Interest Rates

 Investing, Wealth Management  Comments Off on Interest Rates
Jan 302016
 

Okay – so the Fed is trying to move away from its Zero Interest Rate Policy. What’s happened since its December meeting when it announced this policy change?

– Short term money market rates have in fact increased – ever so slightly
– China’s stock market valuations have collapsed. They’ve gone from exorbitantly over-valued to only extremely over-valued.
– Oil has continued its apparent free-fall. The US still imports a lot of oil, but we also have exported at least a couple of tankers full. Iran is back in the oil exporting business – not much yet, but it’s coming. Locally gasoline is in the $1.30s. How can this be bad overall? Obviously not good if you own and oil well or provide services to the industry, but for the rests of the economy – isn’t this is a good thing?
– The US stock market had about as bad a start to the year as anyone could image. Fortunately as we closed out January, we have recovered some the of the losses from the beginning of the year.
– Japan’s central bank gave up on its ZIRP by moving to a NEGATIVE Interest rate policy just like the Euro-zone. Japan is still the third largest economy in the world, but it has been stuck in the doldrums for decades.

Here’s a potentially even more ironic twist to the Fed’s December policy decision. At the end of 2015, the 10 year US Treasury Note was yielding about 2.30%. At the end of January, the yield had DECLINED to about 1.90%.

What’s the story on that?

Bottom line we have a continuing level of uncertainty, both economic and political for investors to deal with. Now there is even a question about whether the FED will even follow thru with additional rate moves this year.

What Does “Asymmetrical Returns” Mean?

 Investing, Wealth Management  Comments Off on What Does “Asymmetrical Returns” Mean?
Jan 222016
 

A few years ago, I finally took the time to better understand the potential impact of variable returns on investments. As you switch from being a saver to an investor you soon begin to recognize that the “average” return for a certificate of deposit or bond is quite different from the “average” return for a stock or mutual fund.

For an investment like a certificate of deposit, the stated rate will most likely work out to be about the average return. Over time it could be different depending on whether the interest is compounded and some other factors, but it will generally be quite close.

On the other hand, for equity’s averages like one year, three-year, five-year return etc., need to have more thought given to them, especially if you try to project them into the future. Standard Deviation is the factor typically used to identify the volatility of a past period’s average return. At most, all you can really say is that for that previous time period the average return was such and such and inter-period returns varied in such a way to indicate that typical range [within one standard deviation at least] was this.

This is why all of performance information comes with the caveat that past performance is no guarantee of future performance. In reality, the average return will change with each periodic measurement added or subtracted to the series as well as the standard deviation. As a result, no matter how much we want to project that number into the future, it really needs to be taken with a serious grain of salt.

Another consideration is sequence of returns. As the investment gets more volatile – think small cap stocks or international investments – the sequence of the returns have even more bearing on the final “average” return. This can be especially challenging for a retiree who is drawing down assets for retirement living expenses. In other words, a couple of really good years at the start of your retirement can make the rest pretty easy financially, but a couple of bad ones at the beginning can be devastating.

Intuitively this probably makes at least some sense, but to get a better handle on the actual impact of this, check out this chart Risk return asymmetry. Bottom line a 10% decline is probably manageable and relatively easily recovered. Declines any greater than that are potentially quite challenging for a retiree to overcome.

Let me know your thoughts.

Retirement Readiness Stoplight Worksheet

 Retirement Planning  Comments Off on Retirement Readiness Stoplight Worksheet
Jan 152016
 

Here’s something I’ve been working on the last few weeks.

I was looking for a relatively simple, quick self analysis tool for my clients to give themselves a personal financial planning check-up.

Much of this is not original, I’m sure bits and pieces have come from a number of sources. I know the stoplight idea came from the Ag Credit Crisis in the 1980’s and most of the status bullets came from a variety of sources over the years.

Anyway, take a look at. Hopefully you will have mostly green lights, but if you have some yellows or reds you want to discuss, let me know.

Red Yellow Green Light WorksheetDLW Planning

No matter what, let me know what you think of the concept.

What’s Going On With the Stock Market?

 Investing, Wealth Management  Comments Off on What’s Going On With the Stock Market?
Jan 152016
 

I am not necessarily surprised by the volatility in the stock market since the beginning of the year. Clearly since it is quite one- sided i.e., that being down, it is even a little disconcerting for an investor trying to maintain a longer view of stock ownership.

As usual it would be a rather extensive list of factors that may be of concern to the market – some of which may be valid and others just noise. Some examples are:

  • China’s slowing Economy – This has been an on-going concern as they shift from a primarily export oriented economy to one with more focus on domestic consumption. Nonetheless, it is still the second largest economy in the World, and it’s still growing at an envious pace. +/-5% is not as good as +/-7%, but compared to the US at +/- 2% it is quite robust.
  • Chinese stock market – I know some people liken the US stock market to gambling, but the Chinese stock market might really be more like a casino due to its relative newness, regulations, controls, and government interventions.
  • Oil at $30/barrel – In spite of all of the pluses for consumers from the decline of $100 per barrel in crude oil, it has resulted in some serious disruptions in the energy industry. Which have now moved out into other sectors. Obviously, it can’t decline another $100, so the real question is, has there been a fundamental change in the World’s demand for oil? That answer is probably yes, but does it justify this price or will there be at least some recovery.
  • The end of the Fed’s Zero Interest Rate Policy – There is an element of adjustment needed by the market as interest rates move away from zero. Short term money market rates have started to generate at least some income. But, what happens to longer term interest rates? So far the 10 year US Treasury yield is down. How often will the Fed act? How much will the Fed push rates up? Will the yield curve simply move up or flatten out with most of the increase coming at the short end of the curve? I think the latter is more likely.
  • Global unrest – This is also an on-going story. Is something really different? Well the players might be different. But, a lot of it still seems to be focused in Middle East. What impact will the decline in oil prices have on this? How about the US starting to export oil for the first time in a very long time? These are all uncertainties and disruptive for the Middle East, but how detrimental to US security and its economy? Seems like, in time, less imported oil would be a good thing for both.
  • Speculators / Computer Trading – Is there any chance that these swings are at least caused in part by them? Certainly the momentum would suggest more declines.

So what impact does this all have on long term investors?

Is this an OPPORTUNITY or a DISTRACTION?

Clearly we are not a lows like we saw in early 2009, which in hindsight was the buying opportunity of the decade. On the other hand, we are not so high that values are ridiculously high like they were before the dot com bubble burst.

So what to do? My typical answer is probably nothing. If you have ready funds, maybe adding to equities would be reasonable if it fits within your overall asset target. Adding toyour fixed income portfolio will probably work out – unless the Fed action become quite aggressive, which I don’t think will be the case. Bottom line, moving out of equities to a money market is not likely to be the right move!

Behaviorial Economics

 Investing, Retirement Planning, Wealth Management  Comments Off on Behaviorial Economics
Jan 072016
 

I came across an article on Vanguard’s Advisors Website this morning, which discussed Richard Thaler’s new book Misbehaving.

In this article two behavioral biases to watch out for – loss aversion and overconfidence – are noted.

Loss aversion obviously refers to the fear of economic losses. For many / most people the emotional impact of a loss is twice as great as the emotional impact of an equivalent gain. As a result the fear of an investment loss can be so strong that even appropriate levels of risk are avoided.

Overconfidence comes in to play with potentially too much trading and possibly not enough diversity in your holdings.

I’ve not read this book, but I have read enough about behavioral finance to be interested in understanding more about how it works.

Right now we maybe seeing some of that with the Chinese economy and the market’s reaction to their chalenges.

Are You An Investor?

 Investing, Wealth Management  Comments Off on Are You An Investor?
Jan 052016
 

If you are an investor, you maybe interested in DLW Planning’s investment assistance!

My investment philosophy has a relatively long-range focus. So even though it’s easy to get caught up in the daily market information, I try to look out much further so I can ignore the daily gyrations.

As you may have notice from previous posts, I look to two sources for support and comfort for that view; William Bernstein’s Coffeehouse Investor and John Bogle and Vanguard.

I generally sum up may Investment Philosophy as follows:

  1. Have a savings plan that works for you!
  2. Diversify your investments to take advantage of their differences.
  3. Watch investment costs and taxes – they matter!
  4. Take a long-term view that fits your goals!

Unfortunately this is not sleek and sexy, but does increase the probability that you will successfully reach your personal financial goals.

If it’s time for your to review your financial/retirement goals or your investment plans, please contact me at don@dlwplanning.com.

Are You An Investor or Speculator? – 2

 Investing, Retirement Planning, Wealth Management  Comments Off on Are You An Investor or Speculator? – 2
Jan 042016
 

As a followup to a previous post, I think its important to determine which category you’re in before you make your first investment.

What’s the difference between an investor and a speculator? In my opinion, it’s the time horizon they use. An investor takes a longer view and invests in a company, country, or economic system. A speculator has a much shorter time line. Although both want to buy low and sell high, the speculator is looking for a much more active with a shorter turn around.

My investment philosophy has a relatively long-range focus. So even though it’s easy to get caught up in the daily market information, I try to look out much further so I can ignore the daily gyrations. Other than personal experience, I look to two sources for support and comfort for that view; William Bernstein’s Coffeehouse Investor and John Bogle and Vanguard.

The previous post discussed the Coffeehouse Investor, for this one Vanguard and John Bogle will be the focus.

Although I do not consider myself to be a Boglehead, I do have great respect for the Vanguard organization and the investment process and philosophy that John Bogle initiated. If you go to www.vanguard.com you will find their principles for investing success as follows:

  • Know Your Goals
  • Invest With Balance
  • Minimize Cost
  • Maintain Discipline

Somewhere I read “the secret to long term investment success is that there is no secret“! If you have identified long term financial goals, following these principles won’t guarantee you’ll reach them. But, I believe they’re likely to significantly increase the probability of success.

If it’s time for your to review your financial/retirement goals or your investment plans, please contact me at don@dlwplanning.com.

Are you an Investor or a Speculator?

 Investing, Retirement Planning, Wealth Management  Comments Off on Are you an Investor or a Speculator?
Jan 032016
 

I think its important to determine which category you’re in before you make your first investment.

What’s the difference between an investor and a speculator? In my opinion, it’s the time horizon they use. An investor takes a longer view and invests in a company, country, or economic system. A speculator has a much shorter time line. Although both want to buy low and sell high, the speculator is looking for a much more active with a shorter turn around.

My investment philosophy has a relatively long-range focus. So even though it’s easy to get caught up in the daily market information, I try to look out much further so I can ignore the daily gyrations. Other than personal experience, I look to these sources for support and comfort for that view: William J Bernstein, Bill Schultheis’s Coffeehouse Investor, John Bogle and Vanguard.

For this post, here is some information on Schultheis’s Coffeehouse Portfolio. He has a free quarterly e-newsletter, which I find quite interesting. It is not bloated with a lot of jargon and hot tips. It’s focused on some concise, commonsense information.

If you go to his website www.coffeehouseinvestor.com  you will see his simple coffeehouse portfolio. He also spells out his Three Principles for Investing:

  • Save for a rainy day
  • Don’t put all of your eggs in one basket
  • There is no such thing as a free lunch

You will also want to check out; If You Can – How Millennials Can Get Rich Slowly by William J Bernstein. It is available as a free download at http://www.efficientfrontier.com. It is a very small pdf in the books section. I don’t think you need to be millennial to find this book both interesting and useful – especially if you are a long-term investor.

If it’s time for your to review your financial/retirement goals or your investment plans, please contact me at don@dlwplanning.com.

 

Happy New Year!

 Investing, Wealth Management  Comments Off on Happy New Year!
Jan 022016
 

As the New Year rolls in, we’re all faced with the challenge of remembering to write 2016 versus 2015. But more important this is also a traditional time to take stock of where we stand with regard to our personal goals and objectives – financial and otherwise.

This is a good time to take a look at your retirement accounts and investments to see how they did last year. 2015 will most likely be a disappointing year for most investors – not a BAD year, but disappointing nonetheless.

Interest remain at historic lows, which is clearly a challenge for savers.

The stock market gave us it typical wild ride, but after all of the year’s ups and downs, it ended the year about where it started.

Given the likelihood of rising interest rates, a sluggish economy, global unrest, etc., etc., 2016 is poised to bring us more of the same.