Ring in the new year with…Financial Planning!

December 20th, 2018

By Matt Miner

Dear Clients and Friends,

At PLC Wealth we enjoy a good New Years party as much as anybody.  But we also know that the end of the year can be a chance to pause and reflect on how 2018 went, and what we aim to change in 2019.

We think it’s terrific to take some time to move from undefined “hope” to vision, and from vision to goals, and from goals to specific plans to make things happen in your life and your family.  As our friend Dave Ramsey says, “Goals are visions and dreams with work clothes on.”

If you’re ready to get a jump on 2019, here are a few financial best practices for the year ahead. Pick one or two of them to tackle.  Give us a call if you’d like to work together to translate these goals into specific plans you can achieve or begin to achieve in the coming year.

1. Do nothing

Seriously. If you have a well-built investment portfolio in place, guided by a relevant investment plan, your best move in hyperactive markets is to let that plan be your guide. That often means doing nothing new with your holdings except your planned, periodic rebalancing. We list investment inaction as a top priority, because “nothing” can be one of the hardest things to (not) do when the rest of the market is in perpetual motion!

2. Double down on your planning

In order to advance your SANF (“Sleep at Night Factor”) in volatile markets, you must have a relevant plan in place that you understand.  That plan guides your portfolio and your new investments. A fresh new year can be a great time to tend to your investment plan – or create one, if you’ve not yet done so. Have any of your personal goals changed, or will they soon? How might this impact your investment mix? Have market conditions put your portfolio ahead or behind schedule? Are you unsure where you stand to begin with? It’s time well-spent to periodically ensure your plan remains relevant to you and your personal circumstances.

3. Prepare for the unknown with a rainy-day fund

Time will tell whether 2019 markets are friendly, foul, or (if it’s a typical year) an unsettling mix of both. Having enough liquid, rainy-day reserves to tide you through any rough patches is a best practice no matter what lies ahead. Knowing your near-term spending needs are covered should help with both the practical and emotional challenges involved in leaving the rest of your portfolio fully invested as planned, even if the markets take a turn for the worse.

4. Redirect your energy to contributing financial factors

While you’re busy staying the course with your investments, you can redirect your attention to any number of related financial and advanced planning activities. While you don’t necessarily need to act on everything at once, it’s worth reviewing your financial landscape approximately annually, and identifying areas in need of attention. Maybe you’ve got a debt load you’d like to reduce, or an estate plan that’s no longer relevant. Perhaps it’s been too long since you’ve reviewed your insurance line-up, or you’d like to revisit your philanthropic goals in the context of the latest tax laws. Refreshing any or all of these items is likely to contribute more to your financial success than will fussing over the stock market’s daily gyrations.

5. Perform a cybersecurity audit

Protecting yourself against cybercriminals is another excellent use of your time. With the new year, revisit a a few basic, protective steps:

Enable two-factor authentication on important accounts

Change key passwords on your most sensitive login accounts

Review your credit reports (using AnnualCreditReport.com)

Place a freeze on your credit file, to block unauthorized access (now free, based on recently enacted federal law)

Especially with child identity theft on the rise, these actions apply to your entire household. Unfortunately, even minor children are now at heightened risk.

6. Have “that money talk” with your kids, your parents, or both

When is the last time you’ve held any conversations about your family wealth? It’s never too soon to begin preparing your minor children for a financially literate adulthood. As they mature, their financial independence rarely happens by accident, with additional in-depth conversations in order. Then, as you and your parents age, you and your kids must prepare to step in and assist if dementia, disability or death take their tolls. There also can be ongoing conversations related to any legacy you’d like to leave as a family. For all these considerations and more, an annual “money talk” can be critical to successful outcomes.  If you’d like help completing this task, PLC Wealth is ready to work with you to get it done.

7. Make 2019 a year you absolutely crush it in your work, business, or volunteer efforts

All of us are engaged in some kind of productive activity that puts us into contact with other people.  This may be our career, our own business, a non-profit organization we serve, or simply running our family’s household.

We all have things we’d like to be different in our daily situation.  As you conclude 2018, think back on items you would like to change in 2019.  Focus on what you can change or influence, not what you can’t, concentrating your efforts your “locus of control.”  For example, if you have a difficult boss or co-workers but you don’t want to change your actual employment, change how you respond emotionally to a difficult situation.  Use tactics like focusing on what you are grateful for in this context, getting more exercise, or having that difficult conversation with someone about why a situation has become problematic for you.

Many of us have room to be more organized and focused on the vital few that really matter.  Make a plan for how to tune out the noise and get the right things done.

Two great resources here are Stephen Covey’s Seven Habits of Highly Effective People, and David Allen’s Getting Things Done.  If you don’t love reading, try an Audible audio book while you exercise or commute.

So, there you have it: seven creative ways to bolster your financial well-being while the stock market does whatever it will in the year ahead. While this list is by no means exhaustive, we hope you’ll find it an approachable number to take on … with two critical caveats.

First, we’ve got a bonus “financial best practice” to add to the list:

Above all else, remember what your money is for.  Money is meant to fund your moments of meaning.  At PLC Wealth, we want our clients to live rich, not die rich.

Second, we recognize that each of these “easy” best practices aren’t always so easy to implement. We could readily write pages and pages on how to tackle each one.

But instead of writing about them, we’d love to help you take action on these steps.  At PLC Wealth, we work with families every day and over the years to convert their dreams into plans, and their plans into achievements. We work in the context of single-issue planning engagements, comprehensive financial planning, and investment management.  We hope you’ll be in touch in the new year, so we can partner with you.

Merry Christmas & Happy New Year to you and your family from the team at PLC Wealth – Josh, Mike, Sandra, & Matt

Good advice is simple – but not easy!

Here in North Carolina, we cope with hurricanes from time to time, and like the storms, financial markets can bring bumpy weather to our investment portfolios.

However, unlike with hurricanes, which are typically in the forecast for several days at least,  no one can truly see over the horizon to know when bad times – a big drop in asset values – may affect our investments.  When that happens, it is more important than ever to have, and to follow, a solid financial plan.

Sometimes the best, most rigorously developed financial advice is so obvious, it’s become cliché. And yet, investors often end up abandoning this same advice when market turbulence is on the rise. Why the disconnect? Let’s take a look at five of the most familiar financial adages, and why they’re often much easier said than done.

  1. If you fail to plan, you plan to fail.
  2. No risk, no reward.
  3. Don’t put all your eggs in one basket.
  4. Buy low, sell high.
  5. Stay the course.

We’ll explore each in turn, how we implement them, and why helping people stick with these evidence-based basics remains among our most important and challenging roles.

  1. If You Fail to Plan, You Plan to Fail.

Almost everyone would agree: It makes sense to plan how and why you want to invest before you actually do it. And yet, few investors come to us with robust plans already in place. That’s why deep, extensive and multilayered planning is one of the first things we do when welcoming a new client, including:

  • A Discovery Meeting – To understand everything about you, including your goals and interests, your personal and professional relationships, your values and beliefs, how you’d prefer to work with us … and anything else that may be on your mind.
  • “Traditional” Financial Planning – To organize your existing assets and liabilities, define your near-, mid-, and long-range goals, and ensure your financial means align as effectively as possible with your most meaningful aspirations.
  • An Investment Policy Statement (IPS) – To bring order to your investment universe. Your IPS is both your plan and your pledge to yourself on how your investments will be structured to best align with your greater goals. It describes your preferred asset allocations (such as your percentage of stocks vs. bonds), and is further shaped by your willingness, ability, and need to tolerate market risks in pursuit of desired returns.
  • Integrated Wealth Management – To chart a course for aligning your range of wealth interests with your financial logistics: insurance, estate planning, tax planning, business succession, philanthropic intent and more.

As we’ll explore further, even solid planning doesn’t guarantee success. But we believe the only way we can accurately assess how you’re doing is if we’ve first identified what you’re trying to achieve, and how we expect to accomplish it.

  1. No Risk, No Reward.

In many respects, the relationship between risk and reward serves as the wellspring from which a steady stream of financial economic theory has flowed ever since. Simply put, exposing your portfolio to market risk is expected to generate higher returns over time. Reduce your exposure to market risk, and you also lower expected returns.

We typically build a measure of stock market exposure into our clients’ portfolios accordingly, with specific allocations guided by individual goals and risk tolerances. But here’s the thing: Once you have accepted the evidence describing how market risks and expected returns are related, it’s critical that you remain invested as planned.

There’s ample evidence that periodic market downturns ranging from “ripples” to “rapids” are part of the ride. As a February 2018 Vanguard report described, from 1980–2017, the MSCI World Index recorded 11 market corrections of 10% or more, and 8 bear markets with at least 20% declines lasting at least 2 months. Such risks ultimately shape the stream that is expected to carry you to your desired destination. Consider them part of your journey.

  1. Don’t Put All Your Eggs in One Basket.

At the same time, “risk” is not a mythical unicorn. It’s real. If it rears up, it can trample your dreams. So, just because you might need to include riskier sources of expected returns in your portfolio, it does not mean you must give them free rein.

This is where diversification comes in. Diversification is nothing new. In 1990, Harry Markowitz was co-recipient of a Nobel prize for his work on what became known as Modern Portfolio Theory. Markowitz analyzed (emphasis ours) “how wealth can be optimally invested in assets which differ in regard to their expected return and risk, and thereby also how risks can be reduced.” In other words, according to Markowitz’s work, first published in 1952, investors should employ diversification to manage portfolio risks.

This leads to an intriguing, evidence-based understanding. By combining widely diverse sources of risk, it’s possible to build more efficient portfolios. You can:

  • EITHER lower a portfolio’s overall risk exposure while maintaining similar expected returns
  • OR maintain similar levels of portfolio risk exposure while improving overall expected returns

Rarely, evolving evidence helps us identify additional or shifting sources of expected return worth blending into your existing plans. When this occurs, and only after extensive due diligence, we may advise you to do so, if practical (and cost-effective) solutions exist.

The details of how these risk/return “levers” work is beyond the scope of this article. But come what may, the desire and necessity to DIVERSIFY your portfolio remains as important as ever – not only between stocks and bonds, but across multiple, global sources of expected returns.

  1. Buy Low, Sell High.

Of course, every investor hopes to sell their investments for more than they paid for them. Here are two best practices to help you succeed where so many fall short: time and rebalancing.

Time

By building a low-cost, broadly diversified portfolio, and letting it ride the waves of time, all evidence suggests you can expect to earn long-term returns that roughly reflect your built-in risk exposure. But “success” often takes a great deal more time than most investors allow for.

In a recent article, financial author Larry Swedroe looked at performance persistence among six different sources of expected return as well as three model portfolios built from them. He found, “In each case, the longer the horizon, the lower the odds of underperformance.” However, he also observed, “one of the greatest problems preventing investors from achieving their financial goals is that, when it comes to judging the performance of an investment strategy, they believe that three years is a long time, five years is a very long time and 10 years is an eternity.”

In the market, 10 years is not long. You must be prepared to remain true to your carefully structured portfolio for years if not decades, so we typically ensure that an appropriate portion is sheltered from market risks and is relatively accessible (liquid). The riskier portion can then be left to ebb, flow and expectedly grow over expanses of time, without the need to tap into it in the near-term. In short, time is only expected to be your friend if you give it room to run.

Portfolio Rebalancing

Another way to buy low and sell high is through disciplined portfolio rebalancing. As we create a new portfolio, we prescribe how much weight to allocate to each holding. Over time, these holdings tend to stray from their original allocations, until the portfolio is no longer invested according to plan. By periodically selling some of the holdings that have overshot their ideal allocation, and buying more of the ones that have become underrepresented, we can accomplish two goals: Returning the portfolio closer to its intended allocations, AND naturally buying low (recent underperformers) and selling high (recent outperformers).

  1. Stay the Course.

So, yes, planning and maintaining an evidence-based investment portfolio is important. But even the best-laid plans will fail you, if you fail to follow them. Here, we get to the heart of why even “obvious” advice is often easier said than done. Our rational self may know better – but our instincts, emotions and behavioral biases get in the way.

Three particularly important biases to be aware of in volatile markets include tracking-error regret, recency bias, and outcome bias.

Tracking-Error Regret

When we build your portfolio, we typically structure it to reflect your goals and risk tolerances, by diversifying across different sources of expected risks and returns. Each part is expected to contribute to the portfolio’s unique whole by performing differently from its counterparts during different market conditions. Each portfolio may perform very differently from popular “norms” or benchmarks like the S&P 500 … for better or worse.

When “worse” occurs, and especially if it lingers, you are likely to feel tracking-error regret – a gnawing doubt that comes from comparing your own portfolio’s returns to popular benchmarks, and wishing yours were more like theirs.

Remember this: By design, your factor-based, globally diversified portfolio is highly likely to march out of tune with typical headline returns. It can be deeply damaging to your plans if you compare your own performance to benchmarks such as the general market, the latest popular trends, or your neighbor’s seemingly greener financial grass.

Recency

Recency causes us to pay more attention to our latest experiences, and to downplay the significance of long-term conditions. When an expected source of return fails to deliver, especially if the disappointment lasts for a while, you may start to second-guess the long-term evidence. This can trigger what Nobel laureate and behavioral economist Daniel Kahneman describes as “what you see is all there is” mistakes.

Again, buying high and selling low is exactly the opposite of your goals. And yet, recency causes droves of investors to chase hot, high-priced holdings and sell low during declines. Irrational choices based on recency may still turn out okay if you happen to get lucky. But they detour you from the most rational, evidence-based course toward your goals.

Outcome Bias

Sometimes, even the most rational plans don’t turn out as hoped for. If you let outcome bias creep in, you end up blaming the plan itself, even if it was simply bad luck. This, in turn, causes you to abandon your plan. Unfortunately, it’s rarely replaced with a better plan, which brings us back to our first adage about those who fail to plan.

To illustrate, let’s say, several years ago, we created a solid investment plan and IPS for you. At the time, you felt confident about them. Since then, we’ve periodically refreshed your plan, based on your evolving personal goals, perhaps a few new academic insights, and any new resources now available for further optimizing your portfolio.

Now, let’s say the markets disappoint us over the next few years. Ugly red numbers take over your reports, seemingly forever. Before you conclude your underlying strategy is wrong, remember: It’s far more likely you’re experiencing outcome bias (with a recency-bias chaser).

Investing will always contain an element of random luck. From that perspective, in largely efficient markets, your best course remains – you guessed it – to stay the course with your existing, carefully crafted plans. While even evidence-based investing doesn’t guarantee success, it continues to offer your best odds moving forward. Don’t lose faith in it.

 Simple, But Not Easy

Let’s wrap with a telling anecdote. Merton Miller was another co-recipient of the aforementioned 1990 Nobel prize. Miller’s portion was in recognition of his “fundamental contributions to the theory of corporate finance.” While his findings were deep and far-reaching, he once summarized them as follows:

[I]f you take money out of your left pocket and put it in your right pocket, you’re no richer. Reporters would say, ‘you mean they gave you guys a Nobel Prize for something as obvious as that?’ … And I’d add, ‘Yes, but remember, we proved it rigorously.’”

Like Miller’s light take on his heavy-duty findings, some of what we feel is our best advice seems so simple. And yet, in our experience, it’s very hard to adhere to this same, “obvious” advice in the face of market turbulence.

Blame your behavioral biases. They make simple advice deceptively difficult to follow. We all have them, including blind spot bias. That is, we can easily tell when someone else is succumbing to a behavioral bias, but we routinely fail to recognize when it’s happening to us.

This is one reason it’s essential to have an objective, professional advisor (along with your network of informal advisors) who is willing and able to let you know when you’re falling victim to a bias you cannot see in the mirror. At PLC Wealth, that is exactly what we are here for! Let us know if we can help you reflect on these or any other challenges that stand between you and your greatest financial goals.

Global Diversification is Your Investment Antacid

Let’s be clear: We did not wish for, nor in any way cause a tumble in the markets, especially among tech stocks. That said, we could not have come up with a more telling illustration to underscore the perennial value of building – and maintaining – a globally diversified investment portfolio for achieving your greatest financial goals.

Global diversification is such a powerful antacid for when (not if!) we experience market turbulence, it’s why we’ve long recommended spreading your market risks:

  • According to your personal goals and risk tolerances
  • Between stock and bond markets
  • Among evidence-based sources of expected long-term returns
  • Around the world

In short, broad, global diversification never goes out of style.

Breaking news shows us why.

Just a few short days ago, third quarter market performance numbers were rolling in, and we were fielding questions about the wisdom of continuing to participate in worldwide stock and bond markets. Some globally diversified investors were beginning to question their resolve after comparing their year-to-date returns to the U.S. stock market’s seemingly interminable ability to whistle past the graveyards of disappointing, portfolio-dampening performance found elsewhere.

Some were asking: “Should we dump diversification, and head for the ‘obviously’ greener pastures watered by U.S. stocks?”

We aren’t the only ones advising investors against reacting to hot runs by turning a cold shoulder to their well-structured portfolio. In his timely September 28 column, Wall Street Journal personal finance columnist Jason Zweig commented: “Looking back in time from today, U.S. stocks seem to have dominated over the long run only because they have done so extraordinarily well over the past few years.”

As current conditions starkly show, there’s a reason for the expression, “Things can turn on a dime.” Whether it’s U.S. stocks, international bonds, emerging markets or any other sources of expected return, the evidence is clear: Trends rise and fall among them all. This we know. But precisely when, where, how much, and why is anybody’s guess. As Zweig suggests in his piece, “Markets tend to lose their dominance right around the time it seems most irresistible.”

What’s next?

We’re drafting this message to you Wednesday evening, October 10, in advance of what may be a wild ride for the next little while. By the time you’re reading this, prices may still be tumbling, or they may already have recovered their footing. We can’t say.

Come what may, we hope we can be particularly helpful to you at this time.

Have current conditions left you troubled, unsure of where you stand?

Let’s talk. We’ll explore whether you’re able to sit tight with your existing strategy, or whether we can help you think through any next steps you may be considering. Most of all, know you are not alone! We are here as your sounding board and fiduciary advisor. Your best interests remain our top priority.

Are you reflecting calmly on current events, recognizing that market volatility happens?

Allow us to applaud you for your stamina, and remind you: Current conditions likely represent a time for continued quietude, along with ongoing attention to managing your tailored portfolio.

Regardless of your temperament, we’d like to share a sentiment from Behavior Gap author Carl Richards’ 2015 New York Times column.  His point remains as relevant as ever:

“On a scale of 1-10, with 10 being abject misery, I’m willing to bet your unhappiness with a diversified portfolio comes in at about a 5, maybe a 6. But your unhappiness if you guess wrong on your one and only investment for the year? That goes to 11.”

Let’s be in touch if we can answer any questions or scale down any angst you may be experiencing.

Regards,

Your PLC Wealth Team

Q3 2018 Client Letter – Is this bull getting long in the tooth?

October 2018

As of August 21, the longest-running S&P 500 rally (by some counts) was born out of “the ashes of the financial crisis.”  As of quarter-end, as reported by Morningstar, “Following a flattish first half, global equities enjoyed a fairly strong third quarter, with the Morningstar Global Markets Index now up 4.5% year to date.”

And yet … you may fret. Tariffs and trade war threats remain wild cards in the financial deck. A Brexit looms nearer and scarier. Emerging markets struggle while global leaders squabble. And, historically, many of the worst days in the markets have arrived in the fall.

When it comes to market forecasts, will the sky be falling soon, or are we set to soar some more? Have you been tempted to get out of “high-priced” markets while the getting seems good? Here are three compelling reasons to avoid trying to time the market in this manner.

  1. Markets (Still) Aren’t Predictable

Before you decide you’d like to stay one step ahead of a market that seems certain to rise, fall or head sideways, consider this quote from The Wall Street Journal personal finance columnist Jason Zweig: “Yes, 2018 is full of uncertainty and teeming with hazards that might make the stock market crash. So was 2017. So were 2016, 2015, 2014 – and every year since stockbrokers first gathered in New York in the early 1790s.”

  1. Economists Aren’t Wizards

A day rarely goes by when you can’t find one respected economist suggest we’re headed for a financial fall, while another opines that we’re going to keep going like gangbusters. Which is it this time? As one Bloomberg columnist reports, “a 2014 study by Prakash Loungani of the International Monetary Fund found that not one of the 49 recessions suffered around the world in 2009 had been predicted by a consensus of economists a year earlier. Further back, he discovered only two of the 60 recessions of the 1990s were anticipated a year in advance” (with “recession” defined in the referenced paper as “a year when output growth was negative”). 

  1. You Can’t Depend on Your Instincts

Still thinking of trying to sell ahead of a fall? For this, and any other investment “hunch” you may have, your best bet is to assume it’s a bad bet, driven by your behavioral biases instead of rational reasoning. For example, loss aversion can trick you into letting the potential for future market losses frighten you away from the likelihood of long-term returns. Couple that with our oversized bias for seeing predictive patterns, even where none exist, and it’s all too easy to talk yourself right out of any carefully laid plans you’ve established for your wealth.

For these reasons and more, we’re here to advise you: Your plans aren’t there to eliminate uncertainty. They’re there to counter the temptation to succumb to it, so please be in touch with us personally if we can help you review your plans.

Reflections on 2018 and the stock markets renewed volatility…

If you were a member of the popular press, you’d probably be happy with 2018’s first quarter performance. At last – some volatility fueling news1 in early February, with plenty of enticing “largest,” “fastest,” and “worst” market superlatives to savor after a long, languid lull.

As usual, there are plenty of potential culprits to point to among current events: global trade wars heating up, the arrival of quantitative tightening (rising interest rates), troubles in tech-land over data privacy concerns, ongoing Brexit talks, and some interesting events over in the Koreas. At quarter-end, one hopeful journalist asked, “Is the Bear Market Here Yet?”2 Another observed: “[T]he number of [Dow Jones Industrial Average] sessions with a 1% move so far in 2018 are more than double 2017’s tally, and it isn’t even April.”3

Has the coverage left you wondering about your investments? Most markets have been steaming ahead so well for so long, even a modest misstep may have you questioning whether you should “do something,” in case the ride gets rougher still.

If we’ve done our job of preparing clients and their portfolio for market jitters, clients may might be able to cite back to us why they’ve already done all they can do to manage the volatility, and why it’s ultimately expected to be good news for evidence-based investors anyway. Remember, if there were never any real market risk, you couldn’t expect extra returns for your risk tolerance.

That said, you may have forgotten – or never experienced – how awful the last round of extreme volatility felt during the Great Recession. Insights from behavioral finance tell us that our brain’s ingrained biases cause us to gloss over those painful times, and panic all over again when they recur, long before our rational resolve has time to kick in.

If you noticed the news, but you’re okay with where you’re at, that’s great. If the volatility is bothering you, talk to a CFP® professional or other qualified financial professional; it may help ease your angst. If you continue to struggle with whether you made the right decisions during quieter markets, plan a rational shift to better reflect your real risk tolerances and cash-flow requirements. Not only is your peace of mind at least as important as the dollars in your account, you could end up worse off if you’ve taken on more risk than you can bear in pursuit of higher expected returns.

As Wall Street Journal columnist Jason Zweig said during the February dip: “A happy few investors … may have long-term thinking built into them by nature. The rest of us have to cultivate it by nurture.”  We couldn’t agree more, and we consider it our duty and privilege to advise you accordingly, through every market hiccup.

The market isn’t misbehaving, people are…

If we’ve been doing our job as your fiduciary advisor, you might already be able to guess what our take is on current market news: Unless your personal goals have changed, stay the course according to your personal plan. Have you checked your plan progress in the last couple of days?  If not, you should.

Still it never hurts to repeat this steadfast advice during periodic market downturns. We understand that thinking about scary markets isn’t the same as experiencing them.  No matter what happens next, context is always helpful to better understand what is happening around you.  This article today by Neil Irwin in the New York Times does a great job of giving context.

Good news is bad news?

So, what’s going on? Why did U.S. stock prices suddenly drop after such a long, lazy lull, with no obvious calamity to have set off the alarms?  As Financial Planning guest columnist Kimberly Foss, CFP® described: “To understand the anxiety that led to many investors rushing to sell last week, you need to follow some tortuous logic. … If American workers are getting paid more, then companies will start charging more for whatever they produce or do, which might boost inflation. ‘Might’ is the operative word.”

“Good news, it seems, is bad news again,” this Wall Street Journal columnist added.

Context and Action

While these sentiments may suggest the catalyst for the current drop, they do not inform us of what will happen next. Sometimes, market setbacks are over and forgotten in days. Other times, they more sorely test our resolve with their length and severity. As Jason Zweig of The Wall Street Journal pointed out yesterday, ‘The stock market didn’t get tested – You did.’  You must understand that the four most expensive words in finance are, ‘This time it’s different.’  We can’t yet know how current events will play out, but we do know this:

1) The (US) stock market goes up more than it goes down. Do you see now why we emphasize the wisdom of long-term?2) Capital markets have exhibited an upward trajectory over the long-term, yielding positive, inflation-beating returns to those who have stayed put for the ride.

3) If you instead try to time your optimal market exit and entry points, you’ll have to be correct twice to expect to come out ahead; you must get out and back in at the right times.

4) Every trade, whether it works or not, costs real money.

5) Volatility creates opportunity for the long-term investor.

For a longer explanation of #5, see my post from just last week on Strategic Rebalancing.  In short, the stock market roller coaster is too unsettling for some investors, who sell when they experience a market lurch.  Don’t be ‘that guy.’  However, this does give long-term investors a valuable—and frequent—opportunity to buy stocks on sale.  That, in turn, lowers the average cost of the stocks in your portfolio, which can be a boost to your long-term returns.

Ignore the Hype

Please, please, please be smarter than the marketers.  Be wary of hyperbolic headlines bearing superlatives such as “the biggest plunge since …” While the numbers may be technically accurate, they are framed to frighten rather than enlighten you, grabbing your attention at the expense of the more boring news on how to simply remain a successful, long-term investor.  And they have absolutely nothing to do with whether your personal financial plan is still on track.  (Not sure if your plan is on track or not?  Send me an email here and I would be happy to talk to you about the tools we use to help answer this question on a daily basis.)

Instead of fretting over meaningless milestones or trying to second-guess what U.S. economics might do to stocks, bonds and inflation, we believe the more important point is this: Market corrections are normal – and essential to generating expected long-term returns.  In short, before you consider changing course if the markets continue to decline, of course we hope you’ll be in touch with us first.  Oh, and turn off the TV.

The Vital Role of Strategic Rebalancing

If there is a universal investment ideal, it is this: Every investor wants to buy low and sell high. What if we told you there is a disciplined process for doing just that, and staying on track toward your personal goals while you’re at it? Guess what? There is. It’s called strategic rebalancing.

Strategic Rebalancing: How It Works

Imagine it’s the first day of your investment experience. As you create your new portfolio, it’s best if you do so according to a personalized plan that prescribes how much weight you want to give to each asset class. So much to stocks, so much to bonds … and so on. Assigning these weights is called asset allocation.

Then time passes. As the markets shift around, your investments stray from their original allocations. That means you’re no longer invested according to plan, even if you’ve done nothing at all; you’re now taking on higher or lower market risks and expected rewards than you originally intended. Unless your plans have changed, your portfolio needs some attention.

This is what rebalancing is for: to shift your assets back to their intended, long-term allocations.  In fact, this is part of the best practices suggested in my recent blog post for the New Year.

A Rebalancing Illustration

To illustrate, imagine you (or your advisor) has planned for your portfolio to be exposed to the stock and bond markets in a 50/50 mix. If stocks outperform bonds, you end up with too many stocks relative to bonds, until you’re no longer at your intended, balanced blend. To rebalance your portfolio, you can sell some of the now-overweight stocks, and use the proceeds to buy bonds that have become underrepresented, until you’re back at or near your desired mix. Another strategy is to use any new money you are adding to your portfolio anyway, to buy more of whatever is underweight at the time.

Either way, did you catch what just happened? Not only are you keeping your portfolio on track toward your goals, but you’re buying low (underweight holdings) and selling high (overweight holdings). Better yet, the trades are not a matter of random guesswork or emotional reactions. The feat is accomplished according to your carefully crafted, customized plan.

Portfolio Balancing: A Closer Look

We’ve now shared a simple rebalancing illustration. In reality, rebalancing is more complicated, because asset allocation is completed on several levels. First, we suggest balancing your stocks versus bonds, reflecting your need to take on market risk in exchange for expected returns. Then we typically divide these assets among stock and bond subcategories, again according to your unique financial goals. For example, you can assign percentages of your stocks to small- vs. large-company and value vs. growth firms, and further divide these among international, U.S., and/or emerging markets.

One reason for these relatively precise allocations is to maximize your exposure to the right amount of expected market premiums for your personal goals, while minimizing the market risks involved by diversifying those risks around the globe and across sources of returns that don’t always move in tandem with one another. We, and the fund managers we typically turn to for building our portfolios are guided by these tenets of evidence-based investing.

Striking a Rebalancing Balance

Rebalancing using evidence-based investment strategies is integral to helping you succeed as an investor. But like any power tool, it should be used with care and understanding.

It’s scary to do in real time. Everyone understands the logic of buying low and selling high. But when it’s time to rebalance, your emotions make it easier said than done. To illustrate, consider these real-life scenarios.

  • When markets are down: Bad times in the market can represent good times for rebalancing. But that means you must sell some of your assets that have been doing okay and buy the unpopular ones. The Great Recession of 2007–2009 is a good example. To rebalance then, you had to sell some of your safe-harbor holdings and buy stocks, even as popular opinion was screaming that stocks were dead. Of course, history has shown otherwise; those who did rebalance were best positioned to capture available returns during the subsequent recovery. But at the time, it represented a huge leap of faith in the academic evidence indicating that our capital markets would probably prevail.
  • When markets are up. An exuberant market can be another rebalancing opportunity – and another challenge – as you must sell some of your high flyers (selling high) and rebalance into the lonesome losers (buying low). At the time, this can feel counter-intuitive. But disciplined rebalancing offers a rational approach to securing some of your past gains, managing your future risk exposure, and remaining invested as planned, for capturing future expected gains over the long-run.

Costs must be considered. Besides combatting your emotions, there are practical concerns. If trading were free, you could rebalance your portfolio daily with precision. In reality, trading incurs fees and potential tax liabilities. To achieve a reasonable middle ground, it’s best to have guidelines for when and how to cost-effectively rebalance. If you’d like to know more, we’re happy to discuss the guidelines we employ for our own rebalancing strategies.

The Rebalancing Take-Home

Strategic rebalancing using evidence-based investment strategies makes a great deal of sense once you understand the basics. It offers objective guidelines and a clear process to help you remain on course toward your personal goals in rocky markets. It ensures you are buying low and selling high along the way. What’s not to like about that?

At the same time, rebalancing your globally diversified portfolio requires informed management, to ensure it’s being integrated consistently and cost effectively. An objective advisor also can help prevent your emotions from interfering with your reason as you implement a rebalancing plan. Helping clients periodically employ efficient portfolio rebalancing is another way that PLC Wealth Management seeks to add value to the investment experience.

Cryptocurrency…what’s all the buzz about?

Have you caught cryptocurrency fever, or are you at least wondering what it’s all about? Odds are, you hadn’t even heard the term until recently. Now, it seems as if everybody and their cousin are getting in on it.

 

Psychologists have assigned a term to the angst you might be feeling in the heat of the moment. It’s called “FoMO” or Fear of Missing Out. Education is the best first step toward facing FoMO and making informed financial choices that are right for you. So before you make any leaps, let’s take a closer look.

 

What is cryptocurrency?

Crytpocurrency is essentially a kind of money – or currency. Thanks to electronic security – or encryption – it exists in a presumably secure, sound and limited supply. Pair the “encryption” with the “currency,” and you’ve got a new kind of digital asset, or electronic exchange.

 

Well, sort of new. Cryptocurrency was introduced in 2009, supposedly by a fellow named Satoshi Nakamoto. His Wikipedia entry suggests he may not actually be who he says he is, but minor mysteries aside, he (or possibly “they”) is credited with designing and implementing

bitcoin as the first and most familiar cryptocurrency. Ethereum is currently its second-closest competitor, with plenty of others vying for space as well (more than 1,300 as of early December 2017), and plenty more likely to come.

 

Unlike a dollar bill or your pocket change, cryptocurrency exists strictly as computer code. You can’t touch it or feel it. You can’t flip it, heads or tails. But increasingly, holders are receiving, saving and spending their cryptocurrency in ways that emulate the things you can do with “regular” money.

 

How does cryptocurrency differ from “regular” money?

In comparing cryptocurrency to regulated fiat currency – or most countries’ legal tender – there are a few observations of note.

First, since neither fiat nor cryptocurrency are still directly connected to the value of an underlying commodity like gold or silver, both must have another way to maintain their spending power in the face of inflation.

 

For legal tender, most countries’ central banks keep their currency’s spending power relatively stable. For cryptocurrency, there is no central bank, or any other centralized repository or regulator. Its stability is essentially backed by the strength of its underlying ledger, or blockchain, where balances and transactions are verified and then publicly reported.

 

The notion of limited supply factors in as well. Obviously, if everyone had an endless supply of money, it would cease to have any value to anyone. That’s why central banks (such as the U.S. Federal Reserve, the Bank of Canada, and the Bank of England) are in charge of stabilizing the value of their nation’s legal tender, regularly seeking to limit supply without strangling demand.

 

While cryptocurrency fans offer explanations for how its supply and demand will be managed, it’s not yet known how effective the processes will be in sustaining this delicate balance, especially when exuberance- or panic-driven runs might outpace otherwise orderly procedures. (If you’re technically inclined and you’d like to take a deep dive into how the financial technology operates, here’s one source to start with.)

 

Why would anyone want to use cryptocurrency instead of legal tender?  

For anyone who may not be a big fan of government oversight, the processes are essentially driven “by and for the people” as direct peer-to-peer exchanges with no central authorities in charge. At least in theory, this is supposed to allow the currency to flow more freely, with less regulation, restriction, taxation, fee extraction, limitations and similar machinations. Moreover, cryptocurrency transactions are anonymous.

 

If the world were filled with only good, honest people, cryptocurrency and its related technologies could represent a better, more “boundary-less” system for more freely doing business with one another, with fewer of the hassles associated with international commerce.

Unfortunately, in real life, this sort of unchecked exchange can also be used for all sorts of mischief – like dodging taxes, laundering money or funding terrorism, to name a few.

 

In short, cryptocurrency, blockchain technology, and/or their next-generations could evolve into universal tools with far wider application. Indeed, such explorations already are under way. In December 2017, Vanguard announced collaborative efforts to harness blockchain technology for improved index data sharing.

 

That said, many equally promising prospects have ended up discarded in the dustbin of interesting ideas that might have been. Time will tell which of the many possibilities that might happen actually do.

 

Even if I don’t plan to use cryptocurrency, should I hold some as an investment? 

If you do jump in at this time, know you are more likely speculating than investing.

 

Bubble or not, consider these two points. First, there are a lot of risks inherent to the cryptocurrency craze. Second, cryptocurrency simply doesn’t fit into our principles of evidence-based investing … at least not yet.

 

Let’s take a look at the risks.

 

Regulatory Risks – First, there’s the very real possibility that governments may decide to pile mountains of regulatory road blocks in front of this currently free-wheeling freight train. Some countries have already banned cryptocurrency. Others may require extra reporting or onerous taxes. These and other regulations could severely impact the liquidity and value of your coinage.

 

Security Risks – There’s also the ever-present threat of being pickpocketed by cyberthieves. It’s already happened several times, with millions of dollars of value swiped into thin air. Granted, the same thing can happen to your legal tender, but there is typically far more government protection and insurance coverage in place for your regulated accounts.

 

Technological Risks – As we touched on above, a system that was working pretty well in its development days has been facing some serious scaling challenges. As demand races ahead of supply, the human, technical and electric capital required to keep everything humming along is under stress. One recent post estimated that if bitcoin technology alone continues to grow apace, by February 2020, it will suck away more electricity than the entire world uses today.

 

That’s a lot of potential buzzkill for your happily-ever-after bitcoin holdings, and one reason you might want to think twice before you pile your life’s savings into them.

 

Then again, every investment carries some risk. If there were no risk, there’d be no expected return. That’s why we also need to address what evidence-based investing looks like. It begins with how investors (versus speculators) evaluate the markets.

 

What’s a bitcoin worth? A dollar? $100? $100,000? The answer to that has been one of the most volatile bouncing balls the market has seen since tulip mania in the 1600s.

 

In his ETF.com column “Bitcoin & Its Risks,” financial author Larry Swedroe summarizes how market valuations occur. “With stocks,” he says, “we can look at valuation metrics, like earnings yield. With bonds, we can use the current yield-to-maturity. And with assets like reinsurance or lending … we have historical evidence to make the appropriate estimates.”

 

You can’t do any of these things with cryptocurrency. Swedroe explains: “There simply is no tangible relationship between any economic or financial parameters and bitcoin prices.” Instead, there are several ways buying cryptocurrency differs from investing:

 

  • Evidence-based investing calls for estimating an asset’s expected return, based on these kinds of informed fundamentals.
  • Evidence-based investing also calls for us to factor in how different asset classes interact with one another. This helps us fit each piece into a unified portfolio that we can manage according to individual goals and risk tolerances.
  • Evidence-based investing calls for a long-term, buy, hold and rebalance strategy.

 

Cryptocurrency simply doesn’t yet synch well with these parameters. It does have a price, but it can’t be effectively valued for planning purposes, especially amidst the extreme price swings we’re seeing of late.

 

What if I decide to buy some cryptocurrency anyway?

We get it. Even if it’s far more of a speculative than investment endeavor, you may still decide to give cryptocurrency a go, for fun or potential profit. If you do, here are some tips to consider:

 

  • Think of it as being on par with an entertaining trip to the casino. Nothing ventured, nothing gained – but don’t venture any more than you can readily afford to lose!
  • Use only “fun money,” outside the investments you’re managing to fund your ongoing lifestyle.
  • Educate yourself first, and try to pick a reputable platform from which to play. (CoinDesk offers a pretty good bitcoin primer.)
  • If you do strike it rich, regularly remove a good chunk of the gains off the table to invest in your managed portfolio. That way, if the bubble bursts, you won’t lose everything you’ve “won.” (Also set aside enough to pay any taxes that may be incurred.)

 

Last but not least, good luck. Whether you win or lose a little or a lot with cryptocurrency – or you choose to only watch it from afar for now – we remain available to assist with your total wealth, come what may.