Archive for Economy and Investing

Defining the “Perfect” Investment

Economy and Investing, Yusuf Abugideirion September 6th, 2018No Comments

Written By: Yusuf Abugideiri, CFP®

If you asked a room of 100 people to define the “perfect” investment, you may not get 100 answers, but you’d certainly get more than one. And more than one answer may be correct! The criteria for judging the merits of an investment include the investor’s risk profile, time horizon, and goals. This sheds some light on the fault of the original prompt for this post, an article about “stomaching” the perfect investment – while there is almost certainly no one “perfect” investment, it is possible to develop an approach to investing that can build a portfolio that fits an individual’s needs perfectly. For the purposes of this piece, we’ll limit the possible ingredients of said portfolio to stocks, bonds and cash.

Risk Profile

Before an individual begins to invest, it is critical that they develop an understanding of their unique risk profile. Let’s start unpacking the term “risk profile” by looking at the three parts that comprise an individual’s risk profile:

  • Risk Tolerance: Refers to the trade-offs that an individual is willing to make when faced with uncertain outcomes. This tends to be a stable characteristic that shifts only slightly over long periods of time.
  • Risk Perception: Represents an individual’s perception of what the trade-offs actually look like in the current environment. This characteristic is very unstable and can vary widely as a consequence of changing external circumstances. Risk perception can stabilized through the accumulation of experience and/or education.
  • Risk Capacity: Refers to the availability of resources that can mitigate financial risks. For example, an individual can increase their risk capacity by receiving multiple stable sources of income or by building significant cash reserves. This is something that can be improved through financial planning.

While an investor may think they know their risk profile, using outside resources can help ensure this is true. For example, one can learn more about their risk tolerance by taking an assessment and reviewing their scores. From there, engaging a financial planner can help them manage their risk perception, develop a strategy to increase their risk capacity, and build a plan that will help them meet their goals.

Time Horizon and Goals

When developing that plan, the individual’s time horizon for meeting each of their goals will also need to be defined. The time horizon of the goal, within the context of an individual’s risk profile, is the key driver in determining the investment plan for achieving it. Some goals, like funding retirement or education expenses, take years or even decades to achieve. Others, like saving for a down payment on a car or building an emergency fund, can be accomplished more quickly.

For big goals with long time horizons, investing in a mix of stocks and bonds makes sense because doing so enables the investor to capitalize on the magic of compound interest over time. The longer the time horizon, the greater the capacity for risk; as such, a greater proportion should be allocated to stocks to capitalize on their higher upside potential (especially for big goals that can only be achieved via a combination of savings and investment returns). As the investor gets closer to the end of a given goal’s time horizon, the mix should shift more towards bonds and cash to secure the value of the portfolio while still maintaining the ability to grow. In contrast, if a goal is small enough that it can be achieved by setting aside cash for a few months, investing in stocks or bonds may be inappropriate – the potential for significant positive investment returns is mitigated by the short time horizon, as fewer compounding periods lessens the potential upside.

For more on Yeske Buie’s investment philosophy and approach to developing the “perfect” portfolio, check out the links below.

The Correct Way to Think About “Corrections”

Economy and Investingon April 4th, 2018No Comments

We’ve had a bit of a bumpy ride over the past two months as market volatility, strangely absent last year, has come roaring back. We think it’s all going to be fine (you knew we were going to say that) but it doesn’t mean we won’t have a bit of a bumpy ride along the way. Here are a few thoughts on what’s happening and how to think about it.

Your morning paper is going to tell you that the market experienced a “correction” today, as U.S. stocks closed more than 10% lower than the highs of January 26. While the concept of a “correction” has no formal definition in economics, it is commonly used when a stock or market falls by 10%. There have been 37 corrections since 1980, which is to say that they’re pretty common.

What is special about this 10% threshold? Nothing. It’s an arbitrary number, which is why it carries no significance in economic theory. The last “correction” occurred on February 8, when the S&P 500 also closed 10% lower than that afore mentioned January 26 high. The index then proceeded to rise 8% over the next month before retracing its path back to that February 8 level today.

Perhaps a more useful way to view recent events is as the return of volatility after a year of unusual calm. And what drives volatility in the stock market? More than anything else, it’s uncertainty. Uncertainty is always present, of course – the future is fundamentally unknowable – but policy uncertainty is not a given. Policy uncertainty, however, is what the White House seems to specialize in these days.

While we don’t subscribe to facile explanations for why the markets do what they do on any given day, we’re sure that policy uncertainty is playing its part. Will the government try to take down some of our biggest tech firms, including Amazon? Will we have a trade war with China? Maybe, though recent experience suggests that the White House is also good at reversing itself when the chaos gets bad enough.

You know that we believe in the fundamental resilience of the U.S. and world economy, and the markets that reflect them, even in the face of policy uncertainty. And we also strive to build resilience into your portfolio and the rest of your financial affairs.

But that doesn’t mean it won’t be a bumpy ride. Buckle up.

Hello volatility my old friend…

Economy and Investingon February 6th, 2018No Comments

As was surely inevitable, volatility has returned to the markets after an historically quiescent couple of years. As this is being written, markets in Europe are down nearly 5% after a similar drop in the US on Monday.

What should we make of this and what, if anything, should we do?

The answer to the first question is that it’s not possible to point to any simple explanation, notwithstanding the fact that your newspaper this morning is bound to be filled with articles declaring that rising inflation and interest rates are the culprit. Maybe, but things in economics are rarely as simple as that and besides, markets have flourished in the past with interest and inflation at much higher levels than today. The short-term answer is the less precise but more accurate villain known as sentiment. Markets are social constructs and, like a school of fish suddenly banking in unison and setting off in a new direction, investors often follow a new trend en mass with no precise trigger to point to. Not that we’re saying one day (or even two or three) constitute a trend.

What we do know is that the pace of economic growth has been ticking up worldwide this past year in a demonstration of synchronized advance the likes of which haven’t been seen in years. The rest of the world is still playing catch up to the US, both in terms of duration of recovery and market valuations. If US markets decide to take a breather, they’ll depress everything else for a while (sentiment knows no boundaries) but underlying realities will ultimately rule the day. And the ultimate underlying reality is that the US and world economies are always biased toward growth, even if they take the occasional breather.

As for the second question above, to the degree we’re likely to see a continuing rise in interest and inflation rates, we factored that in some months ago when we shifted all of our bond allocations to ultra-short maturities, leaving them insensitive to rising rates. Beyond that, a continuing commitment to rebalancing and cash management is the order of the day. That discipline led us to take considerable funds “off the table” over the past six months and will continue to serve us going forward.

So, we’ll all watch the markets with interest in the coming days (or not, it’s certainly not required) and read the daily stream of opinion with a skeptical eye. In the meanwhile, be well!

What is Bitcoin actually worth?

Economy and Investingon January 25th, 20182 Comments

Having risen from $1,000 per coin to a high of nearly $20,000 in the past 12 months (although as we write, it has fallen back to $11,000), Bitcoin has garnered more than a little attention and spawned a host of imitators. We recently came across a post by a gentleman who blogs under the name The Unassuming Banker that we think did a particularly nice job of both explaining what Bitcoin is and why it and the 1,400 other cryptocurrencies that have sprung into existence, whatever their current market value, have an intrinsic value of zero.  We thought we’d share.

“Lately it’s hard to go a day without someone asking me a question about Bitcoin. What is it? Why is it so valuable? Should I buy some? How do I buy some? The guy down on the corner in the pawn/gold exchange shop said he can buy me one (yes, this is actually happening!).

It seems Bitcoin and the crypto-currency craze has truly reached the mainstream and the implication of that are as of yet unknown. What we do know is that it’s attracting every shady crook and scam artist in the world. And why not? There really is tons of money to be made. I hope the following sheds some light on what Bitcoin is and isn’t.”

READ THE REST OF THE POST

And just for fun

We also recently discovered a very funny video on the topic. In this video (Ultra Spiritual Life, episode 86), JP tells you all about Bitcoin, how it works, and why it’s guaranteed to be the best investment of your life.

The Coming Bear Market

Economy and Investingon October 20th, 2017No Comments

This is the title of a recent article by economist Robert Shiller in which he discusses current economic and market conditions in the U.S. and compares them to prior times when markets declined. Shiller is notable for having published a book titled “Irrational Exuberance” in which he “predicted” the Great Recession. He seems to have been predicting another one ever since and runs the risk of exemplifying the broken clock syndrome. One thing that’s important to remember is that someone is always predicting bad things for the economy and the markets, every day, every year, so someone is always going to be able to claim prescience when the markets take a tumble. The reality is much messier, however, and prediction is usually a fool’s game. The economy and the markets are so complex and chaotic that they defy easy prediction. Even Shiller says not to base any investing decisions on his metrics, which leaves us wondering why he insists on regularly trying to scare people. For him, it seems, economics really is the dismal science.

Accepting as our starting point the folly of prediction, we can nonetheless examine conditions on the ground in order to assess the state of the world. First, the U.S. economy has been chugging along at a plus or minus 2% growth rate since the end of the Great Recession and doesn’t seem headed for anything but more of the same. The reason that economic expansions come to an end, historically, is that imbalances build up from one source or another. Low unemployment leads to wage inflation, for example, which spreads throughout the economy until the natural rise in interest rates – or a rise due to intervention by the Federal Reserve – tamps down economic activity, often leading to a recession. As we look around, we do find low unemployment, although it’s deceptive because the “participation rate” – the proportion of the workforce actively looking for employment – is also quite low by historical standards. Which means there’s a lot of room for new workers to decide to rejoin the game. In any case, we’re seeing modest rises in wages but nothing scary. Interest rates remain low and the Federal Reserve is being extremely circumspect in how it returns to a more “normal” monetary environment. The stock market has had an impressive rise and is sporting valuations, as represented by the price-to-earnings ratio, that are above average. Of course, when interest and inflation rates are well below average, you’d expect market valuations to be above average. And the rise doesn’t look like investors are building Castles in the Air, a phrase used by economist Burton Malkiel to describe conditions where investors are playing a greater fool game of buying just because they think prices will go up rather than on fundamentals. The reality is that earnings for U.S. corporations have been extremely strong.

Just as importantly, overseas markets, which represent half of your portfolio, are at a much earlier stage of recovery than the U.S. and have much further to go. And your overseas returns have been enhanced by a weakening dollar. Having said all that, it’s important to note that any significant decline in U.S. markets would likely be accompanied by declines worldwide. In the short-run, everything moves together but in the long-run, valuation levels will drive outcomes.

Finally, no matter what conditions look like, trying to time these things is not a winning strategy, especially if, as we do, you believe in the fundamental resilience and propensity for growth of your fellow human beings. And not only are human beings resilient, but so is your portfolio, which is designed to have a stable reserve that can carry you through six to seven years of a downturn if necessary. Which is to say, as long as you can weather a short-term decline – and you can – markets will always recover and grow in the long-run.

There will be a bear market, we just don’t know when, and nor should we care when, because it will only be a blip to be endured, not a permanent cause for harm.

Video: Yeske Buie Investment Philosophy and Process

Economy and Investing, Videos, Webinarson July 12th, 2017No Comments

Our approach to assembling and managing client portfolios flows from our Worldview – our grounded beliefs about how the world works – which gives rise to our investment philosophy and the systematic process by which it is implemented. Learn how we implement our evidence based process for assembling and managing client portfolios in this 19 minute video.

Related video: The Wisdom of Crowds

The 2017 Trends in Investing Survey

Economy and Investing, Yeske Buie in the Mediaon July 11th, 2017No Comments

Summary By: Lauren Mireles, FPQPTM

The Financial Planning Association® (FPA®) and the Journal of Financial Planning recently released the results of their annual “Trends in Investing Survey”. The survey includes responses from over 300 advisors of various backgrounds and shows advisor data on investments used, diversification, asset allocation, rebalancing and more. One of the most notable data points is the resounding preference of ETFs for the third year in a row.

In his role as Practitioner Editor for the Journal of Financial Planning, Dave assisted in the development and interpretation of the survey. Helping to shed some light on the survey, Dave shared his thoughts with CNBC reporter, Sarah O’Brien.

Regarding the popularity of ETFs for the third consecutive year, Dave shares:

“ETFs have gone from representing a very small part of [advisors’] tool kit to now representing a very significant part,” said certified financial planner David Yeske, managing director of Yeske Buie. “One of the things it suggests is that financial planners are ever more convinced that active management is hard,” said Yeske.

With the next most popular investment vehicle being cash and cash equivalents, Dave says:

As for the increase in cash-type investments, Yeske said it could signal that advisors are taking a more conservative stance on the market. “This makes me think that planners are feeling a sense of caution about the investment world and are building resilience in client portfolios,” said Yeske, who worked on the survey in his role as an editor at the Journal of Financial Planning.

For the first time, the survey explored portfolio diversification. Dave said of the results:

Yeske at Yeske Buie said that, in the short-term, it’s difficult to prevent portfolio volatility through diversification. “No matter how you diversify, everything will move [up or down] together in the short run,” Yeske said. “[…] diversity is more about achieving a certain amount of investment security and safety over the long-term.”

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Short Take: Is the Stock Market Expensive?

Economy and Investingon April 4th, 2017No Comments

Ever since the Dow crossed the 20,000 mark, we’ve been hearing from various quarters that the party is, most assuredly, over. As we noted at the time (Market Note: Dow 20,000), that milestone is just a number. And, of course, the Dow represents just 30 stocks in a  world in which 50,000 stocks are publicly traded, so it’s a bit of a stretch to use it as a proxy for “the market.”

More important is the notion of valuation, which is to say, how much do you have to pay to lay claim to a dollar of assets or a dollar of earnings? That’s a better predictor of future returns than the price of an index. And, perhaps unsurprisingly, the cheaper you can buy those assets or earnings, the higher the return you can expect. Those stocks that trade at low prices relative to earnings or assets are called “value” stocks, and we like them. A lot. So much so that we strongly tilt all of our portfolio allocations toward “value,” whether we’re talking about US Large or Small Company Stocks or the same categories in overseas markets. As a consequence, our portfolios don’t look like “the market,” especially if your idea of the market is the Dow or the S&P 500.

That the S&P 500’s current price-to-earnings (P/E) ratio (how much you have to pay to claim a dollar of earnings) is above 26, compared to a long-run average of 15, is one of the reasons some are suggesting that things may be getting a bit frothy. As we’ve previously noted, comparing the current P/E to the historical average isn’t something that should be done in a vacuum. That average is the result of periods like the late 1970s, when high interest and inflation rates drove the P/E to single digits, and periods like the present, where we’re still enjoying low interest and inflation rates. Having said that, let’s take a look at the current valuation levels of the average Yeske Buie portfolio.

One of the first things to notice is that the All Country World Index, our global stock market benchmark, sports a much lower P/E than the S&P 500, a level of 18 versus 26. This is reflective of the fact that stock markets outside the US have been slower to recover from the Great Recession and are not trading at above-average levels. The second thing to notice is that the Yeske Buie portfolio has a P/E that’s lower still at 16. This reflects our intentional tilt toward value stocks. You’ll also see that the average size of the stocks in our portfolio is much smaller than the benchmark as a consequence of our other intentional focus on small company stocks, which, like value stocks, are expected to produce higher returns over the long run.  A final point worth noting is that the low costs associated with the institutional class mutual funds we use results in aggregate weighted fund level fees that are are much lower than the average mutual fund’s fees as reported by Morningstar. It’s important to control what you can control when investing and expenses are one of those things.

So the next time someone says to you that the “market” is expensive, be sure to ask them, “which market?”

Around the World in 60 Minutes

Economy and Investing, Firm News & Events, Webinarson March 24th, 2017No Comments

The world is in a rare state of flux, with a populist, anti-trade president newly installed in the White House, and populist, anti-EU parties on the rise all across the European continent. Economic conditions in the US and abroad, meanwhile, are showing positive trends, but it’s still to be seen whether the Federal Reserve and European Central Bank can successfully walk the thin line between growth and inflation. In this one hour trip around the world, we share our analyses and recommendations for weathering whatever may come.

(Click the bracket icon in the bottom right corner of the video to enlarge)

ADDITIONAL MATERIALS:

Fundamentals of Fixed Income

Economy and Investingon February 8th, 2017No Comments

Written By: Ryan Klemm, CFP®

At Yeske Buie, we use a few bond funds to obtain exposure to fixed income investments for our Clients. While fixed income may not be the most exciting piece of your portfolio, it is a necessary part of a sound investment strategy. The more “exciting” pieces of your portfolio are the stocks which typically receive much of an investor’s attention due to their role in creating higher returns as a percentage of the entire portfolio. However, fixed income positions, or bonds, play an equally important role  because of their ability to help reduce the volatility of returns and the emotional volatility that comes with investing. They do this by diversifying your portfolio to create a buffer that provides a safety net and by earning a steady return through long-term holding strategies to reduce the overall risk in your portfolio.

But, what is a bond and how do we use bond funds in your portfolios?

Bonds represent an obligation for the borrower to pay a set amount of interest (current income) and to repay the original borrowed amount (principal) at the loan’s maturity date. Individual bonds can be selected to increase your exposure to the fixed income market, however there is a more efficient way to obtain the same exposure. The creation of bond mutual funds have made it easier for an individual to own a piece of hundreds of different fixed income obligations. With bond funds, the investor loses the fixed interest payment, however they greatly increase their exposure and therefore enhance the diversification of their overall portfolio. Bonds are inherently subject to interest rate risk and not all asset classes react the same way to interest rate movement. The ability to increase exposure of fixed-income positions through a bond fund ultimately allows for the smoothing of volatile returns in a changing economic environment. The chart below shows the performance of stocks in comparison to bonds if you had invested $1 back in 1926. The lines representing stocks are constantly rising and falling through their path to an increased return, however if you look at the bond’s path through the same timeframe it is a lot smoother. Bonds act as the “stable reserve” in your investments.

It is important to keep in mind that not all bond funds are created equal. When choosing a bond fund, there are some things to look for when determining which fund bests fits your needs. With the expected return on bonds already being relatively lower, you should ensure that the fund you choose has a low management fee. Expense ratios are a useful tool when comparing different funds and can be used as a deciding variable when investing. The percentage the manager takes ultimately affects your overall return. Next, look at the quality of the fund you’re purchasing and the exposure the fund manager has taken to the overall bond market. Looking for funds that have bonds with short-term to intermediate-term maturities and investment quality ratings is important to the overall financial health of your portfolio. High Yield or “Junk Bonds” create an opportunity for increased return, however the default risk is much greater than choosing a more highly rated bond.

When it comes to your portfolio, we use a few bond funds to obtain exposure to fixed income investments. For Clients who are still working and accumulating assets, the bond funds provide a pool from which we can take money and rebalance the stock funds. For a retired Client, we view the bonds as a reserve that provides liquidity for spending needs. Within the context of our Safe-Spending Policies, a client in retirement holds six years’ worth of spending in that “stable reserve.” In times of market turmoil, spending needs are strictly covered by the bond funds, giving the stocks time to recover and enabling us to avoid “selling low”.

Fixed income may not be the most exciting piece of your portfolio, but it is a necessary part of a sound investment strategy. As always, if you have any questions about any of the funds in your portfolio, we’re always here to talk!


“Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness that most frightens us. We ask ourselves, Who am I to be brilliant, gorgeous, talented, fabulous? Actually, who are you not to be? Your playing small does not serve the world. There is nothing enlightened about shrinking so that others won't feel insecure around you. We are all meant to shine. And as we let our own light shine, we unconsciously give others permission to do the same. As we are liberated from our own fear, our presence automatically liberates others.” ~Marianne Williamson