Investing for Long Run

Blog post #461

We invest for the long run. For long-term financial goals like college and your retirement.

Think of your investment horizon as nearing and then crossing a bridge, such as the Mackinaw Bridge or Golden Gate Bridge.

The investment horizon while you are saving is the period while you drive towards the bridge.

When your kids enter college or you near/begin retirement are comparable to after you have crossed the bridge.

These are serious financial goals and we make our investment recommendations accordingly. We don’t take unnecessary risks. We diversify. We recommend building a globally diversified portfolio that contains thousands of stocks, across industry sectors and geographic regions. We invest in large and small companies, in the US and across the globe.

As we build your portfolio, if you consider it like driving over the bridge, we think it is better to drive in the middle (having a broadly diversified portfolio) than riding the edges of the bridge with no guardrails (owning few stocks or very risky stocks concentrated in one sector or region).*


Why do we structure our portfolios in this diversified manner? Wouldn’t it be better to just load up on high tech stocks? Because the less diversified you are, the closer you may get to the edge of the bridge. Sometimes, this can mean higher returns, but it also may mean greater losses. Owning huge positions in individual stocks can lead to large losses which are unnecessary and hard to recover from.

With a globally diversified portfolio, you will have fewer reasons to worry about poor returns from a single stock or asset class. This does not mean that we recommend 50% or more outside of the US. We generally recommend holding 20-30% of your stocks outside of the US, depending on your personal circumstances. Because there have been many time periods in the past when non-US (International stocks) outperform US stocks for long periods of time, we feel this is prudent in the long-term. And that will keep you in the center of your financial road.

As you approach a bridge, there is frequently a backup. You are stuck in traffic. You may want to change lanes to get in the best toll booth lane. But once you switch lanes, your new lane becomes the slow lane. If you keep changing lanes, you will usually get more and more frustrated.

Investors do similar things. They can be impatient. They may want to get out of the stock market when the road gets scary. They may want to eliminate certain sectors of the stock market from their portfolio (such as small value and International stocks) because they are underperforming other asset classes, even though long-term historical data shows that they outperform or add important diversification benefits over long periods of time.

While we do not have a clear roadmap of the future, we feel that being disciplined and relying on historical financial evidence is better than guessing and continuously changing lanes.

We provide you with objective, rational advice. We do not give in to panic or make hasty, emotional decisions.

For most of us, whether crossing a bridge or investing, we want to follow a safer and prudent path. Your future is too important to risk.

Talk to us. We want to listen. We want to assist you, your family members and friends.


Source:  *27 Principles Every Investor Should Know, by Steven J. Atkinson (Illustrations by Dan Roam) July 2019

It’s Hard to Stay on Top

Blog post #460

The Covid outbreak has caused each of us to adapt and change.

Adapting and dealing with change is not a new concept. In order to succeed over a long time period, organizations and companies must adapt and change to remain on top.

Very little stays constant. We know that change happens over time. Sometimes change is gradual and sometimes it’s sudden. Change can happen for many reasons.

Companies that are successful over long periods must be able to adapt and change, or they will be less successful or less profitable or shrink and possibly even go out of business.

The chart below shows the top 10 US stocks based on market capitalization by decade from 1930 to 2020. The data is based on their overall stock market value at the end of the calendar year, preceding the decade. For example, for 2020, Apple was the largest stock based on market cap as of December 31, 2019 (see the far right column, at the top).

Suggestion….if you can look at this chart on a device where you can enlarge it, the chart is much more informative.

Key takeaway: While some companies remained in the top 10 list for decades, this chart shows how much change there has been over the long term and how hard it is to remain in the top 10.

Based on this past evidence, it is hard to know with confidence if a top 10 stock today will be a top 10 stock in 2030 or 2040.

Exhibit 2, from DFA Article, “Large and In Charge? Giant Firms atop Market Is Nothing New”.

Some observations from this chart:

  1. From 2000, only 2 stocks that were in the top 10 are still in the top 10 as of the beginning of 2020. That is a significant amount of change in 20 short years. What 2 companies do you think these are? Think about this.  The answer is at the bottom.
  2. Apple was not in the top 10 until 2010. It is now #1.
  3. Of the top 10 in 2020, 5 of those companies were not in the top 10 at the beginning of 2010. That is an amazing amount of change in 10 years. And since the beginning of the year, JPMorgan would be out of the top 10 today, and either Tesla or Walmart would be #10. Tesla was far from the top 10 at the beginning of the year.
  4. What decade did Amazon begin in the top 10? The answer is at the bottom.
  5. What stock was in the top 10 every decade from 1930 through 2010, was #2 at 2000, but dropped out after 2010 and is now only about 110-120th largest as of June 30, 2020? General Electric.
  6. The chart by decade shows how the economy and world have changed significantly.
    • Energy stocks were 5 of the top 10 in 1980. There are no energy stocks in the top 10 now.
    • There were 5 technology stocks in 2000 (Microsoft, Cisco, Intel, Lucent and IBM) and 5 technology stocks on the list at the beginning of 2020. However, only Microsoft remains on the list from 2000 to 2020. And none of the other 4 stocks have done well in the 20 years since 2000, compared to the S&P 500 index.
      • Today’s leaders may not be the leader’s a decade or two from now.
      • To show how hard change is, Cisco was #3 in 2000. Its current price is still lower than it was at December 31, 1999. In 2007, Cisco purchased a company called WebEx, a web conferencing start-up. In 2011, a VP of Engineering pitched an idea for a smartphone-friendly conferencing system to Cisco executives. They rejected the idea and Eric Yuan left to establish Zoom Video Communications, which is now worth over $100 billion. Cisco is worth about $174 billion but could be worth so much more.
    • Since 1990, it appears that change is even more frequent, or that is even harder to remain in the top 10 list. At the beginning of each decade, these are the number of companies that appear on the list for the first or only time:
      • 1990:  4 companies
      • 2000:  5 companies
      • 2010:  1 company
      • 2020:  5 companies

While many of the current top stocks have performed extremely well in recent years, you should remember that expectations about future operational performance of a company should already be reflected in it current price. Positive developments that occur in the future that exceed current expectations (such as Covid’s positive impact so far on Amazon and Walmart) may lead to further gains in its stock price. However, unexpected changes are not predictable.

Historical data on the performance of the top 10 stocks following the year in which they joined the list of the 10 largest firms shows much less positive results. As Exhibit 3 below shows, these stocks outperformed the total stock market (this is not compared to the S&P 500) by 0.7% per year in the subsequent 3-year period. Over the subsequent 5- and 10-year periods, these stocks underperformed the total stock market on average by greater than 1% per year. This data was compiled for each calendar year between 1927-2019, not just by decade in the prior chart.



The only constant is change and this clearly applies to the dominant stocks in the market. It remains impossible to systematically predict which large companies will outperform the stock market and which will underperform it. This reminds us of the importance of having a broadly diversified portfolio that provides exposure to many companies and industry sectors.

Answers from above:

1. Microsoft (#1 in 2000, and #2 at the beginning of 2020) and Walmart (#4 in 2000 and #9 at the beginning of 2020).
4. Amazon was not in the top 10 in 2000 or in 2010. The first decade that Amazon appears in the top 10 was in 2020, ranking #3 at the beginning of 2020.



What is going on with DJIA and S&P 500?

Blog post #459

We believe it is important that you understand how the S&P 500 Index works, the concentration that exists in the technology sector and among the top 5-10 stocks. The S&P 500 has not been this concentrated in any one sector in over 70 years. While the overall Index was up about 5% year to date through July 31, 2020 due to the performance of the top 5 stocks, the remaining 495 stocks were down about (6%) for 2020.

The S&P 500 Index is a widely tracked index, composed of generally the 500 largest public companies which are based in the US. The stocks in the Index change over time, as companies are bought, merge, grow and shrink. A company must be profitable to be added to the Index.

The S&P 500 Index has frequently been concentrated in the past but has become very concentrated in just the technology sector in recent years. The top 5 stocks comprise over 22% of the Index as of July 31, 2020. That is now likely to be 25% or more.  Information technology as a sector is now between 25% – 30% of the S&P 500 Index, as the chart below shows:


The S&P 500 is a market-weighted index, meaning that the market value (share price x number of shares outstanding) of the largest companies have the greatest impact on the index’ performance.

As of July 31, 2020, the following are the top S&P 500 stocks and their respective weightings:


Apple 6.40%
Microsoft 5.75%
Amazon 4.90%
Facebook 2.26%
Alphabet/Google 3.26% (A and C shares)


Apple, Microsoft and Amazon, because of their huge market valuation, have a much, much greater impact on the rise and fall of the Index than other companies. Apple’s price change has almost 6X greater impact than Visa, the 10th largest stock, (1.18% as of 7/31/20).

Two examples of large companies, but with much less impact on the Index’ performance would be:

  • Netflix, 22nd largest, but only a 0.781% weighting
  • Costco, 41st largest, but only a 0.522% weighting (as of 6/30/20).

It is widely believed that Tesla will be added to the S&P 500 in the near future. This may have a dramatic impact on the performance of the S&P 500 Index. To be eligible to be added to the S&P 500, a company must be profitable for four straight quarters. Tesla this reached profitability as of June 30th, primarily due to the sale of energy credits, not its core car making business.

Tesla has a market valuation of $400 billion, which exceeds that of Walmart, which is valued at $370 billion. It is rare that a company with a market cap as high as Tesla would initially be added to the S&P 500. Normally, a company with such a massive market cap would have been profitable much earlier and added to the Index before it became so large.

One measure of a company’s relative price valuation is called the P/E ratio, or Price/Earnings ratio. Generally, the higher the number, the more future growth is expected. A very high PE ratio is also viewed as a sign of greater risk. The overall S&P 500 Index currently has a PE ratio of around 24.Tesla currently has a PE ratio of greater than 1,100. Walmart has a PE ratio of 21. 

If Tesla is added to the S&P 500, it would be in the top 10-15 stocks. Tesla’s market cap of $400 billion would be just below the $461 billion market valuation of Visa (both values as of 8/26/20), which is the 10th largest company as of 7/31/20, at 1.18% of the Index. Thus, Tesla would carry a lot of weight in the Index, and it has been a very volatile stock. Tesla has experienced an incredible rise since June 2019. It has also had other periods of huge and fast declines. If it is added to the S&P 500 Index, Tesla would likely add a lot of volatility to this widely tracked index. 

I wrote a post in January 2018, explaining that only 5 stocks caused over 50% of the 2017 DJIA increase (Boeing, Caterpillar, UnitedHealth Group, 3M Co and The Home Depot). Please see this post, 5,000, 30, 5 and 2, for further information. The impact of the top 5 stocks on the S&P 500 Index and this example of the DJIA are why we stress that our broadly diversified portfolios will often act differently than these major market indices. We believe that broad diversification, and not just holding large growth companies, are important in the long-term.

Our goal for nearly all of our clients is to help you reach your financial goals, while taking an appropriate manner of risk. Thus, we feel it is in your best financial interest to own the S&P 500, but only as a portion of your overall portfolio. Historically, over the long term, a globally diversified portfolio has outperformed the S&P 500. This will certainly not be the case every year, or possibly for years at a time. And that is why investing requires discipline and an understanding of how markets and indices work.

Major impact: It is important to note that over $11 trillion dollars track the S&P 500 Index as of the end of 2019. Thus, changes to its composition and the weightings of the top stocks have major market impacts. While the DJIA is widely cited by the press, only about $31 billion in assets actually track the Dow, so the changes discussed below don’t lead to an immediate shift in investor behavior.

Apple stock split causing changes to the Dow

The Dow Jones Industrial Average (DJIA) is quite different than the S&P 500. The DJIA consists of only 30 stocks. The DJIA index is calculated in an unusual method, which emphasizes the actual price change of the highest priced stocks in the index. The Dow is a price-weighted index, meaning higher-priced stocks contribute more points to the index’s daily moves. It is not based on the percentage change of each company and the companies are not equally weighted. 

Apple stock is around $500 per share. Apple is currently the highest price stock of the 30 Dow components, meaning that Apple’s price changes exert the most influence on the DJIA. However, next Monday Apple stock is being split of 4 to 1. This means that each Apple shareholder will receive 3 additional shares and the price will drop to around $125 per share, if the price does not change.

Thus, because of its price per share reduction, Apple will go from being the largest DJIA influencer to middle of the pack, as its approximate $125 share price would be in the middle of the 30 stocks in the Dow. The stock split will have no impact on Apple’s large influence on the S&P 500 Index, as the market capitalization of Apple is not affected by the stock split. United Health Group ($308 per share) will now be the highest price stock in the Dow, and its biggest influencer.

As a result of the Apple stock split, and the change to Apple’s stock price, Dow Jones is adding and deleting stocks to the DJIA, and will modify the divisor that it uses to calculate the DJIA, effective Monday August 31. The changes and prices of each, as of end of business day, 8/26/20:

Being Added to DJIA: $272 (increase from $216 a few days ago), technology
Amgen $250, biopharmaceutical
Honeywell $165, industrial

Being Deleted to DJIA:

Exxon $40, energy
Pfizer $38, pharmaceutical
Raytheon Technologies $61, defense and industrial

S&P Dow Jones Indices, which manages the benchmark, is adding Salesforce to add another technology component, as Apple’s influence will be less in the future. They are swapping two large pharmaceutical companies, likely to get a faster growing company and one with a higher price, in Amgen. Each company being added have high stock prices, so each will have significant impact on its daily movements.  Actually, each newly added company will have more influence on the Dow than Apple will, for now.

Deleting Exxon from the DJIA tracks the reduction of the energy sector in the broader economy. Exxon was the longest lasting member of the DJIA, first added in 1928. This leaves Chevron as the only energy company in the Dow, with just 2.1% of the price-weighted index. At the end of 2011, energy was 12% of the S&P 500. Energy is now only about 2.5% of the S&P 500, the smallest of the 11 industry sectors. Exxon and Raytheon were down at least 30% on the year, so this is a way to potentially add “better performers” to the DJIA.

The Dow and S&P 500 Index, though very different based on composition, number of components and how each is calculated, have behaved similarly over long periods of time. This year has been different, as the S&P 500 was up over 6% for the year as of a few days ago, while the DJIA was down about (1%) for 2020.

We feel that one of our roles is to provide you with helpful and timely information, so you can understand certain financial matters. As the S&P 500 Index and DJIA are mentioned in the press often, we thought this explanation would be beneficial, as well as inform you how concentrated the S&P 500 is in just a handful of technology stocks.


1. “Salesforce, Amgen, Honeywell to Join Dow Jones Industrial Average“, The Wall Street Journal, by: Michael Wursthorn, August 24, 2020
2. “Exxon’s Departure From Dow Highlights Market’s Retreat From Energy Bets“, The Wall Street Journal, by: Karen Langley, August 25, 2020

Beyond Investing….You Get More

Blog post #458

You must make many financial decisions during your life.

Some of these decisions are straightforward.

But many financial decisions or issues can be complex. Often, you may lack adequate information or the specialized skills necessary to make a fully informed decision. There is uncertainty. Laws changes. The financial markets and the world changes.

At what age should you begin to collect Social Security benefits? 62? 65 or 66? Or wait until age 70?

For many decisions and issues, there may not be one, perfect answer. Reaching a decision may depend on various facts, circumstances, judgments and assumptions.

In many cases, these types of decisions can be overwhelming. What you desire to be a rational, logical decision may really be partly an emotional decision. Or it may be an emotional issue, but you want to make a rational decision.

Should you pay off your mortgage early? Should you refinance from a 30-year mortgage to a 15-year mortgage?

When you first became a client, or if you are a prospective client, you most likely come to our firm because you want investment guidance and advice. And we will provide you with that.

Over time, most of our clients come to realize that we can provide you with far more than just investing advice. We help you find solutions to your other financially related issues, questions and concerns.

Our relationship usually begins with planning around investments. What is an appropriate allocation to stocks, based on your family’s goals and needs? Do you need to take more or less risk to meet your various goals? How should your investments be structured for the short and long term?

But at some point in the future…..questions arise…….

Do you need to have life insurance? What kind? Whole life or term life insurance? How much is necessary and what is most cost effective?

Later in life, you may ask if life insurance is even still necessary.

One of the most satisfying aspects of the relationships we have with our clients is to assist them with all these financially related issues. We have decades of financial experience, which you benefit from. Brad and Keith are both CPAs, with over 70 years of combined financially related client experiences. Our Associate Wealth Advisor, Bradford Newsome, is a Certified Financial Planner with over 10 years of helping clients with all kinds of financial matters. We also have resources and access to top financial planning experts within our back-office firm and others, to help work through these issues.

We want to help you. We strive to provide you with much more than just investment advice.

Should you have a long-term care policy? Does it make sense for you and your family?

What is the best way to fund a college education?

How should we save for retirement? How much do we need to save? How do we pick between all the 401(k) choices?

One of the most important roles that we can provide as your advisor is to help you deal with these issues. We can help you with matters which are frequently emotional or complex, so that you can make decisions more rationally.

Throughout our relationship, we encourage you to talk to us about financial issues that are important to you and your family, beyond just your investments.

We provide you with guidance, so you can meet your goals, deal with uncertainty and have a greater sense of comfort and security. We can provide you with guidance, to help you make better decisions. We can teach and explain things to you in an understandable manner. We can save you time and help you to be more organized. We can help you deal with financial complexity, so you can focus on other things that matter to you.

It all starts with a conversation and a good relationship. We are ready to talk with you.

The Importance of Knowing What You Invest In….and Why

Blog post #457

We are very particular about what we invest in and recommend on your behalf, for good reason. Your financial future depends on these decisions.

We developed a philosophy when we began our firm in 2003. We still stick to that same general set of principles and criteria today. We feel that our philosophy has withstood the test of time, through some good as well as some very challenging times.

We utilize low cost investments, not products. We do not use investments that charge commissions or have front or back end loads. 

We know that fees matter. Generally, the lower the fees, the better your returns should be. There is extensive research that shows that in mutual funds, better long-term returns are correlated with lower costs. Thus, we strive to utilize funds that have good long-term investment records, as well as much lower costs (internal expense ratios) than industry averages.

We assume you want your doctor to give you the best medical advice possible, in an unbiased manner. You would not want to get your medical advice from a pharmaceutical sales rep, who can only sell a drug that their firm manufactures. The same goes with your financial advice. You want independent, unbiased advice that is in your best interest.

We try to provide advice and develop an investment plan that solves your needs. We are only compensated by the advisory fee that you pay us. We do not get any additional compensation from any investment that is in your portfolio. We are fiduciaries. This means that we must always put your interests ahead of ours.

We invest in stock and bond mutual funds or ETFs that are readily liquid, so you can access your money when you want or need it. We do not invest in products or alternative investments that restrict your liquidity for a period of years or you can only withdrawal a certain percentage of your assets each quarter or year. We feel that for nearly all our clients, these illiquid investments are not in your best interest. We want you to be confident and comfortable that you can get access to your money when you want to.

We want to be able to understand what we recommend….and be able to explain it very clearly to you, so you can also understand it. We want the funds that we recommend to you to invest in what they say they will and stick to that.  As we design your portfolio, we want the investments that we use to adhere to their stated objectives and asset class categories.

The mutual funds and ETFs that we use and recommend adhere to defined strategies, that are understandable. For example, if we recommend a US Small Cap mutual fund, that means that the fund will own the smallest companies that are publicly traded in the US. If smaller companies are underperforming larger companies in the US, this fund should be underperforming a US Large Cap fund. We can understand this and we can explain it to you. It is logical and rationale.

If we invest in a US Small Cap Value fund, we do not want a significant portion of that fund to be invested in large or mid-size growth companies, as the fund would then have different risk and return expectations.

We do not believe in utilizing alternative investments and hedge funds, because they do not meet many of these criteria. They are usually quite expensive, meaning their internal costs are usually way above 1% or 2% annually.  For the greater costs, we cannot determine in advance that their returns will make this higher cost beneficial.  The funds and ETFs that we recommend have expense ratios that are far below 1%, almost always well below 0.5% annually.

Alternatives and hedge funds can be like black boxes, as they may not provide current information on what they are invested in.  Their holdings and strategies may change frequently, so we cannot understand what they are doing.  Some alternatives use margin or leverage, which can significantly increase the risk of the investment.  We do not invest in funds that use margin in their ordinary course of operations.

After evaluating many alternative investments, we have chosen not to recommend any as of now. We do not believe that the stated goals and objectives (and their actual performance) provide you, our clients, with better expected and actual returns, after their fees. While they strive to provide greater diversification benefits, we are comfortable that we can provide you with broadly diversified stock and fixed income portfolios in a more effective and transparent manner.

We also have specific and disciplined criteria for purchasing and holding individual fixed income securities. Our goal for the fixed income portion of your portfolio is to provide safety and return of your principal, with whatever interest rate can be safely obtained for a given length of maturity. We do not believe in reaching for extra yield, for riskier bonds. We avoid certain sectors of corporate or municipal bonds, which evidence shows have greater default risk. We only purchase investment grade individual bonds or bond funds. For municipal investments, they must be very high quality and only in certain sectors and states.

We hope that understanding what we invest in, and what we avoid, makes you feel more confident and comfortable with our long-term investment strategy and philosophy.

Talk to us. We want to help you, and your family, deal with change, today and tomorrow.

Where do we go from here?

Blog post #456

It’s early August, 2020. In the US, this marks the beginning of the 6th month of dealing with Covid-19, which really started to impact the US in March.

What are we thinking about in terms of investing and financial planning now, and going forward?

What are the lessons of the past 6 months and how should we apply them moving forward?

Markets react quickly and unexpectedly: Stock markets in the US and globally reacted quickly as countries shut down due to the pandemic. Then, unexpectedly, beginning in late March, markets recovered strongly.  Investors looked at the longer term view of recovery and how companies can adapt. However, companies and sectors that continue to be greatly affected by Covid-related challenges are still far off their pre-Covid price levels.

Stick to your asset allocation and financial plan: The rapid recovery of many stocks re-emphasizes why it is so difficult to time and predict the stock market. This is why we are strong believers in developing a long-term financial plan and adhering to that asset allocation.

We work with you to develop a financial plan, based on your goals, your need to take risk and your time frame. We don’t try to time the markets and we don’t base our advice on guesses and predictions.

There is still a long way to go: While there has been great progress in Covid treatments and initial vaccine development, a return to pre-Covid life is still likely to be many months, if not a year or two or even more into the future.

There is no way to know how long vaccine trials will take. We don’t know how many of the potential vaccines will be successful. Even when some are determined to be viable, distribution and receiving vaccines will take time, likely much longer than many now realize. And no one knows how effective any new vaccines will be.

Because of all these medical unknowns, we think it is important for each of us to be realistic and develop a long-term mentality related to this new Covid environment. We need to be resilient. How can you better adjust and adapt? As Covid issues will likely be with us for awhile, are there additional things that you can or should do, to help you and your family cope with this new world?

Is there anything you want to discuss with us, to help you cope?

How your investments will adapt: We focus on developing a very broadly diversified investment portfolio for you, as part of your investment plan. Even more today, we think being very diversified is vital and beneficial.

Your portfolio has growth and value companies, as well as large and small companies. We recommend investments both in the US and Internationally. Diversification, both in stocks and your fixed income holdings, has many benefits. The most important benefit is that you should not be materially impacted by any one industry or company.

As Covid continues in the future, we do not know which countries or companies may be more successful than others. Thus, broadly diversify. As my wife asked the other night during a walk, what will happen to stocks and companies that have hugely benefitted from Covid? Won’t they go down at some point? Will they be considered way overvalued in the future, as Covid is dealt with? We don’t know the answers, which is why a broadly diversified portfolio holds all types of companies, in varying amounts.

No company, industry or geographic region should cause a decline in your retirement lifestyle or your ability to reach your financial goals. Broad diversification provides this.

We want to stress the importance of thinking long-term, even though that means different things, depending on your age.

If you are in your 20s, 30s, 40s, or 50s, you have a very long life expectancy. You should not be focused on what is happening in the markets now. You should primarily focus on saving and investing. That is what I have done and will continue to do, regardless of what the markets are doing. I keep investing, every month, into the same funds and investments we recommend to our clients.

You need to have a positive mental attitude that our country and companies, both in the US and globally, will continue to evolve, grow, adapt and succeed. I believe that years and decades from now, the earnings of public companies will be greater than today, as the world and economies expand. I don’t know which stocks will be the best performers decades from now, which is why we believe in asset class investing as a core principle.

We are concerned about the impact of Covid on small businesses, industries and people that have been greatly affected by Covid, but that does not influence the long-term investment strategy of either our firm or me personally.

As you near or are in retirement, we stress the concept of a “fixed income foundation.” By this we mean that our goal for you is to have many years of your annual withdrawal needs in various fixed income investments, such as bonds, CDs, bond funds or cash.

For example, if you have $1 million of your $2 million portfolio in fixed income investments, and you withdraw $50,000 annually, you have a fixed income foundation of 20 years worth of withdrawals ($1 million divided by $50,000 = 20) and that assumes no interest on the fixed income.

If you have have many years of a fixed income foundation, then mentally we hope that you can focus on that, as your standard of living is not directly impacted by short term declines in the stock market.

Remember, regardless of how old you are, declines in a broadly diversified stock portfolio are temporary, and eventually give way to a more permanent uptrend in the growth of stock prices.

The harder concept for people to grasp, due to human nature, is that lower stock prices mean better value for stocks going forward. It is like a sale at a store (or online!). The store sales seem like a good bargain. Try to think of temporary stock declines like a sale at a store.

We see that periods of market turbulence or stock price declines cause great companies to react, adapt, adjust and add value for the long term. The companies that will succeed will figure out a way to do so, however they are able.

This is why we invest in all types of companies, because you can’t predict who and how they will succeed, and which will have better future stock market returns. For example, while growth companies have excelled, many companies that are now considered value companies trade at a fraction of growth companies’ valuations. Many of today’s cheap companies will succeed, and they will likely have strong stock market returns when we look back, 5 or 10 years from now.

Plan for the future.

Be resilient.

Be positive.

Wear a mask.

Silver lining: Refi Opportunity

Blog post #455

One of the silver linings of the pandemic outbreak is the opportunity to refinance your mortgage or other loans.

You should investigate refinancing and act on this soon. The opportunity for this significant financial benefit should not be ignored.

Key takeaways:

  • If your current mortgage is at an interest rate of 3.5% or higher, and you expect to be in your current house for more than a few years, you should consider refinancing your mortgage.
  • This can be a very individualized decision and there are many options available. Please contact us to discuss refinancing and the impact on your overall situation.
  • In general, we have long been advocates for not pre-paying mortgages, as you should be able to earn more over the long-term with a diversified portfolio than the after-tax cost of a mortgage.
    • However, given the very low rate of interest that can be earned on fixed income investments and that these historically low mortgage interest rates make 15-year mortgages more realistic for more people, we think 15-year mortgages make more sense now than they were in the past.
  • With the ability to borrow at such low interest rates, regardless of whether it’s for a 15 or 30 year mortgage, we still do not think paying off your mortgage balance in full makes sense for most people, especially if you are younger than 60-70.
    • When you pay off your mortgage in full, you are using significant capital that will no longer have the potential to grow for you. While the stock market is always volatile in the short run, in the long run the stock market has outperformed these interest rate levels during almost all 10-20 year time periods. We feel that paying off a significant mortgage all at once, unless you have a vast portfolio, is not the right strategy for most people. 

Current rates: Interest rates vary based on your specific situation, but 30-year mortgage interest rates are just above 3% with no points and 15-20 year rates are now less than 3%. You can pay additional fees, called points (usually .25%-1% of the loan amount), to “buy down” the interest rate to be even lower. I was quoted a 15-year mortgage with 1 point for 2.5%.

  • Buying down the interest rate may make sense, but the payback period may take around 5 years if you pay a full point. Thus, paying additional points should only be considered if you are quite confident that you will be staying in that house for several years, depending on the cost of the points you pay.

Traditionally, most mortgages have been for 30 years. As rates are so low, or you may be many years into your current mortgage, a key question is how many years should your new mortgage be?

  • In other words, should you refinance from a 30-year to a 15-year mortgage?
  • Or should you consider a 20-year mortgage, which is less widely available? 

Let’s review some key concepts to consider in evaluating the refinancing decision process.

Should you refinance? If the savings of reduced monthly payments are greater than the cost of refinancing (and potentially any points you pay) within a few years, and you are sure you are staying in your home for at least a few years, than you should definitely pursue the refinance.

  • For most people, the answer will be yes, if your current mortgage interest rate is at 3.5% or greater.
  • If you have 30-year fixed mortgage of $400,000 at 4%, your monthly payment would be $1,910 (we are not considering property taxes or escrow payments, as these are not really affected by the refinancing).
    • If you refinance with another 30-year mortgage at 3.25%, your new payment would be $1,741 per month.
    • This is a savings of $169 per month, or $2,028 per year.
    • If the refinance costs around $3,000 for illustration purposes, the cost would be recouped in about 1 ½ years, which makes this a simple decision to do the refinancing.
    • Over the 30 years, you would save almost $61,000.

Should you consider a 15-year mortgage?

  • The interest rate may be even lower, say around 2.75% with no points.
  • However, because you are shortening the mortgage term from 30 years to 15 years, the monthly payment will go up significantly.
  • This becomes a major decision, as you must decide if you can afford to lock in a much higher monthly cost, as the payment will increase so much.
    • In our example with a $400,000 mortgage above, the payment would increase from the current $1,910 per month for the 30 year mortgage to $2,714 per month with the 15 year mortgage.
    • This would be an increase of $804 per month, or $9,650 per year.
  • The advantage of the 15-year mortgage is that you will have no mortgage payments later in life or much more equity in the house, faster. You would save more than $138,000 in interest payments in this example.
  • Going to a 15-year mortgage should be considered if you have significant excess monthly savings and you are confident that will continue, and you already have a substantial investment portfolio.
  • If you are not sure about your future income, and your income and expenses are relatively close, then you should probably pass on considering a 15-year mortgage and be pleased with the savings of refinancing to a new 30-year mortgage.

Some other things to consider:

  • Mortgage interest is deductible and if you refinance, the interest will still be deductible if your refi amount is $750,000 or less. Mortgage interest is one of the few tax deductions that remains without limitations. On an after-tax basis, mortgage interest actually costs even less than the stated interest rate.
  • If you cannot afford a 15-year mortgage as the monthly payments are too high for you, but you are part way through a 30-year mortgage, you can always pay more each month, to stay on the same time payment schedule as your current mortgage term. We can assist you in determining this. 
  • We would still advise younger people, particularly those below the age of 40, and maybe even below age 50, to use a 30-year mortgage. The longer your personal time frame, the greater opportunity you have to earn much more in a diversified portfolio than the cost of a mortgage. You can still lock in an incredibly low interest rate for 30 years and use the remaining funds to invest for the long-term.

We hope this information is helpful to you and your family.

This topic is one that you should discuss with your family members, to make sure that they are reviewing their personal situation and doing what is best for them. We would be pleased to discuss this topic with you, or others close to you.


Financial Quick Hits…..Quick Advice

Blog post #454

  • Consider refinancing your mortgage: Interest rates are at historic lows. If you have a mortgage with an interest rate above 3.25%-3.5%, you should be looking into refinancing. We do not always recommend shortening your mortgage, say from a 30-year to a 15-year mortgage, but that may be needed to get the lowest rates that are out there. If you are considering a 15-year mortgage, we should likely talk first. Mortgage firms are very busy, so you may need to be patient.
  • Don’t be afraid to ask. Talk to someone: Talking to someone else can be helpful, in almost all situations. We can be a resource for a wide variety of topics. If you are struggling with an issue or just can’t resolve something, reach out to us or someone else you trust and start the conversation. We help people deal with all kinds of issues, from complex matters like estate planning decisions to balancing a check book for clients. Talk to someone. It may help. It will allow you to get a new perspective, brainstorm and maybe gain some confidence.
  • Have an emergency fund and liquidity sources: The pandemic has taught us many lessons, including the importance of having funds on hand for the unexpected. Some have lost their wages or other income sources. Many have assisted others with financial challenges. It is important that you always have funds readily available, whether in your checking account, a home equity loan that you can borrow against, or as part of your fixed income allocation with our firm, that can be readily liquidated if needed.
    • One of the measures that we use for your liquidity protection is that if you are in a withdrawal mode, we strive to maintain at least 6 months of your future withdrawals in cash. This was very beneficial when the credit markets struggled in March, as we were not forced to sell positions when others were selling bonds at panic prices.
    • It is also important to remember that you should build an emergency fund before you begin to invest in the stock market. This is an important lesson for those in their 20s and 30s. Stock market money is longer term, that should not be needed for at least 5 years.
      • Hint to parents and grandparents: This is a good topic to discuss with your kids/grandchildren.  We can help, if you like.
  • Be aware of credit card bonus categories: Due to the pandemic, some credit cards have added or changed reward categories, particularly among premium credit cards. These have been changing often, so check with your specific credit cards.
  • Do some financial and physical housekeeping: 
    • Subscription services of all kinds are now part of our lives, but you should review them occasionally.
      • Are you really using all the TV or music streaming services you pay for?
      • I have an Audible subscription that I rarely use….so I should cancel it and save the extra money every month.
    • Could you donate clothes or other household goods that you no longer use? This could benefit a charity and get rid of clutter. If you itemize, keep the receipt for tax purposes and document what you donated. Even charitable organizations like Goodwill have made donating items “contactless.”
    • Are you using a password program like 1Password or LastPass yet? This will save you time and energy, and make your life more efficient. Ask any of our firm members, who all use 1Password in their business and personal lives.
  • Don’t take unnecessary risks: We recommend building a globally diversified portfolio that contains thousands of stocks. If you were to own huge positions in some stocks, this can lead to unnecessary risks.
    • As you build your portfolio, if you consider it like a bridge, we think it is better to drive in the middle (a broadly diversified portfolio) than riding the edges of the bridge with no guardrails (owning a lot of a few stocks).*
    • The less diversified you are, the closer you may get to the edge of the bridge. Sometimes, this can mean higher returns, but it also may mean greater losses. Owning huge positions in individual stocks can lead to huge losses which are unnecessary and hard to recover from. For example, if you owned $300,000 of Boeing, GE, Delta or any number of bank or energy stocks earlier this year or a few years ago, those positions are now only worth a fraction of what they used to be.
    • With a globally diversified portfolio, you will have fewer reasons to worry about poor returns from a single stock or asset class. And that will keep you in the center of your financial road.
    • For most of us, whether crossing a bridge or investing, we want to follow a safer and prudent path. Your future is too important to risk.


What we do know is that the financial world keeps changing. This is what makes our role in your life valuable, as we will continue to provide you advice that is relevant and appropriate. We take this responsibility very seriously.

Talk to us. We want to help you, and your family, deal with change, today and tomorrow.


Source:  *27 Principles Every Investor Should Know, by Steven J. Atkinson (Illustrations by Dan Roam) July 2019


A Consistent Philosophy Matters

Blog post #453

“The important thing about a philosophy is that you have one you can stick with.”

–David Booth, Founder and Chairman of Dimensional Fund Advisors (DFA)

Having a core set of beliefs, or a philosophy, is vital to many aspects of your life.

Having a set of beliefs and a philosophy that is logical is especially important when it comes to investing. Having a philosophy that you believe in and can stick with can help you deal with the uncertainties and volatility that come with investing.

The purpose today is not to detail our investment philosophy and beliefs.

The purpose today is to remind you that we make decisions and provide you with advice within a sound and logical framework that we have used since we started our firm in 2003.

While we make changes and adapt to the ever-changing financial world, our overall core beliefs are still the same.

Doing the opposite, such as trying to predict the market’s moves every few months would be almost impossible. Trying to predict the next hot sector or geographic region would be an endless guessing game. Being market timers or trying to predict which money manager will be the best for the next few years seems like unproductive efforts to help meet your long-term financial goals.

Having a long-term philosophy enables us to be disciplined in our decision making. This enables us to have confidence. This enables us to provide you with the financial advice you need.

This enables us to help you stick with your long-term financial plan, even through difficult times and ones of great uncertainty.

We hope this provides you with confidence. We hope this provides you with a greater sense of comfort and security.

How to Deal with Lower Interest Rates

Blog post #452

The Covid pandemic has caused already low interest rates to move even lower. 

Throughout much of 2018, the 10-year US Treasury Note yielded around 3%. During 2019, it dropped from the 3% to 2% and since Covid hit, the US 10-year yield has hovered around 0.6% – 0.7%. It is worse overseas, as Germany’s 10-year notes pay 0.09% and Japan’s are at zero or negative.**

The implication of much lower interest rates are important to you as an investor. Going forward, at least for the next few years, it is likely your fixed income allocation will yield even less than it has been. As each fixed income security that you own matures, it will likely be reinvested at a much lower interest rate.

What are the choices that you have, and we face as your investment advisor, regarding very low interest rates? 

We could recommend some of the following, but that is not likely. We could….

  • Extend maturities
  • Invest in lower credit quality fixed income, to reach for higher yields
  • Invest more in stocks and reduce your fixed income allocation
  • Invest more in alternative investments

For most clients, we are not likely to recommend most of the above, at least not without extensive analysis and conversations with you.

Extending maturities means buying individual fixed income investments or bond mutual funds that are beyond what we are buying now, which is generally 5 years or less. The markets are not paying much more interest to hold longer maturities, so it does not make sense to us.

We view fixed income as your foundation, the safe part of your portfolio. When stocks drop, we don’t want your fixed income to crash as well. We don’t buy high yield (or junk bonds) for this reason. Risk and reward are tied together. If an investment grade 5-year corporate bond is yielding 2% today….and another one yields 6% or 10% for the same 5-year maturity, this means that there is much more default risk in the 6% or 10% bond. We want to try and ensure that you will get your principal back.

For some clients, we may review your stock to fixed income allocation, as fixed income is paying so little. For clients who are younger or can emotionally handle the volatility and greater risk in stocks, it may make sense to maintain a greater stock exposure than we would otherwise recommend. For older clients getting close to retirement or in a withdrawal mode, this may be a difficult decision. We will need to evaluate where you are in terms of your need to take risk, and your willingness to handle more risk. If you are comfortable and have adequate assets, the downside of greater stock exposure is probably not worth it.

We have not found any alternative investments that we are comfortable recommending. We have reviewed many, but they must provide benefits to you through performance track records that add value to your portfolio (and not just expected to add benefits), as well as provide liquidity, be understandable to us and have reasonable or low internal costs. As of now, we prefer to stick with our long-term investment philosophy that we are very comfortable with and not try other investment vehicles.

What does this mean for your future?

We focus on meeting your financial goals and the long-term total return of your portfolio.

  • We are not going to reach for additional yield if it means increasing the risk of defaults on fixed income. Although you will receive less interest income for the foreseeable future, we place greater priority on the return of your principal.
  • We will likely use more investment grade bond mutual funds in the near term, due to the very low interest rates, as they may hold higher yielding investments than we can purchase today. This also provides even greater diversification, which reduces your risk further.
  • We may need to work with you regarding Social Security planning, as we discussed in an earlier blog post, Social Security Projections and Impacts for all, dated May 14, 2020. If inflation remains low for many years, then future Social Security benefit increases will be lower or non-existent.
  • If you are in good health and feel you have a longer life expectancy, delaying Social Security benefits until age 70 may be a strategy that is recommended more in the future. There is a huge annual increase in benefits by waiting until age 70, rather than starting to receive Social Security benefits at your normal retirement age of 65-66.
  • We will continue to carefully monitor the credit quality of your current fixed income investments, as we do when we purchase new investments. We avoid low-quality fixed income investments, in both corporate and municipal bonds. We avoid some sectors entirely which have higher historical default risks.
  • Some clients may face difficult decisions, if interest rates remain low for an extended time period. The future is always uncertain, and things can change. Some may have to reduce their spending expectations or work longer, before they retire.
  • You should review your mortgage and see if refinancing makes sense. Rates are around 3% and even lower, depending on where you live and the length of your mortgage. I thought my refinance at 3.50% a few years ago would be my last, but I will likely refinance it again to lock in these lower mortgage rates.
    • For others, we may recommend paying off your mortgage sooner, which is something that we generally do not recommend. Please discuss these mortgage alternatives with us, as the recommendations are very specific to your individual circumstances.

We know the financial world keeps changing. This is what makes our role in your life valuable, as we will continue to provide you advice that is relevant and appropriate. We take this responsibility very seriously.

Talk to us. We want to help you, and your family, deal with change, today and tomorrow.

Source: **, July 9, 2020.