Your Choice- $1 Million or $5,000 per Month for Life?

Most of our readers will likely have to make that type of decision someday.  From our perspective, it’s a pretty easy answer.  As Cuba Gooding, Jr. famously told Tom Cruise in “Jerry Maguire”:  “Show me the money!!”

Yet, an article in the WSJ on Monday tried to make the decision sound really tough, with losers on both sides.  It would have you believe that many will suffer from either an “illusion of poverty” or an “illusion of wealth” and are likely going to experience a disappointing retirement.  Really?

Researcher Daniel Goodwin at Microsoft Research asked people how adequate they would feel if they have $1 million at the time they retired.  He used a seven-point system with one being “totally inadequate” and seven being “totally adequate.”  Then, he asked them to rate instead an income each month in retirement of $5,000.

In theory, the choices are similar based on pricing of annuities. If a 65 year old paid $1 million for a “single premium immediate annuity” they could receive payments of $5,000 each month for their life.  Actuarially, a 65 year-old is expected to live 18-20 years.  So, 19 years of monthly payments of $5,000 would be $1,140,000 and represent a 1.4% annual return on the investment.

Yet, believe it or not, many people, feel that $5,000 per month is more adequate than the $1 million lump sum.  Mr. Goldstein says that this group suffers from the “illusion of poverty.”  Apparently, these folks are “inclined to think about wealth in terms of monthly income” and don’t want the “burden” of a lump sum which could run out someday.  Hence, they dial down their expenses, eliminate any wants or wishes and make do on their $5,000 per month.

Mr. Goldstein then suggests that I and most people may suffer from the “illusion of wealth.”  He thinks that those selecting the lump sum, through a false sense of security, may spend too much and run out of money. In fact, the larger the lump sum, the more likely the “extra millions will lose their meaning.”  Really?  Do we all suffer from illusions, as Mr. Goldstein suggests?  Are we all on the road to an unsuccessful retirement regardless of our choices?  It certainly doesn’t have to be that way.

Perhaps I should contact Mr. Goldstein and invite him (and his wife) to go through the DWM Boot Camp.  First, we’d sit down and help them with their goal setting. We’d help them identify their needs, wants and wishes.  We’d look at their assets, health care costs, income taxes, expected inflation and investment returns, and insurance and estate matters.  Ultimately, we’d help them design a financial plan.

If Mr. Goldstein was under an “illusion of poverty,” we’d show him that his $5,000 per month program is a poor choice.  To begin with, his $5,000 per month would lose its purchasing power each month due to inflation.  With 3% inflation, after 15 years of retirement, his $5,000 would only buy $3,200 worth of goods in today’s dollars.  Second, if he did a “personal annuity” by simply taking the lump sum, investing it, earning 6%, e.g., and withdrawing the $5,000 per month, his family would still have the $1 million in principal when he passed away.  No need for an illusion of poverty here.

On the other hand, if Mr. Goldstein was under an “illusion of wealth”, the plan would help him identify his needs, wants and wishes and would have helped evaluate whether those potential expenses were affordable based upon his assets, expected investment returns and the other metrics.  We would have created numerous scenarios to ultimately result in a plan that was successful.  The plan would be stress tested for items that could negatively impact that plan and monitored and modified over time.  In short, the plan would not suffer from an illusion of poverty nor of wealth.

We’re glad contributors Shlomo Benartzi and Hal Hershfield ran the article Monday focusing on Mr. Goldstein’s findings. Retirement/financial independence planning is extremely important.   However, we don’t agree that it has to be a dire situation with poor choices, lots of suffering and disappointments.   It’s simple: take the lump sum and put together your realistic plan with a fee-only adviser like DWM and then have us help you monitor it for the changes that will undoubtedly occur in the future. You’ve worked hard for your money, the time will come to enjoy it. As Ginny’s blog http://www.dwmgmt.com/blogs/82-2017-02-07-23-30-00.html pointed out a few weeks ago, retirement/financial independence should be a time for “jubilation” not illusions or disappointments.  Proper planning with the right team can make that happen.

What’s Ahead for the Global Economy and Financial Markets?

Last week, the Federal Reserve raised rates- the third increase since the financial crisis.  Yet, despite world economic growth and the stock markets surging since President Trump’s election (until yesterday), the Fed is still cautious about the future.

The world economy has been picking up.  The Economist reported last week that “today, almost ten years after the most severe financial crisis since the Depression, a broad-based economic upswing is at last underway.”  This is a big change from the early months of 2016 when stocks were down 10% or more due in part to anxiety about China’s economy and related plunging raw material prices.  Fortunately, China, through controls and stimuli, turned things around and by the end of 2016, China’s nominal GDP was growing again.

At the same time, global manufacturing has gotten stronger.  Factories are much busier in the U.S., Europe and Asia.  Taiwan and South Korea are rocking.  Worldwide equipment spending is up; growing at an estimated annualized rate of 5.5% in 4Q16.  American companies, excluding farms, added 235,000 workers in February.  The European Commission’s economic-sentiment index is at its highest since 2011.  Japan, whose growth has been anemic, has revised their 2017 forecast from 1% to 1.4%.

The stock markets have, until yesterday, risen dramatically based on both current economic growth stats and expectations about the future.  With Mr. Trump’s election, there has been hope that taxes and regulations will be reduced which would help businesses and increase corporate profits.  Further, the expected return of $1 trillion of untaxed cash held overseas by American companies could be coming back (repatriated) at new low tax rates.  These funds could produce a big boom in business investment.  And, then add to this the possibility of a $1 trillion private-public infrastructure push for America. Mr. Trump has been talking about growth of 3.5-4%.  There’s been lots of optimism.

Yet, Fed officials forecast growth of only 2.1% this year; about where it has been for 8 years.  So, what’s their cause for relative skepticism?

The list of concerns includes fears about protectionism stifling trade, political disruption in Europe, China’s ability to sustain strong growth, and closer to home, whether or not the White House and Congress can work together to get legislation passed.  If the repeal of Obamacare gets sidetracked, there is concern that tax reform and infrastructure will endure the same fate.  And, of course, we haven’t even talked about a black swan- an unexpected event of large magnitude and consequence.  All bets are off in the case of major problems such as war, terrorism or some other major catastrophe.

We could be on the precipice of a new era with the cutting of taxes and regulations and a huge infrastructure boom creating a turbocharged economy.   Or, we could have a repeat of the many times in the past decade when optimism at the start of the year faded as the year progressed.  No one knows what the future holds.

Yesterday’s stock market declines of roughly 1% were, in large part, a concern about the ability of the White House and Congress to enact their legislative agenda, starting with the repeal of Obamacare.  People are nervous that if the health-care bill doesn’t pass or gets delayed, what will that mean for other policies.    Tax cuts could be delayed and even face a tougher fight in Congress.  Treasury Secretary Steven Mnuchin had earlier thought that tax reform would pass Congress by August and now he is hoping for early next year.  And, infrastructure would come after that.

With all of that in mind, the Fed understandably is cautious and we at DWM are as well.

Why is Alphabet Soup Important to You?

When I first joined the Detterbeck Wealth Management team, I knew it would not be long until I started my designation pursuit. Three of the most respected designations in the financial services industry are the CFA (Chartered Financial Analyst), CPA (Certified Public Accountant), and the CFP® (Certified Financial Planner). Each of these designations are considered to be the best of the best in their niche. “The CFA designation is considered the gold standard among financial professionals worldwide (Finance Professional Post, New York Society of Security Analyst); meaning someone who holds this designation is a chartered professional when it comes to portfolio and investment management. If the CFA is considered the gold standard of finance, it is easy to see the CPA has the same importance with respect to accountancy. Where the CFA and CPA focus on portfolio management and accountancy/tax, respectively, the CFP® focuses on comprehensive financial planning as a whole.  Someone who holds a CFP® designation has proven competence in all areas of the financial planning process including: financial statement preparation and analysis, investment planning, income tax planning, education planning, risk management, retirement planning and estate planning. DWM founders, Brett and Les Detterbeck, understand the importance of continuing education and have set the bar high for the rest of the team. Brett holds his CFA, CFP®, and AIF; while Les holds his CPA/PFS, MBA, CFP®, CFA, and AIF®. They understand what it takes to become true financial planning experts and help pave the way for the rest of the DWM team.

The CFP® or CERTIFIED FINANCIAL PLANNER™ certification is the most respected financial credential for financial planners, financial firms, and those seeking the advice of a financial planner. Therefore, the CFP® is a designation new DWM team members set their sights to obtain, however, there are many other well respected designations in the industry as well. Rather than jumping right into the CFP®, the team and I decided to go after a different designation; one that is specific to our clients and is a great stepping stone to the CFP®. I decided to pursue becoming an Accredited Wealth Management AdvisorSM (AWMA®).

“The AWMA® professional education program is the nation’s original and most well-respected designation for providing financial advice to high net worth clients”. The coursework consists of roughly 2,000 pages of material, 25 hours’ worth of video sessions, and a 4 hour examination that must be taken within 6 months of signing up for the class. DWM team member Grant Maddox is also pursuing the AWMA® and will be sitting for his test later this month.

While the AWMA® is a great program and allows a individual to become specialized in working with high net worth clientele, it is not the only path to becoming a financial planning professional. For example, DWM team member Ginny Wilson took a different path by obtaining the CRPC® or Chartered Retirement Planning Counselor℠. The CRPC® is the nation’s premier retirement planning credential and someone who holds it is considered to have mastered every step of the retirement process and can create a “roadmap to retirement” for almost any client.

As the entire DWM team knows, it is a bit of an adjustment working during the day and studying at night/mornings/on the weekends, but most of the information is very interesting and gives us the knowledge to help clients on their path to financial freedom. I learn something new every time I sit down to study. While I find investment strategies to be the most interesting coursework topics, I probably benefitted the most from learning all of the different estate planning techniques, as I had zero experience with this aspect of financial planning prior to joining DWM. The most eye-opening part of this entire process is just how complicated financial planning can be. If someone does not have the correct asset allocation funded in the proper kind of account, proper estate planning, or doesn’t fully understand all of the different tax ramifications that can come with financial planning, etc., it is possible they could hamper or damage their plan. Planning for your money must be done thoroughly and correctly.  The entire DWM team has dedicated thousands of hours on continuing education, and we are still all learning every day. Working with an advisor who lacks the proper credentials could end up costing you money.

Even though I am still just starting my wealth management journey, I am thrilled I was able to obtain my first designation, AWMA®, two weeks ago. On top of that, I realize now more than ever how important it is to work with a firm like DWM because the alternative could mean working with someone who is not as qualified, thus, costing the client money, servicing and care.  Continuing education is a valued process at DWM and we recognize its importance to our clients. All designations require continuing education classes, seminars, etc., which we welcome as an opportunity to expand our knowledge and be in a position to provide even greater value to our clients.

Safe and Sound

Security, or a lack thereof, has been a hot topic in the news lately, ranging from high-tech hacking scandals to sensitive information leaks. During a time of such concern, we can all agree that security is a top priority in our lives and cannot be overlooked or taken for granted. Whether it is national security, personal security or investment security, one thing is for sure – security is essential in our lives.

The trusted preferred custodian of DWM, Charles Schwab, has always found new ways to implement innovative security functions to protect both the advisor and the client. In addition to a focus on low-cost trading, Schwab has also always focused on investment security and client interests.

Charles Schwab takes multiple steps to ensure the security of client and advisor accounts, and to guard against any potential unauthorized access. Let’s examine some of these key security measures in depth.

Login Authentication and Encryption

SchwabSafe is collection of security measures that ensures the security of your information and accounts. Schwab.com uses advanced encryption technology, such as 128-bit Secure Sockets Layer encryption, to guarantee private communication and secure authentication on all accounts. The website also uses the highest level of Extended Validation certificate. This means that when you’re logging into the website, you will see a green web address bar that indicates all of your information is being protected by SchwabSafe.

Security Tokens

Charles Schwab also offers a free token, available in the form of a key fob or as a phone application, that makes each login as secure as possible. A token creates a six-digit number that serves as an additional numeric password each time you log in to your account. This token provides peace of mind and as a great security measure for clients and advisors. You can order a free or set up your phone application token from Schwab by calling 800-435-4000.

Monitoring Unauthorized or Suspicious Activity

Another great security feature is that Schwab monitors suspicious account activity 24/7. Schwab utilizes pattern analysis and advanced monitoring systems to constantly scan for suspicious or potentially unauthorized activity on your account. SchwabSafe fraud teams are specifically dedicated to ensuring that your account activity is authorized and they will call us and/or you if they detect any unusual behavior, or want to confirm third party checks and other distributions.

Security Tips

If you’re still worried about the security of your financial accounts, there are a few helpful tips you can utilize to put your mind at ease. Make sure that your contact information on your account is current and accurate, so you can be immediately updated in case of suspicious activity. Be wary of using public computers when logging into sensitive accounts. Always make sure to log out of your account when you are finished and do not use computers you don’t trust. As mentioned earlier, using a token when logging in each time is also a very effective way to ensure the security of your personal information.

Make sure your password is unique and has not been used for any of your other accounts. You should always try to change your password every six months. Admittedly, it can be difficult to keep track of multiple different passwords so it may be a good idea to have a system for keeping track of these. However, a sheet of paper does not qualify as a safe and effective system! If you are tech savvy, there are a multitude of phone applications that can maintain your passwords.

In addition to many added security features, accounts held at Charles Schwab are insured by the Securities Investor Protection Corporation (SIPC) in the event of a broker-dealer failure. The SIPC provides up to $500,000 and up to $250,000 for uninvested cash equivalents of protection for each separate account held at Charles Schwab. Furthermore, excess SIPC in an aggregate amount of $600 million in protection is provided for Schwab customers through underwriters at Lloyd’s of London and London insurers.

Here at DWM, we take our clients’ security very seriously. For compliance reasons we are not allowed to hold anyone’s login password for any reason. We operate through cloud based technology to streamline our process and provide increased security. For any questions or concerns regarding security, please feel free to contact us at DWM anytime.

The Oracle’s Wager

When Warren Buffett, Chairman and CEO of Berkshire Hathaway Inc., discusses investing, most everyone in the financial industry pays attention.  No one can disagree with his success or business acumen and few seem to be better at picking stocks.  However, when Mr. Buffett criticized hedge funds back in 2007 for their heavy fees, one hedge fund manager decided to challenge him to an investment duel.  With a hefty bet of $500,000 on the line for charity, the wager was made to determine which strategy could perform better over a 10-year time frame – passive index funds or actively managed hedge fund strategies.  Articles in the WSJ and Fortune last week are spotlighting the performance battle, which will conclude at the end of 2017.  Mr. Buffett picked a low-cost S&P 500 index fund run by Vanguard and the former hedge fund manager, Ted Seides from Protégé Partners on Wall Street, chose five unnamed hedge funds.  While Mr. Seides agreed that over time the expenses from active management would eat into the returns to investors, he believed that an “unusually well-managed hedge fund portfolio” could be superior over time.

According to Fortune, who reports annually on the bet, the results, at this point, are not even close!  The index fund has recorded an annual increase of 7.1% for a total of 85.4% since the start of the bet.  The hedge fund has registered gains of an annual 2.2% or total average gains of 22%.  The discrepancies have been aided since 2007 by an extended bull market and poor hedge fund performance overall.  As Mr. Buffett states in his letter to his stockholders from February 25th, 2017, the performance average of the 5 hedge funds “were really dismal.”  Apparently, short of a complete market-meltdown, Girls Inc. of Omaha, Nebraska will get a nice contribution from Protégé Partners, thanks to Mr. Buffett.

As the WSJ points out, though, Mr. Buffett made his fortune by savvy investing in individual companies and undervalued stocks with his own brand of active management.  Not exactly a shining example for passive investing!  Mr. Buffett, also known as the Oracle of Omaha, releases an annual shareholders’ letter that is always highly anticipated.  One of his themes this year is passive investing versus active investing and his belief that “passive will beat active over time”.  Mr. Buffett has been critical in the past of investment managers for charging high management fees even when their funds underperform.  He encourages investors to use low-cost index funds and states in his letter from last week – “The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”  At DWM, we completely agree with Mr. Buffett on the benefits of passive vs. active investing for traditional asset classes like equities and fixed income.

However, here is where we see things differently.  Mr. Buffett is a billionaire and certainly has a monumental tolerance for risk.  Mr. Buffett has a history of making his fortune investing in exactly the companies included in this Vanguard index fund – the 500 top U.S. large-cap entities.  In contrast to the performance for the last 9+ years, had the bet occurred in the decade prior, Mr. Buffett would be the one on the losing end of the battle.  Since even the Oracle himself cannot predict how the market will perform going forward, at DWM, we believe in the low-cost benefit of passive index funds, but we also strongly believe in asset class and asset style diversification that will protect our clients who do not have the risk tolerance profile of Mr. Buffett.  We use index funds from several classes of equities, not just the S&P 500.  We use a diversified mix of domestic and international small and large cap funds.  We also use other asset classes to “hedge” our exposure to equities by using fixed income funds and alternatives.  We want to protect the assets of our clients, participating when the markets are up like in 2016, but protecting against downturns like in 2008.   A client portfolio with a balanced allocation might be a couple of percentage points below Mr. Buffett’s choice of index fund in various short term time periods, but our use of diversification instead of this concentrated investment style should lead to smoother returns, less downside, and ultimately better long-term results.

Mr. Buffett is an example of business leadership and financial prowess.  In his case, we think his advice to put your investments in low-cost and passive index funds is solid.  He is, however, an example of “do what I say, not what I do” in his investing style and we believe that trying to emulate the investing career of Warren Buffett should come with a warning label – don’t try this at home!  However, we applaud his advice on passive investments, but want to add that, unless you are a billionaire and can weather that amount of risk, diversification is critical to your success.  A strong mix of passive investments and diversification will do better over time.  You can bet on it!

The F-Word (Fiduciary) is Becoming the Antidote

Fiduciary: n. from the Latin fiducia, meaning “trust.”  For Registered Investment Advisers, the legal obligation to always put their clients’ interest first and be proactive in disclosure of any potential conflicts of interest.

Contrast that with a commissioned salesperson.

When you buy a car you know that the salesperson is going to earn a commission.  You know the salesman is there to sell you a car at the highest price you’ll accept and then try to get you to sign up for extras.  It’s your job to do your homework beforehand; know what you need and can afford, and then fight for the best deal you can.  Caveat emptor– buyer beware.

Unfortunately, in the arena of financial services it’s also caveat emptor.  You may think that the commissioned salesperson is there to help you.    They may call themselves “financial consultant,” financial advisor,” or “financial planner,” and may have a business card with some interesting initials or designation as a V.P.  Regardless, if they are paid commission, they are generally focused on selling you products that are best for them and their employer, not you.  There is a fundamental conflict of interest that works against you.  Often the highest commissioned products include large upfront and/or ongoing fees to recoup the big commissions.  The future performance of your investments is diminished dollar for dollar for these excessive fees.

In the 1980s and 1990s, when economic growth and higher inflation pushed equity returns into annual double digit returns, high fees might have been overlooked.  But, when today’s lower growth and inflation produce lower returns, a 1% annual difference in fees, for example, makes a huge difference. Fortunately, astute investors have been moving away from high-cost, conflicted advice and toward low-cost investment advice and total wealth management where the adviser acts in their best interests.  Members of National Association of Personal Financial Advisors (NAPFA), such as DWM, have seen major upticks in business and are helping more and more families reach their financial goals.  NAPFA is the country’s leading professional organization of Fee-Only financial advisors.  Its members sign the NAPFA Fiduciary Oath legally requiring all of us to always put your interests first and disclose any potential conflicts of interest.  See the oath: http://www.napfa.org/consumer/NAPFAFiduciaryOath.asp

Not surprisingly, the big banks and brokerages have tried to limit their continuing losses of business by trying to confuse the issue.   Most have set up a part of their business as “fee-only” and describe their total offering as “fee-based.”  Caveat emptor– “fee based” means the big banks and brokers charge you a fee to begin with and then get commissions on top of that for products they can sell you.

Last summer, the Department of Labor (“DOL”), which is responsible for safeguarding employees, issued a ruling that as of April 1, 2017 all investment professionals who work with retirement plans or provide retirement planning advice would be legally bound to act as fiduciaries, putting the clients’ interests first. This rule would impact trillions of employee retirement dollars and likely save participants billions annually in fees. As expected, Wall Street and the related lobbyists have attacked the ruling.  Their complaint is threefold: 1) it would limit choices to participants (yes, it would reduce many of the toxic overpriced funds currently used), 2) trigger dislocations in the retirement services industry (yes, like modifying the behavior of the bad guys or eliminating them), and 3) causing increased costs for consumers (no, it wouldn’t- this is simply an “alternative fact.”).  Last week, as expected, President Trump issued a presidential memorandum to direct the Labor secretary to begin a new rulemaking process to modify the DOL rule.  Of course, NAPFA, the Financial Planning Association (FPA) and the CFP Board all applaud the new rule and are working diligently to put it in place, keep it there and expand it.  We do too.

We support sensible regulation to protect consumers in the area of financial advice and the requirement of fiduciary responsibility to be in place for all investments.  It is estimated that the shifting of $5 trillion of investments from high-cost, ineffective products to low-cost products could save consumers $50 billion per year, transferring those excess commissions and fees from Wall Street, big banks and brokers to your pocket.

Here’s the best part:  Neither Washington nor Wall Street can stop the movement. The DOL fiduciary rule is not shaping investor behavior, it is simply catching up with it.  Vanguard, the industry leader in low-cost indexing, had $1 trillion in assets before the financial crisis, now it has $4 trillion.  Total Wealth Management firms like DWM, which provide both independent investment advisory services and value-added financial services on a fee-only, fiduciary basis, are working with more and more families.

Consumers know what’s best for them- fee-only fiduciaries who put their interests first. They are voting with their feet and their money away from the old toxic models of the big banks and brokers.  The F-Word (Fiduciary) is becoming the antidote to the sale of commissioned financial products.

Feliz Jubilación!

We loved recently learning the word for retirement in Spanish …Jubilación!  It has a much more festive ring to it than “retirement” or even “financial independence”, as we say in the U.S.  In France, they use the word for retreat or “retraite” to define this time of life.  We don’t think many of us want to retreat, exactly, or hide away from anything!  And in England or Italy, they use a derivative of pension to describe a ‘retiree’ – ‘pensioner’ or ‘pensionato’, while in Spanish, you are a ‘jubilado’!  While they all mean the same general thing, we think this transition in life should be celebratory and warmly anticipated without any anxiety or trepidation.  As wealth managers at DWM, our goal is to make this transition so easy that you are indeed… jubilant!

So how can this transition truly be smooth and worry-free?  We do think that there are some things that you can do for yourself and then some things where your financial advocate, like DWM, can be very helpful.  Let’s start with some of the administrative items that come up at “a certain age”.  In fact, at DWM, we keep track of the important dates and significant milestones in our clients’ lives so we can remind them of the things that they will soon want to do.  For example, at age 50, you can start increasing your IRA or 401(k) contributions each year.  At 55, we like to discuss the pros and cons of long term care for you and your family and around age 60 or 62, we like to discuss Social Security strategies and help you with plans to start thinking about Medicare sign-ups.  We are always available to help analyze the proper benefits, help you schedule sign-ups or meet with professionals to assist you.  We also help with tax strategies and account transitions as you leave your job and need to understand your employer retirement benefits packages.  And when you hit 70 and it is almost time to start taking your required minimum distributions from your IRA’s, we are also here to guide you and manage this.  There are a few things that need to be done, but we like to educate our clients on the process and then help to guide them through it.

It is also important to make sure that your resources are protected and wisely invested to maximize your success in achieving your goals.  Assessing your resources and making a realistic plan will allow you to make the best choices for your future.  As wealth managers, we are always mindful of taxes, asset allocations, estate planning and risk management, as we look for ways to make the most of what you have.  We want to help you realize your goals with a comprehensive financial plan and a roadmap to success.  Money certainly isn’t everything, but having your finances in order and the details understood can make this transition much more worry-free and enjoyable.  Looking at all of your goals and assets with honest and realistic expectations will allow your plan to reach its highest potential.

The other question to ask yourself is what is your passion?  How would you like to spend your time, now that it is yours to spend?  Will you continue working?  Will you travel? Will you move to a new home?  Some people find that they can now spend their time doing exactly what they have always wanted to be doing, but just aren’t sure what that may be!  There are many things to investigate and you can now take some time to explore your options – whether it is continuing to work, volunteer, travel or take up a hobby that might have always interested you.  The goal here is to look at it as a wonderful opportunity where you embrace the change and get excited to find a happy “new normal”.  It may take some time and some patience to make this adjustment smoothly.  Staying healthy, active and engaged with others are all great tips to helping with the emotional transition.  You may have to adjust to your new identity and staying busy and connected with others can definitely support you through this process.

This should be a wonderful time in your life and we are here to help in any way we can as you move forward into “retirement”.  Just remember, you have earned the ability to celebrate – this is your lifetime achievement award!   As your financial advisor, we look forward to helping you look at this time with joyous and resounding JUBILATION!

Warning: Alternative Facts May be Hazardous to your Portfolio Returns

Alternative facts may work sometimes in business and politics, but they don’t work with investments.  Returns are based on reality, which can be complicated, random and uncertain.

30 years ago, in his book, “The Art of the Deal,” Mr. Trump extolled the virtues of “truthful hyperbole” which he described as “an innocent form of hyperbole-and a very effective form of promotion.”  In interviews over the years, Mr. Trump has inflated everything from the size of his speaking fees to the cost of his golf club memberships to the number of units he had sold in his new Trump buildings.   His decades of habitually inflating claims about his business acumen and his wealth have helped produce lucrative licensing deals for the Trump brand around the world.

It is no surprise that President Trump has continued his pattern in his first days in office.  He has made inflated claims about how many people attended his inauguration, his insistence (contradicted by his own Twitter posts) that he had not feuded with the intelligence community, or his claim that Hillary Clinton won the popular vote only because millions of people voted for her illegally.  No worries. Trump adviser Kellyanne Conway simply refers to these as “alternative facts.”  Others might call these falsehoods, some would call them lies.  Regardless, they are part of the “post-truth” era in politics.  Very disturbing but apparently part of the current political landscape. Overall, it reminds some people of George Orwell’s “1984” in which the Ministry of Truth had three slogans:  “War is peace.  Freedom is slavery.  Ignorance is strength.” Yes, very scary.

Even so, in business and politics, alternative facts may be effective.  Voters live in their own bubbles of perception and confirmation bias.  Once they lock in on a candidate, it’s tough to change their minds regardless of subsequent facts.  It’s true- all of us have patterns of irrationality.   We all get lead astray.  This is described brilliantly in Michael Lewis’s new bestseller, “The Undoing Project.”  We can become victimized by the “halo effect” in which our thinking about one positive attribute causes us to perceive other strengths that aren’t really there.  Another is “representativeness” which leads us to see cause and effect when we should accept uncertainty or randomness.  Mr. Lewis showed how pioneer behavioral economists Daniel Kahneman and Amos Tversky demonstrated that all of us misanalyse all sorts of situations, in business, politics, and everyday life.  We accept alternative facts rather than true reality.

Investors can lose lots of money when their beliefs diverge from the reality and they are led by alternative facts and subjective reality.  They believe they understand major issues; such as how tax reform might impact corporate earnings, the odds for a recession, and repatriation of overseas capital.  The real problem is their absolute certainty in areas which are, in reality, uncertain or random.  (The U.S. election results and the markets’ behavior thereafter is a great example).

The subjective reality investor imagines they can understand complex issues and predict what the marketplace will do and even how specific sectors and individual securities will perform.  They exhibit “representativeness,” believing they understand the cause and effect, when it fact they should accept uncertainty or randomness.  Subjective reality investors often believe they know how to “time the market” which has been shown to be a losing strategy over and over again.  Even full-time mutual fund “active” managers consistently underperform benchmarks over time.  Using alternative facts and subjective reality, these subjective reality investors put their (and others) capital at far more risk than they should.  Sometimes they get lucky, most often they don’t.

What really gets these subjective reality investors in trouble is the difference between fact and opinion and falling prey to overconfidence.  No one knows the future.  None of us can possibly comprehend all the forces at work every day and how these continually change.  Each of us has our own baggage we bring to our decision-making every day that turns facts into opinions and often truth into alternative facts.

At DWM, we always say, focus on what you can control and respect what you can’t.  Establish a diversified portfolio with an asset allocation commensurate with your risk profile.  Keep costs low.  Stay tax efficient.  Stay invested.  Stay disciplined.  Monitor results and rebalance as necessary.  Don’t try to time the market.  Don’t think you’ve found the “silver bullet.”  Don’t kid yourself-your subjective beliefs and alternative facts can be hazardous to your portfolio returns.

Big Macs and Donald Trump

Big Macs are becoming a real bargain everywhere in the world… except for the United States. This is because most emerging market currencies have taken a big hit since the election of Donald Trump, whereas, the dollar is as strong as it has been in almost 20 years. Not only has Trump raised expectations of an increased strength of the dollar, but many foreign countries have had problems of their own as well, leaving emerging markets lagging behind.  The Turkish Lira, for example, is one of the worst performing currencies so far this year due to terrorist bombings, economic slowdowns, and a central bank reluctant to raise interest rates to defend the currency (The Economist, Big Mac Index of Global Currencies). Emerging market struggles paired with a surging US dollar has led the Lira to be undervalued by 45.7% according to the Big Max Index.

You may be asking yourself “what on Earth is the ‘Big Mac Index?’” At least that’s what I asked myself the first time I heard it. You may be surprised to hear the Big Mac index is exactly what it sounds like: the cost comparison of a McDonalds Big Mac burger from one country to another. It is a fun, educational, and interesting way to learn how the world is valuing cost of goods on a country by country basis. The Big Mac index is built on the idea of purchase-power parity, meaning in the long run currencies will converge and rates should move towards equalization of an identical basket of goods & services.

In the United States a Big Mac costs $5.06 versus 10.75 Lira, or $2.75, in Turkey. The Mexican peso is even more undervalued at 55.9% versus the US dollar, meaning, a Big Mac only costs $2.23 in Mexico as of January 15th, 2017. The Big Mac index allows us to take complicated subjects, such as international commerce, and make it relatable and understandable.

One drawback of the Big Mac index is it does not take account of labor costs. Of course, a Big Mac will cost less in a country like Mexico because workers earn lower wages than workers in the US. So, in a slightly more sophisticated version of the Big Mac index, labor is included. This typically devalues the US Dollar (USD) compared to other countries around the world because our income is higher. For example, in the traditional Big Mac index, the Chinese yuan is 44% undervalued to the greenback, but after labor adjustments, it is only 7% undervalued. When this adjustment of labor cost is made, it makes it nearly impossible for the USD to trade at a premium against the Euro. This is because Europeans have a higher cost of living and lower incomes than Americans (The Economist, Big Mac Index of Global Currencies). Typically, the Euro trades around a 25% premium against the USD according to the Big Mac index. However, since the election of Donald Trump, even with the labor cost adjustment, the Big Mac index currently finds the Euro UNDERVALUED to the dollar. The US dollar is so strong, it is currently trading at a 14 year high in trade-weighted terms.

 A strong dollar may sound great, but it has many disadvantages. In the United States specifically, a strengthening USD can lead to a widening trade deficit with decreased exports and increased imports. This has a negative result on domestic businesses that operate in foreign countries as well as anyone servicing debts tied to the US dollar. President Trump has publically stated he feels international commerce is rigged against the United States. Whether he is right or wrong, as the trade deficit grows, so does the likelihood of him imposing tariffs on imports from China and Mexico in hopes of bringing balance to trade. If we put a tax on imports, it will lead to something called “protectionism,” or the practice of shielding the United States’ domestic industries from foreign competition. Some feel this is a strong policy because it will keep businesses in the United States and, according to Trump, will prevent us from being taken advantage of. However, it is fairly accepted in macroeconomics that protectionism is a poor/outdated policy because corporate globalization has led to international supply networks that promote convergence and integration throughout the world. Simply put, the countries that are the best at developing goods, develop them, and other countries benefit from the best products at the lowest prices. When something like protectionism takes place, it disintegrates these networks and adversely affects trade-dependent states and the domestic country itself (in this case the United States). The import tax will ultimately drive up prices for domestic consumers who would otherwise benefit from world prices that are significantly lower. This will lead to an increase in trade of intermediate goods and inward investing into value chain niches.

The reason the Big Mac index is so interesting is because it can explain a complex subject like macroeconomics with something as simple as the cost of a hamburger. By knowing the price of a Big Mac on a country by country basis, we are able to understand a significant amount about the world economy and the repercussions the US will face based on the actions we take moving forward.

The Big Mac index is telling us one thing for certain: the US dollar is abnormally strong, which makes the near future uncertain. It is important to have a well-diversified portfolio with an appropriate asset allocation and a competent, experienced fiduciary like DWM to help guide you through times like this. 

Winning the Super Bowl and Achieving Long-Term Financial Success

Clemson and Alabama know it.  The Super Bowl contenders-Patriots, Steelers, Falcons and Packers- know it.  There are many factors and lots of hard work that contribute to success.  You need consistent, effective blocking and tackling.  You need excellent offense, defense and special teams.  You need a super game plan.  And, you need to be able to make modifications as conditions change.  It’s the same thing with achieving your long-term financial goals. This “elephant” needs to be eaten in “smaller bites.”  Wealth management requires attention to the key building blocks, a disciplined process and likely an accountability buddy and coach to be successful.

Here are the main building blocks to achieving your long-term financial goals:

  • Goals– establishing the financial and personal goals for your lifetime and your legacy; separate them into needs, wants and wishes.
  • Financial Plan– developing the road map for your future; showing how you get from point A to point B and accomplish all of your goals.
  • Investments– identifying your investment objectives, constraints, risk tolerance, asset allocation, and rebalancing and other procedures to protect and grow your assets.
  • Income Taxes– determining strategies to minimize your income taxes and make sure your investments and financial planning strategies are tax efficient.
  • Insurance/Risk Management- making sure your coverage is appropriate (like Goldilocks, “not too much and not too little”) and the premiums are as low as possible.
  • Estate Planning- ensuring that your estate will be distributed in the manner you wish, that you pay the least amount of estate tax and that estate administration is inexpensive and hassle-free.

At DWM, we review these key areas with new clients using our DWM “Boot Camp” process.  This is a series of four to six meetings, typically over a 4-12 week period.  For you ex-athletes, our clients tell us these meetings are like “two a day” practices:  “It feels great when they are over.”

Next is monitoring.  Again, you need a process.  In today’s world, “set it and forget it” just doesn’t work.

On a daily basis, you need to track activity in your investment accounts.  You need to keep up to date with the news, the investment environment and the financial information that could be impacting you and your goals.  At least monthly, you need to review investment performance by asset class and compare to benchmarks.  On a quarterly basis, you need to review your investment portfolio for performance and asset allocation.

You should review your financial and personal goals at least a couple of times per year and update your financial plan.  You should review your prior year income tax returns in May, determine what new strategies might apply for the current year and obtain a current year projection.  You should review and update this tax projection in the fall.  You should carefully examine your insurance premium statements when received and, at least every couple of years, go out for quote again.  You should review the key points of your estate plan every year, including executors, trustees and agents and their successors. Based on updated current assets, you need to review if your estate is taxable and the distributions and their timing based on your current plan.

Monitoring is a big job. And, then add to that some of the key life events for you and your family (that may also require changes to your game plan) including:

  • Birth of a child or grandchild
  • Educational matters
  • Child/grandchild reaches majority
  • Weddings
  • Job and career changes
  • Moving
  • Major illnesses
  • Inheritance
  • Divorce
  • Onset of physical incapacity in old age
  • Death of a spouse, parent, sibling or other significant person

Is it any surprise that with all you need to do to achieve financial success and manage your wealth that you might consider an accountability buddy and coach, perhaps someone like DWM?

At DWM, we use a proprietary process to help you develop, monitor and modify your financial plan and manage your wealth over time.  Our Boot Camp is a great way to develop your plan.  Our daily, weekly, bi-monthly, and monthly processes which we refer to as “Increasing Wealth by Adding Value” are designed to monitor your plan and provide suggestions to improve your plan.  Personal meetings with you are times to review both progress and status of your building blocks and changes (including key life events) so we can help you keep your plan current.  And, most importantly, as your independent friend and coach, we are accountable to you and help you be accountable to yourself and your family in achieving your long-term goals.  When you accomplish all of that, it’s like you (and we) have won the Super Bowl.