Month: November 2016

Growing Household Wealth

© Can Stock Photo / kenhurst

The Federal Reserve Bank of St. Louis recently wrote about the tendency of households to grow wealthier as they age. There are lessons in the story that many could apply, to their benefit.

Incomes, of course, influence wealth. Think of income as a faucet running into a tub. The drain at the bottom is where expenses go. The water level in the tub is your store of wealth. You can increase the water level by improving the flow in or restricting the flow out. You can increase wealth by increasing income or reducing expenses.

But there are three more subtle things going on, according to the study. Liquidity, having adequate wealth in safe and liquid forms, buffers against emergencies. It helps people avoid selling assets at bad prices because they need money. And liquidity helps prevent expensive debt defaults and other issues with credit.

Diversification is important, too. Over time, households tend to accumulate more wealth in financial assets and business holdings as well as real estate. When wealth is spread across a number of kinds of assets, a shock in one area is less likely to upset everything.

Leverage, or the relationship of debts to assets, can be an indicator of wealth. Too much debt increases the risk from a negative surprise. Borrowing can be expensive, too. Caution with leverage is generally correlated with household wealth.

Notice how the idea of resilience runs through these more subtle factors. It isn’t that households with more wealth always avoid bad luck or negative surprises. Everybody has those from time to time. Rather, those households are better equipped to deal with adversity because they have liquidity and diversification, and leverage has been kept in check.

Most people do not start out in life with plenty of resources and extra income and an ideal financial position. Many need a working lifetime to accumulate wealth on which to retire. Over the years, liquidity and diversification become larger factors and use of leverage usually declines. These are the factors that explain why households usually become wealthier over time.

As always, call or write if you would like to discuss some aspect of your situation.

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.

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

A Money Plan that Fits You

© Can Stock Photo / wrangler

For 2017 we have resolved to do a better job of listening to our clients and developing plans that suit their needs and desires. We are ready!

Our new short presentation, ‘A Money Plan that Fits You,’ approaches the topic in a step by step way. It can help you understand the three main buckets or portfolio layers that we offer:

• Our core long term investments are intended to provide total returns over the long term. We research opportunities and threats to choose where and how to invest. Inherently and unavoidably, these investments fluctuate in value. That is part of good stewardship.

• Many people need or want a certain amount of ‘money in the bank.’ With this in place, they can tolerate some volatility in the rest of their plan.

• In between ‘money in the bank’ and market-sensitive investments, some people desire a balanced or middle of the road approach. This might produce medium risks and medium returns.

Your circumstances and attitudes are different from those of the next person. By using varying mixes of these three portfolio elements, we can develop a Money Plan that fits you.

Of course we do the arithmetic on your planning issues. Having a portfolio that is easy to live with may or may not get you where you want to go; we won’t kid you about the numbers. But we never forget whose money it is—yours—so decisions on how to invest properly belong to you.

We are excited (as always) about the new year and the improvements we are making. If you would like to see ‘A Money Plan that Fits You’ simply ask. We will send you the short presentation in both PDF and slideshow format. It only takes a few minutes to view.

As always, call or write for a longer discussion, or how our work might apply to your situation.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

No strategy assures success or protects against loss.

Wait Until Next Year

© Can Stock Photo / photoslash

Since the Chicago Cubs don’t need that phrase any more, we thought we would borrow it for this essay about the months and years ahead.

Some of our favorite times of the year are still ahead of us for 2016. Gatherings and holidays and time with friends and family will fill the next few weeks.

Even so, we’ve had to get busy to be ready for the new year. Three things are causing a lot of evolution and change in our shop. Regulatory initiatives and market forces play a role. But the biggest thing is our intent to operate more effeciently, to invest more effectively, and to take care of business for you.

1. The systematic communication programs are helping us reach many of you every week with key perspectives. Some people want to know each day what we think is most interesting or pertinent. For them, we are on Facebook, Twitter, and LinkedIn.

2. We have a new focus on helping clients address their need for stable value elements in their portfolios—in addition to our research-driven focused investment holdings. Clients will be able to specify that a portion of their portfolio be invested with capital preservation as the primary objective.

3. Block trading and systematic programs are making our portfolios more responsive to changing conditions than ever before.

4. We have long offered diversification away from our traditional focused approach to investing. Now we are formalizing that into a separate offering.

So in 2017, we plan to be better equipped than ever before to manage your needs with appropriate portfolios and plans. Two things will never change: our commitment to core investment principles, and the knowledge that the better off you are, the better off we are likely to be.

Happy holidays, and here’s to a healthy, prosperous New Year! Thank you all.

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.

Can Haruspication Work For You?

© Can Stock Photo / DAIVI

We’re fairly certain we will meet one of our communication goals with this essay: to educate. We did not know the big word in the title until we went looking for it. If you knew it already, you are some kind of scholar.

Haruspication is one of many ways in which humans have attempted to divine the future. The practice came to ancient Rome from the Hittites via the Etruscans. It involved examining the entrails of animals that had been sacrificed to the gods for signs and portents. Perhaps it didn’t work that well, since the Hittites and the Etruscans haven’t been heard from for millennia.

In our day, technical analysts purport to be able to learn the future direction of investments by examining charts of various kinds. At the extreme, some say that fundamentals like earnings or financial statements or economic factors do not apply: everything one needs is supposed to be in the charts.

Our view is that facts matter, that understanding financial statements is important to investment analysis, that economic research has its place. By far the most important thing is to choose the questions you want to answer.

For a long term investor, the direction of the stock market or of any particular investment next week or next month or even next year is not all that pertinent. We already know that markets and investments go up and down; we also know what the underlying long term trend has been for many decades.

The questions we most want to answer are, where are the biggest bargains in today’s environment? Are there market stampedes we should avoid, or perhaps even go against? How can we own durable sources of investment income so we can live on our capital?

Neither haruspication nor technical chart analysis is likely to help you reach your goals. You may rely on us to do the work of reviewing quarterly reports, analyzing financial statements, studying economic developments, and thinking about trends in business and society—so that we can help you answer the important questions.

Please call if you would like to discuss your situation, and how our work might apply to it.

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

No strategy assures success or protects against loss.


© Can Stock Photo / robwilson39

Those closest to me know that I am not as smart as my bride, but I am smart. I am not as kind as my late brother John, but I am kind. I am not as focused as my brother Bill, but I am focused. What I do seem to have the most of: perspective.

At this moment in history, we need perspective more than anything else. Here goes.

The freer each one of us is to unlock the highest fraction of our own potential, the better off we all will be. If you believe that, you likely were dismayed by the presidential campaign. My object is not to apologize or rationalize the appeals to our basest and most tribal instincts.

Some proposed the theory that the country needed strong medicine to fix its illness, even though the medicine has unpleasant side effects. Maybe that is correct. Maybe not.

What we do know is that America is built on a system of checks and balances. There is a system, there are institutions, there is always the will of the people. Any clear-eyed review of history shows the imperfection of humans and human institutions—we do not think we will achieve heaven on earth any time soon. But we have tended to correct our worst excesses and get back on a better path, sooner or later.

From an economic perspective, we are looking at a mixed bag. Millions of us have seen in our own work and businesses the deleterious effects of regulation that costs more than it is worth. We may reach a better balance, and hopefully that pendulum won’t swing too far the other way.

As for the protectionist trade policies promoted on the campaign trail, one can only hope that was a cynical ploy. We would do ourselves no favor by paying $400 for $200 televisions, or by engaging in trade wars that would shell out our exports and hurt workers and farmers.

In health care, there is a chance that the hash we have now, which replaced the prior hash, may be replaced with something better. (There is also a chance that life and death changes will harm fellow citizens.)

We would best be served by trying to figure out what the middle 60% or 70% of us can agree on. Partisanship has been a poor substitute for citizenship. There is much to do on many fronts—we have many challenges.

We will survive. Mistakes will be made. We will overreact. And we will come back, and come back, and come back. It is what we do. Keep the faith. Do what you can. Elevate the discourse.

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

Current Market Strategies

© Can Stock Photo / 4774344sean

Our values and principles drive our strategies and tactics. We are paying special attention to three themes in today’s investment markets.

There is going to be a lot of innovation and change in personal transportation in the years ahead. Some of us are already driving cars that warn us when we drift from our lanes, or have another driver in our blind spot, or actually apply the brakes when a hazard appears. Hybrid and electric vehicles are gaining market share from traditional gasoline engines. Whether these technologies lead to self-driving, emission-free cars or not, continuous technological improvements will be part of the landscape.

The suppliers of sophisticated vehicle components and controls and electronic displays may be beneficiaries of the innovation wave, no matter which manufacturers do the best.

Health care broadly defined has come under pressure in the markets for a variety of reasons. Politicians have jumped on the pricing scandals that seem to reveal greed or corruption. Health insurance costs are skyrocketing for some kinds of coverage as our payment system has been transformed from one kind of hash into a different kind of hash.

At the same time, the biopharmaceutical companies offer real cures and solid advances in the treatment of diseases, with amazing things coming. We human beings value life and health and will pay for it. If we own a selection of the largest profitable companies in this space, we may have the opportunity for above-average returns from currently depressed levels. No guarantees, of course.

The third theme is mature in some respects, since we’ve followed it for years. Energy and natural resource companies remain attractive. Prices remain substantially lower than the peak levels of a few years ago, trends are pointing in the right direction, future supplies have been constrained by low prices and global demand is generally strong.

We believe these three themes—the evolution of the auto, biopharma, and natural resources—honor our principles. When we seek bargains and to avoid stampedes in the markets, we gravitate towards sectors that have solid prospects and haven’t become over-priced by becoming too popular. These are our opinions, of course, not facts or guarantees. Please call or write if you would like to discuss whether these themes might be appropriate for your portfolio.

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

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

The Hidden Risk of Bonds

© Can Stock Photo / alexskopje

If I were to tell you that you could buy a bond that would pay out interest of 5% or more per year for the next 30 years, that might sound like a great deal. It’s certainly a great price in today’s interest rate environment—nearly double what 30-year U.S. Treasury bonds pay—and best of all, it lasts for 30 years. Other income may come and go, leaving you scrambling to find replacement investments that may or may not have the same yield, but this hypothetical bond will (one hopes) be around paying you the same rate for three decades. Sounds like a lead pipe cinch, right?


There is a catch. A 5% yield that will not go down for 30 years sounds great in today’s interest rate environment—but it is also guaranteed not to go up for the next 30 years. If interest rates rise and yields go up, your 5% bond will inevitably be left behind. If you try to hold onto your bond, your returns will look pretty pitiful compared to newer bonds that pay more interest and inflation will eat away at your purchasing power. If you try to sell your bond to hop on board higher yield issues, you’ll have to sell at a deep loss—no one will want to pay full price for your 5% bond if they can go out and buy 8% bonds instead. Either way, the damage would be considerable.

In investment terminology, this feature of bonds is known as interest-rate risk. The longer the bond maturity, the higher the risk (which is why longer term bonds pay higher interest.) Not only is it more likely that interest rates will rise at some point during the holding period, the damage will go on for longer before you get your money back at maturity.

We have many reasons to be nervous about holding on to long term bonds, even ones that have performed exceptionally well. For the past eight years, the Federal Reserve’s near-zero interest rate policy has been distorting the bond market, which is why overall bond performance looks so good in retrospect. But we believe that if it is impossible for something to continue, it won’t. Sooner or later the Fed will have to return to a sane interest rate policy, and when it does, long-term bonds are going to suffer badly.

We’ve been in this low interest bubble for so long we’ve forgotten what a realistic bond market looks like. If you find yourself scratching your head at the idea of selling off bonds that seem like a good bet, realize that what looks like a good deal now may not turn out to be so good in a few years. If you have any questions about your holdings, give us a call or email us to talk.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The Meaning of Life

© Can Stock Photo / Toniflap

If you ask Google “What is the meaning of life?” you’ll have more than 25 million search results from which to choose. We cannot answer the question for you, but the question and its answer influence your plans and planning.

Whether we think about “the meaning of life” or not, each one of us has fundamental values and principles that shape our words and deeds and lives. If we are to rely on one another, we probably need some common ground on these values and principles.

We say this because strategy and tactics in planning and investing arise out of our values and principles. If there is some agreement on values and principles, then our strategies and tactics will likely make sense to everyone involved. But if we have completely different ways of looking at the world, then we would probably have different ideas about strategies to deal with opportunities and risks as they arise.

We work with a diverse clientele, people from all walks of life in every kind of circumstance, across the country. You have your hopes and dreams; our object is to understand them, and figure out what role we might play in making them more likely to happen. You may understand ‘the meaning of life,’ or perhaps like us you’ve concluded that life is a journey on the road to understanding. Either way, aren’t we all trying to make sense of it?

Whatever one might think about the meaning of life, it is certain to be better if we listen to one another, respect the intentions and plans of the thoughtful people around us, and help each other get where we are trying to go.

Although it may not look like it, that last sentence is our business plan. It isn’t like the ones you might find in a business school textbook. There aren’t any numbers or growth objectives or profit goals. Simply put, the better off our clients are, the better off we are likely to be.

That has meaning in terms of the resources we need to serve you, personnel and training and equipment and facilities. It shapes how we spend our time, researching markets and managing portfolios and talking to you and communicating in other ways. And it is a big factor in making our practice sustainable.

What is your fondest wish? What are your major objectives? What is the meaning of life? If you’d like someone to listen to your answers, please write or call. It’s what we do.