Persistence Pays in Many Ways

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We have noticed something so prevalent it borders on being a universal truth. In so many of life’s endeavors, persistence is the difference between success and failure.

Tenure in a career builds experience and skills and value to employers…and earning power. Building a reputation in business takes years but can pay off for decades. A friend tells us, a college degree tells potential employers one thing: a willingness to stick with something for at least four years. In a world where instant gratification is so dominant, persistence—or grit—is an asset.

Persistence usually implies effort, willpower, or self-control. But there are ways you can be financially persistent without much thought or effort.

A saver who commits to put $100 monthly into an investment or savings account will run into reasons why it would be OK to skip a month, perhaps intending to make it up later. Maybe they feel it’s not a good time to invest, the refrigerator will need replacing, or an auto repair popped up. So the commitment turns into 12 decisions each year, 120 decisions per decade, 480 decisions over a working career.

By simply setting up an automatic deposit from one’s checking account, one decision is made and it lasts for all time. It is much easier to get one decision right instead of twelve or hundreds.

Many people have 401(k)s, IRAs, or other voluntary retirement plans available to them. Here, too, inertia can help you build wealth. You sign up, and so many dollars go into the plan every payday without any sweat or effort on your part. Sometimes people nearing retirement find out they are in pretty good shape because a young person long ago put wealth-building on auto-pilot.

When you combine these automatic, systematic ways to invest with the power of compounding wealth, amazing things can happen. Call or write if you would like to discuss your situation in more detail.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.

Outcomes May Vary

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After the recovery from the 2007-2009 financial crisis, we had some time to converse with clients about how well things had worked out in the end. Memories of the turmoil had faded and account values began to make new highs.

The less-financially-involved spouse in a client couple interrupted this discussion to say, “I just have one question. A lot of our friends lost half their money in the stock market, a couple of them even had to go back to work after being retired. Aren’t we in the stock market, too? How come we came out OK and they did not?”

You probably know the answer to her question. Most of the unfortunates who lost half their money turned a temporary downturn into a permanent capital loss by selling out at low levels.

Please notice how we characterized the panic. The failure of big institutions, waves of mortgage defaults, unprecedented action by Congress and the Federal Reserve, massive dollar losses in the markets, and economic turmoil with high unemployment and massive uncertainty are all wrapped up in the phrase “temporary downturn.” But that is not what the unfortunates perceived. It isn’t truly how it felt in real time to nearly all of us who held on, either. We all experienced concern or fear or anxiety.

So we all faced the same circumstances, a series of major economic and financial events that were beyond our control. The thing that mattered, however, was the one thing in our control: our reaction to these events. From the perspective of the long view, by putting these events in the context of history and properly judging them over the decades of a lifetime… we see that ‘temporary downturn,’ not a panic that compelled us to ruin our financial position.

Most of our clients lived through episodes of 10% unemployment before, 16% mortgage interest rates, no gasoline at the gas stations, and inflation devaluing our money at double digit rates every year. This is not to mention wars, assassinations, school children coached for nuclear disaster, and recession after recession. All of these difficulties proved to be transitory, producing only temporary downturns.

Long term investment success does not require perpetual optimism or rose-colored glasses. It does take, however, either a sense of confidence that we will handle whatever challenges may come our way—or a resolution to maintain our investment strategies anyway. We covered the End of the World Portfolio in a prior essay and reached the same conclusion.

From a tactical standpoint, we do need to know where our income will come from, and have the stores of cash we need for short term goals. Our comments above pertain to long-term or permanent capital. It makes sense to consider reducing volatility at market high points if that better suits your needs, and we’ll be talking about that when the markets recover.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.

Broken Windows, the Government, and the Economy

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Frederic Bastiat, a 19th century French thinker, gave us a number of enduring ideas including the “broken window fallacy.” His idea went like this:

When the shopkeeper’s son accidently breaks a window, bystanders assure the shopkeeper that it is a good thing, since the glazier will profit, money will circulate, and everyone will be better off. Bastiat names these things as “what is seen.” What is unseen is that the shopkeeper would actually have spent that same money on a pair of shoes or a book or some other good. The glazier’s gain is the cobbler’s loss, and society is poorer by one pair of shoes—after you consider what is unseen.

So imagine a society in which 98 people are gainfully employed in producing goods and services, and 2 people work in necessary, worthwhile and cost-effective ways to regulate the efforts of the 98. If we concede that some level of regulation is necessary, one might conclude that this society shares the output of 100 people.

Now imagine a combination of circumstances that leads to a program to provide better paychecks to five of the workers. The society elects to hire the five to dig holes and fill them in again for generous wages, thus providing “good jobs” for all. What is seen is that everyone has a paycheck, money keeps moving, and thereby everyone benefits. But what is unseen is that society has permanently lost the output of five workers, so the standard of living on average must decline by 5%. No wealth or advantage is created by the digging of holes, when everything is tallied up.

Worse yet, the five might instead be employed in unnecessary regulation of the other workers. If those five spend their days interacting with other workers, the output of five more workers is lost to their oversight. The standard of living on average then must decline by a total of 10%.

Our purpose in writing is not to argue about regulation in general, or the impact of new rules on community banks and financial advisors, or the proper level of government employment. Rather, we are hoping that people will think about what is unseen, as well as what is seen, in matters of public debate. Those of us looking to elevate our economic understanding would do well to start with the Wikipedia article on Bastiat.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Feelings, Numbers, and Big Decisions

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Life comes with many questions, infinite in variety. Should I buy a different home, live somewhere else, go back to school, retire in the sun, spend time differently, have more children, get a dog, buy a second home, invest in solar panels, change careers, take Social Security now?

Feelings are vital to making good decisions about your life and plans. So are numbers. But using one in place of the other may lead to terrible outcomes.

“Know yourself.” Some wise person advised this back in the dawn of history, and it is the foundation of great decision-making. What do you want? Where are you going? Where do you want to wake up every day? What are you trying to accomplish in life?

Notice that numbers do not really enter into these things: this is the next step, when we do all the arithmetic there is to do. If we quantify everything that can be put into numbers, we will have a much easier time in actually making choices and decisions.

For example, one might have feelings about whether to start Social Security earlier or later. You may believe that if you claim benefits at the earliest age, you will be better off because you will ultimately collect a greater number of monthly payments. On the other hand, you may think that if you defer until later, you will be better off because each payment will be higher. These are feelings.

But when we do the arithmetic, we might discover that there is a break-even point out there that applies to you at a certain age. If you live longer, the numbers say deferring benefits is a better option. If you pass away sooner, you would have come out best by taking benefits early. Figuring out which option works best at what age is arithmetic.

Here’s an interesting thing about this decision: nobody knows the date that is going on their death certificate, so numbers cannot PROVE which choice is better. We won’t know until we find out. But obviously, numbers do help us better understand the meaning and consequences of our feelings.
We figure out what we want with our feelings. We learn everything we can learn from the numbers. We use both to arrive at a thoughtful, knowledgeable decision.

When people make decisions without any numbers or with nothing but numbers, sometimes it does not work out. “We deserve a large new home, so we are buying one,” or “Our taxes would be lower if we moved to another state in retirement, so we are moving.” Sure, you bet—but in each case, do the numbers work with all of your other goals and priorities and feelings?

We do our best to understand your feelings, your goals, your objectives, what you are trying to do in life. And we add all the pertinent numbers, in terms you can work with, so that you can make good decisions. Feelings and numbers: both are vital. Call or email us if we can help you sort things out.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Inflated Expectations

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Back in 1970, gas was 25 cents a gallon and you could buy a liter of Coca-Cola for 15 cents. We all know that money is not what it used to be. When planning for the future, we need to remember that our money is not always going to be what it is now, either.

Conventional monetary policy aims for “normal” levels of inflation in the low 2-3% range per year. That may not sound like much, but it adds up. At this level of inflation, prices double approximately every 30 years. If you bury a dollar in the ground and dig it back up in 30 years, you can expect it to only buy half of what it could buy today.

For some people, this is fantastic news. If you take out a mortgage to buy a house, it gradually becomes easier for you to pay it off over the lifetime of the loan. At the end of a 30 year mortgage you’ll still be paying off the same amount, but the prices of everything else (including your wages) will have doubled. A small amount of inflation gives people incentives to invest and take risks with their money, helping make the economy more productive.

If you’re planning to retire on fixed assets, however, inflation poses a serious threat to you. With advances in healthcare it’s not unreasonable to expect new retirees to live another 30 years. After thirty years of inflation your retirement assets will only buy half as much in groceries and rent. Retirement funds that seem generous when you’re 65 may leave you in dire straits when you’re 95.

The simplest way to fix this is just to have more money than you’ll ever need—it doesn’t matter if your money loses spending power if you have even more money to spend. Of course, this is easier said than done! Saving diligently and spending wisely will only take you so far. If your retirement bucket isn’t big enough to weather inflation, you need to be able to grow your bucket. A balanced growth and income portfolio can potentially give you retirement income while still having some growth possibilities.

There are no guarantees; the future is full of uncertainty. Growth-oriented holdings can be volatile, and it takes steady nerves to watch the value of your retirement holdings going up and down. If you can tolerate it, though, including growth holdings as part of your retirement portfolio can give you a chance to stay ahead of inflation.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Money Grows (Just not on Trees)

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If you put $10,000 into a savings vehicle that paid 2% annual interest, how long would it take you to double your money?

The intuitive answer would be 50 years: 50 x 2% equals 100% return. But due to the effects of compound interest, you’d actually get there in 36. You’re not just getting interest on the money you originally put in, you’re getting interest on the interest you’ve already earned.

Doubling your money in 36 years is not terribly impressive. But then, 2% is not a terribly impressive rate of return. At 4%, as you might expect, you can double in half the time: a mere 18 years. And in 36 years, you’ll have doubled twice, to quadruple your original money. In 54 years, it will be eight times what it originally was! That sounds like a long time, but if you started saving in your twenties you could reasonably expect to have 50+ years for your earliest savings to compound.

And that’s at a relatively conservative 4% annual return. As your rate of return increases, your compounded returns increase exponentially. At 5%, your money will increase tenfold in 50 years. At 6.5%, your money will increase twentyfold in the same time: a mere 1.5% increase in returns doubled your money over 50 years! It doesn’t take very many doublings to turn modest savings into a sizeable pile of money.

Of course, sometimes this is easier said than done. Returns are never guaranteed and pursuing higher returns generally means accepting more volatility and risk.

The math behind compound interest can be difficult to grasp, but there’s a simple guideline you can use to estimate long term returns known as the Rule of 72. If you take 72 divided by your annual rate of interest, the answer will be (roughly) the number of years it takes for your investment to double. If you divide 72 by 2, for example, you’ll get 36—exactly as stated up above.

If you would like to see how this works with real money, call or email us.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. investing involves risk including loss of principal.

Are You Getting Your Piece of the Pie?

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The Federal Reserve provides us with a quarterly report of household net worth. The latest number is $85 trillion, up 51% from the financial crisis year of 2008. I don’t care who you are, that’s a lot of wealth—and a nice increase.

The distribution of our wealth from person to person is the subject of some political debate, which we will leave to the politicians. It always has made sense to us to focus on the things within our control; let’s see what we can learn from the numbers.

Our $99 trillion of assets includes homes ($22 trillion), money in the bank ($10 trillion), bonds ($4 trillion), common stock ($13 trillion), mutual funds ($8 trillion), pensions ($20 trillion), and small businesses ($10 trillion).

We owe $14 trillion, including $9 trillion in mortgages and $5 trillion in consumer debt (vehicle loans, credit cards, etc.)

Net worth is simply the value of our assets minus our liabilities, or what we own minus what we owe. $99 trillion minus $14 trillion is our $85 trillion in net worth.

Here are the pertinent points, as we see them:

1. Having wealth in different forms is a good thing, a form of diversification. We the people have money in the bank, different kinds of investments, homes and businesses.

2. Debt can make sense when it helps us own assets of enduring value that we can afford to pay for over time. $9 trillion in mortgages is a large pile of debt, but that helps us own and enjoy $22 trillion worth of homes.

3. Since debt or liabilities are subtracted from assets to determine our net worth, it makes sense to minimize debt over time. One who pays off a car loan and then keeps putting the payment amount in savings each month might get by with a smaller loan the next time a vehicle is purchased.

4. Because assets are the starting point for determining net worth, one should seek to invest effectively for growth and income over time. Money does not grow on trees, but it may grow over time.

Our $85 trillion net worth is a very large amount of wealth. The decisions we make play a big role in determining whether or not we each get our piece of the pie. We have written about Four Habits for Financial Success which might help, and we encourage you to call or email if we can be of service.

Not All That Glitters is Gold

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The gold standard is a seductive idea that tends to emerge in times of economic confusion. We see this today with the anxiety surrounding the Federal Reserve’s long-anticipated rate increase. Gold is synonymous with wealth, and a gold-based currency represents stability in a world of economic uncertainty… or so we think.

Unfortunately the reality is more complex. The value of a currency is based on two things: the amount of that currency, and the amount of economic wealth it represents. If our supply of currency increases at the same rate as the supply of “stuff” for it to buy, prices remain stable.

If the supply of currency grows faster than the supply of “stuff”, it takes more currency to buy the same amount. Prices rise, and then we have inflation. The gold standard is not a guarantee against this: sudden increases in the gold supply (such as from a mining boom) can create spikes of inflation in a gold-based economy. This risk decreases as we accumulate more gold stockpiles, but gold supplies can still be manipulated by currency speculators in the open market, doing serious damage to gold-based economies.

Worse, even if we could keep the supply of gold stable, the supply of “stuff” is not. If a large amount of wealth is wiped out (by wars, natural disasters, or economic collapse) then we have inflation again as there is now too much currency for the shrinking amount of stuff, creating a “double whammy” of inflation on top of economic hardship.

If the currency supply fails to keep up with the “stuff” supply (as is likely when mineral gold reserves become depleted), it’s just as bad. In this case, the currency becomes more valuable and prices decrease. We have deflation, the opposite of inflation. This sounds fantastic at first: all our money becomes more valuable! But then we have a problem, because who wants to spend money today if they know it will be more valuable tomorrow? Everyone begins hoarding money instead of spending or investing it, creating an economic slowdown.

We don’t always agree with the Fed’s policies. However, we believe that having someone influencing the money supply on purpose is a better way to stabilize prices than crossing our fingers and hoping that our supply of shiny metals just happens to expand and contract itself as needed.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

The Retirement Revolution

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Retirement, a relatively modern concept, is changing. Demographics, economics, and social change are all working to rearrange our notions about later years. Some commentators think that the term “retirement” itself needs to be retired. We’ll look at the trends and how they may affect you or people you know.

The changes in life expectancy have been astonishing. Since 1970, the average person is retired for seven more years according to the New York Times. Ken Dychtwald, president of Age Wave, notes the extraordinary growth in the average life span this way: “On the first day of the 20th century, the average life expectation was 47. On the last day, it was 78.”

Bottom line, the increase in our life expectancy has been partly tacked onto our retirement years. But when actuaries predict that there will only be two workers per each Social Security retiree, one has to wonder whether a society can run with one out of three adults living in retirement.

With the high unemployment rates of the financial crisis in vivid memory, it is hard to think about a labor shortage—but that is what the demographics point to. Two good things may come out of that: higher increases in wages, and more flexibility for workers seeking reduced hours, phase-down jobs, or other retirement-friendly alternatives.

Potential social changes are harder to predict. Anecdotally, more people below age 60 have indicated a preference to “always be doing something” in the way of work. Usually the object is a less stressful role, or part-time, or in a field of interest. At the same time, more people are thinking about checking things off their ‘bucket list’ when younger, while their health is good. One client told us, “It makes no sense to scrimp and save until you are too old and sick to do anything.”

One might say that more leisure is finding its way into our working years even while more work is getting into our leisure years.

Now more than ever, learning is an important part of keeping up with changes in the world and the skills required to earn a living. So just as work and leisure are expanding out of traditional boundaries, education is no longer confined to our early years.

We’ve written about the ideal way to retire before. The key things are to know what you want to do, and make plans to get there. Please call or email us if we may be of service in this regard.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

2015: Year In Review

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As we think about the year now ending, we would love to say “It was the best of times, it was the worst of times.” That would not be accurate. However, it truly was “the spring of hope, the winter of despair.”

Nobody has ever conveyed the concept of a mixed bag as well as Charles Dickens did in the opening lines of ‘A Tale of Two Cities.’ And nothing is more fitting when we think about 2015 in the investment markets.

The parts of the market that appeared to be cheapest at the start of the year mostly got cheaper, and cheaper, all year long. Meanwhile, interest rates remained at seemingly impossibly low levels—expensive bonds remained expensive all year. Natural resources that had been sliding for years continued to slide.

Back in the real economy, new jobs were created each month. Retail sales and most measures of economic activity moved higher through the year. Inflation remained quiet, and consumers paid astonishingly little for gasoline. The low prices for natural resources and energy fed into low input costs for businesses, which helped business profits remain near record levels.

The kinds of excesses that cause the end of the growth cycle were simply not present in 2015. The ‘irrational exuberance’ of investors that usually accompanies major peaks in the market is also scarce.

Our principles remain unchanged, but we are always seeking to improve our strategies and tactics. Avoiding stampedes, owning the orchard for the fruit crop, and seeking the biggest bargains are always going to make sense. Putting these principles into practice is the hard part. The new year will see a continuation of the increased attention to diversification, the search for new sources of portfolio income, and new ways to think about effective portfolio construction.

We are ready to say goodbye to 2015, a year when the S&P 500 crossed the breakeven line more than twenty times. But we do so with the spirit of “the spring of hope,” given what we know about how things work. Please call us with your questions or comments.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. </p>

Investing involves risk including loss of principal. No strategy assures success or protects against loss.