Clinton or Trump?

The question that everyone wants to know is which presidential candidate will be better for your investments. Other questions on investors’ minds include how much influence will the winner have on the stock market and is there something different going on with this election cycle? Emotions are beginning to run high. This is quite common as both candidates stir up voter’s anxieties with the goal of getting people out to vote.   Public trust in government is near historic lows. It is clear that there are more people fed up with Washington. The candidates have certainly generated more interest than in past years.  Expectations are that Monday night’s first presidential debate is expected to shatter viewership records. The top voting issues are: a dissatisfaction with government, the economy, foreign policy, health care, terrorism, and unemployment/jobs. There will be investment implications that impact fiscal spending, currencies, global trade, taxes, and regulation.

I have been following the race closely and I am prepared to act on the potential outcomes. Even though I will make some decisions based on the election, they will not be drastic. Research has shown that party affiliation and market performance are not related. The most important variable in determining whether a presidential transition will impact markets is starting valuation. The president that had the best market return over the last 50 years was Gerald Ford (1974-77) at 18.1%. The worst was George W. Bush (2001-2009) at -2.9%.   Gerald Ford was fortunate that the P/E ratio in 1975 was 8.30 and George W Bush’s administration saw P/E’s reach a high of 46.17 in 2002. Looking ahead, the iPhone 7 sales figures will be just as important than this White House race. The rally in the NASDAQ to an all-time high this week was in large part due to the new iPhone 7 launch. A quarterly earnings disappointment sales number from Apple may hit your portfolio more than either of the presidential candidates.

Government policies do eventually impact corporate profits but the Founding Fathers put enough checks and balances in place to deter aggressive agendas. Other research has shown that stock market performance has been higher when one party has controlled the White House but not both chambers of Congress. Studies suggest that investors prefer a split government.

I am prepared to make slight changes to your portfolio depending on who is elected. My hope is that neither candidate will be able to increase fiscal spending or raise taxes. I will be closely monitoring how poor policies could negatively affect interest rates and inflation rates. However, it will ultimately be business profitability, technology advancements, new drug development, and valuations that I will base my decisions upon. Trading on company fundamentals is more important than timing the market based on the next president.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

What is your risk?

Risk is the one of the most misunderstood terms in investing. Most people can gauge their own risk appetite. They either like to take risk or not. If you are a risk taker, the next step is determining your risk tolerance. This is the degree of potential investment loss for a given level of return that you would like to achieve. The commonly used risk metric to calculate this number into a percentage is standard deviation. But just to warn you, this calculation has proven to be a terrible way to determine risk. For instance, back in 2008-2009 when markets collapsed, the standard deviation of the S&P 500 jumped to one of the highest points on record, but this turned out to be one of the best buying opportunities of a lifetime.

The risk that is most important to investors is downside risk.  Warren Buffett has become one of the richest men in the world by understanding this type of risk. It is not a calculation. He measures the intrinsic value (true worth) of a business and assumes a margin of safety. Simply, he wants to know the potential downside if he is incorrect. His goal is to keep his losses small if he misjudges the value of a business.

As an insurance operator, he is constantly calculating his risk threshold. This happens to be the number that I’m most interested in understanding for my clients. As Buffett’s risk threshold has grown, so has his ability to take bigger bets. He believes in concentrating his investments because good ideas are hard to find. Buffett would prefer buying a company with a very high standard deviation that has lost value for non-economic reasons. A company’s ability to turn a consistent profit with minimal capital expenditures is his ideal investment.

The first step to create an appropriate asset allocation is to understand the investors risk threshold. What is the actual amount that an investor could lose without incurring a budget shortfall? This is similar to how Buffett runs his insurance business. If there is a loss in his business, he maintains a 20% cash allocation for liquidity purposes. The excess cash also puts him in an opportunistic position to take advantage of those investors that used standard deviation to calculate their risk tolerance.

Risk is a moving target as personal situations change and markets fluctuate. No two people will have the same risk threshold, but they may have the same risk appetite and risk tolerance. Having a retirement plan is essential to measuring your risk budget. Without proper goal setting it is impossible to understand your risk budget. In this volatile market, there will potentially be better opportunities ahead, if you understand these different types of risk.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Is your home an investment?

The single biggest financial decision that most people will make is buying a home. This major purchasing decision will effect their budget, savings rate, credit score, relationships, lifestyle, and overall happiness in life.

If you want advice on this topic, there is no shortage of “financial experts” giving their opinions on what is best for you. When I Googled, “advice on buying a house”, a Ric Edelman Financial ad was #1 on the page. He is the foremost expert on everything financial. Most of his advice is very good, but in this case, I believe that he is well off the mark. He gives, “11 Reasons to Carry a Big, Long Mortgage”, and thinks a home is not an investment.  For those of you that don’t know Ric, he has been giving financial advice for 30 years, and manages $16 billion for more than 30,000 clients across the country. He is the spokesperson for an army of advisors that follow his guidance.

I could never work at his firm. He would want me to tell you that we should leverage you up and invest any excess cash into the stock market. Instead of making a $100,000 down payment, take the $100,000 and invest it in a stock portfolio. He believes the bigger the mortgage; the bigger the tax-deduction. The aim of his advice is that the stock market will have a higher return than the interest rate on your mortgage.

Ric would have fired me anyway. My recent advice to an elderly client was to take $350,000 and pay off their entire mortgage.  Another client, who is 10 years away from retirement, I recommended having them refinance from a 30-year mortgage down to a 20-year mortgage. I was hoping for a 15-year mortgage but it wasn’t in their budget.

I have yet to meet one retiree who has not regretted owning their house outright. For the savers that have paid off their mortgages, they have the flexibility to buy a vacation home or invest more for retirement. The best advice is actually quite simple. Buy a house with a fixed mortgage that you can afford. The price you pay is most important, but matters less if you plan to buy and hold. A house is a major investment because of the leverage that is creates. Many of my clients with smaller mortgages have tapped their equity to start a business, buy second properties, and ultimately, have the flexibility to retire young.

Buying a home is a personal decision and everyone will have their own circumstances to consider. In some cases, a big mortgage might be better if you bought at the right price and have the means to pay the mortgage. In other cases, a smaller mortgage is better, which will free up more money to allocate into a retirement plan. There are some retirees that prefer to have a mortgage in retirement because they have the ability to pay for it through their cash flows such as pensions, Social Security, and investments. No two situations are alike.

It is best to avoid any wild advice that is counter to common sense. The cornerstone of any financial plan is being able to afford where you live. The second most important part of the plan is saving for retirement. If you get the first part right, I’m confident that the second part gets that much easier.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

The Case Against Buying an Annuity

If a financial advisor ever recommends that you buy an annuity, you should immediately seek a second opinion. Nobody hates annuities more than Suze Orman.  Suze believes that annuity salespeople prey on fear, especially of the retired. Moreover, Suze thinks it is the worst investment that you can make.

In rare circumstances, I believe a small allocation into an annuity might fit into a financial plan. This buyer doesn’t care about leaving an inheritance and they could benefit from more discretionary income. Otherwise, I do not recommend annuities for the following reasons:

  • They are complicated products that can be confusing to the buyer. Even the sellers of many of these annuities don’t understand the features. Last month, MetLife was levied a near-record $25 million fine for errors in understating the value of replacement contracts. According to the Wall Street Journal, MetLife said that the company’s registered representatives weren’t provided “adequate training or guidance on how to conduct a comparative analysis” of products and that “deficient systems and procedures” were evident. If the salesperson doesn’t understand the product, there is no way for the buyer to grasp how the product works.
  • The surrender fees often start at 7% and there is no liquidity.
  • The sales commissions for annuities are very high and range between 6% to 7%.  Most financial advisors wouldn’t sell many of these poorly designed products unless they received this huge commission.
  • Annuities are terrible from a tax standpoint.  They are not subject to the long-term capital gains rate; rather, they are subject to ordinary income taxes.
  • The time to lock into a fixed guaranteed income is not when interest rates are near historical lows and inflation could be on the rise.
  • The guaranteed withdrawal benefit (GWB) that is sold as a benefit is really a gimmick. At the age of 65, a variable annuity offers a 5%-6% guaranteed lifetime income. This guaranteed withdrawal income is based on nothing less than a life expectancy calculation. If an annuity holder lives well beyond their average life expectancy, they can beat the annuity company but their heirs most likely will receive no inheritance. If the annuitant dies early in retirement, the annuity works in the favor of the annuity company.

I offer second opinions for anyone seeking advice before they make an annuity purchase. I will most likely tell you the reasons why not to buy it. There are many other investments that you can make that offer above average dividend yields with the potential for gains. Yes, the market risk will be higher, but a well balanced portfolio can help to diversify away some risk.  Diversification does not prevent losses, but it will help to hedge against inflation and can create a more stable income stream.

If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to mitch@cgfadvisor.com.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Longevity Risk and Retirement

My grandmother just had her 105 birthday! She has now been in the decumulation phase of retirement for over 45 years. Back when she retired in 1970, $1 of buying power had the same purchasing power as $6.11 today.  As she has aged, her investment goals have changed from focusing on total returns to maintaining a comfortable lifestyle in retirement.

The most difficult part of planning for retirement is that you never know how long you will live. There is a gentle balance between controlling your spending or facing a budget shortfall. My grandmother never thought she would live to be 105. Over time, her risks changed as the quality of her life changed.

In the 1970’s, her major investment risks included out of control inflation and a bear market. In 1983, tax laws also changed when Social Security was taxed. An increase in her longevity also gave her more of a chance of potentially facing a significant financial crisis. This commentary is too short to list all of the 20% market drops that she has experienced.

A major disadvantage for retirees today, is investing in a low interest rate environment. It is much more difficult to retire with a high income portfolio of investments that can help maintain a high standard of living during retirement. More retirees have been forced to invest with a focus on total returns. Those that have not saved enough for retirement or hold too much cash, increase their odds of facing a budget shortfall.

As longevity increases, so does the probability that you will no longer be able to take care of yourself.  The cost of nursing home care is now significantly higher.  My grandmother had the benefit of lower nursing home care beginning in her 80’s.   Long-term care insurance premiums are now significantly higher than they were 5-10 years ago. Many insurance companies did such a poor job estimating coverage, that they no longer offer this type of insurance. Only a few companies now offer this insurance. The result is that many people can’t afford the premiums and will need to start saving more for retirement.

We all hope to face longevity risk. Preparing a retirement income plan is essential to minimizing this risk. Your plan needs to begin with a budget and include how this budget will change over time. Determining how to fund this budget in a low rate environment is your challenge. Those that prepare a plan earlier may have a better chance of living a comfortable lifestyle much like my grandmother has over her 45+ years in retirement.

If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to mitch@cgfadvisor.com.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

New risk that could ruin your retirement

The question that most retirees face is how much investment risk should they take in retirement. To answer this question, you first need to understand their budget. The goal of any retirement plan is to customize an investment strategy that will help pay the bills throughout retirement. It is critical that proper assumptions are made that will account for both inflation and market risk. Making a retirement budget will help you avoid one of the biggest retirement mistakes, which is running out of money too soon. The second biggest mistake that retirees make, is not accounting for inflation and market risk. These risks have more to do with the timing of their retirement than anything else.

For instance, retirees that entered retirement before the Great Recession in 2007-2008, took on significant market risk. Some would say that recession never ended.  In 2006, it was common to find longer-term CD rates over 4%. Now, 8 years later, interest rates are still hovering slightly above zero. Overseas, central banks, including the European Central Bank and the Bank of Japan, have implemented negative interest rates. The GDP growth rates for both Europe and the US are hovering between 1%-2.5%.

I believe that the new risk retirees face today is inflation. Inflation risk is a new threat because the Federal Reserve has kept interest rates too low for too long. The Federal Reserve chose not to raise interest rates this week because of slower growth in China and Europe. However, the US economy has added enough jobs that the unemployment rate is now below 5%. Employers are now having trouble finding qualified workers, which is triggering a pick-up in wage growth. Historically, inflationary pressures are usually led by higher wage growth. Since February 2015, the 1-year core CPI measure, which excludes volatile food and fuel costs, rose 2.3 percent. Health care inflation continues to remain in the high single digits.

In the past, retirees would ladder a portfolio of bonds or CDs. This strategy worked well.  Over the past 10-years, the Vanguard Total Bond Market Fund (VBTLX) averaged 4.72%. Now with the 10-year Treasury Rate at 1.87%, those entering retirement today will have a difficult time matching the past results of the Vanguard Total Bond Market Fund over the next 10-years.

I believe that these markets are entering a new phase where inflation may become the greatest risk. If growth continues to fall overseas while US job growth sparks wage inflation, bonds may be setting up for big losses down the line. These risks will only increase if interest rates continue to fall because of the negative interest rate policy overseas.

 

Please read our disclosure statement regarding the contents of this post and our website as a whole.

The material in this blog represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed to be accurate, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. It should not be construed as advice meeting the particular investment needs of any investor.

Underlying data source from Morningstar.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Is it time to change Financial Advisors?

Most people upon hearing that a friend or family member is sick recommend seeking a second medical opinion. I give the same advice when turbulence hits financial markets and you find that your current financial advisor has put your retirement at risk.

Below are 10 warning signs that it’s time to start looking for a new advisor:

1) You haven’t heard from your advisor and feel as though they are servicing their larger clients.

2)Your advisor reviews charts and graphs rather than your personal circumstances.

3) Your portfolio is consistently down more than the S&P 500 index (if this is your benchmark).

4) Your portfolio is comprised of financial products and lacks diversification.

5) You invested with a talk radio host only to find they are not managing your account.

6) Your advisor can’t explain why your portfolio has underperformed the market.

7) Your advisor doesn’t follow the investment markets or doesn’t take responsibility for their investment decisions.

8) Your advisor is greedy when others are greedy and fearful when others are fearful.

9) There has never been a change to your investment strategy or portfolio as your goals change.

10) Your advisor doesn’t manage risk and does not monitor your portfolio.

If you believe that your advisor shows any of these signs, it might be time to move on to a new financial advisor. I recommend that you interview at least two or three advisors before making a financial decision. Feel free to reach out at to me mitch@cgfadvisor.com for one of those interviews.  I offer free portfolio reviews and can bring my 18 years of investment experience to managing your portfolio.

 

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

The material on this site represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed to be accurate, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. It should not be construed as advice meeting the particular investment needs of any investor.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

 

How to survive a divorce financially

If you are going through a divorce your emotions are running on overload. An unexpected divorce has been said to be more draining than an illness or the death of a close family member.

Here are a few tips to help guide you or a friend that you know that is going through a divorce:

  • All divorces involve financial settlements. Take a closer look at your finances/investments to be sure that nothing is missed. Make a list of everything!
  • Your divorce attorney is an expert on the law; however, don’t expect them to understand investments, taxes, and insurance.
  • Now more than ever, you need a post-divorce financial plan. It is best to understand what your budget and cash flow will be after you separate.
  • A good practice is to understand how divorce will impact financial aid, insurance policies, and retirement plans.
  • Understand the rules of a qualified domestic relations order (QDRO) – there are tax consequences and rules that you need to follow.
  • Always consider taxes – there are enormous mistakes made around negotiating pre-tax vs post-tax. You should always consider post-tax.
  • Find a new financial advisor that is not associated with your ex.
  • Take the time value of money into consideration. Always calculate a stream of payments rather than lump payments. You need to determine the rate that money is being discounted.
  • Make sure you will have adequate health, disability, and life insurance coverage after a divorce.
  • Update beneficiary information on all of your investment accounts.
  • Request a copy of your credit report and look for any misinformation. A good credit will be essential to rebuilding your financial future.
  • Open new bank accounts and credit cards in only your name.
  • If you do not fully understand something, do not be afraid to seek another expert to ask your questions.

We can help put your mind at ease and put your financial life back together.  We bring an interdisciplinary approach to the challenges of divorce with our knowledge of investments and financial planning. We have supported our divorced clients and their attorneys by providing solutions to complicated settlement issues as well as helping them avoid common mistakes that can occur during a divorce settlement. Getting the right divorce advice can help put you back on the path towards a more confident financial future.

Many of the clients we work with are from North Attleboro, Plainville, Norton, Mansfield, Raynham, Attleboro, Wrentham. We also have helped answer questions on divorce with people who have called us in Bristol County.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Tim Duncan’s 8 Investment Lessons

This week future hall of fame basketball player, Tim Duncan of the San Antonio Spurs disclosed that he lost $25 million over the course of his career due to an unscrupulous financial advisor and personal friend. We can learn from his losses. Here are my investment lessons:

Lesson #1 – Rule No.1: Never lose money. Rule No.2: Never forget rule No.1. – Warren Buffett

Investment Interpretation – As Albert Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t …pays it.” If you lose money, you can’t compound it. Before making any investment, first think downside risk, then only consider the potential for profits.

Tim’s case – I peg Tim’s losses closer to $100 million if he had slowly grew his wealth by 5% on his investments. Going forward, these losses will compound throughout the remainder of his life.

Lesson #2 – Trust but verify

Investment Interpretation – Never place your full trust in anyone. If you don’t understand your investments, get a second opinion from an accountant or seek the opinion from another financial advisor.

Tim’s case – He had no idea how to track his investments. If you are unsure of how your money is being invested, seek a second opinion.

Lesson #3 – Invest only when there is full transparency

Investment Interpretation – Your money should be held at an independent entity such as a brokerage account that separates your money from your advisor.

Tim’s case – A best practice is to have an accountant or attorney value privately held investments. Tim never assembled such a team.

Lesson #4 – No conflicts of interest

Investment Interpretation – Investments should be made that are in your best interest and are made to achieve your goals.

Tim’s case – He invested in companies in which his advisor was part owner. The advisor made investments that benefited him, not Tim.

Lesson #5 – Avoid complex and complicated investments

Investment Interpretation – If you don’t understand it, don’t invest in it. Keep it simple and invest in what you know.

Tim’s case – Tim was making investments in private equity – hotels, beauty products, sports merchandising and wineries. Non-public investments should only be made by specialists who have assembled teams that have shown a significant track-record of success.

Lesson #6 – Pay attention and review your investments

Investment Interpretation – You should review your statements every 3 months and have an annual review with your advisor. Don’t wait for an “event” that causes these losses to be uncovered.

Tim’s case – All of Tim’s losses occurred over a 8 year period (2005-2013). These losses were discovered as part of his divorce proceedings.

Lesson #7 – Monitor your investments against a benchmark

Investment Interpretation – You CANNOT manage risk in your portfolio if you do not set an appropriate benchmark.

Tim’s case – He would never play basketball without boundary lines nor should he invest without a benchmark.

Lesson #8 – Make investments with qualified investors

Investment Interpretation – A good practice is to invest with a Chartered Financial Analyst (CFA) or with a qualified advisor that has shown a successful track record of investing.

Tim’s case – He invested with an unqualified advisor who was a personal friend. If you invest with a friend, be sure they have the academic background, experience, and qualifications to provide you financial advice.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Should you invest with a Robo-advisor?

There is currently a race to see which company will launch the first self-driving car. Artificial intelligence and automation have become the two biggest business opportunities in the next decade. The financial planning industry has it’s own version of a self-driving car – the “robo-advisor”.

“Robo-advisors” are a new version of a financial adviser that provides portfolio management and financial planning through apps and fancy websites. “Intelligent Portfolios” are showing tremendous growth. Fidelity, Charles Schwab and other firms have recognized the threat and have recently made major strategic decisions to offer more automation. The current leader in the field is Wealthfront. They have gained over $2B in new assets in only a few years.

This week one of my clients asked me if I thought the “robo-advisor” was a good alternative to traditional asset management. Would these services eventually replace financial advisors? To answer this question, I decided to do a little research.

My first step was to sign up for these services as a prospective investor. The technology was amazing and I could see why they have been an overnight success. The account opening process was quick and easy. These “robo-advisors” had me signed up in 5 minutes and had uncovered all of my investable assets and knew every detail about my financial life. The goal setting calculators were the best I had seen. The “robo-advisor” goal setting technology was better than the financial software used by many financial planners.

My second step was to see how they were going to gauge my risk tolerance. I ran various allocations for different goals and changed my age to see how this software would adjust to my risk profile. Surprising, the results were terrible! If this new automated asset allocation was equivalent to a automated self-driving car there would be a 10 car pile-up. The claims of better returns and diversification were unfounded. In one case, my moderate allocation looked like an aggressive allocation. All the services made unwarranted claims of offering a smarter way to invest with better returns over your “typical investor”. They showed how tax loss harvesting was going to add to returns and more global diversification and smart rebalancing would increase returns by over 4%. These claims may not hold in actual practice.

My last step was to review their asset allocations and back-test how they were constructed. How were they going to diversify my portfolio? How were they going to produce “better returns” as they stated on their websites?  I blended all the asset allocations using my tools and compared it to other diversified portfolios in the Morningstar database. What I found was that any of these allocations would be the lowest rated in major categories.  Two of the leading “robo-advisors” had a moderate model of almost 38% in developed markets and 10% in Emerging Markets. These moderate allocations over 5 years offered much more risk than the S&P 500 index and trailed the S&P 500 by over 40%!  The fancy “robo-advisor” software that didn’t miss a detail on my goal planning had somehow failed to show me the 3, 5, and 10-year trailing returns. Calendar returns and a benchmark would have been nice to see as well.

At my wealth management firm, we don’t sell you pie charts or make claims of “better returns”. Our asset allocations are created to seek the best investment opportunities and not just give you market exposure. Now to answer the question that my client asked me earlier this week on:  if he should invest with a “robo-advisor”.  I believe that these automated services will help you to organize your finances, track your spending, and set goals for the future. However, if you are seeking a customized asset allocation, I’d invest my wealth with a real advisor who had knowledge of how to create a model portfolio and one that could ask me more in-depth questions of my risk tolerance.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market.
They are methods used to help manage investment risk.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.