Archive for Investment Planning

No investment is forever

Lo! How the mighty are fallen. That darling of everyone, Apple Inc., has hit a rough patch lately which at one point had dropped its share price by about 20%. Then, it was revealed that Berkshire Hathaway had taken a $1 billion stake in the stock, and up it went, because we all know that Buffett and Berkshire only buy great investments at a bargain, right? (No, don’t rely on that either).

Another old venerable, Exxon, recently had its S&P bond rating reduced from AAA to AA+. It’s been AAA since 1949. Even bond ratings ripple from time to time. On the other hand, Apple’s rating was in junk territory in 1997, and now it’s the same as Exxon.

Exxon, along with a few other large caps, has usually been considered a “widows and orphans” company—safe for the most conservative investors. Johnson and Johnson is another one, but it’s had a rocky road of recalls and product attacks. Nothing is forever, and you should make an effort to be aware of changes, even though I encourage you not to be whipsawed by every bit of news.

During my recent conference at Dimensional Fund Advisors, a speaker mentioned that Apple and Exxon each represent 3-4% of the entire market! In fact, DFA reduces their holdings in both these companies from what a typical index fund (which tries to mirror the market) will hold.

Oh, you say, but I don’t own these individual stocks. Um, somewhere you probably do. For example, the Fidelity Puritan Fund has 2.24% (its 2nd largest holding) in Apple. Vanguard Wellington has 1.08% in Apple and 1.27% in Exxon. Vanguard Total Stock Index has 2.26% (its largest holding) in Apple and 1.68% in Exxon—and just about any target retirement fund you have is going to have one or both of these companies, probably as one of its largest stock holdings. And in a real “contra” move (NOT!), the Fidelity Contrafund has 2.91% of its portfolio in Apple. If you also own some individual shares (my hand’s up, but don’t take this as any recommendation) or put a little money in a technology sector fund, you may be way more invested than you think in this very small segment.

You can hardly avoid these two stocks, and they may actually be companies that are too big to fail, at least without disastrous impact on the world economy. The point I want to make is that a target date or life strategy or any balanced or all-purpose fund still needs to be examine for what exactly is in the portfolio. Especially with target date funds, we think we know how they’ll operate, but they don’t have a long enough history for us to be sure. Examine your portfolio for overlap if you intend to protect yourself by diversification. You may have less variety than you intended.

New investment possibility

DFA logoI’m so pleased to announce that I have been approved by Dimensional Fund Advisors (DFA) to use their funds in managed portfolios. This is really a step up in the quality of funds I can select and offer to you.

DFA only works with advisors (not the general public) because one of their strategies to keep costs low is to prevent the kind of day trading and panic selling that sometimes leaves even no-load passively managed funds awash in capital gains (or losses). When a fund experiences high inflows or outflows, managers are forced to redeem shares to cover costs, and everyone feels the pain in sometimes unexpected tax consequences. In fact, with recent redemptions at the Sequoia fund, managers actually distributed stock to people who wanted large redemptions. Since Sequoia didn’t give shareholders a choice on what stocks they got, it made for some strange tax gyrations. In addition, DFA believes that investing in their funds demands guidance and communication between investor and advisor—they’re not one size fits all.

We’ve discussed so many times (that “we” is me, the press, and probably even the almighty) the difference between active (boo!) and passive (yay!) management, but DFA offers a third way—research driven. Based on research by Nobel Prize economist Eugene Fama, Ken French, and David Booth (all still involved at DFA), certain factors have been identified that, when used to tilt a primarily passive portfolio, have resulted in improved results. I have about a ton of information on the specifics of this and would be super happy to discuss it with you.

DFA has been around for 35 years, and in the economic crisis of 2008-2009 actually saw inflows to their funds, a testament to how much fee-only advisors believe in and communicate a message of faith in the market and faith in their products.

I hasten to add that DFA is still no-load and I’m always going to be a fee-only fiduciary for you—I don’t get any commissions from them. It was quite a vetting process: phone interviews, reviews of my portfolio selections, business approach, and investment philosophy, culminating in a two day trip to Austin, TX, headquarters for an amazing but grueling amount of seminar information-dump. I went in somewhat skeptical that they had a better mousetrap, and left totally convinced that they’re an extremely fined tuned and successful investing machine.

Schedule a meeting and I’ll be excited to tell you about this great offering and what it can mean to your long-term investing picture.

Bernie Sanders’s “ridiculous” proposals

U.S. Senator Bernie Sanders of Vermont

U.S. Senator Bernie Sanders of Vermont (Photo credit: Wikipedia)

I can hardly open the Wall Street Journal without seeing an article about why Bernie Sanders’ proposals won’t work, but I’m not buying it. Sure, any sort of change at all is going to have some unintended consequences. But that’s been true of just about every single governmental policy in the last, oh, 100 years or so. Of course, some people will benefit more than others—just as they did under the Republican presidencies. But, like Bernie, I’d like to see the greatest good for the greatest number, and I’d most like to see policies that will benefit the hard working middle class, tamp down extreme disparities in wealth, and provide basic social supports so that no one lacks basic healthcare, housing, nutrition, and the opportunity for an education.

I like government to stay out of my hair as much as the next person. Hey, I homeschooled my kid for 10 years while paying a pretty big property tax bill to support the local schools. I’ve yet to meet the person that actually enjoys paying taxes. But, as a financial planner, I ask what return I’m going to get on my investment—is there benefit for my (many) bucks?

Healthcare

Really, I have to laugh when I listen to the Republicans pounding their chests about how long you’ll have to wait for a doctor’s appointment if we get Bernie’s single payer national health program. In January I decided to find a new internist, since my previous one has decided that he can’t make a living billing even the best health insurance around. Of course, maybe if he downsized his suite of offices on Lake Shore Drive and didn’t have 4 receptionists chatting to each other at the front desk(who, by the way, NEVER answer the phone), he might be able to eke out a living of, oh I don’t know, a pitiful $300k or so. I had to call 5 recommended internists before I found 1 who was even taking new patients, and then I had to carefully check just WHAT Blue Cross insurance they would take (i.e. not many from the Health.gov marketplace). And then, I have to wait 4 months (mid-April) to get in to see her—and I have no idea whether I’ll even like her, so theoretically if I interviewed 3 practitioners, it could take the better part of a year of waiting to see a doctor for actual examination. For a dermatologist I saw in October, I was told to go home immediately and schedule my 6 month checkup or there wouldn’t be anything left. I can’t imagine that it COULD get all that much worse.

What about the charge that your taxes will skyrocket? Right now I pay $10,144.20/year for a plan that covers me and my daughter, with a $3,500 deductible. It’s an old policy—yes, I liked my insurance and just as President Obama promised, I got to keep it. I haven’t seen any proposal at all that suggests that your taxes will go up by $10,000 a year if we get a single payer. Yes, if you’re employed by a company that pays most of the health care cost, you probably don’t see that kind of bill, but you’re paying it nonetheless—in lower earnings. Unless, of course, companies find a way to offload a cost without any salary compensation. Oh wait, that’s already happened to your retirement. Remember that antique thingy that your parents had—a pension?

I’d happily pay more taxes for better health care for all—prenatal care, lead screening, diabetes prevention, you name it. The comment about how it will never work? It DOES work in every other Western nation, all of whom have better health outcomes than we do. Yeah, maybe hospitals and insurance companies would make less. But something tells me they’d find a way to survive—perhaps by providing the same healthgap insurance they currently provide to Medicare users. Maybe it would create more elite stratification—it all depends on how high the basic bar is set. Once it’s a universal, there’s a limit on how much extra most people will pay. It seems to me that in Europe people still become doctors, and in interviews I’ve heard even they all talk about the better quality of life.

Incremental change is easier than radical change and usually works better. Obamacare was that incremental change. Now, let’s make another one.

Public education for everyone

Some bonehead Republican (I think it was Trump but he says so much crap I lose track) declared that a free university system would make us like Europe, and foreign students all want to come to the U.S. for our superior education. Simply not true. It’s true there are a lot of foreign students on U.S. college campuses for at least two reasons I can see: colleges heavily promote it because these students generally pay full freight, and they’re coming from countries where the university system is generally rigid or substandard (India and China) or where the system offers little potential or is in political turmoil (especially women from Middle Eastern countries). European students are absolutely NOT in evidence as undergrads—in fact, the traffic is the other way since even the best Euro universities are cheaper and easier to get into than the U.S. equivalent. Sure, graduate students come from all over (but again, not predominantly Europeans) but plenty of traffic goes east across the pond, too. There’d probably be more if most U.S. students weren’t so completely incompetent in and terrified of functioning in another language.

Would this put private colleges out of business? Probably, yes and no. The financially weaker ones might have to recast their mission to actually offer programs that would be worth paying for, and a lot of them would fall by the wayside. Oh wait, that’s already happening. The elite schools? Not so much—over half the attendees are already paying full freight, and an awful lot of parents around here would pay absolutely anything to get their kid into those places (you know who you are). I don’t think that will change, and most of these places could already fill their freshman classes three times over with qualified applicants. I don’t think they’ll see empty seats if their application ratio goes from 10 for every 1 accepted to 3 for every 1 accepted. And maybe an expanded public system will stop the horrendous college arms race we’re currently experiencing, and the horrible impact on the mental health of college students.

Right now, its college or you’re a failure. Maybe some changes would produce quality technical and trade education as a viable and respectable option. Pinch me, I’m in Europe.

Social Security

This is actually a Hilary Clinton proposal—that Social Security be redesigned so that it doesn’t penalize women who have stayed home with children. Now there’s a family friendly proposal. Republicans will certainly continue braying that Social Security was never designed to completely fund your retirement. Right. Because when Social Security was designed, people had PENSIONS. Social Security should be redesigned to offer people a respectable retirement consistent with what they earned in their working life. It’s just ridiculous that contributions cease at $118,500 in income. And why not tax people with very high retirement incomes? If it would provide a decent life for the elderly (which we all hope to be someday)—I’ll pay. The societal good seems just compelling to me—and like all income increases, it would raise consumer demand (more money to spend) and not necessarily discourage savings, since everyone would want to live above the minimum. People who save now would continue to save, and people who save very little (the vast majority) would not endure a desperate old age. Our system right now punishes stay at home parents, people who’ve dedicated themselves to socially useful lower paid work, people who’ve gotten ill or taken care of their own elderly parents or got a late in life divorce. Don’t even get me started on the need for long term care—it’s going to take the tragedy baby-boomers are surely facing to confront society with that disaster.

Financial transaction tax

Whew, this one hurts. Bernie is proposing a .5% tax on every $1,000 transacted according to WSJ this morning. That’s pretty high for individuals, but maybe it will return some sanity and thoughtfulness to the process of investing, and slow down the rapid fire high stakes trading that individuals cannot possibly compete with. Does anyone seriously think that it will topple our markets, the strongest in the world? I would like to see some protection for individual investors, but my guess is that if this ever passes it’s going to be a lot more complex than what is currently proposed.

However the election resolves, I think we need to read the handwriting on the wall. Bernie’s policies are overwhelmingly popular with the millennials. Unlike the baby boomers who had no real political agenda except ending the Vietnam War (and then taking up the culture of hedonism), millennials seem to have real political beliefs and economic issues that they intend to fight for. As they get older and move into positions of control, I think we will all have to acknowledge that the times, they are a changin’.