Thursday, February 7, 2019

Being Smart with $$ -- Get the Financial Advice You Pay For

“IGNORE YOUR CLIENTS” is the essence of messages I often get in marketing materials for how to be successful as a financial advisor.  Services offered let you automate and ignore all your clients except the ones who have at least a few million dollars.  After all, they ask, why waste time on small clients who “only” pay $5,000 per year when you can focus on clients who pay $50,000 per year?  Here are my questions: Doesn’t someone paying $5,000 deserve $5,000 of personal attention? (Yes, they do!)  If you are paying $5,000 or more per year, what are you getting for that money that could be in your portfolio growing to $65,000 over 10 years with 6% annual returns? (It better be a lot!)  Have you spoken to your adviser this year?  (Many will answer no or say they have spoken for less than an hour this year.)  Does he/she have you invested in mutual funds that have done worse than low-cost index funds?  (Too often the answer is yes and the cost to you over the years can be quite substantial.)  If this message hits too close to home, consider an hourly, fee-based financial adviser.  You will not pay to be ignored because the adviser only gets paid when actually providing you with service.

Larry Pike, CFA
Client Priority Financial Advisors LLC 

Friday, January 25, 2019

Being Smart With $$ -- It's Risky to be in Stocks & Risky Not to be.

The stock market is risky.  It’s risky to be in it and it’s risky not to be in it.  We all know what can happen in one bad year in the stock market.  But what happens over the long term if you play it too safe? An Ibbotson Associates study reported by Fidelity pointed out the bad news to those who avoid all risk. Over an average 30-year period going back to 1926, a $10,000 investment in safe, short-term assets would have grown to just over $27,000.  But if the same $10,000 were invested in stocks, it would have grown to more than $175,000.  That’s quite a penalty for playing it safe.  But what’s more is that if you were unlucky and picked the WORST 30-year period for stocks, you still would have seen your money grow to over $95,000.   Of course, past performance is no guaranty of future results and money you need in the next few years may be best kept out of stocks as you don’t have time to wait out the volatility.  But history has been unkind to those who play it too safe.  After all, consider that candy bars and houses double or triple (or more) in price every 30 years and then you’ll realize why you need those higher returns.

Larry Pike, CFA
Client Priority Financial Advisors LLC 

Thursday, January 17, 2019

Being Smart with $$ -- Jack Bogle has Died, the Man Who Helped Investors Lower Fees

Vanguard founder Jack Bogle has died. 

“A lot of Wall Street is really devoted to charging a lot for nothing and Bogle charged nothing to accomplish a huge amount.” (Warren Buffet speaking to Becky Quick at CNBC.)  Jack Bogle “introduced the first index mutual fund for individual investors” and “drove down costs across the mutual fund industry.” ( 1/16/19.)  “Fees matter more than most people think and Jack Bogle gave individual investors a way to lower their fees.  The less an investor gives away in fees, the more their own money is working for them.” (Larry Pike, now.)

Larry Pike, CFA
Client Priority Financial Advisors LLC

Tuesday, January 15, 2019

Being Smart with $$ -- Isn't the Stock Market Risky Enough?

2018 reminds us that some years you make money in stocks but some years you lose it.  In either case, you want to make as much as you can and not lose more than necessary.  Many think that buying the star mutual fund of the last few years gives you a better a chance of making money in up years and losing less in down years.  But often the opposite is true.  When you buy a market-tracking index fund instead of an actively-managed fund, you are sure to almost match market returns every year. When you buy an actively-managed fund, you don’t know what you’ll get.  Maybe you want exposure to Europe and are choosing between Vanguard’s European Stock Index Fund and Janus Henderson’s European Focus Fund.  Three years ago, you may have noticed Janus’s strong performance over the prior 3 years versus the Vanguard fund and paid their 5.75% sales commission to buy this fund. But unfortunately you would have paid the price for learning that past performance often doesn’t carry into the future.  The Janus fund went on to severely underperform the unmanaged, market-tracking Vanguard index fund over the next 3 years.  In fact, the performance was so bad that even including the great years the Janus fund had from 2013 to 2015, the total 6-year performance of the Janus fund was far worse than the Vanguard index fund.  This doesn’t even include the commission paid to buy it.  What is the lesson?  Chasing strong past performers is often a losing strategy and buying low-cost, market-tracking index funds lets you match a market benchmark and in the long run that can work out quite well. Isn’t the stock market risky enough without the added risk that your fund might trail the market itself?
Larry Pike, CFA
Client Priority Financial Advisors LLC 

Thursday, December 27, 2018

Being Smart with $$ - Letter to Clients and Friends: Fundamental reasons to be a stock-market investor despite the chaosBeing Smart with

Dear Clients and Friends:

It has been a tough year to be a stock market investor.  Therefore, I believe it is a good time to discuss the mechanics of the stock market and why the majority of experts believe that stocks are appropriate for most portfolios.  Forgive me if I make this too simplistic but a reminder of how we benefit from being an investor in stocks may be useful for everyone.

First, a quick reminder of stock market performance over periods we consider to be the worst of times.  I will reference the Dow Jones Industrial Average as the benchmark that the news channels seem to favor:

The Dow peaked in 2007 at 14,165.

It hit a low of 6,443 in 2009.

Today it is at approximately 22,400, almost 50% above its peak from before the crash 10 years ago despite being down almost 20% from its recent peak in October of this year.

 In 1987, the Dow reached 2,722.

On Black Monday October 19, 1987 it fell to 1739. 

Ten years later the Dow closed the year 1997 at 7,908, almost 3 times higher than the pre-crash peak. 

As a reminder, today the Dow is near 22,400. 

It should be noted that on top of price gains, some stockholders also received dividends each year. 

Now for stock market fundamentals:

When you buy stocks, you are an owner of the company.  As an owner, you share in the profits or losses of that company.  Profits are sometimes paid out in annual dividends so that even in the absence of a change in the stock price, you still might have a positive return.

America’s companies are quite profitable on average. reports that Fortune 500 companies as a group generated around $1 TRILLION in profits last year.  If the same occurs over the next 10 years, that might be $10 TRILLION in new value created that benefits the shareholders in these companies. Profits could be worse so you may prefer to assume they’ll generate $5-7 TRILLION.  When we hear that earnings will be poor in the future, don’t take that to mean corporate America will lose money.  It usually means that earnings might just be lower even though they will still be substantial. Even in 2008, an historically horrible year for the economy, Fortune 500 companies made a small profit.  And even though one year was quite bad, the years before and after saw far higher profits for these companies.

Stock prices can swing wildly for a variety of rational and irrational reasons.  But what happens over the next 10 years when $5-10 trillion of new profits are generated by these 500 companies which were recently worth approximately $21.6 trillion in market capitalization.  It might be reasonable to believe that the owners of these companies, the stockholders, will enjoy nice returns on their investments.

Is there a guarantee that stock prices will rise? Never.

Should you be invested in stocks if you need the money in the next few years?  Probably not since it can take a long cycle for the price of a stock to reflect the fundamental value of a company.

Should you be diversified? Certainly yes because while corporate America as a group is profitable, there will always be a few companies that don’t survive.  Add international exposure for even better diversification.

Are stocks right for everyone?  They are right for you for a portion of your portfolio if you have a long-term time horizon.  If you are retiring tomorrow, you will likely be drawing from your portfolio over the next 30 years and may benefit by having some of your money in the stock market.  If you are in your 80s and don’t expect ever to need a chunk of your money, you may want long-term growth for assets that will go to your kids.  Every investor’s needs are different and the appropriate allocation to stocks will vary for everyone.

Will you panic and bail out in tough times? If yes, stocks are probably not right for you as patience is how stock investors usually succeed.

Can you time the market and know when to get out and when to get in?  Research suggests that more people fail at this strategy than succeed.

I repeat that there are no guarantees in investing and past results may not be an indicator as to what to expect in the future. But consider this:  if you are able to earn an extra 2% on your investments, you might collect nearly double the money over 20 years. Avoiding assets that are volatile in the short term but usually offer higher long-term returns may be assuring yourself returns that don’t let you achieve your long-term goals.

As always, I am happy to discuss your individual circumstances in greater detail.

Larry Pike, CFA
Client Priority Financial Advisors LLC

Wednesday, December 26, 2018

Being smart with $$ - Stock Crash Consolation Prize #2

Stock Crash Consolation Prize #2:  Cheaper Roth Conversions.

Converting a Traditional IRA to a Roth IRA means paying taxes now on your retirement account assets instead of paying taxes when you take the money out in retirement.  But once the money is in the Roth IRA account, it will grow tax free moving forward with all the money available to you in your golden years.  While a Roth conversion may or may not be right for you, it is cheaper to convert when the market is down.  Let’s say you have 100 shares of Apple in your Traditional IRA and were thinking about converting those shares in September.  If you did so, you would have to pay taxes based on the value of Apple at the time which was around $22,000.  But if you procrastinated and still want to convert the shares, now you can do so with the value of your Apple stock around $15,000 and only pay taxes on this much lower value.  Same shares converted, less taxes paid.  Stock crash: bad.  Cheaper Roth conversions: good.  There’s rules and nuances you should know before converting but at least you have another consolation prize from this stock market chaos.

Larry Pike, CFA
Client Priority Financial Advisors LLC 

Being smart with $$ -- Stock Crash Consolation Prize

Stock crash consolation prize:  Tax losses. 
Sell your losers to offset capital gains distributions from mutual funds and gains from winners you’ve sold this year. You can even use losses to offset up to $3,000 of regular income. You don’t even have to leave the market since you can sell one item and simultaneously buy a similar but not identical item. Just make sure not to buy back the loser within 30 days or else you won’t get to use the loss. Do you have a large-cap, actively-managed fund at a loss? Sell it and on the same same day buy a large-cap index fund. Voila. You’ll get the benefit of the loss and still have almost the same exposure to the market. (This does not work in retirement accounts.) Who said a market crash is all bad? 

Larry Pike, CFA