Small Cap Index, 3% Dimensional International Small Cap Value Index, 2.4% Dimensional Emerging Markets Small Index, 1.8% Dimensional Emerging Markets Value Index, 1.8% Dimensional Emerging Markets Index, 10% Bloomberg Barclays Treasury Bond Index 1-5 Years, 10% FTSE World Government Bond Index 1-5 Years (hedged), 10% FTSE World Government Bond Index 1-3 Years (hedged), 10% ICE BofAML 1-Year US Treasury Note Index. Assumes monthly rebalancing. For illustrative purposes only. S&P and Dow Jones data copyright 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. ICE BofAML index data copyright 2018 ICE Data Indices, LLC. FTSE fixed income indices © 2018 FTSE Fixed Income LLC. All rights reserved. Bloomberg Barclays data provided by Bloomberg. Dimensional indices use CRSP and Compustat data.

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. See “Balanced Strategy Disclosure and Index Descriptions” pages in the Appendix for additional information.


Transitions, Discipline and Milestones

Ten years ago, during a beautiful fall week, we moved into our current office space. We enjoyed the picturesque view outside our windows of the leaves changing colors. Keith and I were excited about our future. The S & P 500 was around 1,250.

The US stock market had declined almost 20% during the prior 11 months, but we had no idea what would occur in the coming weeks, months and years.

Five years into our financial advisory firm, in our new offices, we soon faced the bankruptcy of Lehman Brothers, the AIG bailout and the financial crisis of 2008-09. At the bottom of the economic collapse, in March of 2009, the S & P 500 had declined to 682, down 57% from it’s October, 2007 peak.

Today, the S & P 500 is around 2,880. Worldwide stock markets have strongly recovered from the depths of the financial crisis.

As a firm, we have grown significantly over the past 10 years. As we mark the milestone of 15 years as a financial advisory firm, we are very fortunate and truly appreciate the loyalty of our valued clients. We appreciate the trust you have placed in us and are grateful for the referrals that many of you have made to friends and relatives.

As we look forward and back, some key lessons apply as much today as they did 10 years ago.

We had many conversations with our clients during the financial crisis.  We listened to their concerns and we encouraged them to remain disciplined, to stick with the investment plan we had developed with them. We continue to have these type of conversations, as economic and political challenges and uncertainty are always with us.

Many people thought the world was coming to an end 10 years ago, at least financially. It didn’t….and it has recovered. The recovery may have been slow, but as an investor, the past 10 years have been good ones. Our clients have been able to grow their assets and live off of their investments, depending on their stage of life.

This time was not different. The crisis of 2007-09 was not different from other market crashes which preceded it. The key is that financial markets recover. We didn’t know how or when, but we had faith that there would be an economic and stock market recovery. If you are going to invest in stocks, you need to believe that most companies will adapt and their earnings will grow over time.

As it is very difficult to consistently identify which companies, sectors and countries will succeed or fail in the future, we believe in diversifying broadly across many companies and geographic regions. This strategy gives you the best change of success and minimizes your risk by not placing concentrated bets.

Today, with many US market indices at or near all time highs, many are asking the opposite question. Have US markets reached new peaks? Will they go higher?

We believe in rational optimism and being rational to deal with uncertainty. These principles enable us to provide you with financial and investment advice that is timeless and will work, if you are disciplined and patient.

We remain rationally optimistic about the long term financial markets, both in the US and overseas. We know that we cannot time the markets and predict a peak. History and academic data teaches us that corporate earnings will continue to grow, which will lead to higher stock markets in the future, both in the US and Internationally.

We know that certain asset classes that we recommend will trail other asset classes at times, but over the longer term, this diversified strategy will provide you with a smoother and more successful investment experience.

If you focus on your long term financial goals, such as how much money you will need annually for retirement, you will have a much greater chance of success. We strongly encourage you not to be distracted by day to day headlines, politics and the barrage of predictions and economic forecasts.

Fall is a time of transition and change for many. School starts. Students move to college or begin middle or high school. These changes can be positive or negative. For those who are Jewish, next week begins the Jewish New Year, a time of reflection.

Over the past 15 years, Keith and I, along with our firm members, have dealt with all kinds of changes, both personally and professionally. Change, transition and unpredictability will always be with us. To deal with this, we remain very confident in our investment principles and guiding beliefs, which enable us to provide each of you with expert financial advice tailored to your specific situation. We want you to be disciplined and not make reactive decisions.

We hope this provides you with greater comfort and financial security, as we all deal with change and uncertainty.

Let’s Talk