Comprehensive Money Management

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Financial planning and investment management services are provided by Bill Neubauer. With more than 25 years of experience in the financial services industry, Bill has established a reputation as a strategic thinker who enjoys working with other financial planners to advance industry knowledge and best practices.
Prior to starting his own practice in 2001, Bill served as the senior executive responsible for Bank of America’s Private Bank in South Florida. In that capacity, he led a team of 30 professionals including CPAs, CFPs, tax attorneys, portfolio managers, and estate planning experts. His team provided financial advice to high net worth clients and managed in excess of $1 billion in assets.
Bill graduated from Florida State University magna cum laude with a major in finance and investments. He subsequently earned a Master of Business Administration (MBA) degree summa cum laude. He has also completed post-graduate work in credit and financial management at the University of Virginia and investment management at Dartmouth College. Bill is a Certified Financial Planner™ and a NAPFA-Registered Financial Advisor.
A long-time resident of South Florida, Bill has always maintained an active involvement in the local community. He currently serves on the University of Miami's Citizens Board and enjoys working out daily at the UM Wellness Center. He has also served terms on the boards of the Miami Art Museum, Jackson Memorial Hospital Foundation, Historical Museum of South Florida, Junior Achievement of Greater Miami and the New World School of the Arts.
Bill resides in a waterfront home in Coral Gables, Florida which also serves as the company headquarters. In his free time, Bill enjoys the beach, boating, scuba diving, foreign travel and listening to books on his iPhone and iPod.

Happy Independence Day

Perhaps you’ve heard…  The first six months of 2022 was the worst yearly start for the US stock and bond markets for any period since 1970.  Most investors are down more than 20%.  Investors with concentrations in high-flying tech stocks are down 50% or more. 

You are not “most investors”. 

To the contrary…  We built your portfolio for times like this.  That foresight and wisdom is now paying off. 

Even after the recent sharp declines in stocks and bonds, your overall investment portfolio is still up nearly 20% over the past two years.  We are only off about 10% from our absolute all-time highs.  How is this possible?

Vindication for commodities

For years we resisted the temptation to exit commodities.  They were seemingly always a perpetual drag on our investment returns.  We didn’t give up on commodities because we knew the day would come when inflation would return.  Academics have long known that commodities have historically saved investment portfolios when both stock and bonds prices falter.  

Commodities more than fulfilled that promise by surging 117% over the past two years.  The commodities and other “real assets” in your portfolio (as compared to “financial assets” like stocks and bonds) are doing their job and doing it very well.  They are providing a strong buffer to financial assets that have been consistently dropping in value amid unexpectedly high inflation, rising interest rates and the war in Ukraine.

Commodities were assisted in the heavy lifting by our other related investments in energy infrastructure, food & farmland, water resources, raw materials and timberland.  Most investors don’t include separate allocations for “real assets” in their investment portfolios.  Consequently, they lack protection from unanticipated inflation, rising interest rates, wars, famines and other economic risks.  The recent massive gains in these asset classes largely offset the poor performance of traditional financial assets like stocks and bonds over the past year.  The majority of that benefit comes from owning these asset classes before inflation occurs and before the risk is generally understood and widely embraced.  That’s similar to the idea that it’s too late to buy insurance on your home when a fire has already started.  Or too late to shut the stable door after the horse is out of the barn.

Our Top 10 performing asset classes over the last 2 years (annual average): 

  • Commodities +58% per year (i.e., up +117% over 2 years combined)
  • Energy & materials companies up +34% per year
  • US energy infrastructure up +31% per year
  • Food & farmland companies up +23% per year
  • Timber companies up +19% per year
  • Water & environmental services companies up +16% per year
  • Global infrastructure up +15% per year
  • US real estate up +13% per year
  • Large-cap US companies up +12% per year (down -20% over the past 6 months)
  • Small-cap US companies up +10% per year (down -25% over the past 6 months)

Our Bottom 10 performing asset classes over the last 2 years (annual average):

  • Hedges & Macro Trends up +5% per year
  • International developed market companies up +4% per year
  • Innovation up +4% per year (includes the FAANGs and disruptive tech)
  • International real estate up +3% per year
  • International emerging market companies up +2% per year
  • Cash up +1% per year
  • Gold & gold mining companies up +0% per year
  • International developed market bonds down -3% per year
  • International emerging market bonds down -4% per year
  • US bonds down -5% per year

Not to belabor the point, but the past six months to two years have been one of our strongest periods of relative outperformance versus other investors in my firm’s 20-year history.  Nonetheless, it’s hard to celebrate that fact when prices are down from our last report.  Our commitment to real assets like commodities, infrastructure, food & farmland, water resources, energy & materials, timber and real estate is what sets us apart. We are down roughly 10% from our all-time highs while others are down by twice that percentage or more.  We are also up nearly 20% over the past two years while most investors are flat over the same period.  I use a 60/40 US stock/bond portfolio as the benchmark and a proxy for “most investors”.  In fact, we have consistently outperformed a typical 60/40 investment portfolio and the vast majority of investment managers over the past 5 years.  We achieved that result while taking on less risk.  That’s because we are extremely diversified over a wider variety of asset classes than most.  That gives us greater downside protection in a bear market and superior risk-adjusted returns. 

Our Recipe for Success (my analogy to food) 

A superior investment portfolio begins with sound portfolio construction and maintaining an active rebalancing discipline.  Jae tells me that building a great investment portfolio is a lot like making a great salsa (something I know little about).  Both start by adding high-quality ingredients that are then mixed together in roughly equal parts.  It’s a bit risky to make a meal of garlic alone, but when combined with other widely dissimilar ingredients, the addition of garlic makes for a better whole.

(Photo by Jae)

Like making great salsa, a great investment portfolio begins by adding high-quality ingredients in roughly equal parts.

(Photo by Bill)


Commodities and other real assets are the garlic, onions and cilantro in the salsa recipe.  You’d never eat them by themselves, but together they play an important role.  You can make a reasonably decent portfolio without commodities, but a great portfolio includes them too.  They enhance stability, reduce risk and add to long term returns. They add downside protection not only during periods of unexpectedly high inflation, but also gradually over long periods of time. 

Commodities stand alone against the ravages of inflation when stocks and bonds both falter.  Below is a chart of comparing the basic ingredients of our “7Twenty” investment model (7 primary assets with 20 different sub-asset classes).  The performance is measured over 50 years (from 1970 through 2020).  Each asset class beats to its own drummer from time to time.  Depending on the economic and political environment, some zig, while others zag.  However, you’ll notice that when combined together in equal proportion, magic happens.  The whole produces a better result than any of the top performing asset classes alone.  Commodities (often a perennial underperformer) is included due to its unique ability to bail out the other 6 from time to time.  

Notice that mixing all seven ingredients together in equal parts has produced an average annual return over the past 50 years that is roughly equal any of the top performing asset classes alone over that same period of time.  But also notice the equally-weighted blend had only 6 negative 3-year periods, while other individual asset classes had more.  Most importantly, note that the single worst 3-year return for the equally weighted 7-asset portfolio was -13.32%.  Compare that with the negative 3-year return periods between -37.61% and -55.60% for several of the individual asset classes that had similar average annualized returns. 

It's not really magic.  It’s just math. 

Mixing uncorrelated and negatively correlated assets in an investment portfolio reduces risk and improves returns.  The lack of correlation of one to the other smooths out the ride.  When combined, the downturns are shallower and recovery is quicker.  Minimizing the magnitude of market downturns is a critical element in building strong long-term performance. 

So… just like when you make a great salsa, adding these 7 ingredients together in an investment portfolio in roughly equal parts produces a better whole.  The resulting mix provides… 

  • Higher average investment returns over time
  • Less volatility (i.e., lower standard deviation)
  • Fewer negative years
  • Less downside during market downturns (i.e., “worst 3-year cumulative returns”)

The “magic” doesn’t stop there. 

There is another secret in the sauce – tax loss harvesting.  In keeping with the food analogy, I often refer to tax loss harvesting as a proverbial “free lunch”.

Tax-tax loss harvesting is a tax-optimization strategy for taxable investment accounts that adds value on top of periodic rebalancing.  Tax-loss harvesting involves selling positions that are currently valued at less than their original cost and replacing them with new positions that are expected to perform similarly to the asset sold. Losses are recognized for tax savings, but the overall asset class distribution and performance expectations do not change.  Harvested losses accumulate as “tax loss carryforwards” on your income tax returns.  They can be used to offset future taxable capital gains.  Current tax law also allows taxpayers to write off $3,000 per year of accumulated capital losses against ordinary income each year.

Most investment managers do not actively manage client portfolios for tax saving opportunities.  Our routine rebalancing and tax loss harvesting activities are relatively unique.  Most advisors see these time-consuming activities as outside of the scope of their responsibilities.  That’s a shame, as academic studies have consistently found that effective rebalancing and periodic tax loss harvesting add significant value to an investor’s net worth over time.  The recent market volatility is presenting us with the first significant tax loss harvesting opportunity since 2008.  It takes a lot of manual work, but I’ll be busy rebalancing accounts and harvesting losses in individual securities the remainder of this year. 


A great recipe is a great recipe whether it starts in Jae’s kitchen with a well-made salsa or starts in Bill’s office with a well-made pie. 

You have a very well-constructed and carefully managed investment portfolio that has historically generated average annual returns of 10% with lower volatility and less risk than any other alternative structure. 

Your investment performance has been outstanding relative to others in the current bear market.  We are significantly outperforming the market during this bear market downturn.  Our multi-asset structure and mathematically sound process provides considerably stronger downside protection than most.  I’ve discussed this before using historical charts and sound economic principles to demonstrate the logic.  Now you can see it in action with the actual performance of your own portfolio in real time. 

Our 7Twenty portfolio is fulfilling its promise that an equally-weighted, multi-asset portfolio of low-cost, tax-efficient ETFs provides better returns with less downside risk than other strategies that rely on the manager’s purported stock picking prowess or ability to time markets.  This same principle has been proven over and over by numerous academic studies.  Yet sadly, most of the industry (including the financial media) offer smoke and mirrors, and the illusion that any human being (or even a supercomputer for that matter) can effectively beat the markets over time.  The true magic comes from the mathematically sound principles of broad diversification over multiple asset classes, keeping costs low by utilizing index funds and ETFs, routine rebalancing and effective tax loss harvesting.  But that doesn’t sell magazines, doesn’t sell ads on CNBC, and doesn’t justify the salaries and bonuses of highly paid bankers who reside in in high-priced office space with private dining rooms in downtown Manhattan.  They offer little more than an empty promise that they have a better crystal ball than a similar firm across the street.

The current market volatility offers us a unique opportunity to harvest losses in individual investments without giving up any future performance potential on the rebound.  The tax savings can be even more significant over time than the investment earnings alone.    

Your portfolio is optimized for consistency of returns, lower risk, low cost and tax efficiency.  Tax loss harvesting opportunities also provide tangible dollar savings to build your net worth outside of the portfolio returns.

Your quarterly investment reports can be found by logging into your client portal at

Be Smart.  Be Well.  Be Kind.


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Happiness is the meaning and the purpose of life, the whole aim and end of human existence.” – Aristotle


Face it – you spend a lot of time at work – often more time than you spend with your family, with friends, more than you have for yourself. If you’re going have that much time invested in your business, you might as well enjoy it. You owe it to yourself to be happy in your career.


Let me begin by sharing what I consider to be the benchmarks of a successful career:


You love what you do.

You love who you do it with.

You are adequately compensated to support the lifestyle of your choice.


You need all three to be happy. If you’re coming up short on the first two, you’re not happy no matter how much money you make.  Income issues aside, let me introduce the ideas from a book called The How of Happiness.  Author Sonja Lyubormirsky (I’ll refer to her as Dr. Sonja), a Ph.D. research psychologist and psychology professor, has provided useful insights on the concept of happiness.


Dr. Sonja says that 50% of our happiness is fixed – a genetically dictated set point; 10% is circumstantial, or event driven – closing a big deal, getting a new car or taking a dream vacation will temporarily make us happy before we backslide to our set point.  Contrary to the popular saying, whoever has the most toys does not win, at least not in the long haul.  Finally, she has scientifically documented (with 44 pages of footnotes!) the effectiveness of a dozen “happiness activities” (daily intentional behaviors) that can help us permanently increase the remaining 40% of our personal happiness equation.


Let’s look at these 12 activities in the order they’re presented in the book. I’ll raise questions to get you thinking about how each can apply to your career:


1. Expressing gratitude. How many ways can you show that you’re grateful to those you work with?  Who has helped you along the way to your position today that you can acknowledge?  How can you show your clients/customers (both external and internal) that you appreciate their contributions to your success.


2. Cultivating optimism.  Your attitude is a reflection of your thoughts.  What effort do you make to keep yourself thinking positive and hopeful daily, despite “doom and gloom” media and negative people?  What kind of attitude do you bring to the office every day that lifts others’ spirits?


3. Avoiding overthinking and social comparison.  There’s always somebody richer, smarter, better looking, in better shape, etc. in the marketplace than you.  Are you willing to give up comparing yourself to them so you can value the unique human being you are?


4. Practicing acts of kindness.  How can you be a “kinder, gentler” person in the office? Do you go out of your way to do the little things that build your emotional bank account with your associates, no matter what their position?  How can you display generosity toward others, not so much with money as with your time and a listening ear?


5. Nurturing social relationships.  “To have a friend you’ve got to be a friend.”  How do you go about building business friendships?  Do you feel you have to always compete with your peers?  If so, can you turn those into friendly rivalries that spur on better performances from all?


6. Developing strategies for coping.  The world of work is not always fun and games – sometimes the going gets rough, as we’ve all experienced during a recession and the pandemic.  By what means do you keep yourself on a reasonably even keel during stressful periods?  How quickly do you bounce back from the inevitable setbacks you’ll face?


7. Forgiveness.  Occasionally (hopefully not often) people will do you wrong in your career.  Do you understand that holding on to vengeful thoughts toward others holds you back?  What do you do to get over a hurtful business relationship so you can move on?


8. Increasing flow experiences.  We are all familiar with “being in the zone.”  Are there certain behaviors you do that increase the likelihood you’ll get there more often?  What changes can you make to your physical workspace to facilitate this?


9. Savoring life's joys.  How often do you take time to smell the roses?  Or even smell the coffee at your local Starbucks on your way to the office?  Are there other things you take for granted that you could take a moment to enjoy throughout your day?


10. Committing to your goals.  Goals are essential for achievement.  It’s one thing to write them down – are you committed to making the effort to stretch yourself to achieve them rather than give up when things get hard?


11. Living ethically and purposefully.  The most successful people have found a way to develop a strong sense of higher purpose.  They have uncompromising ethics.  Do you make the effort to evolve yourself spiritually, whether through a traditional religious practice or via your own path?


12. Taking care of your body. The benefits of healthful eating, regular exercise and appropriate rest are well documented. Have you been carrying around an extra 20+ pounds from a junk food diet?  Does your health club membership card sit in your wallet unused?  Are you getting enough sleep to be bright eyed on the job without being a caffeine junkie?


Like any self-improvement regimen, Dr. Sonja asserts that you must make a sustained effort with these intentional activities to upgrade your level of happiness.  In other words, you’ve got to turn them into habits.  She provides clear guidelines on how to apply each of the 12, recommending you try a combination of several to see which ones fit best for you.


Though I bill myself as financial planner who helps my clients improve their financial bottom line, having them adopt these activities is really intended to help them improve their personal happiness.  Isn’t that what is life all about?


Aristotle answered that question almost 2,500 years ago.  It rings true today.

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Inflation and Interest Rates – Why They Matter

This blog is going to be long. I blame the word inflation, be it transitory or not, for inflating its length.  Many of the thoughts and words were compiled from articles written by two of my favorite authors on the subject of economics and investing:  Vitaliy Katsenelson and John Mauldin (from whom I have borrowed liberally). 


The number one question I am asked by clients, friends and random strangers is – “Are we going to have inflation?”

I think about inflation on three timelines: short, medium, and long-term. 

The pandemic disrupted a well-tuned but perhaps overly optimized global economy and time-shifted the production and consumption of various goods. For instance, in the early days of the pandemic, automakers cut their orders for semiconductors. As orders for new cars have come rolling back, it is taking time for semiconductor manufacturers, who, like the rest of the economy, run with little slack and inventory, to produce enough chips to keep up with demand. A $20 device the size of a quarter that goes into a $40,000 car may have caused a significant decline in the production of cars and thus higher prices for new and used cars.

Here is another example. The increase in new home construction and spike in remodeling drove demand for lumber while social distancing at sawmills reduced lumber production – lumber prices spiked 300%. Costlier lumber added $36,000 to the construction cost of a house, and the median price of a new house in the US is now about $350,000.

The semiconductor shortage will get resolved by 2022, car production will come back to normal, and supply and demand in the car market will return to the pre-pandemic equilibrium. This is transitory inflation.  It’s a strictly short-term phenomenon.  High prices in commodities are cured by high prices. High lumber prices will incentivize lumber mills to run triple shifts. Increased supply will meet demand, and lumber prices will settle at the pre-pandemic level in a relatively short period of time. That is the beauty of capitalism! 

Most high prices caused by the time-shift in demand and supply fall into the short-term basket, but not all. It takes a considerable amount of time to increase production of industrial commodities that are deep in the ground – oil, for instance. Low oil prices preceding the pandemic were already coiling the spring under oil prices, and COVID coiled it further. It will take a few years and increased production for high oil prices to cure high oil prices. Oil prices may also stay high because of the weaker dollar, but I’ll come back to that.

Federal Reserve officials have told us repeatedly they are not worried about inflation; they believe it is transitory, for the reasons I described above. I’m a bit less dismissive of inflation, and the two factors that worry me the most in the longer term are labor costs and interest rates. 

Let’s start with labor costs. 

During a garden-variety recession, companies discover that their productive capacity exceeds demand. To reduce current and future output they lay off workers and cut capital spending on equipment and inventory. The social safety net (unemployment benefits) kicks in, but not enough to fully offset the loss of consumer income; thus, demand for goods is further reduced, worsening the economic slowdown. Through millions of selfish transactions (microeconomics), the supply of goods and services readjusts to a new (lower) demand level. At some point this readjustment goes too far, demand outstrips supply, and the economy starts growing again.

This pandemic was not a garden-variety recession. 

The government manually turned the switch of the economy to the “off” position. Economic output collapsed. The government sent checks to anyone with a checking account, even to those who still had jobs, putting trillions of dollars into consumer pockets. Though output of the economy was reduced, demand was not. It mostly shifted between different sectors within the economy (home improvement was substituted for travel spending). Unlike in a garden-variety recession, despite the decline in economic activity (we produced fewer widgets), our consumption has remained virtually unchanged. Today we have too much money chasing too few goods– that is what inflation is. This will get resolved, too, as our economic activity comes back to normal.

Today, though the CDC says it is safe to be inside or outside without masks, the government is still paying people not to work. Companies have plenty of jobs open, but they cannot fill them. Many people have to make a tough choice between watching TV while receiving a paycheck from big-hearted Uncle Sam and working. Zero judgement here on my part – if I was not in love with what I do and had to choose between stacking boxes in Amazon’s warehouse or watching Amazon Prime while collecting a paycheck from a kind uncle, I’d be watching Sopranos for the third time. 

To entice people to put down the TV remote and get off the couch, employers are raising wages. For instance, Amazon has already increased minimum pay from $15 to $17 per hour. Bank of America announced that they’ll be raising the minimum wage in their branches from $20 to $25 over the next few years. The Biden administration may not need to waste political capital passing a federal minimum wage increase; the distorted labor market did it for them. 

These higher wages don’t just impact new employees, they help existing employees get a pay boost, too. Labor is by far the biggest expense item in the economy. This expense matters exponentially more from the perspective of the total economy than lumber prices do. We are going to start seeing higher labor costs gradually make their way into higher prices for the goods and services around us, from the cost of tomatoes in the grocery store to the cost of haircuts.

Only investors and economists look at higher wages as a bad thing. These increases will boost the (nominal) earnings of workers; however, higher prices of everything around us will negate (at least) some of the purchasing power. 

Wages, unlike timber prices, rarely decline. It is hard to tell someone “I now value you less.” Employers usually just tell you they need less of your valuable time (they cut your hours) or they don’t need you at all (they lay you off and replace you with a machine or cheap overseas labor). It seems that we are likely going to see a one-time reset to higher wages across lower-paying jobs. However, once the government stops paying people not to work, the labor market should normalize; and inflation caused by labor disbalance should come back to normal, though increased higher wages will stick around.

There is another trend that may prove to be inflationary in the long-term: de-globalization.  Even before the pandemic the US set plans to bring manufacturing of semiconductors, an industry deemed strategic to its national interests, to its shores. Taiwan Semiconductor and Samsung are going to be spending tens of billions of dollars on factories in Arizona.  

The pandemic exposed the weaknesses inherent in just-in-time manufacturing but also in over reliance on the kindness of other countries to manufacture basic necessities such as masks or chemicals that are used to make pharmaceuticals.  Companies will likely carry more inventory going forward, at least for a while.  But more importantly more manufacturing will likely come back to the US. This will bring jobs and a lot of automation, but also higher wages and thus higher costs.  

If globalization was deflationary, de-globalization is inflationary.  

I am not drawing straight-line conclusions, just yet. A lot of manufacturing may just move away from China to other low-cost countries that we consider friendlier to the US; India and Mexico come to mind.  

And then we have the elephant in the economy – interest rates, the price of money. It’s the most important variable in determining asset prices in the short term and especially in the long term. The government intervention in the economy came at a significant cost, which we have not felt yet: a much bigger government debt pile. This pile will be there long after we have forgotten how to spell social distancing.  The US government’s debt increased by $5 trillion to $28 trillion in 2020 – more than a 20% increase in one year! At the same time the laws of economics went into hibernation: The more we borrow the less we pay for our debt, because ultra-low interest rates dropped our interest payments from $570 billion in 2019 to $520 billion in 2020. 

That is what we’ve learned over the last decade and especially in 2020: The more we borrow the lower interest we pay. I should ask for my money back for all the economics classes I took in undergraduate and graduate school!

This broken link between higher borrowing and near-zero interest rates is very dangerous. It tells our government that how much you borrow doesn’t matter; you can spend (after you borrow) as much as your Republican or Democratic heart desires. 

However, by looking superficially at the numbers I cited above we may learn the wrong lesson. If we dig a bit deeper, we learn a very different lesson: Foreigners don’t want our (not so) fine debt. It seems that foreign investors have wised up:  They were not the incremental buyer of our new debt – most of the debt the US issued in 2020 was bought by Uncle Fed. Try explaining to your kids that our government issued debt and then bought it itself. Good luck.

Let me make this point clear: Neither the Federal Reserve, nor I, nor a well-spoken guest on CNBC knows where interest rates are going to be (the total global bond market is bigger even than the mighty Fed, and it may not be able to control interest rates in the long run). But the impact of what higher interest rates will do to the economy increases with every trillion we borrow. There is no end in sight for this borrowing and spending spree. 

Let me provide you some context about our financial situation. 

The US gross domestic product (GDP) – the revenue of the economy – is about $22 trillion, and in 2019 our tax receipts were about $3.5 trillion. Historically, the-10-year Treasury has yielded about 2% more than inflation.

Consumer prices (inflation) went up 4.2% in April and up 5%  in May. Today the 10-year Treasury pays 1.6%; thus, the World Reserve Currency debt has a negative 2.6% real interest rate (1.6% – 4.2%). 

These negative real (after inflation) interest rates are unlikely to persist while we are issuing trillions of dollars of debt. But let’s assume that half of the increase is temporary and that 2% inflation is here to stay. Let’s imagine the unimaginable. Our interest rate goes up to the historical norm to cover the loss of purchasing power caused by inflation. Thus, it goes to 4% (2 percentage points above 2% “normal” inflation). In this scenario our federal interest payments will be over $1.2 trillion (I am using vaguely right math here). A third of our tax revenue will have to go to pay for interest expense. Something has to give. It is not going to be education or defense, which are about $230 billion and $730 billion, respectively. You don’t want to be known as a politician who cut education; this doesn’t play well in the opponent’s TV ads. The world is less safe today than at any time since the end of the Cold War, so our defense spending is not going down (this is why I favor several defense stocks). 

The government that borrows in its own currency and owns a printing press will not default on its debt, at least not in the traditional sense. It defaults a little bit every year through inflation by printing more and more money. Unfortunately, the average maturity of our debt is about five years, so it would not take long for higher interest expense to show up in budget deficits. 

Money printing will bring higher inflation and thus even higher interest rates. 

If things were not confusing enough, higher interest rates are also deflationary. 

We’ve observed significant inflation in asset prices over the last decade; however, until this pandemic we had seen nothing yet. Median home prices are up 17% in one year. The wild, speculative animal spirits reached a new high during the pandemic. Flush with cash (thanks to kind Uncle Sam), bored due to social distancing, and borrowing on the margin (margin debt is hitting a 20-year high), consumers rushed into the stock market, turning this respectable institution (okay, wishful thinking on my part) into a giant casino. 

It is becoming more difficult to find undervalued assets. I am a value investor, and believe me, I’ve looked (we are finding some, but the pickings are spare). The stock market is very expensive. Its expensiveness is setting 100-year records. Except, bonds are even more expensive than stocks – they have negative real (after inflation) yields.

But stocks, bonds, and homes were not enough – too slow, too little octane for restless investors and speculators. Enter cryptocurrencies (note: plural). Cryptocurrencies make of the 1999 era look like a conservative investment (at least it had a cute sock commercial). There are hundreds if not thousands of crypto “currencies,” with dozens created every week. (I use the word currency loosely here. Just because someone gives bits and bytes a name, and you can buy these bits and bytes, doesn’t automatically make what you’re buying a currency.)

“The definition of a bubble is when people are making money all out of proportion to their intelligence or work ethic.” – The Big Short

I keep reading articles about millennials borrowing money from their relatives and pouring their life savings into cryptocurrencies with weird names, and then suddenly turning into millionaires after a celebrity CEO tweets about the thing he bought. Much ink is spilled to celebrate these gamblers, praising them for their ingenious insight, thus creating ever more FOMO (fear of missing out) and spreading the bad behavior.

Unfortunately, at some point they will be writing about destitute millennials who lost all of their and their friends’ life savings, but this is down the road. Part of me wants to call this crypto craziness a bubble, but then I think that’s disrespectful to the word bubble, because something has to be worth something to be overpriced. At least tulips were worth something and had a social utility. (I’ll come back to this topic later in the blog).

When interest rates are zero or negative, stocks of sci-fi-novel companies that are going to colonize and build five-star hotels on Mars are priced as if they already have regular flights to the Red Planet every day of the week.  Rising interest rates are good diffusers of mass delusions and rich imaginations. 

In the real economy, higher interest rates will reduce the affordability of financed assets. They will increase the cost of capital for businesses, which will be making fewer capital investments. No more 2% car loans or 3% business loans. Most importantly, higher rates will impact the housing market. 

Up to this point, declining interest rates increased the affordability of housing, though in a perverse way: The same house with white picket fences (and a dog) is selling for 17% more in 2021 than a year before, but due to lower interest rates the mortgage payments have remained the same. Consumers are paying more for the same asset, but interest rates have made it affordable.

At higher interest rates housing prices will not be making new highs but revisiting past lows. Declining housing prices reduce consumers’ willingness to improve their depreciating dwellings (fewer trips to Home Depot). Many homeowners will be upside down in their homes, mortgage defaults will go up… well, we’ve seen this movie before in the not-so-distant past. Higher interest rates will expose a lot of weaknesses that have been built up in the economy. We’ll be finding fault lines in unexpected places – low interest has covered up a lot of financial sins.

And then there is the US dollar, the world’s reserve currency. Power corrupts, but unchallenged and unconstrained the power of being the world’s reserve currency corrupts absolutely. It seems that our multitrillion-dollar budget deficits will not suddenly stop in 2021. With every trillion dollars we borrow, we chip away at our reserve currency status (Vitaliy Katsenelson of Contrarian Edge has written about this topic in great detail, including our national complacency and arrogance, and things have only gotten worse since). And as I mentioned above, we’ve already seen signs that foreigners are not willing to support our debt addiction. 

Am I yelling fire where there is not even any smoke? 

Higher interest rates are anything but a consensus view today. Anyone who called for higher rates during the last 20 years is either in hiding or has lost his voice, or both. However, before you dismiss the possibility of higher rates as an unlikely plot for a sci-fi novel, think about this. 

In the fifty years preceding 2008, housing prices never declined nationwide. This became an unquestioned assumption by the Federal Reserve and all financial players. Trillions of dollars of mortgage securities were priced as if “Housing shall never decline nationwide” was the Eleventh Commandment, delivered at Mount Sinai to Goldman Sachs. Or, if you were not a religious type, it was a mathematical axiom or an immutable law of physics. The Great Financial Crisis showed us that confusing the lack of recent observations of a phenomenon for an axiom may have grave consequences. 

Today everyone (consumers, corporations, and especially governments) behaves as if interest rates can only decline, but what if… I know it’s unimaginable, but what if ballooning government debt leads to higher interest rates? And higher interest rates lead to even more runaway money printing and inflation? 

This will bring a weaker dollar. 

A weaker US dollar will only increase inflation, as import prices for goods will go up in dollar terms. This will create an additional tailwind for commodity prices. 

If your head isn’t spinning from reading this, I promise mine is from having written it. 

To sum up: A lot of the inflation caused by supply chain disruption that we see today is temporary. But some of it, particularly in industrial commodities, will linger longer, for at least a few years. Wages will be inflationary in the short-term and will reset prices higher, but once the government stops paying people not to work, wage growth should slow down. Finally, in the long term a true inflationary risk comes from growing government borrowing and budget deficits, which will bring higher interest rates and a weaker dollar with them, which will only make inflation worse and will also deflate away a lot of assets.

Question:  How do I invest your money to prepare for the possibility of higher inflation? 

Answer:  Thoughtfully and humbly.

We need to recognize that inflation in the long-term is a probability but not a certainty. Macroeconomics is a voodoo science; it appropriately belongs in the liberal arts department. The economy is an incredibly complex and unpredictable system.

Here is an example: Japan is the most indebted developed nation in the world (its debt-to-GDP exceeds 260%, while ours is 130% or so). Its population is shrinking, and thus its level of indebtedness per capita is going up at a much faster rate than the absolute level of debt. Anyone, including yours truly, would have thought that this forest full of dry wood was one lightning strike away from a disastrous conflagration. And yet Japanese interest rates are lower than ours and the country has been mired in a deflationary environment for decades.

Admittedly, Japan has a lot of unique economic and cultural issues: Companies are primarily run for the benefit of employees, not shareholders (unproductive employees are never let go); there are a lot of zombie companies that should have been allowed to fail decades ago; and the Japanese asset bubble burst in 1991, when debt-to-GDP was only 60%. The point still stands: Long-term forecasting of inflation and deflation is an incredibly difficult and humbling exercise.

As investors we have to think not in binary terms but in probabilities. The acceleration of our debt issuance and our government’s seeming indifference to it and to ballooning budget deficits raise the probability and the likely severity of inflation. At the same time, we have to accept the possibility that the economic gods are playing cruel games with us gullible humans and have deflation in store for us instead.

Inflation and higher interest rates are joined at the hip. The expectation of higher inflation will raise interest rates, as bond investors will demand a higher return. This in turn will result in larger budget deficits and more money printing and thus more borrowing and even higher interest rates.

Here is how I am positioning your portfolio for the risk – the possibility, not the certainty – of long-term inflation and higher interest rates: More than half of your assets were chosen specifically for their likely ability to withstand higher inflation. 

·       Value-oriented companies that have “pricing power”, i.e., the ability to raise prices without losing sales. 

·       “Real assets” such as global infrastructure, utilities, US energy infrastructure (pipelines), commodities and gold. 

·       Natural resource companies focused on basic needs such as food, water, timber, energy and industrial metals and materials. 

And here’s how I am positioning your portfolio for the risk – the possibility, not the certainty – of long-term price stability, deflation and continued low interest rates:  The other half of your assets were chosen specifically for their likely ability to flourish during periods of low inflation. 

·       US and global bonds

·       US and global high growth companies

·       Innovation including young high-growth companies focused on artificial intelligence, virtual reality, robotics, 3-D printing, internet security, electric and self-driving vehicles, internet of things and other disruptive technologies that flourish when the cost of capital is low.

Valuation matters more than ever. Higher interest rates are an inconvenience to short-duration assets whose cash flows are near the present and devastating to long-duration assets. Here is a very simple example: When interest rates rise 1%, a bond with a maturity of 3 years will decline about 2.5%, while one with a maturity of 30 years will decline 25% or so.  This is why I keep most of your bond portfolio in short-duration assets.

The same applies to companies whose cash flows lie far in the future and who are thus very sensitive to increases in the discount rate (interest rates and inflation). Until recently they have disproportionally benefited from low interest rates. They are the ones that you will most likely find trading in the bubble territory today. But their high valuations (high price-to-earnings ratio) will revert downward. Value stocks will be back in vogue again. We have started seeing the rotation from growth to value recently.

Inflation will benefit some companies, be indifferent to others, and hurt the rest. To understand what separates winners from losers, we need to understand the physics of how inflation flows through a company’s income statement and balance sheet.

Let’s start with revenue. Higher prices across the economy are a main feature of inflation. We want to own companies that have pricing power. 

Pricing power is the ability to raise prices without suffering a decline in revenue that comes from customers’ inability to afford higher prices or from the loss of customers to competitors.

Companies that have strong brands, monopolies, or products that represent a very small portion of customer budgets usually have pricing power.

If Apple raises prices on the iPhone, you’ll curse Steve Jobs and pay the higher price. (A friend of mine curses him every time the iPhone frustrates him. I keep reminding him that Steve is no longer with us. Doesn’t help.) Of course, if Apple raises iPhone prices too much and its products become unaffordable, consumers may just start buying iThings less often.

Food, water, and utility companies have pricing power. We own plenty of these stocks, too. The same applies to most consumer staples.

What the pandemic showed us is that humans are adaptable creatures – you throw adversity at us, we’ll indulge in angry outbursts but we’ll adapt. The rate of change of inflation matters even more than absolute rate of inflation. If inflation remains predictable, even at a higher level, then businesses will plan for and price it into their products. If the rate of growth is highly variable, then there is going to be a war of pricing powers for shrinking purchasing ability of the end customer. We want to own companies that are on the winning side of that war.

Let’s go to the expenses side of the income statement. Companies whose expenses are impacted the least by rising prices do well, too. Generally, companies with larger fixed costs versus variable costs do better. 

It is important to differentiate whether the capital intensity of a business lies in the past or in the future. A business whose high capital intensity is in the past benefits from inflation. Think of a pipeline company, for instance (we own plenty of those). Most of its costs are fixed, and they have been incurred in yesterday’s pre-inflation dollars. The cost of maintaining pipelines will go up, but in relation to the total cost of constructing pipelines these costs are small. However, companies that operate pipelines have debt-heavy balance sheets, which can become a source of higher costs. Pipeline companies we own have debt maturities that go out many decades into the future. They’ll be paying off these debts with inflated cash flows.

I’ve seen studies that looked at asset prices over the last few decades and declared “These assets have done the best in past inflations.” Most of these studies missed a small but incredibly important detail: The price you pay for the asset matters. If we are entering into an inflationary environment today, it is happening when asset prices are at the highest valuation in over a century. (This was not always the case during the period covered by these studies.)

For instance, one study showed that REITs have done well during past inflations. This may not be the case going forward. Aside from its being a very broad and general statement (not all REITs are created equal), low interest rates brought a lot of capital into this space and inflated valuations. Investors were attracted to current income, which was better than from bonds, and they paid little attention to the valuations of the underlying assets.

I cannot stress this point enough: Whatever landscape is ahead; we are entering into it with very high valuations and an economy addicted to low interest rates.

We have to be very careful about relying on generalized comments about past inflations. We need to be nuanced in our thinking.

We get asked a lot about gold and cash

Gold: I don’t have a great love for gold.  We own a modest amount in your portfolio as a hedge. We discussed it in the past in great depth, so I won’t bore you with it here.

Cash: I am basically referring to short-term bonds, which seem like the most comfortable asset to be in today. However, their ability to keep up with inflation has been spotty in the past. It is okay in the short term but likely to be value-destructive in the long term. Our view on cash has not changed: In a portfolio context cash should be a residual on other investment decisions. In our portfolios cash is what is left when we run out of investment ideas.

Investing outside of the U.S.

The U.S. government was not the only one borrowing and paying people to stay at home. But the US has done it to a much greater degree than others. Most importantly, we are not slowing down our spending (and thus borrowing), which will likely lead to a weaker dollar. If nothing else, a declining dollar makes foreign securities more valuable in U.S. dollars. The probability of a stronger dollar is low.

But there is more.

The next decade will likely belong to ex-U.S. investing. If you invested outside the U.S. over the last decade, your returns were overshadowed by the gigantic outperformance of the U.S. markets. Today the US is the most expensive developed market. Take Europe, for instance; most European stocks are still trading below 2007 highs. UK stocks trade at a half of the valuation of U.S. stocks.

Our approach to investing is very simple: We are diehard value investors looking for high-quality companies that are significantly undervalued and run by great management. We do not change into flamboyant value-indifferent investors when we cross the border. International investing just gives us a greater palette with which to paint our investing canvas.

We’ve been doing ex-U.S. investing for a long time. Today, about half of our portfolio is outside the US.

If you thought I had a silver bullet and easy answers, I don’t. I know what I am about to say may fall on deaf ears, especially since we are in an apparently never-ending bull market. But as steward of your capital, my most important objective is survival (avoiding permanent loss of capital and maintaining purchasing power) in both inflationary and deflationary environments.  Our goal is to achieve market-like returns with less than market-like risk.

Last decade risk did not matter. Risks were only figments of our imagination, as money printing by the Fed, which was trying to fix a lot of sins and became the biggest sin of all – significantly distorting the price of money and thus the economy. But as Charlie Munger said, “If you are not confused about the global economy, you don’t understand it.”

A suddenly appearing iceberg is life-threatening to a speedboat (or cruise ship), but it is just an unpleasant inconvenience for an icebreaker. Our goal is to have a portfolio of icebreakers. We are playing a different game – we are not racing against the speedboats. We take comfort in knowing that, while the speedboats may outrace us for some time, they are bound to eventually hit an iceberg and sink. One iceberg that we have an eye on today is inflation and higher interest rates (though we are prepared for deflation and lower rates too).

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An Exponential Ride

I've got to admit it's getting better
A little better all the time
I have to admit it's getting better
It's getting better since you've been mine
Getting so much better all the time

– Getting Better, Paul McCartney and John Lennon, 1967, “Sgt. Pepper’s Lonely Hearts Club Band” album

The last year brought exponential growth in – among other things – use of the word “exponential.”  It is now the go-to term when you want to say something is “growing super-fast.”

As humans, we tend to think in terms of linear growth – whatever is happening immediately around us in shorter time periods.  Accelerating, exponential growth is harder to grasp.  Exponential growth means the rate of growth increases with time, just like a car goes faster the more you press the gas pedal.

“Exponential” has become popular recently to describe the way a virus spreads, if nothing stops it.  When one person infects two others, each of whom infects two others, who each infect two others and so on, the numbers can quickly get out of hand.  Exponentially so.

But exponential growth isn’t always scary.  Compound interest is exponential and we all enjoy it (when we’re the lender, at least).  Moore’s Law, which says the number of transistors on integrated circuits doubles approximately every two years, is another example of extremely useful exponential growth.

The number of transistors on a microchip “only” doubles every two years. But that took it from 1,000 transistors to 50 billion in 50 years. Literally, 50 million times more powerful.

But it’s even better. If you go back to the late 1940s when transistors were first being developed, having 1,000 transistors on something called a microchip was barely a dream.  But with time and literally tens of thousands of patents and innovations, etc., we got to 50 billion.  People have been proclaiming the end of Moore’s law for decades.  I’ll take the other side of that bet and we are just exploring the edges of quantum computing.

Read a little about the chip industry’s growth and you’ll see words like “surprise” and “accidental” discoveries.  You’ll also see that it didn’t happen in one place at one time but was literally exploding all over.

But the exponential growth of the microchip would not have been possible without the exponential growth of all sorts of technologies and innovations developed over the previous 100 years. That’s the amazing thing about innovation.  Or, more broadly, we could just call it “progress.”

Humanity is constantly learning and improving.  These improvements build on themselves in an exponential process.  That’s why daily life changed far more in the last 200 years than it did in the prior 20,000 years.  The rate of growth accelerated.  And that’s why we will see more change in the next 20 years than we have seen in the last 200.  Yes, THAT is exponential.

Today we enjoy living standards far higher than even royalty did not so long ago.  Yes, we have problems, serious ones, but we also have advantages.  We know we can make the world better because it is getting better.  And it’s getting better all the time, at least over time.

This month’s blog is dedicated to highlighting good news – positive things that are happening all around us, often unnoticed or unappreciated.  I’ll get back to the problems of the day later, but today I want us to appreciate the positive.  There’s a lot of it out there.  And any serious investor should pay attention because technological innovation is where the real financial upside is (along with, admittedly, a lot of dead-end alleys).

Pandemic Pluses

This year’s top good news, by far, is the COVID-19 vaccines. It was a mind-boggling scientific, manufacturing, and distribution achievement. To have a vaccine at all is amazing; to have several of them only a year after the virus was identified is unprecedented.  This kind of work once took decades.  Operation Warp Speed was indeed a triumph of human work, cooperation between the private and public sectors, effort, and ingenuity.

This happened in part because scientists had been working on the underlying methods and technologies for a long time, not knowing they would be useful in a pandemic.  You can read the whole gripping story in The Atlantic by Derek Thompson.

Briefly, “messenger RNA” (ribonucleic acid) is a genetic substance that tells your cells which proteins to make.  Researchers in various places realized long ago that manipulating RNA could be quite useful, but exactly how to do it was elusive.

It turns out that Hungarian scientist Katalin Karikó discovered mRNA back in 1978.  She eventually ended up at the premier epidemiological university in the United States, the University of Pennsylvania, where she worked on her discovery with other scientists. Eventually in 2000 they began to see some success.

Private companies began working on mRNA products, with Moderna in the US and BioNTech in Germany eventually cracking the code.  US pharmaceutical giant Pfizer had made a deal with BioNTech in 2018 to develop an mRNA flu vaccine.  When SARS-CoV-2 struck, they pivoted quickly.  The result went into my arm a month ago and again this week (and I hope yours as well).  The technology they developed may well lead to other life-saving medicines, like a malaria vaccine (with a variation of mRNA technology) and individually tailored cancer treatments.

I want to focus a little bit on how incredibly successful the actual vaccine is, and to highlight some of the misinterpretations of statistics by the public.  I’ve been participating in a multi-part education program for financial advisors that focuses on the massive amounts of research on COVID that comes out weekly.  This crossed my desk this week:

So, with a 50% effective vaccine, we have a 50% chance of contracting COVID-19, and with a 95% effective vaccine, we have a 5% chance… right?

Actually, the news is much better. Consider what that “95% effective” statistic actually means.  As The New York Times' Katie Thomas explained, the Pfizer/BioNTech clinical trial engaged nearly 44,000 people, half of whom received its vaccine, and half a placebo.  The results? “Out of 170 cases of COVID-19, 162 were in the placebo group, and eight were in the vaccine group.”  So, there was a 162 to 8 (95% to 5%) ratio by which those contracting the virus were unvaccinated (albeit with the infected numbers surely rising in the post-study months).  Therein lies the “95% effective” news we’ve all read about.

So, if you receive the Pfizer or equally effective Moderna vaccine, do you have a 5% chance of catching the virus?  No. That chance is far, far smaller: Of those vaccinated in the Pfizer trial, only 8 of nearly 22,000 people, less than 1/10th of one percent (not 5%), were found to have contracted the virus during the study period.  And of the 32,000 people who received either the Moderna or Pfizer vaccine, how many experienced severe symptoms?  The grand total, noted David Leonhardt in a follow-up New York Times report: one.

German Scientist Gerd Gigerenzer says that his nation suffers from the same underappreciation of vaccine efficacy.  “I have pointed this misinterpretation out in the German media,” he notes, “and gotten quite a few letters from directors of clinics who did not even seem to understand what’s wrong.”  “Be assured that YOU ARE SAFE after vaccine from what matters—disease and spreading,” tweeted Dr. Monica Gandhi of the University of California, San Francisco.

Of 74,000+ participants in one of the five vaccine trials, the number of vaccinated people who then died of COVID was zero. The number hospitalized with COVID was also zero:


This is simply mind-boggling, in terms of not just the speed at which the vaccines were developed but also their efficacy. But just like the 442,000 Teraflop per second computer (the world’s fastest computer now in Japan), the successful vaccine would not have been possible without the multiple decades of work developing it, let alone the even longer period of research prior to the discovery of mRNA.  Moderna literally had a working vaccine model within 48 hours after learning the DNA sequence.  Six weeks later, it shipped its first vaccine batches to laboratories in Maryland to begin human trials.  The summary from The Atlantic article mentioned above:

“The triumph of mRNA, from backwater research to breakthrough technology, is not a hero’s journey, but a heroes’ journey.  Without Katalin Karikó’s grueling efforts to make mRNA technology work [in 1978], the world would have no Moderna or BioNTech.  Without government funding and philanthropy, both companies might have gone bankrupt before their 2020 vaccines (Reagan was wrong on this one…sometimes it takes government to do things that private industry alone cannot).  Without the failures in HIV-vaccine research forcing scientists to trailblaze in strange new fields, we might still be in the dark about how to make the technology work.  Without an international team of scientists unlocking the secrets of the coronavirus’s spike protein several years ago, we might not have known enough about this pathogen to design a vaccine to defeat it last year.  mRNA technology was born of many seeds.”

The vaccines may be what gets us out of the pandemic, but the experience drove some other unintentional innovation, too.  One was remarkably simple: Remote doctor visits.  Many medical issues can be handled with a simple conversation, but (at least in the US) it rarely happened for legal, liability, and insurance reasons.  The pandemic compelled all the players to cut through those barriers.  I don’t think we will be going back.

This also illustrates the exponential growth principle.  Now that remote medicine is allowed and people (both providers and patients) are getting comfortable with it, we will expand the range of services delivered that way.  Technology will be the key – or rather, a bunch of technologies working together. Virtual reality cameras and visors, 5G bandwidth, haptic sensors to convey “touch” without being there – all will speed up the process and should lead to better outcomes.

But even as the pandemic unfolded, other innovation continued. Let’s look at some more examples.

Food Future

The last year also gave many of us a new relationship with our food. With restaurants closed or limited, we did more of our own cooking.

In fact, our food habits and methods are always changing.  Many plants we eat simply didn’t exist in their current form even a century ago.  They have been cross-bred and manipulated into what we know now.  That process is continuing as several companies now offer plant-based meat substitutes.  As often happens with new technologies, prices are falling and people are finding new uses for the products.

Material Factors

Some of the most amazing breakthroughs are also the most basic: the materials we use to build everything else.  Hydrogen, for instance, is the most abundant element in the universe yet we have long struggled to isolate and make use of it.  This is changing.

The current process for producing hydrogen consumes a lot of energy itself, and also emits large amounts of greenhouse gases.  Another method called electrolysis is simpler and cleaner.  All you need is water and electricity.  The electricity can come from renewable sources.  That means hydrogen can (in theory) be produced almost anywhere, reducing the need to haul fossil fuels around the world.

Beyond hydrogen, other materials science breakthroughs are brewing everywhere.  Graphene, which is basically a sheet of carbon just one atom thick, nearly weightless but 200 times stronger than steel.  Scientists refer to it as a “super-material” for obvious reasons.  The applications are endless.

There are also major breakthroughs in nanotechnology – manipulating matter at super-microscopic levels.  This is a bit unbelievable so I’m going to list but a few:

Progress has been surprisingly swift in the nano-world, with a bevy of nano-products now on the market.

Never want to fold clothes again?  Nanoscale additives to fabrics help them resist wrinkling and staining.

Don’t do windows?  Not a problem!  Nano-films make windows self-cleaning, anti-reflective, and capable of conducting electricity.

Want to add solar to your house?  We’ve got nano-coatings that capture the sun’s energy.

Nanomaterials make lighter automobiles, airplanes, baseball bats, helmets, bicycles, luggage, power tools—the list goes on.

Researchers at Harvard built a nanoscale 3D printer capable of producing miniature batteries less than one millimeter wide.

And if you don’t like those bulky VR goggles, researchers are now using nanotech to create smart contact lenses with a resolution six times greater than that of today’s smartphones.

And even more is coming.  Right now, in medicine, drug delivery nanobots are proving especially useful in fighting cancer.  Computing is a stranger story, as a bioengineer at Harvard recently stored 700 terabytes of data in a single gram of DNA.

The applications are endless.  And coming fast.  Over the next decade, the impact of the very, very small is about to get very, very large.

Again, all this is coming now.  And as I described above, the real impact is exponential.  Using nanotechnology to solve these problems will free up the productivity currently being applied to them, so it can be multiplicatively used for something else.  What would that be?  Probably things we can’t presently imagine.

While we are approaching the limits of lithium-ion batteries, there are literally scores of new technologies being developed which will far surpass current technology.  The ultimate green energy, fusion energy, is fast becoming more than a pipe dream.  There is a revolution in agricultural production that will completely disrupt current production cycles over the next 20 years.  A little slower than Moore’s Law, but just as powerful.

You may have missed that last year Brown University scientists began wirelessly connecting the human brain in quadriplegics. An electrode array is attached to the brain’s motor cortex and then high-speed networks allow the patient to communicate.  We are not all that far from the day when, if you choose, you will be able to “talk” directly to your computer simply by thinking.

Entrepreneurial Shifts

Our most important natural resource, by far, is the human mind. Any one of them has astonishing potential all by itself.  When we put them together, true magic happens.

As you know, this pandemic/recession has destroyed hundreds of thousands of small businesses all over the world.  But it didn’t destroy the entrepreneurs who founded them.  I believe many will do what comes naturally to them and start more businesses – hopefully better than those they lost.

Transitions are hard but often lead to a better place. I believe some wonderful new ideas – and very successful businesses – will emerge from this time.  I can’t wait to see what they are.

We literally live in one of the most exciting periods in all of human history.  Oh, did I not mention the possibility that we might live a great deal longer than previous generations?  Of course, that’s a financial planner’s nightmare since we design retirement spending scenarios designed to last at most 30 years.  Maybe in the next positive letter…

Exponential and Your Investment Portfolio

What are we doing with your investment portfolio to ride this wave of exponential progress into the future?  Step one was the introduction of an entirely new asset class which I have labeled “Innovation”.  In this category we focus on companies leading the exponential wave into the future. Investments in this category include (among others) …

·       SPDR Kensho New Economies ETF (symbol KOMP) constructed around themes such as autonomous vehicles, 3D printing, genetic engineering and nanotechnology.

·       iShares Exponential Technologies ETF (symbol XT) big data and analytics, nanotechnology, medicine, networks, energy and environmental systems, robotics, 3-D printing, bioinformatics and new financial services technologies (fintech).

·       ALPS Disruptive Technologies ETF (symbol DTEC) 100 companies focused on 10 themes including healthcare innovation, internet of things, clean energy & smart grid, cloud computing, data & analytics, fintech, robotics & AI, cybersecurity, 3D printing, and mobile payments – all with a focus on disruptive technologies and innovation.

·       ARK Innovation ETF (symbol ARKK) specializing in bleeding edge companies in the areas of genomic revolution, industrial innovation, digital currencies and artificial intelligence)

Lastly, even outside the Innovation category, we focus on companies run by management teams that are progressive, forward-thinking and that embrace change.  This is particular evident in those areas of your investment portfolio dedicated to food, water and clean energy.  Even in the international emerging market category, we focus on consumer growth companies and “cash cows” benefiting from exponential growth in the internet, mobile computing, 5G, disruptive retail and innovative healthcare solutions.

The New Roaring 20’s

The original roaring 20’s was the ten-year period that followed the pandemic of 1917.  That too was marked by exponential growth in communications (the telephone and radio), the automobile, mass consumerism and social, artistic and cultural dynamism.  So far at least, the roaring 20’s of 2021 looks quite similar.

Jae and I are looking forward to being able to travel soon.  He gets his second Moderna vaccine in a few weeks.  We’ve also closed on our purchase of a co-op apartment on the western edge of New York City’s Central Park, which will be our permanent home away from home. 

I truly hope that we avoid a fourth wave (which coincidentally was the same number of waves experienced in the pandemic of 1917-1918) – and that more of the country and the world opens up soon.  But to do that we really need to encourage everyone to get their vaccinations.  Then we can relax these intrusive precautionary measures and people will get on with their lives, both personally and professionally.

That being said, we will probably face versions of COVID-19 for years.  New variants will develop in countries that have not been able to vaccinate and achieve herd immunity.  The doctors and scientists I follow fully expect that we will need periodic booster shots for a few years at least.  But I know of several companies that are also working on a “universal” vaccine.

Beyond vaccines, technologies are being developed that will constantly clean viruses and bacteria from our homes and gathering places, with no harm to human beings. Nano robots have been invented to clear our arteries of plaque.  Further innovations of that technology will be available before the end of the decade that I think will become ubiquitous.



Most of the credit for this month’s blog goes to the NY Times best-selling author and renowned financial geopolitical expert, John Mauldin for many of the thoughts, words and ideas included in this month’s blog. 


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It’s a Whole New World

So much has changed in our lives in 2020.  Everyone is feeling stressed.  Here are a few of today’s top stressors.  It’s not a complete list.  What are your top 5 stressors?  And what does it say about our current situation if you have difficulty limiting your list to just 5?



Sickness and death


Job loss/Furloughs



Wild Fires





Cabin fever




Systemic bias



Food Insecurity



Sense of loss


Fear of dying alone



Political extremism


Conspiracy theories


Weight gain

Political protest


Unconscious bias



White Supremacy

Proud Boys

Police shootings


Hate speech

Extreme partisanship


Hatred of elites



No Funerals


Climate Change


Election fraud

No Weddings


Mass Shootings


Fact checking

Fox News


Rachel Maddow


Racial Justice

Institutional Norms

Deep State

Social Distancing


Fake News

Foreign Interference

Hate Speech



Loss of Civility

Media Bias




You’ll notice that “investment performance” is not on the list.  Developing and implementing your investment strategy is my job, not yours.  I’m good at it because I have the time and interest to consistently learn.  I’m constantly seeking out new ideas to minimize risk and maximize future returns.  Managing risk is my specialty.  Diversification, strategic thinking and careful research are my primary tools.

Covid-19 is disrupting societies, economies, and markets around the world like no other crisis since World War II.  Policymakers, health workers, business and investors have been caught flat-footed, and without a playbook.  Adoption of trends that were already well underway have accelerated at a breathtaking pace, and new trends have emerged.  Working from home, online grocery delivery, home fitness, online education, relocation from cities to suburbs, online shopping, restaurant delivery, e-sports and video games, and dozens of other new trends are now firmly in place and here to stay.  Change is always stressful, especially when the speed is breathtaking.  When it comes to your investment portfolio, you can relax and take a deep breath.

I’ve spent much of the past 6 months rethinking investment strategy to adapt to the new realities.  I’ve attended two week-long strategic investing conferences for investment professionals.  I’ve participated in dozens of daily webinars hosted by fund companies and industry leading educators.  Both of the strategic investment conferences (originally scheduled for Phoenix and for Sydney) were virtual online events this year.  I’ve heard from 60+ leading investment thinkers from around the world.  I’ve listened to podcasts and finished more than a dozen audible books online.  The voices included portfolio managers, CIOs, senior investment analysts, investment strategists, economists, independent consultants and practitioners. Each offers his/her best high conviction ideas on contemporary and emerging portfolio construction strategies, to help us build better quality investor portfolios in a whole new world.

Even as I continue my own education, I’ve been busy making strategic changes to our investment strategy and investment selections.  This was necessary as the rules have changed. 

First, it’s important to understand that you remain highly diversified across 20 different asset classes, each chosen for specific reasons.  That part has not changed.  The changes I’m referring to are occurring within each of the asset classes.  Each change will be highlighted in some depth below. 

My goal is always to minimize risk and volatility while achieving market-like returns over time.  Like pieces in a puzzle (or players on a sports team), each asset class plays a very specific role in portfolio construction.  Some benefit from inflation.  Some deflation.  Some from economic growth.  Some from economic slowdown.  Others from rising interest rates.  Others from falling rates.  I could go on.  When we put them together, the whole is greater than the sum of the parts.  And each part is absolutely necessary to fully maximize the benefits for the whole.

A robust, carefully constructed investment portfolio with routine tax-aware rebalancing protects us from the negative consequences of making reactive investment decisions.  It avoids adverse outcomes that typically result from undisciplined portfolio decisions and unpleasant surprises on your tax return.  But a thoughtful strategy and robust framework is not enough.  Investment processes must be flexible enough to shift with changing paradigms, to avoid introducing unintended risks into portfolios.  It helps to have a clearly articulated and defined investment philosophy and framework to overcome our human tendencies, and successfully navigate treacherous conditions such as those experienced in 2020.

For the past 50 years we’ve lived in a period of mostly declining interest rates.  Rates have fallen from more than 20% in the early 80’s to negative in some parts of the world today.  That represented a tailwind for stocks, bonds and real estate for most of those years.  Returns of 8% to 10% were common during much of our investing lifetimes.  A new reality has now set in.  Today rates have nowhere to go but up.  Valuations are stretched by historic standards.  Demographically most of the developed world is aging and exiting their most productive years.  Economic growth and the investment return that it generates are increasingly harder to come by.  Much of the growth we have seen in recent years can be directly attributed to Fed policies that effectively pull future returns forward.  As a consequence, Investment returns for diversified portfolios are likely to average no more than 4% to 5% per year over the next 5 to 10 years.  This is the consensus among most economists and Wall Street banks.  Northern Trust was the latest institution to lower their long-term return forecast to 4% just last week, joining JP Morgan, PIMCO, and others (see the “Ivy Portfolio Index” attached).

Meanwhile, central bank “money printing” to prop up the economy has added increased risks to the financial system including the fear of resurgent inflation or even a potential monetary collapse.  A global pandemic still has yet to run its course, potentially leaving a path of both physical and economic pain that has yet to be fully realized.

We are entering a period of great unknowns.  The greatest minds of our time are wise enough to know that we have never been here before and none of us can accurately predict where we’re going from here.  Depressed yet?  Don’t be.  A lot of good things are happening at the same time.

A bull case can be built on the fact that we’re entering a period of great technological innovation and dramatic increases in productivity.  Self-driving cars, 3-D printing, “internet of things”, wearable technology, cloud computing, genomic engineering, robotics and artificial intelligence are disrupting and revolutionizing our world. 

A bear case can be made that these disruptive technologies are resulting in rapid change that may be beyond our ability to cope – at least in the short term.  Just ask Alexa if you’d like to know more! 

While I am a long-term optimist, I place no short-term bets either way.  Your portfolio will help us prepare for all possible scenarios.  There will be winners and losers among your 20 asset classes.  That is by design.  You’re positioned for all possible scenarios.  No matter which scenario unfolds and at what pace, your portfolio is designed to produce market-like returns with as little drama as possible. 

Here’s a brief description of some of the changes that I’m begun making inside the 20-asset class structure of your investment portfolio.  Note that underlined names and phrases in blue are links to more information.  These changes will better position us for success in this new world:

Equities:  Broad-Based

US Large Cap Stocks: No doubt that you’ve heard that a handful of stocks now make up more than 25% of the market capitalization – Facebook, Apple, Amazon, Netflix, Google (FAANG).  In fact, the largest 50 of the 500 companies that make up the S&P 500 index now represent well over half of the S&P.  Even as these top 50 have become quite expensive, many of the 450 remaining offer compelling values.  I’m focusing on individual companies that produce high “free cash flow”.  These are solid companies that generate cash income beyond what is needed for reinvestment in the businesses.  Many of these companies pay solid and sustainable dividends, can add value by buying back stock, and have solid earnings growth prospects for the future.  These are the “Cash Cows” of the S&P.  The Pacer US Cash Cows 100 ETF (symbol COWZ) has been added to your investment portfolio along with some individual companies that I believe offer compelling value that fits this theme.

US Small Cap Companies:  Smaller companies tend to be more volatile than large companies, but as a group they have historically offered better investment returns over long periods of time.  The Pacer US Small Cap Cash Cows 100 ETF (symbol CALF) has been added to your portfolio along with some select smaller capitalization companies that offer strong free cash flow, compelling valuations and solid growth prospects.

Int’l Developed Market Companies:  International stocks are currently less expensive than their US counterparts.  This may reflect the higher weight of high-flying technology names in the US indices.  International companies also offer geographic diversification and currency diversification in an uncertain world.  The Pacer Developed Markets International Cash Cows 100 ETF (symbol ICOW) includes international companies with selected for their strong free cash flow and stable dividends.

Emerging Market Companies:  Emerging market stocks are a different animal, so to speak.  Here we want Cheetahs, now Cows.  Emerging market countries are where we were back in the 1950’s.  Here we look for fast growing companies that are best positioned to capitalize on the rapid population growth in the developing world.  The Emerging Markets Internet + eCommerce ETF (symbol EMQQ) and the Columbia Emerging Markets Consumer ETF (symbol ECON) avoid the problem of inefficient “state-owned enterprises” that dominate many broad-based emerging market funds.

Equities:  Natural Resources & Basic Needs

Energy & Materials Companies:  The fossil fuel industry is dying.  Rapid advances in technology and reduced costs are catapulting clean energy companies focused on solar, wind, geothermal and battery technologies into taking their place.  I’ve been exiting all broad-based energy companies relying on fossil fuels in favor of renewable energy ETFs and individual companies that are leading the charge (pun intended).

Food & Farmland Companies: The world’s population is growing – and through good times and bad –– we all have to eat.  I’m now supplementing the two industry ETF stalwarts, VanEck Vectors Agribusiness ETF (symbol MOO) and iShares MSCI Global Agriculture Producers ETF (VEGI) with companies like Farmland Partners which owns 158k acres of farmland and Gladstone Land which owns 88k acres.  I’m also supplementing the broad-based food and farmland ETFs with individual companies including leaders in the plant-based foods revolution such as Kroger, Beyond Meat and rapid growers like United Natural Foods.

Water & Environment Companies: Water is the new oil.  We all take it for granted.  And why not?  We turn a tap and out it comes.  But that’s about to change.  The basic problem is that the quantity of water in the world is finite, but demand everywhere is on the rise.  Water is considered an “axis resource”, meaning it’s the resource that underlies all others.  So, whether you’re building a computer chip, or growing crops, or generating power, all these things require lots of water.  We invest in ETFs like the Invesco S&P Global Water Index ETF, and individual industry-leading companies such as  Veolia , Xylem and Consolidated Water.

Timber Companies:  A unique characteristic of timber companies is that their inventory keeps appreciating in value even during recessions – as their trees continue to grow during good times and bad.  Lumber is also used primarily in the single-family home market, which is booming during the pandemic as people leave high-rise living in cities for work-at-home solutions in the suburbs.  We invest in both iShares Global Timber & Forestry ETF (symbol WOOD), and directly in Weyerhaeuser, the largest landowner in the United States with 12 million acres of timberland under management.

Fixed Income:

Cash & Currencies:  This is our dry powder.  There are times when cash is king even when the yield is next to nothing.  The US dollar has been on a long run versus other countries for more than 20 years.  With the current unprecedented pace of Fed money printing, some believe that that this trend is long in the tooth.  For that reason, and to hedge our bets, we are beginning to include foreign cash in the mix through currency ETFs.  Favorites include the Australian and Canada dollar (commodity currencies) and the Swiss Franc (which has a long history of responsible management of their currency).

US Bonds: Historically the least risky asset class may now be the riskiest of them all.  After 50 years of declining rates (which causes the prices of existing fixed-rate bonds to rise in value), many of us wonder how much lower they can go if at all.  Nonetheless, bonds remain an important diversifier.  We avoid the risk of rising rates by focusing on bonds with short duration, inflation-protected bonds, variable rate bonds, and bond substitutes like new products such as Cambria Tail Risk ETF (TAIL), which invests in a combination of US treasuries and “put options” on the stock market that would rise in value significantly in the event of a sizeable market downturn. 

International Developed Market Bonds:  Our focus here is on currency diversification to reduce the risk of decline in the US dollar and inflation-protection through TIPS purchased from major developed issued by responsible governments including Germany, Spain, the UK, Australia, China and Japan. 

Emerging Market Bonds:  Bonds issued by developing countries offer both currency diversification and high yield.  Today emerging market countries like South Korea, Indonesia, Malaysia, Taiwan and the Philippines often have stronger balance sheets and less debt than many of their developed market counterparts.  These countries have younger populations and better growth prospects than their more highly developed competitors.  In that sense the bonds of these countries may be mispriced, leaving room for significant appreciation in addition to their already high yields. 

Real Assets & Alternative Diversifiers

US Real Estate:  There is something to be said for physical assets that we can feel and touch, and which don’t become obsolete when someone invents new software code, a faster computer chip or better high-tech mousetrap.  Shopping malls and office buildings may be in secular decline, but apartment communities in low tax states, senior housing and datacenters in suburban markets are on the ascendency.  Income-producing real estate provides low risk and solid dividends as long as one doesn’t bet too heavily on particular types and locations.  We are now supplementing broad-based REITs with companies that own senior housing, medical offices, apartment communities in the Sunbelt, distribution warehouses and cloud-based datacenters that are in increasing demand all over the country.  REITs currently produce dividends of 4% to 5%.  Even assuming no appreciation in asset values, this asset class offers solid returns.  Given the tax structure of REITs, we typically hold real estate investments in tax-deferred retirement accounts whenever possible.   

Global Real Estate:  If real estate itself is a good diversifier, owning it globally magnifies the diversifying properties.  Cell towers, data storage facilities, and cloud-based data centers are exploding in demand worldwide.  We own US domiciled REITs that maintain real estate holdings worldwide.  Yields here are even higher than with US properties, averaging 6% to 7% globally. 

Global Infrastructure:  Highways, bridges, and airports make up the bulk of publicly-owned global listed infrastructure, but the fastest growth is coming from the rapid expansion of critical infrastructure that uses smart technologies. Years of dithering and missed opportunities in Washington have forced innovators and investors alike to create their own infrastructure boom. With the economy crying out for stimulus and an election on the horizon, these companies may finally be ready to rebuild the nation and the world.  Regardless of which party wins the US election, it’s a safe bet that we will be heavily investing in rebuilding our infrastructure beginning next year. Rebuilding infrastructure means new jobs and economic growth, which may be sorely needed as we come out of the pandemic and face dislocation in so many service industries.  We are getting ahead of this curve by investing in Global X US Infrastructure Development ETF (symbol PAVE) and SPDR S&P Kensho Intelligent Structures ETF (symbol SIMS).  The former invests in traditional companies that benefit from infrastructure development including railroads, engineering companies, heavy equipment makers and contractors.  The latter focuses on smart building infrastructure, smart grids, intelligent transportation infrastructure and intelligent water infrastructure.  This category could explode upward when Congress and the President get serious about rebuilding our infrastructure and stimulating the American economy in the process.

US Energy Infrastructure:  We’re gradually exiting the oil and gas pipelines that once dominated this category in favor of progressive utilities that have embraced new technologies including solar, wind, nuclear and other non-fossil fuel source of energy.  We remain partially invested in Kinder Morgan, an energy pipeline company that is expected to benefit from consolidation of the remaining US pipeline infrastructure as they gobble up weaker players.  It doesn’t hurt that Richard Kinder, one of the greatest minds in the energy industry, owns 10% of the shares.

Gold & Gold Miners:  The Federal Reserve can print money, but they can’t print gold.  Gold has historically performed well during deflationary periods when fear is high and when low interest rates make the carrying cost low.  Gold also performs well in inflationary periods when confidence in paper money is waning.  Our gold holdings are diversified in vaults throughout the world including London, New York, Frankfurt, Perth, Toronto and Zurich.  We also hold companies that own gold in the ground in the form of the gold miner ETF iShares MSCI Global Gold Miners ETF (symbol RING) and individual gold mining companies such as Newmont (symbol NEM).

Commodities:  Commodities are turning in a solid performance in 2020.  The category includes oil and gas, agricultural products, industrial metals, and precious metals including silver, platinum and palladium – many of which have industrial uses in technologies of the future.  Most importantly, commodities are a tangible real asset that outperforms when the US dollar is weak, as it was for most of 2020 to date.  Commodities are in finite quantity and extraction involves significant costs, offering a thesis for increased scarcity as population growth continues around the world. 

Innovation:  This is the most exciting category to talk about.  It’s all about the future, except that the future is now.  Innovation has persisted throughout the course of history; but it has not always progressed in a predictable or linear fashion.  Innovation is episodic.  Periods when we have seen increases in rapid adoption of new technologies typically coincide with sustained and accelerating economic growth.  I believe that we’re now living through a 4th industrial revolution and that is driving the current pace of innovation in the marketplace.  Building on the 3rd (a digital revolution occurring since the mid-20th century), the 4th reflects many technologies – blurring the lines between physical, digital and biological spheres.  Innovation is everywhere.  It can be found in any part of the economy regardless of sector classification, market capitalization or geographical location.  That’s why I’ve created a space for innovation as a separate asset class.  The companies that are leading this revolution don’t necessarily fit in any of the other 19 categories.  Some of them are small and not yet profitable.  They don’t always appear in other broad market indices.  There are 5 platforms of growth that will generate significant economic value over the next 5 to 10 years:

·        Global E-commerce.  Beyond companies like Amazon and Alibaba – who have penetrated industries like travel, books, household products, groceries, office supplies and media – I see significant opportunities in fashion, autos, travel, ride sharing, restaurant delivery and even textbooks.  There are opportunities in payment companies that are easy to use and add security and safety to the system.  Drone manufacturers and other ways to delivery packages are also potential areas for investment.

·        Genetic breakthroughs.  The genetics industry is on the cusp of creating meaningful advances in diagnostics and therapeutics, and even in areas like agriculture and artificial intelligence applications.  Human longevity and aging may even be manipulated through advances over the next 10 to 15 years.

·        Intelligent machines.  Artificial intelligence or machine learning is permeating every layer of product development. If the past 30 years we spent time collecting and organizing data with mainframes, personal computers and mobile phones.  The next 30 years could be set up to take that data and change our lives in the physical world.  The future of production will include individualized products designed to the needs of the customer.  Efficiencies in the design and manufacturing process, employing robotics, 3D printing, and manipulation of massive amounts of data, will enable that level of specificity and customization.

·        New finance.  Efficient pricing and methods of payment are advancing and being adopted rapidly.  Methods of exchange are evolving with trends in e-commerce, allowing mobile payments and digital wallets to gain traction. This is especially true in developing countries that lack the advantages (or burdens) of a brick-and-mortar banking infrastructure.  In many poor countries, payments by smart phones have already completely replaced paper currencies and the need for bank accounts or credit cards.  FinTech is a merging of finance and technology and rapid adoption is already underway everywhere in the world.

·        Exponential data.  Our ability to collect, store and deliver data to create more efficient marketing and distribution has taken a major leap forward in recent years and is growing exponentially.  That requires massive amounts of datacenters, fiber-optic cable, and cell towers.  Advances in artificial intelligence, computing power and memory are allowing us to fully exploit that data.  The creation, cleaning, storage, and delivery of data will lead to new applications like augmented and virtual reality, artificial intelligence & machine learning, software as a service, and the sharing economy.  Some have postulated that data is becoming the new oil.  I agree.  

We are covering this space through a variety of thematic ETFs focused on the innovators that are changing our world.  These include The SPDR Kensho New Economies ETF  (symbol KOMP), the iShares Exponential Technologies ETF (symbol XT), the ALPS Disruptive Technologies ETF  (symbol DTEC), the ARK Genomic Revolution ETF (symbol ARKG), the iShares Robotics and Artificial Intelligence ETF  (symbol IRBO) and the iShares Cybersecurity and Tech ETF  (symbol (IHAK). 

Hedge Strategies & Macro Trends:  A hedge is a risk management technique to minimize volatility, reduce risk and improve performance.  Hedge funds have historically used complex techniques such as long/short equity strategies, put/write and covered call options strategies, leveraged dividend strategies, merger arbitrage and tail risk management techniques to achieve these objectives.  Other techniques include momentum and macro-trend following strategies designed to exploit market inefficiencies.  We use several well-regarded ETFs to cover this asset class including the Direxion Work from Home ETF (trend following), the AFGiQ US Market Neutral Anti-Beta Fund (long/short equity), Blackrock Enhanced Equity Dividend Trust (leveraged dividend), the Quadratic Interest Rate Volatility and Inflation Hedge ETF  (tail risk), the Global X NASDAQ 100 Covered Call ETF  (options) and the Amplify Transformational Data Sharing ETF (macro-trend) to gain exposure to transformational blockchain trading technology (which goes well beyond crypto-currency applications).

Conclusion:  If you’ve made it this far, you now have an appreciation for how I spend my time.  Roughly half of my time is spent educating myself and applying what I learn to portfolio construction.  The other half is implementation and responding to individual client needs.  My goal is always to help you achieve your goals as articulated in your financial plan.  The strategy is always evolving in an effort to better manage risk and take advantage of new opportunities as they emerge.  New ideas are constantly being considered for introduction to our disciplined investment framework.  The goal is always to minimize risk, reduce volatility and generate strong long-term returns as we work together to achieve your financial goals.  The goal is simple.  The challenge lies in the design, the implementation and the rebalancing discipline.  That’s my job.  One less thing for you to stress about as we move forward together into this Whole New World. 

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Goldman Sachs: National mask mandate needed to restart US economy

Government mandates to wear a mask in public have become a uniquely hot-button issue in the U.S., which finds itself in the throes of a coronavirus crisis that appears to be drifting out of control by the day.  The debate pits scientific consensus against libertarian philosophy.  The public welfare against individual freedom.  Reasoned thought against inflamed tribal passion.

“Your liberty to swing your fist ends where my nose begins”.  – former Supreme Court Chief Justice Oliver Wendell Holmes, Jr. (addressing pragmatic limitations on liberty.)

Impact on Economic Activity

Goldman Sachs – whose focus is always on business, the economy and making money – weighed in on the debate in a new study released last week.  Goldman observes that “New US coronavirus cases have risen sharply in recent weeks, leading investors to worry that renewed lockdowns will again depress economic activity.”

Jan Hatzius, chief economist at Goldman, says that “a national face-mask mandate would partially substitute for renewed lockdowns that could otherwise subtract more than a trillion dollars from gross domestic product and cripple the US economy.”

Goldman’s new study compares data from 125 countries and scores of US counties with and without face mask mandates.  The researchers concluded that a government order to wear face masks in public “could cut the virus’s infection rate by nearly 60 percent, and reduce fatalities by nearly half.”

Public Confidence

“We find that face masks are associated with significantly better coronavirus outcomes,” they wrote, and this “seems to reflect a largely causal impact of masks rather than correlation with other factors (such as reduced mobility or avoidance of large gatherings).”

Beyond the medical evidence, mandatory face mask usage would also increase public confidence and feelings of personal safety, further increasing the likelihood that individuals and families feel comfortable returning to work, school and other activities.  

Avoiding Lockdowns

Looking at the U.S., the researchers found “face mask usage is highest in the Northeast, where the virus situation has improved dramatically in recent months, and generally lower in the South, where the numbers have deteriorated”.

“For example, only about 40 percent of respondents in Arizona say that they ‘always’ wear face masks in public, compared with nearly 80 percent in Massachusetts.”

“If a face mask mandate meaningfully lowers coronavirus infections, it could be valuable not only from a public health perspective but also from an economic perspective because it could substitute for renewed lockdowns that would otherwise hit GDP,” the researchers wrote.

Their data showed that countries that fail to reach widespread masking usage see both infections and deaths increased.

It Ain’t Over Til It’s Over

The Goldman report comes as Florida, Texas, California and Arizona – the states that have accounted for much of the recent rise in U.S. cases – imposed new restrictions and rolled back their reopening plans.

There are now 10.9 million confirmed cases of COVID-19 world-wide and at least 521,000 people have died, according to data aggregated by Johns Hopkins University. The U.S. continues to lead the world, with a case tally of 2.8 million and death toll of 131,000.  The US has only 4% of the world’s population but more than 25% of virus-related deaths.  

On Monday, Tedros Adhanom Ghebreyesus, the head of the World Health Organization, said that the pandemic is “not even close to being over.”

Still, mask wearing in the U.S. has been lax and not uniform. Hugo’s Tacos, a Los Angeles Mexican restaurant, temporarily closed its doors, claiming that its workers were being bullied for enforcing mask-wearing protocols in their restaurants.

LA, particularly, has seen an explosion of COVID-19 cases, with about 100,000 cases and more than 3,300 deaths.

Tribalism and the Culture War

While science and the rest of the world are largely in agreement, the medical guidance in the US has become embroiled in a culture war.  The US president’s view on mask usage is seen undercutting efforts by public-health officials to encourage the use of facial coverings and other personal protective equipment, or PPE, to halt the resurgence of the infection.

Impact on the Stock Market and Economic Recovery

Concerns about a resurgence of the disease also has created turbulence in the equity markets after the Dow Jones Industrial Average, the S&P 500 index and the Nasdaq Composite Index all surged from the late-March lows on the back of hope that America had gotten a handle of the outbreak, which bullish investors surmised could help to stoke a so-called V-shaped, or sharp, economic recovery.

Goldman warns that failure to issue a timely national mandate on mask wearing will jeopardize the US recovery and potentially lead us into a lasting recession or depression if the virus is not contained.  Community spread has already reached levels that exceed our ability to test, contact trace and isolate.  

A national mask mandate is our only viable solution to quickly returning to economic prosperity.  Public resistance is akin to “cutting off the nose to spite the face”.  Resistance based on anger, mistrust or tribalism will only reduce public confidence, risk further damage to our economy and slow our efforts to restore our nation’s health.



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Pizza, Beer and Getting Punched in the Mouth

When I was a kid living in Tucson, Arizona, my family of seven often packed into our Chevy station wagon and headed to Shakey’s Pizza Parlor on Friday nights.  My ten-year-old self loved Shakey’s.  It wasn’t just about the pizza.  There was something magical about the overall experience.  Shakeys’ was always packed and noisy.  Mechanical “player pianos” pounded out music.  Live musicians in straw hats wandered from table to table, and we all sang along to familiar ragtime tunes.  I loved that we were there as a family and that my parents were momentarily unperturbed by their five rowdy kids, possibly helped along by the free-flowing pitchers of beer.

It’s odd how some small things become seared into our memories, while others simply disappear.  One such odd memory is one of the many comical signs adorning the walls that somehow inexplicably captivated me:   

     “Shakey’s made a deal with the bank.  We don’t cash checks and they don’t make pizzas”. 

I guess that just struck me as quite clever in my ten-year-old mind.  They were setting the rules, but doing so with a bit of humor.  In that spirit, I’d like to roll out my own new rule for you and the other clients of Comprehensive Money Management:

     “CMMS made a deal with its clients.  We’ll help you achieve your financial goals, and you’ll stop worrying about the daily ups and downs of the markets”. 

I’m hard at work doing my part.  Are you ready, willing and able to do yours?

We’re Standing Tall

     “Everyone has a plan until they get punched in the mouth.”  – American philosopher Mike Tyson

Unlike so many others, your plan remains strong and fully intact.  In fact, thanks to this insane volatility, a few new opportunities have emerged that may help us come out stronger on the other end.  Your plan was designed to weather an occasional punch in the mouth, and has handled that well.  You’re still standing and looking good without much added wear or tear.

The New World Order

I’ve spent a lot of time researching coronavirus and COVID-19 – and now – with confidence – I can tell you that I don’t know how this will play out. Nobody does.  It may go away in a month, or it may linger much longer.  The optimist in me thinks that over the next month or two – things will get worse – then will start to get better.  Just as it is hard to see what would ever stop good things from continuing forever, it is also hard for us to see how bad things will end and get better on the other side.

I do believe that capitalism will win – and that pharmaceutical companies will find a cure or a vaccine.  I’ll bet on capitalism – our selfish perpetual engine with the power to do seemingly impossible things.

The realist in me hopes the optimist is right, but suspects that COVID-19 may linger longer than a few months.  How much longer?  We don’t know, and we don’t have to, because you have a solid financial plan that knows how to take a punch and continue to push forward – not in panic – but with dignity and grace.

My Focus

All of my waking hours are focused on continually managing risk, lowering your tax bill, and repositioning your portfolio for the New World Order that lies ahead.  That will likely be a world of economic deleveraging, more people working from home, higher unemployment, lower investment returns and less fervent speculation on Wall Street.  Debt-fueled stock buybacks by corporate CEOs that pumped up stock prices to maximize their bonuses are likely a thing of the past.  Market returns for a diversified portfolio are likely to be no more than 5 to 6% in the coming years.  We’ve prepared for that.  Your financial plan built in to the MoneyGuide Pro financial planning software assumes a 5.5% average annual return.  Even after this recent punch in the mouth, your actual long-term average annual return is still beating that goal.  Your investment portfolio and overall financial plan remain solid and fully intact.        

Taking Action

I’m not sitting still.  For the past two weeks, I’ve been furiously rebalancing and harvesting losses in taxable accounts.  I’m adding value by capturing the loss in select securities for tax purposes, even as the replacement security is positioned to catch the rebound.  I’ve also begun to make a few strategic changes in individual investment selections within the confines of your overall asset allocation plan.

     “Life can only be understood backwards—but it must be lived forwards.” – Søren Kierkegaard

Within your EQUITY allocation (the “engines”), I’m gradually switching from ETFs that invest in the broader markets to those that focus primarily on high quality, cash rich companies with strong balance sheets.  I’m de-emphasizing REITs that invest in all property types (including shopping malls and office buildings) in favor of those that focus on trends with sound demographic underpinnings, such as medical offices, senior housing and hospitals.  I’m repositioning the portfolio in recognition that many small businesses will fail – and many industries will never be the same.

Within your FIXED INCOME allocation (the “brakes”), I deemphasized higher-yield corporate bonds long ago in favor of safer US treasury securities.  You have been rewarded for that move, as both short and long-term treasuries have soared while corporate bonds have faltered.

Within your REAL ASSETS allocation (the “diversifiers”), gold, alternative strategies and other hedges are playing their part by cushioning the portfolio from uncertainty, economic turmoil, and corporate and consumer deleveraging.  Who would have thought that Brent crude would be trading at $4 a barrel – well below the price of water – which it did earlier this past week?  Or that gold would quickly rise by 25% in a few short weeks after many years of a slow and torturous decline?  The diversifiers in your portfolio serve us well when the unexpected strikes, or when the engines falter and the brakes fail.      

Consumer behavior will change due to this virus; and consumers are 70% of the US economy.  I’m working hard to anticipate and get out in front of these changes before they are fully known and appreciated by the wider world.

We’ll Get Through This Together

I told you earlier what I don’t know about this virus.  Nor do I have a crystal-clear picture of its impact on our consumer-driven economy.  What I do know is that you can have clarity, or you can have undervaluation; you cannot have both. Today we have anything but clarity, but undervaluation is coming to us real fast.  Bargains only happen when people are confused and truly scared. 

For an added confidence booster, I recommend that you revisit my earlier blog “What Do I Own and Why Do I Own It?”.  A newly updated and revised copy is attached.  Each of the investments in your portfolio – the engines, the brakes and the diversifiers – play a critical role.  They work together to produce the best possible long-term outcome and maximize your long-term wealth.

So, let me do the strategizing and the worrying and help you navigate these volatile markets.  We may not yet be at a market bottom, but I’m convinced that the things we own today offer compelling long-term value once we get past the current period of uncertainty.  I also believe that investors will be rewarded for adding new money to their investment portfolios at these levels. 

Maintaining a long-term time horizon is paramount.  Every decision we make, we need to make from the perspective not of tomorrow, next week or even next year – but three to five years from now. 

That’s why investing is hard. 




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My Support for You in a Crisis

Good evening.

I’m sure you don’t have to be told that our country – and the world—are in a big awful mess.  The Covid-19 virus has disrupted everything: our sense of personal safety, our jobs, the economy, and – for an undefined period of time – our investment portfolios. 

I’m reminded of the stories my mom and dad shared with me about growing up during the Great Depression and World War II.  They were stories of collective sacrifice as the world faced great and sometimes mortal threats.  Of course, my parents survived (or else I wouldn’t be here), and we both know that our society will survive this as well. 

Perhaps a silver lining is what doesn’t kill us makes us stronger.  I’m hopeful that this crisis will bring us together as one nation and one world.  We are all human, and all a bit fragile.  This pandemic also reminds me that we are all on this planet for a short period of time.  Perhaps this crisis may help us re-learn what is truly important and what is less so. 

There is nothing that brings people together like a common enemy.  This time that enemy is COVID-19 and the threats that it presents to our physical and financial health.  I’m writing, not because I can add much to what you’re already getting from the media, but because I deeply want to proactively comfort you and lighten your load a bit if I can.  Let me offer these thoughts in no particular order.

Keeping your head when all others are losing theirs

I would ask you to recognize that we are ALL experiencing a lot of stress as we navigate through this pandemic.  You do not need to worry.  I’m doing that for you!  I lie awake at night thinking about you and my other clients.  I’m spending many of my waking hours looking for opportunities that will help us come out stronger on the other end.  I’m also thankful that tax season is largely behind me, with nearly 100 client tax returns already filed or ready to file.  That frees up my time to rebalance, harvest tax losses, and look for new opportunities.  I’m taking action to protect your portfolio, reduce future taxes, and reposition your investment portfolio for the gains ahead.

Herd mentality

We all need to recognize that we’re all part of the human herd.  By that I mean that you probably share the instinct to sell and get out of the way of whatever the market does in the highly unpredictable near future.  Our fight or flight instincts tempt us to retreat to the sidelines.  Even those of us who manage investments for a living are not immune.   The outcries of the irrational, instinctive part of our brain – which scientists tell us is the most powerful – is screaming right now. 

This is precisely why investing is not easy. 

We are all emotionally affected by the events of the world.  Neither you nor I are immune from human emotion.  But despite all the emotional pressure, our higher cognitive functions must remain in control. 

Are you currently thinking like a lizard, rabbit or Dr. Spock?

Scientists tell us that the human brain has three parts, the cerebral cortex at the top (which makes us rational humans), the cerebellum immediately below (which has the intelligence of a rabbit), coordinates muscular activity, and then the limbic brain at the top of your spinal cord, which controls fight or flight reactions.  That bottom nodule of thinking tissue has roughly the same intelligence as a lizard.

When humans encounter danger (and the recent market behavior certainly qualifies, particularly when it is also associated with a life-threatening pandemic and global economic shutdown), the mind instinctively retreats to the limbic brain.  Which means that many of us are currently functioning with the intelligence of a lizard.  It’s in that kind of environment that a disciplined investment strategy really shines!

Don’t feel bad if you find yourself thinking like a lizard at this moment.  We all do that from time to time.  The key for each of us is to recognize what is happening with our biology, tame the fight or flight automatic impulses of our limbic brain, and strive to react more like Dr. Spock. 

What to do? 

If you feel shut down by fear, I understand what that feels like and empathize with your feelings.  I’m here to listen.  Sometimes just talking things through can pull the locus of our awareness out of the bottom of the brain toward the top. 

Focus on the opportunities:

The market turmoil is giving us a rare opportunity to add value to our financial lives.  I feel like a kid in a candy story when I’m harvesting tax losses and reestablishing cost basis across your portfolio.  I’m also looking for opportunities to perform Roth IRA conversions at these lower valuations.  And of course, the treasury bonds, infrastructure, precious metals and cash in your investment portfolio can be redeployed at a time when stocks are on sale, giving portfolio returns a boost once we get to the other side of this crisis and the economy recovers again.

What’s Next?

I hope that you were not expecting me to tell you how long the Covid-19 epidemic will last, or to measure its long-term economic impact, or have any insights into when the markets will eventually recover.  Of course, I have no idea of any of those things – and nobody else does either.  Humility is a good thing to have when you’re forecasting the economy or markets. You never know what relevant facts you might be missing, so it’s best not to be too confident.  Those of us who have experienced three major downturns (or four if you experienced Black Monday crisis back in 1987) remember how unexpected they were, how experts and pundits were caught by surprise, and how wrong they were when they tried to tell us what was coming next.

The Long Term:

I only know one thing: which direction the next 100% movement in the stock market is going to be.  Long term investors know this.  Throughout recorded history, investment portfolios typically double every ten or twenty years, especially when measured from what could be close to a market low.  Cash may feel good right now, but it is guaranteed to lose value after considering inflation.  Of course, getting out of markets may feel satisfying in the moment, but it begs the question of when to get back in.  Most of us can’t finance our retirement earning less than 1% per year. 

Selling low and buying high is not a winning investment strategy.  Neither is consistently selling during market downturns and buying back in at market highs.  Our highly diversified 7/20 model (seven primary assets classes and 20 sub-asset classes), routinely rebalanced, is a winning strategy.  It has consistently provided high single digit returns with fewer negative years than any other strategy (see 47-year analysis attached).  Note the worst three-year rolling return for this strategy was -13%.  This is also a strategy that on average has resulted in a doubling of value every 7 to 10 years.  This is not a strategy practiced by lizards.  It is a strategy created by and faithfully followed by academics and the smartest minds on Wall Street who think and react more like Dr. Spock.

Bill’s crystal ball

I’ve been writing and publishing blogs for my clients every quarter now for 18 years.  My long-term clients may remember that I often signed them “Dr. Doom”.  I’ve always been a bit of a contrarian.  I have found that tendency has served me well over time.  That also manifests itself in feeling more optimistic when those around us are losing their heads.  That’s where I am today.  I suspect that the short-term pain is not over.  But for long term investors, when Wall Street sees “blood in the streets”, it has always proven in retrospect to be a great time to invest for the long term. 

If you need help getting through this crisis, please let me know. 

Please accept my best wishes, my sympathy, and my support as you and your family navigate this crisis together.  Rest assured that you are never far from my mind, and that I’m working diligently to ensure that your investment portfolio comes out of this crisis well positioned for the rebound that will inevitably come.  I’m glad to have you as a client and am lucky to have a job that I truly love. 

Be kind.  Be smart.  Be well.

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Perspective in the Panic

Back in 1987, right after the markets had experienced the famous “Black Monday” decline which took the Dow Jones Industrial Average down by 23% in a single day, the cover of the weekly Barron’s financial publication featured a suitcase with the frightened eyes of investors peeking out of its dark recesses, and an arm reaching out to wave a white flag.

This weekend—after the worst market week since the 2008 financial crisis—and one of the worst months since the 1930s—that image represents how a lot of poorly diversified, high-flying investors are feeling right now.  The US stock market finished out a remarkably bad week of negative returns, including consecutive days of 1,000-point drops in the Dow and similar percentage declines in the S&P 500 index. 

The Good News:  If you’re open to hearing good news, consider that even after the market turmoil this week, your portfolio is still up about 3% over the past 12 months (February 28, 2019 to February 29, 2020).  You are not one of those “poorly diversified, high-flying investors”.

Diversification is a bad word when markets are steadily rising and we’re all feeling a bit greedy.  Likewise, that word is music to our ears when the unexpected turns to surreal and the bottom falls out.  Diversification means you’ll never have all of your money in the top performing asset class.  It also means that you will lose much less when markets inevitably and unexpectedly fall.  Over the longer term, diversification provides solid market returns without the thrill of a roller coaster ride (see the “47-Year History of a Multi-Asset Class Diversified Portfolio” attached).

The Bad News:  The bad news is that last week’s market events were caused by something real—the Coronavirus, more precisely COVID-19—and the uncertainty surrounding the possibility that it will spread into a pandemic—and if it does—how much damage it will do to the world economy.  That uncertainty and the potential risks to our health and wealth have not gone away.  A case can be made that the worst is behind us, or that this is just the beginning. 

At present, fewer than 100 people have been diagnosed with the virus in the United States.  That may provide false comfort considering that fewer than 500 have been tested.  According to the CDC, the U.S. has tested 459 people for COVID-19 as of February 28th.  In comparison, Guangdong, China, has tested 320,000 samples, and South Korea has tested more than 66,000 people.

We appear to be behind the curve.  A laboratory test designed by public health officials to identify cases of COVID-19 in the U.S. has been bogged down by a botched rollout to states and inaccurate readings.  There are currently no tests available outside of the CDC in Atlanta.  That comes on the heels of budget cuts to the operational disease fighting budgets of the CDC, NSC, DHS and HHS by $15 billion in 2018.  The Complex Crisis Fund designed to preemptively prevent and fight pandemics was eliminated in its entirety just last year. 

Even though a lot of attention has been given to the virus’s impact on the markets, the more important issue is the health of you and your family.  You—like Jae and I—should be closely monitoring the spread of the disease.  You should know that simple surgical masks will not prevent wearers from contracting the virus.  Medical experts say that we should be conscientious about washing our hands and using hand sanitizer and cleansing wipes. 

There doesn’t appear to be a working coronavirus test at the moment, at least not in the US, so watch for the symptoms: fever, cough, runny nose, shortness of breath.  There is no cure, but experts recommend resting and avoiding overexertion, drinking plenty of water, using a clean humidifier or cool mist vaporizer, and taking aspirin, ibuprofen or naproxen for pain and fever.  In 98% of the cases, the disease is not fatal, but it does seem to be more dangerous for older people and those who suffer with heart disease, diabetes, lung disease and obesity. 

Our wish is that you and your family will stay well, and that the virus will not become the pandemic that many (including market traders) are fearing.  And please understand that we (and everyone else) don’t know what the market will do on Monday or next week.  The downside action might continue, or we might experience a quick recovery.  Historically, the best plan when bear markets present themselves is to sit tight.  My goal for you is to follow the best plan we know and wait for the recovery.  That being said, your individual ability to withstand volatility and risk not only dependent on the size of your resources and your time horizon before needing to withdraw money, but also on your psychological makeup.  You have a carefully crafted financial plan and an investment strategy designed to maximize your wealth over a lifetime.  That plan is our collective best effort to help you achieve your long-term goals.  If you need a refresher on the investment strategy, an update to your financial plan, or have concerns about your psychological ability to stay the course, let me know.  I’m here to listen and to help.  

In the meantime, your most important priority should be on keeping you and your family safe.  My suggestion is that you prepare for the worst, even as you hope for the best.  I have attached a COVID-19 Fact Sheet that I compiled from reputable websites including the World Health Organization and the Center for Disease Control in Atlanta.  I consider these to be the best and least biased resources available to help you navigate this crisis: and

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Live Long and Prosper: Resources That Will Change Your Life


Yes, it’s true.  Jae and I are fully committed to a whole food, plant-based (WFPB) lifestyle.  Variations on this theme include the Mediterranean, Flexitarian, Nordic, Ornish, DASH, Engine 2, Mayo Clinic and Vegan diets.  All of these diets emphasize eating fiber-rich, low-fat unprocessed whole plant foods to maximize health, prevent or reverse disease, and increase longevity.  WFPB diets minimize or avoid processed foods, junk foods, added sugar, meat, eggs and/or dairy. 


The January, 2020 issue of US News & World Report includes their annual “Best Diets” report ranking 35 diets based on multiple criteria selected by a nationally recognized panel of experts in diet, nutrition, obesity, food psychology, diabetes and heart disease.  Whole food plant-based diets took most of the top 10 spots. 


We’ve both been “woke” (slang for self-educated and newly awakened) to the impressive health benefits of living a mostly whole-food, plant-based lifestyle. For us, there is no turning back.  Jae’s new company, PLANTATUDE® offers a wide variety of services including helping individuals and families make a successful transition to a healthier lifestyle.  Jae also works with restaurants seeking to add high quality plant-based meal alternatives to their menus.  See for a complete list of services.  


If your new year’s resolutions include losing weight or pursuing a healthier lifestyle, you will find the following list of our favorite health supportive videos, books and websites helpful, if not essential.  These resources will help you become “woke” too and increase your odds of a successful transition.    


Documentaries and Videos:


The Gamechangers (2019) available on Netflix and


What the Health (2017) available on Netflix and at


Eating You Alive (2015) available for free at


PlantPure Nation (2015) available for free at


Forks Over Knives (2011) the movie that started it all available for free on Netflix or for purchase at


Books and Audiobooks (click on hyperlink):


How Not to Die: Discover the Foods Scientifically Proven to Prevent and Reverse Heart Disease by Dr. Michael Greger MD


How Not to Diet:  The Groundbreaking Science of Healthy, Permanent Weight Loss by Dr. Michael Greger MD (the sequel to How Not to Die)


The China Study: (revised and expanded): The Most Comprehensive Study of Nutrition Ever Conducted and the Staring Implications for Diet, Weight Loss and Long-Term Health by T. Colin Campbell, PhD


The Engine 2 Diet: The Texas Firefighters 28-Day Save-Your-Life Plan That Lowers Cholesterol and Burns Away the Pounds by Rip Esselstyn


Food Over Medicine:  The Conversation that Could Save Your Life by Pamela Popper PhD


The Cheese Trap  How Breaking a Surprising Addition Will Help You Lose Weight, Gain Energy and Get Healthy by Dr. Neal Barnard


Forks Over Knives: The Plant-Based Way to Health by T Colin Campbell, PhD and Caldwell B Esselstyn, MD


Prevent and Reverse Heart Disease: The Revolutionary, Scientifically-Proven, Nutritionally-Based Cure by Caldwell B Esselstyn, Jr., MD


The Healthiest Diet on the Planet:  by John A. McDougal, MD


Eat to Live: The Amazing Nutrient-Rich Program for Fast and Sustained Weight Loss by Joel Furhman, MD


UnDo It!How Simple Lifestyle Changes Can Reverse Most Chronic Diseases by Dean Ornish, MD


Websites: is a non-profit, science based public service providing thousands of bite sized videos on the latest in nutrition research:


Physicians Committee for Responsible Medicine leads a revolution in medicine that puts a new focus on health and compassion:


Recipes and more from the author of The Engine 2 Diet:


The nation’s first Medicare-approved program to reverse heart disease by making comprehensive lifestyle changes.


McDougall Research & Education Foundation offers the second of only two Medicare-approved programs to reverse serious illness including high blood pressure, heart disease, diabetes, and others all without drugs: 


Cornell Universities online program on the science of a plant-based diet and the role nutrition plays in chronic disease:


US News & World Report annual report ranking 35 popular diets based on multiple criteria selected by a nationally recognized panel of experts in diet, nutrition, obesity, food psychology, diabetes and heart disease.  Whole food plant-based diets took most of the top 10 spots.


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Why Do-It-Yourself Investors Underperform

The results of research performed by Dalbar Inc., a company which studies investor behavior and analyzes investor market returns, show that the average investor consistently earns below-average long-term investment returns.  This is amazingly consistent no matter what time period is measured.

Their 2016 study looked at the twenty-year period ended December 31, 2015.  During this period, the S&P 500 Index averaged 8.19% a year – a pretty attractive historical return.  The average multi-asset individual investor earned a market return of only 2.11%.


Admittedly, this data is outdated, spanning the 20-year period from 1996 to 2015.  However, 20 years is long enough to identify a strong trend.  The data is also consistent with earlier Dalbar studies.  While asset class returns may have modestly changed during the past five years, I highly doubt that the average individual investor has evolved to the point that his or her returns wouldn’t still be sitting somewhere towards the bottom end of this chart.

I saw similar charts early on in my own investing career and instead of getting discouraged, I decided to investigate why the average retail investor performs so poorly.  It didn’t take long to realize that there are two primary issues that we all have to overcome – fear and greed.                                 

Fear and Greed

Humans are a flawed species. We’re emotional creatures.  Often, in real life, that’s a good thing.  Joy and love, heartbreak and loss, hope and longing — these are all sensations that make life worth living.  However, when it comes the stock market, emotion is best left at the door.  It leads to undisciplined, irrational decisions, and often these emotions lead to losses.

Everyone knows it’s best to buy low and sell high.  This is an easy enough principle to understand.  However, it’s not easy to enact.

Most people love price reductions when they’re available at the grocery store, in the shopping mall, or on an e-commerce site.  However, people tend to be afraid of discounts in the stock market. 

On the contrary, many retail investors are prone to the herd mentality, where there is perceived safety.  They’re willing to chase momentum, allowing the fear of missing out to overwhelm their good sense.  Far too often, the average investor has shown a willingness to sell at bottoms and buy at tops, which is why their performance is so low relative to the performance of individual asset classes.


Why the Underperformance?  Emotions! 

We humans are emotional creatures.  Research shows that the main reasons for the dismal performance are related to emotional and behavioral factors. Turns out, the majority of us are terrible investors when investing our own money due to the way our brain is wired.  We just simply aren’t programmed to be rational, disciplined investors.  It’s not our fault.  It’s baked into our DNA!  Humans suffer from a myriad of behavioral biases which stem from emotions that impair our decision-making processes.  As a result, we tend to make irrational decisions at the worst possible times, which in turn lead to lackluster long-term investor performance.  This flaw in our make-up impacts us continuously.  Although its less obvious during roaring bull markets, it punishes us mercilessly during bear market downturns when the ramifications of our failure to adhere to a sound plan become clearer and painfully acute.   


Emotional Biases 

If you are going to manage your own investments, you will need to master your emotions and behavior.  This is not easy.  It is extremely difficult to emotionally detach ourselves from our money.  Investors need to recognize the biases they are most prone to.  Below is an overview of a few of the most powerful “money-losing” biases that control our behavior, even in those circumstances when we are fully aware: 


Buying High

Study after study shows that when the stock market goes up, investors put more money in it.  And when it goes down, they pull money out.  This is akin to running to the mall every time the price of something goes up and then returning the merchandise when it is on sale – but you are returning it to a store that will only give you the sale price back.  This irrational behavior causes investor market returns to be substantially less than historical stock market returns. 

What would cause investors to exhibit such poor judgment?  After all, at a 7% return, your money will double every ten years (see"Rule of 72").Rather than chasing performance, you could simply have bought a single index fund, and earned significantly higher returns. 



The problem is that the human reaction to both good news or bad news is almost always to overreact.  These emotional triggers cause illogical investment decisions.  The tendency to overreact can become even greater during times of personal uncertainty; near retirement, for example, or when the economy is bad.  There is an entire field of study which researches this tendency to make illogical financial decisions.  It is called behavioral finance.  The study of behavioral finance documents and labels our money-losing mind tricks with terms like "recency bias", “availability bias” and “herd mentality”.  Human beings tend to…   

·       Exhibit a recency bias, where we overweight what happened recently and extrapolate it into the future. 

·       Show an availability bias, making us more willing to invest into stocks we can readily recall. 

·       Perceive less risk in something we have familiarity with, thus helping to explain why so many are so comfortable keeping concentrated positions in their employer. 

·       Pursue gambles that have significant upside potential, despite their improbable outcome — explaining why we continue to buy lottery tickets with a highly negative expected value. 

·       Exhibit a significant aversion to losses.  Loss aversion refers to people's tendency to prefer avoiding losses to acquiring equivalent gains: it is better to not lose $5 than to find $5.  The utility of a monetary payoff depends on what was previously experienced or was expected to happen.  Some studies have suggested that losses are twice as powerful, psychologically, as gains. 

·       Move with the herd, showing a strong bias to do what everyone else is doing, and avoid the risk that comes with being singled out — especially if there’s a bad outcome and someone needs to be blamed. 

·       Overconfidence.  Investors repeatedly overestimate their ability to predict market events.  This leads to higher frequency of trading, which typically results in lower returns. 

·       Chasing Performance.  The average investor repeatedly performs the cardinal sin of investing, which is “buying high and selling low”.  Studies show that individual investors tend to wait to invest until they see strong market returns.  By the time their money is invested, they may have missed the majority of the market increase.  On the other hand, investors tend to panic after a significant decline and usually sell out near the bottom.  Waiting too long to invest and selling on fear will inevitably hurt a portfolio’s return.   

These are but a very few of our biases that negatively impact our decision-making.  If you want to blow your mind, take a look here at the many others that make up the full and depressing list:  (P.S.  Is it any surprise that our politics are so broken when you see the complete list of cognitive biases that drive our thinking?) 

A picture (or bar chart) that’s worth a thousand words

What is a wise investor to do? 

As the research shows, most individual investors have a difficult time ignoring their emotions when making investment decisions over their own money. But if you’re one of the rare individuals that can consistently do all of the following things, you may not need professional help.  Ask yourself if you can… 

·       invest the time and energy to create, implement and stick with a thoughtfully designed asset allocation plan (known as “investment policy” in industry jargon).   

·       design your investment policy to produce an “expected return” that is consistent with your long-term goals and ability to accept risk.  Risk and volatility are inherent in investing.  There is no “free lunch”.  Risk and return are always inversely related.  Risk doesn’t always manifest itself immediately, but tends to overwhelm after long periods of complacency. 

·       select low-cost, tax-efficient index funds or ETFs to build your portfolio consistent with the asset allocation plan defined in your investment policy. 

·       rebalance your investment portfolio periodically to maintain the desired allocation, all the while being aware of the tax consequences of your actions. 

·       harvest losses periodically to build a war chest of tax loss carryforwards that can be used to mitigate the inevitable tax consequences that will result if you’re successful. 

·       ensure that each of your investment assets is located in the ideal type of account to minimize future taxes.  This is known as “asset location” (as opposed to “asset allocation”).  For example:  

o   Real estate investment trusts or REITs should always be held in tax-deferred retirement accounts since they pay high “unqualified” dividends that are subject to high ordinary income tax rates.  

o   Precious metals should ideally be located in tax-deferred retirement accounts since their long-terms gains are taxed as “collectibles” at a 28% rate rather than the regular 15% capital gains tax rate. 

o   High dividend paying value stocks and funds should be held in taxable investment accounts to take maximum advantage of the qualified dividend tax rate of 0%, 15% or 20% depending on your taxable income. 

o   Assets with high long-term growth expectations should be located in Roth IRAs or Roth 401(k)s where their long-term growth will occur completely tax free.  

·       sit tight and do nothing in periods of extreme market turmoil or other times of great personal stress.  This is when otherwise disciplined investors make their greatest mistakes that destroy their long-term average returns. 

Don’t overestimate your ability to keep fear and greed in check when managing your own money.  Even highly-skilled professional investment managers who do this for a living tend to outsource the management of their own portfolio to another investment manager.  All humans make emotional mistakes when it comes to their own money.   

Unless you have the logic and emotion-devoid disposition of Leonard Nimoy’s “Spock”, greed will slowly and deliberately cause you to deviate from your well-designed plan.  Likewise, fear will cause you to panic during periods of stress.  This is why the average investor in America fail to produce investment returns much better than the rate of inflation over long periods of time.  The past twenty years included two market crashes and several other periods of extreme volatility.  It took many investors 15 years to recover from the tech collapse of 2000 when the NASDAQ lost 78% of its value and broad US stocks fell by more than 50%.  A similar fate befell many less disciplined investors in 2008 when financial institutions collapsed, decimating investment portfolios and causing the Great Recession of 2008.  Those were the two biggest drops since 1987 and 1929.   

Significant market corrections tend to occur every 8 to 12 years.  None of us know when the next one will come, how severe it will be, or how long it will take to recover.  We can’t control returns, but we can control the risk we take to achieve them.  Absent an infallible crystal ball, asset allocation (spreading your eggs across different baskets) is a basic strategy in any well-designed investment plan.  Notice in the chart below the unpredictability of returns for each asset class from year to year.  Last year’s winner may be next year’s dog.  Or repeat for another winning year.  Putting too many eggs in one basket almost always results in broken eggs.  

Individual asset class returns in any given year are random and unpredictable.

Owning roughly equal weights of most asset classes (periodically rebalanced) produces a higher likelihood of solid and consistent returns.  I follow a discipline of investing across 7 asset classes, which I further divided into 20 sub-asset classes.  Each asset class and sub-asset class has been carefully selected based on their previous return history and their lack of correlation to each other.  Some can be expected to zig when others happen to zag.  After all, if the asset classes all performed equally, there would be no point in diversifying.  Historically this level of extreme diversification has produced returns similar to the best performing single asset class, but with much less risk and less volatility.   

In the following chart, notice that an equally weighted 7-Asset Class Portfolio produced an average annual return that was almost as high as the best performing asset class, but with (a) much less volatility (i.e. a lower-standard deviation from the mean), (b) more shallow periodic losses and (c) fewer negative years.  Although this data covers a full 46-year period, the same pattern repeats itself over any ten-year rolling period that one might choose to analyze. 

This data provides solid evidence for a well understood phenomena:  Following a disciplined investment strategy that equally weights multiple asset classes is likely to produce consistently higher returns with less stomach-churning volatility than owning any single asset class alone.   

This demonstrates a counter-intuitive but mathematically sound anomaly.  It consistently works because returns experienced by each individual asset classes tend to be non-correlated or even negatively correlated to each of the other asset classes.  Each responds differently to uncontrollable factors such as inflation, interest rates, government policy, and the ebbs and flows of dozens of other factors including human behavior.  Including them all in the mix smooths out the returns for the portfolio as a whole as those factors unexpectedly take center stage from time to time.     

Loss avoidance is the key to making this work.  Full recovery from a market loss requires a gain equal to roughly twice the magnitude of the original loss.  For example, after a 20% loss, it takes a 40% gain to return from the new lower base to get back to the original starting point.  Minimizing the size of periodic losses through effective asset allocation and routine rebalancing minimizes the size of the subsequent gain that is needed to fully recover.  One of the many pearls of wisdom dispensed by Warren Buffett is “Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No. 1”.  In reality occasional losses are inevitable, but keeping those losses shallow is the key to long-term success. 

Investing during bull markets always seems easy.   

Just ask your next-door neighbors, friends and co-workers who may not know much about behavioral science, portfolio design, market discipline, rebalancing, tax loss harvesting, the math behind Buffett’s Rule #1, and who may have forgotten the stomach-churning lessons of 2000 and 2008!  However, they marvel at their own bull market investing prowess and wonder why you would pay someone to do what they do so easily.  That is the fallacy of focusing entirely on return, without understanding the risks one took to achieve that return.  Like a bad houseguest, those risks have a way of showing up unexpectedly and with great fanfare at very inconvenient times.     


Yes, investing always seem easy when everything you buy keeps going up.  Flaws in portfolio design, tax efficiencies, high fund expenses, and the failures to rebalance and harvest losses are easily ignored when the markets are rising.  Rising markets hide these sins.  But even in these good years, an undisciplined investor may be leaving money on the table.  The inherent costs mount through good times and bad, but are often unrecognized until the portfolio heads south.  Only then does the importance of asset allocation, rebalancing and tax loss harvesting tend to come into sharper focus.  Lack of attention to these disciplines tends to quietly punish investors even in good markets, but can be quite painful when markets turn negative as they inevitably do from time to time.   

For those Spock-like individuals who have the skills to build and consistently maintain a well-designed asset allocation plans – and who have superhuman abilities to detach oneself emotionally from their money during periods of great stress – going it alone may be for you.  But for the other 99% of the population, including many investment professionals, their challenge is to find competent and trustworthy professional help that will put their client’s interests ahead of their own. 

It’s an industry that is known for “smoke and mirrors” sales tactics and high fees charged by commissioned brokers and insurance agents, where does one find a true professional who will put your interest first?  Here’s a foolproof formula: 

·       Competence:  Make sure that your advisor is a CERTIFIED FINANCIAL PLANNERTM.  Good investment management begins with a well-designed and comprehensive financial plan.  Only CFPs have the skillset and industry-leading resources to build such a plan.  Most others offer “financial plans” that are little more than sales tools in disguise. 

·       Integrity:  Only work with someone who is a FIDUCIARY.  Stockbrokers and insurance agents are not fiduciaries.  They may call themselves “financial advisors”, “financial consultants” or “financial solutions advisors” (nobody like the titles “salesman” or “asset gatherer”).  But make no mistake, most of the people hiding behind these titles are commissioned stockbrokers and insurance agents in disguise.  The job is to keep as much of your money as they can get away with.  Their only obligation is to recommend “suitable products” – a very low bar.  You should only do business with “Registered Investment Advisors”.  Only registered investment advisors are fiduciaries.  Fiduciaries have a legal obligation to put your interests ahead of their own.  These others do not.  Ask for their Form ADV-Part 2 (their regulatory “firm brochure”) which all Registered Investment Advisors must provide. 

·       Fee-Only:  Know how your advisor is compensated.  “Fee-only” advisors reduce conflicts of interest by fully disclosing their fees and refusing to accept product sales commissions, mutual fund trails and any other forms of third-party compensation.  Fee-only advisors are more likely to recommend products like index funds and ETFs that are much less expensive since they don’t provide kickbacks to the advisor.  Be careful of the deceptive words “Fee-Based”.  That’s a clever way of saying that they take commissions, trails and other product sales compensation in addition to the fees that you pay to them directly.  Sadly, how much they’re paid and who pays them is not required to be disclosed. 

·       Track Record:  Check out the advisor and their firm at:  

o   For CFPs: 

o   For Commissioned brokers:   FINRA's BrokerCheck 

o   For Registered Investment Advisors:  SEC's Investment Adviser Public Disclosure 

·       Top questions to ask and other tools:


How does your financial advisor stack up?

 Comprehensive Money Management

·       Certified Financial Planner?  YES Ö

·      Fiduciary?  YES Ö

·       Fee-only?  YES Ö

·       Track Record?  YES Ö 

·       Financial Planning?  YES Ö

·       Design and Implementation of Investment Policy Statement?  YES Ö

·       Routine Rebalancing?  YES Ö

·       Tax Loss Harvesting?  YES Ö

·       Timely Response to Your Needs?  YES Ö

·       Attention to Detail YES Ö

·       Comprehensive set of services including tax preparation?  YES Ö

·       Market-like returns with less than market risk?  YES Ö

·       Strong track record during periods of turmoil?  YES Ö


Thanks for trusting in me and thanks for being such a great client! 




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Healthy, Wealthy and Wise

In recent months, many of my clients have experienced health issues that impact their enjoyment of life and plans for retirement.  Health and wellness have become a greater concern as Americans face an epidemic of heart disease, cancer, diabetes and obesity.  Long term financial planning starts with an assumption that you’ll be here to enjoy the long term.  This month’s blog, “Healthy, Wealthy and Wise” takes a detour from my usual financial topics and shares my own evolution in seeking greater knowledge of health and wellness.  I’d like my own life to be full of health, wealth and wisdom.  My goal is to help you achieve or maintain the same. 

More than 35% of the US adult population is clinically “obese”.  That figure is up from 23% in 1962. 

It gets worse.  The percentage of the US adult population clinically diagnosed as simply “overweight” is even higher and rising very quickly.  It was 39% in 1997, 45% in 2004, 57% in 2007 and 66% in 2010.  The National Center for Health Statistics at the CDC says this figure is expected to reach 75% in 2020 and 85% by 2030.   

Obesity in the United States is a major health issue, resulting in numerous diseases, specifically increased risk of certain types of cancer, coronary artery disease, type 2 diabetes, stroke, as well as significant increase in early mortality and economic costs. While many industrialized countries have experienced similar increases, obesity rates in the United States are the highest in the world.

More than half of all Americans will eventually succumb to heart disease.  Another 1/3 to cancer, diabetes or stroke.  These “lifestyle diseases” are diseases of affluence.  They rarely occurred hundreds of years ago.  Today they are nearly unheard of in less affluent parts of the world such as rural China and most of Africa where the populations eat mostly unprocessed whole plant-based diets.  Americans spend more per capita on health care, yet our health outcomes are lower than most developed nations and many nations in the under-developed world. 

Nutrition is a very hot topic.  Diet books are perennially best sellers.  Almost every magazine and newspaper features nutrition advice.  Given the barrage of information, are you confident that you know what you should be doing to improve your health?  For most of us the answer is no.  There is too much conflicting information out there.  It’s easy to become confused.

Health and nutrition have been on my mind for some time.  While I am first and foremost a financial advisor, many of my conversations with clients often drift toward their health and wellness.  America has a health problem.  So do many of my clients. 

I’m a prolific reader.  For the past twenty years I’ve read (or listened to) dozens of books on financial planning, investment management and economics.  This probably doesn’t surprise you.  I’ve also read (or listened to) dozens of books on health, diet and healthy lifestyles.  That may be a surprise.

The most impactful of the financial books I’ve read was What Wall Street Doesn’t Want You to Know by Larry Swedroe.  The ground-breaking principles I learned in that book literally launched my career as an independent fee-only financial advisor and investment manager.  A Random Walk Down Wall Street by Burton Malkiel, The Investors Manifesto by William Bernstein, and The 7Twelve Portfolio by Craig Israelson are three more of my favorites.  These and other books helped me overcome years of misinformation and the effects of a steady diet of corporate ‘Kool-Aid’ designed to benefit their own bottom lines.  These books opened my mind to the smoke and mirrors that characterizes much of America’s financial services industry and made me a better financial advisor and investment manager in the process.  Wall Street and the financial news media have a financial interest in keeping us both entertained and confused.  They focus their efforts almost entirely on stock picking and fortune telling -- what Jane Bryant Quinn refers to as “investment pornography”.  They emphasize what is sexy and fund rather than what is truly important.  More knowledgeable investors focus their efforts on asset allocation, routine rebalancing and the use of low-cost, tax-efficient index funds and ETFs.  This doesn’t have sizzle and doesn’t line the pockets of Wall Street Wizards, but it works.      

In the financial world, there are a few simple truths.  Anything that deviates from those truths invites confusion.  The same is true in the world of health and wellness.  After dozens of false starts, I’m now confident enough of my knowledge in this area to share it with you.    

We are now in an era of lifestyle medicine – a trend toward eating mostly unprocessed whole plant-based foods combined with moderate daily exercise.  This simple yet powerful lifestyle combination can reverse or undo the most common chronic diseases as well as to help prevent them.  I’ve learned that decades of randomized controlled trials by dozens of researchers definitely prove that radically simple lifestyle changes can often have greater impact than do drugs or surgery, and without the negative side effects.  Most of the things we know or think that we know were brought to us by years of steady propaganda from the meat, dairy and pharmaceutical lobbies designed to benefit their bottom lines.  Let’s call that “nutrition pornography”.  Both the financial services profession and the nutritional community suffer from similar afflictions. 

I’m amazed and inspired by how and why these simple lifestyle changes are so powerful, how far ranging their effects can be and how quickly people can show measurable improvements – often in just a few weeks or even less.  Research is showing that many of our most chronic and debilitating diseases, and even aging at a cellular level, can be slowed, stopped or even reversed by lifestyle medicine.  This includes reversing severe coronary heart disease, reversing type-2 diabetes, reversing, slowing or stopping the progression of early stage non-aggressive prostate cancer, reversing high blood pressure, reversing elevated cholesterol levels, reversing obesity, reversing some types of early stage dementia, reversing some auto-immune conditions, and reversing emotional depression and anxiety.  Hundreds of compelling studies have been published in peer-reviewed medical and scientific journals and presented at the most well-respected physicians’ conferences. The world is beginning to take notice.

Science is a powerful tool for raising knowledge and awareness.  Peer reviewed scientific research is the best answer to what is often the biggest obstacle – skepticism that simple lifestyle changes can result in such powerful, far-reaching and measurable improvements and how fast you can look and feel better.   I’m taking the risk of laying out my convictions and sharing my own reading list in the hope you’ll take the first step of reading or listening to one or more of these books.  My hope and expectation is that they will inspire and empower you as each of these books did for me.  These books will help you rise above the noise and misinformation that we’ve fallen victim to when it comes to our own health and well-being.  Each book has something different to offer, but they share a common prescription – following a mostly whole food, plant-based lifestyle is the key to your long-term health and longevity.

Imagine a world where Pfizer or Johnson & Johnson came up with a single pill that prevented or reversed most common diseases and extended life an average of 12 to 15 additional years.  What would you be willing to pay for such a pill?  That outcome exists if you open your mind to the possibility that much of what you know or thought that you knew may be wrong.  Trust me when I tell you that a little humility and an open mind on this subject can be life-saving.  Take that first step and read or listen to one of these books or watch one of the documentaries listed below.

Note:  I listen to most of my books through an app at  I find that much more convenient as I can cover a lot of ground while at the gym, shopping for groceries, or driving in the car.  The links listed by each title allow non-subscribers to download the app and listen to one book for free without joining.  These same titles are available in print or kindle at

Here are my favorites:

The China Study by T. Colin Campbell, Ph.D., biochemistry, nutrition, and microbiology.  Campbell is a senior science adviser to the American Institute for Cancer Research and sits on the advisory board of the Physicians Committee for Responsible Medicine.

The Engine 2 Diet, NY Times bestseller by Rip Esselstyn, former firefighter and world-class triathlete

How Not To Die by Michael Greger, MD

Eat to Live by Joel Fuhrman, MD

Undo It! By NY Times best-selling author Dean Ornish, MD

If you prefer to begin by watching a movie instead, here are some good choices available on YouTube, Netflix or Amazon

Forks Over Knives: “Medicine is not something that comes in a pill bottle, it’s what you put on your plate. Rather than treat the symptoms of chronic disease, a diet focused on whole, plant foods have the potential to reverse it altogether”.  Watch the trailer:

Vegucated: “Understanding the impacts of their choices can motivate people to make more permanent changes to their diet and the way they think about food”.  Watch the trailer:

Eating You Alive: “Once people make the connection between food and health, their world can be changed completely”. Watch the trailer:

Food Choices: “Your relationship with food will likely be changed forever”.  Watch the trailer:

What the Health: “Focusing on the debilitating chronic diseases that an overwhelming number of Americans are experiencing, What the Health shares how a plant-based diet has the potential to completely change the health of a nation and the world”. Watch the trailer:

Plant Pure Nation:  “This documentary pulls the curtain back on the corporate interests behind the food industry and how that influences laws and social norms”.  Watch the trailer:

Chow Down: “Highlights the journey of three people who attempt to reverse their heart disease and diabetes by adhering to a plant-based diet”. 

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Broken Eggs

We face a looming retirement crisis that will impact millions of elderly and soon-to-be elderly Americans, as well as our children and grandchildren who will have to bail out those generations.

The Facts:

Overall Population

·        78% of Americans live paycheck to paycheck.

·        1 in 4 don’t set aside anything for savings each month.

·        Nearly 3 in 4 say they’re in debt, and over ½ say they think they will always be.

·        Nearly 8 in 10 of Americans are “extremely” or “somewhat” concerned about affording a comfortable retirement while two-thirds believe there is some likelihood of outliving retirement savings. (Northwestern Mutual) 


·         48% of households in America headed by individuals at least age 55 have no retirement savings. 

·        In order to maintain our standard of living post-retirement, we need to have saved at least 11 times our income by age 65. That means saving 15 percent to 17 percent of income across your working life. (Research done by Aon Hewitt and the University of Georgia)

·        60% of pre-retirees in America aren’t on track to achieve even 8 times projected income, a very conservative estimate of bare bones retirement preparedness (National Institute of Retirement Preparedness) 

·        We face a looming retirement crisis that will impact millions of elderly and soon-to-be elderly Americans, as well as our children and grandchildren who will have to bail out those generations.

·        By 2035, and for the first time in U.S. history, Americans over the age of 65 will outnumber our children.  With increasing deficits as far as the eye can see, its unlikely that our kids will be up to that challenge. 

·        The US government is currently spending $1 trillion more every year than it takes in.  With the bulk of that going to defense, social security, Medicare and interest on our $22 trillion in debt, it’s a mathematical certainty that taxes will be higher for future generations than they are today.

·        Even those who think that they are okay may be at risk.  More Americans in history have placed their retirement nest eggs in a single basket – US stocks.  The current bull market is now the second longest in US history and US stocks have never been this expensive by almost any measure.  That begs the question.  What will happen to their nest eggs when a recession strikes and they have no time to recover?

How Did This Happen: 

·        Steadily growing life expectancies is one reason.  Someone who retired in the 1950s probably didn’t expect to live beyond their late 60s or early 70s, but odds are now about 50-50 that someone retiring today will live into their 90s.

·        There has been a dramatic widening of the wealth gap between the top 20% and the rest of America.  While America as a whole has been getting richer, the vast majority of Americans have not.  The 540 billionaires in the US now control 64% of all US wealth.  These 540 people, which could easily fit in an average size movie theater, now have more wealth than the bottom 240 million Americans combined. 

·        For the majority of those 240 million people, the cost of living has risen much more dramatically than incomes.

Average Americans are treading water:  “Despite some ups and downs over the past several decades, today’s real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago. And what wage gains there have been have mostly flowed to the highest-paid tier of workers.”  --  Pew Research Center 

But the problem isn’t just the cost of living due to inflation; it’s that the “real” cost of raising a family in the U.S. has grown incredibly more expensive with surging food, energy, health, and housing costs.

Researchers at Purdue University recently studied data culled from across the globe and found that in the U.S., $65,000 was found to be the optimal income for “feeling” happy. In other words, this was a level where bills were met and there was enough “excess” income to enjoy life. (However, that $65,000 was based on a single individual. For a “family of four” in the U.S., that number was $132,000 annually.) 

Gallup also surveyed to find out what the “average” family required to support a family of four in the U.S. (Forget about being happy, we are talking about “just getting by.”) That number turned out to be $58,000.

Skewed by the 1%

The issue with the Census Bureau’s analysis is that the income numbers are heavily skewed by those in the top 20% of income earners. For the bottom 80%, they are well short of the incomes needed to obtain “happiness.” 

The chart below shows the “disposable income” of Americans from the Census Bureau data. (Disposable income is income after taxes.)

So, while the “median” income has broken out to all-time highs, the reality is that for the vast majority of Americans there has been little improvement. So, if you are in the Top 20% of income earners, congratulations. If not, it is a bit of a different story.

No Money, But I Got Credit

As noted above, sluggish wage growth has failed to keep up with the cost of living which has forced an entire generation into debt just to make ends meet.

While savings spiked during the financial crisis, the rising cost of living for the bottom 80% has outpaced the median level of “disposable income” for that same group. As a consequence, the inability to “save” has continued.

So, if we assume a “family of four” needs an income of $58,000 a year to “just get by”, that becomes problematic for the bottom 80% of the population whose wage growth falls far short of what is required to support the standard of living, much less to obtain “happiness.” 

The “gap” between the “standard of living” and real disposable incomes is more clearly shown below. Beginning in 1990, incomes alone were no longer able to meet the standard of living so consumers turned to debt to fill the “gap.” However, following the “financial crisis,” even the combined levels of income and debt no longer fill the gap. Currently, there is almost a $3300 annual deficit that cannot be filled.

This is why we continue to see consumer credit hitting all-time records despite an economic boom, rising wage growth and historically low unemployment rates.

The mirage of consumer wealth has not been a function of a broad increase in the net worth of Americans, but rather a division in the country between the Top 20% who have the wealth and the Bottom 80% dependent on increasing debt levels to sustain their current standard of living.

Nothing brought this to light more than the Fed’s own report on “The Economic Well-Being Of U.S. Households.” The overarching problem can be summed up in one chart:

More Money

Of course, by just looking at household net worth, once again you would not really suspect a problem existed. Currently, U.S. households are the richest ever on record. The majority of the increase over the last several years has come from increasing real estate values and the rise in various stock-market linked financial assets like corporate equities, mutual and pension funds.

However, once again, the headlines are deceiving even if we just slightly scratch the surface. Given the breakdown of wealth across America we once again find that virtually all of the net worth, and the associated increase thereof, has only benefited a handful of the wealthiest Americans. 

Despite the mainstream media’s belief that surging asset prices, driven by the Federal Reserve’s monetary interventions, has provided a boost to the overall economy, it has really been anything but. Given the bulk of the population either does not, or only marginally, participates in the financial markets, the “boost” has remained concentrated in the upper 10%. The Federal Reserve study breaks the data down in several ways, but the story remains the same – “if you are wealthy – life is good.”

The illusion by many of ratios of “economic prosperity,” such as debt-to-income ratios, wages, assets, etc., is they are heavily skewed to the upside by the top 20%. Such masks the majority of Americans who have an inability to increase their standard of living. The chart below is the debt-to-disposable income ratios of the Bottom 80% versus the Top 20%. The solvency of the vast majority of Americans is highly questionable and only missing a paycheck, or two, can be disastrous.

While the ongoing interventions by the Federal Reserve have certainly boosted asset prices higher, the only real accomplishment has been a widening of the wealth gap between the top 10% of individuals that have dollars invested in the financial markets and everyone else. What monetary interventions have failed to accomplish is an increase in production to foster higher levels of economic activity.

It is hard to make the claim the economy is on the verge of acceleration with the underlying dynamics of savings and debt suggesting a more dire backdrop. It also goes a long way in explaining why, as stated above, the majority of Americans are NOT saving for their retirement.

“In addition, many workers whose employers do offer these plans face obstacles to participation, such as more immediate financial needs, other savings priorities such as children’s education or a down payment for a house, or ineligibility. Thus, less than half of non-government workers in the United States participated in an employer-sponsored retirement plan in 2012, the most recent year for which detailed data were available.”

But more importantly, they are not saving on their own either for the same reasons.

“Among filers who make less than $25,000 a year, only about 8% own stocks. Meanwhile, 88% of those making more than $1 million are in the market, which explains why the rising stock market tracks with increasing levels of inequality. On average across the United States, only 18.7% of taxpayers directly own stocks.”

With the vast amount of individuals already vastly under-saved, the next major correction will reveal the full extent of the “retirement crisis” silently lurking in the shadows of this bull market cycle.

This isn’t just about the “baby boomers,” either.

Millennials are haunted by the same problems, with 40%-ish unemployed, or underemployed, and living back home with parents.

In turn, parents are now part of the “sandwich generation” who are caught between taking care of kids and elderly parents.

But the real crisis will come when the next downturn rips a hole in the already massively underfunded pension funds on which many American’s are now solely dependent.

For the 75.4 million “boomers,” about 26% of the population, heading into retirement by 2030, the reality is that only about 20% will be able to actually retire.

The rest will be faced with tough decisions in the years ahead.

What Can We Do?

·        First, individuals and families must make saving for retirement a priority. It can be difficult to think about your 401(k) or IRA when you're living paycheck to paycheck, but putting a little bit away each month will make all the difference. The earlier you start saving, the better off you'll be 

·        The long-term solution lies in the adage "time is money," or at least the opportunity to make money.  If you put in a little bit in savings each year starting at a young age, it will add up to a lot of money by the time you're 65 years old – and much more than if you start saving for retirement when you're 40 or 50 years old. 

·        A recent article showed the benefits of starting saving for retirement at 25 or 30 years old.  A $650 monthly deposit into a 5 percent compounding account will yield $1 million after 40 years.  A little over $10 dollars a day (the price of an average dine-in lunch) would yield half a million dollars.  Run those same numbers over a 20-year period, and the results are $267,000 and $132,000, respectively.  

·        The answer is obvious: start saving early, even if it's a small amount, and get regular tax-free savings.

·        The last day for 2018 contributions to your Roth IRA is April 15th.

   Congress must act as well. 

·        This retirement crisis is not news for policy makers. 

·        Senators Tom Cotton (R-AR), Cory Booker (D-NJ), and Todd Young (R-IN) have developed a bipartisan package of common-sense bills that would help boost retirement security for individuals and families. It was strongly endorsed by the Bipartisan Policy Center. I hope these bills are reintroduced in Congress this session because they are needed.

·        Congress needs to invest in hard working families by helping make sure they can save for retirement now, so they will be set up for success in later years. But it also must be careful to avoid further complicating an already overly-complicated retirement savings system.

·        The dirty little secret is that government can provide all the incentives in the world for workers and families to save for retirement. But none of it will matter unless those workers and families make saving for retirement a priority as well.

·        Lastly, and perhaps most importantly, inequities in our tax system – which were compounded by the Tax Cuts and Jobs Act of 2017 – made a huge problem even worse.  Fixing those inequities will need to become a priority if we hope to avoid serious economic consequences and social unrest.   

Prefer the cartoon version?  “Meet the Broken Nest Egg”:


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What Do I Own and Why Do I Own It? 2019 Update

In times of economic turmoil and financial market upheaval, it’s a good idea to take a deep breath and reflect on this question.  Understanding what you own and why you own it is the first step toward building confidence and conviction.  Confidence and conviction are always tested during periods of market volatility.  The more you understand about the design of your portfolio, the better you’ll sleep at night when the world around us appears to be coming unglued.  

Before we look inside your portfolio, let’s first review a few principles.  It is important that you first have this foundation to fully understand what you own and the role it serves in your portfolio:

Principle #1: None of us can accurately predict the future.  This might come across as common sense, but deep down none of us really believe it.  We are all human beings who tend to follow our “gut”.  That in turn is heavily influenced by media reports, crowd psychology and an unfortunate human tendency to extrapolate recent trends well into the future.  If one of our investments drops unexpectedly, fear sets in and we emotionally project that it will go to zero.  When another investment rises to new highs, greed takes over and our gut tells us it will keep going to the moon. The truth is that nobody can reliably and consistently predict the future, but that never stops us from trying!

Principle #2: Human emotions always trump logic when they are at their most extreme.    Our gut feelings offer a false confidence that is heavily driven by consensus opinions that were likely formed by reading, listening and watching what the masses are saying.  It’s hard to go against the consensus.  Even if the consensus proves to be right, any advantage you might gain by following it was lost as the markets have long since re-priced to reflect consensus.  The expected result is already baked in.  Going against consensus, when you are right, can be quite rewarding.  

Principle #3: Attempting to ‘Beat the Market’ is a Fools Game.  The market is by definition the sum of all investors, each of which has multiple votes based upon the size of their financial commitment.  The sum of all investors set a price for each investment based on all the known information about that investment and all other known environmental factors.  The price is determined and constantly fluctuates in a tug of war between those who are bullish and those who are bearish, with the big players who have the greatest knowledge and resources dominating the game.  The rest of us are just casual observers.  It is foolish for any of us to think we can correctly guess the winner, not just once or twice, but time and time again.     

Principle #4: Diversified Portfolios = Safety.  If none of us can consistently and accurately predict the future, and if the prices of all investments already reflect all the known information that is available, the ONLY reasonable strategy is to spread our money around and not make any big bets.  Putting all of your eggs in one basket is a get rich quick strategy that rarely works other than for a very lucky few, most of whom later lose it all in the next round.  Diversification is known in investment circles as the only true “free lunch”.  It is a strategy to mitigate risk and to slowly and steadily move forward one step at a time, with only a few steps back every now and then.  It’s a strategy that avoids big losses and improves your likelihood of reasonable gains over the longer term.

Principle #5: Over time, the law of averages prevails.  Investors who stick with managers, allocation strategies and a rebalancing plan achieve better risk-adjusted returns and will end up richer.  Putting all your eggs in the stock market is great when it’s on a tear, but don’t be fooled by short-term results.  It’s the old fable of the tortoise and the hare.  Steady, disciplined and consistent always win over time.

Principle #6: Don’t obsess over the losers.  Diversification means that some of your investments will do very well and others may do less well or even poorly.  That is by design.  It’s impossible to know the outcomes in advance.  Expect this to happen and don’t obsess over the losers.  And whatever you do, don’t dump those that go down!  They are likely tomorrows winners as they are now out of favor and bargain-priced.  It’s a peculiarity of human nature that we feel better buying things that are now expensive and dumping things that are now cheap!  

Principle #7: The smartest guys in the room build disciplined models and follow them religiously.  Two of thesmartest in the universe are David Swenson who manages the $27 billion Yale endowment fund and Jack Meyer who does the same for Harvard’s $36 billion fund.  Their strategies are quite similar, so much so that many investors now refer to what they do as “The Ivy Portfolio”.  The Ivy Portfolio is famous for its simplicity and discipline.  It equally weights a large number of asset classes and regularly rebalances back to those equal weights.  Each asset class is chosen due to its lack of correlation to the other asset classes, not to the investment manager’s predictions for how well that asset class will do in the future.  In less formal terms, some are likely to zig while others are likely to zag.  Each asset class will respond differently to changing economic conditions, government policies and investor psychology.  Equal weighting is designed to combat our human tendency to tell ourselves stories about why one will do better than the other (predicting the future).  Equal weighting allows the markets to set prices based on all the known information.  Equal weighting acknowledges that to favor one asset class over another is another way of saying that you know better than the markets.  We do not.

Principle #8: Volatility is our new best friend.  Following a disciplined process reduces our reliance on emotion and prevents us from making bad decisions in periods characterized by the emotional extremes of greed and fear.  In fact, the volatility that brings out these emotions becomes our best friend.  Big drops in any one asset class require us to accumulate more while it’s temporarily cheap.  Big increases in any one asset class force us to take some of our chips off the table before it comes back down to earth.  

Principle #9: Learn from how the smart guys on the block manage their money.  Our current model portfolios embrace the Yale and Harvard methodology.  All of our model portfolios embrace diversification and require disciplined rebalancing back to the target percentages.  However, the design of the old models did occasionally make bigger bets in one direction or another (inflation versus deflation, dollar strength versus dollar weakness, etc.).  Sometimes that worked to our advantage, sometimes not.  Our newer models equally weight twenty different asset classes as the base case, with modest deviation from those targets based only on individual investor considerations.  The portfolio is highly diversified across asset classes (breadth) and highly diversified within each asset class (depth).  The strategy relies on a disciplined rebalancing process to maintain our weightings over time.  We sell what goes up and buy more of what went down.  We let the markets set the appropriate price without second guessing our equal weightings.  We let rebalancing do the work for us and make our buy sell decisions.  It is the opposite of a “predict the future” strategy.  We don’t have to constantly guess if the markets have it right or have it wrong.  

10 Twenty – Diversified Investment Portfolios with a Plan.  

Ten model portfolios are available for my diverse set of clients, each of which includes twenty distinct asset classes.  A chart comparing the models is attached as the last page.  Each asset class was chosen with an eye toward reducing correlation to the other asset classes.  The goal was to have some asset classes in the mix that would respond favorably to almost any potential future scenario.  The default model is called “Balanced” and requires an equal 5% weighting to each asset class.  The other models are more or less conservative or aggressive and make adjustments to account for individual investor risk tolerance, need for return, and other circumstances.  Rebalancing is performed primarily in tax deferred retirement accounts when possible.  We also look to harvest losses in the taxable portfolio to offset other positions that have taxable gains.

The asset classes are divided into the categories of equities, fixed income and real assets with all asset classes assigned to one or the other.

Equities – aka the “Engines”

Equities do especially well in periods of better than anticipated economic growth.  They do poorly when growth falls short of expectations.  Notice that it is the difference between the expectation of growth and the actual growth that drives the price of equities.  Equities can do poorly in periods of strong growth when their prices had already discounted strong expected growth.  Likewise they can perform well in periods of weak growth and when the economy is doing poorly as long as they perform somewhat better than the lowered expectations.  There are 8 asset classes in our model that fall under the category of equities:

Broad-based Companies

1.       Large U.S. companies (5%): U.S. large capitalization stocks have been the best performing asset class in the world in recent years after coming off a decade of flat performance that generated a measly 2% average return per year during the period from 2000 to 2010.  The strong recent performance is largely due to flight capital from Europe and Asia looking for greater safety in the U.S. dollar and our historically more stable economic and political systems.  By some accounts, this rally is long in the tooth as U.S. stocks (like Johnson & Johnson and Exxon for example) are at least 30% more expensive than their European counterparts (like Bayer and Royal Dutch Shell).  This defies logic since these companies have relatively equal prospects given that they sell similar products to the same customers all around the world.  The U.S. companies that make up the S&P 500 are trading at a price that equates to a 2% dividend yield, whereas the 500 largest European companies trade at a price that produces a dividend closer to 3%. Overemphasizing this asset class while its trading at premium valuations relative to others is making a big bet that U.S. companies will continually and consistently grow faster than the markets already lofty expectations.  That seemingly ignores the headwind of a higher U.S. dollar that will make U.S. exports more expensive to the rest of the world.  Meanwhile, international companies in similar business will see their exports to the U.S. surge as their prices become more competitive compared to their U.S. counterparts.  The allocation decision isn’t about patriotism; it’s about the laws of economics.  Rubber bands stretched too far tend to snap back, as do valuations of any one asset class when pushed to extremes. 


2.       Small and Medium size U.S. companies (5%):  Smaller companies tend to outperform larger companies over time, and value-oriented small stocks tend to outperform growth-oriented small stocks over time.  Those are well established truisms that have been accepted for decades.  We include small and medium sized companies in our portfolio to take advantage of these probabilities.  We also follow a value tilt when portfolio size justifies a larger number of separate investment assets in the mix.


3.       International developed market companies (5%): Currently priced at a 30% discount compared to their U.S. competitors, this asset class looks to be a better bet relative to U.S. equities at current prices. 


4.       Emerging market companies (5%): Despite greater instability and volatility, it is important to have some exposure to the portions of the world that are growing.  And some are on fire.  Literally and figuratively!  Latin America has added more citizens to its middle class in just over two years than Texas has residents.  Mexico, despite all its bad press, is a rising manufacturing power.  Frontier markets like the Philippines, Indonesia and Africa may well be the next big boom.  But right up front I will say we shouldn’t toss around the phrase “BRIC” – Brazil, Russia, India and China – as an investable class.  The acronym should stand for “bloody ridiculous investment concept”.  Those four countries couldn’t be more different in terms of education, history, natural resources, economic policies, work culture, respect for rule of law, demographic, or market outlook.  Russia and Brazil thrive on high energy costs; India and China suffer from them.  If treating that small group as homogeneous is silly; treating the other 150 or so developing and frontier markets as a unit is downright absurd.  The various countries of the world will follow their own unpredictable paths.  We will focus on the more stable “global blue chips” that know their markets better than any U.S. company could.  We also favor ETFs that focus on companies that closely tied to emerging market consumers.  Young populations of upwardly mobile consumers are part of the demographic trends that favor growth for these consumer-focused companies.

Natural Resource Companies.  Heavily leveraged banks and insurance companies come and go.  Software and other tech companies are only as good as their continued ability to innovate.  Retailing and the fashion industry is littered with winners and losers.  Natural resource companies, by comparison, are unique for their mundane, predictable and relatively stable businesses and strong stable and growing dividends.  They also provide a degree of inflation protection that most other equities do not.  These unique characteristics set them apart.  For these reasons, we carve them out from the universe of broad-based equities and give them a category of their own. 

5.       Energy companies (5%): Developed economies need energy to transport goods, feed people and provide all the benefits of modern lifestyles.  It takes ten times more energy to produce a meat diet than a diet based on rice alone.  Producing and delivering energy is a stable business that generates strong and growing dividends over time.  There is a reason that Exxon has grown to become one of the largest companies in the world. Unlike other industries, the original players are all still around in one form or another. We can’t say that about almost any other industry.


6.       Food and Farmland companies (5%): The big argument for it is easy to guess: the demand for food will continue to skyrocket as frontier and developing economies progress, and as rising middle classes of China, Africa and the Middle East demand better and more reliable sources of protein.  By one measure, if every person in China ate two extra eggs a week, it would require all the grain Canada currently produces just to feed the chickens!  And, food aside, farmland is also in demand for biofuel production.  Annual returns from farmland have been very strong in recent years, somewhere in the mid-teens when you include cash rents, profit-sharing income, and appreciation.  The inflation benefits are obvious, for both the annual income stream and, more importantly the residual value.  That leads some people to call farmland “gold with a coupon.”  The bad news is that there has already been a big move in prices, especially for the best located: prime Iowa acreage may be in a bubble, with prices reaching as high as $20,000 acre earlier this year.  On the other hand, the worldwide ratio of arable land per person keeps dropping, from almost three acres per person in 1960 to about one now, while developing demand for its output is nearly certain to rise.  


7.       Timber Companies (5%):  Timber companies provide strong income streams along with inflation protection.  The headline here is simple: Harvard has a $3 billion dollar allocation to timber, an enormous 10% of its endowment.  After tremendous success in the US woodlands market, buying from paper mills that needed cash and then selling out to other endowments and pension plans that awakened to the value, Harvard headed to Romania and New Zealand and reloaded.  It’s now stomping around the forests of Brazil looking for even more.  Timber is special.  It is perhaps the only asset class that can do four distinct jobs:  It’s an outstanding hedge against inflation.  It throws off a steady income stream with only modest effort.  It is a fundamental way to play the expansion of the world’s economies.  Finally, it’s a surprising play on green technologies as new and unexpected markets for wood products are continually developed.  Somewhat counter-intuitively, “green” regulations are creating a push toward timber as a “renewable energy resource.


8.       Water and Environment Companies (5%):


Water: All evidence seems to indicate that people really do enjoy water.  Too bad, because only about 1% of it on the entire planet is potable.  You already know that the supply is under incredible and growing pressure from increasing populations.  The exact reason that’s true, however, is a bit surprising.  It’s not so much that people drink more water, or even use it for other purposes like bathing.  It’s that as the demand for protein food sources increases, the need for fresh water to create it explodes:  from this point of view, in fact, eating a hamburger is the same as taking a 12 hour shower.  Given exponential growth needs, water may the ultimate liquid investment!


Environmental Services: More people on the planet living a middle-class lifestyle means more waste and more pollution, pure and simple.  Companies that clean up the planet will be in demand for eons to come. 

Fixed Income – aka the “Brakes”

Fixed income in the form of cash and bonds adds stability to portfolios.  They also provide much needed liquidity in times of market turmoil, becoming the fuel that we need to purchase other assets when they happen to be down.

9.       Cash (5%):  Cash is the first fuel we use when rebalancing.  It also provides liquidity for distributions for those who are retired from the workforce.  It grows naturally from accumulated dividends.  


10.   U.S. bonds (5%):  U.S. bonds offer deflation protection, but can be hurt significantly in periods of rising interest rates and increased inflation expectations.  For that reason, we have shortened the maturity (known as duration) of our bond holdings in general.  We also emphasize short and medium-term inflation protected bonds over nominal bonds that lack inflation protection.


11.   International developed market bonds (5%):  International bonds currently offer higher yields than their U.S. counterparts.  We limit our portfolio primarily to foreign government bonds and inflation-protected foreign bonds to mitigate default risk and inflation risk.  Foreign bonds also offer diversification away from the U.S. dollar which can at times be a plus and at other times a minus.  For that reason, we favor a mix of 50% currency hedged and 50% non-currency hedged international bonds.  


12.   Emerging Market bonds (5%): There are many reasons that emerging market debt instruments bear so much higher rates of interest than U.S. obligations.  Partly it’s the perceived safety of U.S. instruments, and partly, it’s fear of inflation in the issuing country. And then there’s the currency risk that you’re taking on in those foreign jurisdictions.  But it’s very hard to ignore four or five extra percentage points of interest these days.  Besides, these are not your father’s emerging markets.  Emerging market countries are actually in much better shape financially than their developed country counterparts.  Most are creditors, not debtors.  Additionally they have younger populations and fewer retirees to support, which should enhance their growth prospects when compared to the west. We favor 50% dollar denominated emerging market bonds and 50% in local currencies.  

Real Assets – the “Diversifiers”

Real assets are physical, as opposed to financial.  Even in periods of modest inflation, currencies (and the financial assets measured by them) lose value, real assets hold theirs.  

Real Estate and Infrastructure: 

13.   U.S. Real Estate (5%):  REITs are tax advantaged pass-through vehicles that collect rent and mortgage payments from every part of the real estate world including residential and commercial, with subcategories like health care, luxury resorts, shopping malls and even self-storage.  REIT dividend rates are higher than bond yields, which makes them susceptible to rising interest rates.


14.   International Real Estate (5%):  International REITs operate exactly like US REITs except that they own property outside the U.S.  They are currently paying significantly higher dividend yields than U.S. REITs due to the perception of greater safety in the U.S. than in European and Asian markets.  


15.   Global Infrastructure (5%):  In many parts of the world, infrastructure such as bridges, power plants and even airports are owned by public companies.  These generate returns over long periods of time from user fees, royalties, rents, and shares of government tax income.  The good news, and the bad, is that you usually have a governmental partner:  That can provide monopoly power, but also some uncertainty… politicians have been known to change their mind on occasion.  Outside the U.S., many smart folks believe infrastructure is the very best way to profit from the developing economies of Asia, Latin America, Eastern Europe and Africa.  Immature economies will suffer from fits and starts as they adjust to capitalism and therefore can be a roller coaster.  Long-term infrastructure projects might be safer, with water and energy infrastructure the surer bet.  


16.   U.S. Oil and Gas MLPs (5%): Master Limited Partnerships or MLPs are a unique and very underappreciated asset class.  Congress created special vehicles back in the ‘80s to spur energy infrastructure construction, and could almost say that they went overboard bestowing investor incentives to kick-start that effort.  MLPs trade publicly, do not pay entity-level tax, pay out nearly all of their net income directly to unit holders, and can actively manage energy businesses to grow distributions.  The most interesting sort of MLP for most investors are those active in the “midstream” sector.  These companies provide pipelines, storage facilities, and other plumbing to move energy products around the country.  That should keep revenue growth cooking and help this group maintain its long history off increasing distributions by something like 5% to 10% per year.  The yields they generate for investors are tax-favored since they are treated as a “return of capital”.  A 6% yield suddenly looks more like 8% or 9% after considering this tax benefit.  The annoying thing is that it’s harder to figure out how to buy each MLP.  Pure MLPs generate a K-1 and can be a little messy around tax time.  MLPs in the form of ETFs are much simpler to work with but do lose part of their tax advantage. 


Commodities and Alternative Strategies

17.   Precious Metals (5%):  Is gold a good investment?  I don’t know: Is insurance?  In both cases you’re spending dollars to protect against something you very much hope doesn’t happen.  Obviously, the one great and undeniable advantage of gold is that, over many centuries and indeed throughout human history, it has generally retained its value against the vagaries of paper currencies.  There is quite an active little argument about whether gold “is money”.  It certainly has some fantastic characteristics that make it a natural candidate for that role; it’s difficult to produce, there are limits on the supply, it is incredibly durable (98% of all gold ever found in civilization is still kicking around), its fungible, easily divisible, measurable, and transportable.  But it has also proven time and time again to be quite volatile.  So gold is insurance in our portfolio, nothing more.   Whether it qualifies as an investment, or merely a smart thing to do, is just semantics.  But do remember that nobody would recommend paying lavish insurance premiums without something to insure.  Same with gold.  It protects your financial assets from confiscation through devaluation at a time when many central banks are experimenting with unprecedented money printing on a scale never before seen.  Gold has risen by as much as 100% per year, and has fallen by as much as 25% per year, in just the few years that we’ve owned it.  I’ve come to believe that 5% in gold and other precious metals is enough insurance for most portfolios as too much can make for a bumpy ride. 


18.   Commodities (5%):  Physical commodities tend to behave differently than stocks and bonds, which is a good thing when you’re looking for diversification.  There have been many times in history when stocks and bonds were both declining in value, while commodities did the reverse.  Energy commodities were terrific performers during the 1970’s and early 1980’s even while world economies were stagnant.  Over time, energy should become more and more expensive as demand will increase with a growing middle class and the costs of extraction continue to rise.  There may still be plenty of oil and gas left in the ground, but it’s getting harder to find and more expensive to extract over time.  That suggests that energy prices should rise over time at something more than the rate of inflation.  

Commodities in general are a great diversifier.  They exhibit a low correlation to almost every other asset class.  That alone is enough of a reason to include them in our portfolio.  Increasing demand for agricultural and other food products, not to mention potential currency depreciation, add to their allure.  This category is also where we park other alternative strategies that may be appropriate from time to time including private equity, long short funds, merger arbitrage, and other hedging strategies.

19.   Thematic Strategies: We are entering a decade when technological innovation and powerful demographic trends are likely to significantly impact our world.  Companies are struggling to adapt to these new realities.  Some will be successful and others not.  Traditional investing focuses primarily on geography (US vs International) and company size (large, medium and small cap) as differentiators of performance.  A thematic approach shifts the focus to investments that stand to benefit from rapidly evolving demographic and technological changes.  We are heading toward a future that includes self-driving electric vehicles, genomic alteration that will extend life expectancy, robots that more efficiently and accurately perform functions than their human counterparts, and artificial intelligence that offers implications beyond our imagination.  Think of how Uber, Amazon and Facebook have already changed our lives.  There is much more to come.  Thematic strategies focus on identifying disruptive innovators with the potential to create exponential growth and profitability.  Such companies demand at least a modest allocation in any diversified portfolio.


20.   Hedge Strategies: For years, hedge fund managers have engineered financial strategies to protect portfolios from the bear markets that occur from time to time. These strategies come in a variety of flavors, but their common element is a goal of providing positive returns that are uncorrelated with stocks and bonds.  Common hedge strategies include 

a.       “long-short” equity strategies that take long positions in stock that are expected to appreciate and short positions that are expected to decline.  

b.       merger arbitrage strategies, also known as risk arbitrage, seek to profitably speculate on the successful completion of announced mergers by taking advantage of inefficiencies in the market prior to closing a transaction.

c.       relative strength/momentum investment strategies focus on buying stocks that are rapidly appreciating and quickly exiting the moment that they stop rising in value.

d.       private equity seeks to invest in privately held companies before they go public, hoping to cash in on their rapid growth before it is fully priced in the public markets.

Historically these highly engineered growth enhancing and risk mitigation strategies were only available to ultra-high net worth investors who often paid their hedge fund managers “2 and 20” (2% annual fee plus 20% of profits).  That has changed with the introduction of a low cost, high quality ETFs that replicate many of these strategies.  Our modest allocation to hedge strategies offer investment returns that are uncorrelated with public equity markets and can therefore enhance returns and reduce overall portfolio risk over time.  

Considerable thought has gone into the creation of our ten portfolio models.  The principles under which they were constructed are based on strong academic research that provides sound empirical evidence of a tendency toward superior performance and risk reduction in the real world.  If you’d like to read more about the research that underlies our strategy, I can suggest the following resources:

The Investors Manifesto by Dr. William J. Bernstein

The Ivy Portfolio by Mebane T. Faber, CAIA, CMT and Dr. Eric W. Richardson

7 Twelve – A Diversified Portfolio with a Plan by Dr. Craig L. Israelson

The Alternative Answer by Bob Rice, Bloomberg TV’s Alternative Investment Editor

Unconventional Success by David Swenson, Chief Investment Officer, Yale University

The Age of Deleveraging – Investment Strategies for a Decade of Slow Growth and Deflation – Dr. A. Gary Shilling

The Crash Course – The Unsustainable Future of Our Economy, Energy and Environment by Chris Martenson, PhD.



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Confessions of Your Investment Manager: I’m preparing for a Market Crash

As we enter the eleventh year of economic expansion, valuations in the US stock and bond markets have reached all-time highs.  Real estate construction is booming.  Cranes fill the skyline in every major city in the US and many around the world.  Unemployment is low.  Inflation is moderate.  Optimism is high. 

Meanwhile, consumer, corporate and government debt are extraordinarily high and rising, salaries are stagnant and tax revenues are falling.  These are unusual and unexpected occurrences for an economy in the later stages of a strong, central-bank-driven, economic expansion. 

Ten years after the “Great Recession”, we are witnessing the longest bull market in history, approaching ten years (or nearly 3,650 days). 

As market risks rise, complacency is in the air

After eleven years of mostly rising US stock prices, “expected future returns” (based on today’s current lofty valuation levels) are falling.  The demographics of an aging population and high levels of debt make it unlikely that future investment returns will be as strong as they have been in the past.  This is not news to those of us who are serious students of the economy and the markets. 

Each year four American institutions publish their long-term strategic economic views and market return expectations for the next 5 to 10 years.  Their predictions rely on an understanding of economic cycles, market valuation metrics, and behavioral science.  While forward looking projections into an uncertain future are rarely perfect, all four have accumulated a solid track record that adds to their credibility.  My quarterly emails always include a copy of the “Ivy Portfolio Index”, which provides historical returns of the assets classes we invest in, alongside the future “expected returns” for each of these four institutions.  This offers both a crystal clear “rear-view mirror view” of where we have been and a less clear but well-reasoned “front-windshield-view” of where we appear to be heading.   

Past and future returns

Historically speaking, a well-diversified portfolio that equally weights most major asset classes has returned between 6% and 8% for the past ten years.  However, all four institutions that publish their economic and market forecasts expect future returns to be significantly lower than that historical average:

·        Northern Trust expects a 60/40 global stock/US bond portfolio to average 5.25% for the 5 years.  

·        PIMCO expects a multi-asset portfolio to average 4% over the next 10 years.

·        JP Morgan Chase expects a well-balanced portfolio to average 5% over the next 10 years.

·        AQR Capital Management (a research firm that provides data utilized by pension plans) expects that a balanced portfolio will average 4% over the next 10 years.

There is no escaping the fact that these institutions are quite sanguine about future forward looking returns.  That reflects the current high starting prices.  In their commentaries, each institution references similar realities that impact their forecasts.  These include slowing economic growth based on aging world populations (especially in Japan, China and Europe), the end of economic stimulus and “extraordinary measures” by central banks, and (especially) the very high levels of debt around the world at a time of rising interest rates.  

Lower expected future economic returns will not be linear

It is likely that the next 5 to 10 years will witness both bull and bear markets.  There are likely to be some double-digit positive years as well as significant negative years.  That is consistent with these institutional projections – which are long term averages.  

One of my most important jobs as your financial advisor is to help reduce the negative impact of the next bear market or market crash, without exiting the markets entirely (an alternate solution that few of us can afford).

Risk management is now more important than ever

Diversification doesn’t pay off during bull markets.  It keeps you from having all your eggs in a single high performing basket.  However, diversification pays off big time when markets turn negative, as they inevitably and unexpectedly do from time to time.  

Diversification helps to limit the size of the losses when these downturns occur.  After a sizeable market loss, it can take nearly twice the percentage gain as the percentage loss incurred, just to get back to where you started.  A smaller loss guarantees a much more rapid recovery on the other end.  A smaller loss also allows you to sleep better at night when others are tossing and turning.  And it reduces the likelihood that you’ll bail out altogether.  

Minimization of losses is the most important factor in achieving strong long-term returns.  At this point in the economic cycle, wise investors and their advisors are focused primarily on risk, and should not be stretching for higher hoped for returns. 

Only one future will come to pass, but many are possible

Crashes most frequently occur after lengthy periods of economic success, when valuations are extended, optimism is high, and complacency is the norm.  After many years of strong returns, markets have become priced for perfection.  That’s nothing new.  Bear markets typically occur every 8 to 12 years when prices get ahead of themselves and investors become complacent.  Then, inevitably, something unexpected happens.  The immediate triggers vary.  Then paradigm shifts and the herd suddenly changes course.  

This is part of who we are as a species.  We move along the continuum between greed and fear at least once a decade or so.  It’s been a consistent story since time immemorial.  We’re taught this as children through stories like “The Emperor has No Clothes!” when a young boy clearly sees obvious facts that the herd chooses to ignore.  It’s illustrated in the childhood game of musical chairs when more and more players join the game only to lose their seat when the music suddenly stops.  An awareness of these all-to-human frailties is the first step in ensuring that you are prepared when old perceptions and new realities suddenly and violently come into conflict.          

Taking a few chips off the table

Of course, it would be foolish to think that I (or any investment manager) will be able to exit the markets the day before the next crash.  What I do aim to do however, is prepare and protect your portfolios as the probabilities of negative surprises rise.  It’s time for many investors (and especially those who have accumulated the majority of their total lifetime wealth) to take a few chips off the table.

After a market crash, journalists are fond of asking “What are you doing now?”  A better question might be “What did you do ahead of time to prepare?”  What a portfolio manager does ahead of a market changing event will have a much greater impact than their reaction after the fact.  The ability to successfully react and take profitable action after the event is limited (like grabbing a chair when the music stops).  

Despite our efforts, the economic cycle has not been repealed.  Nor has the ongoing battle between greed and fear.  Crashes will inevitably occur from time to time…

Crashes exist precisely because human beings are wired to become greater risk takers and increasingly complacent after long periods of strong market performance.  When logic suggests that we should take a few chips off the table, greed and complacency set in and many investors instead choose instead to double down.  This can cause the music to keep playing longer than expected.  Frankly, it may continue for some time.  As valuations become increasingly stretched and expectations rise to unsustainable levels, markets become increasingly vulnerable to unexpected negative events.  And then it ends.  How much sand can you add before the last grain of sand collapses the entire pile?       

Are we there now?  Perhaps not, but we’re definitely closer than yesterday.  At the crux of this debate is the fact that every bear market is different.  Soul searching, regulation and legislation is imposed after each episode, never before the crash occurs.  Post-crash models are developed to perfectly spot (with hindsight) the last crash, but often the focus point is no longer correct for the next crisis.  

The global system is complex and dynamic.  I’m confident that the next crash will result from a separate set of vulnerabilities than the last.  That said, the lessons of history are not to be dismissed out of hand.  I’m convinced that it’s important to study and understand market valuation tools and the history of economic cycles to help us prepare.

How will we know when a bear market is just around the corner?  

Economists cite four main indicators that can signal changing probabilities.  Right now, all four are flashing red or yellow.

The four main indicators:

·        Corporate behavior – Mergers and acquisitions, initial public offerings and corporate stock buy-backs are always good to keep an eye on.  There is strong evidence that most of the gains in the US stock market in recent years have been a direct result of financial engineering via stock buybacks.  Generally, markets do a pretty good job of determining prices.  That assumes there is a fairly diverse group of buyers and sellers and that each act in its own economic self-interest.  In real life, however, this is not always the case.  In recent years there has been a mind-boggling increase in corporate buy backs.  Corporations tend to buy back stock regardless of economic value, thereby distorting stock prices.  Buybacks offer a quick way to boost executive bonuses, regardless of the risks and rewards passed on to shareholders.  They can push up prices beyond their market determined true economic value.  


Between 2012 and 2015, US companies acquired $1.7 trillion of their own stock, with many companies going deeply into debt to purchase their shares on the open market.  More recently buybacks have been funded by corporate tax cuts and repatriated foreign cash.  This rocket fuel was in plentiful supply after the recent tax cut, but may now be largely spent.  With interest rates rising, the price of this rocket fuel is also going higher.  With leverage ratios high, and interest costs rising, stock buybacks are likely to be fewer and less frequent in the future than we’ve seen in the recent past.  If you want to understand why US stock prices are rising much faster than they are around the world, the first thing to look at is this “elephant in the room”.


·        Profitability metrics – Corporate profit margins are at all-time highs.  Theoretically at least, outsized profits eventually lead to greater competition as new entrants join the market to share in the riches.  Eventually these new competitors and employees themselves demand a greater share of the pie, thereby bringing margins back down to earth.  Those are factors that have, until recently, kept profit margins relatively consistent over long periods of time, always eventually reverting back to the mean.  If history is a guide, future profit margins will decline from these currently lofty levels.  The price-to-earnings ratio is a key valuation tool.  If earnings fall or are expected to fall, stock prices will likely follow.    


We also know that high stock market valuations do have a negative impact on future stock market returns.  Expensive valuations should still be considered as a warning sign.  Today, Schiller’s cyclically adjusted price-to-earnings ratio (CAPE) remains the highest it’s been in all of US history at 32.70 (i.e. US companies are currently valued at 32.7 times their ten year average earnings; a record high).  This indicates the U.S. equity market is quite rich by historical standards.  That begs the question—are we near the end of this bull market or will it go higher still?  Markets do have a way of defying logic from time to time, and attempts at timing rarely work out.  


While CAPE is not a short-term timing tool (according to Professor Schiller’s own admission), it does help us to shape our expectations for the future.  It narrows the funnel of doubt.  Professor Schiller is on record as stating that today’s market reminds him of the Roaring 20’s and the Tech Boom of late 1990’s, both all of which ended with significant economic pain.


·       Balance sheet and credit metrics – High debt levels are rarely a good thing!  It depresses investment and places a future drag on economic activity.  Consumer debt, corporate debt and government debt in the US are all setting new records.  If growth slows, that couldn’t come at a worse time.  Central banks around the world are reducing or reversing their extraordinary accommodative policies and interest rates are beginning to rise around the globe.  They have few tools left should economies falter.  


The US federal government could soon pay more in interest on its debt than it spends on the military, Medicaid or social programs.  The massive run-up in debt of the past decade combined with newly rising interest rates creates a one-two punch.  


A growing budget deficit, made worse by the recent tax cuts, in combination with steadily rising interest rates, will put a crimp on future growth and asset prices.  With less money coming in and more going toward interest, political leaders will find it harder to address pressing needs like fixing crumbling roads and bridges or to make emergency moves like pulling the economy out of future recessions.  Within a decade, more than $900 billion in interest payments will be due annually, easily outpacing spending on myriad other programs.  Already the fastest-growing major government expense, the cost of interest is on track to hit $390 billion next year, nearly 50 percent more than in 2017, according to the Congressional Budget Office.  I thought that fact deserved both bolding and underlining!


·        Positioning – Knowing where you are in the crowd is a very useful thing.  I always attend at least a few webinars each week and listen how other managers are positioned to ascertain what the herd is saying.  Right now, the herd is mostly “all in” and somewhat euphoric.  Even well-informed and anxious advisors are afraid to pare back their equity valuations, for fear of missing out.  The final stage of a bull market can be quite lucrative to investors.  It’s also quite dangerous to advisors who can be punished in the short term by their clients if their exit (in retrospect) turns out to have been premature.  In the game of musical chairs, nobody enjoys sitting alone in a chair while the music continues to play.     

The four main indicators are all flashing red or yellow.  What now?

The four indicators provide both kindling and fuel for a bear market. But, the list isn’t exhaustive.  Something is missing, i.e., the spark to ignite the fire is needed.  The spark in 2000 was the collapse of a handful of massively overvalued start-up Dot Com companies with no earnings (i.e. “the emperor had no clothes”).  The spark in 2008 was one too many no-down-payment mortgages (the “last grain of sand”) and the last renter on earth suddenly became a homeowner and there was no one left to buy at the new record high prices (i.e. “too few chairs when the music suddenly stopped”).  Could this be where we are with the US stock market today as the baby boomers continue to liquidate holdings to finance their retirement?

How bad can it get?

None of us can say for sure what the next catalyst will be or when it will occur, but the massive and growing size of consumer, corporate and government debt in the face of rising interest rates will likely make it more severe than most people currently expect.  History offers a sobering assessment:

·        On July 8, 1933, the Dow was down to 41.22, a 90% loss from its record-high close of 381.2 on September 3, 1929.  

·        The NASDAQ Composite fell 78% over the three weeks from it’s all time high on March 10, 2000.    

·        Recall that a 50% drop requires a 100% gain to get back to even.

How many people do you know that are mostly invested in highly priced US stocks?  Have they been bragging lately about how much better they are doing than you in the markets, with your globally diversified, lower risk (and currently lower return) portfolio?  Do they understand the risk they are taking for an extra few percentage points?

My final confession today: There is no perfect answer.

Having an awareness of the lessons of history can help us prepare for the next bear market.  It gives us an idea of what we need to monitor.  As markets rise beyond expectations, we can lean away from expensive assets while being mindful of the danger.  We can regularly rebalance out of the asset classes that are rising the fastest and into those that are falling or rising less quickly.  Those actions can significantly mitigate the losses when they arrive unexpectedly.  I’m currently leaning away from expensive US growth stocks in favor of less expensive value stocks that offer greater downside protection.  We also have lower exposure to US stocks than do most US investors.

It’s likely that none of us will be able to spot the exact turning point.  This is a fact that should be accepted.  But, I believe that a good process should have investors leaning out of risk assets as valuations rise and future expected returns decline, before the exuberant market psychology changes, and before the volume of debt and corporate stock buybacks collapse under their own weight.  

The best solution:  Diversify, diversify and diversify some more.  And pay off as much debt as you can.

Yes, that’s something we’re already doing.  We invest in a very wide variety of asset classes with a history of little correlation (or better yet, negative correlation) to the others.  It does little good to diversify among asset classes if they all go up and down together at the same time.  The underperformance of the laggards is the price we pay to avoid the really big double-digit declines that occur from time to time.  Diversification provides greater stability and predictability in long term returns with considerably less volatility.

True diversification also requires that we include a healthy dose of “real assets” that should do well when inflation returns.  Inflation is especially harmful to stock and bond prices.  It is a risk that is often ignored.  

Real estate, infrastructure, commodities, precious metals and inflation-protected bonds offer protection from this monster.  If you’re looking to finance your retirement over 30 or more years, inflation is the wild card that can derail even the best financial plan.  

And lastly, which is heresy for an investment manager to say:  Your best “risk adjusted return” may simply be to pay off debt.  Talk about shooting oneself in the foot!  Isn’t that a little like Macys telling shoppers to go to Gimbels (or Amazon to bring that analogy up to date?).  Perhaps.  But I’d rather sleep at night knowing that I’ve offered you the best possible advice even if it results in less assets under management for my firm.

Paying off a 5% mortgage or a 7% car loan is the same as a guaranteed 5% or 7% investment return.  When the best minds on Wall Street are projecting 5 to 10 year expected returns at 4% to 5% (and with the possibility of short-term loss), doesn’t paying off higher rate debt sound reasonable?

What’s next?

I’ll be making modest changes in your portfolio in the 4th quarter.  

These Include:

·        Adding more inflation-protection.  I’ll be rebalancing fixed income portfolios away from nominal bonds and toward inflation-protected securities, particularly those with shorter durations carrying less market risk.

·        Lowering portfolio costs.  I’ll be adding new ultra-low cost, no-transaction fee funds from State Street and others.  Under new arrangements with TD Ameritrade, many of the newest and lowest cost ETFs in the world are now available with no transaction fees.  I’ll work to lower your portfolio costs by replacing existing funds with these new funds, especially in tax-deferred retirement accounts where capital gains taxes are not a consideration.

·        Tax loss harvesting.  The recent downturn in international stocks and bonds relative to US assets offers an opportunity to harvest losses in these asset classes even as we keep allocations unchanged.  I’ll be selling investments in asset classes that have losses and replacing them with similar investments with identical performance characteristics, generating tax loss carryforwards.  That’s the equivalent of a “free lunch”.  It may not be as tasty as a free lunch made by Chef Jae, but it puts free money in your pocket thanks to the extra efforts of Chef Bill.    

·        Increased use of alternative assets.  Your current investment policy includes an allocation for “Soft commodities and Other Alternatives”.  Other alternatives include long/short funds, market neutral funds, S&P 500 put/write strategy funds and “thematic investments”.  Many of these funds are designed to produce positive returns regardless of the direction of stock prices.  Thematic investments include investments in companies that are likely to outperform most others during a market downturn.  These include innovative companies that offer new disruptive technologies, health care and biotech companies that benefit from an aging population, and those who are focused on high growth areas such as robotics, artificial intelligence and cyber security.  I’ll be increasingly adding new ETFs that specialize in “Other Alternatives” later this year.

·        Reviewing your asset allocation.  After years of cheap money and strong investment returns, it may now be time to take some chips off the table.  We can do this by making incremental changes to your allocation model.  That involves reducing exposure to highly priced equities and increasing exposure to fixed income and real assets that typically offer more stable and/or inflation-protected returns.  I’ll contact you before year-end if I believe that changes are in order given my knowledge of your financial resources, risk tolerance and long-term goals.

All my best,



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Thriftville & Squanderville -- A True Story

Thriftville and Squanderville: Our generation's greatest investor and big picture thinker--Warren Buffett--came up with these names in an article in Fortune magazine published in October of 2003.  As our politics deteriorate and our nation becomes increasingly fixated on culture wars--few seem to notice the huge asteroid (figuratively speaking) that is heading our way.

This asteroid may not be quite existential, but it may bring to humanity almost unimaginable consequences, though perhaps not as dire as those that faced by the dinosaurs. Like our predecessors, it may catch many if not most of us unaware. 

The asteroid I’m speaking of is our national debt, which is now spiraling uncontrollably upward--after a poorly timed tax cut--and amid the rapidly rising interest cost of servicing our massive debts. It is giving the US economy a temporary sugar high, even as the rest of the world begins to slow.

We narrowing escaped a smaller asteroid in 2008, thanks to extraordinary measures taken by central banks around the world.  Few saw that coming at the time and even fewer are prepared for the fact that may be coming again.   

More now than ever, Buffett's warning has the potential of becoming a greater reality quite soon.  Below is an excerpt from Buffett's 2003 piece:

Our trade deficit has greatly worsened, to the point that our country's "net worth," so to speak, is now being transferred abroad at an alarming rate.

A perpetuation of this transfer will lead to major trouble. To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time, that's how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.

Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.

The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there's a quid pro quo--but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).

Over time Thriftville accumulates an enormous amount of these bonds, which, at their core, represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off--or simply service--the debt they're piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying. They want quick and painless solutions to make Squanderville great again.

Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So, the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land and Squanderville companies. And eventually the Thrifts own all of Squanderville.

At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat--they have nothing left to trade--but must also work additional hours to service their debt and pay Thriftville rent on the land and companies so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.

It can be argued, of course, that the present value of the future production that Squanderville must forever ship to Thriftville only equates to the production Thriftville initially gave up and that therefore both have received a fair deal. But since one generation of Squanders gets the free ride and future generations pay in perpetuity for it, there are--in economist talk--some pretty dramatic “intergenerational inequities”.

Let's think of it in terms of a family: Imagine that I, Warren Buffett, can get the suppliers of all that I consume in my lifetime to take Buffett family IOUs that are payable, in goods and services and with interest added, by my descendants. This scenario may be viewed as effecting an even trade between the Buffett family unit and its creditors. But the generations of Buffetts following me are not likely to applaud the deal (and, heaven forbid, may even attempt to welch on it).

Think again about those islands: Sooner or later the Squanderville government, facing ever greater payments to service debt, would decide to embrace highly inflationary policies--that is, issue more Squanderbucks to dilute the value of each. Worse yet, they might even give themselves a tax cut!  After all, the government would reason, those irritating Squanderbonds are simply claims on specific numbers of Squanderbucks, not on bucks of specific value. In short, making Squanderbucks less valuable would ease the island's fiscal pain.

That prospect is why I, were I a resident of Thriftville, would opt for direct ownership of Squanderville land and companies rather than bonds of the island's government. Most governments find it much harder morally to seize foreign-owned property than they do to dilute the purchasing power of claim checks foreigners hold. Theft by stealth is preferred to theft by force.

The biggest issue alluded to by Buffett is the unsustainable trade deficit.  We (the US) have been getting too good of a deal for too long. Not the other way around!  Other countries have given us increasing supplies of valuable goods in exchange for more and more squanderbucks and squanderbonds of dubious value.

This deficit has created warehouses stuffed of dollars and dollar-based debt at America's most important trading partners. The dollar reserves are especially large in Asia, where export-oriented countries like China and Japan have run large trade surpluses with the U.S.

Demanding that their people buy more goods from us is a little like pushing water up hill.  You can’t force Thriftville residents to buy expensive Squanderville products when other nations produce them more cheaply.

The solution is not threats of tariffs on foreign produced goods. Even elimination of all tariffs on US goods has minimal effect.  We just have very little to export at the right price points to the thriftier nations of the world.  To the contrary, we ourselves are a consumer nation addicted to low priced goods and services offered by others who can typically build better, faster and cheaper than can the aging supply of American workers.  Immigration of low wage labor has kept us competitive in some industries like agriculture, but it is unlikely that we’ll be able to add enough immigrants fast enough to keep our goods and services competitive over time.  We desperately need more low-cost immigrant labor to compete, but that seems unlikely in the current political environment. 

The real problem: The reality of the trade deficit is that Americans spend too much and save too little.  We’ve been doing that for a long time, having accumulated massive debt and fully stuffed closets and garages which serve as circumstantial evidence. 

Threatening tariffs to beat up on our lenders and toughening immigration policies that discourage low wage workers from coming here only make our problem worse. The baby boom generation of Americans have become fat and happy thanks to our addiction to low cost foreign goods. Today, virtually everything sold in WalMart comes from overseas. Even without new tariffs, inflation is likely inevitable. Add a 20% tariff on top of the already rising prices, and it can ignite an upward spiral in prices last experienced during the stagflationary period of the 1980’s.  Tariffs are nothing more than a tax on the American people. When you’re addicted to cheap goods and up to your eyeballs in debt, adding tariffs is akin to pouring gasoline on a fire. 

The U.S. is still considered one of the most stable countries in the world and one of the most desirable place to own real assets such as real estate and businesses. Why would our trading partners only want U.S. Treasuries (squanderbonds), especially as we become more hostile to our lenders. Selling assets to foreigners offers at least a possible way out.

For the past fifty years, our trading partners around the world have been trading things of real value (goods and services provided with scarce materials and human labor) for pieces of green paper with no intrinsic value.  It is we, not they, who have been the greatest beneficiaries of this Faustian bargain. This has been a great boon to the current generation of Americans as they have enjoyed a lifestyle well beyond their means. But the clock is ticking as we head to a tipping point when the next generation must pay the bill. Tariffs and reductions in immigration are more likely to accelerate that process than delay it further. Pouring gasoline on a fire is not a reasonable solution. 

I do not see any short-term remedy for this situation for America. The reality we are in is upsetting and you might not want to believe me, but maybe you'll believe Warren Buffett. As the baby boom ages, and immigration declines, the gross domestic product of the US (by definition) must slide.  Simply put, GDP is the # of workers x productivity of workers. As the baby boom leaves the workforce, GDP will decline unless the workers are replaced by new immigrants.  This is Japan’s problem since their culture discourages immigration altogether.  In short, we need massive new immigration just to prevent a decline in economic activity.

Will current efforts to restrict immigration and threats of tariffs against our bankers push us to a tipping point?  Nobody knows when or how that will occur. When does the last grain of sand cause the pile to collapse?

The risks are high.  Investors would be wise to diversify into real assets with intrinsic value (real estate, infrastructure, farmland, water, timber, energy and inflation-protected bonds).  CMMS clients are already there, but some may wish to add to their holdings of real assets for even greater protection over the coming months and years.

All of us should cut our spending and increase savings to prepare for a long period of perpetual rain.  A storm is coming that few seem to notice, so there is still time to make adjustments and better prepare.

Eventually our debt collectors from around the world will be knocking at our doors. Rising interest rates on an already massive and growing debt (national, corporate and household), combined with increasingly hostile policies and angry rhetoric, make me very nervous.

Where is the tipping point, or the point of no return?  That’s the $71 trillion dollar question.

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Politics and Investing Don’t Mix

When it comes to your investment portfolio, should you ignore the noise coming out of the White House? Or should we be making changes?  What does Trump mean for your investments? 

Here are the most common questions I’ve faced on this topic in recent months and my answers:

No. 1. How will Trump affect the economy and the stock market?

We start with an overlooked truth: Presidents, regardless of party, get too much credit for when things go right and too much blame when they go wrong.

The president is but one part of the government, which accounts for less than a quarter of the economy, though obviously it has a huge impact on markets and the broader economy through foreign policy, regulations, tax policy and spending.

Yes, Donald Trump can and will affect the economy and the markets. But we should not put all of our focus on the marginal impact of the president while giving short shrift to more important things such as corporate revenue and earnings, the Federal Reserve, interest rates, inflation, congressional spending, employment, retail sales, Supreme Court decisions, and, of course, valuations.

Like all presidents, if he does good things it will be supportive of the markets; if he commits major errors – such as starting a trade war or gets the U.S. into a serious shooting war – it will be detrimental.

No. 2. Why is the market rallying when some predicted stocks would fall if Trump were elected?

One explanation for the market’s post-election enthusiasm for Trump was based on expectations of tax reform, tax cuts, infrastructure spending and deregulation.  However, that was a post-hoc narrative.  The simple fact that markets in Germany, France and Japan rose more than in the U.S. since the election suggests that something else is at work.

My explanation is that the global recovery from the financial crisis continues apace, slowly repairing and rebuilding from that event. If you insist on singling out an explanation for why global markets are rising, look no further than the robust recovery in corporate earnings, especially in Europe.

As for forecasts of a Trump crash, that – like mostothers – was simply wrong – at least so far.


No. 3. How can you say politics doesn’t matter to markets?

Let me be precise: Politics can and occasionally does matter to markets – especially in the short term – but just much less than many people assume.

If I told you the president was going to be impeached, and the markets will continue to power higher for a few years, you might think I was batty. But that is what happened when Bill Clinton was impeached in 1998.  The next year, the Standard & Poor’s 500 Index rose more than 21 percent, and the Nasdaq Composite Index gained more than 85 percent. Yes, it would all end badly the next year, but the impeachment was irrelevant to the dot-com bubble popping.  

So too was the accusation that President Barack Obama was a Kenyan-born Marxist who was hell-bent on “Killing the Dow”.  When he left office early last year, the Dow was about 15,000 points and nearly 300% higher than the day he took office.

And when President George W. Bush introduced unfunded tax cuts, many economists assumed that the deficit would balloon, inflation would soar, and jobs would be wiped out.  Two of those three things never happened, and the market rose 94 percent.

If you let your political ideology get in the way of your investing decisions, the results are never pretty.


No. 4. The Trump news flow is overwhelming.  What should we do?

I think we all hoped that once the election was over, we could go back to our normal lives without the incessant parade of campaign news.

No such luck.

Investors need a way to sequester the noisy news flow out of the White House.  It is too easy to let the relentless and disturbing headlines throw off well-designed long-term financial plans.  Investors must read the news, but not let it interfere with thinking clearly.

Look, let’s be honest about the commander-in-chief: He is the world’s leading Twitter troll, a man whose main goal is to interrupt your thinking, misquote and insult other people, engage in rhetorical sleight of hand, and impugn the integrity of those trying to do honest work. What all trolls want is a reaction, something Trump has achieved to great success.

The first rule for sanity on the internet is “Do not feed the trolls”.  No one can really ignore the president of the United States, but it’s probably best to view much of what he says or tweets as minor background noise.

No. 5. You keep saying not to worry about who is president; but surely you do worry about him, right?  

Yes, as a citizen I do worry about the president’s rampant prevarications and the degraded culture he has created.

The search for facts and reliable information is the bedrock of modern civilization and well-functioning markets.  Agnotology (culturally constructed ignorance) is dangerous and worrisome.  Exaggeration is one thing.  Living in an alternate universe is another.  I have no interest in returning to the dark ages before the Enlightenment.  However, that seems to be the direction in which we’re headed, and some people seem to think it will make them the most money.  

It likely won’t, and now more than ever, truth remains the best disinfectant. 

No. 6. But I’m really worried about the increased polarization of social media, the propagation of “alternative facts”, increased tribalism, a decline in civil discourse and the resulting damage being done to our institutions and our democracy.  What should I do?

First, listen dispassionately.  One of the reasons I engage on social media is to seek out people who disagree with me.  If they can make an intelligent argument about another point of view, it is time well spent. I used to think that 140 characters cannot possibly enough to have an intelligent discussion. While that may still be the case for some topics, for the most part, I now believe that if you cannot express it in 140 characters, you are on a rant. And by all means, there’s the right time for long form analysis; given that you have read up to this point, I presume you agree.

Let me quote from a Financial Times article that, in my assessment, goes to the core of human behavior: 

“We humans are social creatures. Given a choice between being right on a partisan question (abortion, guns, globalization, climate change) and having mistaken views that our friends and neighbors support, we would rather be wrong and stay in the tribe. ... in surveys of views on climate change: college-educated Republicans and Democrats are further apart on the topic than those who are less educated.”

Second, strive to keep an open mind and genuine curiosity.  Aside from the hot button issues listed, I would add to that many of our democratic institutions have been vilified for partisan purposes:  The FBI, the CIA, the judiciary, and the Federal Reserve.  It’s easy to self-select social media friends, select internet sites or cable news channels that reinforce our biases and deepest fears.  Fear can lead to ignorance and conspiratorial thinking.  This media can be manipulated to exploit a person’s political views in order to instill fear and sell grand conspiracy theories.  Fear and ignorance can destroy our democratic institutions in the face of conspiratorial boogey men such as the current Breitbart, Alex Jones/InfoWars and Fox News narrative of an evil “Deep State” that will take away our freedoms.  Much of this panders to the fears of the “browning of America” and stokes anger among the intellectually disabled while masquerading as alternative news. 

... the evidence suggests that curious people are less subject to the temptations of partisanship. When the national conversation becomes polarized, we need to encourage curiosity about how things work rather than them-and-us tribalism.

I'm here to tell you, politics and investing don't mix.

This is a statement that rocks one of our most fundamental and most cherished beliefs. Like many of you, I too have very strong political convictions that affect how I see the world.  Whether you sit on the left or on the right, I have some bad news:  Your politics can kill you in the markets.

As a student of investment theory, I’ve learned that understanding behavioral psychology, statistics, cognitive biases, history, data analysis, mathematics, brain physiology, even evolution can help us make better investing decisions.  Indeed, these are all key to learning precisely what not to do.  While making good decisions can help your portfolio, avoiding bad ones is even more important.

We humans make all the same mistakes, over and over again. It's how we are wired, the net result of evolution. That flight-or-fight response might have helped your ancestors deal with hungry saber-toothed tigers and territorial Cro-Magnons, but it drives investors to make costly emotional decisions.

And it's no surprise.  It's akin to brain damage.

To neurophysiologists, who research cognitive functions, the emotionally driven appear to suffer from cognitive deficits that mimic certain types of brain injuries. Not just partisan political junkies, but ardent sports fans, the devout, even hobbyists.  Anyone with an intense emotional interest in a subject loses the ability to observe it objectively: You selectively perceive events.  You ignore data and facts that disagree with your main philosophy. Even your memory works to fool you, as you selectively retain what you believe in, and subtly mask any memories that might conflict.

Studies have shown that we are actually biased in our visual perception – literally, how we see the world – because of our belief systems.

This cognitive bias is not an occasional problem – it is a systematic source of errors.  It's not you, it's just how you are built.  And it is the reason most people are terrible investors.

How does this play out in the world of investing?  Let me share two examples. I don't pick favorites: Both Democrats and Republicans are implicated.

Back in 2003, the dot-com crash had about run its course. From the peak of the market in March 2000 to the March 2003 trough, the Nasdaq had gotten crushed, losing 78 percent of its value.  Yes, Seventy Eight Percent!

As Federal Reserve chief Alan Greenspan took rates down to 1 percent, the Bush administration passed $1 trillion in tax cuts. As someone else once said about the stock market, "Give me a trillion dollars, and I'll throw you one hell of a party."

Yet many of my Democrat friends on Wall Street – fund managers, traders and analysts – were highly critical of the tax cuts.  At the time, I heard all the reasons why they were so bad: They were deficit-busters, unlikely to create jobs, giveaways to the wealthy.

While those critiques may have been true, they were also irrelevant to equities.  As armchair policy wonks obsessed over these issues, they missed the bigger picture: Liquidity is a major factor in how the economy and stock markets perform.  Trillions of dollars in fresh cash was very likely to goose equities higher.  (Sound familiar?)  Indeed, the impact of the tax cuts did just that. Combined with Greenspan's ultra-low rates, you had the makings of a cyclical bull market rally.  From 2003 to 2007, the Standard & Poor's 500-stock index – the usual benchmark for equities – gained 100 percent.

And my politically active friends on the left missed most of it.

Fast-forward six years to the credit crisis in 2008. The S&P 500 had fallen 58 percent. By March 2009, op-eds in the Wall Street Journal were already blaming the crash on President Obama (took office two months earlier).

But conditions were forming that would hasten the end of the sell-off.  Markets were deeply oversold. Once again, the Fed chair was cutting rates – this time, it was Ben Bernanke, and he took rates down to zero.  In a panic, Congress forced the accounting rule-making body to be more accommodative to the banking sector. FASB 157, as it is known, ended mark-to-market accounting – essentially allowing banks to hide their bad loans.

All these factors suggested that a substantial rally from the market lows was coming. Historically, average gains in post-crash bounce-backs were 70 percent.  The easy money to the downside had been made, and it was time to stop betting that the markets were heading south.  If history held true, we were looking at the mother of all bear market rallies.

By that March, I was explaining this to clients.  But the greatest pushback this time around came from across the political spectrum.  My GOP family and friends were lamenting the occupant of the White House.  I heard things like "Obama is a Kenyan, a Muslim, a Socialist.  He is going to kill business."

What followed was the single most intense six-year rally in Wall Street history.  By the end of the Obama administration, the US stock market had more than tripled!  

And some of my politically active friends on the right missed most of it.

Remember, the cycle of booms and busts are surprisingly regular occurrences.  What some people call a "100-year flood" actually happens far more frequently – since 1929, there have been 18 crashes.

It's just as important that an investor participate in the cyclical bull markets, capturing the rally as well.  All things considered, missing the downside and catching the upside makes for a pretty decent investment strategy.  If only…

You need not be a mathematical wizard to learn this lesson.  When you are in the polling booth, vote however you like; But when you are reviewing your investing options, it is best to do so with a cold, dispassionate eye and stick with a well-designed investment plan designed for both good times and bad.


Whatever fears you have based on the current state of our politics, you are not alone. These fears and the risks involved are already baked into market prices.  

There are many variables that drive market prices.  US government policy is but one of dozens of factors.

Your portfolio is constructed like a well-built car.  It is 60% engines (for growth), 20% brakes (for safety) and 20% seat belts and air bags (for crash protection).  Like your car, your investment portfolio is designed to get you to your chosen destination, as quickly, efficiently and safely as possible.  Don’t let politics interfere with the job its designed to do.   



Credit to Alex Merk, President and CIO of Merk Investments for many of the words and ideas included in this month’s blog.






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How “tax reform” will affect YOUR wallet

The most significant changes under tax reform is the tax treatment of businesses. Unlike changes to the individual tax scheme, which are temporary and somewhat piecemeal, the changes to the business tax scheme are permanent and fairly comprehensive. 

Changes in tax law always results in winners and losers.  This time is no exception.  Here’s a quick synopsis of the five biggest winners and losers with the new tax law:


·       Stockholders/owners of C-Corporations.  The maximum tax rate on C-Corps is permanently reduced from 35% to 21%.  

·       Self-employed taxpayers with pass-through income.  S-Corps, LLCs and partnerships  now benefit from a permanent new 20% deduction on qualified business income (subject to income limits).  

·       CPAs who prepare tax returns.  The law adds complexity in tax planning for higher income individuals, even as some lower income taxpayers with basic tax returns may find some simplification due to loss of many deductions (i.e. more people will use the one-page Form 1040EZ, which some have incorrectly referred to as a “postcard”). 

·       Married couples earning less than $600,000. They benefit from a temporary elimination of the marriage penalty built into the tax rate schedules. 

·       Parents of young children who plan to send their kids to private schools.  They can now utilize 529 college-savings plans to cover much of the cost of private elementary, middle and high school using these tax-advantaged plans.


·       Individuals, families and businesses who pay for health insurance.  The elimination in 2019 of the Affordable Care Act’s “individual mandate” (that requires all citizens to maintain health insurance or face penalties) will raise premiums by an estimate 10% for those who are insured.  Hospitals and State governments may be negatively impacted by having to provide higher cost emergency room treatment to potentially larger number of uninsured and indigent patients.   

·       High income taxpayers in mostly blue states.  Many will lose part of their deductions for state and local income taxes, sales taxes and property taxes, potentially reducing their ability to itemize deductions at all.  The states with the highest combined income tax, property tax and sales tax rates are New York (12.7%), Connecticut (12.6%), New Jersey (12.2%), Illinois (11.0%), California and Wisconsin (11.0%).

·       Homeowners and Realtors.  Many homeowners will lose all or part of the benefit of real estate tax and interest deductions.  These provisions may also negatively affect all homeowners.  Realtors who sell homes may also be hurt if limits on the deductibility of mortgage interest, home equity loan interest and property taxes negatively impact home prices and home sales activity.  

·       Virtually all US taxpayers …if the law is allowed to expire.   Only the business entity tax law changes are permanent.  Owners of the C-Corps, S-Corps, LLCs and partnerships get a permanent tax break.  All other taxpayers will see any benefits under the new law expire in 2025 unless a future Congress and President decide to extend them or make them permanent.

·       Kids under age 24 with taxable income.  Young people who are dependents on their parents return will now pay 37% tax on income over $12,500 (due to changes in the calculation for “kiddie tax”).

·       Future generations.  $1.5 trillion added to the national debt ($1.0 trillion assuming the CBO’s best-case scenario for added revenue growth).


And now the details…  Here’s a summary of the two dozen tax law changes that have the greatest impact on most Americans:

1. Bigger Standard Deduction, Goodbye Exemptions

A hallmark of the new law is the near doubling of the standard deduction to $12,000 on single returns, $18,000 for head-of-household filers and $24,000 on joint returns … up from $6,350, $9,350 and $12,700 in 2017. As under present law, individuals age 65 or older and blind people get even higher standard deductions. Two 65-year-olds filing a joint return, for example, would add $2,500 to the $24,000 standard deduction. An individual taxpayer age 65 or older would add $1,550, bringing the standard deduction to $13,550.

Congressional analysts say bulking up the standard deduction will let more than 30 million taxpayers avoid the hassle of itemizing write-offs on their tax return because the bigger standard deduction would exceed their qualifying expenses.  However, that isn’t true for many since personal exemptions are being eliminated simultaneously.  

In exchange for the bigger standard deductions, personal exemptions (the $4,050 deduction for each exemption claimed on the return) are eliminated.  A married couple with four kids would lose $24,300 in exemptions in exchange for the $11,300 boost in their standard deduction. 

2. Say Hello to a Higher Child Tax Credit and a New Family Tax Credit

Starting in 2018, the $1,000 tax credit for each child under age 17 is doubled to $2,000, with $1,400 of the credit refundable to lower income taxpayers. Additionally, the package significantly increases the income phase-out thresholds. The credit begins to phase out for couples with adjusted gross incomes over $400,000 (up from $110,000 in 2017) and $200,000 for all other filers (up from $75,000).

In addition to the enhanced child tax credit, there is a new, nonrefundable credit of $500 for each dependent who is not a qualifying child including, for example, an elderly parent or disabled adult child. This credit would phase out under the same income thresholds. 

 3. Tax Bracket Bingo

The proposal to shrink the number of income tax brackets to four was left on the cutting room floor. The new law keeps seven tax brackets, but with different rates and different break points. For example, not only is the top rate lowered from 39.6% to 37%, but that rate also kicks in at a higher income level. And, note that whatever new bracket you fall in, more of your taxable income will be hit with lower rates. (On the other hand, restrictions or elimination of some tax breaks probably may mean more of your income will be taxed.)  The marriage penalty is eliminated for those in the lower brackets, but remains in place for couples earning combined income of $600,000 or more.    

Here are the current tax brackets and the new ones set to apply for years 2018.



4. Squeezing Homeowner Tax Breaks

Lawmakers decided to reduce – from $1,000,000 to $750,000 – the amount of debt on which homeowners can deduct mortgage interest. The limit applies to mortgage debt incurred after December 15, 2017, to buy or improve a principal residence or second home. Older loans are still subject to the $1 million cap.

The law also bans the deduction of interest on home-equity loans. And this change applies to both old and new home-equity debt. Interest accrued on home-equity debt after December 31, 2017, is not deductible.  Taxpayers with home equity loan debt should consider refinancing if their total loan amount is $750,000 or less and if they have enough other deductions to exceed the standard deduction.

A proposal to extend the time you must own and occupy a home to qualify for tax-free profit when you sell it was dropped from the final legislation. As in the past, the law allows you to shelter up to $250,000 of such profit, or $500,000 if you’re married, as long as you have owned and lived in the house for two of the five years before the sale.

5. Deduction for State and Local Taxes

One of the most valuable tax deductions allowed for individuals—the write off for what you pay in state and local income, sales and property taxes—is getting squeezed.

Starting in 2018, the new law sets a $10,000 limit on how much you can deduct of the state and local taxes you pay. A plan to limit the write-off to property taxes only was scrapped. You can deduct any combination of state and local income or sales taxes or residential property taxes, up to the $10,000 cap. 

Don’t assume that you can beat this crackdown by prepaying 2018 taxes before December 31, 2017. Although a fourth quarter 2017 estimated state income tax bill due in January or a property tax bill due in January that covers 2017 can be paid in 2017 and deducted on your 2017 return without being subject to the new limit, Congressional tax writers specifically noted that prepaying 2018 taxes won’t earn a fatter deduction.

(Note this: Even under the new rules, property and sales taxes will remain deductible for taxpayers in a business or for-profit activity. For example, if you own a residential rental property, you can continue to fully deduct property taxes paid on that property on Schedule E.)

6. Casualty Losses

Going forward, the new law greatly restricts the opportunity for individuals who suffer unreimbursed casualty losses from sharing the pain with Uncle Sam. Under the old rules, such losses were deductible by those who itemize to the extent the loss exceeded $100 plus 10% of their adjusted gross income. Starting in 2018, the law allows a deduction of such losses only if they occur in a presidentially declared disaster area. 

There’s the opposite of a crackdown for 2016 and 2017 losses in presidentially declared disaster areas. The new law permits individuals who suffered such losses to deduct the loss without reducing the write-off by 10% of adjusted gross income. To be deductible under this rule, the loss must exceed $500. Also, for covered losses, the deduction is available even for those who claim the standard deduction.

7. Estate Tax Dodges a Bullet (again)

Efforts to kill the federal estate tax fell short, but the new law doubles the amount that can be left to heirs tax-free in 2018, to about $11 million for couples and about $22 million for married couples. The amount will rise each year to keep up with inflation.

But, as with many changes in the law, this one expires at the end of 2025, when the tax-free amount will revert to earlier levels.

The law does not change the rule that “steps up” the basis of inherited property to its value on the date the benefactor died. As in the past, any appreciation during the life of the previous owner becomes tax-free.

8. Medical Deductions Survive . . . and Get Healthier 

Despite efforts to eliminate the deduction for medical expenses, the new law is actually more generous than the old one. Under the old rules, medical expenses were deductible only to the extent they exceeded 10% of adjusted gross income. For 2017 and 2018, however, the threshold drops to 7.5% of AGI. Come 2019, the 10% threshold returns.  

9. Alimony Becomes Tax Free . . . but Not Until 2019

A big change is coming for divorce. In the past, alimony paid under a divorce decree was deductible by the ex-spouse who paid it and treated as taxable income by the recipient. Starting with alimony paid under divorce or separation agreements executed after December 31, 2018, the reverse will be true: Payors will no longer get to deduct alimony, but the payments will be tax-free for the ex-spouse who receives them. (That’s the same rule that has and will continue to apply to child support payments.)

10. Status Quo for Teachers' Tax Break

The Senate wanted to double to $500 the tax deduction teachers can claim for using their own money to buy classroom supplies. The House wanted to eliminate this write-off all together. In the end, neither happened. The deduction stays at $250 for teachers regardless of whether or not they itemize.

11. Squeezing Commuter Benefits

The new law eliminates, starting in 2018, the rule that allows employers to deduct up to $260 a month per employee for the cost of transportation-related fringe benefits, such as parking and transit passes. Employees can still use pre-tax money to cover such expenses, but employer subsidies may dry up. The new law puts the kibosh on the federal bike commuter benefit that had allowed employers to provide employees up to $20 a month tax-free to cover bike-related expenses. 

12. Tax Breaks for Students Survive

The effort by the House of Representatives to eliminate the deduction for interest paid on student loans and to begin taxing tuition benefits earned by graduate students were snubbed by the Senate. Neither proposal made it into the new law.

As under the old law, you can continue deduct up to $2,500 a year of interest paid on student loans. This write-off can be claimed by those who take the standard deduction, but it phases out at higher income levels. Also, tuition waivers and discounts received by graduate students will retain their tax-free status.

The new law also declares that, if a student loan is discharged due to the borrower’s death or permanent disability, the amount discharged will no longer be considered taxable income. 

 13. A Reprieve for Dependent Care Plans

The House of Representatives called for preventing working parents from setting aside pre-tax money in dependent care flexible savings accounts to pay for child care costs. The Senate blocked the effort, so the tax break remains in the law. Parents can continue to set aside up to $5,000, pre-tax, in these accounts.

14. No More Roth Do-Overs

The new law will make it riskier to convert a traditional individual retirement account to a Roth. Under the old law, you could reverse such a conversion—and eliminate the tax bill—by “recharacterizing” the conversion by October 15 of the following year. Starting in 2018, such do-overs are done for. Conversions will be irreversible.

15. Investors Control Over Tax on Capital Gains

For a while, it looked like Congress might restrict the flexibility investors have to control the tax bill on their profits. Investors who have purchased stock and mutual fund shares at different times and different prices are allowed to choose which shares to sell in order to produce the most favorable tax consequences. You can, for example, direct your broker to sell shares with a high tax basis (basically, what you paid for them) to limit the amount of profit you must report to the IRS or, if the shares have fallen in value, to maximize losses to offset other taxable gains. (Your gain or loss is the difference between your basis and the proceeds of the sale.)

The Senate called for eliminating the option to specifically identify which shares to sell and instead impose a first-in-first-out (FIFO) rule. The oldest shares would be assumed to be the first sold. Because it is assumed that the older shares likely have a lower tax basis, this change would trigger the realization of more profit sooner rather than later. 

In the end, though, this idea fell by the wayside. Investors can continue to specifically identify which shares to sell to arrange for the most favorable tax outcome.  CMMS uses the “High Cost” method of selling partial lots which means that the current taxable gain is automatically minimized.

16. The Zero Percent Capital Gains Bracket Survives

The new law retains the favorable tax treatment granted long-term capital gains and qualified dividends, imposing rates of 0%, 15%, 20% or 23.8%, depending on your total income.

In the past, your capital gains rate depended on what tax bracket you fell in. But, with the changes in the brackets, Congress decided to set income thresholds instead. For example, the 0% rate for long-term gains and qualified dividends will apply for taxpayers with taxable income under about $38,600 on individual returns and about $77,200 on joint returns.

17. Like-Kind Exchanges Survive ... But Only for Real Estate

Generally, an exchange of property is a taxable transaction, just like a sale. But the law includes an exception when investment or business property is traded for similar property. Any gain that would be triggered by the sale of such property is deferred in the case of a like-kind exchange. This break has applied to assets such as real estate and tangible personal property such as heavy equipment and art work.

Going forward, though, the new law restricts its use to like-kind exchanges of real estate, such as trading one rental property for another. It’s estimated that the change would cost affected taxpayers more than $30 billion over the next ten years.

18. Fewer Taxpayers Need Fear the AMT

Originally, both the Senate and the House bills called for eliminating the alternative minimum tax, a parallel tax system developed more than 40 years ago to ensure that the very wealthy paid some tax. Taxpayers who may fall into the AMT zone have to calculate their taxes twice to determine which system applies to them. In a last-minute change, though, the new law retains the individual AMT, but limit the number of taxpayers ensnared by it by significantly hiking the AMT exemption. (The new law does abolish the corporate AMT.)

19. Tax Relief for Passthrough Businesses

The new law slashes the tax rate on regular corporations (sometimes referred to as “C corporations”) from 35% to 21%, starting in 2018. The law offers a different kind of relief to individuals who own pass-through entities—such as S corporations, partnerships and LLCs—which pass their income to their owners for tax purposes, as well as sole proprietors who report income on Schedule C of their tax returns. Starting in 2018, many of these taxpayers will be allowed to deduct 20% of their qualifying income before figuring their tax bill. For a sole proprietor in the 24% bracket, for example, excluding 20% of income from taxation would have the effect of lowering the tax rate to 19.2%.


The changes to the taxation of passthrough businesses are some of the most complex provisions in the new law, in part because of lots of limitations and anti-abuse rules. They’re designed to help prevent gaming of the tax system by taxpayers trying to have income taxed at the lower passthrough rate rather than the higher individual income tax rate. For many pass-through businesses, for example, the 20% deduction mentioned above phases out for taxpayers with incomes in excess of $157,500 on an individual return and $315,000 on a joint return. At the end of the day, most individuals who are self-employed or own interests in partnerships, LLCs or S corporations will be paying less tax on their passthrough income than in the past.

21. Deductions (That Lots of People Take) Get the Ax but Two Credits Survive

The new law eliminates a popular deduction for moving expenses. The deduction, which was available to itemizers and non-itemizers, allowed taxpayers to deduct the cost of a job-related move. Going forward, only members of the military can claim it. 

The new law also repeals all miscellaneous itemized deductions subject to the 2% of AGI threshold, including the write-off for tax preparation fees, unreimbursed employee business expenses and investment management fees.

The House of Representatives version of the tax overhaul wanted to scrap the credit for the elderly and the disabled, which is worth up to $1,125 to qualifying low-income taxpayers. It also unplugged the credit for plug-in electric vehicles, which is worth of up $7,500. The Senate refused to go along, though, so both tax breaks will continue.

22. Kiddie Tax Gets More Teeth

Under the old law, investment income earned by dependent children under the age of 19 (or 24 if a full-time student) was generally taxed at the parents’ rate, so the tax rate would vary depending on the parents’ income. Starting in 2018, such income will be taxed at the same rates as trusts and estates … which will produce a much higher tax bill. The top 37% tax rate in 2018 kicks in at $600,000 for a married couple filing a joint return. That same rate kicks in at $12,500 for trusts and estates . . . and, now, the kiddie tax, too.

22. Affordable Care Act (aka “ObamaCare”) Individual Mandate: Dead or Alive?

The new law does repeal the “individual mandate” – the requirement that demands that you have health insurance or pay a fine. But not until 2019. For 2018, the mandate is still in place. 

23. Wither Withholding?

The new law is causing quite a ruckus in payroll offices around the country. Under the old law, the amount of tax withheld from paychecks was based on the number of allowances employees claimed on W-4 forms. And, the number of allowances was tied closely to the number of exemptions the worker claimed on his or her tax return. Starting in 2018, there are no exemptions, so there’s a mad scramble going on to figure out how to set withholding under all the new rules. 

The new law orders the Secretary of the Treasury to come up with a new system, but also says 2018 withholding can be based on the old rules. Keep an eye out on this one.

24. 529 Plans Aren’t Just for College Anymore

The new law allows families to spend up to $10,000 a year from tax-advantaged 529 savings plans to cover the costs of K-12 expenses for a private or religious school. Previously, tax-free distributions from those plans were limited to college costs.  This is a big win for 529 Plan providers as taxpayers with young children enrolled in private schools will be motivated to contribute more to these plans.


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Stop Worrying… Embrace the Security Freeze

The recent cybersecurity attack that hit the credit reporting agency Equifax has been called the worst data breach in the history of the modern era.  While this may be true, it’s likely your data was stolen long before the Equifax fiasco.    

A majority of Americans (64%) had already experienced at least one type of data theft, before the Equifax breach was reported, according to Pew Research Center.  Most are unaware.  

If you ever used Yahoo mail, you were likely part of the Yahoo data breach, announced in 2016, that impacted an estimated 1 billion user accounts.  Or perhaps you had your health insurance with Anthem, who reported in 2015 that as many as 80 million current and former customers had been impacted.

Earlier this year the U.S. Office of Personnel Management announced that data on 4 million government employees was compromised.  A few weeks later, Sally Beauty, a nationwide retailer, announced that they found their customer information available for sale on a Russian website.  It was the same website that offered stolen credit card data in the wake of the massive data breaches at Home Depot and Target.   

Cleaning up after your identity is stolen can be a nightmare.  My suggestion is that you use the recent Equifax disclosure as a wake-up call.  Get out in front of this problem before discovering that someone opened a new credit card or filed for a phony tax refund in your name.    

If your response is to do what each of the breached organizations suggest — to take them up on one or two years’ worth of free credit monitoring services — you might sleep better at night but you will probably not be any more protected against crooks stealing your identity.  Credit monitoring services aren’t really built to prevent ID theft.  The most you can hope for from a credit monitoring service is that they give you a heads up when ID theft does happen, and then help you through the excruciating process of getting the credit bureaus and/or creditors to remove the fraudulent activity and to fix your credit score.

In short, if you have already been victimized by identity theft (fraud involving existing credit or debit cards is not identity theft), it might be worth paying for these credit monitoring and repair services or sign up for any free services offered by the offenders.  If you are not offered free monitoring and would prefer not to pay monthly fees for the rest of your life to LifeLock or a similar service, and don’t mind putting up with a myriad of ads, there is a free alternative.  Go to to sign up for a free account and you’ll get access to free credit monitoring. If they notice any suspicious activity, you’ll get an alert.  Plus, Credit Karma also gives you free access to your credit scores and reports, as well as tips on what factors are impacting your credit.

If you want to be more proactive, a monitoring service is simply not enough.  I strongly advise you to consider freezing your credit file at the major credit bureaus. 

There is shockingly little public knowledge or education about the benefits of a security freeze, also known as a “credit freeze.” Also, there is a great deal of misinformation and/or bad information about security freezes available online.  As such, I thought it best to approach this subject in the form of a Q&A, which is the most direct method I know how to impart knowledge about a subject in way that is easy for readers to digest.

Q:  What is a security freeze?

A:  A security freeze essentially blocks any potential creditors from being able to view or “pull” your credit file, unless you affirmatively unfreeze or thaw your file beforehand.  With a freeze in place on your credit file, ID thieves can apply for credit in your name all they want, but they will not succeed in getting new lines of credit in your name because few if any creditors will extend that credit without viewing your credit file first.  And because each credit inquiry caused by a creditor has the potential to lower your credit score, the freeze also helps protect your score, which is what most lenders use to decide whether to grant you credit when you truly do want it and apply for it. 


Q:  What’s involved in freezing my credit file?

A:  Freezing your credit involves notifying each of the major credit bureaus that you wish to place a freeze on your credit file.  This can usually be done online, but in certain circumstances you may need to contact one or more credit bureaus by phone or in writing.  Once you complete the application process, each bureau will provide a unique personal identification number (PIN) that you can use to unfreeze or “thaw” your credit file should you need to apply for new credit in the future.  Depending on your state of residence and your circumstances, you may also have to pay a small fee to place a freeze at each bureau.  There are four consumer credit bureaus, including Equifax, Experian, Innovis and Trans Union When you do a credit freeze, it is imperative that you freeze your credit with all three bureaus.


Q:  How much is the fee, and how can I know whether I have to pay it?

A:  The fee ranges from $0 to $15 per bureau, meaning that it can cost upwards of $60 to place a freeze at all four credit bureaus (recommended).  However, in most states, consumers can freeze their credit file for free at each of the major credit bureaus if they also supply a copy of a police report and in some cases an affidavit stating that the filer believes he/she is or is likely to be the victim of identity theft.  In many states, that police report can be filed and obtained online.  The fee covers a freeze as long as the consumer keeps it in place.  Equifax has a decent breakdown of the state laws and freeze fees/requirements.  Also, if you were subject to the recent Equifax breach, Equifax will waive their freeze fee for the first year.


Q:  What’s involved in unfreezing my file?

A:  The easiest way to unfreeze your file for the purposes of gaining new credit is to spend a few minutes on the phone with the company from which you hope to gain the line of credit to see which credit bureau they rely upon for credit checks.  It will most likely be one of the major bureaus.  Once you know which bureau the creditor uses, contact that bureau either via phone or online and supply the PIN they gave you when you froze your credit file with them.  The thawing process should not take more than 24 hours.


Q:  I’ve heard about something called a fraud alert. What’s the difference between a security freeze and a fraud alert on my credit file?

A:  With a fraud alert on your credit file, lenders or service providers should not grant credit in your name without first contacting you to obtain your approval — by phone or whatever other method you specify when you apply for the fraud alert.  To place a fraud alert, merely contact one of the credit bureaus via phone or online, fill out a short form, and answer a handful of multiple-choice, out-of-wallet questions about your credit history.  Assuming the application goes through, the bureau you filed the alert with must by law share that alert with the other bureaus.  Consumers also can get an extended fraud alert, which remains on your credit report for seven years. Like the free freeze, an extended fraud alert requires a police report or other official record showing that you’ve been the victim of identity theft.


Q:  Why would I pay for a security freeze when a fraud alert is free?

A:  Fraud alerts only last for 90 days, although you can renew them as often as you like. More importantly, while lenders and service providers are supposed to seek and obtain your approval before granting credit in your name if you have a fraud alert on your file, they’re not legally required to do this.


Q:  If I thaw my credit file after freezing it so that I can apply for new lines of credit, won’t I have to pay to refreeze my file at the credit bureau where I thawed it?

A:  It depends on your state. Some states allow bureaus to charge $5 for a temporary thaw or a lift on a freeze. However, even if you have to do this once or twice a year, the cost of doing so is almost certainly less than paying for a year’s worth of credit monitoring services. The Consumers Union has a handy state-by-state guide listing the freeze and unfreeze fees.


Q:  Is there anything I should do in addition to placing a freeze that would help me get the upper hand on ID thieves?

A:  Yes; periodically order a free copy of your credit report. By law, each of the three major credit reporting bureaus must provide a free copy of your credit report each year — via a government-mandated site: The best way to take advantage of this right is to make a notation in your calendar to request a copy of your report every 120 days, to review the report and to report any inaccuracies or questionable entries when and if you spot them.


Q:  I’ve heard that tax refund fraud is a big deal now. Would having a fraud alert or security freeze prevent thieves from filing phony tax refund requests in my name with the states and with the Internal Revenue Service?

A:  Neither would stop thieves from fraudulently requesting a refund in your name.  However, a freeze on your credit file would have prevented thieves from using the IRS’s own Web site to request a copy of your previous year’s tax transcript — a problem the IRS said led to tax fraud on 100,000 Americans this year and that prompted the agency to suspend online access to the information.  If you become the victim of identity theft outside of the tax system or believe you may be at risk due to a lost/stolen purse or wallet, questionable credit card activity or credit report, etc., the IRS recommends that you contact their Identity Protection Specialized Unit, toll-free at 1-800-908-4490 so that the IRS can take steps to further secure your account.

The IRS issues taxpayer-specific PINs for people that have had issues with identity theft.  If approved, the PIN is required on any tax return filed for that consumer before a return can be accepted. To start the process of applying for a tax return PIN from the IRS, check out the steps at this link.  You will almost certainly need to file an IRS form 14039 (PDF), and provide scanned or photocopied records, such a driver’s license or passport.  Understand, however, that the IRS does not approve all PIN requests, and the approval process seems to be quite delayed and haphazard at best.


Q:  Okay, I’ve got a security freeze on my file, what else should I do?

A:  It’s also a good idea to notify a company called ChexSystems to keep an eye out for fraud committed in your name. Thousands of banks rely on ChexSystems to verify customers that are requesting new checking and savings accounts, and ChexSystems lets consumers place a security alert on their credit data to make it more difficult for ID thieves to fraudulently obtain checking and savings accounts.  For more information on doing that with ChexSystems, see this link


Q: If I freeze my file, won’t I have trouble getting new credit going forward? 

A: If you’re in the habit of applying for a new credit card each time you see a 10 percent discount for shopping in a department store, a security freeze may cure you of that impulse. Other than that, as long as you already have existing lines of credit (credit cards, loans, etc) the credit bureaus should be able to continue to monitor and evaluate your creditworthiness should you decide at some point to take out a new loan or apply for a new line of credit.


Q:  How do I get started?

A:  Here are detailed instructions on how to freeze and thaw your credit with each agency:


  • Credit freezes may be done online or by certified mail – return receipt requested.
  • Check your state’s listing for the exact cost of your credit freeze and to see if there is a reduction in cost if you are a senior citizen.
  • Request your credit freeze by certified mail using this sample letter. Please note the attachments you must include.
  • If your PIN is late arriving, call 1-888-298-0045. They will ask you for some ID and arrange for your PIN to be sent to you in 4-7 days.
  • Unfreeze: Do a temporary thaw of your Equifax credit freeze by snail mail, online or by calling 1-800-685-1111 (N.Y. residents dial 1-800-349-9960).
  • Info on freezing a child’s credit with Equifax can be found here.
  • If requesting a freeze by mail, use the following address:
      • Equifax Security Freeze
        P.O. Box 105788
        Atlanta, GA. 30348


  • Credit freezes may be done online; by certified mail – return receipt requested; or by calling 1-888-EXPERIAN (1-888-397-3742). When calling, press 2 then follow prompts for security freeze.
  • Check your state’s listing for the exact cost of your credit freeze and to see if there is a reduction in cost if you are a senior citizen.
  • Request your credit freeze by certified mail using this sample letter. Please note the attachments you must include.
  • You can also freeze a child’s credit report. The information contained at this link is applicable for all three credit bureaus. You must first write a letter to each bureau to learn if your minor child has a credit report and if so, then you can proceed to freeze it.
  • Unfreeze: Do a temporary thaw of your Experian credit freeze online or by calling 1-888-397-3742.
  • Info on freezing a child’s credit with Experian can be found here.
  • If requesting a freeze by mail, use the following address:
    • Experian
      P.O. Box 9554
      Allen, TX. 75013


  • Credit freezes may be done online, by phone (1-888-909-8872) or by certified mail – return receipt requested.
  • Check your state’s listing for the exact cost of your credit freeze and to see if there is a reduction in cost if you are a senior citizen.
  • Request your credit freeze by certified mail using this sample letter. Please note the attachments you must include.
  • Unfreeze: Do a temporary thaw of your TransUnion credit freeze online or by calling 1-888-909-8872.
  • Info on freezing a child’s credit with TransUnion can be found here.
  • If requesting a freeze by mail, use the following address:
    • TransUnion LLC
      P.O. Box 2000
      Chester, PA 19016


Q:  Anything else?

A:  Beware of related phishing & other scams.  Criminals will use every tactic they’ve got to take advantage of this situation.  With so many Americans worried about whether their information was exposed and if they are at risk, crooks are going to tap into that fear in order to trick you into handing over your personal information.

If your information was not exposed, you still may receive a fake email, text or phone call from a criminal offering to help or asking for your information to either determine whether you were affected by the Equifax hack or to help you protect yourself.

But even if you fall for one of these scams, with a credit freeze in place, the criminals won’t be able to carry out fraud in your name.

With scams related to the hack expected to pop up everywhere, here are some tips to help you protect yourself, your money and your identity:

  • ID thieves like to intercept offers of new credit and insurance sent via postal mail, so it’s a good idea to opt out of pre-approved credit offers. If you decide that you don’t want to receive prescreened offers of credit and insurance, you have two choices: You can opt out of receiving them for five years or opt out of receiving them permanently.  To opt out for five years: Call toll-free 1-888-5-OPT-OUT (1-888-567-8688) or visit The phone number and website are operated by the major consumer reporting companies.To opt out permanently: You can begin the permanent Opt-Out process online at To complete your request, you must return the signed Permanent Opt-Out Election form, which will be provided after you initiate your online request. 
  • Be wary of unexpected emails containing links or attachments: If you receive an unexpected email claiming to be from your bank or other company that has your personal information, don’t click on any of the links or attachments. It could be a scam. Instead, log in to your account separately to check for any new notices.
  • Call the company directly: If you aren’t sure whether an email notice is legit, call the company directly about the information sent via email to find out if it is real and/or if there is any urgent information you should know about.
  • If you do end up on a website that asks for your personal information, make sure it is a secure website, which will have “https” at the beginning (“s” indicates secure).
  • Look out for grammar and spelling errors: Scam emails often contain typos and other errors — which is a big red flag that it probably didn’t come from a legitimate source.
  • Never respond to a text message from a number you don’t recognize: This could also make any information stored in your phone vulnerable to hackers. Do some research to find out who and where the text came from.
  • Don’t call back unknown numbers: If you get a missed call on your cell phone from a number you don’t recognize, don’t call it back. Here’s what you need to know about this phone scam.

If your questions weren’t answered here or you need additional guidance, give me a call or send an email.  I want to help.

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When is your Financial Independence Day?

On July 4, 1776, a small band of colonial leaders declared independence from the Kingdom of Great Britain.  The American Revolution changed the course of world history forever and launched a nation that no other has since rivaled. 

In the spirit of the heroes of the American Revolution, would you be willing to consider declaring your own revolution...your Declaration of Financial Independence? 

5 Stages of Wealth

To get where you want to go you need to know two things.  You need to know where you are and you need to know where you want to end up.  Let's set the context by describing what I call, the five stages of wealth.

Wealth Stage 1.  Your cash flow (including your paycheck) is sufficient to pay all of your bills (on time!) plus consistently invest 10% of your gross income. This puts you on the pathway to financial independence. 

Wealth Stage 2.  Cash flow from your investments is equal to your earnings contributions (10% of gross pay).  I call this 'one to one'...where for each dollar you are contributing to your long-term investment program, the pot of money you've created is also projected to contribute (earn) a dollar.  For example, you're investing $10,000 per year and your investment portfolio of $120,000 is expected to have total average earnings of $10,000 per year (over the long term). 

Wealth Stage 3.  Expected cash flow from investments is equal to your paycheck.  Congratulations!  You are financially independent!  At this point, you would expect to be able to tap your investments each month for an amount that would cover your expenses (including inflation) indefinitely.  For example, if it takes $4,000 per month to pay your bills and you had a portfolio of stocks and bonds worth $1,200,000; using a 4% annual withdrawal rate you should be able to meet your current and future lifestyle expenses. 

Wealth Stage 4.  Cash flow from your investments is equal to two-times the income needed to pay your bills.  We define this as 'Wealthy'.  You now have enough cash flow from investments to pay all your bills with a substantial margin which allows you to raise your lifestyle, make charitable and family gifts, etc. 

Wealth Stage 5.  Cash flow from your investments is five-times or more what is needed to pay your bills.  We define this as 'Rich'.   

Which wealth stage best represents your situation?  When I was describing the 5 Stages of Wealth to one client, he said, "I'm not at stage one yet.  How would you describe that stage?"  "Financial stress," was my reply.  If you're having trouble paying your bills or are not saving and investing at least 10% of your gross income for the long term you're either in la-la land or feeling stressed out.

If you are not where you should be at this point in time, here are a few tips to get you started:

1.  Automate your investment program:  Ten percent of gross income is the minimum needed to put you on the path to financial independence so just do it!  Start with a a repetitive monthly contribution to a Roth IRA and your employer's retirement program, particularly if they match contributions. 

2.  Attack bad debt:  Bad debt is anything you borrow money to buy that is expected to go down in value.  First commit to avoid creating any new bad debt, then put in place a plan to automatically pay off your debt as fast as you can.

3.  Adjust your lifestyle:  Adjust your spending patterns to compensate for items number one and two above.

4.  Hire a coach:  Accelerate your success by hiring a coach, someone who has the experience to take you further, faster.  If you wanted to transform your fitness and physical appearance, hiring a nutritionist and personal trainer would be a good place to start.  In the financial world consider hiring a Certified Financial Planner™ practitioner

At the time, the idea of a small group of colonialists taking on the world's mightiest country would have seemed impossible.  They proved anything is possible to those with vision and an unwavering commitment to never give up until they achieved success. 

If you decide what you want, set in motion a plan to achieve it, and never give up until the deed is done, you, too, can create the life of your dreams!  Happy Fourth of July!



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Market Pullbacks May Not Be Worth Waiting For

By William Neubauer, CFP MBA, Comprehensive Money Management

I have noticed that many retail investors are currently sitting on cash and waiting for an opportunity to get back in the market. Many of these people either pulled their money out of the market after the Financial Crisis, or raised cash before or after significant political events like Brexit, or the US and European elections.

Psychologically, the degree of cash on the sidelines can cause an investor to join the ‘gloom and doom’ camp, where they no longer cheer for economic progress, but rather look forward to the next economic shortfall or political misstep to justify their bearish positioning.

Some in this camp may have felt their prayers were being answered on May 17, when the S&P 500 registered its steepest decline since September 9 and finally appeared to be taking in all the news coming out of Washington. However, those hopes for a more significant pullback were quickly dashed over the rest of the week as the S&P 500 recovered more than 50% of its decline, and MSCI EAFE made new multi-year highs.

With so much money on the sidelines or hiding in low-risk assets and a lack of market weakness, I think there are two questions worth asking: 1) Is a market pullback likely? and, 2) Is a pullback worth waiting for?

Is a pullback likely?

I believe with fairly high conviction that over the next 12-18 months, the market is likely to experience a pullback. However, I am skeptical that such a pullback will be at the time, to the degree, or for the reasons that many investors have been expecting. One reason I do not prefer significant cash holdings is that the next pullback may happen from higher levels and therefore not present an entry price that is any lower than where the market stands today. A second reason I think investors with cash could be disappointed is that I do not envision a pullback that will be deep enough to justify the decision many investors made when raising cash last summer or fall. That is because, in our view, the recent and significant improvements in economic data and political landscapes around the world have created greater unease for those with cash on the sidelines. Investors with high cash now appear more determined to get invested, leading to pullbacks that have been both shorter and shallower than normal, which can be seen in the two charts below

Finally, a pullback may not come for the reasons many investors expect. The old saying “a watched pot never boils” has an application to markets, in our view. Markets are most affected by the unexpected, and investors are becoming accustomed to Trump’s war with the media. With so much media attention currently focused on President Trump, the market is constantly assessing the likelihood of his administration achieving their economic agenda. For example, small-caps and material stocks, which were viewed as the obvious and disproportionate beneficiaries of Trump’s tax and infrastructure plans, have already retraced 80-100% of their relative post-election gains. In fact, we may have gotten close to the point that the bigger surprise to Wall Street would be the President’s economic agenda getting back on track.

Is a pullback worth waiting for?

I believe the answer is “no” for investors with time horizons beyond five years. That is because, for investors with longer time horizons, I believe successful timing of a market entry or exit level (market timing) can be difficult, costly, ultimately may not materially impact long-term returns, and may conflict with the efforts of an investment manager.

Market Timing is Difficult:  Market timing, which involves dramatic shifts in a portfolio’s asset allocation based on the price movements of a market, is notoriously hard. Professional market timers  regularly admit that only about half of their trades are profitable. I do not regard the tactical portion of our investment process as market timing, since our trades are typically smaller shifts and generally based on reasons that extend beyond simple price movements.

The experience of market timers is less predictable than that of long-term investors, who have historically benefitted from the fact that the US large-cap stocks have risen in value 62 months out of 100 since 1926 (source: CRSP). The odds have been even better for investors when market valuations are close to fair value when measured by our Price Matters® methodology, as they are now (Table 1). Given the different investment experiences of these two groups of investors, it begs the question, why would a long-term investor accept historically poorer odds by trying to time the market?

Table 1: Returns of Large-Cap Stocks When Valuations Are Close to Fair Value (plus or minus 10%) Using CMMS’s Price Matters® Methodology

Source: Riverfront Investment Group, calculated based on data from CRSP 1925 US Indices Database ©2017 Center for Research in Security Prices (CRSP), Booth School of Business, The University of Chicago. Data from Jan 1926 through March 2017.

Market Timing Can Be More Costly in Today’s Environment:  When an investor is being “paid to wait” as their cash is accumulating interest at the bank or yield on short-term bonds, the long-term costs of market timing can be less punitive. However, today’s low interest rate environment does not pay an investor to wait, and in fact, I believe it imposes somewhat of a penalty on money that remains on the sidelines. With short-term rates at less than 1% and inflation running over 2%, as measured by the Consumer Price Index (ex-food and energy), cash on the sidelines loses purchasing power every day it remains idle.

Market Timing May Not Materially Impact Returns of Long-Term Investors: In our view, the longer an investor’s time horizon, the less important market timing is. I believe the old Wall Street adage that “successful investing is not about timing, but about time in” holds merit for most long-term investors for two reasons. First, over long time horizons, the US stock market has generally recovered its losses, as evidenced this year with most broad US market indexes hitting all-time highs. Second, long-term investing gives the investor the benefit of experiencing what Albert Einstein called “one of the most powerful forces in the universe”: compound interest. Compound interest allows a $100 dollar investment growing at 10% annually to return more than 6.7 times an investor’s initial money after 20 years. Investors who employ market timing tend to be un-invested or underinvested more frequently and are thus unlikely to experience the full benefits of compound growth. Table 2 shows how missing out on the first 1, 2 or 3 years of a 20-year time horizon can impair potential long-term returns. In our view, the risks posed by a strategy focused solely on market timing are simply not worth the potential return for the long-term investor. If done successfully, the positive impact to the portfolio is unlikely to be significant; but, if done unsuccessfully, the negative repercussions could be substantial.

Table 2: Compound Interest: Investing early can make a big difference in long-term returns

Market Timing Can Conflict With the Efforts of an Investment Manager:  The motivation for waiting on the sidelines is often a result of investors feeling like they already missed out on a bull market. While it may be true that some markets can hit levels of overvaluation that make them poor investments, investment managers with broad mandates are paid to identify and seek to avoid those markets.  At CMMS, we have been reducing our exposure to US equities, recognizing that the US bull market is now 9 years old, and I have been buying equities in developed markets outside the US, such as Europe and Japan, where I believe valuations are still considerably cheaper than they are in the United States.

An Alternative Strategy to Market Timing

Long-term investing deserves entry and exit strategies that are consistent with the investor’s goals and objectives and are based on a sounder footing than one’s ability to forecast market movement over short periods of time. I believe the goal of a long-term investor should be to get invested as soon as possible, while minimizing the risk of committing all their capital prior to a significant market pullback.

There are a number of strategies that can be used to accomplish this goal, and the strategy I have devised blends what I believe to be the best ideas from several strategies and tailors them to the long-term investor. It is a three-pronged plan I describe as: Immediately, Opportunistically, and Eventually.

·        Immediately: Based on our view that the US market is around fair value and markets outside the US remain ‘cheap’, I prefer an approach of putting a portion of our cash to work immediately.

·        Opportunistically: After not experiencing a pullback of greater than 3% thus far in 2017,I believe there is probably a pullback on the horizon. Therefore, I am inclined to hold onto a portion of our cash for an opportunity to invest at lower levels. Considering the short and shallow nature of pullbacks over the past six months, I set modest pullback targets of 3-6%.

·        Eventually: For the final portion of cash, I often set a date or series of dates over the next 3 to 6 months to invest the remaining proceeds. Once the dates are selected, I believe it is important to adhere to the investment discipline regardless of the market levels at those times.


William Neubauer, CFP, MBA

Comprehensive Money Management Services LLC

Additional Sources: 

Doug Sandler, CFA at ETF Strategist Channel

Charts by Riverfront Capital 

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2017: Party Like It’s 1999?

…or… How I Learned to Stop Worrying and Love Volatility (with credit to Dr. Strangelove)

Why are we so diversified?  Why so many different asset classes?  Aren’t US stocks the best place to be?  Shouldn’t we be more aggressive?  These are a few of the questions I’ve fielded recently with ever greater frequency as the bull market in US stocks enters its ninth year----an unusually long period for any asset class to rise without a serious correction. 

The frequency of the questions reflects a degree of complacency in investor psychology that is typical of the final years of a bull market.  It may also reflect wavering conviction in the wisdom of broad diversification after a period when US stocks have performed much better than other asset classes as they have in recent years. 

We all have short memories. 

The more time that passes between market crashes, the less we remember the pain.  Continually rising markets and double digit increases begin to feel normal.  That sets the stage for greater risk taking and unhappy endings.  Ultimately the paradigm will shift and reality will hit hard.  The timing and the triggers are rarely guessed accurately in advance, but the likelihood that serious corrections will occur is nearly guaranteed.  Sh*t happens---roughly every 6 to 12 years throughout history.  In recent years we had drops averaging more than 40% in 1973, 1981, 1987, 2000, 2008.  The longer the period between serious corrections, the harder the fall.  We’re now entering year 9.

It’s not “different this time”.

This slogan was popularized in 1999 to justify extraordinarily high stock valuations.  It turned out not to be correct.  It’s never different this time.  High valuations reduce future returns, it’s as simple as that.  They also increase the risk of a major crash.  That is why we diversify.  Diversification acts as a shock absorber.  Most of the asset classes we own have long term “average expected returns” of 5% to 10% per year, each with its own degree of volatility.  Individually, they can provide a very rough ride.  Collectively the ride is much smoother. 

Diversification is a free lunch

Diversification allows you to decrease the risks you face in investing without decreasing your expected returns.  To see why, imagine you are considering two investments, both of which are expected to appreciate at 10% on average, but which have a 1 in 5 chance of going down in value by as much as 50%. If you buy just one of these investments, there is a 20% chance that you will lose half of your money.  But if you buy them both (assuming they are perfectly uncorrelated), the chance of losing half of your money falls to only 4%, while your expected return is still 10%.  Keep adding asset classes?   The more uncorrelated asset classes you add, the lower your chance of losing half your money.  Why?  Because only rarely do they all have bad years in the same year.  

Learn to love volatility

Volatility can add to long term returns when it is used to our advantage.  We follow a disciplined asset allocation and rebalancing strategy that forces us to consistently sell high and buy low, always returning to our original target percentages.  Volatility creates the opportunity to do just that.  Multitudes of studies demonstrate that this discipline adds between 1% and 3% annually to long term returns over long periods of time.  The more the volatility, the greater the excess return.  Most of these studies use rolling ten year periods as their definition of long term. 

Trust Data, Not "Predictions."

Many people approach investing as a series of "predictions”… like "I just have this feeling that the stock market is going to go up in the next six months." The problem with this is that even the so-called "experts" have a horrendous record at making these kinds of predictions about the direction of the market. To put it charitably, they are wrong more often than they are right. 

Suffice it to say that none of the evidence suggest that it is wise to pay too much attention to the average commentator's "feelings" about the stock market. 

Invest for 2017, not 1999. 

An alternative approach is to try to avoid making predictions and to invest based on what the data tells us and what we know to be true about the markets.  For instance, we know the kinds of portfolios that have performed the best in the past, we know that the returns we get from buying an asset in the future will be inversely related to the price we are paying to get it, and we know something about the way that markets work.  We can compile all of these "truths" and data into a framework that will let us make rational decisions about what to invest in without the need to make any hand-waving predictions.

Consider the Math.

The magic of compound interest is pretty impressive. If you can generate a 7% average return for 10 years, you will double your money. In 20 years your money will quadruple. In 30 years it will increase in value by a factor of 8.  In 40 years it will increase in value by a factor of 16. 

But compound interest has a downside as well. If you sit through a bear market and your portfolio takes a 50% decline, then you need a 100% increase to make up for this.  If your portfolio falls by 75%, then you need a 300% increase just to break even.  This could take decades.  But it could be worse.  If you invest 100% of your portfolio in the next Enron and lose everything, you will never break even.  You will never recover from a 100% loss. 

Manage Risk Above All Else. 

It is tempting to say then, that the first rule of investing is don't lose money. But of course, you have to be willing to accept the possibility of a short-term loss in exchange for a long-term gain. But it is essential to understand the size of the risks that you are taking and to actively manage your portfolio to avoid "falling off a cliff" at the wrong time. 

Your portfolios accomplish this in two ways.  First, it remains diversified at all times, since this increases the chance that something in a portfolio will do well no matter the external environment.  Second, we actively control the volatility (size of the swings from a day to day, week-to-week, and month-to-month basis) and make adjustments if this goes outside our expected range.  Managing risks prudently comes first; if we can do that right, the returns will follow. 

Thoughts are Fragile, Systems Last.

Many people, objectively speaking, "know" how to invest. The basics of the subject are not that difficult to understand, and anyone can buy good mutual funds or ETFs from a discount broker like Vanguard, E*Trade, or Charles Schwab.  Yet despite this, many of these same people achieve returns that fall far short of their potential.  Research from Dalbar shows the average investor in the stock market struggles to keep pace with inflation --- this in a market that has gone up an average of 7% a year over the last century. 

The reason most investors fail is simple: inability to execute

Two things tend to fall in the way of even the best-laid investment plans.  The first thing that trips up even well-informed investors is inattention. Many people have great intentions when it comes to investing.  And then life happens.  Kids come along, work heats up, other side-projects or hobbies come along that seem more interesting for a Saturday afternoon than re-balancing a portfolio.  The result is that too often people end up in undiversified portfolios that are in dire need of a rebalancing, or --- worse yet --- not even knowing what they are invested in or where to go to do anything about it. 

The second is psychological mistakes. The human brain came into its present form millennia ago in a hostile environment of lions, tigers, and warring tribes.  The "impulses" that we get through our intuitions may have worked very well in this kind of environment, but they frequently do us harm in the modern-day financial markets.  So in the time they do spend on their investments, individuals too often end up making decisions that cause them active harm, like pulling money out of the markets at a low in 2002 and putting it back in at a high in 2007. 

Luckily, there is a clear solution that makes it easy to execute: use a system. 

Taking a systematic approach to investing takes the emotions and impulses out of investing.  Our "thinking" is mostly at the time of creating the system, rather than in the heat of the moment when we are more likely to make a mistake. 

Our approach systematizes most of the key aspects of investing.  We have a clear plan, defined buy and sell criteria, and routine monitoring for rebalancing opportunities.  That takes emotions out of the process as much as possible.  Best of all, having a system allows you to relax and spend your Saturday afternoons doing things that are more interesting, knowing that someone else is monitoring the system and taking action for you when it is most needed and most effective. 

The challenge to adhering to any system is maintaining discipline and conviction.  

If you abandon a system based on short term disappointment, you don’t have a system at all.  Maintaining discipline and conviction is hard.  Helping you do that is an important part of my job.  Given the strength of the US stock market in recent years as compared to virtually every other asset class, the challenge of maintaining discipline and conviction in a system that requires broad diversification has been especially tough.     


Commonly asked Questions

Many of us have a heightened sense of risk as we head into 2017.  For better or worse, rapid political change is producing major uncertainty for the US and abroad.  This is a good time to review your investment strategy and ensure that your confidence and convictions are high enough to survive the volatile period that may be yet to come.  Part of that process is asking questions.  Some of the more common questions I’ve received lately have been addressed in a separate attachment.  I hope you’ll take the time to review them and ask more questions until you are strong and firm in your conviction that we have the right strategy to help you weather any coming storms.

Reading materials:


Part 2:  Conviction Building Q & A

Q:  Are we missing lost opportunities by not being more US centric? 

A:  Don’t be fooled by the fact that US stocks have recently had a good run.  Emerging market stocks had a great run 2004 to 2008.  Gold shined even more brightly from 2000 to 2011.  Every asset class eventually has its day in the sun.  Today’s winners become tomorrow’s losers.  The timing may be unpredictable, but the fact that every asset class will spend time at both the top and the bottom of the performance chart is baked in the cake.  Novice investors often fall into the trap of thinking that yesterday’s winners will always be winners, then invent stories to justify the increasingly lofty prices.  “It’s different this time” becomes the rallying cry.  Such investors often navigate through a rear view mirror oblivious to the dangers that lie ahead. 

Most investable asset classes have strong multi-year runs from time to time.  They are inevitably followed by steep declines.  We saw this with silver (1981-1984), US bonds (1981-1987), technology stocks (1997-2000), emerging market stocks (2004-2008), gold (2000-2011), and real estate (2003 to 2007).  All of these periods ended with major givebacks, some as much as 50% or more. 

Q:  I understand that US stocks go down at times (just like everything else) but at some point and historically they bounce right back to their original place and go beyond, right? 

A:  At some point?  True.  If you can patiently wait 10, 20 or even 30 years!  It took more than 25 years for US stocks to recover from the lows of the great depression.  After the crash of 1929 and 1930, US stocks didn’t get back to those same levels until 1957, a full 28 years later!  More recently, after the crash of 2000, it took 10 years for US stocks to get back to their former levels.

Q: I understand that 2008 was a trying times for stocks because of the financial meltdown, but when was the last time that happened, in 1930's?

A: Oh no!  Big corrections are the norm, not the exception.  Most individual asset classes, including US stocks tend to get over-extended and suffer a severe correction every 6 to 10 years, sometimes sooner.  For US stocks the corrections of 25% or more occurred in these years:

1929       -47%

1931       -83%

1933       -40%

1934       -32%

1937       -55%

1939       -32%

1942       -35%      

1946       -27%       

1962       -27%       

1968       -36%       

1970       -36%       

1973       -48%     

1981       -27%      8 years after the prior 25%+ correction

1987       -34%      6 years after the prior 25%+ correction

2000       -49%      12 years after the prior 25%+ correction

2008       -57%      8 years after the prior 25%+ correction

2017       ?             9 years and counting.  We’re due!!!



Given this history, is it any wonder why we choose to broadly diversify?

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Diversification, Discipline and Conviction: The Secret to Taming Fear and Greed

It is well understood in the field of behavioral economics that markets are built as much on human emotion as they are on fundamentals.  During periods of market euphoria, we become over-confident and prone to taking greater risk.  During periods of market gloom, we become despondent and head for the hills.  These behaviors of course are the exact opposite of what prudent investors should be doing.  Buying low and selling high sound very simple, but are nearly impossible to do, especially on a consistent basis.  Market timing holds great psychological appeal, but in the real world it rarely ends well.  Markets can defy logic and go on to become even more overpriced after you sell.  And nobody rings a bell to give the “all clear” sign when markets reach the bottom and let us know when to jump back in.  So given the artificial environment, and the nagging feeling that it won’t end well, what is a prudent investor to do?

Our best hope is to tame our emotions and ride out the ups and downs by building strong conviction around a sound investing discipline.  There is overwhelming evidence that diversification across a very broad spectrum of asset classes (including those that are currently out of favor) is the key.  Your individual asset allocation and return expectations should be based on both your financial and emotional ability to withstand market downturns.  Extreme diversification offers a degree of safety that, while not perfect, does offer some protection to shield us from market extremes.  That’s not a free lunch though.  Diversifying may offer some protection against short term stock markets declines, but it also comes at the cost of not fully benefiting from stock market runs on the upside.  For most of us that’s a small price to pay for greater consistency and increased peace of mind.  Moreover, study after study offer compelling evidence that this approach delivers stronger and more predictable long term returns. 

Yet the urge to fully participate in the euphoric action is too much for many of us to resist.  Many otherwise intelligent people jumped on the bandwagon in 1998-99 to board the tech stock rocket ship, or the second home craze in 2005-07, only to crash and burn. 

Likewise many otherwise intelligent people couldn’t resist the powerful urge to sell their underperforming emerging market stocks, international bonds, commodities and gold at recent market lows, only to lock in real losses, possibly just before the stage is set for another bull market run. 

Fear and greed are inescapable emotions for human beings.  Even intelligent individuals who are very knowledgeable and disciplined can become victims.  That’s why so many professional investment managers have other professional investment managers handle their personal portfolios rather than do it themselves.  They know how easy it is to succumb to these emotions when it is your own money at stake, and where a formal ‘investment policy statement’ no longer rules the day. 

Discipline is hard.  It requires not only a cerebral understanding of the ups and downs of markets and individual asset classes, but pre-emptive emotional preparation to remain calm and focused when markets or individual asset classes go to temporary extremes in either direction.  The secret may be to plan ahead, imagine those periods of extended euphoria or the feeling of the pit in your stomach during horrendous market declines, and rehearse in your mind how you will respond.  If you know that you won’t be able to handle it, take proactive action now by giving me a call to talk about adjusting your exposure to the equity markets.  We’ll discuss if the resulting change in long term return expectations will support or conflict with your long term goals and we’ll make changes if needed.

The Yale endowment philosophy that we follow is part of the solution.  I refer to this as a ‘philosophy” and not a “portfolio” as the approach refers to the practice of spreading your assets across a very wide variety of different asset classes in equal or relatively equal proportions, not to a particular asset allocation formula.  While it hasn’t always been wrapped in the “Yale wrapper”, this philosophy has been what we have followed since founding my firm more than thirteen years ago in 2002.  The philosophy is best known as a result of its successful implementation by David Swenson at Yale University and is now followed by most of the Ivy League university endowments and a growing number of professional investors worldwide.  Its popularity stems from the significant amount of empirical research that demonstrates that it outperforms all other investments models over time. 

This philosophy of extreme diversification over a wide variety of asset classes with relatively equal weighting and routine rebalancing takes advantage of the fact that every asset class eventually has its day in the sun.  It respects the fact that we can’t predict which asset class will take its turn next.  Rebalancing adds incremental return by forcing us to sell a little of the asset classes that are rising and becoming more expensive, and buy a little of those that are falling and becoming better values.  A wide body of independent research offers compelling evidence that this enhances long term returns by a significant sum. 

The practice of diversification, relatively equal weighting and routine rebalancing is widely respected in the academic world as the only reasonable way to participate in the modern investment markets.  Study after study demonstrates its superior long term performance, always beating all other approaches in any rolling 10 year period going back hundreds of years both in the U.S. and abroad.  The philosophy recognizes that none of us, no matter how gifted, can accurately predict the future much less get the timing right for entry and exits to markets or individual asset classes.  Not only is that impossible to get right consistently over time, but it is also unnecessary.  The disciplined approach we follow offers compelling risk adjusted returns for long term investors without all the angst and second guessing that goes into haphazard or trend based strategies that almost always underperform over long periods of time.

The chart below helps to illustrate the unpredictable nature of the markets and the wisdom of owning a little of everything.  You’ll notice that over time every asset class has it’s time near the top.  There is no predictability, only randomness. 

Intuitively you can see what empirical studies so clearly demonstrate; chasing performance by only investing in those things that have already reached the top (rear view mirror investing) is a loser’s game.  Successful investors own all the asset classes and remain patiently focused and disciplined.  They rebalance routinely, harvest losses for tax purposes occasionally, and patiently watch as each asset class eventually takes its place at or near the top.  Embrace the fact that none of us can pick tomorrow’s winners.  Better to own them all.  

Note:  As we face increasing economic and political uncertainty in the fall of 2016, you should take some comfort that we are the guys in white.  




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An Interview with Your Advisor

I get a lot of questions about our investment strategy, especially in times like these when a single asset class (US stocks) has been on a tear and virtually everything else has been lagging.  Here are a few of the most common questions and my responses:

Is our strategy working?

The goal of multi-asset diversification is first and foremost to avoid “the big loss” that tends to occur in any one asset class with some regularity every eight or ten years.  The US stock market fell more than 30% in 2000 and about 38% in 2008.  Some think we are now due.  It takes a 60% gain to recover from a 30% loss.  That’s just math.  Most of my clients would find such a loss devastating and don’t have the time or intestinal fortitude to wait out a multi-year recovery just to get back where they started.  Nor is that necessary.  We can achieve market returns with bond-like risk through multi-asset diversification.  Our strategy is working perfectly.  We’ve had average annual returns for the past ten years of 9% across all client portfolios.  The last two years have been light as money has flowed out of other asset classes and into US stocks making them now rather pricey.  No one knows if this will continue, but the longer it does, the more likely pain will follow.  We avoid that pain by maintaining a commitment and discipline to multi-asset diversification.

Is there a downside to multi-asset diversification?

Being diversified across the widest possible array of asset classes means that you’ll never have all of your money in the best performing asset class in any year (of course the reverse is also true!).  The past two years US stocks have had a phenomenal run.  At the same time, most other asset classes had modest single digit returns or were even negative.  Mitigating the risk of a big drop can come at a cost of lower short term performance from time to time, but in the end multi-asset diversification produces superior long term returns over rolling ten year period without the roller coaster ride of very high highs and very low lows from year to year. 

Is this what the Ivy Portfolio is about?

Yes.  David Swenson in his PhD dissertation thirty years ago performed long term studies that demonstrated that multi-asset diversification with routine rebalancing always outperforms all other strategies over any rolling ten year period.  His studies proved that this has remained true over time and all the way back to when records were first kept in 1880’s, both in the US markets and abroad.  His results were so impressive that Yale hired him right out of school to run their multi-billion endowment.  Thirty years later he is still at the helm and has become a legend in the investment world as the top performing investment manager of all time.  Harvard, Stanford and lots of other Ivy League universities now adhere to the discipline of multi-asset diversification, earning the strategy the nickname of “The Ivy Portfolio”. 

How has this strategy performed recently?

The past two years have been all about the US stock market.  The performance of every asset class has paled in comparison.  The period reminds me a lot of 1998 and 1999 when everyone and his brother was concentrating their wealth in US stocks and in US tech stocks in particular.  The words “it’s different this time” ruled the day as US stocks were bid to unsustainable levels.  In 2014, when newscasters announced that “the U.S. stock market hit another new high today”, consider that meant it was just getting back to its former level last reach 15 years earlier!  For those who invested their money in the year 2000, it took 15 years to get back to breakeven!  For those invested heavily in US stocks back in 1998 and 1999, it felt good at the time, but we all know how that ended.  It takes a lot of discipline to avoid the temptation to over-emphasize any one asset class in an investment portfolio.  Succumbing to the temptation to “chase performance” by doubling down on yesterday’s winners almost always ends badly.  Our multi-asset investment discipline provides equity-like returns but with bond-like risk.  It’s the closest thing that we have to a “free lunch” in the investment world.

What happened in the second half of 2014 after starting the year so strong?

Two unexpected and seismic events occurred in late 2014 that were temporary setbacks.  First oil prices fell more than 50% after having been stable for many years.  We own oil in the commodities category of our allocations and also own oil companies in the natural resource category.  Second, the US dollar recorded its largest and fastest gains in recorded history against virtually every currency in the world.  The Euro was at about $1.35 to the dollar and now hovers around $1.09.  That was more than a 20% drop in the Euro versus the US Dollar in just a few months.  The same was true of the Japanese Yen and all other currencies around the world.  So what does that mean to us?  Even if valuations of European and Asian companies remain unchanged in their home currencies, they fell when measured in US dollars.  We own international stocks, bonds, real estate, infrastructure and other assets.  As the dollar rises, the values of these assets fall when measured in US dollars.  Normally currency moves are small and gradual, but the move in 2014 was largest and fastest in our lifetimes.  The big drop in oil prices and the big rise in the dollar combined to erase the double digit returns recorded earlier in the year.  We ended the year with a modest 1% to 2% gain.  The good news is that it is unlikely that this is a continuing and forever trend.  A snapback or reversion to the mean is possible in 2015 or 2016 since big moves in either direction are often overdone.

Commodities and gold have performed poorly recently.  Why are they in our portfolio?

Disciplined multi-asset investing requires a meaningful commitment to non-correlated and negatively correlated asset classes, even those that are currently out of favor.  Including assets that are negatively correlated with the growth assets in our portfolio protects our downside when the winds change.  We have to be prepared for all scenarios.  Commodities and gold are negatively correlated with stocks.  As the US stock market propelled to new highs, commodities and gold moved in the opposite direction.  Yet, despite several years of under-performance, gold remains the best performing asset class over the past fifteen years.  From 2000 to 2010 US stocks were flat, with a return averaging less than 1% per year.  Gold and some commodities recorded annual double digit returns during that same period.  Gold more than tripled over this time span.  None of us know when or if this will occur again.  Trends only become obvious after they are firmly established…  And then they can come to an abrupt end.  By the time inflation starts to show up again, real assets such as real estate, commodities and gold will have already soared to new highs while equities will have rolled over.  We maintain disciplined allocations to all asset classes to maximize upside opportunity and minimize downside risk.  This enhances long term returns, but (by definition) it means that we won’t have everything or most everything in the top performing asset class each year.  The opposite is also true.  We won’t lose big when the winds shift unexpectedly as they always do given enough time, often when valuations are already stretched, making the fall quite painful. 

Is inflation really a concern?

Not at the moment.  In fact deflation seems to be most likely scenario, leading central banks all over the world into “currency wars” to depreciate their currency.  They perform this experiment in an attempt to stimulate their economies, create inflation and gain short term advantage over others.  But this is a zero sum game, with gains in exports achieved by some coming at the expense of reduced exports for others.  Many fear that this one-upsmanship will end badly with rapidly rising prices as people lose faith in paper currencies.  There may be a tipping point when all of this has gone too far.  For that reason, we maintain a healthy 40% commitment to “real assets” that would hold their own when inflation unexpectedly returns or paper money drops in value. 

Most well designed retirement plans can withstand a lower rate of return than originally projected, but very few can withstand much higher inflation.  No rate of return is adequate if prices are rising exponentially.  Unexpected inflation is the most serious and potentially devastating risk for retirees.  We protect against that risk by maintaining a healthy commitment to real assets in your portfolio.

What are “real assets”?

Real assets include things that have intrinsic value like food, water, energy and other basic necessities of life.  They include domestic and foreign real estate, global infrastructure, energy and food commodities, and traditional stores of value such as silver and gold.  Some people also include inflation-protected bonds and natural resource companies under the classification of “real assets”.  We have a healthy amount of all of these things in our multi-asset diversified portfolios.  Unfortunately, a few of them such as oil and gas commodities, natural resource companies and precious metals have been taking it on the chin for a while.  That will change at some point.  Our discipline of not straying from prudent allocations will be what protects us from the sizeable losses that other investors who are more US stock-centric will experience from time to time.    

What are you doing to actively manage my portfolio, add value, and enhance long term returns?

Routine rebalancing, typically once per year, has been proven over and again to add to long term returns.  We sell a little of what has been going up and buy more of what has been going down.  Eventually trends reverse and you are better off now owning more shares than if the volatility had never occurred.  Even more importantly, I regularly perform “tax loss harvesting” to capture taxable losses by selling assets while they are down and replacing them with similar investments that will have similar gains when the rebound occurs.  In the meantime we receive a “free lunch” in the form of a capital loss that reduces your taxable income.  This doesn’t show up in quarterly returns, but often adds more value to your net worth you than you would ever achieve from investment returns alone.

Ultimately though, the most important way I can add value is to help you avoid “the big loss”.  That comes with helping you maintain the discipline of multi-asset diversification even when the powerful human emotions of fear and greed tempt us to deviate from our well designed plan.  Most investors can’t resist this temptation.  They can’t help but compare themselves to their less diversified neighbors who might have a good run every now and then.  They are always selling asset classes when they are down, abandoning well designed strategies when they are temporarily under-performing or changing advisors every time the wind blows in the wrong direction.  This is a sure-fire way to underperform all investors as a group over the long term.  Many people never learn these lessons, always thinking that they just have bad luck or a cloud hovering over them, when in fact they are the ones that seal their own fate.  Trust in the logic and proven history of diversified multi-asset diversification if you want to win the game over time.  Always chasing yesterday’s winners is a losing strategy and the mark of inexperience, lack of knowledge and inability to control our all too human impulses.  None of us can predict the future and none of us can tell which asset class will be next in taking its turn at the top.  Disciplined investing means sticking with a well-crafted plan and routinely rebalancing even when you feel like shaking things up from time to time.  Patience and discipline are always rewarded in the investment world.  Constantly searching for greener pastures is a losing strategy and a sure-fire way to underperform. 

Sometimes a picture is worth a thousand words.  Notice the unpredictability, randomness and extreme moves of individual asset classes.  Relative performance of one to the other can’t be predicted, only explained in retrospect.  Would you rather pick one or two and take a roller coaster ride or maintain a disciplined allocation to them all, making the ride as smooth and predictable as possible?  Your portfolio is very close to the “Asset Class Blend” in white.


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Take the Emotion Out of Investing for Better Returns

What do we know about the basics of investing? Buy low sell high. Diversify.  Invest for the long-term. Sounds easy, but it’s not. Every day I talk to investors who understand these concepts, and yet have difficulty executing them.  For many, this knowledge of what they should do vs what they are able to do on their own is the main reason they seek out a NAPFA-Registered “fee-only” investment advisor to manage their money based on a well-designed long term plan.

The problem with investing starts with our natural inclination to want to own what has done well recently.  It makes us feel better.  It makes for a good story at the cocktail party to say we made a big bet on the latest-greatest investment.  However, recency bias doesn’t make for a good long-term investment strategy.

We also know we need to diversify, but what does that really mean?  It means owning a variety of asset classes, including those that are out of favor.  It means buying some more of these asset classes when they don’t do well.  Investments are cyclical so that today’s must have is tomorrow’s has been.  In other words, a good portfolio has assets that have a negative correlation – when one part of the portfolio goes up another tends to go down.  If everything in your portfolio is going up you’re not diversified.  How else can you buy low and sell high if nothing’s down when something else is up?  It’s no fun watching parts of your portfolio going down, but having the discipline to rebalance with your long-term goals in mind will help drive long-term results.




Successful long-term investing means not chasing results or trying to time your entry/exit into the market.  The above graphic is a good illustration of what usually happens when we try and do either.  Again, the counterpoint to emotional investing is having a long-term goal and a strategy in place to meet it.  There will be ups and downs along the way, but your goals remain clear.

Unfortunately, our brains are wired to want to chase results and make emotional decisions.  We know we are supposed to buy low and sell high but we’d rather buy into the hot investment (buying high) and then sell it when it doesn’t work out (selling low).  That’s why the average investor will consistently underperform a basic market index.



Source: 2012 DALBAR QAIB Study

Don’t think that professionally managed funds are any better.  87% of large-cap active managers underperformed their benchmark over the prior 60 months.  The same problems that individuals run into when they let their emotions take control and they chase results, occurs when professionals try it as well.  On top of paying higher fees for this ‘professional’ management you’re still likely to get sub-par results.

Certainly sounds appealing then to go to a discount broker and do it yourself.  However, this supermarket approach of picking a few stocks and funds that look appealing to us isn’t much better.  Despite the best of our intentions our cognitive biases, like wanting to follow the crowd and seeking out information that conforms to our beliefs, will come into play.  It is nearly impossible for an individual to be devoid of these emotional biases that inevitably lead to poor investment decisions. At least when you suffer poor performance with a discount broker you’ll be saving on fees.

Emotion-Free Investing Is Hard But Possible

The right approach for investors is to have an advisor manage their money who will focus on a sound long-term investment strategy without chasing short-term results.  Investors need to work with a company that is a fiduciary – that the investor’s best interest will always come first.  Investing in a brokerage house that has an incentive to put your money in their products or products from which they get a kick back is not in your best interest.  Investing with a discount broker that allows you to pick from a buffet of investment choices is not doing you any favors.

And for some peace of mind, turn off the 30-second stock market updates on your phone.  Paying too much attention to the short-term noise in the markets can cause us to make knee-jerk decisions that will be detrimental to our long-term performance.  Better to understand the long-term benefits and strategy of your portfolio and ignore the short-term ups and downs. Coming up with a sound long-term investment strategy – and then keeping your emotions in check and sticking to it – is the best thing you can do to achieve your long-term financial goals.



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Investment Management is Simple, But Not Easy


The smartest people on Wall Street understand four wonderfully powerful truths about investing.  We could all benefit enormously by adhering to these four great truths:

1.  The dominating reality is that the most important decision is your long-term mix of assets: how much in stocks, real estate, bonds, or cash.

2.  Diversify within each asset class—and between asset classes.  Bad things do happen—usually as surprises.

3.  Resist the temptation to “tinker” with your plan too often.  The discipline to stick with a well-crafted asset allocation plan is often even more important than picking the “right” plan.  Market sentiments change quickly and every dog will eventually have its day.  Selling an asset class at a recent low and increasing your investment in another asset class that has hit new highs is a surefire way to underperform over the long term.  Allow disciplined rebalancing to do the work for you.  Don’t abandon a prudent long term strategy based on short term disappointment, or based on the bravado of friends who had a better year.  They likely are taking too much risk, are insufficiently diversified and will quiet down after their next big loss.  They are also likely underperforming versus you over longer periods of time.

4.  Be patient and persistent. Good things come in spurts—usually when least expected—and fidgety investors fare badly. “Plan your play and play your plan,” say the great coaches. “Stay the course” is also wise. So setting the right course is crucial—which takes you back to number 1.

Curiously, most active investors—who all say they are trying to get “better performance”—do themselves and their portfolios real harm by going against one or all of these truths. They pay higher fees, more costs of change, and more taxes; they spend hours of time and lots of emotional energy; and accumulate “loss leaks” that drain away the results they could have had from their investments if they had only taken the time and care to understand their own investment realities, develop a sensible long-term program most likely to achieve their goals, and stay with it. 

Less experienced investors tend to abandon well-crafted strategies when they are temporarily down, and become over-exuberant and over-confident when they are up.  These emotions are self-defeating in the investment world.

Trying to time the market is the biggest mistake investors make. They sell at the bottom and buy at the top. They get out of stocks when everyone is pessimistic and panic is in the air, and they get in or double down when everyone is optimistic about what is going to happen.  They also make a big mistake by constantly trying to pick those stocks that will outperform.  Few if any are able to do this consistently. 

We are all better off sticking to a disciplined plan based on a broad array of index funds.  The goal is to mirror the world’s financial markets without making any big bets for or against any one of them.  An even better reason for individuals to index is that they are then free to devote their time and energy to the one role where they have a decisive advantage: knowing themselves and accepting markets as they are—just as we accept weather as it is—designing a long-term portfolio structure or mix of assets that meet two important tests:

1.  You can maintain the discipline and live with it through thick and thin.

2.  The long-term “expected results” are likely to achieve your long term goals.  

Changing managers—firing one after a period of short term underperformance and hiring another who has had some recent success—is also self-defeating.  Strategies and tactics that fare well in one short term period typically do poorly in the next.  In the industry this known as “dating” and is widely recognized as an expensive waste of time and energy that should be avoided by all serious investors.

So the great advantage of investors who are wisely concentrating on asset mix decisions is that it helps them avoid the “snipe hunt” of a vain search for “performance” and concentrates their attention on the most important decision in investing—long-term asset mix to minimize the odds of unacceptable outcomes caused by avoidable mistakes and maximize the chances of achieving their investment objectives.

If, as the pundits say, “success is getting what you want and happiness is wanting what you get,” investors—by concentrating on asset mix—can be both successful and happy with their investments by living with and investing by the four simple truths—so investments really do work for and serve them.

Of course, as all experienced investors also know, most individual investors take many, many years, make many mistakes, and have many unhappy experiences to learn these “simple but never easy” truths.


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Comprehensive Money Management Services LLC
535 Vilabella Avenue
Coral Gables, FL 33146
Phone 305-662-7757
Fax 305-402-8409
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Comprehensive Money Management Services LLC (“CMMS”) is a Registered Investment Adviser located in Coral Gables, Florida. The firm is registered with the State of Florida Office of Financial Regulation. CMMS and its representatives are in compliance with the current filing requirements imposed upon Florida-registered investment advisers and by those states in which CMMS maintains clients.

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