Bonds that Go Boom!

Let’s talk about bonds! You scarcely hear or read much about bonds. The stock market, especially in recent days with the Brexit, grabs the headlines all the time. Bonds just aren’t glamorous, but they’re an important part of your retirement portfolio. They provide safety, stability and steady interest payments—three things that will help sustain your lifestyle during retirement. One thing, though, that most bonds don’t offer is inflation protection. And, as you well know, the cost of living tends to rise almost yearly. But there is one kind of bond that adjusts for inflation: Treasury Inflation-Protected Securities or more commonly referred to as “TIPS.”

You see, our economy is managed with mild inflation as part of its strategy, with 3% being the target rate. Think about what a new car, your weekly grocery bill and cable TV cost 20 years ago. I guarantee you that just about everything costs more today. A $50 bag of groceries, for instance, now costs $77 because of inflation. TIPS are unique because they are guaranteed to keep pace with inflation as defined by the Consumer Price Index (CPI), offering more security during your retirement.

To compensate for issue costs, TIPS have two components: the first is the coupon (guaranteed interest rate of the bond) and the second is the inflation premium. To illustrate, if a $1,000 regular government bond was issued with a 3% interest rate, the bondholder will receive a $30 interest payment. However, if there was a 10% rise in the CPI, that bond would have no inflation protection, but TIPS would compensate for the increased cost of living. Now let’s compare the previous bond with a TIPS bond issued with a lower interest rate of 2% and 10% inflation. The TIPS bond holder is given the interest plus a 10% inflation premium which is added to the face value ($1,000) of the bond. So the bond is now valued at $1,100, and the bondholder is paid 2% of that amount or $22 of interest earnings. In this case, the TIPS bondholder out earns the regular bondholder.

Just like there are no perfect people, there are certainly no perfect investments, and this applies to TIPS as well. Some disadvantages are:

• TIPS are issued at lower interest rates than comparable bonds.
• The inflation boost when added to the face value of the bond is taxable (unless you hold TIPS in a tax-favored account).
• If the Fed raises interest rates, but there is no inflation, TIPS will not go up in value.

If you’re diversified, though, TIPS can be an attractive part of your retirement portfolio. In designing a portfolio, you want to have a mix of assets that can move inversely under different market conditions; bonds and stocks work in concert with one another in your portfolio. If you don’t include enough risk (think stocks), your investments may not earn an adequate return to meet your goal. However, with too much risk (think not holding enough bonds), the money may not be there when you need it.

Having the right mix of stocks and bonds can reduce your portfolio risk, your potential losses, and–with TIPS–offer you inflation protection. Sure, bonds aren’t glamorous, but they can play a significant role in achieving your financial goals and a successful retirement.

“I Wish You Were My Financial Advisor”

My clients and other people may think that I spend my work day watching the stock market and making trades. I actually do neither. My job is to help my clients achieve their personal and financial goals, not to outguess the markets. After all, I’m a financial advisor, not an astrologer. Besides, neither daily stock market analysis nor trading add any value to my clients’ accounts. Sure, I may occasionally tweak my clients’ accounts, but more often than not, I spend my days caught up in the minute details of my clients’ accounts. It’s certainly not the most glamorous part of my job, but it’s a very important one.

Let me give you an example. A recently widowed client came in for an appointment several months after her husband’s death so that we could review her financial security and change the beneficiaries of her accounts. We first addressed her financial security going forward, and I assured her she had enough money to last her the rest of her life. By the way, that’s my principal role in my clients’ lives—making sure they don’t outlive their money and can enjoy a worry-free retirement. Anyway, this widow had four different accounts, all of which her deceased husband was either the joint owner or the primary beneficiary. So the next task was changing the beneficiaries and ownership of these accounts. We wanted to make sure there would be a smooth transition of funds in case something happened to her.

What we did was a simple procedure that any good financial advisor would do. But a week later, we also performed a standard operating procedure which my firm employs. That is, confirming that the brokerage company we use entered all my client’s information correctly. Sure enough, we found several mistakes. For instance, we noticed that of one of the beneficiaries’ last name was spelled incorrectly and saw that another account’s beneficiaries hadn’t even been changed.

So I called the brokerage firm and told the service representative that we had discovered these two mistakes. She immediately corrected the two errors, and asked me if there was anything else I needed. I said I was good to go, and she said, “I really appreciate your attention to detail. I wish you were my financial advisor.” I thanked her for the compliment and then went about my mundane day, ignoring the gyrations of the stock market.

(This article was originally published on Paladin Registry: http://blog.paladinregistry.com/advisors-2/i-wish-you-were-my-financial-advisor/)

Sir Isaac Newton: The Emotional Investor

Sir Isaac Newton, as everyone knows, was a genius. His endless curiosity led him to tackle problems as minuscule as rug-peeing cats and as grandiose as humanity’s ultimate purpose in the cosmos. Naturally, we might think that a person this smart would also be a genius investor, someone who’s able to outguess the markets and become a multimillionaire with his investment acumen.

But Sir Isaac Newton was no outlier when it came to investing. He started out well enough by investing some of his money into the South Sea Company, a hot stock of the seventeenth century, and sold the stock for a handsome profit. But the stock continued to rise after he sold it. Initially, Newton resisted reinvesting his hard earned money back into the stock, but it continued to rise even higher, and that’s when the trouble began. As the stock price kept going up, Newton started to experience the all too human emotions of envy, regret and greed which often get investors into big trouble.

As the stock climbed, he plowed all his money back into the South Sea Company and shortly afterwards, the stock crashed, and he lost a fortune. By some accounts, he lost the equivalent of almost $3 million, adjusted for today’s dollars. Reflecting on his loss, Newton was quoted as saying, “I can calculate the motion of heavenly bodies but not the madness of people.” He blamed others instead of himself for his stock investing folly. But he simply let his emotions get away from him. He moved from being an investor to a speculator and a gambler. He gambled away a fortune, and as the saying goes: the house always wins.

If Newton had lived in modern times, he may have learned from social scientists that human beings are not wired to invest in the stock market. In times of stress, our primitive brain, which is responsible for survival behaviors such as flight or fight, kicks in. The primitive brain really starts to go haywire when we are losing money, or we feel like we are in danger. It for sure comes in handy if we smell smoke in our house, but it can cloud our judgment when it comes to our investment decisions.

Humans also have another behavioral bias called the “recency” effect. That is, we tend to apply a higher probability to things that have happened recently. Think back to earlier this year when the Dow Jones Industrial Average dropped over 1,100 points in less than a month. Many people thought that we were going to have a replay of 2008 when the market dropped about 40%, and they panicked. Of course, we didn’t go into another recession, and the markets recovered.

As Sir Isaac Newton proved, the smartest guy in the room is often not the smartest investor. Newton didn’t have discipline or a goal-oriented plan; he just kept jumping in and out of the market. Like Newton, our emotional behavior can blow up our plans. Worse, it’s almost impossible to identify this behavior in ourselves. Even if we could recognize it, we can’t turn our primitive brains off to think objectively. That’s why you should work with a trusted financial advisor who is not emotionally attached to your money and can think objectively. A good advisor will keep you disciplined and focused on your goals and not let your emotions drive your investment decisions. And unlike Newton, a good advisor won’t gamble away your money.

(This post was originally published on Paladin Registry: http://blog.paladinregistry.com/investing-2/the-emotional-investor-sir-isaac-newton/)

Navigating Market Storms and Wall Street Hype

When it comes to making predictions, everyone’s an expert. Apparently you just have to sound like you know what you’re talking about, and you’re considered credible.

This is especially true in the financial industry, where there tends to be a lot of machismo, particularly during times of market volatility. It seems like everyone has an opinion about where you should invest your money. But smart investors know to steer clear of the noise and stick to a disciplined and diversified strategy.

Athlete picks
Given the onslaught of “expert” advice, it came as no surprise (well, maybe a bit) when I saw that Jose Canseco was tweeting about negative interest rates and gold a few weeks ago. You may recall the Oakland A’s slugger with the Popeye-sized biceps from the 1990s. Yes, that Jose Canseco. He was one of the “Bash Brothers,” along with Mark McGwire. Now he’s hot for gold.

On Feb. 12, he tweeted, “not a surprise but everyone should be in gold.” Minutes later, he added, “$1500+ by Memorial day.” Mind you, this is coming from the same guy who famously had a ball bounce off his head and over the wall in right field at Cleveland Municipal Stadium, resulting in a home run for the opponent. Despite his lack of professional investing experience, he’s reacting like so many other “experts” to the recent turmoil in the financial markets. I may find his tweets amusing, but I’m certainly not piling my clients into the glittering metal.

Beating the pros
Canseco’s recent musings brought to mind Orlando, the “ginger feline” who made news back in 2012 by beating a team of investment professionals and a group of students in a yearlong stock-picking experiment. The cat picked his stocks by throwing a toy mouse at a grid of publicly traded companies. His human opponents used methods involving “research” and technical analysis. At the end of the year, Orlando’s picks had returned nearly 11% while the pros had gained just 3.5%. In comparison, the Standard & Poor’s 500-stock index rose 13% that same year. They all would have been better off just buying an S&P index fund.

More recently, MarketWatch reported that Wall Street’s most-hyped stocks lost big in 2015. In fact, they did worse than the stocks that the same highly trained, highly paid analysts said not to buy. Apparently, though, bad forecasting is customary among Wall Street analysts. In the article, Brett Arends reports, “Each year since 2008, analyst data supplied by Thomson Reuters and stock performance data from FactSet show that analysts’ bottom-10 stocks on average have beaten their top-10 counterparts by 10 percentage points.”

For fans of professor Eugene Fama, a Nobel laureate in economics, this comes as no surprise. He has long maintained that even when professional money managers do outperform their comparative indexes, luck plays a huge role in their superior performance. “I’d compare stock pickers to astrologers, but I don’t want to bad-mouth the astrologers,” Fama has been quoted as saying.

Stay diversified
Since the beginning of the year, we’ve seen a lot of turbulence in the markets and anxiety among investors. However, the best way that I know of to combat the fear of a down market is to look back in history. The stock market has so far been an upward-reaching entity. Yes, it occasionally takes a break, temporarily declining or hovering at lower elevations. But over the long run we have seen, and can expect to see, growth.

Yet, as our “experts” repeatedly demonstrate, it’s impossible to know which stocks will do best next week, next month or next year. That’s why my advice is always the same: Stay disciplined, goal-oriented and diversified with your investment strategy. It’s the surest way to navigate market storms, Wall Street hype and “juiced” home run hitters.

This article was originally published on NerdWallet.com (https://www.nerdwallet.com/blog/investing/navigating-market-storms-and-wall-street-hype/)

Why You Should Have Bonds in Your Portfolio

You scarcely read or hear much about bonds these days. The stock market, especially in recent weeks, grabs the headlines all the time. Bonds just aren’t glamorous. Sure, Michael Milken, “the junk bond king,” brought some glamour and headlines to bonds back in the late ’80s, but they haven’t received that kind of coverage since.

Yet that’s no reason for investors to forget about this important asset class. Bonds are one of the three major asset categories — along with stocks and cash — you should have in a balanced portfolio. Investing in a mix of these assets is a good strategy for achieving your financial goals.

Having bonds in your portfolio can help reduce risk, which is a welcome proposition given the market volatility we’ve seen since the beginning of the year. Stocks tend to be more volatile than bonds — they go up and down further and faster — and that makes them a riskier proposition for the short-term investor. Think of stocks as cleanup hitters. They’re going to hit a lot of home runs, but they’re going to strike out a lot too. Bonds are more like leadoff hitters, the guys who can consistently hit singles and get on base. They can be a stabilizing force amid volatility.

Inverse movement
The stock market, like most things, tends to cycle. Right now, the decline seems to be a reaction to the dramatic drop in oil prices and the slowing of China’s economy. Bonds cycle, too, but they’re not as volatile as stocks. Instead, bonds often have acted as insurance by reducing portfolio volatility.

This is because bonds often move inversely to stocks, and this tends to be mostly true when stocks are falling. However, bonds are in an unusual place right now because of historically low interest rates. When rates rise, the value of bonds will go down. But this should not deter you from holding bonds in your portfolio because they are still less volatile than stocks, and if the stock market takes a big hit, bonds usually rise. This means bonds and stocks work in concert with one another in your portfolio.

In designing a portfolio, you want to have a mix of assets that can move inversely under different market conditions. Diversifying in this way reduces your risk and thus your chances of getting hurt.

Asset allocation
Asset allocation — holding the right proportion of stocks, bonds and cash for your situation — is important because it can impact your financial and personal goals. However, designing the best asset-allocation model or portfolio can be complex. You need to look at your time horizon and your tolerance for risk.

Your mix of stocks and bonds also should be determined in part by the amount of money you need and when you will need to withdraw it from your accounts. If you don’t include enough risk (think stocks), your investments may not earn an adequate return to meet your goal. However, with too much risk (think not holding enough bonds), the money may not be there when you need it.

For instance, an older person should have fewer stocks and more bonds in his portfolio. A 25-year-old, though, can have a higher ratio of stocks. She’s in it for the long run and can take more risk than someone who’s nearing retirement.

Stay diversified
We’d all like to know what will happen to our money in 2016. While we can count on the media to offer plenty of headlines and opinions about the economy and markets, the danger comes when we base our investment strategy on these headlines.

We can’t know what will happen to stocks or bonds, and we can’t outguess the markets. If I could, I’d probably have a cult following. But we do know this: The markets will go up, and the markets will go down. And some parts of your portfolio will do better than other parts.

Having the right mix of stocks and bonds will reduce your portfolio risk and your potential losses. So instead of trying to pick a bunch of hot stocks, investors should stay diversified and goal-oriented — and not forget about bonds.

(This article was originally published on NerdWallet.com (https://www.nerdwallet.com/blog/investing/why-you-should-have-bonds-in-your-portfolio/)

My Top 10 Predictions for 2016

With the recent market volatility, we all want to know what will happen to our money in 2016, and there are plenty of opinions in the media about what might happen in the economy and the markets. The danger, however, comes when you base your investment strategy on such opinions.  But if you insist on following forecasts, here is a list of my top 10 predictions that you can count on coming true in 2016:

  1. The markets will go up and the markets will go down.
  2. There will be unexpected news.  Some of it will move prices.
  3. Acres of newsprint will be devoted to the likely path of interest rates.
  4. Acres more will speculate on China’s growth outlook.
  5. TV pundits will frequently and loudly debate short-term market direction.
  6. Some economies will strengthen. Others will weaken. These change year to year.
  7. Some companies will prosper. Others will falter. These change year to year.
  8. Parts of your portfolio will do better than other parts. We don’t know which ones.
  9. A new book will say the rules no longer work, and everything has changed.
  10. Another new book will say nothing has really changed, and the old rules still apply.

Market Volatility: Don’t Panic. This is Only a Test.

Do you remember this public service announcement? “This is a test. This station is conducting a test of the Emergency Broadcast System. This is only a test.”

The Emergency Broadcast System was created in 1963 during the Kennedy administration and used until 1997. If you were watching a show during that time, you knew not to change the channel or adjust the dials on your TV set. (And in the early days, the three or four other channels you could get were all usually conducting the same test anyway.)

Now let’s add a few words and phrases to that PSA in terms of your investments over the past year: “This is a test. This is only a test of your will and patience.”

This past year, most of your investments were flat (at best) and some even lost money. But if you have a well-diversified portfolio, you should not change your investments — and you should certainly not attempt to guess which investments will be the best performers in the coming year. Investing is inherently unpredictable. But as a long-term investor, you must not be swayed by volatility, even when the grass looks greener elsewhere.

Market cycles

In 2015, many investors may have asked, “Am I in the wrong investments?” Well, if your portfolio is well-diversified, probably not. In fact, it’s likely that it was the markets that performed poorly, not your investments. The reasons for that vary, from economic uncertainty in China to the dramatic drop in energy prices and concerns over potentially rising interest rates.

But none of this is unusual. Markets, like many things in life, tend to cycle. They go up and they go down, and we don’t know when they will do so. The markets have had a pretty good run since 2009, so it seems to me that we were due for a flat or negative year (of course we couldn’t know exactly when that might occur).

What to do?

One of my clients recently asked, “Did anything do well?” As a matter of fact, international small companies did pretty well. (For instance, Dimensional’s International Small Cap Growth fund (DISMX) yielded around 10.5% last year.) He then asked me if he owned shares of any of those kinds of companies. I told him that his broadly diversified portfolio has a small portion of international small companies in it.

Then he wanted to know if he should move most of his money into international small companies. I responded with a resounding “No!” Besides being a riskier investment category, international small companies show absolutely no evidence that they will do well again this year.

No memory

I asked my client to imagine that he was flipping a coin and trying to guess which flip would result in heads and which flip would result in tails. Of course, after numerous tosses, we agreed that he’d have an even distribution of heads and tails. But, more importantly, we agreed that a coin is an inanimate object with no memory. Just because five flips have landed on heads doesn’t mean that the next flip will land on tails.

I explained that stocks are the same way. They have no memory. There is no guarantee that international small companies will continue to do well next year. Sticking to the discipline of having a broadly diversified portfolio helps us avoid falling prey to the false notion that last year’s best performers will be the winning performers the next year.

Keep it boring

A well-diversified portfolio doesn’t speculate or gamble on what is going to happen next. “Investing should be boring,” I told him. “If you want excitement, try hang gliding. If you want to gamble with your money, go to Vegas.”

So in 2016, resolve to stick with your well-diversified portfolio. If you’re not sure whether you’re diversified enough, have a trusted advisor take a look. But remember, this past year was simply a test of your patience and your will to stay appropriately invested, even when the going gets rough.

(This article was originally published on NerdWallet.com:  http://www.nerdwallet.com/blog/advisorvoices/volatility-psa-dont-panic-this-is-only-a-test/)

What a Fed Rate Increase Could Mean for You

Since the Great Recession started eight years ago, the Federal Reserve has kept its benchmark interest rate near zero as a way to strengthen the economy. However, according to the minutes from an October 2015 gathering of Fed officials, a rate increase is likely in December. A decision should be announced Dec. 16.

Any economic change brings good news and bad news. Here are a few parts of your financial life that might be affected by a rate increase:

Home sales

Rising interest rates generally put downward pressure on the demand for homes and home prices, at least in the short term. So if the Fed raises rates, you may not see very many “For Sale” signs in front yards for a while.

This might make you nervous if you’re planning to sell your home soon. After all, most people’s wealth is in their homes. But a small rate increase doesn’t necessarily mean that the housing market will plummet. If rates stay near their historic lows, many prospective buyers will realize that they still can afford a new home and will buy one, anyway.

Bonds

Interest rates and bond prices move in opposite directions. When interest rates go up, bond prices go down. If you’re thinking about selling your bonds before they mature, higher interest rates will work against you. However, if you’re holding those bonds until maturity, you can sleep well. You’ll still collect interest, though at a lower rate than you would on newer-issue bonds.

If you own shares of a bond mutual fund, a rate increase will more than likely cause those shares to temporarily drop in value. But fund managers will begin to buy higher yielding bonds, which might help soften the blow. For the future, consider this strategy used by proactive bond fund investors: Stay out of long-term bond funds, which take the biggest beating when rates rise.

Stocks

The effect of rising interest rates on stock prices is a little murkier than its effect on bonds. Stock prices generally decrease when interest rates go up, but that’s not always the case. If we’re in an economic expansion when rates rise, more often than not, stocks go up. Conversely if the Fed is raising rates to “cool down” an overheated economy, stocks tend to go down before rebounding. If you own CDs, their rates will increase immediately if the Fed raises the benchmark.

Hiring and income

By keeping rates low, the Fed hoped to encourage economic growth, which is often measured by employment numbers. If the Fed does raise rates, it would be a signal that employment is recovering, and firms are hiring.

More hiring means more income for everybody. And higher incomes tend to solve other problems, including low demand for housing. Even though a rate hike would mean that it costs more to borrow money, higher incomes help offset these costs.

Higher incomes also mean more spending. More spending means that workers keep their jobs. And the cheap prices that we’re seeing at the gas pump put even more money into consumers’ pockets that they’ll want to spend.

In the Fed’s words, it might be time for a rate increase because there’s been a “tightening of the labor market.” In plain English, that means more hiring and less firing. Ultimately, the Fed’s decision reflects growth — which means that, for you, the good news of a rate increase should hopefully outweigh the bad news.

How Owning a Dog Can Bite You in the Wallet


During the holiday season, many children pester their parents for a puppy. Maybe you’re one of those parents whose kids are trying to convince you that they’ll take care of the new pet, and that you won’t be stuck having to clean up after it or take it for walks.

You might even be starting to consider your children’s pleas. After all, is there a more endearing scene on Christmas morning than an adorable puppy, wearing a bow and peeking out of a box? You can almost hear the kids shrieking with delight.

People tend to make emotional decisions when choosing a pet (we do that with other investments, too). The reality is that the cost of owning a midsize dog throughout a reasonably long lifespan could add up to the price of a down payment on a house or even a year or two of higher education.

Paying up for your pup

In “The Cost of Owning a Dog,” veterinarians Dr. Race Foster and Dr. Marty Smith report how pricey owning a dog can be. Starting with the initial costs (which can be as high as $1,500 and include purchase price, vaccinations, toys, crates, beds, possibly training classes, and adoption fees or payments to the breeder for purebreds), they break down the costs year-to-year over a 14-year life span.

Ongoing costs, which can add up to $200 per month, include visits to the vet, food, and products and services such as grooming, training, boarding and flea control.

Here are their total estimated costs for a 50-pound dog throughout its 14-year lifetime:

  • Low estimate: $4,242
  • Medium estimate: $12,468
  • High estimate: $38,905

As your dog ages, it’s not uncommon for it to develop a hip problem, allergies or some other illness, leading to the higher estimates. Because of modern medical technology, veterinarians can now perform once unheard-of operations and procedures on suffering dogs and cats, significantly increasing both their life expectancy and their owner’s happiness. However, these latest procedures can be costly. The authors write that they routinely saw clients who spent over $2,000 on a single veterinary problem.

I should mention that the authors live in the Midwest. If you live in a more expensive city, such as New York or Los Angeles, expect the costs to be even higher. Of course, most of us won’t end up spending nearly $40,000, but some might spend even more.

>> MORE: How pet owners can prepare for financial emergencies

Pets vs. retirement savings

At these totals, it makes sense to consider whether owning a pet can actually have a significant effect on your current financial situation. Spending $5,000 for an emergency pet visit, for example, can deplete short-term savings or cause you to go into debt by putting that bill on a credit card. Paying off this debt could even affect your long-term financial goals if you can’t afford to make retirement plan contributions because of the vet bills.

One way to help keep these bills from getting out of hand would be to buy pet health insurance. This type of insurance can help alleviate the financial burden of caring for the animal members of your family. A multitude of pet insurance companies exist today, all varying in services covered, cost, customer service and claim reimbursement. Like any other insurance coverage, you’d need to compare the benefits they provide and the cost of the insurance premium, the deductibles and the copays.

Apart from the cost analysis, there is another factor that might be the single most important item on the ledger: your time. Plain and simple, dogs take a lot of it. Walking, feeding, cleaning up, training and even home repairs are part of the time commitment. If you’re not willing or able to spend a significant portion of your free time with your dog, you may want to consider getting a less-time-consuming pet instead. Or maybe consider not getting a pet at all.

Make no bones about it (I couldn’t resist): Owning a dog can add up to big investment dollars. Before putting your finances at risk, make sure that you can truly afford a dog.