U.S. Housing Market: Not Hot Everywhere

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Zillow just reported that the U.S. Housing Market is up 49% overall since 2012. That’s roughly 6% per year in that time period-though, to be fair, 2012 was when the housing market hit bottom after the 2008-2009 financial crisis. The U.S. Housing Market is huge- $33 trillion (“T”). It’s larger than the value of all U.S. stocks and is about equal to the Gross Domestic Products (GDPs) of the U.S. ($19T), China ($12T) and Canada ($2T). Commercial real estate, including retail, hotels, office buildings, apartment buildings and industrial is about $6T.

The U.S. housing market has had some big winners and some big losers in the last 7 years. Almost 1/3 of the gain of $11T since 2012 has occurred in California. Four of the country’s 10 most valuable markets are in California; LA (5% increase in value in 2018), San Francisco (9.6% increase), San Jose (10% increase) and San Diego (3% increase). New York Metro itself has $3T of housing. The Washington, D.C. metro housing is worth $900 billion. DC itself has more housing value than 40 states, including Colorado, Arizona, Ohio and Oregon.

Unfortunately, housing in some areas hasn’t done so well. Illinois has many state-specific issues which makes it one of the worst housing markets areas. In fact, among the nation’s top 100 metro areas, Chicago is expected to be the weakest housing market of them all in 2019. With mortgage interest rates possibly causing a likely national homes sales slowdown of 2% in the U.S. in 2019, Chicago metro, including Naperville and Elgin, is expected to have an 8% decline in home sales this year. Taxes are a big problem in Illinois. Illinois homeowners are subject to the highest overall tax burden in the country, including the second highest property taxes in the U.S. Since 1996, Illinois property taxes have grown 43% faster than home values and 76% faster than home values in Cook County (Chicago). Worse yet, less than 50% of the tax increases have gone to pay for services. Most of the increase has gone for teacher and other governmental pensions and debt service on bonds.

In 2017, Illinois raised income taxes- the largest permanent state hike in history. Add in a sluggish state economy and outbound migration and the Illinois housing market is hurting. Even so, the Illinois Association of Realtors expects the median value of houses in IL to rise in 2019 by 4%, to roughly $196,000 for the state and $241,000 for Chicago.

The Lowcountry in SC is faring much better. Charleston Metro is now home to 700,000 people. Ongoing job growth means continued housing demand. The median home value in Charleston is now about $320,000 and Charleston home values went up 8% in 2018. The forecast for 2019 is 3% growth. Buyers outnumber sellers. A typical home in Charleston receives only one offer. However, homes sell for only 3% less of the listing price on average with 73 days on the market.

Charleston has many reasons for its housing growth:

  • A booming job market with an unemployment rate under 3% and one of the least unionized states in the nation
  • Wages are low
  • South Carolina’s overall tax burden is among the lowest, particularly for retirees.
  • Huge Tourism industry including being the most sought after wedding destination in the country
  • Home Appreciation is strong- 31% over the last 10 years

Overall, the U.S. Housing market is strong for now. Many winners, but some losers. Mortgage rates, after jumping to 5% and more on 30 year mortgages just a few months ago, are now down in the low 4% range. If they stay there, 2019 could be a pretty good year again for the U.S. Housing Market. But, with many areas coming off a strong run overall the last several years, a cool-down on housing prices wouldn’t be surprising. We’ll continue to watch how the events unfold and keep our clients and readers informed as conditions warrant.

DWM 4Q18 & YEAR-END MARKET COMMENTARY

Fantasy Football and portfolio management may be more similar than one would think. Over the past weekend, I drafted a playoff fantasy football team which I’m hoping will amass more points than the other five “owners” in my league. Fantasy football drafting for both the regular season and playoffs is similar in that you want to take the NFL players that get the most touchdowns and the best stats in turn for rewarding you with higher points. The team with the most collective points wins! However, playoff fantasy drafting is much different than a regular season fantasy draft, with the key difference being one doesn’t know how many games that a player will actually play! Patrick Mahommes may be the best player available per game on paper; but if his KC Chiefs lose in their first game, a middle-of-the-road player like Julian Edelman from the Patriots who is expected to play multiple games, can be superior. Thus, the key is trying to pick not only the best available player, but also the one who will play the most games.

It’s sort of like investing, where picking NFL players and their teams become synonymous with picking companies. You want a collective bunch of players/securities that outperform others which ultimately leads to higher values. I looked at this draft pool of players like I would constructing a portfolio: diversifying my picks by player positions and teams.

Some of the other owners didn’t follow this disciplined approach, instead opting at throwing all of their marbles into the fate of one team and hoping it would lead them to the Fantasy Football Holy Land. And just like investing all or the majority of your dollars into one stock, this type of “coaching” can lead to utmost failure. Case in point: one owner loaded up on one team, taking several players on the Houston Texans. Ouch. (If you’re an NFL fan, you know that the Texans were squashed by the Colts and are out of the playoffs, just like this “owner” is now out of contention in our Fantasy League!) The morale of this story is: there is no silver bullet in football or investing; stay disciplined and diversified and reap the rewards over the long term.

And now onto the year-end market commentary…

Unfortunately, there were not many good draft picks this year. In fact, as stated in one of our previous blogs, around 90% of asset styles were in the red this year. And I don’t mean the Red Zone! Let’s see how the major asset classes fared in 4q18 and calendar year 2018:

Equities: Stocks were driving down the field, reaching record highs right before the 4th quarter began and then…well, let’s just say: “FUMBLE!” with the MSCI AC World Index & the S&P500 both dropping over 13%! This was the steepest annual decline for stocks since the financial crisis. Yes, investors were heavily penalized in 4Q18 for several infractions, the biggest being:

  • The slowing of economic growth
  • The ongoing withdrawal of monetary policy accommodation, i.e. the Fed raising rates and until recently, signaling more raises to come
  • Trade tensions continuing to escalate
  • The uncertainty of a prolonged US Government shut-down
  • Geopolitical risk

None of these risks above justify the severe market sell-off, which brought the MSCI AC World Index to a -10.2% return for 2018. This is in stark contrast to 2017, when it was up 24.0%! “Turnover!” Frankly, the stock market probably overdid it on the upside then and now has overdone it to the downside.

Fixed Income: The Barclays US Aggregate Bond Index & the Barclays Global Aggregate Bond Index “advanced the ball” in the fourth quarter, up 1.6% and 1.2%, respectively. Still, it wasn’t enough to produce any “first downs” with the US Agg essentially flat and the Barclays Global down 1.2% on the year. Bad play: In December, the Fed raised rates another quarter-point and indicated they may do more. Good play: within the last week, they may have completed the equivalent of a “Hail Mary” by signaling a much more dovish stance – it certainly made the stock market happy, now up 7 out of the last 9 days at the time of this writing.

Alternatives:  Like an ordinary offense playing against the mighty Chicago Bears D, alts were “sacked” in the fourth quarter as evidenced by the Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, falling 4.0% for the quarter and finishing the year down 5.1%. This is the worst showing ever for this alternative benchmark. Frankly, we are shocked with this draw-down, chalking it up to 2018 going down as the year where there was no place to hide. Gold*, Managed Futures**, and Merger Arbitrage*** proved to be good diversifiers in 4q18, up 7.5%, 3.6%, 2.4%, respectively; but not many “W’s” (aka “wins”) for the year in alts or any asset class for that matter.

Put it all together and a balanced investor is looking at negative single-digit percentage losses on the year. Yes, 2018, in particular the fourth quarter, was a brutal one for investors. It was like we were in the Red Zone about to score an exhilarating touchdown, only for a “Pick 6” to happen. (Pick 6 is when the football is intercepted and returned into the opposing end zone.) What we learned is that “L’s” (aka “losses”) or corrections can still happen. Going into this year, many had forgotten that markets actually can and do go down. Further, markets can be volatile, down big one day, and up big the next. So what is one to do now, besides putting the rally caps on?

The answer is: essentially nothing. Be disciplined and stay the course. Or, if your asset allocation mix has fallen far out-of-line of your long-term asset allocation target mix, you should rebalance back to target buying in relatively cheap areas and selling in relatively expensive areas. Or, if you happen to have come into cash recently, by all means put it to work into the stock market. This may not be the absolute bottom, but it sure appears to be a nice entry point after an almost 20% decline from top to bottom for most stock indices. From a valuation standpoint, equities haven’t looked this attractive in years, with valuations both here in the US and around the globe below the 25-year average.

And speaking of football, it’s easy to be a back-seat quarterback and say, “maybe we should’ve done something differently” before this latest correction. But we need to remember that empirical studies show that trying to time the market does NOT work. You have to make not just one good decision, but two: when to get out and when to get back in. By pulling an audible and being out of the market for just a few days, one can miss the best of all days as evidenced by the day after Christmas when the Dow Jones went up over 1000 points. In conclusion, if you can take the emotion out of it and stay fully invested through the ups and downs; at the end of your football career, you give yourself the best chance to make it to the Super Bowl.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

 

*represented by the iShares Gold Trust

**represented by the Credit Suisse Managed Futures Strategy Fund

***represented by the Vivaldi Merger Arbitrage Fund

Can Money Buy You Happiness?

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Happy New Year!! We hope you had a fantastic holiday season. Now, it’s on to 2019 with planning and resolutions for the New Year. What are your goals? More money? More Happiness? More Joy? As you tackle these huge questions of money and meaning, we’d like to offer you some ideas.

Does money buy happiness? King Midas was rich, but his gold didn’t bring him happiness.   That’s because there’s a difference between being rich and being wealthy. Brian Portnoy, in his book, “The Geometry of Wealth,” articulates this well: “Being rich is having ‘more.’ The push for more is a treadmill of which satisfaction is typically fleeting. Wealth, by contrast, is funded contentment. It is the ability to underwrite a meaningful life- however one chooses to define that.”

Money, of course, is a huge part of our daily lives. Our life cycle with money includes earning, spending, saving and investing. Our first paycheck shows us our ability to earn and sustain ourselves. Next, where do we spend the money and how much do we save? Lastly, as we accumulate money, we choose to put our financial capital at risk to grow at a higher rate of return than cash. Money is like the oil in your car; without it, the car grinds to a halt, but with it, YOU still have to steer the car in the right direction.

Sonja Lyubomirsky in “Pursuing Happiness,” identifies three factors which determine happiness/human fulfillment. These are disposition (who you are), circumstances (what you face) and intentions (what you do). Her research shows that outcomes are impacted as follows: 50% comes from disposition, 40% from intentions and 10% from circumstances. The good news is that we can control our intentions; which, of course, is our review, planning, implementation and monitoring of our life planning.

As Daniel Kahneman (featured in earlier DWM blogs) has proven, how well we handle our intentions and planning has a lot to do with “Thinking Fast and Slow.” The fast brain is the home of impressions, impulse, and feelings. The slow brain is engaged when we are deliberately thinking and making informed choices. The two systems work together; the key is using our slow brain as we shape a life of money and meaning. The process of building and executing a plan can be, in itself, a source of happiness.

In 2015, the Dalai Lama and Archbishop Desmond Tutu met and discussed life; recapped in “The Book of Joy.” They separated happiness into two categories; one, experienced happiness, which comes and goes with daily pleasures, and, two, reflective happiness, the achievement of joy, which takes work. Dr. Portnoy identifies the four pillars of joy:

  • Connection-the need to belong
  • Control-the need to direct one’s own destiny
  • Competence-the need to be good at something worthwhile
  • Context-need for a purpose outside of one’s self

These “Four C’s” are at the heart of funded contentment. And while contentment can be achieved by all, including those in lower levels of income, money helps.

Dr. Kahneman found in his research that happiness directly increases as income increases. However, after about $75,000 of annual income (per person), experienced happiness levels out. The concept is that good and bad moods come and go at the same pace for someone making $100,000 per year as compared to someone making $1 million per year. However, reflective happiness, or funded contentment, does increase with higher incomes for many people. This is because at higher levels of income, money, allocated wisely, can underwrite the Four C’s, which constitute reflective happiness. Money can be used for both experienced and reflective happiness and, by using both our fast brain and our slow brain, we can achieve both.

In our crazy, chaotic world, it’s important not to let our fast brain guide all of our intentions. We need to have a plan and a process and be ready to adapt it as the world changes. True happiness takes work. Our goal, as wealth managers, is to assist you with a process not only to protect and grow your money, but also to help you achieve “funded contentment”- the ability to underwrite a meaningful life- however you choose to define that.

Good luck on your planning for 2019. Please let us know if you would like us to help.

“Nowhere to Hide for Investors”

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Most years, financial markets are a mixed bag; some asset classes are up and some are down. Some years, like 2017, everything is up. And then there are years, like 2018, when everything is down. It’s been decades since stocks, bonds, commodities and gold all have reported negative results. Even though the American economy remains strong, with low unemployment and steady growth, expectations for the future have diminished. Rising trade tensions, a sharp slowdown in Chinese spending, rising interest rates and no additional tax reform have reduced the outlook for economic growth and corporate profits worldwide.

So, what’s an investor to do? We suggest you go back to the basics and review your financial and investment strategy for the future:

1)Determine how much risk you need to take on to meet your financial goals. What is the annual real rate of return you need to have enough money for your lifetime(s) and the legacy you wish to leave? When we say real return, we mean the nominal return less inflation. You, perhaps with help from your financial adviser, need to determine your expected investment portfolio at your time of “financial independence,” the annual amount you expect to withdraw from the portfolio to cover your needed and wanted expenses (any annual amount over 4% of the portfolio could be a problem), estimated inflation and estimated longevity. The calculation will produce a rate of return needed to meet your financial goals.

2)Next, determine how much risk you want to take on. Your “risk profile” is based on your risk capacity (your financial assets), your risk tolerance (your attitudes about risk), and your risk perception (your current feelings about risk). We’re all hard-wired with certain attitudes about risk. Some of us are aggressive and some of us are conservative or even defensive. Some of us are victims of the “recency bias,” which means that we think that whatever direction the markets have moved recently will continue (forever). At a minimum, we need to take on the risk we earlier determined necessary to meet our goals. If that seems too aggressive then we need to revise our financial goals downwards. If we want to take on more risk than is needed to reach our goals, that’s a personal choice.

3)Your risk profile should be based on the long-term, but may need to be adjusted. Once you, perhaps with help from your financial adviser, have determined you long-term risk profile as defensive, conservative, balanced, growth or aggressive, you should maintain that profile for the long-term and not move up or down due to short-term market conditions. Don’t try to time the markets’ ups and down. Staying invested for the long-term in an appropriate risk profile is your best strategy. However, life events can result in major changes in a person’s life. Death of a family member or loved one, marriage, relationship issues, changes in employment, illness and injury are all examples. At these times, your risk profile should be reviewed and, if appropriate, adjusted.

4)Determine an asset allocation based on your risk profile. There are three major asset classes; stocks (equity), bonds (fixed income), and alternatives (gold, real estate, etc.). Your risk profile will determine how much of your portfolio would be in each of these categories. A defensive investor would likely have little or no equity, substantial fixed income, and some alternatives. An aggressive investor could have most or all in equity, some or no fixed income and some or no alternatives. A balanced investor might have 50% equity, 25% fixed income and 25% alternatives.

5)Compare the real return you need to the asset allocation. Let’s use a balanced investor, for example. If equities have an expected net long-term return of 8-10%, fixed income 2-4%, and alternatives 2-4%, a balanced investor would have a hypothetical long-term net return of 6%. (9%x.5 + 3%x.25 +3%x.25). A 6% nominal return during times of 3% inflation produces a 3% real return. Compare this real return to your return needed in exercise one. A defensive investor who has no equities will be fortunate to have a hypothetical return equal to inflation. Someone who sits in cash will not even keep up with inflation. An aggressive investor, with all or mostly equities, will, over time, have the greatest return and will experience the greatest volatility. Aggressive is not for the faint of heart, aggressive investors generally lost 30-45% of their portfolio value in 2008.

6)Diversify your portfolio. After selecting your asset allocation, you need to look at your “investment styles” within each asset class. You should consider a global allocation for diversification. In 2018, while all equities are down, the S&P 500, led by Facebook, Apple, Netflix and Google, has been down the least. But, it doesn’t always work that way. The S&P 500 index was down 9.1% cumulatively from 2000-2009, while international stocks were up 17% cumulatively including emerging markets, which were up 154%. In the 11 decades starting in 1900 and ending in 2010, the US market outperformed the world market in 5 decades and underperformed in the other six. Consider perhaps having 20-30% of your equities in international holdings and make sure you have exposure to mid cap and small stocks domestically.

Conclusion: 2018 has been a tough year, particularly after 2017 was so good. We sometimes forget that even with the 10% and more corrections in the markets since October 1, equities have been up 7-10% per year, fixed income and alternatives up about 2% per year over the last three years ending this Monday, December 17th. If you need/want a real return above zero, you will likely need to invest in equities in some proportion. Determine how much risk you need/want and stick with it for the long-term, subject to life events changing it. Stay diversified and stay invested. Focus on what you can control, including enjoying the holiday season. Happy Holidays.

 

 

 

 

It’s beginning to “cost” a lot like Christmas!

 

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It’s beginning to “cost” a lot like Christmas! It’s a fun play on the popular holiday song, “It’s beginning to look a lot like Christmas”, originally written by Meredith Wilson in 1951. Though times have certainly changed since the 1950s, the spirit of gifting and giving during the holidays has always remained the same. According to the National Retail Federation, the average American spends an average of $1,000 during the holiday season!

It’s not uncommon, as we approach the holiday season, that you might find yourself feeling grateful, compassionate and more charitable than any other time of the year. Now is the time people eagerly give to their loved ones and generously give back to those in need. Here’s a look into new and exciting ways people are giving and gifting in 2018:

529 College Savings Plans

As the total student loan debt in the U.S. approaches the $1.5 trillion mark, 529 college saving plans have grown in popularity. Unlike ordinary gift checks, a 529 savings plan can an act as an investment in a child’s future that has the ability to grow, tax-free, for the use of qualified educational expenses (K-12 tuition included under the new tax law). While college savings may not be the most riveting gift for a young child to receive at the time, the potential to alleviate the future burden of student loans, all or in part, will be one gift they won’t soon forget.

Custodial Investment Accounts

There are two main forms of custodial investment accounts, UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts. They are virtually identical aside from the ability of UTMA accounts to hold real estate. Custodial accounts can be a great way to teach children about investments while limiting their access to investment funds. Depending on your state, access to custodial accounts is limited to minors until the child has obtained ages 18-21.

In 2018, individual gifts are limited to the annual $15,000 gift-tax-exemption limit ($30,000 for married couples). Family and friends can contribute directly to custodial accounts of another person. If these accounts are properly titled as retirement accounts, such as a Custodial Roth Account, contributions must be made indirectly, limited to $5,500 for 2018, and the donee must have earned an income equal to or greater than the contribution made.

Charitable Gifts

Did you know you can complete charitable gifts in the name of a friend or family member and still capture the tax deduction? Assuming you itemize, funds given to charity can come from any taxable account (or qualified, see below) of your choosing and may list a donor of your choosing. For example, one can give to St. Judes Children’s Hospital using their own personal funds, receive a tax deduction for doing so, and list the donor as someone other than themselves, like a grandson or other relative. So long as you can prove the funds used came from you, i.e. your name is listed on the account used, you should receive a deduction for these forms of charitable contributions.

There are several ways to give back to charity, one of the more tax efficient ways is by way of Qualified Charitable Distributions (QCDs). This is an alternative to Required Minimum Distributions (RMDs) that you are required to take from your IRA upon obtaining age 70 1/2. A QCD allows you to give a portion or all of the amount that you otherwise would be required to take from your IRA to charity. The benefit of doing so is to exclude these funds from your taxable income. This process can be especially beneficial if, under the new tax reform, you will be using the new increased standard deduction, $12,000 for individuals and $24,000 for married filing jointly, as opposed to itemizing.

There are many forms of giving. Integrating both charitable giving and family giving can be an intricate part of your overall plan, and it doesn’t always have to “cost you an arm and a leg.” Ensuring your gestures are both sustainable and tax-efficient are good questions to ask. At DWM we are always looking for new ways to give back to our clients and friends by assisting in these areas. Please, never hesitate to reach out to us in regards to new ways to give back to your family, friends and charitable organizations.

Understanding Benchmarks: Why is my Portfolio Trailing the S&P 500 so far in 2018?

Many investors with well-balanced, diversified portfolios might be asking this exact question when they compare their year-to-date (“YTD”) return with that of the S&P 500. To understand the answer to this question is to understand your portfolio composition and your relative performance to a benchmark which may or may not include the S&P 500.

Per Investopedia, “a benchmark is a standard against which the performance of a security or investment manager can be measured. Benchmarks are indexes created to include multiple securities representing some aspect of the total market.” Within each asset class – equities, fixed income, alternatives, cash – you’ll find lots of benchmarks. In fact, the total number of indexes is somewhere in the thousands! That said, “when evaluating the performance of any investment, it’s important to compare it against an appropriate benchmark.” So let’s start by getting familiar with the most popular as well as the most applicable benchmarks out there.

  • Dow Jones Industrial Average: Arguably the most well-known index for domestic stocks, the Dow is composed of 30 of the largest “blue chip” stocks chosen by the editors of the Wall Street Journal. The Dow is not a good benchmark to compare your diversified equity portfolio because 1) 30 companies is a small sample given there are over 3000 publicly listed stocks traded in the US alone. 2) The Dow isn’t well diversified with a heavy influence to industrials and excludes big names like Apple, Amazon, & Berkshire Hathaway. 3) It is price-weighted, meaning a stock with a higher price will have a higher weighting in the index than a stock with a lower price. Change in share price is one thing, but absolute share price shouldn’t dictate measurement. Thus, this index is severely flawed.
  • The S&P 500: Another index for domestic stocks, composed of 500 large-cap companies representing the leading US industries chosen by the S&P Index Committee. It’s certainly not as flawed as the Dow, but it too has its own problems: the biggest being that it is market-cap weighted, meaning that a stock’s weighting in the index is based on its price and its number of shares outstanding. So as a company’s stock price rises and its market-cap grows, this index will buy more of that stock and vice-versa. Thus, the index is essentially forced to buy larger, more expensive companies and sell companies as they get cheaper. This “flaw” is great in times when large cap growth companies are hot: think about FAANG – Facebook, Amazon, Apple, Netflix, Google – these are all stocks that up until recently have soared and essentially the reason why the S&P500 heading into this month was one of the only 10% of 2018 positive areas amongst all of the asset categories Deutsche Bank tracks. (See graph below.) However, the S&P500 won’t show too well when growth is out of favor and investors emphasize value and fundamentals like they did in the 2000s, a decade when the S&P500 had basically zero return.
  • There are many other popular equity benchmarks such as the Russell 2000 (representing small cap stocks), MSCI EAFE (representing international stocks – in particular ones from developed regions of Europe, Australiasia, and the Far East), MSCI EEM (representing stocks of emerging regions), and lots more.
  • All of these above focus on a particular niche within the equity market. Therefore, none of them really make a good benchmark for comparison to your well-balanced, diversified portfolio. It’s like comparing apples to oranges! Which is why we favor the following benchmark for equity comparison purposes: MSCI ACWI (All Country World Index): This index is the one-stop shop for equity benchmarks consisting of around 2500 stocks from 47 countries, a true global proxy. It’s not a perfect benchmark, but it does get you closer to comparing apples to apples.

Next, we look at popular benchmarks within Fixed Income:

  • Barclays Capital US Aggregate Bond Index:  Basically the “S&P500 of bond land” and sometimes referred to as “the Agg”, this bond index represents government, corporate, agency, and mortgage-backed securities. Domestic only. Flaws include being market-cap weighted and that it doesn’t include some extracurricular fixed income categories like floating rate notes or junk bonds.
  • There are others, like the Barclays Capital US Treasury Bond Index & the Barclays Capital US Corporate High Yield Bond Index, that focus on their respective niche, but probably the best bet comparison for most diversified fixed income investors would be the Barclays Capital Global Aggregate Bond Index. This proxy is similar to the “Agg”, but we believe superior given about 60% of its exposure is beyond US borders. Not exactly apples to apples, but it can work.

Lastly, Alternatives:

  • For Alternatives, benchmarks are somewhat of a challenge as there aren’t as many relative to the more traditional asset classes of stocks & bonds because there are so many different flavors and varieties of alternatives. We think one of the most appropriate comparison proxies in alternative land is the Credit Suisse Liquid Alternative Beta Index. It reflects the combined returns of several alternative strategies such as long/short, event driven, global strategies, merger arbitrage, & managed futures. As such, it can be considered as an appropriate comparison tool when comparing your liquid alternative portion of your portfolio.

Now that you’re more familiar with some of the more popular and applicable benchmarks of each asset class category, you may be asking the question: which one of the above is the best for comparison to my portfolio? The answer is: none of them alone, but rather a few of them combined. In other words, you would want to build a blended proxy consistent with the asset allocation mix of your portfolio. For example, if your portfolio is 50% equities / 30% fixed income / 20% alternatives, then an appropriate blended benchmark might be 50% MSCI AWCI Index / 30% Barclays Capital Global Aggregate Bond Index / 20% Credit Suisse Liquide Alternative Beta index. Now you’re really talking an apples-to-apples comparison!

You now should be equipped on how to measure your portfolio versus an appropriate benchmark. With 90% of assets categories being down for 2018 according to data tracked by Deutsche Bank through mid-November (see graph below), most likely you are sitting at a loss for 2018. 2018 has been a challenging year for all investors. Besides a select group of large cap domestic names (that are big constituents of the S&P500), most investment areas are down. That 90% losing figure is the highest percentage for any calendar year since 1920! Yikes! This also could be the first year in over 25 that both global stocks and bonds finish in negative territory. Wow! It’s a tough year. Not every year is going to be a positive one, but history shows that there are more positive years than negative ones. Stay the course.

Our investment management team here at DWM is made up of CFA charterholders. As such, we believe in prudent portfolio management which adheres to a diversified approach and not one that takes big bets on a few select areas. We know that with this diversified approach, it’s inevitable that we won’t beat each and every benchmark year-in and year-out, but we can be capable of producing more stable and better risk-adjusted returns over a full market cycle. Further, we are confident that our disciplined approach puts the client in a better position to achieve the assumed returns of their financial plans over the long run, thereby putting them in a position to achieve much sought long-term financial success.

Have fun with those comparisons and don’t forget to lose the oranges and double up on the apples!

Focusing on Football and Finances

 

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We started an activity in our office recently that we call “reverse-mentoring”. Historically, of course, the mentoring comes from the most experienced on down to the least experienced and the teacher and the student do not often change places. However, this informal program allows our youngest team members to teach the older team members what the world looks like from a Millennial perspective. We get to hear how the world looks through the kaleidoscope of a post-911 and post 2008 recession view. The impact of the explosion of internet and social media influence is something the younger generation can’t necessarily comprehend – they have always just had it. It seems all the older generation can do is play catch up and learn all they can from the younger crowd. The reverse-mentoring helps us look through a new and changing lens and we all enjoy hearing about the different generational perspectives.

The most significant difference in generational experience is the impact of the speed of information access and communication. It is mind-boggling how quickly news spreads, how widely social, political or economic information will travel. It is the age of near-constant distraction. We have hundreds of cable channels, apps on your phone with real-time sports scores, stock market quotes or breaking weather and news. We are constantly interrupted by texts, emails or alerts. My favorite example of over-the-top multi-tasking is the NFL Red-Zone cable channel. They move from game to game, finding the games with teams that are currently in the “Red Zone” or 20 yards from a scoring opportunity. They will sometimes show a split screen with several games at the same time so you don’t miss the exciting plays from every NFL game currently being televised! It will give you a headache trying to watch all of the action at once.

A Wall Street Journal article recently talked about how information “overload” is “leading us to make bad choices about our money”. The article suggests that our shortened attention span prevents us from fully digesting all of the pertinent information we need to make informed financial decisions. As much as we are now bombarded with data and information, if we can fully concentrate on the task at hand, we can also use some of these information tools to enhance our decision-making! Our smart-phones or IPads offer convenient ways to manage our banking, credit and investments. Here are some of the tips from the article to help you avoid the pitfalls of making poor financial choices.

Avoid multitasking: Multitasking can lead to ineffective completion of any of the tasks you are trying to accomplish. One business journal recently advised business owners that multitasking in the workplace should be discouraged and instead task completion should be the focus in order to have a successful business. As the article points out, trying to multitask makes us worse at most tasks!

Pick the Right Time of Day: Be sure that you have enough time to analyze information or make decisions. Try to choose a time when interruptions will be minimal and you can concentrate on one thing at a time.

Focus on the most relevant and not just the most available information: Try not to make snap judgements based on the most immediately available information. Taking time to do necessary research will allow you to make more informed choices. The latest information is not necessarily the whole story!

Look at the Big Picture: There are apps that can help monitor bills, payments, account balances and can help you track trends or payment schedules to take some of the work out of these tasks. Take the time to put the whole picture together before making a decision about one piece of your financial picture.

Keep away from the Phone: That small computer in your hand is a big culprit in causing distraction. One of our reverse-mentors told us about the latest Apple IOS 12 update which now shows how much screen time you spent in any given period and also will track the activities that you spent time on. If you saw that you spent 5 hours on your phone one day, with about 3 of those on FaceBook, Twitter or checking your Fantasy Football standings, it might prompt some restraint and help you to lessen your screen time each day. That is a useful tool!

We want all of our DWM clients to feel confident that, as your financial “quarterback”, we are paying very close and undistracted attention to your financial health. We try to carefully review all of the information at hand to make informed financial decisions on your behalf. We want our clients to worry as little as possible about financial decisions and we always welcome any questions or requests for assistance. We hope that when making your own decisions, you can slow down and take time to carefully determine the best path. Also, our dependence on constant information and interaction truly can take away from the wonderful experiences in our lives. So put down the phone, enjoy time spent on your favorite activities and with your favorite people. Watch one football game at a time! We think this will enhance your financial health and help you focus on the important things in your life.

A True Halloween Scare: Volatility Returns to the Marketplace

Recently, we here at DWM posted a blog discussing the phenomenon that “Bull Market Runs Come in All Lengths”. Within this article, we mentioned the idea that before our current bull run ends, we may see many more pullbacks and/or corrections.

Within the current month, we have seen these types of market downturns as investor fears of upcoming mid-term elections, tariffs, rising rates,  and international economic slow-down issues have spiked levels of consumer fear (measured by the volatility index, VIX), by nearly 50% .

While this data can’t tell us whether the current bull market run is coming to an end, it opens up the opportunity to better understand just what is happening in the economy, and how we should handle times like these.

To understand the severity of market moves, there are three unique distinctions: a pullback, a correction, and a bear market, which signify downward market moves of 5%, 10%, and 20% respectively.

Over the past month, securities within all asset classes – equities, fixed income, and alternatives – have experienced one of these. On October 23rd, in fact, over 40% of the stocks in the S&P 500 were considered to be in bear market territory. Since then, markets have continued their run of ups and downs.

What can this market data tell us about the future? Unfortunately, not much. While markets tend to be cyclical in nature over the long-term, the short-term is usually marred by emotions (herd mentality, greed, and fear) rather than by solid fundamental and economic modeling. Furthermore, the risk of attempting to predict these short-term outcomes can have a serious long-term effect on the performance of an investor. Studies have shown that by missing out on only a few days strong returns in a market cycle can drastically impact the portfolio’s overall return.

Thus, in order to stay on track with long-term financial goals, one of the most successful and least anxiety-inducing ways to manage investments is to generate a financial plan, assess and re-assess risk tolerance regularly, and continually stay disciplined to these values in order to avoid making emotional and poor decisions. In conjunction with these actions, an investment portfolio needs both an appropriate asset allocation based on a client’s financial plan and has to be made up of a well-diversified portfolio that can help provide exposure to market areas, such as fixed income and alternatives, that are arenas that may still produce returns even with stocks stuck in a slowdown. The combination of these strategies can work as shields to protect both an investor’s assets, and his/her mental health during times of volatility such as today’s challenging marketplace.

At times, corrections, pullbacks, and even bear markets can actually be good things! If certain areas of the market are being overvalued, or company valuations are getting ahead of their fundamentals, pullbacks and corrections can serve as a check and balance system, to get these more in line. This makes companies, sectors, and markets more stable as they can refresh a bull market that is verging on inflating itself beyond its means.

Furthermore, a pullback, correction, or bear market move down for a certain security can provide other opportunities. For example, this month, DWM will be creating value for clients by taking advantage of tax-loss harvesting options. Tax-loss harvesting is the process of selling out of a security that has lost value since an investor first bought it, and using that loss to offset any gains that an investor realized during a tax year. This upside can serve as a nice treat to offset the “trick”-y investment arena of October.

One other somewhat notable factoid is that in the mid-term election year of October 2014, the stock market took a noticeably similar look. That of the Dow Jones down nearly 3%, rebounding, and selling off throughout, ultimately dropping into correction territory. This was quickly followed by a November post-election market boom hitting record highs for the Dow and S&P 500. Once again, while interesting to see, take these numbers with a grain of salt moving forward and looking at future returns.

All in all, keeping in mind that while volatility and uncertainty in the marketplace can be scary, maintaining a balanced, disciplined portfolio and financial plan, and staying dedicated to that plan throughout all market cycles is the key to being financially sound and minimizing the number of sleepless nights. At DWM, we proactively discuss these matters with clients, and strive to keep our clients informed, motivated, and on-target to their financial plans to help them reach their long-term financial goals. Happy Halloween!

Your “Hidden Brain” Impacts Your Politics

Hopefully, all of us will vote in the midterms on 11/6 or before. Roughly half the country will vote for Republicans (conservatives) and half will vote for Democrats (liberals.). Did you know that your choices are not only impacted by your upbringing and experiences, but also very specifically by your genes? We’re hard-wired from birth for much of our political views.

Shankar Vedantam is one of my favorite authors and commentators. He is NPR’s social science correspondent and before that a journalist at The Washington Post. His 2010 book “The Hidden Brain: How our Unconscious Minds Elect Presidents, Control Markets, Wage Wars and Save our Lives” describes how our unconscious biases influence us. I highly recommend it.

Mr. Vedantam relates the story that on a regular basis, right before an election, someone will share an article with him about how science proves that the brains of a liberal are stunted or that Republicans are less intelligent than Democrats. While those claims likely have no merit, Mr. Vedantam contends that there are “genuine psychological differences between liberals and conservatives.”

On a recent Hidden Brain telecast, Mr. Vedantam hosted political scientist Dr. John Hibbing to the show. Dr. Hibbing is co-author of “Predisposed: Liberals, Conservatives and The Biology of Political Differences.” Dr. Hibbing pointed out that differences between partisans are not limited to politics. There are generally differences in food choices, living spaces, and temperaments. Conservatives generally like meat and potatoes; liberals are more likely to prefer ethnic food. Conservatives tend to have organized rooms with things like sports memorabilia, while liberals tend to have lots more books and may not be as tidy. As far as temperament, conservatives tend to favor order and tradition and liberals tend to be more comfortable with ambiguity and change.

Then, there’s a huge difference between conservatives and liberals when it comes to threats and danger. According to Dr. Hibbing, conservatives tend to see the world with its terrorists, home invaders, drug cartels, and immigrants as a very dangerous and threatening place.   Liberals tend to believe they live in a relatively safe society.   Conservatives therefore want and need the government to help them “protect themselves and their family, limit immigration, and put lots of money into defense and law and order.” Liberals, on the other hand, are reinvigorated by immigrants coming to our country, don’t see the need to spend so much money on defense and support gun control. Conservatives and liberals read about events of the world and they simply don’t respond to them in the same way.

Mr. Vedantam chimed in: “There is a very powerful illusion that we have that the rest of the world sees the world the way we see the world. And, if they come to a different conclusion, it must be because they’re being deliberately obtuse or somehow deliberately biased, as opposed to the idea that people are actually seeing the world the same way, but reacting to it differently.” Psychologists call it a case of “false consensus” that we assume others will see the world the way we do.

People are wired differently. Roughly 30-40% of our political views come from genetics based on research by Dr. Hibbing. 60-70% comes from our environment. Mr. Vedantam has described how researchers separate the effects of biology from those of the environment. They look at fraternal and identical twins. Both sets of twins have identical initial environments, but the fraternal twins have similar but not identical genes. Data from thousands and thousands of twin pairs supports the conclusion that political views are quite “inheritable.”

Finally, brain activation patterns of liberals and conservatives are different. Dr. Hibbing has conducted tens of thousands of experiments in which he showed various pictures to individuals whose brain was being scanned. Liberals’ brains would highly activate at times much differently than when conservatives’ brains were highly active. The brain scan results alone proved “incredibly accurate in determining whether an individual was a conservative or liberal.”

Frankly, I find it very helpful to learn that political views are at least, in part, biological. Years ago, left-handers (like both my mother and father) were thought to be lazy and had their hands hit with a wooden ruler to make them write “correctly,” using their right hand. People saw left-handers as a flaw, something that needed to be driven out. Now, of course, we understand that being left-handed is very biological. Similarly with politics. Dr. Hibbing concludes: “If we recognize that others, virtually half the country, are oriented to the world in a different fashion, maybe we would be a bit more tolerant to them. This is the only way we’re going to get anywhere if we at least understand where they are coming from even if we might deeply disagree with their conclusions.”

As we approach the midterms with the vitriol rising, let’s all remember our hidden brains and those of others, particularly family and friends and show tolerance and respect to all. We may see the same world differently: our unique genes, unconscious biases and life experiences may produce different conclusions and different political preferences. Yet, we’re all Americans and we and our country will all do better if we work together.

The Life Insurance Puzzle

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We read an article last month in Investment News that suggests that life insurance should not be used as a savings vehicle. As you might imagine, there was some uproar among the life insurance industry readers that heartily disagreed with the premise of the “Guestblog” by Blair Duquesnay.   Ms. Duquesnay believes that there are certainly appropriate purposes for life insurance, but saving for retirement is not one of them. She stated in a follow-up that “life insurance is an instrument of protection, not accumulation.” We wanted to look a little closer into this to understand both sides of the argument.

First, let’s start with some of the universally acceptable reasons for having a life insurance policy. As Ms. Duquesnay says, life insurance should be purchased, in general, “because there will be a financial impact” on a business or family if someone dies. Certainly, protecting our loved ones or business partners is prudent and responsible. If something happens to you, you might want to provide a benefit for regular or special spending needs, potential increased child care costs, a mortgage payoff or other debt relief. Similarly, a death benefit might help cover college costs or provide a lifetime of comfortable support to our dependents. Some policies can be used for estate planning, long-term care or asset protection. It is also true that, in general, the need for a life insurance death benefit may decline over time, as your life circumstances change.

Let’s talk about the different types of life insurance:

1.Term Life, or annually renewable life insurance, offers an affordable premium to buy a particular level of insurance for a specific period of time. Maybe you use it, maybe you won’t and maybe you keep it going, maybe you don’t, but, either way, at the end of the term, the policy expires and, generally, there is no longer a need to have it. There is no additional value to the policy beyond the safety net of the death benefit.

2.Whole Life is the most common form of permanent life insurance, which means the benefit coverages will be around for your lifetime, as long as you pay the premiums. There are two parts to it – an investment portion (cash value) and an insurance portion (face value or death benefit). Premiums are fixed and are considerably higher than term policies, with high mortality charges for keeping the guaranteed death benefit. These products are designed to stay in force for your lifetime and come with steep surrender charges if you terminate the policy early. There are also substantial up-front commissions and fees for investing part of your premiums in a tax-deferred account. You can access your cash value by taking a loan out with the insurance company against the account value in the policy and they will charge you interest. If you stop paying the premiums, you may be able to switch to a paid-up policy that will be worth the existing cash value, but in general, these products are expensive to keep in place.

3. Universal Life is designed to also be a permanent insurance policy, but is considered adjustable because the policy offers the flexibility of changing premium amounts and having a fixed or increasing death benefit. If you need to stop paying or reduce premiums, your accumulated cash value can be used to keep the policy from lapsing. Once the policy value goes to zero, the policy and death benefit lapse forever. There can be steep surrender charges if terminating or withdrawing from your account, which will reduce any accumulated cash value. Like Whole life policies, your premium pays a portion to a high-interest cash value account and a portion for a death benefit. The growth is dependent on the performance in the accounts, on investment earnings (or losses) and on the amount of your premium contributions. The flexibility can be beneficial, but the policy value can deteriorate and lapse and the fees and costs are much higher than a term policy.

4. Variable Life – these are policies built like Universal life contracts (there are also hybrid Variable Universal Life policies, just to make it more confusing), but the investments are kept in managed mutual fund sub accounts with investments selected from a menu. This gives the policy holder more investment choice (and risk) for the cash value account in the policy. However, like Universal life, the same risk applies – the accumulation is dependent on the amount paid with your premium and the performance of the investments in the cash value account. The flexibility might be attractive, but it also increases the risk to the policy. Again, once the policy value goes to zero, the policy and death benefit lapse forever.

There are more insurance products and deeper complexities to the above definitions, but this is a basic outline of some of the life insurance choices. As you can see, the “permanent” life insurance policies and their saving (or investment) option can be costly and will allow for less flexibility in the growth of your investment savings than using standard investment accounts not tied to insurance. We generally find that the expensive fees, commissions and surrender charges keep us from recommending these products as a saving vehicle. “Buy term and invest the rest” is the motto of most fee-only advisors. The insurance industry is always working to improve these products and find the sweet spot for combining protection with accumulation. We certainly agree that there may be appropriate circumstances for using the more complex insurance products. At DWM, we don’t sell any of these insurance products, but we are happy to review your current policies or insurance needs to help you find the sweet spot for you and your family!