Tactics

Taking Stock

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One of the things we do periodically with you is take stock. Having a periodic review helps us stay in touch with what is going on in your life. It’s also a good time to review your holdings, the economy and the markets as well. The items to discuss fall into these two basic categories.

  1. Planning – connecting your money to your life.
    1. Cash flow needs, saving, spending and lifestyle.
    2. Thinking on retirement.
    3. Plans for residence, if any, moving or major remodeling.
    4. Estate and trust considerations.
    5. Other objectives, special considerations, taxes.
  2. Investing – your portfolio and the markets.
    1. The role of volatility in long term investing.
    2. Risk tolerance discussion.
    3. Time horizon review.
    4. Our assessment of opportunities and risks.

Of course, we spend a lot of time working with you when a money question comes up. You can ask us anything, any time. If we don’t know the answer, we’ll do our best to find it.

Clients, if things are happening we should know about, please email us or call. Otherwise, we’ll be in touch by and by.

The Long View

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The unemployment rate dropped to 3.5%, a fifty-year low, according to the Labor Department’s report for September. Like clockwork, some observers were quick to find the clouds around this silver lining.

That got us to thinking about life fifty years ago compared to today. Looking at the facts, it is hard to think of it as anything but unimaginable progress. In 1970, more than three quarters of homes lacked air conditioning. Televisions were only in 61% of them. 38% had washing machines. One in twenty lacked indoor
plumbing. There was about one land line telephone for every two people.

More startling are the things that nobody had in 1970, because they had not yet been invented. Mobile phones, digital cameras, post-it notes, email, video games, inkjet printers, MRI scanners, fiber optics, personal computers, GPS, and the internet, to name a few of them.

Median household income, adjusted for inflation, grew 37% over that half century. The rich got richer, but the average household made a lot of progress, too.

However, life isn’t all puppy dogs and rainbows, as an older acquaintance of mine likes to say. The economy grew and shrank in its cycle of expansions and recessions. The stock market, measured by its major averages, also went up and down year to year, sometimes sharply.

In between the record low unemployment rates at the beginning and end of the fifty years, we had three episodes of unemployment in excess of 10%.

We have noticed that when times are bad, some have difficulty imaging a recovery. And when times are good, some can scarcely think about the possibility of poor times returning. We humans like to believe that present trends and conditions will persist, good or bad.

The bad news is, the economy and the markets will continue to go up and down. The good news is, over the long term we have made amazing progress on almost every front. The past is no guarantee of the future, of course. In our opinion, there are many reasons to believe our progress will continue.

Clients, if you would like to talk about this or anything else, please email us or call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Generating Positive Externalities

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People or companies may confer benefits on third parties without cost, as a side effect or byproduct of their actions. Planting a tree improves the neighborhood and provides shade to a neighbor. Keeping bees results in the pollination of nearby crops. Providing first-aid training to workers may save lives outside of work. A video or blog post created for clients might contain an idea that helps people who are not clients.

These are examples of what economists call positive externalities. These things are all good: they make the world a better place.

I believe the concept applies in our interactions with others, as well. Have you ever had your day brightened by the smile of a stranger? Opened a door for someone with an armload of packages? Been thanked for doing an otherwise thankless task? Let someone with whom you do business know how much you appreciate what they do?

All of these things are benefits without costs attached. They are positive externalities, on the small scale of daily life. They are also free to the giver.

But just as planting a tree improves our home as well as the neighborhood, generating positive externalities in daily life also helps us. Friends and family members respond to the empathy, kindness and thoughtfulness embedded in them. If employed, our colleagues and superiors are likely to value the intangibles we add to the workplace environment. In business, our clients and teammates enjoy our interactions more.

Generating positive externalities is not charity. There are no costs involved, only benefits to both giver and recipient. Win-win.

The general concept has been around for a long time, and is often expressed more simply: be kind. Fill up the buckets of others. Do unto others.

Clients, if you would like to talk about this or anything else, please email us or call.

Navigating Life

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I have never been what they call “an early adopter.” Even at the dawn of the personal computing age, my strategy was to figure out where the leading edge of technology was, and take two steps back. So it may not surprise you to know I am fairly new to the world of smart phone navigation.

The way those systems work reminds me of the way we approach life here at 228 Main:

1. Start where you are.
2. Proceed by way of your plans.
3. Arrive at your dreams.

When the phone maps a route for you, it never says “Gosh! There are a lot of problems where you are. It’s too far to go! Maybe you should wait for a better day to go.” It simply takes your location and starts to make plans.

Once underway, if you get off course, the phone figures out whether it is better to go back the way you came, or take a new route to the same goal. One way or the other, it wants you back on track. It won’t let you go mile after mile the wrong direction.

If you don’t know where you are going, any road will do. So one of the basic requirements is knowing your destination.

When we think about our work for you, there are many similarities. We begin by understanding where you are, your starting point. We invest time in learning your goals (or dreams), helping you clarify them if necessary. Where you are, where you want to go: it is about the same as using your phone to navigate.

Then we do the work. Sort out the best path to get you to your dreams. Check in and monitor it to make sure you are still on course. Provide midcourse corrections if needed. And communicate continuously with you.

Clients, if you would like to talk about this or anything else, please email us or call.

The Next Energy Revolution is Here!

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Back in 2017, we wrote about two trends that would interact to change the world. Declining costs of solar power generation, combined with declining costs of battery storage, would herald an energy revolution.

In a recent article, Bloomberg News suggests that solar and wind energy is more economical to build than coal or gas plants in two thirds of the world. Five years ago, this wasn’t the case anywhere.

New sources of energy have heralded remarkable periods of growth and prosperity in the past. Water and steam brought us into the modern era more than two centuries ago. Coal and petroleum pushed development beyond what anyone could have predicted, before their use became widespread.

The next energy revolution, solar and wind plus battery storage, will bring massive new opportunities – and threats to older technologies. We are thinking about ramifications for investors.

1. The demand for copper may rise, against a constrained supply.
2. Underdeveloped areas of the world may develop faster, since solar can be deployed on much smaller scales than big central generating plants using fossil fuels.
3. Cheaper electricity may encourage new uses, not yet dreamed of.
4. Incumbent electric utilities may find themselves with stranded assets in the form of obsolete plants and equipment.

No guarantees on any part of the future, of course. But it does seem to be unfolding as we expected a couple years ago.

Clients, if you would like to talk about this or anything else, please email us or call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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

Teaching an Old Stock New Tricks

© Can Stock Photo / alexskopje

Consolidated Edison Company of New York (Con Ed) was listed on the New York Stock Exchange back in 1824. Known then as New York Gas Light, it holds the record for the longest listing on the exchange.

For every single day of those nearly two centuries, every share of its stock was owned by somebody. Through financial panics, recessions, wars, the Depression – through everything – every share of its stock was owned by someone.

It seems curious to us that some investment advisors advocate the belief that the vast majority of investors are incapable of owning shares of stock through the inevitable downturns. (Stocks do go up and down, as we often note.) Yet somebody has to own every share, every day.

These advisors with low expectations of you usually rely on one of two basic approaches.

1. Keep 40 to 60% of your long term assets in bonds or other forms of fixed income. This strikes us as an exceptionally poor idea for many long term investors, because of historically low interest rates, and potential losses from inflation and rising interest rates.

2. Expect to be able to sell out before big declines, and reinvest before big rises. This unlikely outcome is usually sold as a “tactical” strategy. It is a great one, too, but only on paper. Nobody to our knowledge has ever demonstrated a sustainable long term ability to reduce risk while maintaining market returns with in and out trading.

Our experience tells us that many people understand long term investing, and living with the inevitable ups and downs. Many more can be trained to become effective investors. We think you can handle the truth: real investments go up and down.

The thought of forfeiting a significant fraction of potential future wealth by pandering to fear of short-term volatility hits us wrong. We won’t do it here at 228 Main, nor would we pretend we our crystal ball works well enough for in and out trading.

Of course, our approach is not right for everyone. Clients must be able to live with their chosen approach, and not everyone can live with ours. We can handle the 60/40 or 40/60 mix for clients who want less volatility. But the fraction in the market is going to experience market volatility, a pre-requisite to obtaining market returns.

We mean no disrespect to advisors with different approaches. After all, they lack the main advantage we enjoy: working with the best clients in the whole world.

Clients, if you would like to talk about this or anything else, please email us or call.


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

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

 

Letters To Our Children #8: Keep Your Eye on the Horizon

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We wrote before about your three investment buckets, each with a different time horizon. Here is why that is so crucial.

Business founder Jeff Bezos highlighted the key thing about time horizons.
“If everything you do needs to work on a three-year time horizon, then you are competing with a lot of people. But if you’re willing to invest on a seven-year time horizon, you are now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue.”

The investment parallel is clear: just by lengthening the time horizon, you can live with the short term volatility that is inherent in the pursuit of long term investment results.

Those with a short time horizon—an insistence that market values be stable day to day or month to month—can generally expect meager returns. Stable values and liquidity both cost a premium, and if you want both you’re not left with much room for returns. This is good for your short-term bucket, but may hamper you anywhere else.

Behavioral economists have a theory that the preference for stability is very strong, part of human nature. If the demand for stability is high, then the price of stability may be high—and the rewards for enduring volatility may prove to be large since fewer are willing to do it. This is based on our opinion, no guarantees!

Bottom line: we believe in investing for the long term with your long term money, and leaving short term strategies to your short term bucket. It pays to understand volatility, and its role in your investment returns. No matter what, you should be able to live with your chosen strategy, even when (especially when?) it is uncomfortable.

Clients, if you have questions about this or anything else, please email us or call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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

Every Share of Stock is Owned Every Day

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Every share of stock in existence is owned every single day by somebody. But the market news often refers to “all the selling on Wall Street” on a down day, or “the buying on Wall Street” on an up day. In reality, every share sold was also bought.

This came to mind when we recently read the words of a supposed expert: “investors need to be protected from themselves.” Since “you can’t change people” then the right prescription is a 60/40 or 40/60 mix of stocks and bonds, because otherwise people would sell out at a bad time – in a down market. But every share sold gets bought! So we cannot all be selling at the same time.

The idea that nearly everyone should give up the potential returns of long term stock ownership on a large fraction of their wealth because they won’t behave properly seems wrong-headed to to us. Our actual experience with you over the years says that many people are either born with good investing instincts, or can be trained to invest effectively.

We believe you can handle the truth. Long term investing requires living with volatility, the ups and downs. This is not appropriate for your short term needs, of course, for which you need stability.

In these times when bonds pay so little, insistence on a significant allocation to a sector where returns are likely to be historically poor for many years seems short-sighted. Particularly when used to shield true long term money from normal stock market action.

Let’s be clear: our philosophy is not for everyone. History suggests that about one year in four, broad stock market averages are likely to go down. If you can’t stand that with some fraction of your wealth, our approach is not the right one for you.

Clients, if you would like to talk about this, or anything else, please email us or call.


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

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

Letters to Our Children #7: Know Your Assets

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Our previous letters have talked about the three buckets you have for your money: short term, long term, and in-between. Each one serves different purposes. Today we will dive into the details of the different assets you can put into those buckets.

The simplest and most familiar asset class is cash. It has a fixed value and is completely liquid, available to spend any time you want. While the change jar on your counter is not exactly an investment, you can put it in a savings account and generate a little bit of interest. Short term certificates of deposit and Treasury bonds can also be considered cash equivalents as long as the maturity is within a few months. They can not be spent without notice, but could be turned into cash quickly for major expenses.

Longer duration CDs and bonds fall into another asset class: fixed income. You can expect higher interest by accepting longer maturities and shakier credit ratings, so fixed income will generate more income than cash. There is a reason for this: your risk exposure also increases. Buying bonds with poorer credit quality increases the risk that the borrower will go broke and default. And if you lock in your money long term at a fixed interest rate, you will be in for pain if inflation and interest rates rise. This can make fixed income investing difficult in a low interest rate environment.

The third main asset class are equities, or stocks. These are what you are thinking of when you talk about the stock market. Stocks represent partial ownership in a given company. Exchange-listed stocks are liquid, and owning a share of a rapidly growing company offers the potential for higher returns. But again, these returns come at a trade-off of volatility and risk. There is no fixed face value or interest rate on equities, and the market price can change rapidly.

There are also alternative investments outside of these three main asset classes. Most alternative investments are tangible assets such as real estate or physical commodities. These assets are largely speculative: they do not grow on their own and do not pay out interest. As such, we do not generally recommend them.

Different assets are useful for each bucket. Your short-term bucket needs both liquidity and stability, so it should be mostly or entirely in cash. Your long-term bucket can tolerate more volatility and will probably want to seek higher returns, so equity investments may be more appropriate. The intermediate-term bucket can hold a range of investments, although you will probably want a healthy proportion of cash and short-term investments.

Your financial situation is unique, and there is no one-size-fits all approach. Clients, if you want to discuss what is in your buckets, please call or email us.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

CDs are FDIC Insured to specific limits and offer a fixed rate of return if held to maturity.

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.

Stock investing involves risk including loss of principal.

Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

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