Author: adamweingartner

While there are more important issues afoot in the equity markets, the 50 basis point surprise cut from the Federal Reserve is a gift horse that should not be looked in the mouth.  Wealth management is more than investment selection, and this is a perfect time to demonstrate how we can attempt to add value outside of your portfolio.

I had a friend in the office today who works for JP Morgan Chase and he said that yesterday he got a mortgage refinance done for a client at 2.5% for a 30-year fixed rate.  Now that’s probably going to be the best of the best in terms of credit rating and assets with his firm (membership has its privileges), but at this point in time, it’s worth assessing your situation and perhaps inquiring with a mortgage banker, regardless if it’s for debt consolidation, limiting duration (going from 30-year to 15-year for same payment), or just paying a couple dollars less per month.

If you do not have a mortgage banker with whom you’ve worked in the past and are looking for one, we can certainly give you the names of several we know and trust.

– Adam

Hi everyone,

The risk du jour is the novel Coronavirus. The human death toll should not be minimized here, but our job is to put things in perspective. We say this quite a bit during our blog posts, but just to reiterate. We do not know what is going to happen next.  We are not virologists, immunologists, epidemiologists, or any other kind of ologists.  Our job is provide a mix of mostly stocks and bonds to give everyone the greatest opportunity to ride out downturns as well as take advantage of the stock market’s compound growth (per unit of individual risk).

These posts are designed to look to the past as our guide and try and take emotion out of the decisions we use to make sure that your financial life remains on track.  For a little perspective, the S&P 500 is now back to the same price it was on December 5th, 2019.  That’s 82 days ago.  What’s changed in the last 82 days is our confidence in the future path of the market (sentiment).  Letting price be our guide, rather than emotion, let’s take a look at how history can offer us several guides.

1. According to Bespoke, since March 2009, there have been 18 different instances of a 2% decline on a Monday. On average, the return over the next week has been 3.16% (there has been a positive return 17/18 times), and over the next month has been 6.08% (positive returns 17/18 times).

2.  According to a recent article, when looking back at the past 20 years, previous epidemics like SARS in 2003 and the Ebola scare in 2014, caused the S&P 500 to decline between 6% and 13% over varying lengths of time.  At the time of writing this post, the S&P 500 is already down 8.1% from its all-time high last week.

3. Since 1990, the S&P 500 has had 260 days in which the daily return has been below 2%.  That means, on average, there are about 9 per year.  What the coronavirus has done over the past week has concentrated these moves over a short period of time, which is adding to some of the fear.

Let’s get a few other things out of the way.  Yes, it’s possible that it’s different this time.  Yes, none of the other recent global pandemics have been as deadly, this quickly (in terms of human toll).  Yes, none of the other cases have the potential to affect global supply chains and threaten the “just-in-time” nature of the global economy.

All we can do is report the news.  The two outcomes, in aggregate, are very simple.  This gets better, or it gets worse.  The CDC came out yesterday and told the market that the US should prepare for a “not if, but when” scenario for some type of event here in the US (there are some rumblings of Long Island having potential cases).  This has already been priced into the stock market.  While I don’t have a crystal ball, and I can’t imagine a piece of information that would come out in the next week to make all of this go away, I do believe that we are closer to the end of this short-term decline than the beginning.

For our younger clients, those of you who have not made your 2019 or 2020 IRA contributions, those dollars being put to work at 8% better prices will bear themselves out over 20-30 years.  For those of you no longer in the accumulation phase of your financial life, make sure your tray tables and seats are in the upright position.  The good news is that fear re-entering the market sows the seeds for the next advance and without risk, there is no reward.

– Adam

In traditional financial planning, the time between the beginning of the calendar year and tax day is usually a busy one as it relates to transaction volume.  As clients get their W-2s and 1099s from their various sources of income, a decision needs to be made about 2019 IRA contributions (which can be made until April 15th), taking a piece of your year-end bonus or extra savings for 2020, and even sometimes pulling money out to satisfy Uncle Sam.

With cash coming in and out, our toughest decision for clients is whether or not to put the money to work immediately, or wait for a better entry into the equity markets.  Each year we go through a litany of pros and cons about whether to dollar cost average throughout the year, or invest a lump-sum immediately and ignore the short-term gyrations.

As you know, here at Second Level Capital, there is an evidence-based reason we do everything (not just, “the market seems kinda high right now, let’s wait”).  The good news is that three of my favorite writers have weighed in on the subject over the last few weeks.

If you’re interested, take a gander at the links below to get some different perspectives other than me saying the same boring stuff over and over.

Also, most 1099s are available for taxable accounts (non-IRAs).  They can be found through Schwab’s website, or we are happy to email them to you if you wish.  Also, if you’re getting to a point where doing your taxes yourself is becoming a hassle, or if you’re unhappy with your current CPA, we are happy to put you in touch with several options, all of whom we trust implicitly.

– Adam

• Now NEVER Feels Like the Right Time to Invest
• Why Market Timing Can Be So Appealing
• Three Dollar Questions

Happy New Year!  Welcome to an entire year of eyesight and Barbara Walters jokes.  And just in case you weren’t feeling old enough, I just wanted to let you know that January 1st, 1990 is further away than January 1st, 2050.  The math checks out.

On that depressing realization, let’s look at some numbers.  Over the past 70 years (since 1950), the S&P 500’s yearly performance has been above 20% 18 times.  In the year following those 20%+ gains, the market has been higher 15 times (83.3%) with an average return the following year of 11.2%.  It’s important to remember that the S&P 500 is positive 70% of years anyway, but 83% provides a small edge to the upside from an historical perspective.  Conventional wisdom points to a positive year for stocks, but not as great as last year.

Unless you’ve been living under a rock, you already know that 2020 is a presidential election year.  At this time, all signs point toward a Trump reelection.  Moody’s analytics runs three different scenarios in which people vote based on their finances (Pocketbook Model), based on the value of the stock market (Stock Market Model), and based on the unemployment rate (Unemployment Model).  All three are predicting an electoral college victory.  At this point in time, I see no reason to deviate from the conventional wisdom, but IT’S STILL EARLY.

Per some of our previous posts, the third year of a presidential term, on average, is the strongest.  Generally, the first two years are spent making good on campaign promises, while the last two years are spent propping up the stock market and the economy to get re-elected.  This makes it not surprising that the final year of a presidential term happens to be the second strongest.  From 1928 through 2012 the average return in an election year is around 7%.

Since it’s our job to always be on the lookout (and I’m not a natural optimist), even in the face of the clearest stock market trend in the past 10 years, here are some headwinds that could derail our current stock market run.

1. Valuation & Positioning – The S&P currently trades at 18x forward earnings.  This is toward the upper end of the historical range, and if we get up to 20x earnings, that’s been a very reliable indicator that new money will likely underperform the long-term S&P average if you invest now.  The CNN Fear and Greed Index topped out yesterday at 97 (out of 100!).  This means that people are overly optimistic and prices have gotten a little ahead of themselves.  We can expect some of the froth to burn off and a healthy pullback is welcomed.
2. Interest Rates – The Federal Reserve could not have been clearer during 2019.  They will not raise interest rates until inflation starts to move.  This is the playbook from the 1950s, and it’s much better for the Fed to be one step behind, then one step ahead (their tools work better fighting inflation than deflation).  The problem is that the Fed doesn’t know why inflation isn’t rampant at these interest rate, unemployment, and GDP levels.  If the market starts believing that the Federal Reserve is losing control over the monetary system (watch the price of Gold), this could be a major shift.
3. Election – Super Tuesday in March will be the first real indication of who’s for real on the Democratic side.  If a far left candidate (Sanders or Warren) were to come through Iowa and perform well on Super Tuesday, I do think the market would take a pause.  Until then, the markets will be focused on Q4 2019 earnings coming up in the next 2-3 weeks.
4. Brexit – I think this is more of a non-event, but with the clear majority in Boris Johnson’s corner, it looks like Brexit is going to happen at the end of January.  Whether or not a deal is struck with the EU or a “no-deal” Brexit occurs remains to be seen.
5. China – While a “Phase 1” trade deal is getting ready to be signed on January 15th, and Phase 2 trade talks will begin shortly thereafter, the implementation and governance of these new trade rules may tell a different story.  The devil is certainly in the details with this one.
6. Inflation – If there is a sustainable increase in the price of energy and the average consumer starts feeling a little pressure at the pump again, it will cause the consumer to pull the purse strings back a bit.  The strength of the American spender has been the solid footing that this rally has used to jettison to all-time highs, so any change here will be noteworthy.

Now the fun stuff.

Things We Like Going Into 2020

• We love not getting too smart about this market.  This market has been more resilient than anyone expected, and until that changes, the trend remains our friend.
  • “It’s expensive.”
  • “It can’t keep going up forever.”
  • “Eventually we WILL have a recession.”
  • All these things and many more are true.  But the economy and the year-to-year stock market changes have very little to do with each other.  Corporate earnings were up 33% in 2018 and the S&P 500 was down 4%.  Corporate earnings were up 5% in 2019 and the S&P 500 was up 30%.  Don’t overthink it here.  Stick to the rebalancing regiment to systematically sell the oversized winners (US Stocks, REITs, Utilities) and purchase the laggards (Europe, Emerging Markets, Energy).  If the trend continues and US stocks have another stellar year, you will still participate.  If not, we will have sold a little at a nice profit.  All or nothing, just like “in or out”, is not an investment strategy, it’s a gambling one.
• Names to watch in 2020
  • • It’s not lost on us that the allure of taking a shot on a few concentrated bets is enjoyable.  In our minds, if this is what it takes to allow the majority of your assets to work their magic over time in low-cost index funds, that’s a small price to pay for “staying the course” with some added garlic.  But my compliance department tells me that I can’t make a recommendation to purchase individual names without assessing the suitability of each person’s individual situation. Sounds logical to me and I would rather be safe than sorry.  
    • So here are some themes that might be of interest, if you want to know the individual names, don’t hesitate to give us a call.
      • eSignatures – It’s a common verb (to eSign) in the business world, and with cyber security only becoming more of an issue, electronically verified signatures will continue to be something our increasingly digital world will crave.  
      • Biotechnology – I continue to believe that there will be a large amount of mergers and acquisitions in the biotech space in 2020 and specifically attractive are “one drug” companies that could be ripe for takeover given their simplicity to “bolt on” for big pharma.
      • MLPs – This space has been beaten down over the last 3 years (really the last 10 years), but with oil up 35% last year, we believe that best of breed energy companies in this space offer substantial dividend yields with potential for capital appreciation.  It is likely this space is extremely volatile with energy prices and geopolitical events abound.
      • 5G Technology – 5G isn’t sneaking up on anyone as a theme, but there is one company in particular that looks promising.
      • Cannabis – This was one of the big disappointments of 2019 after being all the rage in 2018.  We believe it’s worth dipping your toe in this space at current valuations (which are still too hard for some companies).  
      • Digital Payments – We believe the digital payment space will continue to grow at a relatively rapid pace, both here and abroad.  Several companies are being acquired by large, very well known money managers, and with the larger digital payment companies up big in 2019, the potential for growth through M&A appears to exist.

With all individual stocks, they are much more of a gamble, but I’m still very curious about how each sector performs.

Looking forward to a great 2020!

– Adam

Let’s take a look back at some of the predictions from late 2018 before we jump into some of the trends of 2019 and whether or not we think those will continue.  Our 2020 Predictions (I know you’re waiting on pins and needles) will be coming in another week or so.

1. “The China Trade War Will End Quickly” –  Well, we’re not starting this post out too well.  Even though a “phase one” trade deal appears to be finalized, the market was left with uncertainty for most of 2019.  Even as we showed signals late in 2018 that a rebound could occur, our feeling was that in order to get a significant move back toward all-time highs, we were going to have to have more clarity on BOTH interest rates and the trade war.  We only got clarity on interest rates, and to our surprise, that was more than enough to boost the market.  Repeat it slowly…”Don’t Fight the Fed”. Crystal Ball Grade = C-.
2. Brazil will be a standout emerging market performer – Early in 2019, Brazil came out to a hot start having gained 18.8% in January alone.  But over the last 11 months, we’ve gone nowhere.  While no one is going to complain about the 19% return this year, I expected it to outperform the S&P 500 and it hasn’t.  While things continue to improve here in the U.S., the rest of world merely stabilized.  Perhaps this will be a trade that proves itself in 2020, but we shall see.  Crystal Ball Grade = B-.
3. Long Semiconductors – Finally we got one right!  The semiconductor index is the best performing sector of the entire market, up more than 50% this year.  Specifically AMD is the best performing stock in the S&P 500 up more than 130% over the last 12 months.  Crystal Ball Grade = A+.
4. Long Crude Oil – With all the media attention surrounding how terrible energy stocks have been this year (and decade), when I look back at the actual price of oil, it’s up more than the S&P 500!  Exploration and production companies declined 16% this year, while the price of the commodity they are exploring for increased by more than 30%.  It’s tough to believe that price of oil on December 28th last year was $44.59, while the current price is $60.89.  We continue to believe this is a classic value opportunity, and one that will be interesting to watch in 2020.  But remember, just because something is cheap, doesn’t mean it can’t get cheaper, although building a position in this sector is not the worst idea in the world.  The massive debt overhang in the oil and gas industry is sure to provide more pain, so patience will be key.  It might be one that takes 3-5 years, instead of 6-12 months, but we believe the possible payoff to be worth it.  Crystal Ball Grade = B.
5. Short (bet against) the US Dollar – While recent dollar weakness is making this trade seem closer than it really is, most of 2019 saw the US dollar in a clear uptrend.  FX volatility was nearly non-existent and in a few currencies it was the lowest on record…EVER.  Money continues to flow into the United States as we remain the shining star on the hill.  The US consumer remains confident and ready to spend, although the spending habits of the largest age group (millennials) is causing many retailers to adapt or die.  Crystal Ball Grade – D+ (it’s not a grade they like to give out).

So what did this mean for you in 2019?  It means that if you ignored the steep decline in 2018 and did nothing, you had a great year.  If you were silly enough to take some of the suggestions above, you did fine too.  But as one of my favorite writers, Morgan Housel, said recently in a podcast, investing is one of the only endeavors I know of where devoting more time to it, doesn’t necessarily make you any better (in terms of performance).  What I really mean is that I don’t want you to get mad at me when I don’t pick a stock that’s up 130% next year.

As we close out the decade, the 2010s will be the first ever in which we did not have a recession.  That’s really amazing.  But instead of trusting the trend, one that’s now a decade in the making, the inevitable thought remains, “Well there’s going to be a recession eventually“.  To that end, I would quote Peter Lynch, “More people have lost money waiting for corrections and anticipating corrections than in the actual corrections.”

We remain optimistic over the next 12 months, but will expand more in our outlook for 2020 (coming soon).

Happy Holidays Everyone!

– Adam

On the eve of Thanksgiving, I think it’s natural to step back and take stock of the things we are thankful for in our lives.

Brad and I have been on our own at Second Level Capital for about a year and a half now, and I will speak for both of us in saying that it’s been the best decision we’ve made in our business lives.  Having friends become clients and having clients become friends has been a real blessing, and I’m honestly not sure if I could be happier with the current state of affairs.

As for the stock market, it decided to cooperate this year (which is always appreciated), with stocks and bonds both returning double digits.  The S&P 500 is up north of 20% this year and for most of our broadly diversified ETF portfolios in the moderate to moderately aggressive range, the yearly returns are in the mid-to-high teens.

But before you get excited about buying those new wireless headphones on Black Friday, remember that the fourth quarter decline in 2018 skewed these year-to-date numbers to the upside, so in terms of how you should really be thinking about the stock market going forward is that since January 2018, the S&P 500 is up about 10% (not including dividends).  This should be the anchoring thought when the inevitable question rears it ugly head, “With stocks at all-time highs, is now a good time to get a little more conservative?”  To this logical question, I respond with the only truthful answer…I don’t know.

What I do know is that the portfolio construction we’ve built is working.  It allowed us to stay the course during an almost 20% decline in Q4 of last year, which, in turn, allowed us to participate in the strong advance of 2019.  Generally, year three of the presidential cycle is the strongest as the incumbent turns his attention from enacting social reforms and making good on campaign promises, to boosting the economy and doing everything in his power to get re-elected (who knew?).  As far as the fourth year in the presidential cycle, year four is the second strongest.  Will 2020 be a repeat of 2019?  Maybe.  Will a broadly diversified portfolio return more than the interest in your savings account?  The answer in 14 of the last 17 years has been yes.  I certainly like those odds.

Feeling very thankful and appreciative for every one of you.

– Adam

P.S. In case the turkey doesn’t put you to sleep, here are some of my favorite articles I’ve read throughout the month.  Enjoy.

• • Making Money vs. Sounding Smart – Had the pleasure of meeting Adam Collins this year, and he’s as smart as they come.  He’s also becoming a must read for his research and voracious reading habits.  This must be what it’s like not to have kids.
  • The Best Investment You Can Make – Nick Maggiulli of Ritholtz Wealth Management turns his high powered perception to spending time with family.
  • I Will Absolutely Be Long At The Top – Larry Tentarelli from Trend Trading Signals clearly lays out what’s required in order to take part in multi-year advances, even though the noise can be deafening along the way.

This week, the S&P 500 made an all-time high (the Nasdaq Composite and Dow Jones Industrial Average did not make all-time highs, but more on that later).  Since the low on October 3rd, we’re up about 7%, which was expected given the historical context expanded upon in on our last blog post, State of the Union.

When overtaking an important price level, generally there needs to be a catalyst to promote a more confident buying environment (this is the fourth time the Dow Jones has attempted to breakout above it’s trend line dating back to January of 2018).

While we expect the rally to continue into year-end, it’s very possible that we see a pullback prior to a more traditional “Santa Claus rally”. As far as sentiment (future expectations) is concerned, the market is overbought. CNN’s Fear and Greed Index topped out at 76 yesterday (classified by them as “extreme greed”) and the 5-day moving average of the put/call ratio (a measure of how many people are buying protection vs. how many people are betting on further advances) is the lowest it’s been since July 29th when we proceeded to go down 7% in the next five trading days.  The classic non-confirmation (when one index makes a high, but it’s not accompanied by the others) is always a signal to watch as well.

While I don’t think we’re going to see that type of downward selling pressure in November, the overall fundamentals of the economy just aren’t setting any records.  For the half of the S&P 500 companies that have reported, earnings growth is down about 1% from last quarter, while on average, revenue has increased slightly.

It may get a little spooky out there for the next few weeks, but just like always it will be Thanksgiving before you know it.

– Adam

 

It’s been awhile since we’ve done a market update, and since we’ve started to notice a little concern creeping into our client communications, it’s a good sign there is some small, yet growing concern.

First, let’s start with some market data to cut through a little bit of the noise as well as some facts about where we are in historical context.

• • Price
    • Since January of 2018 (18 months ago) to last week, the S&P 500 is up 2% (not including dividends).  We are in a sideways market and have been for the better part of two years.  This makes sense fundamentally, as the overall global outlook for growth is now more uncertain than it was 18 months ago.  Whether or not this slowdown will be a natural lull period of the global business cycle, or will lead to a global recession remains to be seen.
    • Since Jan 2018, the Nasdaq 100 (the top 100 largest technology companies) is up 8.5% (not including dividends).  This outperformance vs. the S&P 500 is typical given the risk/reward of higher growth companies.  Something to watch going forward will be whether or not this outperformance persists or if people start selling their high growth companies in favor of more conservative options given the historic underperformance of value stocks over the last 10 years.

• • Sentiment
    • Near-term sentiment in late August had gotten close to the extreme negative levels of December 2018 (CNN’s Fear and Greed Index) where we made a short-term bottom in the stock market.  The bounce from a “fearful” state to a more neutral environment has occurred and was expected.
    • In addition to the Fear and Greed Index (which is a fairly decent contrarian indicator), the cumulative number of stocks advancing vs. the number of stocks declining is currently at an all-time high, while price remains roughly 2% below all-time highs.  This divergence has been historically bullish for stocks.
    • The AAII Sentiment Survey (a survey of “do-it-yourself” investors) data shows that as of last week, just 26.13% of investors felt positive about the stock market, while 42.21% felt negative.  For context, just before the December 2018 bottom, the bullish percentage was 20.9% and the bearish percentage was 48.87%.
    • Ideally, I would like to see negative sentiment increase further, which means the market would likely move down (about 3%-5% lower should do it).  Once everyone is convinced that the world is going to end and overreacts by deviating from their original plan (this means selling out of fear), the seeds are sown for the next advance.  At some point those “marginal buyers” get back into the stock market, and if history is any guide, it’s not at lower prices.

So, what are you supposed to do?

1. 1. If you’re a younger investor and focused on the long-term…all these short-term gyration mean nothing.  In fact, as a younger investor, it’s actually better if the market continues to go lower at the beginning of your financial journey.  It helps boost overall returns when dollar cost averaging over time (here is a Josh Brown interview from 18 months ago in the LA Times discussing this very situation).  The only real danger here is not continuing to save.  It boggles my mind how people (not within 5 years of retirement) get so afraid of events that have historically taken place every decade or so.
   2. If you’re in the “Retirement Redzone”…As your potential retirement date closes in, additional review becomes more and more important.  At some point, the amount of time until you retire becomes short enough to where “stay the course” starts to blend with a bit of a gamble (although it’s all a bit of gamble isn’t it?).  Most of the time, I ask clients, “Given where you want to go, do you want to continue on the same path?”   Sometimes there is no alternative.  But if your choices are between accepting market risk in the medium-term vs. switching to something more conservative, your goals need to be revisited.  Think of this as a stress test.  Because of the perceived inability to “ride out a storm”, risk tolerance and investment objectives need to be weighed carefully and often.  Communication with your advisor is paramount during this period.  If this analysis yields a possible outcome you won’t be able to stomach, you need to lower your exposure to the market.  But if you’re comfortable taking the market risk in exchange for the opportunity to continue to earn a competitive return, make sure you stick with your decision.  We can’t make this individual decision for you, and it’s not an easy one, but we can sure help you look at it from all angles.
   3. If you’re in retirement and taking income from your portfolio…focus on sectors and individual companies that have and will continue to pay solid cash flow and have a track record of doing so for a very long time (dividend aristocrats).  With the prospect of interest rates continuing to go lower, utility stocks, real estate investment trusts (REITs), and defensive sectors (healthcare and consumer staples) are at or near all-time high prices.  This means you’re probably feeling great about your income-heavy portfolio.  This too shall pass.  Make sure your primary focus is consistent cash flow, and try to disregard overall portfolio value fluctuations.  This is easier said than done, and you should be watching closely for any changes in dividend behavior across your portfolio.

The value of a financial advisor comes in the creation of a plan, effectively allocating capital based on that plan, and constantly reviewing it over time, taking into account life’s inevitable surprises.  Regardless of what we believe will happen in the stock market, you need to know what’s possible and mentally prepare for all outcomes.  Being able to stomach negative scenarios is much more important to achieving an overall plan than guessing which sector leads the charge to the next bull market.

– Adam

Along our continuing journey to become better advisors, Adam and I recently discussed whether or not we should start offering “Financial Planning” services to our clients.

In a world where technology has made asset allocation increasingly commoditized, many financial advisors (FAs) have turned to financial planning as a way to increase both service to their clients and revenue for their firm.  FAs pay thousands of dollars to take classes and tests in order to receive a Certified Financial Planner (CFP) designation.  Clients, after providing a more detailed outline of monthly revenues/expenses, assets/liabilities, etc., receive a binder containing his or her financial plan, and with it, the comforting validation they are “on track.”

Over the last few years, Adam and I have met with many local advisors and planners to discuss our industry.  FAs are a chatty bunch and rarely miss an opportunity to inform competitors of their greatness.  Not long ago, we had lunch with the CEO of a well-known advisory firm here in St. Louis. This firm requires all clients to participate in their financial planning, making it the real service they offer, as opposed to asset management.  Out of honest curiosity, I asked how best to judge the quality of a financial plan or planner (Good article on this).  He said the best financial planners were the ones who got the most referrals from their clients.  This was the point in the conversation where my skepticism began to set in.  So, the best financial planners are the best marketers?  That didn’t sit right with me since most can agree the best salesmen aren’t always selling the best product.  Surely there has to be some metric, or is it only after 25 years of working with a CFP you can look back to determine whether or not you received “good planning”?

(Aside:  This skepticism applies to asset managers as well.  The most Assets Under Management (AUM) certainly doesn’t correlate to the best performance, in fact, there is evidence to suggest the opposite.)

We find that investment management and finanical planning dovetail quite a bit, so let’s just address the most common questions clients ask a financial planner.

Question: How do I get started?

Answer: Step one of financial planning is the same for everyone: Take advantage of employer sponsored retirement plans. If possible, max out your 401k; Certainly utilize the maximum match from your employer.  After that, contribute the maximum allowed to a ROTH or Traditional IRA. If you’re doing this and still have extra money accumulating each month, open a non-qualified account or think about a 529 plan if you have children.  

Question: How much money do I need to retire?

Answer: This is not as scary or as complicated as it seems. Just back into the number.  How many gross dollars per month do you think you’ll need when you retire?  $5k per month? $7k per month?  How long do you want to work?  How much is your portfolio worth today?  Using those three numbers, you can determine how much a month or year you should be putting away. Here’s an easy-to-use spreadsheet.

Question:  If I have some extra cash, should I pay down debt or invest the money?

Answer: This is a common question we get all the time.  People feel differently about debt, so the answer varies.  But in general, if your interest rate is lower than your average portfolio return, invest.  If it’s higher, pay off the debt.  Many people just don’t like having debt, so they’d rather pay it off regardless and that’s totally fine.  Personally, I like Dave Ramsey’s Debt Snowball Method for paying off multiple debts over time.  

Question: Based on our household income, how much house can I afford?

Answer:  A simple Google search gets you pretty far down the road.  General rule of thumb is that about 30% of your take home pay should be used for mortgage, taxes and insurance.

I’m not anti-financial planning, just as I’m not anti-asset management.  I’m pro-transparency.  Without question, occasional complex individual needs arise which require the services of multiple professionals.  I just don’t like making a blanket statement and using financial plans as tool for financial advisors to up-sell an existing client base.  I feel it’s disingenuous (and dangerous) to promote a linear relationship between “if I do X, then Y will happen” when it comes to people’s financial life.  Embedded in every financial plan and every portfolio is a myriad of variables that we only know one thing about…they’re wrong.  Realizing that delaying gratification today for an ultimate payoff years down the road is the real value provided by an advisor or financial planner will shape this conversation more accurately.   Knowing the path is different than walking the path.  Having a walking partner along the way is infinitely more valuable than any binder can be.

-Brad

During the late 1970s and early 1980s, a new genre of children’s book came on the scene. They were called Choose Your Own Adventure books, and they were some of my favorites. I didn’t realize it at the time, but I loved the feeling of being in control (shocking, I know) and the anticipation of what would be next when I flipped to page 127 to see if my literary journey would be extended. A few months ago, Netflix even released it’s first “Choose Your Own Adventure” movie, called Black Mirror: Bandersnatch (it’s not great, but worth it for the nostalgia purposes if you were into the books).

As a kid, I would inevitably choose a wrong turn, get frustrated, skip ahead to the last chapter and work my way back. As I got older, I realized the books weren’t about finding the optimal path on the first try, but more about exploring.  The books never really stop you dead in your tracks, they simply send you back to where you made the wrong decision and allow you to choose a different path. While I wish life worked this way, it rarely gives you the ability to atone for a mistake by simply flipping back a couple of pages. The same is true for investing.

At any given point in time there are a laundry list of issues that can cause behavior in the stock market to change.  And when I say “behavior”, I mean cause large amounts of money to deviate from their current course.  For instance, right now, the risk du jour is the trade talks with China. The United States is the greatest consuming engine in the world, and we buy a great many things that are created, produced, or assembled in China.  President’s Trump consistent view of foreign policy has been relatively clear: “What have you done for me, lately?”. The answer when it comes to China is not that much. China steals as much intellectual property as they can get their hands on and has used it over the last 30+ years to propel themselves into the second largest economy in the world. Placing tariffs on Chinese goods will no doubt put a short-term strain on the Chinese and American economies.  This data should start showing itself in late Q3. Whether or not cooler heads will prevail and allow them to come to a mutually-beneficial agreement before then (or before the election) remains to be seen.

We’ve got a massively dysfunctional European Union, a member of which, who literally doesn’t know whether they are coming or going.

We have a ever-growing national debt, a concerted effort from central banks around the world trying desperately to combat the greatest deflationary force in the history of the world (technology), a bit of domestic spending problem (“mandatory spending was roughly 2.5 trillion dollars in 2017…good luck trying to touch social security, medicare, medicaid, or veterans benefits, etc.), an inverted yield curve, and so on and so forth.

If you’d like to dwell on possible negatives outcomes, some of which will affect your investing life, that’s fine. Flip over to the pessimist chapters of the book and keep believing you’ll be on the mountain top during the next Great Depression.

We’ve been entrusted with people’s financial lives and we will continue to stay the course and bet on American ingenuity regardless of stock market fluctuations (which are likely to come soon). If you’d like to bet against that in the short-term, you certainly have the possibility of being right. But to me, it’s just too big of a risk if you’re wrong.

– Adam

Further Reading

Dispassion

The Unsatisfying Certitude of Uncertainty