NewsLetter Vol. 12, No. 5 – September 2019

HRE Headshot_01-2019

Harold Evensky CFP® , AIF® Chairman

DEAR READER,

NOT SO GOOD NEWS

Financial Literacy Skills Have Taken a Nose Dive Since the Great Recession

“Younger people had the sharpest drop in their ability to answer four of five financial literacy questions correctly…

It’s been a decade since the Great Recession’s upheaval, and while some measures of Americans’ economic well-being have recovered like the unemployment rate, their financial literacy isn’t one of them.

Between 2009 and 2018, there was an 8% slip in the amount of people who could correctly answer most questions about interest rates, inflation, bond prices, financial risk and mortgage rates — from 42% to 34%.

That “clear trend of declining financial literacy” is one of the worrying signals in a three-year study from the FINRA Investor Education Foundation, the educational arm of the nonprofit organization regulating the brokerage industry.”

https://www.marketwatch.com/story/americans-financial-literacy-skills-have-plummeted-since-the-great-recession-2019-06-26

ARE YOU GOD’S WIFE? A FEW ITEMS TO MAKE YOU SMILE

From Lee

Teacher Debbie Moon’s first graders were discussing a picture of a family One little boy in the picture had a different hair color than the other members. One of her students suggested that he was adopted.

A little girl said, “I know all about adoption — I was adopted …”

“What does it mean to be adopted?” asked another child.

“It means,” said the girl, “that you grew in your mommy’s heart instead of her “tummy !”

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On my way home one day, I stopped to watch a Little League baseball game that was being played in a park near my home. As I sat down behind the bench on the first-base line, I asked one of the boys what the score was.

“We’re behind 14 to nothing,” he answered with a smile.

“Really?” I said. “I have to say, you don’t look very discouraged.”

“Discouraged?” the boy asked with a puzzled look on his face.

“Why should we be discouraged? We haven’t been up to bat yet.”

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An eye witness account from New York City, on a cold day in December some years ago: A little boy, about 10 years old, was standing before a shoe store on the roadway, barefooted, peering through the window, and shivering with cold.

A lady approached the young boy and said, “My, but you’re in such deep thought staring in that window!”

“I was asking God to give me a pair of shoes,” was the boy’s reply.

The lady took him by the hand, went into the store, and asked the clerk to get half a dozen pairs of socks for the boy. She then asked if he could give her a basin of water and a towel. He quickly brought them to her.

She took the little fellow to the back part of the store and, removing her gloves, knelt down, washed his little feet, and dried them with the towel.

By this time, the clerk had returned with the socks. Placing a pair upon the boy’s feet, she purchased him a pair of shoes.

She tied up the remaining pairs of socks and gave them to him. She patted him on the head and said, “No doubt, you will be more comfortable now.”

As she turned to go, the astonished kid caught her by the hand and, looking up into her face with tears in his eyes, asked her:

“Are you God’s wife?”

OH NO!

Lubbock Avalanche-Journal

“What, me worry?”

 MAD Magazine leaving the newsstands after 67-year run.

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CANNABIS: THE INVESTMENT OF THE FUTURE?

Journal of Financial Planning FPA Survey

22%……….Respondents who say they plan to decrease their use/recommendation of individual stocks over the next 12 months

44% ……. Respondents who say they plan to increase their use/recommendation of ETFs over the next 12 months

55%……… Respondents who say clients have asked about investing in marijuana or cannabis stocks/companies in the past six months.

10……….. Number of states, plus Washington, D.C., that have legalized recreational marijuana over the last few years.

$50 billion. Estimated worth of legal marijuana in the U.S. today.

 

CAUTIOUS CEOs

Journal of Accountancy

 5%………. Portion of CEOs in 2018 who said they expected a drop in the growth of global GDP.

29%……..   Portion who said so in 2019

2012……   The last time they were so pessimistic

 

OUTLOOK BLEAK FOR US RETIREMENT SAVINGS

InvestmentNews

“Most Americans aren’t financially prepared for retirement.

About 44% of Americans said their retirement savings are not on track, versus 36% who said they are, according to the Federal Reserve Board’s six annual survey of household economics. The rest of Americans aren’t sure whether their plan is on track or not and one-quarter have no retirement savings or pension whatsoever.

RETIREMENT MONEY

Less Than $10,000…….         19%

$10,000-$99,999……….         31%

$100,000-$499,999……         24%

Over $500,000………….        12%

Don’t Know …………….         14%

 

THE PROBLEM WITH PLUS LOANS

Kiplinger’s Personal Finance

New student loan rates are lower, but parent loans are still no bargain.

COST OF A $31,000 LOAN

FEDERAL STUDENT LOAN….        4.529%            Total Cost…. $38,606

PARENTS PLUS LOAN …               7.079%            Total Cost…. $43,344

 

GOOD LIFE LESSON

One day a schoolteacher wrote on the board the following:

9×1 =     7

9×2 =   18

9×3 =   27

9×4 =   36

9×5 =   45

9×6 =   54

9×7 =   63

9×8 =   72

9×9 =   81

9×10 = 90

When she was done, she looked to the students and they were all laughing at her because of the first equation, which was wrong, and the teacher said the following”

“I wrote that first one wrong on purpose, because I wanted you to learn something important this was for you to know how the world out there will treat you. You can see that I wrote the RIGHT thing nine times but none of you congratulated me for it but you all laughed and criticize me because of one wrong thing I did.”

So this is the lesson:

The world will never appreciate the good you do a million times but will criticize the one wrong thing you do…. DON’T GET DISCOURAGED. ALWAYS RISE ABOVE ALL THE LAUGHTER AND CRTICISM. STAY STRONG.

SPACE

Texas Monthly

Number of people who have walked on the moon 12
Percent who were once Boy Scouts 92%
Weight of lunar rocks, core samples, pebbles, and moon dust the six lunar missions

brought back to earth

 

842lbs

Number of pairs of moon boots that were left on the moon to compensate for the weight

of the 842 pounds of moon rocks

 

12

Number of U.S. flags planted on the moon 6
Number of successful U.S. space shuttle missions 133

 

 CLIENTS CURIOUS, BUT PLANNERS WARY OF CRYPTO

Journal of Financial Planning – FPA Survey

 34%………………          An interesting concept to keep an eye on, but not invest in yet

32%………………           Not a viable investment option

18%………………           A fad that is best avoided

15%………………           A gamble; only worth investing money you can stand to lose

1%……………….           A viable investment option that has a place in a portfolio

 

EYES OF THE BEHOLDER

Planners may not be too fond of crypto but volatility junkies seem pleased. Of course, planners are focused on long-term financial health and it seems many crypto investors are more into entertainment.

 Crypto Conference Shows Bitcoin Getting Whole Lot More Fun Again

As little as six months ago, Bitcoin was moribund, with prices languishing at a fifth of their record high, disappointing a mass of cryptocurrency enthusiasts who had grown used to extreme — and often upwards — moves in the virtual currency.

But this week’s Asia Blockchain Summit in Taipei highlighted how volatility is back, reviving the excitement around crypto trading.

“Bitcoin is fun, but it’s a hell of a lot more fun at 100 times leverage,” said Arthur Hayes, the founder and chief executive officer of the exchange BitMEX. “That’s what people want to see in crypto, they want that high volatility,” he said. “At the end of the day, we’re all in the entertainment business of traders.”

https://www.bloomberg.com/news/articles/2019-07-05/crypto-conference-shows-bitcoin-getting-whole-lot-more-fun-again

 

HERE’S HOW MUCH YOU NEED TO EARN TO BE IN THE TOP 1%. HINT: IT’S A LOT

USA Today

“The Economic Policy Institute (EPI) published a study that looked at income inequality based on 2017 reported wages, and the results may be surprising. While the top 1% obviously outearn the bottom 90% by a considerable margin, you don’t need to make millions each year to join them. And if you consider yourself relatively well-to-do, you may be in the top 5% or 10% already.

Currently, you need to make a minimum of $421,926 per year to be considered in the top 1%, according to the EPI study. But in this crowd, that’s just scraping by. The average annual income among the top 1% is $718,766, and the top 0.1% earn an average of $2,756,865. By contrast, the bottom 90% make an average of just $36,182…

The 1% income threshold varies by state. In New Mexico, you only need to earn $255,429 to join this elite group, while Connecticut residents need a minimum of $700,800. You can view statistics for every state and region, and the country as a whole, on the EPI website

While most of us – by definition – will never join the top 1%, joining the top 10% (or even the top 5%) is attainable for those in well-paying fields. You need to make $118,400 to join the top 10% and $195,070 for the top 5%. Again, these figures don’t include investment income, but they give you a baseline.”

https://www.usatoday.com/story/money/2019/07/10/what-you-need-to-earn-to-be-in-the-top-1/39659489/

 

AH WELL

BRAIN PILLS ARE A BUST – AARP BULLETIN

One in four Americans 50 and older take a supplement for brain health. They are likely flushing dollars down the drain, says a new report by AARP global counsel on brain health…

The study, “The Real Deal On Brain Health Supplements,” says more than $3 billion was spent on memory supplements in 2016, a number that is expected to nearly double by 2023.

“Despite adults’ widespread use of brain health supplements, there appears to be little reason for it,” the study says. “It’s a massive waste of money.”

 

TRUST ME, THE CHECK IS IN THE MAIL

The fiduciary/suitability debate continues. Having lost to big $$ in the national arena, the fight now moves to state regulation. Recently Massachusetts considered a proposal to apply a state-based common law fiduciary standard to broker-dealers’ and investment advisers’ advisory activities. A consortium of organizations including my Committee for the Fiduciary Standard sent a letter to the state in support of the proposal. Below is an excerpt from the letter highlighting the issue:

Here are just a few examples of firms’ marketing materials supporting the conclusion they function as “trusted advisors.”

  • A. Davidson states: “Trust is the cornerstone of the relationship between you, as an investor, and the D.A. Davidson & Co. financial professionals working for you. Your needs should always come first.”
  • Mass Mutual states: “Join millions of people who place their confidence and trust in us.”
  • Raymond James states: “[I]t’s developing a long-term relationship built on understanding and trust. Your advisor is there for you throughout the planning and investing process, giving you objective and unbiased advice along the way.”
  • Schwab states: “A relationship you can trust, close to home.”
  • UBS states: “The UBS Wealth Management Americas approach is based on the trusted relationship of our Financial Advisors and their clients. Our experienced Advisors are committed to understanding clients’ needs and delivering insightful, informed advice to help them realize their dreams.”

The harm to investors is immense when they reasonably, but mistakenly, believe they are getting advice that’s in their best interest based on a trusted relationship with their financial professional. In addition to paying higher costs, investors who rely on biased sales recommendations as if they constituted unbiased advice can end up facing unnecessary risks or receiving substandard returns. Cumulatively, these industry practices drain tens of billions of dollars every year out of investors’ pockets and into the pockets of firms and their financial professionals. According to one study, Massachusetts IRA investors alone lose approximately $491 million a year as a result of conflicted advice. The losses are even larger when considering all types of accounts (retirement and non-retirement) and the full range of products sold within these accounts.

Given how broker-dealers advertise and function as advisers in position of trust and confidence with their customers, it is entirely appropriate to apply a common law fiduciary duty to their advisory activities.

If you’d like to see the entire letter, please let me know.

 

ASSET ALOCATION — SMART, NOT BRILLIANT

From JP Morgan’s most excellent Guide to the Markets 3Q 2019

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SOMEONE MUST BE DEADLY AT SCRABBLE

What happens if you rearrange the letters

From my friend Leon

PRESBYTERIAN: BEST IN PRAYER

ASTRONOMER: MOON STARER

DESPERATION: A ROPE ENDS IT

THE EYES: THEY SEE

THE MORSE CODE: HERE COME DOTS

DORMITORY: DIRTY ROOM

ELECTION RESULTS: LIES — LET’S RECOUNT

SNOOZE ALARMS: ALAS! NO MORE Z’S

 

 PICTURES FOR ‘SENIOR’ PEOPLE

From my #1 son. I think he’s trying to rub it in …

WARNING:  If you are not a senior, you cannot look at these pictures because you will not understand!

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PROTECTING THE LITTLE GUY

InvestmentNews

 I sure am pleased to see the government protecting the opportunity for the little guy to invest in private placements. The following are excerpts from two articles in the same issue of InvestmentNews:

SEC Wants More Access to Private Placements

“The Securities and Exchange Commission is looking for ways to allow more investors to buy unregistered securities and enable emerging companies more easily to raise capital….SEC Chairman J Clayton has pushed open private markets more widely to ordinary investors so they can be in on the ground floor of the launch of breakthrough companies.”

“Alternative investment advocates assert that such products diversify portfolios and offer investors a way to hedge against general market downturns. Investor advocates warned private placements can be highly risky and often harm investors.”

GPB Reports Huge Value Declines

“In a blow to investors, GPB Capital last Friday reported significant losses in the value of its investment funds which are in the form of private partnerships…The two largest GPB Holdings II and GPB Automotive Portfolio, have seen declines in value, respectively, of 25.4% and 39%….GPB’s five other smaller funds reported declines in estimated value of 25% to 73%, according to GPB.

Having served as an expert witness for decades, I’ve seen all too often how investors, particularly smaller investors, have been devastated by investments in exciting sounding private placements that the neither understood nor appreciated the risk. I vote on the side of investor advocates and believe the SEC should also.

MORE PROTECTING THE LITTLE GUY

“In a letter Tuesday, the American Securities Association accused the CFP Board of subverting the authority of the Security and Exchange Commission by holding certification designees to a standard of service beyond what is required by law.”

https://www.wealthmanagement.com/industry/cfp-boards-private-standards-raise-concerns

How awful and presumptuous of the CFP Board to require higher standards of professionals than the abdominally low ones currently required by law. What are regulators thinking of? If I didn’t know better, I’d think it was a joke. Unfortunately, I do know better and it’s not a joke. If you haven’t yet asked your advisor to sign the Committee for Fiduciary Standards Oath, now’s the time.

https://www.advisorperspectives.com/articles/2012/04/17/harold-evensky-s-fiduciary-oath

MORE GREAT HISTORICAL PICTURES (AND A FEW REPEATS)

From my friend Judy

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WHAT IS THE SIZE OF THE AVERAGE RETIREMENT NEST EGG?

2019 analysis of more than 30 million retirement accounts by Fidelity Investments found that the average balance in corporate-sponsored 401(k) plans at the end of 2018 was $95,600.

https://finance.yahoo.com/m/d84dcdd6-f54b-3db9-ad85-b7b9d3919510/what-is-the-size-of-the.html

 

TRAGIC NEWS WITH A HAPPY ENDING

Lubbock Avalanche-Journal

“When announcers last July declared Joey Chestnut the winter of Nathan’s Famous hot dog eating contest, spectators had little reason to doubt the score: 64 dogs and 10 minutes.

But the judges, unable to clearly view the contestants’ plates amid all the cups on the table and overwhelmed by the eater’s ability to scarf two or three frankfurters at a time, had undercounted Chestnut by 10 dogs, briefly robbing him of a new world record.

Although judges quickly corrected the score and handed Chestnut his world record, the error caused a small scandal. And it sent organizers of the annual Fourth of July contest scrambling for solutions to avoid a repeat.”

 

I LOVE LUBBOCK

This was a posting on our neighborhood website around July 4th.

“Ziggy ran from our house. Currently wearing a unicorn costume and an American flag.”

I’ll bet I know why Ziggy ran away. Should be easy to find.

 

BITCOIN RESEARCHERS WARN OVER POTENTIAL SUDDEN, SHORT PRICE SURGE

Now, new research has found that national holidays and family gatherings could drive interest in buying bitcoin and other cryptocurrencies when the market is already doing well or improving — suggesting we could be set for a new bitcoin boost this Independence Day weekend, but it might not last.

As families and friends gather for Fourth of July celebrations across the U.S., many will be asked the question: “Have you heard of bitcoin?”

Bitcoin and cryptocurrency awareness, something that was harder to measure before bitcoin’s epic 2017 bull run sent the bitcoin price from under $1,000 per bitcoin to almost $20,000 in fewer than 12 months, appears to be closely tied to the bitcoin price, which gets pushed on by so-called fear of missing out (FOMO), according to bitcoin and crypto prime dealer SFOX’s research team.

“Part of the narrative surrounding [the 2017] unprecedented bull run was that many people were hearing about bitcoin for the first time,” the researchers wrote in a blog post. “Over Thanksgiving dinner, the story goes, Luddites in the family would ask the more tech-savvy among them about this ‘bitcoin’ they’d seen in mainstream news  —  and how could they purchase some ‘bitcoin coins’ for themselves?”

https://www.forbes.com/sites/billybambrough/2019/07/04/bitcoin-could-surge-this-4th-of-july-holiday/#4ec7b1ea1d61

 

A SOBERING CONCLUSION

For investors who want to pick individual stocks.

“Research from Vanguard, the fund house that invented passive funds, showed investors would capture the best returns in the American stock market by owning more than 500 companies.

The firm tested nine separate portfolios made up of varying numbers of shares: one, five, 10, 15, 30, 50, 100, 200, 500, and found the higher number of shares, the better returns.”

https://www.telegraph.co.uk/investing/funds/perfect-number-stocks-hold-portfolio-think/

 

HOW TO BE A HIT ON THE BEACH

https://youtu.be/n3ckybKWhHI

 

CAVEAT EMPTOR 

As much as I like and respect Kiplinger, I remind you that investing based on headlines and good stories is a dangerous strategy. Here’s an example:

Kiplinger Mutual Fund Spotlight

WINNING BY LOSING LESS

“A hefty chunk of cash has helped this small-company fund’s performance.

Cash is always king at Royce Special Equity. Charles Dreifus and Steve Mc Boyle want to have ample funds to snap up shares when they see opportunities. The small-company stock mutual fund typically holds 8% to 10% of its assets and ready money — more than its peers (funds that invest in value-priced small-stocks), which maintain a roughly 3% cash position.”

The article goes on to say, “Overall, the fund’s strategy of winning over time by losing less has earned mixed results. Special equities five-, 10-and 15-year annualized returns, for instance, lag its typical peer and the Russell 2000 index. But the fund has been roughly 15% to 20% less volatile than its peers over those stretches.”

Sounds good, and indeed in 2018 the fund lost about 40% less than its peer universe. However, how did it look over the long term compared to an ETF alternative? For that purpose, I used the iShares S&P Small-Cap 600 Value ETF (IJS), and the answer is, “not so good.”

ROYCE SPECIAL EQUITY INVESTMENT

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When taxes are factored in, the results are even more depressing.

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How about the risk-adjusted argument? Another “not so good.”

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I then looked at the fund ranked number one in the story by Kiplinger for one-year returns. Again, the “winning by losing” rationale was a failure. Add to that the fact that the tenure of the three fund managers was just a shade over a year and a half when the article was published highlights my warning of “buyer beware.”

QUAKER SMALL/MEDIUM IMPACT VALUE

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And how about when we factor in taxes?

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And of course, all of these statistics are not very meaningful as all of the managers are fairly new.

MANAGER TENURE

Andrew Cowen           –          1/12/2018

Thomas Lott                –          1/12/2018

Andy Kaufman            –          2/01/2019

 

I’M DEFINITELY GETTING TOO OLD FOR THIS NEW AGE

From American Way Magazine

“Goat yoga is so 2017 … A new class in England’s bucolic Lake district pairs wellness with…lemurs.”

 

I THOUGHT I WAS AN OPTIMIST

Massachusetts police ask residents to refrain from crime until after the heat wave passes
https://www.cnn.com/2019/07/20/us/police-department-heat-wave-stop-crime-trnd/

 

POORLY CORRELATED? NOT SO MUCH

JP Morgan’s Guide to the Markets 3Q 2019

Limited correlation benefits with hedge funds and private equity.

09-2019_14

 

OVER CONFIDENCE — BUY LOW, SELL HIGH

From The NBER Digest “How Strongly Do Expectations About Returns Affect Portfolio Choice?”

Based on a study of Vanguard customers (average age 58.7 with and an average of $467,000 invested with Vanguard). “The survey data show that there is a positive relationship between an investor’s expectation of the return in the next year on the stock portfolio and that investor’s portfolio composition… On average, an investor expecting a 1 percentage point increase in return over the next year increases portfolio equity holdings by about 0.7 percentage points.”

 

REALLY GOOD NEWS!!

“Want to live longer? Drink alcohol, new study says” | USA TODAY 

“A recent study of nearly 8,000 men and women aged 78 to 88 suggests that drinking alcohol at an advanced age might actually increase longevity….

Now, in contrast, a paper titled “Alcohol Consumption in Later Life and Mortality in the United States,” just published in the journal Alcoholism: Clinical and Experimental Research, reports that researchers have found consistent associations between occasional and moderate drinking and lower mortality rates, compared to lifetime abstainers.

Occasional drinkers are those who consume alcohol less than one day a week and who, when they do drink, limit intake to three drinks daily for men, two drinks for women. Moderate male drinkers, indulging on one or more days per week, imbibe one to three drinks while females have one to two.”

https://www.usatoday.com/story/money/2019/07/13/drink-wine-beer-alcohol-at-senior-age-to-live-longer-study-finds/39670541/

 

MOVE OVER MEDITATION

If alcohol doesn’t work, try rage…

“Meditating is one way to reduce stress, pulverizing a porcelain toilet is another — or at least that’s the thinking behind the rise of rage rooms. In the past few years, more than 50 of these facilities have opened around the world, inviting pent-up patrons to pay a fee, put on safety goggles and vandalize their way back to their happy place…”

American Way magazine

 

CHARTS WORTH PONDERING

From JP Morgan’s always fascinating Guide to the Markets 3Q 2019

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WHERE DOES THE TIME GO?

According to the Pew Research Center, which has analyzed the ATU surveys [Bureau of Labor Statistics and its American Time Use Surveys], Americans age 60 and older sleep just over 8½ hours a day, on average. About seven hours are spent on leisure; three hours on chores and errands; a little more than one hour on eating; about one hour on personal activities, such as grooming and health care; and just under an hour on unpaid caregiving and volunteering.

Work remains part of the equation, as well. Men age 60-plus spend two hours a day, on average, on paid work; women age 60-plus spend one hour and 12 minutes.

Looking more closely at leisure, the average person age 60-plus spends the bulk of their leisure time — about 4¼ hours each day — in front of a television, computer, tablet or other electronic device. (That’s an increase of almost 30 minutes in the past decade.) The balance of leisure time is spent, among other activities, on socializing, reading, listening to music, attending events, etc.

https://www.wsj.com/articles/what-people-do-in-retirement-hour-by-hour-11562338744

 

 MORE OLDER THAN DIRT

 I have a little “nostalgia” book with “Remember When” for my birthday year — 1942

World News:         Lieutenant Cornel Doolittle leads a bombing group over Tokyo.

National News:    The Manhattan Project begins; zoot suits are a fashion statement for men; Kellogg’s  Raisin Bran and instant coffee introduced.

Life Expectancy:   62.9 years

Cost of Living:       New house: $3,775; new car: $920; average income: $1,885/year; movie ticket: 30 cents; gas: 15 cents; bread: 9 cents/loaf

1942 Birthdays:    Wayne Newton, Annette Funicello, Harrison Ford, Muhammad Ali, Aretha Franklin, Sandra Dee, Barbara Streisand, Tammy Wynette

Movies:              Casablanca, Bambi, Mrs. Miniver

Music:                 Jingle, Jangle, Jingle; White Christmas; Deep in the Heart of Texas [Yes!]

 

INVESTORS IMPERILED?

AARP says new SEC rule fails to protect retirees. AARP BULLETIN

“Investing for retirement will be less safe and more confusing under a new Securities and Exchange Commission regulation governing the actions of stockbrokers and investment advisors, AARP and others say… . The new regulation best interest rule, adopted 3-1 in June by the SEC commissioners, doesn’t protect investors, critics say. Under the rule, no one is required to offer advice or recommendations that put the interest of investors first, AARP and other critics say. ‘As a result, conflicts will continue to taint the advice American investors received from brokers,’ says SEC Commissioner Robert Jackson Junior, the dissenting vote.

AARP agrees. ‘This rule will have a negative impact on the ability of Americans to save and invest for retirement,’ says Nancy LeaMond, AARP’s Executive Vice President and Chief Advocacy and engagement officer.”

Seems I have good company with my frustration regarding the new SEC regulation.

THE PENSION CRISIS AT CONGRESS’ DOOR

AARP BULLETIN

Pensions that have been cut or approved for cuts……………………………………..…… 90,000

Workers and retirees whose plans are expected to run out of money…………..1,300,000

 

POLICE HUMOR

From my friend Alex

09-2019_18

ONE MORE ‘DIG DEEPER’

AND THE NO. 1 STOCK FUND MANAGER IS…

Wall Street Journal

“The winner: Dennis Lynch, head of the Counterpoint Global team at Morgan Stanley Investment Management and manager of Morgan Stanley Institutional Discovery Portfolio (MPEGX) — which romped across the finish line with a 30.8% return for the trailing 12 months ended June 30.”

https://www.wsj.com/articles/and-the-no-1-stock-fund-manager-is-11562638561?mod=flipboard

IWP is the iShare Russell Mid Cap Growth

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09-2019_21

A WORD OF WARNING FROM KIPLINGER’S

Although I’m a user of Angie’s List, Kiplinger’s says to take the recommendations with a grain of salt.

“Angie’s List was founded in 1995 to help consumers pick reliable home-service providers. But in 2017 when it was bought by the same company that owns homeadvisor.com, it changed the way it does business. Now, instead of charging an annual fee, Angie’s List is free — it’s funded almost entirely by advertising and referral fees from the companies it evaluates. A recent report from the nonprofit Consumer Federation of America (www.consumerfed.org) explains how that arrangement undermines the usefulness of the ratings and the ‘short list of top-rated pros’ users receive.

CFA recommends that if you use Angie’s List read the detailed consumer comments for A-rated businesses with at least 25 comments, and pay extra attention to comments that are negative…. Always double-check a pro’s reputation with the Better Business Bureau (www.bbb.org), ask to see proof of licensing and insurance, and check references.”

 

PONDERISMS

From my special friend Patti

  • Why do peanuts float in a regular Coke and sink in a Diet Coke? Go ahead and try it.
  • Why do you have to “put your two cents in” but it’s only a “penny for your thoughts?” Where’s that extra penny going?
  • What disease did cured ham actually have?
  • How is it that we put man on the moon before we figured out it would be a good idea to put wheels on luggage?
  • Why is it that people say they “slept like a baby” when babies wake up like every two hours?
  • Why are you IN a movie, but you’re ON TV?
  • Why do toasters always have a setting that burns the toast to a horrible crisp, which no decent human being would eat?
  • Why do the Alphabet song and Twinkle, Twinkle Little Star have the same tune?
  • Why did you just try singing the two songs above?
  • How did the man who made the first clock know what time it was?

 

POT CALLING THE KETTLE BLACK?

Don’t Listen to Your Market Guru

In his Real Money column Tuesday morning, Cramer had some advice for investors who are listening to market pundits and basing their stock picks or trades off of them. Cramer’s take? Make up your own mind.

Here’s a snippet of what Cramer has to say about those who are following the words of a market pundit. “I am simply saying that once again we listened to a guru — a word I hate — and the guru was full of sound and fury but signifying nothing having to do with the stock market.”

https://www.thestreet.com/video/jim-cramer-earnings-season-apple-snap-15028757?puc=_htmltsc_pla1&cm_ven=EMAIL_htmltsc&tstmem=165571391&utm_source=newsletter&utm_medium=email&utm_campaign=TSC&utm_term=BREAKING+NEWS%3A+Don%27t+Trust+the+Market+Gurus%3A+Jim+Cramer+on+Earnings%2C+Apple+and+Snap+-+Live+at+10+a.m.+ET

 

UNCLE HAROLD’S BARN GOOD CHIPS

They’re not just good, they’re GREAT! (sorry, no sample)

09-2019_22

UPSIDE DOWN

A Danish bank is offering mortgages at a 0.5% negative interest rate — meaning it is basically paying people to borrow money

“Jyske Bank, Denmark’s third-largest bank, said this week that customers would now be able to take out a 10-year fixed-rate mortgage with an interest rate of -0.5%, meaning customers will pay back less than the amount they borrowed…Many investors fear a substantial crash in the near future. As such, some banks are willing to lend money at negative rates, accepting a small loss rather than risking a bigger loss by lending money at higher rates that customers cannot meet.”

https://www.businessinsider.com/danish-bank-offers-mortgages-at-negative-interest-rates-2019-8

 

MORE OLD PICTURES

If you’re old enough to remember who these people are – from Peter

09-2019_23

09-2019_24.png

Hope you enjoyed this issue, and I look forward to “seeing you” again.

_HRE SIGNATURE

Harold Evensky

Chairman

Evensky & Katz / Foldes Financial Wealth Management

 

For previous issues:

NewsLetter Vol. 12, No. 4 – July 2019

NewsLetter Vol. 12, No. 3 – May 2019

 

 

 

 

 

Important Disclosure
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Evensky & Katz / Foldes Financial Wealth Management (“EK-FF”), or any non-investment-related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from EK-FF. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. EK-FF is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of EK-FF’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are an EK-FF client, please remember to contact EK-FF, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. EK-FF shall continue to rely on the accuracy of information that you have provided.

 

 

Just inherited an IRA? Take a moment to consider your options

Marcos- cropped

Marcos A. Segrera, CFP® Financial Advisor

Have you or will you inherit an IRA from someone that is not your spouse?

This is not uncommon. Roughly 42 million US households own some type of IRA. So odds are you know someone other than your spouse who owns an IRA. Play your cards right and you could be a named beneficiary.

If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA from a friend or family member (NOT A SPOUSE), you have several options, depending on whether the account holder was under or over age 70.5 .

If the account holder was under 70.5, here are your choices:

  1. Open an Inherited IRA and use the Life Expectancy Method
    1. Rollover (transfer) the assets into an inherited IRA held in your name. You can open the inherited IRA at places like Charles Schwab, TD Ameritrade, Fidelity, etc. You must begin required minimum distributions no later than 12/31 of the year after the account holder died. Required minimum distributions (RMDs) are mandatory as per the IRS and you are taxed (ordinary income) on each distribution. You will use the IRS Single Life Expectancy Table to determine your annual RMD. Take the value of the account at the end of last year, divide it by the number corresponding with your age on the table and voila. Assuming the account is invested, the undistributed assets can continue to grow tax-deferred. You are also able to name your own beneficiary.
  1. Open an Inherited IRA and distribute within 5 years
    1. Rollover (transfer) the assets into an inherited IRA held in your name. You can open the inherited IRA at places like Charles Schwab, TD Ameritrade, Fidelity, etc. In this case no need to take RMDs. However, the full account value must be distributed by 12/31 of the fifth year after the account holder died. You will need to pay ordinary income taxes on the amount distributed. Undistributed assets can continue to grow tax-deferred for up to five years. You are also able to name your own beneficiary.
  1. Lump sum distribution
    1. Exactly like it sounds, you take a full distribution from the deceased’s IRA and pay all the taxes now. No opportunity for tax-deferred growth. You may move to a higher income bracket depending on the amount of the distribution and your current income level.

If the account holder was over 70.5, here are your choices:

  1. Open an Inherited IRA and use the Life Expectancy Method
    1. Same as above with one detail to note. If the original account holder did not take an RMD in the year of death, an RMD must be taken from the account by 12/31 of the year the original account holder died.

  1. Lump sum distribution
    1. Exactly like it sounds, you take a full distribution from the deceased’s IRA and pay all the taxes now. No opportunity for tax-deferred growth. You may move to a higher income bracket depending on the amount of the distribution and your current income level.

Although your individual circumstances must be taken into account, we typically find the greatest opportunity offered to a non-spouse beneficiary is the ability to open your own inherited IRA and allow the undistributed amount to grow tax-deferred over time. The added flexibility of being able to name your own beneficiary means that this account could stretch significantly beyond your own lifetime and continue growing and providing for future generations. In fact, many IRA owners planning for the future use the stretch feature as a way to comfortably provide for their child’s retirement through the power of tax-deferred compounding.

Sounds wonderful? We agree. Unfortunately, this flexibility may be put to an end with the passing of the SECURE Act (Setting Every Community Up for Retirement Enhancement Act). This legislation, that has already been passed by the House, would kill the stretch provision for non-spouse beneficiaries. The SECURE ACT would require non-spouse beneficiaries to pull out all of the money held in the Inherited IRA within 10 years. The effect would make more of an IRA subject to higher taxes sooner.  We would hate to see such a great planning opportunity be put to bed but we will have to wait on Congress to see where we end up. Don’t hold your breathe.

Do you think you may be inheriting an IRA? Stay tuned or feel free to reach out with questions.

Happy investing.

Marcos

 

Feel free to reach out to Marcos by phone 305.448.8882 extension 212 or email: MSegrera@Evensky.com

 

 

Resources:

https://www.irs.gov/publications/p590b#en_US_2018_publink1000231236

https://www.ici.org/policy/retirement/plan/ira/faqs_iras

https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/inherited_ira/withdrawal_rules

 

The Value of a Financial Planner

John_Salter2012

John R. Salter, CFP®, AIFA®, PhD Wealth Manager, Principal

Financial planning is the process of determining how you can meet your financial goals by managing your financial resources. Probably you have already thought about your own financial planning. Maybe you have thought about working, or already work, with a professional financial planner. Whatever your situation, we wanted to discuss the value of working with a financial planner.

Financial planners provide advice on how to achieve financial goals. The quality of the advice should be measured by whether you attain those goals. The value of financial planning lies in the development of a plan specific to your goals, but just as important is the guidance you get along the way.

Below are just a few ways financial planners provide value to clients.

Creating a Financial Plan

One well-documented fact about our lives is we are likely to spend more time planning a vacation than planning for our retirement. And why not? The vacation seems much more fun! However, the vacation is a one-time event, whereas issues related to your financial life have a lasting impact on your future (and your ability to take vacations, for that matter!) A financial plan maps out the steps you need to take in the areas of spending, saving, investing, managing risks, and handling bequests in order to attain your financial goals.

A financial planner provides the analysis and can outline the steps needed to meet your current and future financial goals.

Being a Sounding Board

Should you pay off your mortgage? Should you buy or lease your car? What about buying a rental property? Were you pitched an annuity at a free dinner? A financial planner can help you answer all these questions and more, either through an analysis and/or by providing the details you need to make an informed decision yourself. You can probably think back to times you have contemplated a decision, seemingly to no avail, when an objective opinion could have saved you time.

A financial planner is there to help.

Optimal Investing

Investing should be boring. We should focus not only on achieving returns, but also evaluate the risk we are willing to accept to reach those returns. This “risk” refers to how much your portfolio might drop in a short-term bear market, but also the risk that you might not be able to meet your future financial goals. Our investments should be diversified; we should not have all our eggs in one basket. The best portfolio should arise out of the overlap between your risk tolerance, your financial capacity to take risk, and the risk and return needed to meet your future goals.

A financial planner helps determine your optimal portfolio.

Staying Disciplined

Long term, we are likely to be our own worst enemy in terms of keeping our financial plan on track, both in terms of performing the financial planning tasks we need to undertake and sticking with the investment plan. One notable example is estate planning, which seems to be the last item on everyone’s to-do list. Sometimes we need simple “nudges” to make sure these tasks are completed. Financial planners also help stay on track with our investments. When the market’s down, you want to adjust and make it more conservative, and then get back in when it is up. This is the easiest way to lose money long term. Ongoing management includes rebalancing or bringing the investment mix back to target. In general, this is selling the winners and buying more of what hasn’t done as well recently, and of course assumes long-term investment values will rise. Does short-term market volatility get you worried? Why not have your financial planner help you stay disciplined through the ups and downs of the market cycle, which are inevitable, simply by reaching out to you during rough markets?

A financial planner helps you stay disciplined through the financial planning process.

Managing Behavior

We are human, and therefore we are hard-wired to make terrible financial decisions. We want to be in the market when things are going well, and out when things look bad. We should do the opposite. We focus too much on the short term; we want to make decisions based on short-term noise rather than long-term analysis. We want to be in the winners and out of the losers, whereas being spread across winners and losers (being diversified) is the best long-term strategy. We want our investments to be exciting and sexy, but they should be dull and boring. We want to chase the investments that did well in the too-recent past, but they are likely those that will falter in the short-term future. We make decisions based on simple rules of thumb because we cannot perform complex math in our head. Our behavior, based on the emotions tied to our money, prevents us from reaching our future financial goals.

A financial planner helps manage your behavior and separate emotion from your money.

Tax and Cost Efficiency

In a world of lower return expectations, and given that we cannot control the markets, the ability to control and take into consideration tax and cost efficiency becomes even more important. Many financial planners have access to the universe of financial products. This means they also have access to the range of costs of products and may be able to implement a plan more cost effectively compared to a retail solution. If a financial planner can access a mutual fund for 0.5% less, that is 0.5% more staying in your portfolio. Tax savings produce similar benefits. A financial planner can not only make long-term tax-efficient recommendations but can also strategically position your individual investments in certain accounts to minimize current taxable income. A solution which decreases the tax you pay also results in more money accumulated or available.

Keep on Track

A financial plan is important to meeting goals, and maintaining and monitoring the plan are the check-ups required for progress. Annual meetings with your financial planner provide the opportunity to review your goals and see progress toward meeting them. Of course, we all know life can change at any moment, so updating and monitoring financial plans takes account of the ebbs and flows of life.

So, what is the quantifiable value of a financial planner? Many studies have addressed this question. These examples include many of the topics above, such as the financial planning process, portfolio construction and investment selection, rebalancing, and tax efficiency. The answer? Studies have concluded the value of a financial planner and the financial planning process can add an upwards of 3% in returns per year.

Below are links to a few of these studies.

https://www.fidelity.com/viewpoints/investing-ideas/financial-advisor-cost

http://www.envestnet.com/sites/default/files/documents/ENV-WP-CS-0516-FullVersion.pdf

https://www.vanguard.com/pdf/ISGQVAA.pdf

https://corporate1.morningstar.com/uploadedFiles/US/AlphaBetaandNowGamma.pdf

No matter how you might value a financial planner, the true value comes from the benefits listed above and from following and keeping on track with the financial planning process. Value goes beyond simple products or investment choices and returns. A financial planner is your partner in meeting your future financial goals.

Feel free to contact John Salter with any questions by phone 1.806.747.7995 or email: JSalter@EK-FF.com

For more information on financial planning visit our website at www.EK-FF.com.

NewsLetter Vol. 11, No. 3 – June 2018

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Dear Reader:

 

DEPRESSING IF TRUE

“Medicare to go broke three years earlier than expected, trustees say.

Medicare’s hospital trust fund is expected to run out of money in 2026, three years earlier than previously projected, the program’s trustees said in a new report published this afternoon.

“The more pessimistic outlook is largely due to reduce revenues from payroll and Social Security taxes, and higher payments than expected to hospitals and private Medicare plans last year.

“The solvency report is the first since the repeal of Obamacare’s Independent Payment Advisory Board earlier this year as part of a massive spending agreement in Congress. The panel outside experts was designed to tame excessive Medicare spending growth, but costs never grew fast enough to trigger the controversial board, and no members were ever appointed. Social Security faces depletion in 2034, the program’s trustees also said today. That’s identical to last year’s projection.”

https://www.politico.com/story/2018/06/05/medicare-outlook-2026-625908

 

GOOD NEWS? BAD NEWS?

From my friend and long-term care guru, Bill Dyess.

I don’t know if it’s good news that someone needed LTC this long, but it was certainly good news that their insurance covered them. Here are the largest claims as of 12/31/2017 (and they’re still being paid!)

Male Female
Paid to date $1,592,000 $2,600,000
Years claim has been paid 9 years, 10 months 13 years, 9 months
Initial premium/year $4,474/year $2,600/year
Years paid until claim began 6 years, 6 months 13 years, 9 months

 

PITHY THOUGHT

For market timers….

Think about the few times when there was lots of certainty—2000 or 2009. How did that work out?

 

TEST RESULTS

From my last NewsLetter …

A TEST

John Durand wrote Timing: When to Buy and Sell in Today’s Markets, a classic in active investment management. He also wrote How to Secure Continuous Security Profits in Modern Markets, in which he opined: “As this is written, one of the greatest bull markets in history is in progress. People have been saying for several years that prices and brokers’ loans are too high; yet they go on increasing.… People who deplore the high at which gilt-edged common stocks are now selling apparently fail to grasp the fundamental distinction between investments yielding a fixed income and investments in the equities of growing companies. Nothing short of an industrial depression … can prevent common stock equities in well-managed and favorable circumstanced companies from increasing in value, and hence in market price.” When was his book published?

No winners, but here are ones that came mighty close:

Alan Rosoff ……………… 1928

Richard Lorenz………….  1930

Jewell Davis ………….…  1925

The publication date was September 1929.

The Great Depression started October 29,1929.

TIDBITS FROM AARP

  • Only about 37% of couples share financial decision-making equality. For shame!
  • The average parent thinks allowances should begin at age 10.
  • Approximately 29% of women in dual-income marriages make more money than their spouses; that’s up from 16% in 1981.
  • The “average” family in the top 10% of wealth in the United States receives an inheritance of about $367,000, while families at the median level of wealth report an average of about $16,000.
  • The average payout from the tooth fairy in 2017 was $4.13; in the West, it was $6.
  • About 53% of grandparents contribute to their grandkids’ education, and 23% contribute to health and dental bills.

 

FOREWARNED IS FOREARMED

When markets take a dip, it’s not the end of the world (and if it is, who cares about markets?).

06-2018_Market Downturn

Even better, from our perspective, is that corrections are great buying opportunities.

 

GOOD NEWS, BAD NEWS

While the Federal Reserve’s “Report on the Economic Well-Being of U.S. Households in 2017” stated that “overall economic well-being has improved over the past five years,” that optimistic headline masks a lot of sad news.

“Economic Well-Being. A large majority of individuals report that financially they are doing okay or living comfortably, and overall economic well-being has improved over the past five years.

“Even so, notable differences remain across various subpopulations, including those of race, ethnicity, and educational attainment.”

Furthermore:

“Dealing with Unexpected Expenses. While self-reported financial preparedness has improved substantially over the past five years, a sizeable share of adults nonetheless say that they would struggle with a modest unexpected expense.

“• Four in 10 adults, if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money. This is an improvement from half of adults in 2013 being ill-prepared for such an expense.

“• Over one-fifth of adults are not able to pay all of their current month’s bills in full.

“• Over one-fourth of adults skipped necessary medical care in 2017 due to being unable to afford the cost.”

https://www.federalreserve.gov/publications/files/2017-report-economic-well-being-us-households-201805.pdf

 

PHEW!

Good thing I went to college a zillion years ago. Here are the statistics for Cornell’s Class of 2022:

Applicants     –           51,000+ (a record high)

Admit rate      –           10.3%    (an all-time low)

Admitted        –           5,288

 

SAD BUT TRUE

Cyberattacks are a reality of life today, and we take the risk very seriously.

2.9% of advisors have faced successful attacks on their firm (not us).

44% of firms with more than one employee require mandatory cybersecurity training (we do).

81% of advisors believe addressing cybersecurity is high or very high on their priority list (we believe it’s very high).

 

IF YOU HAVEN’T SEEN THIS

New York Times

“Hoping to thwart a sophisticated malware system linked to Russia that has infected hundreds of thousands of internet routers, the F.B.I. has made an urgent request to anybody with one of the devices: Turn it off, and then turn it back on.

“The malware is capable of blocking web traffic, collecting information that passes through home and office routers, and disabling the devices entirely, the bureau announced on Friday.”

https://www.ic3.gov/media/2018/180525.aspx

 

TULIPS

As I wrote in my last NewsLetter:

Here’s what Crypto pioneer Mike Novogratz said on Monday on CNBC’s “Fast Money” (12/11/17).

“This is going to be the biggest bubble of our lifetimes.” Which, of course, does not stop him from investing hundreds of millions in the space. While conceding that cryptos are the biggest bubble ever … “Bitcoin could be at $40,000 at the end of 2018. It easily could.” Then, of course, it may not.

Turns out, so far, it’s “not.”

06-2018_Bitcoin USD Price

 

GOOD ADVICE

Also from AARP, an excellent article (as always) by Jean Chatzky: “Planning for the Worst.” Why disability insurance may be a must-have for you and this article is must-have reading for my younger readers.

https://www.aarp.org/work/working-at-50-plus/info-2018/disability-insurance-chatzky.html

 

DISMAL

“Dismal Outlook for Millennials” was the headline in a planadviser article. Why?

67% 66% 47%
Feel they will outlive their savings Have no retirement savings Think they will be unable to retire when they would like to

And, to my amazement,

Only 34% Only 21%
Participate in a retirement plan Are worried about their retirement security

 

THE ANSWER IS “BECOME A CEO”

“Income inequality in the United States has increased significantly since the 1970s, after several decades of stability….”

Wikipedia

The New York Times ran an interesting, albeit depressing, story highlighting this issue:

“Want to Make Money Like a CEO? Work 275 years.

“This year, publicly traded corporations in the United States had to begin revealing their pay ratios—comparisons between the pay of their chief executive and the median compensation of other employees at the company. The results were predictably striking.”

Examples included:

CEO Median Employee Years to Earn
Walmart $22.2 million $19,177 More than 1,000
Live Nation $70.6 million $24,406 2,893
Time Warner $49 million $75,217 651

 

https://www.nytimes.com/2018/05/25/business/highest-paid-ceos-2017.html?emc=edit_nn_20180525&auth=login-email

 

 WHY WE NEED A FIDUCIARY STANDARD

From the Wall Street Journal:

https://www.wsj.com/articles/wells-fargos-401-k-practices-probed-by-labor-department-1524757138

“Wells Fargo’s 401(k) Practices Probed by Labor Department
“Department is examining if bank pushed participants in low-cost 401(k) plans into more expensive IRAs

“The Labor Department is examining whether Wells Fargo & Co. has been pushing participants in low-cost corporate 401(k) plans to roll their holdings into more expensive individual retirement accounts at the bank, according to a person familiar with the inquiry.

“Labor Department investigators also are interested in whether Wells Fargo’s retirement-plan services unit pressed account holders to buy in-house funds, generating more revenue to the bank, the person said.”

It’s important to note that at this stage, it’s just a “probe,” but it’s no secret that these actions are common throughout the financial services world. If you’re responsible for a 401(k) plan, be sure your advisor is a 3(38), not a 3(21), fiduciary.

From the National Institute of Pension Administrators: “A 3(21) investment fiduciary is a paid professional who provides investment recommendations to the plan sponsor/trustee. The plan sponsor/trustee retains ultimate decision-making authority for the investments and may accept or reject the recommendations. Both share the fiduciary responsibility. By properly appointing a monitoring an authorized 3(38) investment manager, a plan sponsor/trustee is relieved of all fiduciary responsibility for the investment decisions made by the investment professional.”

 

WE HAVE A LONG WAY TO GO

“The Securities and Exchange Commission’s enforcement strategy to protect retail investors resulted in the return of a record $1.07 billion to harmed investors in 2017, SEC officials said Tuesday.”

Financial Advisor.

 

“JPMORGAN TO REMOVE SOME FIDUCIARY RULE HANDCUFFS, OTHERS MAY FOLLOW”

“JPMorgan Chase & Co. is telling its brokers and private bankers to prepare for changes to its retirement account policies and products in preparation for the likely repeal of the Department of Labor’s fiduciary rule next week.

“The message, sent in emails from bank executives to advisors at J.P. Morgan Securities, Chase Wealth Management and Chase Private Bank on Wednesday, signals that Wall Street firms are poised to move quickly to reverse restrictions that they imposed to comply with the conflict-of-interest rule that took partial effect last June.”

 

ONE MORE TIME

As I continue to beat the fiduciary drum continually, what can I say? It’s REALLY important. So, below is an excerpt from an interview with Phyllis Borzi in my friend Christopher Carosa’s FiduciaryNews.

FN: Now to the present. It looks like the Conflict-of-Interest Rule has not survived its court challenge and that the current administration seeks to, in essence, rewrite it. Still, the impact of the Rule remains. The term “fiduciary” – in part thanks to your efforts, in part thanks to John Oliver – has been elevated in the minds of the investing public. What aspects of the Conflict-of-Interest Rule are now “baked into the cake” of the retirement industry and would be hard to reverse, formal regulation or not?

Borzi: It’s probably too early to tell. But one of the lasting legacies of the DOL conflict-of-interest rules is in the greater public understanding of the need to seek an advisor who is willing to agree in writing to be a fiduciary. Unfortunately, most consumers are not yet at the point where they can tell for sure whether someone who assures them they are acting in their best interest (and thus using that term as a marketing slogan) is genuinely accepting legal liability as a fiduciary. That’s why consumers must get that acknowledgement of fiduciary status in writing and not simply accept the representations of individuals purporting to be acting in their interest.”

That’s why getting the Committee for the Fiduciary Standard’s oath (http://www.thefiduciarystandard.org/wp-content/uploads/2015/02/fiduciaryoath_individual.pdf) signed by your advisor is so important.

You can read the full transcript of the FiduciaryNews interview here:

http://fiduciarynews.com/2018/05/exclusive-interview-phyllis-borzi-says-original-fiduciary-5-part-test-left-plan-sponsors-holding-the-bag/?utm_source=BenefitsPro&utm_medium=IsthePerfectFiduciaryRuleEvenPossible&utm_campaign=051718z&ct=t(EMAIL_CAMPAIGN_5_15_2018)

 

ROBO PLANNING

The hot story in the planning world is Robo-Advisors: i.e., planning based on computer algorithms. I just heard a quote from an MIT AgeLab presentation that captures my thoughts:

“My life is not an algorithm; my life is a story.”

 

PRINCIPLES

Of course, when discussing fiduciary concepts, it’s important to consider principles, so I thought I’d share the story of “A Man of Principles” from my friend Phil.

“In 1952, Armon M. Sweat, Jr., a member of the Texas House of
Representatives, was asked about his position on whiskey. What follows
is his exact answer (taken from the Political Archives of Texas):

“‘If you mean whiskey, the devil’s brew, the poison scourge, the bloody
monster that defiles innocence, dethrones reason, destroys the home,
creates misery and poverty, yea, literally takes the bread from the
mouths of little children; if you mean that evil drink that topples
Christian men and women from the pinnacles of righteous and gracious
living into the bottomless pit of degradation, shame, despair,
helplessness, and hopelessness, then, my friend, I am opposed to it
with every fiber of my being.’

“‘However, if by whiskey you mean the lubricant of conversation, the
philosophic juice, the elixir of life, the liquid that is consumed
when good fellows get together, that puts a song in their hearts and
the warm glow of contentment in their eyes; if you mean Christmas
cheer, the stimulating sip that puts a little spring in the step of an
elderly gentleman on a frosty morning; if you mean that drink that
enables man to magnify his joy, and to forget life’s great tragedies
and heartbreaks and sorrow; if you mean that drink the sale of which
pours into Texas treasuries untold millions of dollars each year, that
provides tender care for our little crippled children, our blind, our
deaf, our dumb, our pitifully aged and infirm, to build the finest
highways, hospitals, universities, and community colleges in this
nation, then my friend, I am absolutely, unequivocally in favor of it.’

“‘This is my position, and as always, I refuse to compromise on matters
of principle.’”

 

DELAY MAY BE GOOD

If you’ve not yet planned your retirement, the two major contributors to increasing the probability of financial success are delaying retirement and social security. If you have questions, check with us. That’s our forte.

06-2018_How Americans Claim.png

Source: Wealthmanagement.com

 

A GOOD START

https://www.bloomberg.com/news/articles/2018-05-24/carney-and-dudley-urge-banks-to-prepare-for-move-away-from-libor  

“10 Universities with the most billionaire alumni”—a useless but interesting tidbit. Here’s the list:

SCHOOL                               # of Billionaire Alumni

University of Michigan                         26

University of Chicago                           29

University of Southern California       29

Yale                                                         31

Cornell                                                    35

MIT                                                           38

Columbia                                                53

University of Pennsylvania                 64

Stanford                                                  74

Harvard                                                188

 

 

OVERCONFIDENCE

“The overconfidence effect is a well-established biased in which a person’s subjective confidence in his or her judgments is reliably greater than the objective accuracy of those judgments, especially when confidence is relatively high.” ~Wikipedia

Overconfidence (e.g., Lake Woebegone, where all the children are above average) is a classic behavioral heuristic and one that often leads to poor investment decisions.

“There’s a Big U.S. Gender Gap in Retirement Investing Confidence Wealth Management

“Sixty percent of college-educated, not-yet-retired men say they’re comfortable managing their investments, compared to 35 percent of women.”

It’s that recognition of reality that makes women generally better investors then men.

 

OLD MEN

Given my current age, I kind of liked this:

One evening the old farmer decided to go down to the pond, as he hadn’t been there for a while.
He grabbed a twenty-liter bucket to bring back some fruit while he was there.

As he neared the pond, he heard voices shouting and laughing with glee. As he came closer, he saw it was a bunch of young women skinny-dipping in his pond. He made the women aware of his presence and they all went to the deep end. One of the women shouted to him, ‘We’re not coming out until you leave!’

The old man frowned, ‘I didn’t come down here to watch you ladies swim naked or make you get out of the pond naked.’

Holding the bucket up he said, ‘I’m here to feed the crocodile….’

Some old men can still think fast.

 

Hope you enjoyed this issue, and I look forward to “seeing you” again in a few months.

 

_HRE SIGNATURE

Harold Evensky

Chairman

Evensky & Katz / Foldes Financial Wealth Management

 

Check out the link below for Harold’s previous NewsLetter:

NewsLetter Vol. 11, No. 2 – April 2018

 

 

Buyer Beware: What Do You Get From Your Advisor?

Brett Horowitz

Brett Horowitz, CFP®, AIF® Principal, Wealth Manager

Although I have never been to Thailand, I have read that you cannot go more than a few feet in a typical town market without someone yelling “same same.” It is the vendor’s way of telling you that what they offer is the same as everyone else, thus encouraging you to end yourcomparison shopping and buy from them.

Recently I spoke with a gentleman considering whether to become a client of our wealth management firm, and he asked matter-of-factly how we are different than all the other hundreds of investment firms in the area. It seems that most of the public thinks of all financial firms as “same same,” yet they differ widely. Here are a few of the things that may distinguish one financial advisory firm from the next.

You Don’t Know What You Don’t Know

I cannot tell you the number of prospective clients who sit down to meet with us and have no idea how to answer the following three major questions.

  1. What return do you need in order to meet your personal goals?

If your portfolio is making 20% per year but it is loaded with risky assets that are keeping you up at night and you only need to earn 5% per year to live your current lifestyle, what is the point of taking the extra risk? Is your plan to make as much money as possible or to have the ideal lifestyle with the least amount of risk? If your goals change, shouldn’t the asset allocation (and desired return) be altered as well?

  1. Is your portfolio performing suitably to help you meet your goals?

If you are not receiving performance reports every so often, how do you know if the current advisor is doing a good job in helping you meet your goals? What does this performance tell you about the likelihood that you will meet your goals? Do you have a plan in place for tracking your goals?

  1. How does your current advisor get paid, and what is the total cost of your relationship?

If you cannot determine how much your advisor is being paid, isn’t it vital that you ask, to make sure the fees are reasonable? The US Department of Labor 401(k) fee website (http://www.dol.gov/ebsa/publications/401k_employee.html) compared two investors who started at age 35 with a 401(k) balance of $25,000 and never contributed again. Both investors earned 7% per year before fees, but one paid a 0.5% annual fee and one paid a 1.5% annual fee for the investments. The ending value after 35 years would have been $227,000 for the investor who paid a 0.5% annual fee versus $163,000 for the investor who paid a 1.50% annual fee. The 1 percentage point difference in fees reduced the account balance at retirement by 28%! An advisor cannot control the market, but they do have some control over taxes and expenses.

Out of Sight, Out of Mind

We recognize that you have a lot going on and you do not always get around to completing your tasks. Perhaps you bought a life insurance policy years ago and have never revisited that decision to determine whether it still makes sense. Perhaps you never made a change to your estate documents or IRA beneficiaries after a marriage or divorce. Or perhaps you have not revisited your 401(k) allocation since the first time you made the initial selection.

Is this something that your advisor addresses? Does your advisor even know or want to know about your social security benefits, life insurance, or estate documents? Or have you simply been reduced, in your advisor’s eyes, to “a number?”

There are also certain age milestones that should prompt you to confer with your financial expert to ensure that decisions are made responsibly, such as:

  1. A few months before age 62, we suggest you sit down and go through a social security analysis to determine the optimal age for beginning to collect benefits.
  2. A few months before age 65, we recommend you research and apply for Medicare (as delaying will likely lead to penalties, based on the current Medicare rules).
  3. At age 70½ (or earlier for inherited IRAs) and each year thereafter, you need to decide the best approach in taking Required Minimum Distributions from your IRA.

Tax Brackets

Knowing your tax bracket and working with your accountant can help you achieve the highest after-tax return on your bonds.

Tax Sheltering

Placing certain assets to take advantage of IRAs, where you do not pay taxes on income and gains, can help boost your overall return.

Capital Gain Distributions and Tax Losses

If you are not watching out for mutual fund capital gain distributions at the end of the year, you are likely to get hit with a large tax bill. In addition, one of the ways to lower your tax bill is to take advantage of losses in your account once they take place.

Rebalancing

It is important to keep your asset allocation consistent with your goals by rebalancing between stocks and bonds. This may also lead to higher risk-adjusted portfolio returns over time.

The Devil Is in the Details

At the end of the day, it will benefit you to find a firm that puts a lot of time, effort, and thought into these details. The plan that is put in place on Day 1 should not be “buy and hold” (often described as “set it and forget it”), but rather “buy and manage,” with changes based on research, long-term projections, and unique circumstances. I can assure you that all financial firms are not “same same.” It is incumbent upon you as the buyer to ask the right questions before choosing the firm that’s best for you.

 

Feel free to contact Brett Horowitz with any questions by phone 305.448.8882 ext. 216 or email: BHorowitz@EK-FF.com

For more information on financial planning visit our website at www.EK-FF.com.

Irrational Investing: You’re Not the only One Who’s Nuts

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Good news! You’re not irrational, you’re human.

I just came from one of the most exciting lectures I’ve ever attended. That shouldn’t be a big surprise, because Danny Kahneman, the speaker, is a Nobel Laureate. Professor Kahneman received the Nobel Prize in economics for what has become known as Behavioral Economics. Basically, his studies brought to light the difference between the rational investor—someone who always rationally makes investment decisions in his or her best financial interest—and real people like you and me. We live in a complex world and that’s certainly true of investing.

To manage the complexities of life, we often use something called heuristics to help us efficiently make decisions in spite of complexities. Think of heuristics as mental shortcuts. Most of the time, these shortcuts work out well; unfortunately, they sometimes result in our making decisions that, when looked at objectively, seem irrational. Each of us also comes complete with a bunch of cognitive biases that lead us to create our own reality, which may not be consistent with the real world. Let me share some examples from Professor Kahneman’s lecture.

Built-In Bias

Just after being introduced, Kahneman asked everyone to look at the audience in the room (there were about one hundred financial planners in attendance). After a few seconds of our rubbernecking, he asked us to raise our hands if we believed that the quality of our planning advice is above the average represented by the other planners in the room. Well, surprise, surprise, we were all above average—just like Garrison Keeler’s Lake Woebegone, where all of the kids are above average.

The problem, of course, is that’s not rational. Half of the audience must have been below average. Professor Kahneman explained that as humans we have an innate overconfidence bias that leads us to have confidence in our judgment—a confidence greater than objective accuracy would suggest. How, he asked, might that get us into trouble when investing? Lots of ways.

We are often overconfident in our ability to pick investments or in the abilities of the money manager we love or the ability of financial media mavens to guide us to the best investments.

Kahneman told the audience about the research of Terry Odean and Brad Barber, University of California professors, who studied the trading results of almost seventy thousand households during a six-year period, accounting for about two million buys and sales. They found that investors who traded the most—those with the most confidence and the best ideas—earned an annual return 11.4 percent. The problem was that the market return was 17.9 percent. The professors’ conclusion? Overconfidence in your good idea may be hazardous to your wealth.

The best protection we have against overconfidence is to step back and apply a strong dose of humility and skepticism before we act.

Next, Kahneman put up a slide that looked something like this:

HHTHTTHTTH

TTTTTTTTTTT

He explained that it represented the results of tossing two coins ten times. He and asked which one we thought was the fair coin and which one was bogus. As sophisticated practitioners we knew instantly that the second coin was bogus: Ten tails in a row? Give me a break. In hindsight, I’m embarrassed to say we fell for the heuristic called representativeness. You know the one: if it walks like a duck and quacks like a duck, it must be a duck.

The problem is that the randomness heuristic led us astray. Had we stopped to think it through, we would have realized that getting ten tails in a row is just as random as the first toss series; the problem was it didn’t look random. Our brains, knowing a coin toss is random, took a shortcut and concluded that toss one looked random so it was authentic; toss two was obviously not random, so it must be bogus.

How can that get us in investment trouble? Ever consider investing in a fund with a Morningstar rating of less than four or five stars? Probably not; bad mistake. Use the star information as one element in your selection process, but the Morningstar ratings are not guarantees of future superior performance. You need to do a lot more research than simply defaulting to the stars as the sole selection criterion. Doing so puts you at serious risk of picking a loser and rejecting a superior investment.

Muddled Math

Professor Kahneman also introduced us to the work of Professor Dick Thaler on mental accounting. It seems that in addition to occasionally being misled by our heuristics and biases, we also stumble over what would seem to be simple math. I know this from personal experience with my clients. I remember having a visit after the tech bust from a retired surgeon, who came into my office almost in tears.

“Harold, I don’t understand. Last year I made 80 percent on my investments and this year I lost only 60 percent, yet my statement says I’m way under water!”

My client’s mental accounting told him that a gain of 80 percent less a loss of 60 percent should leave him 20 percent ahead. The reality was that his original $1,000,000 investment grew 80 percent to $1,800,000, so his 60 percent loss was on $1,800,000, for a loss of $1,080,000. The end result? A balance of $1,800,000 less $1,080,000 left him with only $720,000. It was a painful way to learn that big losses take much bigger gains to recover.

Consider, for example, a volatile investment of $100,000 that loses 50 percent the first year, leaving you with $50,000. Suppose the next year you make 50 percent, so your average return for the two years is 0 percent. Did you break even? Nope. Your $50,000 grew 50 percent to $75,000, leaving you $25,000 under water. Remember that the next time you want to risk funds in a high flyer.

Framing

Kahneman presented much more on the problems investors face because we’re human and not necessarily rational. Then he provided us with the hope that we might help our clients (and ourselves) be better investors through the power of framing.

Framing has to do with the idea that the way people behave depends on how questions are framed. Suppose I offered you two brands of chocolate bars. One was 90 percent fat free and the other contained 10 percent fat. I’ll bet I know which one you’d chose. Have you looked for prunes lately? You may have trouble finding them unless you look for dried plums. The Sunkist marketing department understands framing.

How can you use this technique to be a better investor? Here are a few ideas:

The next time your neighbor gives you a hot tip, instead of focusing on all the good things that might happen, reframe your focus and ask yourself what might go wrong. My partner, Deena, once helped a client make an important decision by pointing out that if she made the significant investment she was considering and it succeeded, she could increase her standard of living by 10 percent. However, if it didn’t pan out, she would have to work four years beyond her planned retirement date to make up for the loss. She passed on the opportunity. She may not have made a killing and missed out on taking a world cruise, but she was able to retire just when she wanted to.

Reframe your performance-evaluation horizon. Investing for retirement is investing for the rest of your life, so when evaluating your investment’s performance, keep your eye on the long-term, not the daily market gyrations. That means skip the comparisons to last month, last quarter, or year-to-date performance and look at performance over years and market cycles. Also, reframe your benchmark. You might compare your large-cap core manager’s performance to the S&P 500 but not to your portfolio. Instead, consider using a real-return benchmark—compare your portfolio return to inflation. After all, that’s what your plan should be based on.

Are you holding a position in a stock at a big paper loss, but you’re reluctant to sell because then it would be a real loss? If I asked you whether you’d buy that stock today, you’d tell me I’m nuts. You wouldn’t touch that dog with a ten-foot pole! Let’s reframe your decision. Since the cost of trading today is negligible, you could sell your investment tomorrow and have the cash proceeds in your hand almost immediately. That means by holding onto your stock, you’ve made the decision to buy it again!

The moral? We’re human, not rational, and recognizing reality and learning about some of the problems our biases and heuristics get us into and using framing to help manage these risks will make us far better investors.

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.

Life Timing: What Did Lynn Hopewell Teach Us?

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Harold Evensky CFP® , AIF® Chairman

You’re not average, so don’t plan the quality of the rest of your life based on averages.

I was sitting front row center in a big conference room at our national planning symposium; I’d been looking forward to this talk for a while. The speaker, financial planner Lynn Hopewell, was a good friend and one of the most thoughtful practitioners I knew. My partner, Deena, and I had been responsible for planning this program and we invited Hopewell to speak because he told us he had a few major concepts he wanted to share with his peers. Here’s what he shared that day:

And End Not So Near

Welcome, everyone. I have few stories to tell that I hope will be a wake-up call for the financial planning profession. The first is about my planning for an engineering client, Ms. Jane. She is sixty-three, a very successful and accomplished civil engineer, and president of a major structural engineering firm. She hired me to work with her in developing a comprehensive retirement plan. Well, since I too am an old engineer, I know how they think—detail, detail! So I worked very hard to provide Ms. Jane a plan that would resonate with her. Finally, I was sitting down with her, ready to blow her socks off, and after going through my complete analysis, I thought I had.

“Mr. Hopewell,” she said, “I’m very impressed with the thoroughness and depth of your plan. I have only one small question.”

Well, needless to say, I was beaming at the compliment and looked forward to answering her “one small question.”

She went on, “I understand that selecting a mortality age—the age the plan assumes I die and will no longer need income—is a critical element in the planning process.

“Obviously,” I said, “if we arbitrarily use a very old age, such as one hundred, we’re likely to have to tell you to reduce your spending so that your nest egg will last to that age. Of course, if you die before one hundred, you’ll be leaving a lot of money on the table that you could have enjoyed spending while you were alive. If we assume a much younger age and you’re long-lived, the consequences could be even worse because you’d run out of money before you ran out of time. As a consequence, we work hard to select a reasonable planning age.”

“That makes sense to me,” she said, “and I understand that the age you selected for the plan is based on the projected age of my death from a national mortality table.”

“Correct! And not just any mortality table. We spent quite a bit of time consulting with actuaries to determine which table reflected the most current actuarial data.”

“I understood that. What I’m still a little confused about is the meaning of that age. As I understand it, if the table says my mortality age is eighty-eight, that means half the people will have died by eighty-eight and half will still be alive.”

“Correct.”

“Well, doesn’t that mean if I plan to age eighty-eight, I’ll have a 50 percent chance of outliving my plan?”

That question hit me like a Mack truck. Ms. Jane was correct. Even worse, in thinking about it, I realized that anyone with the resources to need the advice of a financial planner was likely to have had better health care and nutrition than the average of the universe of individuals making up the mortality table. That means Ms. Jane had better than a 50 percent chance of outliving my plan. This was a major wake-up call for me and should be for any practitioner relying on a traditional mortality table. Lynn said, “After acknowledging Ms. Jane’s point and scheduling a follow-up visit to give me time to consider the ramifications of her simple question, I hunkered down in my office to consider how I might resolve this problem.”

So, I went back to my own office and did the same. After additional conversations with my actuary friends, I concluded that a reasonable solution would be to use more customized actuarial tables—those that allowed me to factor in whether the client is a smoker, nonsmoker, her current health, and whether the lifespan of her immediate family is long, average, or short. Then, using the appropriate customized table, we would select an age that represented only a 30 percent chance of her outliving the age indicated in the table.

Here’s an example that shows how big a range the mortality age can be depending on these factors:

Life Timing Chapter Image file - mortality age range

Obviously, there is no guarantee that the age selected will coincide with the client’s mortality; however, following this process is likely to provide a much more realistic estimate.

Well, Lynn was right. That was a major wake-up call, because I’d been using a standard actuarial table and mortality age for my planning assumption. That was about to change.

Even if Lynn had stopped there, this information would have justified all of the time and cost of attending the three-day symposium, but there was more. Lynn’s next story was about the ah-ha moment he had one day when developing a college funding recommendation.

College Calculations

Not long ago I was preparing a simple college funding recommendation for a client. You know how that goes. It’s a simple time-value calculation that requires input on how many years until college, how many years of college the client wants to pay for, the annual cost, and the college tuition inflation rate. My input looks something like this:

Life Timing Chapter Image file - college calculations

A financial calculation would result in a recommendation that the client set aside about $145,000 to fund this expense. When I presented this to the client, he asked how confident I was about my number. When I thought about his question, I realized the answer was not very. My estimate was what we refer to as a “point estimate.” This means that unless every assumption I made was exactly right, my recommendation would either over- or underfund the college tuition bill.

As a former engineer, I remembered that when trying to estimate the probability of uncertain events, we used a technique known as a “Monte Carlo simulation.” Developed at Los Alamos National Laboratory during the Second World War for the design of nuclear weapons, Monte Carlo is really a simple concept. Rather than making a single guess regarding a possible outcome, we make guesses about the likely ranges of the outcomes. We then simulate thousands of possible futures with different combinations of those possible outcomes.

Let’s expand the table I showed a minute ago to more realistically reflect the uncertainty in our estimates.

What we know with some certainty:

  • Years to college 4
  • What we’re making an educated guess about
  • Tuition somewhere between
  • Annual cost $30,000 to $50,000
  • College costs inflation 5 to 7 percent
  • Investment return 6 to 10 percent

With these ranges, there are many thousands of possible outcomes, for example:

Life Timing Chapter Image file - college calculations no. 2

The Monte Carlo simulation calculates for each of these examples how much money that investors would need to set aside today if they want to fully fund four years of education. If the analysis ran a thousand examples, the results, listed in order of decreasing savings, might look something like this:

Life Timing Chapter Image file - college calculations no. 3

In this case, the question was how much should you put away now if you want an 80 percent probability of meeting your goal? The answer would be $167,000, because 80 percent (800/1,000) of the simulations would have succeeded with that amount of savings or less.

Well, this was another major wake-up call for me. In hindsight, it seemed obvious that a point estimate was inappropriate and that a Monte Carlo simulation could provide a more meaningful answer. In wrapping up his discussion, Lynn reminded us that expanding the input matrix meant making more guesses. Despite the mathematical rigor of a Monte Carlo simulation, adding more guesses does not justify adding two more decimal places to the answer. His point was that we should use Monte Carlo as an educational tool and not suggest it is a mathematically accurate answer.

The Takeaways

When planning retirement, don’t assume average mortality—you’re not average.

When attempting to quantify an uncertain future, don’t default to a single estimate. Use a Monte Carlo simulation to develop an understanding of the likelihood of possible outcomes, but don’t take the results as gospel.

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.

Market Timing for Fun and Someone Else’s Profit – Don’t Do It

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Harold Evensky CFP® , AIF® Chairman

A broker stands looking out of the window of his sumptuous office down at the marina thirty stories below with his client at his side. “See those yachts down there?” says the broker to his client. “The one on the left is mine, the one in the middle is my partner’s, and the one on the right is our office manager’s.”

“Where are your clients’ yachts?”

David Samuel: Hello, Harold. It’s David Samuel again. I know you have that AAII meeting coming up next week, but this can’t wait. My brother said he just got a call from his broker, who told him to bail out of the market at least for the next few months because the firm’s technicians said they see a major correction coming within weeks. I assume you’ve probably seen the same and agree, but I just wanted to double-check.

Harold Evensky: David, I just want to be sure I have this straight. You’re saying the broker is confident enough in his crystal ball to say that everyone should run to cash?

DS: You got it.

HE: Hum, I know he works for a big wire house; I wonder if that firm has moved all its money to cash? I don’t think so, because a move of that magnitude would have made the papers, and none of the managers we monitor have made significant liquidations recently. It somewhat makes you wonder what your brother’s broker knows that no one else does.

DS: Well, I understand that he’s been in the business for decades and he’s a senior VP at the firm, so he must know something.

HE: I’m sure he knows how to sell, because the impressive title comes with generating big commissions for the firm. There are many quality SVPs who earn their commissions from long-term quality advice.

Unfortunately, there are some who succeed by focusing on generating commissions independent of the client’s needs. That’s the basis for the old joke: “How do you make $1,000,000 in the market? Start with $2,000,000.” In deciding whether market-timing advice is something you want to follow, remember, when market timing, a broker earns a commission for the sale of each and every one of the positions their clients sell and another commission when they repurchase those positions. Here are a few things you might want to consider:

Can you name the top ten musicians of all time? The top ten baseball players? The top ten presidents? Of course, you can. We might argue about the list but most people can make up a list.

Now, tell me the top ten market timers of all time? Can’t even name one, can you? Your brother’s broker may be the first, but do you really want to bet on that?

What do market reality and statistics tell us? There are innumerable problems with market timing, including transaction and tax drag. But there are two major problems. You have to make two correct calls: 1) when to get out and 2) when to get back in. Factoring in transactions and taxes, research indicates you need to be correct about 70 percent of the time.

Markets don’t just drop precipitously, but they recover quickly, so waiting for confirmation of the end of a bear market usually means missing a significant part of the recovery. That makes for a tough hurdle.

For example: In a study covering the period 1987–2007, research found that the annualized return for someone invested for 5,296 days was 11.5 percent. Unfortunately, if you missed the ten best days (less than 2/10 of 1 percent), your return would have dropped to 8 percent,

Why would you be likely to miss those best days? Because those best days occurred within two weeks of a worst day 70 percent of the time. And they occurred within six months of a best day 100 percent of the time!

In an industry study in 2008, researchers found that although the annualized market return for the prior twenty years was 11.6 percent, the average stock fund investor earned a paltry 4.5 percent. It turned out that for most investors, market timing was mighty expensive. And, David, unless you’ve recently obtained a working crystal ball, it’s likely to also prove costly for you.

To make money in the market, you have to be in the market through thick and thin. In fact, if you remember our discussion on rebalancing, you’ll remember that bear markets are great buying opportunities for long-term investors. So, my advice is to stop listening to so-called experts spouting nonsense and go back to making money in your business.

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.

The Three Ps of Investing: Philosophy, Process and People

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Harold Evensky CFP® , AIF® Chairman

In Real Estate, it’s location, location, location. In investing, it’s philosophy, process, and people. Most investors look at past performance when evaluating a manager. That’s a rearview mirror approach. If you’re driving forward, keeping your eyes on the rearview mirror is dangerous. Looking backward is equally dangerous for investors. You can’t buy past performance, so don’t invest based just on looking backward. To avoid that mistake, here’s a simple process that works for any investment manager you might hire—mutual funds, separate accounts, or alternatives.

Philosophy

When you are evaluating money managers, find out what their  investment philosophy is. What is their unique view of the investment world? How is it different from those of their competitors? Is it credible that a manager can overcome the drag of expenses and taxes and provide risk-adjusted returns better than other alternatives? Basically, you’re looking for a good and credible story. How might you find it? Read the manager’s letters, prospectus and marketing material; look for something more than “we buy low and sell high.”

Process

A good story is nice, but how does the manager make it work in the real world? Answers to this question may be harder to pin down, but remember, it’s your hard-earned money at risk.

People

Philosophy and process are essential, but ultimately it’s people who make the difference. People will be making investment decisions about your money.

Don Phillips is a managing director and board member of Morningstar. He is a good friend of mine and one of the most-respected professionals in finance. He has some simple advice regarding people: “You want people with passion for the job of money manager.”

Did the managers you are considering invent the firm’s philosophy and process or have they at least been around long enough to have developed a passion for it? If not, even if the investment passes the test of the first two Ps, move on to your next investment alternative.

Testing the Ps

In this conversation with a gentleman I will call Happy Promoter, I put the three Ps to the test.

Happy Promoter (HP): Good morning, Mr. Evensky. My name is Happy Promoter. I’m familiar with your firm and I appreciate your taking the time to see me this morning.

Harold Evensky (HE): Mr. Promoter, it’s my pleasure. I understand you represent Sophisticated Hedge Fund Strategies and you have a new offering available. My friend Mr. Jones suggested I meet with you; I’m always interested in learning about new potential investments for our clients. Please tell me about your program.

HP: It’s a very sophisticated long-short strategy based on an evaluation of a myriad of market dynamics that guide our trading algorithms to ensure that we provide consistent alpha in all markets. Because we can profit in both rising and falling markets, we can mitigate downside risk, and by the judicious use of margin, we can provide returns that significantly exceed the S&P 500. We’ve backtested our strategy for the last ten years and the results substantiate the success of our strategy.

Well, at this point, I’m thinking I need to know a lot more before I take Mr. Promoter’s pitch seriously. Backtesting is a common but questionable way of evaluating a new investment strategy. It mathematically simulates how the strategy would have fared if it had existed in the past. One obvious problem is that unless the strategy is 100 percent automatic—no active decisions or modifications are made by the manager along the way—there is no way of knowing if the simulation is a fair representation of how the strategy will be implemented in the future. An even bigger problem is that there’s no reason to believe that future markets will mirror the historical environment used for the backtesting. Bottom line: because it theoretically would have worked in the past is no reason to believe it will succeed in the future. The financial world is full of failed investment strategies that had wonderful backtest results.

So, I decide I need to take Mr. Promoter through the process I call the “three Ps.”

HE: Mr. Promoter, what you’ve said sounds good, but I need more meat to the story. Can you tell me what your basic investment philosophy is? What do you see in the financial markets that the thousands of other professional investment managers don’t? After all, the market is a zero-sum game. For everyone who makes a buck, there has to be someone else losing one.

HP: Harold—may I call you Harold?

HE: Certainly.

HP: We believe that our sophisticated algorithms will provide the edge.

HE: I understand that, but can you be more specific?

HP: No, I’m afraid that our process is quite confidential and proprietary.

HE: Well then, can you at least give me some details about the procedures you use to implement your sophisticated process?

HP: Good lord, no! Our system is a black box and all the details are carefully guarded secrets. It’s the “secret sauce” that enables us to provide the low-volatility, high returns your clients are seeking.

HE: I see. Then I guess I’d have to look to the experience and quality of the intellectual capital behind your strategy. Will you tell me who developed your sophisticated strategy and what experience they have in implementing it?

HP: Harold, I’m the lead creator of the strategy and I’m supported by a two-man team of MBAs. My educational background is a master’s in History; however, I’ve been fascinated by the market for decades and I spent the last few years studying market movements. I finished developing my strategy just last month. I know that as a sophisticated practitioner you’re aware that alternative managers with well-established track records work only with large institutional clients and have no interest in dealing in the retail market, so a new manager such as I can provide your clients with the best alternative.

Mr. Promoter seemed like a nice guy, but he miserably failed the three Ps, so I thanked him for his time. My only thought after this brief meeting was, “What a waste of time; wait until I get hold of Jones!”

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.

Pascal’s Wager: The 0.1 Percent Risk

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Harold Evensky CFP® , AIF® Chairman

Playing Russian roulette with a thousand-chamber gun might not seem so risky, until you consider the consequence of that 0.1 percent risk.

I’ve been working with Linda, my client, for the last hour entering data into MoneyGuide, our planning program. We’re now discussing the plan’s time horizon—how long her nest egg needs to last so she can keep groceries on the table.

“Linda,” I asked her, “one of the major guesses we need to make is how long you will need money.” (That’s my tactful way of asking what age she thinks she’ll die.)

Years ago, we used a standard actuarial table to estimate how long someone might live. Unfortunately, as a thoughtful friend pointed out, that means you’d have a 50 percent chance of outliving your nest egg, so today we use an age that, based on your current health, your family’s health history, and if you are or are not a smoker, represents a 30 percent chance of your reaching that age. (Chapter 15, Life Timing. What Lynn Hopewell Teach Us?”)

“Linda,” I continued, “based on your current health and your family health history, we should consider using age ninety-three for planning.”

“Harold, you must be kidding. I’ll never make it to ninety-three! Let’s use eighty-five.”

“Sounds like a nice number. How did you decide on eighty-five?”

“Well, actually no particular calculation. It just seems like a reasonable age to use and I want to be reasonable in my planning.”

“Tell me, Linda, are you familiar with Pascal’s wager?”

“Pascal’s what?”

“Pascal’s wager is a philosophical construct devised by the seventeenth-century mathematician, Blaise Pascal. Here’s my version: If you knew for certain there was only a 10 percent chance that God exists, you would have two ways to live your life: You could conclude the probability of God’s existence was so low you’d elect to ignore morals and ethics and live a totally outrageous life. If, when you died, it turned out that there really is no God, hence no consequences for your immoral life, you lucked out. Of course, if, when you died, you discovered God was not a myth and you found yourself chest high in fire and brimstone, where you’d be roasting for eternity, you might not be very pleased with your choice.

“On the other hand, suppose you decided that, even with the low odds, you would live a moral and ethical life. If, when you died, you discovered there is no God, you would still have lived a comfortable life. If there is a God and you’re rewarded in heaven for your exemplary life, you will have won the eternal lottery.”

“So, what’s this got to do with retirement planning?”

The answer is everything! All too often in planning, we get caught up with the power of probability. Live until ninety-three? Possible, but not likely, so I want to make plans based on living until age eighty-five. Based on probabilities, that’s not an unreasonable response. However, as Pascal taught us, that conclusion is missing an important half of the equation, namely, the consequences. Often the terrible negative consequence of coming out on the short side of the probability overwhelms the low probability.

Let’s suppose Linda does live only until age eighty-five. That means she can spend more between now and then because her money doesn’t have to last for another seven years. Good outcome.

Suppose she lives well beyond eighty-five. If we use eighty-five, as a planning age, that means by eighty-six, if her plan works out as expected, her nest egg will be approaching $0! The consequences of living another seven years supported solely by her Social Security income? That means reducing her standard of living by about two-thirds, which may not be on a par with fire and brimstone forever but it’s high on the quality-of-life disaster scale. The moral? Don’t just consider probabilities when planning—consider the consequences.

“Still want to plan only to eighty-five, Linda?”

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.