Italy, Investing and Principles

Blog post #413

My wife Felicia and I were fortunate to have travelled for the past 10 days to Bologna and Florence, Italy, as well as day trips north and south of each, respectively, to visit various family owned establishments that produce Parmigiano Reggiano, balsamic vinegar and a winery south of Florence, in the Tuscan hills.

When we meet and talk with you, and in these blog posts, we often stress a number of investment themes, which we feel are important for your long term financial and investment success. It seemed more than a coincidence that some of the same critical success factors and issues in investing are vital to each of these high quality, multi-generational businesses.

  • Diversification
  • Patience and Planning for the long term
  • How to deal with events you cannot control

We first visited the Hombre dairy farm in Modena, Italy, which produces 14 wheels of Parmigiano Reggiano a day. The farm has over 500 cows, of which they use 268 cows to produce top quality cheese. While they only use one or two types of cows, they diversify by having many extra cows in their herd.

This is not a quick or simple process. The cows are milked two times per day, at 3 am and 3 pm, 365 days per year, to produce the amount of milk necessary to make the cheese wheels. Each morning’s batch of milk is carefully handled by a small team within a certain number of hours, over and over, in an attempt to ensure that all of the air bubbles are removed before the cheese is sealed.

The cheese is then aged for 24-30 months in a special climate-controlled room. The cheese wheels are cleaned and rotated weekly, to prevent moisture build up. The optimal price at market is 36 months, so the farm tries to sell them at around 30 months. Each wheel must be individually inspected by an expert with a small hammer to be graded as Parmigiano Reggiano. A wheel that is not approved is worth less than 50% of its optimal price. One error in the process can significantly affect the end price.

The dairy farm must be patient and think long term. They have taken care to produce a high-quality product by investing in their land (to feed their cows) and they have to adjust to weather and other factors which could impact any part of the production or aging process.

We visited a family owned business in Modena, north of Bologna, which produces very high-quality balsamic vinegar. La Vecchia Dispensa top products are not the typical balsamic vinegar which we would put on salads, for example. See link to Zingerman’s article, for an explanation.

The production of the balsamic vinegar they bottle and sell this year originated generations ago, back to 1925. We toured their 5-story storage facility, which was like a small tower in a castle, with very narrow, winding, cement stairs between each floor.

The vinegar is aged in wooden barrels, which are key to the aging and taste process. Unlike wine, the type of wood barrel and how the barrel has been aged is much more important to the end product than the grapes which are used. The wooden barrels last for 50-100 years and improve with age. Like our emphasis on long term planning and investing, this family treats these wooden barrels as truly very long-term assets.

Simone Tintori explained to us that they source the grapes from 5-7 separate farms in the Modena area, to ensure they are diversified, particularly if one or more of the farms has growing or harvesting problems. After the grapes are harvested, they choose which ones to use, and the skin and juice are added to barrels in an amazing process.

They have barrels of various sizes and types of wood on different floors of the tower. The barrels are not sealed; they have holes at the top which are covered with a small piece of cloth. A number of times a year, some of each barrel’s contents are transferred by a master to the next barrel in its row. The barrels themselves are not turned or rotated at all. Gradually, over years and decades, juice is moved down the row and then finally taken out of the last barrel with something like a soup spoon. That is the only product to be sold from that row, that year.

The family has a special barrel, called the starter, which can be used to begin a new batch. This carefully treasured starter juice is kept in a glass container, so it is not affected by the aging of the wood barrel. One starter container is in the tower we were in, but they also have four other starter containers in different locations of Modena, as this is so vital to all their future production.

Like the cheese above, and the wine below, their product must be inspected by experts. Blind taste tests determine whether each batch, which is a combination of many decades of grapes, aging and blending by the master, will be certified, as they hope. If a batch fails, the market value drops by 1/2 – 2/3, which Simone says happens, as the judging can be very subjective. Their top quality, traditionally produced and aged balsamic vinegar can sell for $100 to hundreds of dollars per bottle.

Just as we can control with you how much risk should be taken by setting your allocation to stocks, they can control the aging and treatment of the barrels.

They are patient. They are diversified over decades, as each barrel contains juice from many years that has been added and taken out. The taste of each years’ grapes is beyond their control, as that is impacted by weather conditions, particularly near the harvest.

Similar to a mutual fund that may contain hundreds of individual company stocks, no one company stock can have a significant impact on your financial future. This can be a positive or negative, but it is prudent from a long-term perspective. Likewise, no one season of grapes has too much impact on any year’s final production, as the balsamic vinegar that is bottled in any year is the result of decades of grapes, aging in aged barrels, combinations and care. It is very well diversified.

The last food related tour of Italy was a boutique winery about an hour south of Florence, called Fattoria Fugnano, in San Gimignano. We arrived on a rainy day, as they were in the midst of their harvest of grapes. Unlike the balsamic vinegar producers, who are not dependent on a specific year’s harvest, we were greeted by the winery’s owner Laura Dell’Aria, who said she hadn’t slept for days due to the very rainy weather at this most vital time of the year for them. She explained that the grapes could not be harvested for a number of days after the rain stops, as the additional moisture of the rain negatively affects the grapes. Fortunately, as our terrific visit ended hours later, the storms had stopped and the sun shone brightly.

As we often discuss, we focus on things which matter and things you can control. It must difficult to be in a business like a winery where weather, which cannot be controlled, can have such a material impact on one’s livelihood. As financial advisors, we have to deal with uncertainty in many aspects, but if you plan with us, have a long-term perspective or timeframe to meet your financial goals, then shorter term volatility and uncertainty usually can be offset.

Laura is the second-generation owner of the winery, which she took over at age 23 after her grandfather passed away in the late 1990s. Laura explained that she has made some mistakes and learned many things over the years. And she is still learning and trying new things.

Since we founded our firm, we have learned to help our clients remain disciplined and not be as affected by emotions or investment fads. We know that diversification is critical. Just as Laura and her staff educated my wife and I about their wines (which were great, and we highly recommend visiting her winery), their land and even about their bottles and labels, we try to educate you, our clients, to view your portfolio as a whole and for the long term.

Each of these products, Parmigiano Reggiano cheese, balsamic vinegar and the wine, must meet local regulatory approval to be labeled as the highest quality they desire. Not all of the products will get top approval each year. Some years, some products will not fare as well. However, the companies do not give up on their long-term processes, dedication and commitments to quality.

Similarly, in a globally diversified investment portfolio, some asset classes will outperform for a year or many years….and some asset classes will underperform for a year or many years. Just as the wine maker does not give up if a year or two is not as top quality as they desire, we do not feel it is in your best interest to give up on an asset class that has not performed as well for a lengthy period of time, unless there is new data that justifies such a change.

We had a fabulous trip. We also took 2 cooking classes and learned how to make various pasta dishes from scratch. But don’t worry, I’m not giving up my day job to make ravioli full time!

Credit score tips and tricks…for everyone

Blog post #412

Your credit score is very important for your financial future, if you want to get a mortgage, lease an apartment, refinance an existing mortgage, get a credit card, a vehicle loan or almost any other kind of debt. In some states, your credit score can even impact your homeowners insurance rates.

This post can be helpful to you, regardless of your age, marital status or income. It may also be valuable to others you know, such as family members, and we encourage you to forward it and share it with others.

Everyone should have at least a few credit cards in their own name. Even if you are married, each spouse should have credit cards in their own name, so you can each establish and have your own credit history. This does not mean that you have a joint credit card account with American Express and each have a card with your name on it. This means each person in a marriage should have a few credit cards that each person has applied for in their own name. This is vital in case of divorce or death of one of the spouses. We highly recommend this as we repeatedly see spouses, particularly women, who have not established credit history in their own names.

Credit score basics: Credit scores are calculated and maintained by a few major organizations, based on data accumulated by a number of national organizations. FICO score is the most commonly used credit score, based on a company called Fair Isaac.

FICO scores are reported on various scales, with some that top at 850, and others that have 900 as a maximum score. The higher the score the better for you, in terms of likelihood of approval, lower interest rates and other fees.

Per, these are the 4 major FICO scores and their ranges:

  • FICO score 8: 300-850
  • FICO mortgage score: 300-850, and there are different models for each rating company, Experian, Equifax and TransUnion.
  • FICO Auto score: 250-900, used in auto financing
  • FICO Bankcard score: 250-900, used by credit card issuers

Per, the following scores and grade ranges, based on a grade scale of 300-850:

800-850 exceptional, 20%
740-799 very good, 25%
670-739 good, 21%
580-669 fair, 18%
300-579 risky or very poor, 16%

On an 850 point scale, the average American has 701 FICO score, per, on 9/17/19.

Obtaining your credit score: Many card companies and banks now provide free FICO or comparable credit scores to their banking and credit card customers, with your monthly statements or online. American Express, Capital One, Citi, Discover, Chase and many others provide this data for free. If you can get your credit score for free in this manner, which is usually updated monthly, there is no need to pay another company to obtain your credit score.

How is your credit score determined?

Credit scores are determined based on a calculation with the following weightings and factors.

35% payment history
30% amount you owe
15% length of credit history
10% new credit open
10% types of credit you have

Although these factors are well known, and more are details below, there is no clear information as to how an exact credit score is calculated. For example, there is no specific formula available to consumers that tell us how each specific score is calculated.

To try to understand how you can improve and then maintain your credit score, let’s review the factors and what impacts them.

35% payment history: If you have late payments, this factor is going to be negatively affected. This is the most important factor in determining your FICO score.

It is vital that you make your payments on time to have a good or excellent credit score.This includes all kinds of obligations, including credit cards, vehicle loans, student loans, mortgage, and medical bills. Any company that you owe money to could report a payment late to a national credit bureau, which can have a negative impact for years (reduce your credit score).

The best way to have a good payment history is to make all your payments on time. Even if you can only afford to make a minimum payment on a credit card, if you make them on time every month, you will get a good score in this category. The best way to make sure you make your payments on time every month is to set up automatic payments. If you are having financial issues and can only afford to be making a minimum payment, you should seek assistance regarding this situation, which is beyond the scope of this blog post.

30% amount you owe: It is not just what you owe, but how you owe it. What does that mean?

Credit bureaus and credit card companies evaluate how much outstanding debt you have. They look at your total debt, which is your outstanding credit limits and loan obligations. It is good to have some debt, but too much will be a negative.

It is recommended that you keep your overall credit card utilization rate, for all credit cards, at below 30%. This means that your outstanding usage should be less than 30% of the total of your credit limits. If you have charged or have a balance outstanding of $5,000 and the total credit limit of your credit cards is $10,000, you have a 50% utilization rate, which is not good. If you have the same $5,000 balance outstanding, and your credit cards limits total $40,000, your utilization rate is 12.5%, which is excellent. Remember, the data may be reported to credit reporting bureaus at a different time than your billing cycle, so this could be impacted even if you pay off your balance every month.

But the factor that many people are not aware of is what is called your card utilization rate. Credit scores are also impacted by the outstanding balance of each individual credit card, as a percentage of the total credit limit of the respective credit card. You should limit the charges per month or outstanding balance of any individual credit card to 30% or less of that card’s credit limit. For example, if you have a $3,000 outstanding balance on a credit card with a $4,000 credit limit, that is a 75% utilization rate. This is viewed as a major negative. The credit card companies report this information to the credit bureaus at any time during a month, so even if you pay off your balance in full every month, this is still negative.

You should strive to keep your usage of each individual credit card below 30% at any point in a month. Thus, if your credit limit on a card is $4,000, you should try not to charge more than $1,000 on that card in a month. If you have a credit card with a $10,000 credit limit, you should not charge more than $2-3,000 on it in any month. This is why it is important to have a reasonable number of credit cards and at times, you may need to spread your spending across multiple cards.

If you only have two or three credit cards, rarely use one and then charge most of your spending on one card, you are likely using up a lot of your credit limit, thus causing your utilization rate to be very high. This will cause your credit score to go down, but can be improved over time, by a better use of your credit cards (use more of them, but not charging more than 30% of each card’s credit limit).

If you close a credit card, you are reducing your overall credit limit, which could be a negative for your overall utilization rate, as well as impact your credit length history, which is another factor.

This is why over time, you should obtain a reasonable number of credit cards, keep them open for a long time and not close them unless there is a specific reason to do so, and have a appropriate amount of credit limits on both a per card basis, as well as on an overall basis, so you can be below the 30% utilization rate both on a per card and overall standpoint.

15% length of credit history: Your credit history is built up over time. This is why it is important to establish credit when you are young, develop good habits, and keep credit cards open for a long time, even if you rarely use them. It is best to use a number of credit cards at least once or twice a year, even if you only use a few the majority of the time. If you set up a utility or automatic bill to be paid, and then set that credit to be paid automatically, you will improve this score over time.  In general, if you don’t have an exceptional credit score, don’t close a credit card, even if you rarely or hardly ever use the credit card.

10% new credit open: Applying for a loan or credit card triggers a process known as a hard inquiry, in which the lender requests your credit score for use in its lending decision. Hard inquiries typically lower your credit score by a few points, but as long as you continue to pay your bills on time, scores typically rebound within a few months.

10% types of credit you have: Credit scores reflect your total outstanding debt and the types of credit you use. The FICO® Score tends to favor a variety of loan types, including both installment credit (loans with fixed monthly payments) and revolving credit (like credit cards, with variable payments and the ability to carry a balance). Credit mix can influence up to 10% of your FICO® Score.

Changes in your score: It is not uncommon for your credit score to vary every month, due to changes in your outstanding balances, as well as if you applied for a new loan or credit card. However, your credit score should not move dramatically from month to month, unless something caused it to change significantly, such as a missed payment or payments, or multiple credit requests.

Strategies for those in their 20s: For younger people, particularly those in their 20s, establishing credit and a good credit score is even more important. Since 2010, you cannot get a credit card on your own if you don’t have an income until age 21.

Parents can, and should, have their children become authorized users of one or two credit cards that are actually in the parents’ name, if they feel their children are financially responsible. This could be done for high schoolers, and especially college age students, who could then pay the balances each month. The parents, as the account holders, remain legally responsible for all charges, but the children benefit from being authorized users and begin to build credit history. This will be valuable after they turn 21 and can apply for credit on their own.

Chase is now offering credit cards to college age students, with very low credit limits, which can further help students to establish a credit history, and hopefully good habits. This program is only available to Chase customers. However, it has an interest rate of 16.99%, so we don’t recommend this credit card unless you are sure it will be paid off every month. If college aged students choose to apply for this credit card, you could earn a credit limit increase after making 5 monthly payments on time within 10 months from account opening when meeting the credit criteria. You will not have to pay an annual fee and you will have access to Credit JourneySM. With Credit Journey SM you will have unlimited access to your credit score.

Once someone turns 21, they should develop a strategy of gradually applying for credit cards over a period of years, such as a new card every 6 months. If they are able to pay the balance off each month, they should focus on getting a card that provides a good cash back for most purchases (like 1.5%) from a major financial institution, such as Chase, Capital One, Bank of America or Discover. They should be strategic and selective, as discussed above, as applying for too many cards in a short period of time will result in a reduced credit score and possible rejections.

The illogic of credit scores: Your income, assets, length of employment have nothing to do with your credit score. Even though they would appear to be key to one’s ability to pay off debt, which is the purpose and supposed predictive value of a credit score, they are not any part of the calculation. To us, this seems illogical, but it is reality.

  • For example, a 30 year old earning $60,000, with minimal savings or investments, with 5-7 credit cards that are all 3-6 years old, each with low utilization rates and no late payments, and a car loan, may have an excellent credit score.
  • Someone who is 60, who earns $200,000 a year, but has only two credit cards, one which they never use and the other is used a lot, a mortgage but no car loan and substantial investments, may have a much lower credit score than the 30 year old above, due to how credit scores are determined.
  • This 60 year old may not have as high of a credit score, but the credit score could be raised if the suggestions above were followed.

There are also other applications available to you to view your credit scores. One of those options is Credit Karma. Through Credit Karma you will be able to view your credit score and reports. Credit Karma does not provide you with a FICO credit score. However, it uses Transunion and Equifax to pull your credit scores, but you will need create an account first through before accessing your credit score. Credit Karma also monitors your credit reports and will send you an alert via the email on file when there is a change on your reports. You could get additional useful information such as thoughts on how you can improve and what affects your scores. Your credit report and credit score should always be readily accessible through logging into or available through the Credit Karma app.

As your overall investment strategy is important to your current lifestyle or future retirement plans, your credit score is also an important part of your financial well-being. If you work to improve your credit score this should help you to qualify for loans when you need them. Most importantly, using your credit in a responsible, consistent manner and earning good credit scores could help build wealth and allow you to do business with companies. If you don’t know how credit works, this could get you in trouble.

If you have any questions, need direction with your credit, or would like to discuss this further, please contact our office.

For additional information concerning your annual credit report or travel rewards and credit cards, please see the links below to past blog posts that we believe could be beneficial to you.


High yield dividend stocks: good or bad?

Blog post #411

With interest rates so low, clients and others have asked us about buying high yielding dividend stocks.

Their logic goes….wouldn’t it be a good idea to buy a stock that has a dividend yield of 4-5%, since this pays more than the interest rate on a CD? They could earn more income by owning the stock and receiving the dividend payments.

This sounds like a good idea, but, it does not always work out so well. The primary risk in this strategy is that the price of the stock could drop, which negates some or all of the higher dividend yield benefit. The other risk is that the company may not be able to continue paying the dividend at the same rate in the future…that the company would be forced to cut their dividend.

Currently, the companies in the S&P 500 Index, the largest companies based in the US, pay a dividend yield of around 1.85%. For example, if a company pays a dividend of $2.00 per share and has a stock price of $100, its dividend yield would be 2%. This would be pretty typical of a large US company in today’s market. If a stock is paying dividend yield that is far higher than 2%, say 4% or more, we would consider that to be a high yielding dividend stock.

Some examples of currently high yielding dividend stocks are: IBM, 4.47%; ATT, 5.27%; ExxonMobil, 4.83%; Verizon, 4.12%; Ford, 6.37%; Wells Fargo, 4.22%; Macy’s 8.83%.**

Examples of other companies with lower dividend yields would be: Apple, 1.42%; Wal-Mart, 1.83%; Microsoft 1.34%; and Costco, .88%.**

We are focused on your total return when we manage your money. This means we are focused on what happens to your principal (the amount of money you have invested and what happens to that balance over time), as well as the income (interest and dividends) which are generated from that money.

If you are focused primarily on the dividend or interest yield, you are not focusing on the total return.

Stocks that have a very high dividend yield have a high yield for reasons which are usually not good. You should view high dividend yielding stocks with the following guideline: risk equals reward. If a stock has a very high dividend yield, it usually means there is extra risk involved. The higher the dividend yield, the more cautious you should be about the stock. Remember this!

ABC stock may have had a 2% yield and a $100 share price. But if the stock price drops significantly, say to $50 per share, and still pays $2 per share a year in dividends, ABC Company now has a 4% dividend yield ($2 dividend/$50 per share stock price). This stock just became a high paying dividend stock.

This scenario is the usual case, as other than utility companies and REITs (real estate investment trusts), most companies don’t strive to pay 4-6%, or more, as a dividend yield. They get into that position usually because their stock price has dropped. The company has run into problems. Strong competition. Falling earnings and revenue. Debt problems. And their future earning forecasts would typically be going down.

For companies like this, which pay a far higher dividend yield than the norm, you should also consider the potential that the dividend may not be sustainable in the future. One prime example of this is GE, which due to serious financial problems had to drastically cut their dividend from 96 cents per year in 2017 (which was a 4% dividend yield at the time in September, 2017) to 4 cents per share per year in late 2018. GE stock went from $50 per share on January 1, 2000 to range over the last six months of around $9-11 per share. GE’s dividend yield is now approximately .44%. This is a very low dividend yield, but it is not a positive sign, as the company cannot afford to pay out more in dividends, due to the major business issues it faces.

While high yielding dividend stocks can pay good income, their stock performance may not be as good over the longer term, especially when compared to other indices or benchmarks. This is why we emphasize focusing on total return (the growth of your overall invested money), and not only on the dividend yield.

To provide an illustration, we researched many large companies with currently high dividend yields and compared their stock performance over the past 10 years. As the chart below shows, the performance of these high dividend yielding stocks were dramatically less than the performance of a globally diversified stock portfolio, such as we recommend.

The chart below shows how 3 of these stocks, IBM, ExxonMobil and ATT, performed over the last 10 years (from September 14, 2009 – September 11,2019), as compared to a globally diversified asset class mutual fund, DFA Global Equity Portfolio,*** which is invested in 70% US stocks, 30% International and Emerging Market stocks, with exposure to small companies and real estate stocks, with significant exposure to value stocks.

We clearly recognize that this is an illustration of only three companies, so it is not intended to be considered as definitive financial research. There may be high yielding dividend stocks which outperformed various benchmarks over the past 10 years. The point we are making is that by owning a globally diversified portfolio of asset class funds, we strive to provide you with better overall returns, than by just focusing on stocks with greater dividend yields.

As we reviewed a number of companies in researching this blog post, we noted the same pattern over and over. Companies that have high dividend yields now, had poor stock performance over the past 5-10 years. We do not know how these stocks will perform in the future, but we would not recommend that you build a portfolio of a few of these stocks as the core, significant portion of your investment portfolio.

All stocks come with risk. Stocks with much higher than average dividend yields come with much greater risk to your principal, your investment capital. We don’t think that is a risk that is worthwhile for the core part of your investment portfolio.

We hope that this is helpful and informative to you and your family. Sometimes our role is to provide you with guidance, and other times it is to help prevent you from making financial mistakes.

If you are considering purchasing high yielding dividend stocks, maybe you should talk to us first.


** Dividend yields as of September 11,2019, per Yahoo Finance.

***DFA Global Equity is presented to be representative of WWM’s globally diversified investment portfolio. It is not a representation of any client’s specific portfolio and is presented only for illustrative purposes. The chart does not reflect WWM’s annual investment advisory fee, but that would not materially change the outcome which the chart shows. For more information on DFA Global Equity, please see Dimensional Investments, ticker symbol DGEIX.


Dealing with Change

Blog post #410

Change can take many forms.

Change can be positive.

Change can be negative.

Change can be something you have control over, such as a decision you make to buy a new house.

Change can be something you have no control over, such as the death of a loved one, changes in the tax law, or stock market increases or decreases.

One of our roles as your financial advisor is to help you cope with change, and to help you make better decisions with many of the issues that usually accompany change.

Along with change usually comes choices and decisions. Often, during times of change, you are faced with many decisions which need to be made. The decisions can be overwhelming, and they frequently need to be made quickly. You benefit from having a financial advisory firm that can and does help you handle these changes and decisions.

As financial advisors, we are always dealing with change, as the financial markets never stay the same. We make decisions and provide advice; we deal with uncertainty and strive to be rational.

However, changes that affect your life frequently begin as some type of personal change. You may be going through a life transition, job change or some other sudden event, whether it is good or bad. And in addition to whatever the change is, it is often accompanied by decisions of all types, forms and paperwork….and usually when you are already overwhelmed with many issues, there may be financial decisions that are related to the change. It’s when change affects you and your family that we can often be the most helpful.

Over recent weeks, we have helped numerous clients deal with all types of decisions that come with change.

We have assisted clients with decisions about moving, housing transactions and relocating.

We have helped, and will continue to help, clients who are dealing with changes caused by new or ongoing health problems in their family. This may require emotional support, answers to questions, and retirement planning earlier than expected.

The financial markets have brought changes to people’s assets, so they have met with us to review if they are on target toward their financial goals, as well as to review if their asset allocation is now appropriate for their family.

Due to the sudden drop in interest rates, we have advised numerous clients with issues regarding mortgages and refinancing. These can be confusing and overwhelming and we have helped clients sort out the process.

We are regularly helping clients and their families deal with the changes caused by aging.

We have provided advice to clients regarding long term care insurance, when to begin taking Social Security, as well as their employer-based retirement accounts such as 401(k)s and rollovers.

We have helped clients deal with the death of parents or loved ones.  We have helped clients handle the settling of their parents’ estates and the inheritances which they have received.

We can be a source of stability, who our clients know they can rely on to help them in times of need, as well as with decisions brought upon by good events in their lives.

When you are faced with changes and decisions, we are here for you.  Let us know how we can help you.

If you have friends or other family members who are experiencing some type of change, and could benefit from our advice, please put them in contact with us.