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Retirement Rob

What Does Fiduciary Mean and Why is it Important?

Leading Edge Financial Planning is growing!  Thanks to you for spreading the word about Leading Edge, we're adding new advisors to increase our capacity and continue to improve the quality of our service for current and future clients.   

We've been tremendously fortunate to have added three new advisors over the last few months.  Many of you already know Ben Dickinson as he's been with us for almost two years now.  However, he's moving into more of an advisory role as he's increased his knowledge base, experience and met the SEC's requirements to become an Investment Advisor Representative (IAR).   

We've also added Mark Covell as an IAR.  Mark is a soon-to-be-retired Marine fighter pilot as well as an American Airlines pilot.  And yes, he's brilliant and talented in addition to being a Marine warrior for our country!   

For many of you, this article may be your first introduction to Rob Eklund.  He's one of our latest additions to the team.  We're very excited to add Rob to our team of advisors because of his passion and excitement for helping people with their personal finances.  My guess is his enthusiasm will come through in this article. He tells his story of searching for a trusted, fiduciary financial advisor to help him and his family with their personal finances before becoming an IAR himself.  Click here to learn more about Rob's background and experience, and please check out his article below... 

What Does Fiduciary Mean and Why is it Important

The first time I heard the term "fiduciary," I said to myself, "fidu…what? Sounds fancy." Then I fell asleep. Admittedly, this topic appears boring and could put my 16-year-old boy all hopped up on Mountain Dew to sleep! But here is a wake-up call; knowing who is and who is not a fiduciary is the first step in finding someone to help you with your retirement and investment planning.   

I have been interested in investing ever since I was knee-high to a grasshopper. However, I acquired this fiduciary knowledge several years ago when I was a newly minted first officer for a major airline, before becoming an investment advisor myself.  At that time, I began a journey to find a trustworthy financial advisor for myself and my family. As a military officer, money had not been a primary concern, and to be honest, I didn't have enough of it to matter. But as I began my major airline career in 2013, I realized I would soon have enough money that I had better start thinking about how to manage it. I knew I needed help. Furthermore, my focus was on learning how to be a first officer while still juggling my Air Force Reserve career.  

Many questions ran through my head. The biggest and most important was, "How can I protect my money?" The money I had worked so hard to accumulate. What I found surprised me.  Many financial advisors wanting my business were not fiduciaries. Some of these advisors were very intelligent and could sell with the best. One problem, they only had a "suitable" duty of care to me versus a fiduciary standard.   

The Suitability Standard 

The suitability standard means an advisor or broker only had to put my money into investments they deemed adequate. They did not need to give me advice that put my interests ahead of their own.    

The Fiduciary Standard 

A fiduciary is someone who acts on behalf of another person and has a legal and ethical obligation to put their clients' interests ahead of their own.  SEC Chairman Jay Clayton defined the fiduciary responsibility this way, "This duty - comprised of both a duty of care and a duty of loyalty - is principles-based and applies to the entire relationship between the investment adviser and the client." When someone is a fiduciary, it applies to the "entire relationship," not parts of it. It is the highest standard in the financial world.  

You may be saying, "Okay. Great! Aren't all financial advisors' fiduciaries?" Unfortunately, the term financial advisor is very nebulous and can apply to almost anyone.  In fact, most financial advisors are not fiduciaries.  Furthermore, more than half of respondents (53 percent) to a 2017 Financial Engines survey mistakenly believe that all financial advisors are already legally required to put their clients' best interests first.    

Regulation Best Interest, aka "Reg BI"? 

Reg BI, effective January 1st, 2020, attempted to improve upon the suitability standard and move the ethical bar higher for anyone who calls themselves a financial advisor.  Instead of only having a suitable duty, they are now supposed to have a "best interest" duty. The regulation takes several steps to raise the bar (like having to disclose conflicts of interest); however, it does not change the dynamics of how a non-fiduciary advisor operates or receives compensation.   

"It is difficult to get a man to understand something when his salary depends upon his not understanding it." ~Upton Sinclair  

I believe this is what Reg BI attempts to do. It tries to get brokers to act in the client's best interest, but their salary often depends on him not doing so. I fear that many advisors will continue finding ways to put clients in funds that pay them a commission. Even in the regulation itself, the term "best interest" is ill-defined and very open to interpretation.  

Fee-Only versus Fee-Based 

The critical distinction is that an advisor operating under Reg BI can still be paid by a 3rd party to put a client's money in certain investments or insurance products.  In other words, if an advisor gets paid by a third party (mutual fund company or insurance/annuity company) to put your money in certain investments or insurance products, then there is a conflict of interest.  And at that moment, the advisor needs to disclose that they are NOT acting in a fiduciary capacity.      

Most fiduciaries operate in a "fee-only" manner.  This means the client's fees are the only source of income for the advisor, and they are not paid commissions from third parties or outside sources that could bring into question the objectivity of the advice given.  Be sure to understand the distinction between a "fee-based" financial advisor who may earn a commission and a fee versus a fee-only advisor.  The language is very nebulous and confusing for a reason.   

Back to my personal journey in search of a trustworthy financial advisor; During one conversation, I asked, "Do you have a fiduciary duty to me?" What should have been a simple yes or no, was instead a bunch of hemming and hawing, but no real answer. Not to be deterred, I asked again. This time I received another vague response, so I asked once more. Finally, this advisor told me he only had a suitable responsibility (today, he would have told me he had a best interest responsibility).  Case closed! He may have been a great advisor, but he had no legal obligation to do what was best for my family and me.  

 I wanted my financial advisor to do what was in my highest interest. Furthermore, I wanted someone whose advice was objective and had no incentive to put me in a particular mutual fund. For me, the fiduciary advisor is the answer.  

"How do you find out if someone has a fiduciary responsibility to you?" This one is easy, ask.  

Ask the following question, "If I hire you as my advisor, do you always have a fiduciary duty to me?" If the answer is not a fairly quick, "Yes" I advise looking elsewhere. If it is, follow it up with this question, “To be clear, you never put on a broker hat and always have a fiduciary responsibility to me?” The answer should again be, “yes.” 

Beyond asking, you should also be able to find out by looking at the disclosures on their website or looking at their Form ADV Part 2A/Firm Brochure or the new Client Relationship Statement (CRS) mandated by Reg BI. 

When I became an advisor, I knew I wanted to do it the right way and act as a fiduciary for my clients.  Thankfully, Leading Edge Financial Planning (LEFP) shares this belief. Our Form ADV Part 2A says this: 

Item 10: Other Financial Industry Activities and Affiliations "No LEFP employee is registered or has an application pending to register as a broker-dealer or a registered representative of a broker-dealer. LEFP only receives compensation directly from our clients. We do not receive compensation from any outside source, nor do we pay referral fees to outside sources for client referrals." 

 If you have gotten this far and not fallen asleep, I thank you. As you now know, I am a fiduciary and vow to protect my clients' hard-earned money with the highest devotion to their goals. Until next time, I hope you have only tailwinds and blue skies! 

 

Robert E. Eklund, CRD # 7317768 
Investment Advisor Representative  
www.leadingedgeplanning.com 

Robert Eklund - Financial Planner

Rob is a Southwest Pilot and soon to be retired Air Force Lieutenant Colonel. He grew up working on his family’s ranch in Colorado and went to high school in Alaska.  In 2000, he graduated from the United States Air Force Academy, earning a Bachelor of Science degree in Legal Studies.  Rob has served over twenty years in the Air Force, ten years on active duty, and over ten in the Reserves. During his military career he flew the C-130 while stationed in Germany and the KC-10 in California. Rob has accumulated over 700 hours of combat flying hours and participated in multiple Operations.  He was hired by Southwest Airlines in 2013 and became a staff officer at USNORTHCOM’s Domestic Operations Division in 2016. While holding this position as an Air Planner, Rob helped areas recover from Hurricane disasters; specifically, he was called to active duty to aid in recovery efforts following Hurricane Maria.

While studying at the Academy, Rob discovered his enthusiasm for the study of personal finance and investing.  As his military service comes to a close, he is excited to combine his passion for helping and protecting others with his enthusiasm for personal finance.  This culminated in 2020 with Rob passing the Series 65 Uniform Investment Advisor Law Exam and joining the Leading Edge team as a fiduciary advisor.  A fiduciary’s role comes naturally to him as he enjoys helping people whether that benefits him or not.  Rob knows the tremendous trust clients place in their financial advisors, and it is his goal to grow that trust through the highest level of transparency and integrity.  In his personal life, Rob married up to the love of his life and has been married for 18 years. He is overwhelmingly proud of his son, whom he recently donated a kidney.

 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this post will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 02/10/2021 and are subject to change at any time due to the changes in market or economic conditions.

September 12, 2022

Categories
Charlie Education

“The Envious Investor”

 

 

“My neighbor invested all of his portfolio in TESLA and now I’m envious!  It feels like I’ve FOREVER missed out.  And I might have less money in retirement because I missed the hot stock, ETF, Mutual Fund, etc.?” 

 

“As an investor, you get something out of all the deadly sins—except for envy. Being envious of someone else is pretty stupid. Wishing them badly or wishing you did as well as they did—all it does is ruin your day. Doesn’t hurt them at all, and there’s zero upside to it."

 

"If you’re going to pick a sin, go with something like lust or gluttony. That way at least you’ll have something to remember the weekend for.”

 

Warren Buffett

We understand these concerns and feelings because we’re investing for retirement too!  Furthermore, as investment advisors we hear these concerns almost every year.  If you’re a diversified investor, there will always be an asset class, a high-flying stock or mutual fund that has higher returns than your diversified portfolio.   

Does this mean we’ll have less money for retirement than our neighbor who’s ONLY investment last year was TESLA?  Historical evidence says you’ll likely do just as good or better over the long-term.  The “over the long term” part of the sentence presents the challenges.  In other words, it’s really hard to be a long-term investor when it feels like the world is falling apart around you AND your drinkin’ buddies are killing it with their daily newsletter stock picks!   

We all feel the pressure (envy) of missing out on great investments that we should have known were going to do better than all the others.  The good news is that diversification still works.  It’s never really “cool” nor does it ever feel great.  However, we believe, and the evidence supports the fact that your chances of success are better in the long run.  Check out the numbers from the chart below from BlackRock.   

 

Take a look at our short video where Charlie discusses what it was like in 2020 as investor.  How challenging it can be to stay the course and not chase recent returns.  Furthermore, the difficulties of feeling like you’ve forever missed out if your returns weren’t as high as your neighbor who invested in TESLA, Bitcoin, etc.   

Thank you! 

Charlie & the Team at Leading Edge Financial Planning 

 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 03/12/2021 and are subject to change at any time due to the changes in market or economic conditions.

 

Categories
Charlie Education

What Lies Ahead? The Top Ten Investing Principles for Getting Through the Next Market Downturn, Pandemic, Recession, etc.

What Lies Ahead?

Not even Hollywood writers could have created a story like we lived out in 2020. In this video, Charlie Mattingly and one of Leading Edge’s newest advisors, Rob Eklund, discuss what this year has taught us, how to better prepare in the future, and thoughts about the markets and economy going forward.   

Leading Edge financial advisor Rob Eklund, a First Officer for a major airline and a retired Air Force Pilot, review what investors can learn from mission planning in the Air Force and airlines.  For example, how can we be proactive instead of reactive? Many times, people may remark how pilots need quick reactions to be successful.  As Rob and I know, if you are frequently reacting as a pilot, it’s a good indication you did not plan sufficiently.  We believe it’s the same with investing and retirement planning.   

Although, it is to prepare prior to a recession or market downturn, there are many things we can do during the event itself. Vanguard posted the following graphic listing just a few of the value-added strategies that are critical to consider during any market decline.  

 

In addition to the checklist above from Vanguard, we believe there are ten essential principles to help all of us remained focused and less stressed during the next market downturn or recession.  

 

Embrace the efficiency of the markets in the long term.   

 

In the short term, the stock market reflects investor phycology (and many other unpredictable factors).  However, over time, equity prices tend to represent the future cash flows of a business.  We can all share in those future profits if we have the discipline to remain invested.

Don’t try to outguess the market. 

Although there is some debate within the finance community on the exact level of impact on investment returns, most will agree that strategic asset allocation and the amount of time in the market (not market timing) have the most considerable influence on investor returns.    

Resist chasing performance.  

Do not select investments based on past returns.  Funds that have outperformed in the past do not always persist as winners in the future.  Past performance alone provides little insight into a mutual fund or ETFs ability to outperform in the future.  

Let markets work for you.  

The financial markets have historically rewarded long-term investors.  We have the opportunity to earn an investment return that outpaces inflation by supplying capital to the companies we invest in. (I.e., stocks, mutual funds, exchange-traded funds) 

Consider the drivers of returns.  

Evidence shows that buying investments at a fair price (value factor), buying companies that demonstrate a consistent trend of profitability (profitability factor), and companies that tend to be smaller (small-cap premium) point to differences in expected future returns.   

Practice smart diversification.  

Diversification helps reduce risks that have no expected return.  Global diversification can prove beneficial over the long term while reducing the short-term volatility of a portfolio.   

Avoid market timing.  

You never know which market segments will outperform from year to year. Time in the market is much more profitable than attempting to time the market.   

Manage your emotions. 

It’s challenging to differentiate the short-term ups and downs of the market from the long-term returns needed to outpace inflation. In reality, the most significant risk we face is losing purchasing power over the long-term, during retirement, versus the risk of short-term losses in the market.   

Look beyond the headlines.  

There will ALWAYS be a news headline that could prevent you from investing in the stock market.  The news headlines will either attempt to scare you out of the markets or lure you into the latest investing trend.  Either strategy increases viewership, which in turn sells more commercials.   

Focus on what you can control.  

As we mentioned at the beginning of the article, just like pilots plan for their missions in great detail, we believe thorough planning is the best way to ensure a successful investing experience plus a fulfilling and prosperous retirement.   

Please don’t hesitate to call or email us anytime.  We’d love to hear from you! 

Charlie Mattingly

Charlie@leadingedgefinancialplanning.com 

865-240-2292 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/18/2020 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie High Income Pilots Retirement Mistakes

Trust Your Instruments, Not Your Gut, When it Comes to Flying AND Investing!

​As a brand-new pilot, one of the first things you learn is how to mitigate the risk of the potentially deadly physiological phenomenon known as spatial disorientation or spatial-D. In pilot speak, spatial-D is when your body is telling you one thing and your flight instruments (and airplane) are telling you something completely different. Sadly, spatial-D has claimed the lives of many pilots.

In this video, one of our newest Leading Edge team members and previous Marine F/A-18 fighter pilot, Mark Covell discusses just one example of spatial-D.  Mark shares how carrier pilots tend to feel like they are pitching up as they are launched off the carrier at night due to the massive acceleration from the catapult. During daytime, VFR conditions this is probably a non-issue. However, in weather, or at night, this type of spatial-D is potentially deadly.

What does spatial-D have to do with investing and retirement planning? Personally, I feel like all of 2020 could be compared to being catapulted off a carrier at night and not knowing what is up or what is down.

During the heat of the battle from February until the markets settled a bit in early April, investor emotions were all over the place. Years of stock market gains evaporated in days, even hours. Furthermore, many people thought, and the news media quickly suggested we were headed for the second Great Depression. And don’t get me wrong, anything was (and is) possible. Sometimes, the unknown can be truly scary.

One slightly humorous example of investor spatial-D was early in the pandemic when the shares of ticker symbol ZOOM shot up due to investors buying up shares as quickly as possible. Zoom Technologies, a so-called penny stock had risen more than 240% in the span of a month before the SEC suspended trading. Unfortunately, the traders failed to realize the ticker symbol ZOOM did not represent the Cloud Video Conferencing company Zoom they thought they were purchasing – Ticker symbol ZM.

Here is the headline from MarketWatch.com dated February 27, 2020.

In the airplane, pilots must fight spatial-D by cross-checking and TRUSTING their instruments. If, as an investor, you did not trust your instruments during 2020, it may have been very costly.

So, it’s a dark night and the weather is terrible.  What are the instruments you trust?  What is your primary and backup instrument? Here are four instruments that I think can save your investments as well as your financial sanity during uncertain times…

1. Cash reserves – Emergency Funds.

    • Having extra cash can prevent withdrawals from retirement accounts or excessive credit card debt in emergencies.  Studies also show having cash in a bank account makes people happy. In an article posted on PYMNTS.com,  “Can Cash Really Make You Happier”, Joe Gladstone, research associate at the University of Cambridge in the U.K. and co-author of two recent studies about money and happiness said,

“We find a very interesting effect: that the amount of money you have in your bank account right now is a better predictor of happiness than your aggregate wealth,” Gladstone explained. “Having more money in their bank account makes people feel more financially secure, which leads to an increase in happiness.”

2. Have a working knowledge of financial history.

    • You don’t have to be an expert or financial historian, but I believe being familiar with financial history is akin to training before you go on a flying mission.  Pilots call this chair flying.  Athletes and musicians use a technique called visualization that helps them prepare for uncertainty and reduce anxiety for a sporting event or concert.

3. Admit that times are scary, and you do not know what’s going to happen.

    • This may sound silly, but I’ve seen many people get themselves into a “square corner” because they assumed that something was going to happen when in fact there was no indication or possible way of knowing what the future may hold.  We have heard investors say “my gut tells me…” many times.
      • Some of the best investors in the world invest with the mindset of preparing to be wrong. That’s why diversification is not popular or “sexy” because it’s like admitting you don’t know what’s going to happen in the future, so you must prepare for multiple scenarios.  However, diversification can feel disappointing but prove to be a profitable strategy over the long term.

BlackRock Investment Management Company posted the graphic below on their investor education website about diversification and “S&P Envy” over the last 20 years.

4. Prepare and Plan by having a clear vision of your goals and priorities.

    • If you don’t understand the “why” behind your investments as well as why you’re investing and saving in the first place, you will most likely bail-out of your plan during difficult and uncertain times.  Changing your investment plan mid-crisis creates a very high likelihood that your investment returns will be significantly lower.
    • Simon Sinek started a movement by encouraging businesses to “Start with Why.” It’s a powerful mindset that leads to trust, inspiration and success.  I believe the same applies to your financial and investment game plan.

5. Remember that you are invested in companies – not politics.

    • Sometimes our politics clouds the investment and retirement planning picture.  This rule falls under the axiom; “control the controllable.”  If you’re allowing your politics to affect your investment game plan than you may want to see rule number 2 above.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/09/2020 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie Education Kevin

Why Not Buy Individual Stocks?

So, you want to be a stock picker? This video may make you think twice. There are stories of someone getting lucky with a homerun stock return but it’s rare.  (More than 50% of stocks do not beat their market). Kevin explains why it’s so difficult to successfully invest in individual stocks and the effect of skew. He also examines the history of investment returns when owning the top 5 stocks individually versus owning those stocks within a diversified portfolio.  The information may surprise you!

Explaining Skewness (from Investopedia.com)
– Skewness, in statistics, is the degree of distortion from the symmetrical bell curve in a probability distribution.
– Distributions can exhibit right (positive) skewness or left (negative) skewness to varying degrees.
– Investors note skewness when judging a return distribution because it, like kurtosis, considers the extremes of the data set rather than focusing solely on the average.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 06/08/2020 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie Education Kevin

5 Things You Can Do to Prepare for This Bear Market

Who could have imagined we would start with the spread of a virus, add in some political election turmoil, and now we have an OPEC price war.  Wow!

Although we can’t control viruses and oil price wars, there are many things we CAN do to prepare for this bear market or recession.  Here are five things to do in order to not freak out and bring peace to your financial life:

1. STOP WATCHING THE NEWS AND START READING IT.

It’s important to be informed.  However, the 24-hour news cycle, selling fear and anxiety, is at an all-time high. Instead of watching TV or sensationalized videos, read your news from reputable sources. This will help reduce your emotional reaction while helping you stay knowledgeable and informed. Call us if you would like suggestions of reputable sources.

2. EVALUATE YOUR PERSONAL BUDGET & BALANCE SHEET.

For those of you that have very low debt and a sufficient emergency fund, you can rest easy.  Even if you’re laid off or furloughed you will have sufficient cash to prevent you from raiding your retirement funds.  If this is not you, consider the following:

● Develop a spending plan to eliminate all short-term, high-interest debt as soon as possible.
● Refocus your spending on necessary items only.
● Increase your emergency savings through automatic payroll deductions.
● Avoid new purchases unless cash is available.

3. CONSIDER A REFI ON YOUR MORTGAGE.

A good friend, and client, recently refinanced his mortgage to a 15-year 2.56% interest rate. This past week we saw mortgage rates fall to the lowest level in almost 50 years. That’s a game-changer for retirement planning!

4. STAY IN THE FIGHT.

You don’t have to be invested in 100% equities all the time, but staying in the market in some capacity is required to capture the long term market gains that are available to all of us.  It’s been shown that leaving the market only to return later may diminish your returns significantly.  In fact, if you miss out on just a few of the positive days in the market, your long-term stock averages could suffer tremendously.  You have to manage risks in the stock market – not avoid them completely.

 

The chart below shows how $10,000 invested in the S&P 500 index, for the 20-year period of 1999 through 2018, would have performed under various scenarios.

5. FOCUS ON YOUR GOALS & YOUR INVESTMENT TIME HORIZON.

Remember, the money you will need in one to five years is not at risk in stocks.  It’s only a paper loss until you sell the stocks. You wouldn’t sell your house or rental real estate property just because the price declined so why would you sell your stocks?  Furthermore, more conservative portfolios recover faster from downturns than aggressive ones.  For example, according to Charlies Schwab, a portfolio with more than 70% stocks and the rest in bonds took more than two years to recover from the 2008 financial crisis, compared with just seven months for a portfolio with more than 70% in bonds and the rest in stocks.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 03/12/2020 and are subject to change at any time due to the changes in market or economic conditions.

September 12, 2022

Categories
Charlie Education Kevin

How will the coronavirus affect my investment portfolio?

The question everybody seems to be asking these days is: How will the coronavirus (now officially named COVID-19 by the World Health Organization) affect my investment portfolio? 

Of course, the unsatisfying answer is: we honestly have no idea.  You can count the unknowns.  The virus is now up to more than 73,332* cases and almost 1,870* fatalities—and counting.  But nobody knows whether the virus will eventually run rampant across the Chinese economy or burn itself out.  Nobody knows if it will spread widely beyond China and become a global crisis or remain largely confined to the Middle Kingdom.  Either way, it’s hard to predict the impact of the virus on the Chinese or global economy, much less on the U.S. and global stock markets.

There are three different ways to guesstimate the impact of our latest pandemic:

The first and easiest is to look at how U.S. and world markets responded to past health scares. When the public became aware of the SARS epidemic (a previous strain of the coronavirus) back in 2003, the S&P 500 index fell 14% over the subsequent two months, from mid-January to mid-March. But, according to a historical look-back by the MarketWatch economists, the market was up 20.76% a year later. The Avian flu outbreak in 2006, the Swine flu outbreak in 2009, the Ebola outbreak in 2014 and the Zika epidemic in 2016 saw initial downturns between 5.5% and 7%, but a year later, the markets had recovered by between 10 and 36 percent.

We can note that the S&P 500 index fell 3% in the two weeks after January 17, when the coronavirus outbreak first made headlines. Since then, the index has bounced back to all-time highs.

The second is to assess the impact that the COVID-19 outbreak is having on the Chinese economy—which, while its stocks are seldom a major part of U.S. investment portfolios, would certainly affect the world economy through disrupted supply chains and reduced demand for products and services sold by outside firms. China now makes up 15.5% of the global economy. It is a major purchaser of commodities like oil and agricultural products, and companies as diverse as smart phone makers and auto companies rely on its manufacturing output.

The Chinese government is trying to contain the spread of the virus by imposing severe travel restrictions and by forcing 50 million people in affected areas to remain in their homes—which, of course, means they are not going to work and not being productive. At the same time, however, the Chinese government is pumping liquidity into its economy—an estimated 1.7 trillion yuan from the People’s Bank of China—in order to contain the economic damage it is causing with the quarantine measures. Will the two balance each other out? We can note in passing that the SARS epidemic caused a temporary 2.4% decline in Chinese production. Nobody knows if the new epidemic will have the same, greater or lesser impact.

The third way to evaluate the potential damage of the pandemic is to focus on certain individual companies that are being affected by the initial phase of the outbreak. A recent U.S. News & World Report analysis singled out Carnival Corp., whose Diamond Princess cruise ship is currently quarantined at a dock just off the Japanese coastline—with 3,600 passengers onboard. More than 200 of them have come down with the coronavirus, which means that this single ship has more cases than any individual country besides China. Carnival stock is down about 17% since mid-January.

The article also mentions Wynn Resorts, which has major holdings in China’s gambling Mecca of Macao. The company’s Macao resorts have been shut down by the Chinese government, causing Wynn to lose $2.6 million a day. The stock is down roughly 15% from its peak.

You may not have heard of Yum China Holdings, but it is the parent company of the KFC, Pizza Hut and Taco Bell brands. The $20 billion company has had to shut down its China-based locations, and the stock has lost 15% of its market value this year.

Finally, consider Nike, which has closed half of its company-owned stores and stores managed by partners in China. About 17% of the company’s revenues come from China, and Chinese factories produce about 20% of Nike products. Nike’s stock doesn’t seem to have been hammered like the other companies on this list, but you can expect a reported decline in earnings this quarter.

So what does this mean? Anybody who tells you that they know how the COVID-19 epidemic will play out in American household portfolios would have to be considered a charlatan. We simply don’t know. But so far, history suggests that the market reactions to past pandemics have been temporary, just like all other kinds of market downturns. Not knowing when to get out and back into the markets constrains our options to hanging on and hoping—maybe expecting—that this time around won’t be very much different.

We’re always available for your questions.  Don’t hesitate to reach out, 865-240-2292.

Charlie & Kevin

*As of 02/18/20 according to the World Health Organization

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 02/15/2020 and are subject to change at any time due to the changes in market or economic conditions.

Sources:

Of Dollars and Data, How Will Coronavirus Affect Your Portfolio?
MarketWatch
US News & World Report
CNN
Nasdaq.com
Zacks

September 12, 2022

Categories
Charlie Education Kevin

2019 Year-End Investment Report

We have just completed the final quarter, not only of the year, but also the decade, so it’s as good a time as any to reflect back on the market behavior for the past year, and also for the past 10 years. The short version is that we have experienced a bull market for the entire ten-year period, with no -20% bear market periods and only a few 10% corrections since June 2009. People who record the history of the markets will remember that the investors of the 2010s participated in the longest bull market in American history – a totally improbable event considering that the decade came right after one of the most dramatic market setbacks in modern times.

Also worth noting is how the predictors of doom were once again totally off-base. When the Federal Reserve Board stepped in to stem the worst of the Great Recession, there were widespread cries that the Fed was “printing money” in a way that would lead to massive inflation and/or the bursting of a stock market bubble. Today, an expansionist Fed is routinely criticized for being too tight, rather than too loose. Inflation, meanwhile, has ranged from 0.7% to 2.1% – which hardly signals a crisis. If you’ve noticed any bubble-bursting in the equities markets, please help us find it.

By any measure, 2019 was a remarkable year for investors – and who could have guessed? Stocks went on sale in December 2018, and many were predicting that the bearish trend would continue through calendar 2019. But investors who took advantage of the lower prices or stayed the course saw well-above-average gains almost literally across the board. The markets went on sale again in August when there were reports of a very slight inversion of the yield curve in the bond markets which (it was widely reported) signaled that a recession was on the near horizon. Those rumors turned out to be false and the yield curve–that is, the difference in bond rates between short-term and long-term issues–had subsequently steepened.

A breakdown shows that just about every investment asset was up strongly in 2019.  The Wilshire 5000 Total Market Index — the broadest measure of U.S. stocks — gained 9.08% in the 4th quarter, finishing the year with a hefty 31.02% gain.  The comparable Russell 3000 index was up 25.52% for the year, and has gained an average of 11.83% for the decade of the 2010s.

 

Looking at large cap stocks, the Wilshire U.S. Large Cap index gained 9.09% in the fourth quarter, providing a 31.51% return for the year.  The Russell 1000 large-cap index finished the year with a similar 31.43% gain (averaging a 13.54% gain over the last 10-year period), while the widely-quoted S&P 500 index of large company stocks gained 8.53% during the year’s final quarter and overall finished up 28.88% in calendar 2019 – narrowly losing out to the decade’s best yearly gain of 29.6% in 2017.   Over the last ten years, investors in the S&P 500 saw annualized gains of 11.22% in the value of their holdings.

 

Meanwhile, the Russell Midcap Index finished the 2019 calendar year up 30.54%, averaging 13.19% a year for the decade.

 

As measured by the Wilshire U.S. Small-Cap index, investors in smaller companies posted 9.01% gains in the final quarter, to end the year with a 26.21% return.  The comparable Russell 2000 Small-Cap Index posted a 25.52% gain in 2019.  

 

Even the foreign markets were generous to investors this year. The broad-based EAFE index of companies in developed foreign economies gained 7.81% in the final quarter, and ended the year up 18.44% in dollar terms. However, the past ten years have not been the best times to invest in international stocks; the index recorded an annualized gain of just 2.57% over that time period.  In aggregate, European stocks were up 20.03% in 2019, while EAFE’s Far East Index gained 15.46%.  Emerging market stocks of less developed countries, as represented by the EAFE EM index, were up 11.36% in dollar terms in the fourth quarter, giving these very small components of most investment portfolios a 15.42% gain for the year.  However, their 10-year track record is not enviable: up just 1.20% a year for the decade.

 

Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, posted a 1.14% loss during the year’s final quarter, but it finished the year with a 25.76% gain.  The S&P GSCI index, which measures commodities returns, gained 8.31% in the 4th quarter, to finish the year up 17.63%.  Looking back, however, commodities returns dramatically lagged U.S. stocks over the past decade: the total return for the commodities index overall was a negative 5.44%.

 

In the bond markets, coupon rates on 10-year Treasury bonds dropped almost a full percentage point, year-on-year, to stand at 1.75% at year end.   Similarly, 30-year government bond yields have fallen from 3.01% at the beginning of the year to 2.38% coupon rates today.  Five-year municipal bonds are yielding, on average, a meager 1.14% a year, while 30-year munis are yielding 2.15% on average.

 

It’s hard to overstate how unusual this long bull market has been in investing history.  Bear markets tend to occur about every 3.5 years, and the previous record was 9.5 years from November 1990 to March of 2000.  However, we still have a ways to go to match the 418% that was achieved in the 1990s.

 

Longer-term, it is certain that we will experience a recession, but no person alive can predict the hour or the day.  Most economists are reluctant to predict an economic downturn when unemployment is at record lows and the slow-growth economy is chugging along with a 2.3% gain in 2019.  2020 might see a recession or at least a slowdown in growth if there is another trade conflict with China, and a shift toward rising interest rates could drive up the cost of debt servicing for corporations that are highly leveraged.  Nobody knows where the Presidential impeachment process will go from here.

 

At the same time, dramatic increases in domestic oil production has lessened the possibility that the economy will experience an energy recession, and healthcare cost increases have moderated over the course of the decade.

 

Similarly, nobody can predict when or how the bull market will end, how deep the coming recession or bear market will be, or, really, anything other than the fact that all past downturns were followed by upturns which took the markets and the economy to new heights.

 

We love hearing from you!  Please don’t hesitate to call or email if we can help you, 865-240-2292.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 01/10/2020 and are subject to change at any time due to the changes in market or economic conditions.  This article was written by a guest author.

Sources:
Wilshire index data
Russell index data
S&P index data
Nasdaq index data
Morningstar
International indices
Commodities index data
Treasury market rates
Bond rates
Investors.com
Miami Herald
New York Intelligencer
PWC
Focus Economics
MSN

Categories
Charlie Education Kevin

How Financial Markets are Affected in Election Years

You can’t help but notice it’s an election year, and often an election year comes with serious concern that the financial markets will go haywire. So, is this worry justified?

In this video, Kevin summarizes the data of the last 90 years to uncover how the financial markets were affected during each presidential election year as well as what happened in the subsequent year. He discusses if the markets reacted differently based on which party won the election, if there are any patterns of market behavior and if you need to adjust your investment strategy in response to the election cycle.

We love hearing from you! Please don’t hesitate to call or email if we can help you, 865-240-2292.

 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 01/17/2020 and are subject to change at any time due to the changes in market or economic conditions.  This video was filmed in December 2019.

Categories
Charlie Education Kevin Video

The Next U.S. Recession

Bloomberg recently published its recession probability model. The model states that as of November 2019, the chance of a recession in the next 12 months is 26%. That sounds okay but what about this? The chances of NOT having a recession are 74%. Now that’s a pretty great number! But is this predictive model a function of the latest stock market performance or does it have real predictive power?

The stock market has performed nicely in the last few months as well as year-to-date. No wonder no one is talking recession at the moment. But the truth is, the exact timing of the recessions and market downturn is unknowable. In fact, we may not even know we’ve had a recession until it’s nearly over.

In this video, Charlie discusses the only surety is that we WILL have a recession sometime in the future and trying to follow the advice of prognosticators to determine when it will happen can be an expensive mistake. Ask anyone who pulled their money out of the markets in January 2019 because of the inverted yield curve. Now that’s a good predictor of recessions, right?

 

To view the recession tracker visit: Bloomberg, U.S. Recession Chances Inch Down to 26% Within Next 12 Months

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/04/2019 and are subject to change at any time due to the changes in market or economic conditions.

September 12, 2022