Happy Halloween!

halloween-moneyHappy Halloween! Halloween can be one of the best times of the year, especially if you’re creating memories with your family and friends. We all love to watch scary movies and get a little spooky on Halloween, but do you know what’s even scarier than a creepy clown on Halloween? Having poor financial habits. My name is Grant Maddox and I am a new Service Associate with DWM.  As a recent College of Charleston Business graduate with a concentration in Finance, I have learned a thing or two about spending while on a “college budget”. I have also learned through my course work how important it is to stay on your budget and not over spend.

Americans love to spend!  The 2015 Bureau of Labor Statistics reported that average spending in the U.S. across all types of expenses increased in 2015. Expenditures for food, housing, apparel and services all rose between 3.4% and 3.9%. We know the Consumer Price Index remained largely unchanged at 0.73% last year. In other words, the increase in spending was principally not the result of inflation. Instead it shows American households simply spent more in 2015.

There are many reasons why Americans may spend more – for one thing, technology has made it so much easier. As accessibility to online retail and credit options increases, so do our spending habits. You can pay with a swipe of a card or by hovering your phone over a machine!  It is eerie how easy you can spend your hard-earned dollars!  In fact, kicking off the end of year spending season is Halloween. Just how much do Americans spend on trick-or-treating and other Halloween festivities? The National Retail Federation (NRF) forecasts total Halloween spending—including candy, costumes, and decorations—to come to $7.4 billion this year. We are inundated with eye-catching campaigns to encourage excessive spending, especially during the holidays.

Establishing a budget that includes life’s essentials such as rent, utilities, food, and transportation is important for setting up yourself or your child for success. It is crucial to encourage saving early and often to gain the benefits of compounding. While many young professionals may see saving for future goals, such as a down payment on a house, as a non-priority, saving, in fact, can certainly make a huge difference. As a parent, you can even encourage your child’s saving by offering to match a percentage of their contributions to a designated savings account. These lessons can be invaluable to them as they grow older. Having direct deposits of paychecks, direct deposits to savings vehicles and automated payment schedules help us manage our bill payments and savings potential more easily.  Technology can be a wonderful attribute to our society and for our spending, when we use it wisely.

At DWM, we encourage you to plan for your major purchases and be sure that your goals are all part of a larger successful financial plan.  Looking for ways to right size your spending isn’t just about planning ahead for luxury items.  Reviewing all household expenditures to determine if they are needs, wants, or wishes is also a great practice. I look forward to learning all I can about total wealth management and helping our clients and others to achieve their financial goals.

aaeaaqaaaaaaaafdaaaajgvhztrjmmuxlwniytatnguwmy1hnjg5lwfjzdq0mjexmji0nqEditor’s Note:  Please join us in welcoming Grant Maddox to our DWM team.  Grant joined our firm in October as a service associate and is training/learning/working toward becoming a junior advisor. Welcome aboard, Grant!

Is Our World Really a Bad Place?

world-held-up-by-hands-002Aren’t you glad the contentious presidential debates are now over?   Do you feel like the only things reported are politicians bashing each other and other terrible and depressing events?  Wondering what this world is coming to? Sick of the negativity?  Yes, we are too.

The problem is that “big data,” the media and politicians all know the “secret.”  Our brains are hard-wired to react strongly to negative impulses.  Not surprising, from the dawn of human history, survival depended on our skill at staying away from danger.  To ignore bad news could be dangerous and/or fatal.

That’s why political smear campaigns work better than positive ones.  Nastiness just makes a bigger impact on our brains.  Hence important political issues take a back seat to allegations of candidates being “crooked” or “womanizers.”

Researchers Marc Trussler and Stuart Soroka ran an experiment at McGill University in Canada focused on the kind of political news people really prefer to read.  Even though, when asked, participants said they wanted good news stories, in a controlled experiment they generally chose stories with a negative tone- corruptions, set-backs, and hypocrisy rather than neutral or positive stories.  We are all unfortunately naturally attracted to negative content.

This phenomenon is more solid evidence of our “negativity bias”, which is the psychologists’ term for our desire to hear and remember bad news.  Is it any surprise that the media and politicians know this and focus their content accordingly?

So, think of a typical evening newscast.  Out of 30 minutes, there are 28 minutes filled with stories of political accusations, tragic events around the world, reports of threatening diseases and commercials designed to suggest we can’t live without their product or service. And, at the end, two minutes of a heart-warming, human interest story.  So, basically 90% disturbing stories and 10% of what most of the world is really like.  Is it any surprise that we start to think the world is a bad place?

Let’s look at the facts.  There are 7 billion people on earth.  How many do you think are threats to the rest of us?  Let’s include the world’s worst politicians, terrorists, violent criminals, corrupt corporate officers and downright evil people.  Let’s say there are 7 million of these threats to society.  That’s less than 1/10 of one percent.  In other words, 99.9% of the people in the world are likely decent human beings or at least not a threat to others.

Mahatma Gandhi summed it up this way:  “You must not lose faith in humanity.  Humanity is an ocean; if a few drops of the ocean are dirty, the ocean does not become dirty.”

In addition, the negativity bias impacts more than just our reactions to politicians and the media.  It impacts our relationships with friends and loved ones as well.  Because negative interactions take on a greater weight in our brains than positive interactions, we must have more positive stimuli than negative just to “stay even.” Researchers suggest a ratio of five to one.  For example, studies show that marriages where there was five times the positive interaction as compared to negative interaction were likely to be stable over time.  Couples heading for a divorce generally had a ratio of less than 5 to 1 and sometimes below 1 to 1.  Our other relationships need the similar 5 to 1 ratio for success.  Great relationships in life may be built over time on many small positive interactions.

I am sure we all cannot wait to have November 8th and our presidential election behind us.  Regardless of your political feelings, we must all agree that this “dirt” that both parties have been throwing into our “ocean” is sickening.  Let’s hope both parties give us better choices in the future.  For now, we might all benefit by just turning off the news sometimes and instead identifying and celebrating positive, even if small, observations in our daily lives.  And, then taking the time to provide positive communication, smiles and interaction with our loved ones, friends, associates and even those we pass on the street. The world is not a bad place.  Our ocean of humanity is not dirty.  Let’s all just do our part to keep it clean.

Hurricane Matthew

hurricane-matthew-update-part-2

Hurricane Matthew was a scary time for DWM as it approached the US. For one, we know how devastating natural disasters can be to people’s lives, businesses, homes, and general well-being. Secondly, Matthew could potentially have directly affected our DWM family as it was expected to first touch the US in South Carolina, where half of our team and many DWM clients are located. It was an unsettling experience as our Charleston team/clients, along with much of the southeast coast, were instructed to evacuate to safety.

As Hurricane Matthew first formed as a category 5 hurricane and started its approach toward the US, analysts from JP Morgan projected it to be the second most costly US hurricane on record for insurers, behind Hurricane Katrina in 2005. To earn this devastating title, Matthew would need to reach a total of $25 billion in insured losses. While still devastating, the most recent projections from CoreLogic (a real estate data provider) estimated around $10 billion in total losses, making insured losses between $4-6 billion. If these totals are confirmed, it would make Hurricane Matthew the 22nd most devastating storm since WWII, according to a recent estimate by Goldman Sachs. By the time Matthew made landfall in the US near McClellanville, South Carolina, it was reduced to a category 1 hurricane.

Even with Hurricane Matthew having inflicted significantly less damage than originally projected, Goldman Sachs still estimates it may cost about 5,000 US jobs in October. When storms like Matthew hit, jobs in the restaurant, hotel, and education sectors normally suffer the most. For example, 30,000 jobs were lost in those sectors when Hurricane Sandy struck, however, 40,000 jobs rebounded (mainly in construction) during the rebuild of the 2012 catastrophe.

While businesses almost always suffer and sometimes risk closing their doors when catastrophes like Matthew strike, homeowners can typically expect a higher burden. “These days homeowners who live close to the coast tend to opt for a 5% deductible on the hurricane wind damage portion of their policy,” said Bob Hunter, Director of Insurance for the Consumer Federation of America. Meaning: a homeowner, whose $500,000 house was fully destroyed, would have the obligation to pay $25,000 of repair costs before the insurance company covers the remaining $475,000.

While it is good news Matthew did not strike the East Coast with the force we originally expected, that reinsurers will likely be able to cover all insured losses, and that only .003% of all jobs in the US will be affected; it all pales in comparison to the 34 lives that were lost in the US and over 1,000 lost in Haiti. DWM’s thoughts and prayers go out to all families affected during this awful natural disaster.

P.S. Our new Charleston office at Church and Broad streets came through unscathed with no damage.  And, Les, Ginny Wilson, and our newest team member, Grant Maddox, and their families evacuated and all were safe and dry.  Grant, by the way, is a recent College of Charleston graduate in finance who has had some very interesting internships.  These included a stint as deputy finance chairman for the successful campaign of Charleston’s current mayor, John Tecklenberg.  Please join us in welcoming Grant to the DWM team.

DWM 3Q16 Market Commentary

wall-street-vs-main-streetWith all the uncertainty in the news today, a human being might emotionally feel quite anxious. If you hadn’t looked at your portfolio in a while, you may assume it’s not doing so great. But your portfolio does not have emotions and, if properly constructed, is capable of producing in all environments. In fact, if your portfolio did have emotions, it would probably be feeling quite happy as 2016 has so far been a pretty good year performance-wise, at least the portfolios we supervise. The thing is that Wall Street and Main Street don’t operate on the same level. Main Street may be feeling a little down, but Wall Street on the other hand may shrug off those fears and look at the opportunities. Or vice-versa. Case in point: The recent negative feelings of Main Street don’t resonate with the recent positive results stemming from Wall Street.

After a wild finish for stocks in 2q16 thanks to the surprising June 23rd Brexit vote, the US stock market calmed down and continued upward as represented by the S&P500 gaining 3.9% for the third quarter. Other equity markets did even better like small caps* and emerging markets**, both up 9.0%. Outside of equities, both fixed income and alternative markets generally charged ahead, adding to this upbeat 3q16 report.

Let’s start with the results of the major asset classes:

Equities: The MSCI AC World Equity Index registered +5.3% for the quarter and is now up 6.6% on the year. International small cap value***, up 10.5%, was one of the best places to be in the second quarter. That said, the stars of the year remain the mid cap space****, +12.1%, and emerging markets**, +16.0%. The S&P500 underperformance trend continues.

Fixed Income: The Barclays US Aggregate Bond Index, the most recognized bond benchmark, was up 0.5% in 3q16 and now up 5.8% for 2016. Unfortunately, that benchmark doesn’t allocate to the two hot spots in bond land this year: high yield bonds, +5.6% and 15.1%, quarter-to-date and YTD, respectively, and emerging markets debt, +4.8% and 16.6%. Hence, it is prudent to construct fixed income portfolios that contain more than treasury, investment-grade corporate, and agency exposure like the “Agg” and invest into other areas that can provide diversification and potentially better returns.

Alternatives: The Credit Suisse Liquid Alternative Beta Index was up 2.1% for the quarter and 3.2% YTD. Of course, one of the key benefits of alts is that they generally don’t trade in symphony with the rest of the market. But that doesn’t mean they necessarily will go down when equities and fixed income are up, like they were in this quarter. Alts beat to their own drum. What we think is important for our clients is designing an alternatives model with multiple non-correlated alternative assets and/or strategies that collectively produce consistent positive returns.

By looking at the above results and doing some simple math, we can theoretically see that an investor; with a balanced portfolio of, say 50% in equities, 25% fixed income, and 25% alternatives; could have overall net results of 6-8% YTD. And there’s still a quarter to go in 2016! Of course, nothing is guaranteed and there is certainly “uncertainty”. Whereas Wall Street may shrug off lots of things Main Street would not, here is the short list on what is keeping those traders up at night:

  1. The Election – this really is something that is causing more anxiety for Main Street than it is Wall Street. As crazy as it may seem, the market can actually see “good” in either of the major candidates. What the market doesn’t like is a surprise. If results came out opposite of the polls ala Brexit, it could get ugly, i.e. markets would trade lower. We don’t see that happening though.
  2. The European banking sector – Is Deutsche Bank with its thin capital issues the next Lehman Brothers? We don’t think so, but those banks all trade with one another and if one major bank fails, there can be a contagion effect that could even affect us on the other side of the globe.
  3. The economy – If you looked at the companies within the S&P500 and used that as a yardstick for the US economy, you might get a little alarmed to know that 3q16 will almost certainly be the sixth consecutive quarter of falling earnings. That hurts valuations now but we’re cautiously optimistic that that trend will end soon. When actual earnings (and estimates) start to rise, the market could continue to climb (even) higher.
  4. The Fed – What’s next for the Fed? There are two more meetings this year. We think one 25 basis points rate hike is already “baked” into the market. In other words, traders are expecting it. As long as the Fed keeps communicating clearly, they and their actions shouldn’t cause that much disruption.

In conclusion, Main Street is not Wall Street. For many, this Presidential Election is bringing a lot of unnecessary anxiety and we can certainly understand why. Of course, the market is generally efficient by constantly looking ahead at expectations and adjusts accordingly. Unless there are major surprises, it tends to shrug off news that can make Main Street nauseous. So if it’s getting to be too much for you, feel free to turn off the media noise and keep it off until November 9th, the day after the Election. Wall Street will keep doing its thing. More importantly, DWM will be doing its thing, keeping our clients’ portfolios prepared for what’s next.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

 

*represented by the Russell 2000 Index
**represented by the MSCI Emerging Markets Index
***represented by the DFA Intl Small Cap Value Fund
****represented by the Dreyfus Mid Cap Index Fund
† represented by the Barclays Capital US Corporate High Yield Bond Index
‡ represented by the PowerShares Global Emerging Markets Sovereign Debt ETF