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: **WSJ.com, July 9, 2020.

Is there a disconnect?

Blog post #451

The 3 months that just ended June 30th was terrific for nearly all asset classes, both in the US and Internationally.

The financial markets have been volatile, as one would expect, given the onset of the Covid-19 crisis. The 34% decline in the S&P 500 for the 33 days up to March 23rd was the fastest decline from an all-time high. But this rapid decline was then followed by one of the best 50 days in the history of US stock markets.

Markets are unpredictable. If the above market moves don’t teach you that, then nothing else will. This is why we emphasize the importance of staying in the market, because you don’t know what tomorrow will bring.

Early this week was another good example of the difficulty of predicting what the markets will do.

  • Over the weekend, Covid cases were rising and states were moving toward more closings, not openings. The news was bad both medically and for the economy.
  • With no new positive medical or vaccine developments on Monday and Tuesday, and Covid cases increasing, the markets went up on Monday and Tuesday.
  • You can’t predict that. Just stay in the market for the long-term. Be disciplined and take the long view.

How can large US company stock indices be down by only single digits for the first 6 months of the year, despite the Covid outbreak, widespread shutdowns and huge unemployment?

Many people have asked this question, wondering if there is a disconnect between the stock market and the actual economy. They are right and wrong.

The stock market looks into the future and values long term future expectations for publicly held companies. Thus, these large company indices that many view as “the market” are representing the future prospects and expected future cash flows for large companies like Apple, Delta, Amazon, Costco, Facebook, Marriott and many more. These large indices, such as the Dow Jones and S&P 500 are heavily impacted by a handful of the largest companies, as these indices are market weighted. This means the largest companies by stock market valuation have the greatest impact on the indices. And remember, the DJIA consists of just 30 stocks.

The stock market does not directly reflect the many small, private companies that are hurting or have already gone out of business. The market does not directly factor in the restaurants and stores near each of us that have already closed or are struggling. They are private, so they are not traded as stocks. But these privately held businesses are, or were, most likely customers or have relationships with many larger, public companies, and their owners and employees all shop at public companies. All this information should be factored into the current value of publicly traded stocks.

Thus, “Main Street” and “Wall Street,” if I can use those terms, are different.

The question that we cannot ever answer is about the future. As we often say, we don’t have a crystal ball.

What will the eventual impact of the stress on these smaller businesses be on the larger economy?

Will unemployment continue to go down? How fast or slow?

How will Covid impact consumer spending and will it affect the purchases of Apple products? When will people begin traveling again in large numbers and restore those related businesses and workers?

Will Target, Costco and Walmart feel the brunt of high unemployment? Will consumer spending drop or increase over the next 3 or 6 months, or longer, due to all these Covid effects?

Apple, Target, Costco and Walmart stocks are each near their 5 years highs. What the market is saying about these companies right now, based on their stock prices, is that they will succeed in the future. This helps to explain why these indices are at the levels they are at.

Other public companies, which are facing the negative brunt of the Covid impact, are still crushed, even if they have rebounded from their lows. Airlines, hotels, travel and leisure, and energy companies are far off their pre-Covid levels.

How do we handle and process these issues?

From an investment standpoint, we have a choice of how to approach all these issues. As a firm, we have taken the path that says that we will hold a diversified portfolio of many stocks, mostly in the US, as well as around the world.

But we have chosen not to play an expensive and most likely, unsuccessful guessing game to try and determine the answers to all the above questions, because no one really knows any of the answers.

We are not going to try and guess which stocks will outperform others over the next 1, 5, 10 or 20 years. That would not be our primary focus to help you to reach your financial goals.

We want to focus on the key things that matter to you most. We want to make sure you have adequate funds for your needs, both in the short term and the long term.

This is why we work with you and talk to you about the importance of developing an appropriate investment allocation between stocks and bonds that you can live with, especially during market downturns.

We hope this makes sense to you. This approach should provide you with comfort and clarity.

We want to wish you and your family a happy 4th of July weekend. We hope that you stay safe, and socially distance.

As we said above, we don’t have a crystal ball. However, we do believe in science. We do believe in the benefit of wearing a mask when in public places. In our humble opinions, we believe that if more people would wear a mask, we (and the stock market) would be better off in the long run.

Our firm will be closed on Friday, July 3rd, in observance of the 4th of July holiday.

Blog post 450: A Milestone Interview

Starting in mid-June, 2014, I committed to writing these posts weekly, which we have done for the past 6 years. Since 2009, this is the 450th blog post we have written.

We hope these blog posts are helpful to you, as we strive to provide you with guidance, timely information and clarity, as you deal with a constantly changing financial world.

What have you learned from the last few months, from the pandemic and the financial markets?

The most important lesson confirmed what we already knew, that financial markets cannot be timed and predicted. One of our firm’s guiding principles and beliefs is that you can’t successfully time the markets….that you can’t successfully try to time when to get out of the stock market and then accurately figure out when to get back in. It is too hard to be right both times, getting out and getting back in.

No one could have predicted the strong stock market recovery since March 23, 2020. The stock and bond markets move on news that is unexpected. In other words, new information that is not already known. The Federal Reserve’s strong and sweeping actions could not have been predicted or timed in advance. They have done much more, and acted much faster, than they did during the Financial Crisis of 2008-09. That has had a major positive impact on the bond market, and thus, the stock market.

When unexpected progress is announced on vaccines or treatments, it is likely the markets may increase. However, there remains great uncertainty about future cases, the ability to control Covid, how the economy will react and future governmental and Federal Reserve responses.

Nearly all of our clients have adhered to their long-term plans. They have remained in the stock market. We plan and determine each client’s asset allocation to be appropriate for their risk tolerance, time frame and their need and ability to take risk…. your need for stock market exposure. We want each client to have an appropriate stock market exposure so you can emotionally handle the downturns.

What are some of your earliest investing memories and lessons?

I didn’t make any real investments until I was in my late 20s or early 30s. My first financially related memory was working at my local public library during high school, when an older gentleman advised me to read the Wall Street Journal every day. I have been a Wall Street Journal subscriber and reader since my first year of college, for almost 40 years now.

The summer after my first year in college I worked as a busboy at a resort in Wisconsin, putting myself through college. Chrysler was near bankruptcy at the time. I wanted to buy $500 or $1,000 of Chrysler stock and called my mom to discuss it. She had no investing experience, as my parents were divorced and we lived paycheck to paycheck. She said I needed to save the money to pay my college tuition and not to risk it on Chrysler stock. I would have made a lot of money if I had bought that stock, but she was clearly right. I had no business even thinking about buying Chrysler stock, as that was critical money that I needed for the coming year of college.

The lesson is that money needs to be considered in various buckets, based on your time frame. I needed the money for tuition and housing for the next year. Money invested in the stock market requires a long time frame, at least 3-5 years or much longer.

You need to think about your investments based on your time horizon. If you are saving for a retirement that may last decades, what happens today is not as critical. We are planning and focusing on providing you with enough capital for an income stream that will last you for decades.

What are some of the important decisions that you have made and why?

The decision to adopt the investment philosophies that we did in 2003, and still believe in and adhere to today. These guiding principles enable us to have a set of beliefs that give us confidence and a foundation for investment policy and the decisions that we make. We believe this gives our clients confidence and comfort, despite financial uncertainty.

My decision to ask Keith to be my partner in 2008 was critical. I will forever be thankful for his trust in me and leaving our prior firm, a week after his 4th child was born. While we have very different styles and personalities, we analyze things well together and complement each other. We feel that one plus one equals three, which is the basis for a strong business relationship.

The decision to be fee-only financial planners and not to accept any commissions is vital. We act as fiduciaries and put our clients’ interest first, always. If our clients do well, so do we. If they lose money, our income declines as well.

We have made several major investment policy decisions that we feel are proper in the long run. We believe in global asset allocation and broad diversification. While certain asset classes have performed below US Large stock indices for a number of years, we know these periods of underperformance often turn around. Over the long-term, meaning decades, a globally diversified portfolio has outperformed a US-only portfolio. We expect that to be true going forward.

We got out of commodities after 2010. We did this because we did not think commodities provided an effective hedge against inflation, which was the original purpose of buying commodity funds. This had been a good decision, as commodities have done very poorly since then.

We have avoided alternative investments and hedge funds. We believe in using very low costs investments, which we can understand and provide daily liquidity. Most alternative and hedge funds don’t meet these criteria. We invest only in high quality fixed income investments. We review different investments regularly, and have modified portfolios and investments over time, but new investments must meet our foundational criteria.

How does writing this blog fit into the firm? Why do you do this every week?

As founder of WWM and author of nearly all of these 450 blog posts, writing these weekly blog posts represents our commitment and discipline to effectively and timely communicate with you, our clients.

We want you to know that we care. We want you to know that we are always thinking about our constantly changing world and how it impacts you. We want to be unique as a firm. By writing each week, we can inform you and provide our thoughts to you in real time.

Writing a blog post every week means we are constantly looking for relevant topics to write and communicate about. Finding topics in the past months has NOT been a challenge. We feel this process makes us better Advisors for you. We listen to your questions and issues, as those frequently become future blog posts topics.

I want to thank the other members of our firm, and Michelle Graham in particular, who works with me each week to produce the blog and deals with my many editing changes. We must research and meet various compliance regulations, which takes time. We spend hours per week on each blog. It is a firm-wide effort.

There are very few independent financial advisors that make this type of commitment to their clients to produce their own, original content on a weekly basis. We hope you find this valuable and helps you to be a better and more successful investor.

What do you see for the future of the firm and its clients?

In the near-term, we will be working with clients on a virtual basis and we are well prepared for that.

WWM has grown at a steady, moderate rate over the past decade, and we hope that continues. We want to add clients, but only at a pace that will enable us to provide excellent service to all of our clients, new and continuing.

We are particularly pleased that we are working with multiple generations of client families. We have many clients where we work with grandparents, their children and even grandchildren. We work with parents and they are now introducing us to their children. We have helped many clients deal with life transitions, such as those who have had a spouse die or have gotten divorced. These can be difficult times for people and having a firm with this expertise that can assist you through those times can be critical to your well-being.

We are looking forward to engaging clients in a Wealth Analysis and planning processover the next year, and beyond. We are using a top of the line, comprehensive financial planning software that will enable us to interact and plan with you in a new way. Brad Newsome, an Associate Wealth Advisor who we hired last summer, is very experienced with this software program. He will be leading this implementation and the related client discussions. This process will address long-term financial planning and projections, goal setting, Social Security decisions and projections, college funding and many other areas. If you are interested in starting this process, please let us know.

We are committed in providing you with excellent financial advice, a dedication to client service and to be lifelong learners in many areas of financial and investment matters. We are committed to listening to your questions and concerns, and to invest in people and technology to provide the level of service, advice and long-term financial results that you deserve.

We plan to remain disciplined and stick with our commitment to communicate with our clients regularly via this blog, as well as through phone and Zoom calls. Hopefully in the not too distant future……meetings with you, wherever in the country you live.

Thank you for reading.

And thank you for being a loyal client!

Making financial decisions easier

Blog post #449

Your financial life can involve many decisions, choices and emotions. We can help to make it easier for you to deal with.

Staying in the market and sticking with your long-term asset allocation plan during a pandemic is not easy, but it can be done. We have helped you with this and will continue to do so.

Choosing among the many choices of a 401(k) plan and saving for college can be overwhelming. We can help, as we have for many others.

Dealing with finances and financial decisions after the loss of a spouse is not easy. We can help you or those you know, as we have helped many others.

Determining how much you need to save, and how you much money you will need in retirement is not simple, but we can assist you with this planning process.

We remind you to focus on the long-term. The stock market often looks forward into the distance, not at today or the next few weeks.

Markets move on unexpected news, good or bad. We remind you not to focus on day-to-day market moves, which should increase your ability to realize your long-term financial goals.

Dealing with a pandemic is not easy. Dealing with financial decisions during a pandemic can be even more challenging. We are ready and willing to help you, with whatever financial decisions or concerns you may have.

In recent weeks, all remotely and virtually, we have helped clients with many different issues. These have included decisions involving their asset allocations, investing issues, charitable planning, mortgage and moving decisions, selling a house, generational planning and gifting, job changes, as well as assisting clients going through life transitions.

Helping you and your family to make better quality financial decisions is one of our primary roles. We do this by listening and talking with you. You can benefit from our decades of financial experience and hundreds of client interactions.

We realize that uncertainty always exists, as financial markets, tax laws, the world and your life circumstances are always changing.

We strive to make complicated matters simpler for you.

We strive to give you guidance that is in your best interest.

We strive to provide you with clarity and guidance, for whatever issues you may be facing.

In this time of extra uncertainty, we are confident that we can provide you, and those you care about, with solid financial advice. Talk to us. We are here for you.

Our firm has relationships with approximately 125 clients in 18 states, including Michigan, Florida, and many others. We work virtually with clients across the country, so we are well prepared to assist you, other generations of your family, as well as your friends.

Dealing Thoughtfully with Uncertainty

Blog post #447

For this week’s blog post, we encourage you to watch this short video.

David Booth, Founder and Executive Chairman of DFA (Dimensional Fund Advisors) shares his thoughts on the importance of having an investment plan that you can stick with, uncertainty and how to think about the future.

I didn’t know what the word “clairvoyant” means. It means to have the ability to predict the future.

As Booth states at the beginning of the video, we don’t have the ability to predict the future; humans are not clairvoyant.

We hope you find this few minute video worthwhile.

David Booth on Dealing Thoughtfully on Uncertainty

We help you plan. We help you with a strategy to reach your goals. We consider your goals and risk tolerance.  We help you make good decisions.

Just as we strive for your relationship with our firm to be beneficial for you, we hope this video is helpful.

Uncertainty can create opportunity. Please feel free to forward this blog post and video to others you know who could benefit from our firm’s approach to financial planning and investing.

Adapting and Investing – Part I

Blog post #446

To be successful at almost anything, you need to be able to adapt. This applies to individuals, families, companies and countries.

In the past months, we have all been forced to adapt and change. Going forward, we will all need to continue to adapt, innovate and change.

Though there has been tremendous loss of life, if you step back with a broader view, individuals and societies around the world have adapted incredibly quickly, in various ways and with differing levels of success, to the Covid pandemic.

If I had told you on February 1st that most of us would be working from home (and staying home!) during March, April, May and even into the summer, you would have not thought that would be possible or could work. Now, many companies are realizing that a certain percentage of their employees can successfully work remotely, and they are innovating to meet the challenges of the Covid era.

Our firm adapting

We hope working remotely is not a permanent requirement, but a choice that people and companies can make. For many years, we have had a team member, Michelle Graham, who has worked for us remotely very successfully, after she started with us an in-office employee.

As a firm, we had steps in place, which had been tested for many years so we would be prepared to work remotely, if needed. Fortunately, we have been able to handle this difficult situation very well, from an operational standpoint. We have received phone calls, done Zoom and phone meetings, placed stock and bond trades and managed your portfolios all from remote locations. With no problems or glitches.

Our firm: core principles

We continue to believe in many of the core investment principles we adopted nearly two decades ago, but we have also adapted and made changes throughout the years, as well as in response to this crisis.

In terms of fixed income investments, we have adapted and reacted quickly to change.

  • Our role is to purchase the optimal type of fixed income investments that we feel would be safe (you should be repaid the principal upon maturity), pay the best interest rate for a given maturity and we monitor the security while it is in your portfolio.

Covid and Fixed Income Impact

When the Covid crisis severely affected the credit markets in mid-March, we had a conference call with fixed income executives of our primary mutual fund company. As a result of that call, subsequent analysis and decisions, we sold many individual corporate bonds of companies that were previously considered safe, but in this new world, appeared much riskier. We did not need to act in a panic. We did not need to sell due to a need for cash or because we, or our clients, had used margin or leverage. We waited until prices improved. Over a period of weeks, we sold bonds that were held which the Covid crisis has impacted the most, mostly in the retail, hotel and energy sectors.

While we still believe in buying and holding individual investment grade corporate bonds, we reacted with thoughtfulness and conservatism. We decided to sell the bonds of companies whose financial situation appeared to be the most impacted by this crisis, especially where there was no real visibility of how or when these companies would recover. We hope these companies do recover. But given the changed circumstances, we thought our clients should be holding better quality fixed income securities. We adapted quickly and decisively, for you, our clients.

Municipal bonds and bond funds – other changes

Usually, municipal bonds are only purchased for those in the highest tax brackets (incomes above $520,000 or $625,000, single or married), and only for their taxable accounts. Municipal bonds are debt issuances of state and local municipalities, as well as colleges, hospitals, water and sewer systems, and other projects. The interest is not taxable by the US Government, which enables the issuers to generally pay lower interest rates than corporate bonds or bank certificates of deposits (CDs).

It is our responsibility to monitor and adapt to what the financial markets provide. Recently, in a major change, some high-grade municipal bonds are paying higher interest rates than CDs and investment grade corporate bonds.

  • If this anomaly continues, it is possible that we will be purchasing municipal bonds for clients in all tax brackets, not just for those in top tax bracket, which is something that we have rarely done in the past.
  • This is a decision that we will make based on what the financial markets are offering at a given date, which constantly changes. It is our role as your financial advisor to adapt to the financial markets and do what is in your best financial interest.

While we have generally used mostly individual bonds and CDs for larger clients in the past, another way that we are adapting to the new, Covid world is likely to be a greater use of bond mutual funds within your fixed income portfolio. We have always been strong believers in diversification in both fixed income and stocks….and we continue to believe this. Due to the greater credit risk that now exists in the economy, we feel that adding bond mutual funds, in addition to other types of fixed income investments, will provide clients with greater security and more diversification.

  • If you add to your portfolio or have other fixed income investments that mature, if we invest those funds into an existing bond fund, that may provide a greater return than if we buy a new individual fixed income security.

These are just a few of the ways that we are adapting and evolving, as we always have, to changes in the world and changes in the financial markets.

We know that the world has changed dramatically.  We are committed to adapting, which means continually evaluating our business, principles, investments and practices.  When needed or when it makes sense, we will adapt and change, if we feel that would be in your best financial interest.

As always, we are here for you, and family members or friends who could use our guidance and assistance during the crisis.

Thinking about risk

Blog post #445

I never know where the ideas for these blog posts will come from. That can be a little risky, as I need to develop an idea every week.

Early Wednesday morning I was on a phone call with Delta, to cancel a flight for a trip we were supposed to be taking for a family event that was to occur this weekend.

I was fortunate that my call was answered quickly and a very nice Delta employee was able to process the cancellation, which we had been unable to do online or via their app. As she was processing the cancellation, the woman asked how me, and my business, were doing. I told her how bad I felt for her, Delta and the other Delta employees, as they didn’t do anything wrong to cause the crisis they are now facing.

Then I realized that many Delta employees at all levels (executives, pilots, phone representatives, etc.) are likely facing a huge double whammy problem right now that could have been avoided.

  • Many of them likely didn’t manage their risk properly. Many of them likely took on way too much single stock risk, by owning lots of Delta stock.
  • This could have been avoided with proper advice and planning. At the same time when many of them could lose their income due to Covid-related job losses (or have their incomes reduced, if they are able to keep their job), they have incurred huge losses in their Delta stock ownings, which has been crushed. Double whammy of loss!! Ouch!

This got me thinking about risk. 

Some risk can be avoided. Some risk can’t be prevented.

Some risk can be minimized. But risk is always there.

Your risk needs to be managed properly.

Dealing with risk is vital. Helping you to deal with financial and emotional risk is one of our main roles and can be of great value to you.

We often talk about diversification and its importance. The examples below are real world and should be evidence of why you should not own a huge amount of any one stock, and especially if it is your employer. We have seen unexpected issues arise in the past that severely impacted one company, or an industry, or now with Covid, are impacting many different industries.

Delta: Is now down 63% from its 2020 high and was down 72% at its 2020 low.

Marriott: Is now down 40% from its 2020 high and was down 69% at its 2020 low.

JP Morgan Chase: Is now down 40% from its 2020 high and was down 69% at its 2020 low.

These are Covid related losses, and likely would not have occurred if not for this crisis. But there are many examples of companies and industries that have suffered great losses for all kinds of reasons, due to technological changes, bad decisions, product failures (think of the Boeing Max), or lack of keeping up with societal trends. Think of GE, Boeing and many large retailers. Some have succeeded, others have not.

The energy sector has been hurt over many years, which worsened due to the Covid pandemic this year. There are many far worse examples than this, but Exxon Mobil is down 53% from where it was trading in 2016, dropping from $95 to around $45 now.

What are the lessons from this?

  • Be diversified. Do not own too much of one stock and definitely not too much of your employer’s stock. Our globally diversified portfolios eliminate the risk of a concentrated portfolio, by providing lots of diversification. Our clients are very well diversified, both in stock and fixed income holdings, in numerous, structured ways.
  • People don’t think single stock risk or the lack of diversification will actually impact them. But it happens. Remember Enron? Lehman Brothers? Some “unexpected event” could cause a huge financial crisis at almost company.
  • Reaching for yield is a significant risk. If a stock or bond is paying a dividend or interest rate that is far above market yields, then there is much greater risk involved.
    • We have seen people buy stocks for the “great” dividend yield and then something happens to the company….and the dividend is cut or even eliminated…and usually the stock price has dropped as well.
    • This is why we focus on your goals and your overall portfolio, not on dividend paying stocks or the yield of your stock portfolio.
  • Overconfidence and not expecting risk to show up. You always need to be prepared for unexpected events and risk to show up, as we have experienced with the Covid pandemic.
    • You need to be prepared emotionally for stock market declines of 10%-20% within every year.
    • You need to be prepared for occasional major declines in stocks of 30-50%, which could take several years to recover.
    • This is why we focus so much on your overall asset allocation, on the mix of stock and fixed income, based on your specific needs, risk tolerance and time frame…so you will be able to handle these types of declines.
  • With the current Covid crisis….there is still a significant amount of risk (and unknowns) that remain. 
    • While segments of the stock market have made major recoveries from the March lows, there are still many unknowns related to the pandemic.
    • Will there be future waves of Covid-19 that return in the fall or winter, or later? How will localized outbreaks impact manufacturing, food production and other aspects of our lives?
    • What will unemployment look like going forward? How quickly or slowly will those now unemployed return to jobs, and at what income levels?
    • When will an effective vaccine be released that is proven to be effective on a mass basis, in the US and globally?
    • What new programs will the US and other governments introduce to provide income and help people, companies, and state and local municipalities to help bridge the financial gap? What further actions will the Federal Reserve take, to continue to provide the financial markets and companies with support?
    • How quickly will people return to restaurants, stores, large events? How fast or slow will that be? Months? Years?
    • When will people return to traveling and tourism, both in the US and globally?
    • As these unknowns gradually get answered or resolved, risk and market volatility will likely remain high. No one can provide answers to these questions. The markets will react suddenly to good news, as well as to disappointments. You need to be prepared for both. 
  • Even the smartest make mistakes and even repeat them.
    • Warren Buffett has just repeated one of his biggest mistakes. He wrote in the 2007 Berkshire Hathaway shareholders letter about buying US Airways preferred stock in 1989. It quickly stopped paying the high dividend he was expecting. He eventually sold the stock at a gain in 1998, but he said that owning airlines was like a “bottomless pit.”
      • He wrote in the 2007 letter: “Now let’s move to the gruesome. The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers.”
      • After swearing off airline stocks forever, he and his team started to load up on airline stocks in the fall of 2016, and by December 31, 2019, Berkshire Hathaway had invested more than $6 billion, owning close to 10% each of the top 4 US airlines. After the Covid crisis crushed the airlines stocks in March 2020, Buffett announced that they sold their airlines holdings during April 2020, at significant losses. He no longer thought the risk of owning the airlines was worthwhile. He never anticipated a pandemic type risk when he considered buying these stocks in 2016.

Risk of loss will show up again. What seems like unexpected risks, like 9/11 or the Covid pandemic, are always there, but we do not focus on them until they become known events. Other seemingly “unexpected” events will certainly happen again in the future. We just don’t know what the source of the major event, or risk, will be….and what its impact will be in the future. As none of us has a crystal ball or can predict the future, we as your advisors have a key role in helping you to manage your risk. And we take that responsibility very seriously.

We want to help you manage your risk, so that you and your family can reach your financial goals, whatever they may be, knowing that there are known and unknown risks that will impact you in the future.

If we are able to help you reach and maintain your financial goals and help you to effectively deal with all the risks that will show up along that journey, then we will consider our relationship a success.

We hope that you and your family are healthy, and enjoy this Memorial Day weekend with appreciation for your health, and the sacrifices of many who have come before us, so that we are able to live and enjoy the benefits of our country. Even during this pandemic, we have much to be thankful for.

As always, we are here for you, and family members or friends who could use our guidance and assistance during this crisis.

If you know of someone who may benefit from this blog regarding single or company stock risk, please forward this blog to them and let them know we are open to speaking with them.

 

 

Social Security Projections and Impacts for All

Blog post #444

Based on preliminary estimates, there may not be any increase in Social Security benefits to recipients next year, for 2021.**

Social Security benefit increases are based on annual changes in the consumer-price index (CPI) and are announced each year in October. CPI data from January – April would indicate no increase for 2021, per a policy analyst of The Senior Citizens League.**

The 2020 increase was 1.6%. Over the last decade, cost of living (COLA) increases in Social Security averaged 1.4%. These are much lower than the 3% average increases in the preceding decade, between 2000-2009.

While these increases have been minor, costs of food, housing, utilities and health care still seem to rise at a much greater pace. Since 2000, Social Security COLA benefits have increased by 53%, but prices of what a typical retiree spends grew by almost double, by 99.3%. In a report by The Senior Citizens League, this has resulted in lost buying power of Social Security benefits of 30% since 2000. 

This raises the importance of maintaining your purchasing power, or of having your other assets grow at a rate that is greater than inflation, which will be discussed further below. 

Social Security is still a vital benefit for most people, and we think it will continue to be for the long-term. For example, if a couple is receiving benefits of $20,000 per year, per person, that is $40,000 per year. Using what was considered a historically safe withdrawal rate of 4% from a diversified stock and fixed income portfolio (which is based on data with much higher interest rates than we have experienced for more than a decade), that $40,000 income flow would be the equivalent of having $1,000,000 of assets. If you are receiving more than $20,000 per year, or your future projection is to receive more than that, the equivalent asset base would be much greater than $1 million. That is not insignificant, especially as the benefits are risk-free and are not subject to any financial market volatility.

As interest rates have been very low since around 2008, the value of that income stream is actually now much greater. If you were to invest $1 million in an all fixed income portfolio over the past few years, you may only generate $10-20,000 per year, not the $40,000 as described above in Social Security benefits.

What are the implications of this information? 

Social Security benefits are not likely to increase much next year, or in near future. However, most costs are likely to keep going up. In the near term, gas will be less, and you may spend much less on travel, but we all hope that once a vaccine is discovered, some normalcy will return.

The key is that over the long-term, you must earn more than the rate of inflation on your overall investment portfolio, so that you can maintain or increase your purchasing power. The only place to do that for most people, to earn more than inflation on an after-tax basis, is in stocks or other riskier investments.

Although stocks have declined in 2020 and there has been heightened volatility in recent years, you must focus on the long-term benefits of having a diversified portfolio. We provide and plan for a solid “fixed income foundation” to provide stability for your near-term financial needs, for your next 5-10 years of spending, if you are in or near retirement.

Though it can be difficult, patience and discipline are required to maintain your stock allocation, but it has been rewarding to do so over the long-term. And your focus must be on the long-term, not on the next few months or years, but on the rest of your life, and that of your spouse and other family members.

A globally diversified portfolio goes through ups and downs, but over the long-term, a globally diversified, balanced portfolio can provide returns that are far in excess of inflation. For illustrative purposes, the Vanguard Star Fund has returned 6.76% per year over the past 15 years, and 9.16% per year since its inception in 1985.**** This fund generally has a 60% stock and 40% fixed income allocation, with diversified holdings in the US and significant International exposure. This is not a fund that we recommend, so this is not performance data of our firm. But I think this information is relevant for illustrative and informational purposes, to reinforce the long-term benefits of staying invested in stocks and being well diversified.

Social Security planning

If you are not yet receiving Social Security benefits, or are years from receiving Social Security benefits, you should verify your projections regularly at SSA.gov. Check your earnings and projected benefits every few years.

Even if your income goes down this year, due to the Covid crisis, you should know that benefits are based on a 35-year average, which is weighted toward your later years of earnings. Also, it is important that you, and a spouse/partner, earn credits for as many years as you can. For example, for 2020, you earn one credit for each $1,410 of earnings, up to 4 credits per year. You need to earn 40 credits, or 10 years of work, to be eligible for retirement benefits.***

Even if you or your spouse only work part-time for a significant number of years, there is still a long-term benefit of earning some amount of money, to earn these credits, and the resultant years of Social Security benefits later in life.

Focus on the long-term.

Adhere to your plan. Or talk to us about your planning.

Be positive.

As always, we are here for you, and family members or friends who could use our guidance and assistance during this crisis.

 

Sources:

** “Social Security recipients may be in for a rude awakening later this year,” Alessandra Malito, Marketwatch.com, published May 13, 2020.  Social Security statistics in the first 4 paragraphs are from this source.
*** Data per Social Security website, SSA.gov.
****Per Morningstar.com, May 14, 2020, for Vanguard Star, VGSTX. The returns cited do not include any advisory fees, such as our firm would charge a client.

Credit Card/Grocery Tips and Thoughts about Buffett

Blog post #443

Get more credit card benefits for grocery, restaurant and delivery purchases

As we are all buying or ordering more groceries, as well as using delivery services due to the pandemic, a number of premium credit cards have significantly increased their rewards for grocery purchases and food delivery services, either from grocery stores or restaurants.

Chase and American Express recently announced that for many of their premium credit cards, they will be offering up to 5X points or cash, on grocery store purchases. For some credit cards, this now includes grocery delivery services like Instacart.

Each credit card may have different benefits, and differing time frames (some through May 31, some until July 31), so you should check on each credit card’s specific benefits.

This may not be huge money, but if you can get 5% back, rather than 1%, that can make a difference to you and your family.

Other related items:

  • Some Chase credit cards are offering rewards for restaurant delivery services, like Door Dash. If you have these cards, take a look at their rewards or search for this on the Internet.
  • If you have normally charged all your purchases to accumulate airline or hotel points, you may want to consider using other credit cards that offer cash or points that are redeemable in other ways, especially if you already have lots of airline and hotel points, and don’t plan to travel in the near future (though we certainly hope that travel can resume sooner rather than later).
  • Instacart has become a popular grocery delivery service.  After using Instacart, I was very surprised with a recent purchase from a local grocery store (which is not a chain). While we thought this was a great service, there was a 12% mark-up on the food, plus a delivery fee, service fee, and we paid a tip as well.
    • In later reviewing the grocery store’s website, I learned that purchases through Instacart were marked up 12% (and ours was actually more), in addition to the other fees. Each grocery store’s relationship with Instacart is likely different.
    • While grocery delivery services are important these days, you should be aware of this cost, as it can be significant. We are more likely to pick up groceries that the store can pack, which will still be safe, and save a lot of money.

Thoughts on Warren Buffett’s virtual Shareholder meeting

This Saturday afternoon, Warren Buffett spent a few hours on a virtual live stream for Berkshire Hathaway’s annual meeting, providing a financial history of the US and the stock market, as well as discussing how Berkshire Hathaway and his team have handled the pandemic.

He announced that they sold all their airline stocks in late March and April, at significant losses. They had accumulated up to 10% stakes in the 4 largest US airlines in past years (Delta, Southwest Airlines, United Continental and American). He said, “the airline business has changed in a major way and the future of airlines is much less clear.” He said he made a mistake in buying them, as he believed the airline earnings would continue to increase, but that has changed now due to the pandemic.

The other major news was that Berkshire has not made any large stock purchases or deals in 2020.  This is quite different than in the financial crisis, when Berkshire made major investments or provided financing to many companies, including Goldman Sachs, Bank of American and others.

Buffett discussed the current situation as still having many unknowns, but the variance in possible outcomes is less than it was in March. He gave huge credit to Fed Chair Powell and the committee for their swift actions in March, 2020, and implied that the financial markets and the economy would be far worse now without their many programs and steps.

Our observations about Buffett/Berkshire’s actions and non-actions:

Buffet/Berkshire’s decision to sell all their airlines stock holdings, at or near a market bottom, could be viewed as startling or surprising, as he generally holds for the very long term. Buffett stressed in his comments that the sales should not be interpreted as his view on the overall stock market, only in relation to the airline sector.

Buffett is decisive, which is commendable. He acts quickly, when he buys, sells or makes transactional decisions. He is also confident enough in himself that he can admit a mistake and walk away from a loss.

This is just my assumption, but he must have thought that the other Berkshire companies would earn more with the proceeds from the airline stock sales than had he left the money in airline stocks. Or he thinks the airline stocks will decline much further or not recover for many years.

This is something to consider, as does he think that it will take many years for the airlines, and thus, hotels, travel and other leisure companies to get back to “normal,” or pre-pandemic earnings levels? This would be one of the many unknowns he referred to indirectly throughout the introduction and during his Q & A.

That Berkshire has not made any major stock purchases or provided financing to major corporations as they did in the Great Financial Crisis, or at other times in the past, is indicative of several factors, but should not be overly concerning to individuals as long-term investors.

  • Interest rates are very low and the Federal Reserve has taken strong action that has allowed large corporations to borrow huge sums in the credit markets recently (billions), which many were unable to do in 2008-09.
    • For example, Boeing is facing a severe cash crunch, due to their Max plane problems, and now the lack of demand for planes, due to Covid 19.
    • Last Thursday, Boeing borrowed $25 billion in one of the largest bond offerings ever. There were many different maturities, but the 10-year maturity paid 5.15%, or 4.50% more than the 10-year US Treasury bond. Boeing is rated just above junk status, as a very low-grade investment quality company, right now.
    • But instead of having to go to Buffett, and pay say 10-12%, which he may have been willing to entertain, other institutional investors (likely bond mutual funds, insurance companies, etc.) were more than eager to buy these Boeing bonds. As Buffett is not going to loan money to risky companies at 4-5-6% interest, he has not made these types of deals right now.
      • Just like we are not going to buy these Boeing bonds as investments for our individual clients. We would agree with Buffett that the risk is much greater than the reward. We are fine to pass on these.
  • Similarly, as the stock market dropped a lot very quickly and then has made a significant recovery, Buffett/Berkshire did not jump into the stock market to make any major purchases.
    • His view as a very patient, generally long-term investor has not changed. He wants to buy when he feels he is getting a bargain, or he perceives value. He views taking no action is an action.
    • Berkshire likely has more than $200 Billion already in many individual stocks. The top 5 holdings from 12/31/19 were Apple, Bank of America, Coke, American Express, and Wells Fargo. His holdings in these and other financial stocks have dropped significantly, due to less credit card usage, as well as increased default risk, if the pandemic crisis worsens or continues longer than expected, and there is not further governmental financial support. But he has not sold any of these major holdings, or anything else.
      • While Buffett clearly did not pound the table Saturday and say stocks are under-valued, he remains optimistic about the long-term prospects for stocks.
        • He provided clear caveats, and important reminders for stock investors, that stocks may not always perform well and there may be long periods without a recovery.
        • He said to be an investor in stocks, you must be prepared for significant declines, sometimes as much as 50%.
        • Buffett: “I don’t believe anybody knows what markets are going to do tomorrow, next week, next month or next year. Anything can happen. You need to be careful about how you bet simply because markets can do anything (in the short-term). Nobody knows what’s going to happen tomorrow.”
        • Buffett: “Equities (stocks) will outperform US Treasuries over the long term.”

Berkshire Hathaway and Warren Buffett are very different than you, our clients, and how we manage your portfolio. We feel it is important to listen and learn from Buffett and his team.

However, we are managing your portfolio so that you can meet your goals, and those of your family. Buffett is managing Berkshire Hathaway as a public company with a multi-generational mindset, and for stockholders, not to meet your personal spending and savings needs.

We share Buffett’s concerns and the many unknowns about the future. We have often stated that the future is unknown, because it is, but there are even more unknowns now than normal.

We are confident that we have structured your portfolio to be able to handle the unknowns of the future, by providing you with an appropriate amount of conservative fixed income “Foundation,” based on your personal circumstances. 

We remain confident long-term investors, for ourselves and for you.

As always, we are here for you, and family members or friends who could use our guidance and assistance during this crisis.

 

Riding a Financial Roller Coaster

Blog post #442

Let’s imagine your investment portfolio is like a roller coaster.

There are different types of roller coasters, in this imaginary world.

Ride 1: This is not your typical roller coaster. It is very flat, with a gradual decline that is barely noticeable. Not much excitement. Kind of boring. Slow. You get into your car and you don’t even need to be buckled in. No seat belt is required. You can see that there are no curves or major ups and downs to deal with. You can tell the ride ends slightly lower than the starting point, but it is barely noticeable. It is safe and secure and easy to handle. From the beginning of the ride, you can see where you will end, safe and sound, as the ride is all outside.

  • This ride would be the equivalent of a portfolio that consists of only very conservative fixed income, with short maturities. There would be no stocks in this portfolio. Just CDs, government bonds, and maybe a few investment grade corporate bonds. Over time, the rate of inflation will probably exceed your rate of return.
  • Ride 1 has hardly any risk, but hardly any reward, in terms of fun, or financial gain.
  • This ride is generally recommended for older riders, or those with specific circumstances in the near term.

Ride 2: This is very different than Ride 1, but typical of most of the coasters in this imaginary theme park. As you near this ride, it appears daunting. You can clearly see that passengers are required to use a seat belt and an overhead harness. 

  • You can see that this ride starts with some ups and downs, as well as some major curves.
  • This coaster quickly enters a huge building, which you can’t see into. 
  • There is a large sign in front of the ride:  Shortly after the start of this ride, the remainder of the ride will be in the dark. You won’t know where the ride will take you.
    • You won’t know what will happen next. You can’t see where the ride goes, once it enters the building (like Space Mountain).
  • There is a very deep moat around the building, and it appears that the building was built far underground.
    • You expect that the ride will go very far down, at some points.
  • You are also thinking….there must be some pretty big hills and huge declines in this ride, but you will not know about them in advance.
  • You don’t know where the end of the ride is or even how long it is.
    • You can see that the building is massive, very tall and wide, rising much higher than the first ride you saw. It must go in many different directions.
  • As you near the boarding area for Ride 2you see another SIGN. It reads:
    • This ride is safe, but you must be prepared for ups and downs and unexpected curves.
    • You will not know what will happen in advance, at any point during this ride, once your car quickly enters the building.
    • The ride requires a seat belt and 2 shoulder harnesses, for your safety. We require all these safety measures for diversification, in case one does not work.
    • The length of time of this ride varies, sometimes greatly. Every ride will be different. This is what makes this ride unique.
    • This ride can be fun, but at times very scary! You have been warned!!
    • You can choose to ride alone, in a single-seater, or we offer a two-seater, so you can be accompanied by one of our expert guides, who will help with your experience. 
      • We highly recommend that you choose to ride with an expert guide.
      • If you chose to ride with one of our expert guides, they will meet with you in advance, to help prepare you for this ride.
      • They will also pull off the track and talk to you a number of times during the ride, to check and see how you are doing, and maybe make some adjustments, based on your experience and feelings during the ride.
        • They will not be able to tell you exactly when things will occur on the ride, but they will give you guidance that will enable you to be better prepared to make it through the entire ride.
    • You can get off mid-ride, and end the ride early if you want, but that will deposit you directly onto ride number 1. We don’t usually recommend that.
      • If you want to go back onto Ride 2, where you re-enter is almost impossible to predict. Re-entry to Ride 2 can be emotionally difficult.

Nearly all our clients are on Ride 2 and all elected to ride with an expert guide.

A few clients, as well as those anticipating buying a house or with kids entering or going into college, are on Ride 1.

You have survived Ride 2. You can handle it. 

You survived the downturn late in 2018. You enjoyed the large gains of 2019 and were enjoying additional gains through mid-February 2020.

Then another unexpected drop on the financial ride occurred, and the markets collapsed with the Covid onset.

And since March 23, just as unpredictably, the markets have strongly bounced back. April has been a very positive month.

We told you that markets would increase and decrease in ways that are unexpected and sometimes may not even seem rational. The key is to stay on the ride and to keep being prepared, and positive, about the future.

We will guide you along the way and help to make adjustments when necessary.

We don’t know how the ride will continue, but we are pretty sure there will be more good experiences than bad ones. And we will be there for you, as well as your friends and family members, if they want guidance on their financial journey.