Watch out for scams!

Most North Carolinian’s are working hard to take care of their families and help their neighbors in the current crisis.  Nevertheless, criminals seek to exploit the Covid-19 pandemic to further their scams.

We received the notice below from the North Carolina Secretary of State warning residents to be wary, and we want to share it with you.  If you or someone you care about comes across something questionable related to investing or charitable activities, please don’t hesitate to call. We can help you check it out.  PLC Wealth is here to help you and answer any questions you have.

Take care, and thank you for your business with PLC Wealth.”

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NC Secretary of State Offers Tips to Avoid COVID-19 Related Investment Scams

NC Secretary of State Elaine Marshall is cautioning investors that the ongoing Coronavirus pandemic will likely spark a surge of investment fraud.

 

“Sadly, scam artists will seek to exploit rising concerns about COVID-19 to draw people into investment traps,” warned Marshall. “Fraudsters often use the day’s headlines in their pitches, so expect to see them prey on the fear surrounding the unfolding Coronavirus pandemic and recent economic developments to promote sham investments.”

 

The North American Securities Administrators Association (NASAA), of which the NC Secretary of State’s Office is a member, is joining state regulators in offering tips to keep investors safe in these uncertain times.

 

Bad actors may develop schemes falsely purporting to raise capital for companies manufacturing surgical masks and gowns, producing ventilators, distributing small-molecule drugs and other preventative pharmaceuticals, or manufacturing vaccines and miracle cures.

 

Scammers also will seek to take advantage of concerns with the volatility in the securities markets to promote “safe” investments with “guaranteed returns” including investments tied to gold, silver and other commodities; oil and gas; and real estate. Investors also can expect to see schemes touting quickly earned guaranteed returns targeting seniors worried about economic disruptions and losses to their retirement portfolios.

 

“From guarantees of high returns without risk to promises of a miracle cures, if it sounds too good to be true, it probably is,” warned Secretary Marshall. “I urge North Carolinians to follow these tips to help protect your financial and physical health as you navigate these uncertain times.”

 

Investors are encouraged to call the NC Investor Hotline at (800) 688-4507 or email us at before signing over money in any investment opportunity. If you suspect an investment opportunity is fraudulent, you may report it at www.sosnc.gov. You can also find a wealth of investor education material at www.sosnc.gov/divisions/securities.

 

Schemes to Watch for: 

 

Private placements and off-market securities. Scammers will take advantage of concerns with the regulated securities market to promote off-market private deals. These schemes pose a threat to retail investors because private securities transactions are not subject to review by federal or state regulators. Retail investors must continue to investigate before they invest in private offerings and independently verify the facts for themselves.

 

Gold, silver and other commodities. Scammers may also take advantage of the decline in the public securities markets by selling fraudulent investments in gold, silver and other commodities not tied to the stock market. These assets are often promoted as “safe” or “guaranteed” means of hedging against inflation and mitigating systematic risks. However, scammers may conceal hidden fees and mark-ups, and the illiquidity of the assets that may prevent retail investors from selling the assets for fair market value. There are no “can’t miss” opportunities.

 

Recovery schemes. Retail investors should be wary of buy-low sell-high recovery schemes. For example, scammers will begin promoting investments tied to oil and gas, encouraging investors to purchase working or direct interests now so they can recognize significant gains after the price of oil recovers. Scammers will also begin selling equity at a discount, promising the value of the investments will significantly increase when the markets strengthen. Never lose sight of the risks associated with any prediction of future performance and remember that market gains may not correlate with the profitability of their investments.

 

Get-rich-quick schemes. Scammers will capitalize on the increased unemployment rate with false promises of quick guaranteed returns that can be used to pay for rent, utilities or other living expenses.

 

Replacement and swap schemes. Investors should be wary of any unlicensed person encouraging them to liquidate their investments and use the proceeds to invest in more stable, more profitable products. Investors may pay considerable fees when liquidating investments, and the new products often fail to provide the promised stability or profitability. Advisors may need to be registered before promoting these transactions and legally required to disclose hidden fees, mark-ups and other costs.

 

Real estate schemes. Real estate investments may be appealing because the real estate market has been strong and low interest rates have increased demand. Scammers often promote these schemes as safe and secure, claiming real estate can be sold and the proceeds can be used to cover any losses. However, real estate investments present significant risks, and changes to the economy and the real estate market may negatively impact the performance of these products.

 

How to Protect Yourself:

 

The NC Secretary of State’s Securities Division offers this guidance to help investors avoid investment scams:

 

Ask before you invest. Investors in North Carolina should call the NC Investor Hotline at (800) 688-4507 or email us at to find out if the salesperson and the investment opportunity itself are properly registered. Investors also can check the SEC’s Investment Adviser Public Disclosure database and FINRA’s BrokerCheck. Avoid doing business with anyone who is not properly licensed. If you suspect fraud, please report it to us at www.sosnc.gov.

 

Don’t get hooked by a phishing scam. Phishing scams may be perpetrated by those claiming an association with the Centers for Disease Control and Prevention, the World Health Organization, or by individuals claiming to offer medical advice or services. Watch out for con artists offering “opportunities” in research and development. These scams may even be perpetrated by people impersonating government personnel, spoofing their email addresses and encouraging victims to click links or open malicious attachments. These emails may look real and sound good, but any unsolicited emails with attachments and web links may be directing you to dangerous websites and malicious attachments that can steal information from your computer, lock it up for ransom, or steal your identity. When in doubt, don’t click.

 

There are no miracle cures. Scientists and medical professionals have yet to discover a medical breakthrough or develop a vaccine or cure for COVID-19. Don’t fall for online pharmacies claiming to offer vaccines and don’t send money to anyone claiming they can prevent COVID-19, through a vaccine or other preventive medicine.

 

Avoid fraudulent charity schemes. White-collar criminals may pose as charities soliciting money for those affected by COVID-19. Fake charities will frequently use sound alike names that mimic established charities. Rather than clicking on the links or responding to the email addresses or phone numbers provided in a text, email or social media post, do an internet search to find the charity’s website and reach out to them directly. A link in an unsolicited email could send you to an impostor site. Give generously but wisely to make sure your help is going to those who need it.

 

Be wary of schemes tied to government assistance or economic relief. The federal government may send checks to the public as part of an economic stimulus effort. It will not, however, require the prepayment of fees, taxes on the income, the advance payment of a processing fee or any other type of charge. Anyone who demands prepayment will almost certainly steal your money. And don’t give out or verify any personal information. Government officials already have your information. No federal or state government agency will call you and ask for personal

A Covid-19 update from your PLC Wealth team

To say the last couple of weeks have been unexpected, unparalleled and dizzying would still be understating exactly what we have lived through in the last few weeks.  Based on further news today (specifically, the Stay at Home Orders issued by Wake County, NC for our local clients), most of us will be sheltering in place for the coming weeks, as we should.  I have listened intently, as I am sure you have, to all sides of the discussion that has carried on since the beginning of the outbreak.  At this point, the experts are making the case for the seriousness of the virus as it spreads exponentially, and that it is likely that the healthy and optimistic among us could be putting our most vulnerable at risk.  Slowing down our movement even further, whether by choice or by requirement, seems to be inevitable for a while longer to give us all the best opportunity to get through this.  While we do not know how long this Covid-19 virus will last, I want to take a few moments to speak to you directly about what we are doing as a firm and how you can continue to reach us during these times.

We have implemented many changes in the last couple of weeks as part of our Business Continuity Plan due to Covid-19.  Thankfully, we were prepared for a remote working environment, and hopefully you have seen no interruption in the normal service from our team.  We have all set up our home workspace.  This give us access to our email, phone calls, and client files just as easily as we have them in the office.  Our phone service is fully digital which means we can take it with us wherever we go.  If you call the office and dial my extension, it will ring my mobile phone.  If I call you from my mobile phone, I will be doing so from my office line.  We also have a fully digital and secure document management system for our firm which means we can safely access all your files at any time of day from any location in the world.  Additionally, all our portfolio management, financial planning and client relationship software is cloud-based and accessible from any location.  Believe it or not, it really did not take much time for PLC Wealth to convert to a virtual firm with the same capabilities as when physically in the office.

Now, obviously, there are some challenges.  It is impossible to fully replace the face-to-face relationship, both for our internal operations and for our client relationships.  We are utilizing a secure and compliant messaging tool for internal communications.   While there may be times that we need to access the office, we are attempting to have only a 1-person max in the office at any time.  We will also plan to continue with client meetings moving forward through virtual meeting technologies such as Zoom.  If you do not have access to a computer for such a meeting, we can still have a conversation the old school way…over the phone…in order to make sure that we do not fall behind in our relationship with each of you.  Again, if you need us in the meantime, we are an email or phone call away, just as we have always been.

There are a few logistical items to cover: First, mail will be checked regularly, but maybe not every day.  Additionally, we have always made the effort to suggest linking your personal bank account to your brokerage accounts to allow for quick money movements back and forth, should they be necessary.  Since we are no longer at the office, a time like this makes it necessary.  So, if you need to make an IRA contribution or want to add funds to your brokerage account, we can still do that by an electronic transfer.  Getting money from your accounts is just as easy, or we can have a check mailed to you.  The bottom line is that getting money from your accounts or to your accounts is just as easy as always.  Finally, if you have actual stock certificates, those must be mailed directly to TD for deposit in your account, so just let us know if you need the mailing address.

Unfortunately, times of crisis create opportunities for bad actors.  There are already stories of scams coming to the surface, so be prepared and know what to look for:

 

  1. – There are no miracle drugs or remedies for Covid-19 at this time so don’t fall for this one.  And do not click on any links that may be in an email stating such things, as the link may be another way to inject a virus on your computer.
  2. – Be very skeptical of any investment ‘opportunities’ with research claims that are no supportable.  People will make wild claims to prey on other’s hopes and inability to use the rational brain in times of stress.
  3. – Never, never, never disclose your social security number, account numbers, or any other piece of Personally Identifiable Information (PII).  There are rumors that spam calls and emails are already going out claiming that thsi information is needed to get your piece of the Stimulus bill or a tax refund.  Hold on to your PII like you (financial) life depends on it.
  4. – Generally, just be skeptical in these times of anything that seems too good to be true.  If you are not sure, get in touch with us to talk through it.

 

Let me leave you with a little encouragement in the midst of Covid-19 .  Take this time to do something that many of us no longer do naturally on our own…slow down, exercise (by yourself), rest, re-energize, call someone you haven’t spoken with in a while, or binge watch movies with your family that you never have the time for…but mostly, just look around you to see all of the blessings that you inevitably still enjoy.  Sometimes, when we are not able or willing to do that which is in our best interest, it is necessary for it to be forced upon us.  We find ourselves in one of those times in history.  We are a creative and adaptive species so I look forward to hearing about some of the ways that you will get through this…because you will get through this.  I will leave you with three pieces of advice that I am confident will be good for you in the long run…Wash your hands, don’t touch your face, and don’t touch your stocks.  Know that we are committed to continuing to serve you and your family. We will strive to provide you with an even higher level of service than that which you have come to expect from us.  If you need anything at all, even if it is just to have a conversation about the events of the day, please let us know.  We are here to help.

Carpe diem,

Josh and the PLC Wealth Team

Volatile equity markets, falling bond yields, and the coming recession: A letter to our clients

By Matt Miner

August 15, 2019

Dear Clients,

First, THANK YOU for your business with PLC Wealth Management! We are honored to serve as your advisors and to walk through life with you.

Second, we think today is a good day to talk with you about jumpy stock markets, falling bond yields, and our thoughts regarding the US economy. Our letter wraps up with actionable advice for you to implement immediately. Pretty exciting, right?

As I prepared to join my family for dinner last evening, I received a forwarded email. According to a tweet by advisor Michael Batnick, yesterday was the 307th time that the Dow fell 3% or more in a single day, over the course of the last 100 years. To see the folks on CNBC jumping up and down, wild eyed and foaming at the mouth, you could be forgiven for imagining that the entire US economy been vaporized.

Volatile Stock Markets

On average a downward move of the magnitude we experienced yesterday happens 3.07 times each year. Equity markets have been mostly placid over the last decade, and yesterday’s market decline was the first drop of that size in 2019. But if we simply achieve historically average volatility, we can expect two more moves of the same size before we celebrate New Year’s Day 2020! Said differently, drops of 3% come around slightly more than three times as often as Christmas.

For a different comparison, UNC and Duke always get invited to the NCAA Men’s Basketball Tournament. In each program’s history, UNC has played 160 NCAA tournament games and Duke has played 147 NCAA tournament games. Coincidentally, the Dow Jones Industrial Average has declined 3% or more in a single day in the last 100 years the same number of times as the two most storied programs in college basketball have played a game in the NCAA tournament: Many, many, times! Stock market volatility is table steaks. It’s why investors expect to earn a positive return for investing in stocks.

The Russell 3000, one of our preferred index comparisons, was down 2.89% yesterday and is down 4.85% for the month. No one likes that. But the same index is up 14.63% in 2019, 9.53% per year on a rolling five-year basis, and 13.20% per year on a rolling ten-year basis (ftserussell.com as of 8/14/2019 market close).

The stock market can be a rough ride, but it has reliably propelled investors’ wealth upward over time. The chart below shows the growth of one dollar from 1970 to 2017 invested in one-month T-Bills, the S&P 500 Index, and in a globally diversified stock portfolio, similar to PLC Wealth’s equity investment style.

Friends and neighbors, you only get hurt on a roller coaster if you jump off.

Falling Bond Yields

It is true that bond yields have fallen, meaning that money invested in the bond market today earns less interest than it did at this time last year. This has resulted in strong appreciation of bond funds (bond prices move in an inverse relationship to bond yields). For example, DFAPX, an investment-grade bond fund, has appreciated 7.81% in 2019, something I did not expect as we entered this year. On the other hand, falling rates mean that maturing bonds will be reinvested at lower interest rates than bonds that matured in the recent past. It also means that interest rates earned on assets like money market funds, certificates of deposit, annuities, and savings accounts have been reduced.

The Yield Curve

What about the ever-famous inverted yield curve? Once you finish this article you’ll be able to amaze your friends and confound your enemies because you’ll know the answers to questions like, “What is a yield curve?” and “What is an inverted yield curve?” and “What does a yield curve inversion mean?” and most meaningfully, “What should I do?”

First, a yield curve plots the returns investors expect on debt over different periods of time – for example one, five, ten, and thirty years. Investors normally demand to be paid more to loan their money for longer periods. You may have experienced this as a consumer: 30-year mortgage rates are higher than 15-year mortgage rates. This is because the longer the loan, the greater the investor’s exposure to the vagaries of inflation, the risk that the borrower fails to repay, and the risk that the money is locked up at a time the investor wants liquidity. In the graphic below, the August 2018 yield curve (the line with the gray diamonds) is the most “normal” looking, even though the rates are low by historic standards.

Second, an inverted yield curve like the blue line with dots, labeled “Current” in the graph above, means that investors demand 2% to loan to the US government for one year, but only ~1.65% to loan for ten years. How can this be? The inverted yield curve signals that bond investors expect poor economic performance resulting in low interest rates over that time period.

Third, an inverted yield curve has accurately predicted economic recession (two or more quarters of negative growth) or an economic slowdown (a reduction in the growth rate) with 100% accuracy going back to the Eisenhower administration. The predictive value of the inverted yield curve is particularly potent if the inversion lasts for more than one full quarter which is the case as I write you this letter.

Here’s the unvarnished truth: A recession is coming. A recession is always coming. What we don’t attempt to do is predict when the recession will arrive. The fact that a recession is coming is part of your plan. When you work with an advisory firm like PLC Wealth, your plan includes the expectation of recession. It’s kind of like knowing you’ll need to replace your car. You don’t know exactly when you’ll need a new car, but you’ll need one sometime. By planning with PLC Wealth, you have prepared for recession.

Cam Harvey, a terrific professor at my business school alma mater – Duke’s Fuqua School of Business – was quoted yesterday by WRAL saying, “Maybe this is not the right time to max out your credit card…Maybe it’s not the right time to take the vacation with your family that is going to overextend you.” Professor Harvey goes on to recommend you “[do] 100% effort at your job.”

At PLC Wealth we never recommend you max out your credit card. Instead, we recommend you negotiate discounts and pay cash!

We love vacations, but we don’t recommend you overextend yourself to take one. Go camping if that is what your budget supports!

Putting in 100% effort at work is timeless advice your dad gave you, too.

Call to Action

What should you do to prepare for the coming recession? For that matter, what should you do to prepare for the coming prosperity? The advice does not change. Do excellent work. Live on less than you make. Invest the difference wisely. Make a good tax plan. Bless your family with a thoughtful estate plan. Prepare for catastrophe with suitable insurance and emergency funds. Care for your health. Spend time with the people you love. Live according to your values. Be kind.

If you have questions about market volatility, bond yields, or the coming recession, give us a call. We are here to help with any topic where life meets money. Once again, thank you for your business with PLC Wealth Management.

Home is where the __________ is. 1.) Heart or 2.) Hassle?

June 17, 2019

Matt Miner

Over the weekend I received a thoughtful note from a client about renting versus owning.

Our client asked what we thought about the possibility of renting throughout one’s entire life, and taking the money that would be used for a large house down payment (in this case, a 100% down payment) and investing it as we recommend. I wanted to share my reply below:

 

Dear N_________,

It’s always great to hear from you!

First, there’s nothing wrong with renting for the rest of your life as long as this is part of your plan, and you do it eyes-wide open. Like anything, it is just a whole lot better if it’s intentional. This is how you’re approaching it, so well done!

In your mail you mention that owning a home means you have to pay taxes on it and maintain it for the rest of your life. This is true, but renting just means you pay someone else to do this for you.

You are correct that you could probably invest the money you’re putting into this house and get enough return to continue renting throughout your life. We can model this with some assumptions if you’d like.

Whether renting forever is scary just depends on your planning. We can share with you that according to Tom Stanley, (author of The Millionaire Next Door and other data-driven books about the wealthy), 95 – 97% of wealthy people choose to own their own home with these type of ratios:

1.) 10% – 25% of their net worth tied up in the house

2.) A mortgage balance between Zero-times and Three-times annual income (not more)

For a family earning $120,000 per year, with a net worth of $350,000 that WANTED to own, these could be reasonable numbers:

  • $360,000 purchase price
  • $72,000 down (< 25% of total net-worth tied up in the house)
  • $288,000 mortgage balance (< 3X annual income)
  • All-in monthly / annual payment of $2300 / $27,600

The family in this case should have enough money to build wealth. Even though the bank may be happy to approve their application (!) a $500,000 house is too expensive for this family. As our friend Tom Stanley says, asking the bank how much you should borrow is like asking a fox to count the chickens in your henhouse.  On the other hand, a $275,000 house will allow them to become wealthier faster, or to support other goals along the way, such as travel, children’s education, or giving.

For a family in retirement with a net worth of $1.7M, having a paid-for $360,000 house would be totally reasonable; this is less than 25% of their total net worth.  For this retired family, a $700,000 house is too much. The home will make it difficult for their other assets to support their lifestyle.

On the positive side, when you own a home, what you get is some protection from long-term inflation for part of your housing budget, and you get a portion of your portfolio returning a very predictable amount once you own it in cash: You save the principal and interest portion of your mortgage payment.

As you can see from the ratios above, we don’t recommend putting 100% or even 50% of your net worth into a house.  On the other hand, copying what wealthy people do in terms of habits and ratios is usually a good idea too!

Conceptually, when you rent, this is what you pay:

Rental Price

  1. Landlord’s Cost of Capital on the home itself
  2. PLUS Landlord’s Profit
  3. PLUS Landlord’s Real Estate Taxes & Insurance
  4. PLUS Landlord’s Maintenance and Repair Costs
  5. MINUS Tax Benefits that may accrue to the Landlord (deductibility of repair expense, interest expense & depreciation, possibly at a higher tax rate than your own)

When you own, this is what you pay:

Home Ownership Price

  1. Your cost of capital on the home itself
  2. PLUS Your Real Estate Taxes & Insurance
  3. PLUS Your Maintenance and Repair Costs
  4. MINUS Tax Benefits that may accrue to you (for middle-income tax payers, the TCJA has made this less likely given a much higher standard deduction)

Just looking at that formula lets you know that for an equivalent house, all else equal, by owning you will save the Landlord’s Profit component MINUS any tax benefits that may be greater for the Landlord than they are for you (you may or may not be able to deduct your interest and real estate taxes each year, and you cannot deduct repairs or depreciation as an owner-occupant).

Rather than reinvent the wheel with a bunch of calculations, please check out this excellent article, and then let me know if you want to go deeper on any of this. In a lot of ways, it all comes down to preference and then putting the right plan in place for you.

 https://affordanything.com/is-renting-better-than-buying-should-i-rent-or-buy/

We wish you all the best!

Matt

Fuqua Finance Forum – April 10th, 2019

Photos (left) Laurinda & Matt and (right) Ruben, Oriana, Matt, Laurinda, Monique, & Francisco

Matt Miner

April 10th, 2019

Whoa!  Sitting over here at WaDuke thinking about the excellent conversation we had together this morning. Such a delight to be with y’all, with Laurinda, and with Professor Dyreng.  Huge thanks to BLMBAO for this opportunity.

Thanks to all the folks who wanted to chat afterward.  I am honored that our time together was helpful to you.

Thanks to the several of you who asked about copies of the slides.  They are posted below for you to review, anytime.

Wishing you every success with life and money,

Matt Miner

2019.04.10 Matt Miner Slides

 

 

Some additional reference material below:

My website, Design Independence, with lots of content geared to MBAs

Recent interview on Radical Personal Finance podcast about my career transition to planning.

Interview on Masters of Money podcast

 

Blogs posts I referenced yesterday:

Renting versus owning – Afford Anything

The Shockingly Simple Math – Mr Money Mustache

 

Book recommendations:

Millionaire Next Door by Stanley is always top of the heap. The idea is that wealth is about habits.

Total Money Makeover by Ramsey is the best motivation book (“why”) and the best budgeting book

The Only Investment Guide You’ll Ever Need by Chris Tobias is terrific on both PF and investing topics

Personal Finance for Dummies by Tyson is comprehensive and accessible.

If you Can by Bernstein is a great DIY resource.

Your Money or your Life, by Dominguez and Robbins, is the frugality book.  Frugality: you can control your spending and achieve a high savings rate on any income.

The Automatic Millionaire by Bach

Richest Man in Babylon by Clason – seminal in this genre

The Wealthy Barber by Chilton – story based and easy PF content

January 2019 – Quarterly Review: “Average returns” are rare

What if Charles Dickens had begun his classic “Tale of Two Cities” as follows: It wasn’t the best of times, it wasn’t the worst of times, it was the usual mixed bag.

While the statement may reflect reality, it doesn’t grab your attention half as well as Dickens’ actual opening sentence describing the French Revolution. As he concluded about the period, “some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”

Thus, we’ve long known about our infatuation with extremes – Best! Worst! Delight! Despair! These are the sentiments that fuel our dreams and inspire our works of art. But you do yourself a disservice if you allow superlatives to rule your investing. In capital markets, if you get caught up in extremes and devalue the sweeping tides of time, you risk giving up your greatest edge: a clear-eyed understanding of what’s really going on.

As we reflect on the events of 2018, here are two evidence-based points worth repeating:

1. “Average” annual investment returns aren’t typical; in fact, they’re rare.

To quote a more contemporary source than Dickens, Cliff Asness of fund manager AQR recently observed: “This world is pretty much designed to convince us that we’re always at DEFCON 1, when 5 is the mode and 4.5 the mean.”

Other year-end analyses concluded that market volatility for 2018 remained on the low side. Even the wilder swings toward year-end were not that remarkable in the grand scheme of things.

And yet, many “noisiest authorities” have been quick to play up the superlatives, while downplaying how these sorts of best of times, worst of times conditions have long been more the norm than the exception in capital markets. As expressed in this Forbes column, “when you take the long view – and if you’re a long-term investor, then you should – you’ll see that what feels jarring right now is actually just a return to normal levels of short-term volatility.”

This brings us to our second point.

2. You are human; you are susceptible to recency bias.

While there are many behavioral biases that trick us into sabotaging our best financial interests, we’re especially interested in the damage recency bias could cause in current conditions.

Recency bias can trick your brain into downplaying decades of robust market performance data, while magnifying the run of unusually calm market conditions we’ve been enjoying relatively recently – essentially since March 2009. This in turn may lead you to lend more weight than is warranted to current volatility.

That’s not to say the ride will be fun if we encounter more turbulence ahead. But by remembering extremes are actually the norm in your quest to generate durable long-term returns, you stand a much better chance of preserving your objective perspective and your portfolio, come what may.

We are grateful for the opportunity to remain at your side, ever eager to advise your course through whatever the markets have in store for us in 2019 and beyond. How can we help? Let us know!

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

What Is the Yield Curve?

August 27, 2018
By Josh Self

The yield curve is flattening (or growing steeper)! … Yield curve spreads are widening (or narrowing)! … The yield curve has inverted (or normalized)!

Headline-grabbing yield curve commentary somehow sounds important, doesn’t it? But what is a yield curve to begin with, and what does it have to do with you and your investments?

A Tour Around the Curve

Yield curves typically depict the various yields across the range of maturities for a particular bond class. For example, Figure 1 would inform us that a U.S. Treasury bond with a 5-year maturity was yielding 2.4% annually, while a 30-year Treasury bond was yielding 3.4%.

Bond class – A bond class or type is typically defined by its credit quality. Backed by the full faith of the U.S. government, U.S. Treasury yield curves are among the most frequently referenced, and often the high-quality benchmark against which other bond types are compared – such as municipal bonds, corporate bonds, or other government instruments.

Term/Maturity – The data points along the bottom X axis of a yield curve represent various terms available for a bond class. The term is the length of time you’d need to hold a bond before your loan matures and you should receive your initial investment back.

Yield – The data points along the vertical Y axis represent the interest rate, or yield to maturity currently being offered – such as 2% per year, 3% per year, and so on. The yield curve for any given bond class changes every time its yields change … which can be frequently.

Spread – The spread is the difference between the annual yields on two bond maturities. So, in Figure 1, there’s a 1% spread between 5-year (2.4%) and 30-year (3.4%) Treasury bond yields.

Define “Normal”

Next, let’s look at the curve itself – i.e., the line that connects the data points just discussed.

The shape of the yield curve helps us see the relationship between various term/yield combinations available for any given bond class at any given point in time.

Just as our body temperature is optimal around 98.6°F (37°C), there’s a preferred equilibrium between bond market terms and yields. “Normal” occurs when short-term bonds are yielding less than their longer-term counterparts. Under normal economic conditions, investors expect to be compensated with a term premium for taking the incremental risk of owning longer maturities. They’re accepting more uncertainty about how current prices will compare to future possibilities. Conversely, they’ll accept lower rates for shorter-term instruments, offering greater certainty.

At the same time, evidence suggests there’s often a law of diminishing returns at play. Typically, the further out you go on the yield curve, the less extra yield is available. Thus, Figure 1 depicts a relatively normal yield curve, with a bigger jump to higher returns early in the curve (a steeper spread) and a more gradual ascent (narrower spread) as you move outward in time.

Variations on the Curve

If Figure 1 depicts a normal yield curve, what happens when things aren’t so normal, which is so often the case in our fast-moving markets?

The shape of the yield curve essentially reflects evolving investor sentiments about unfolding economic conditions.

In short, expectations theory suggests that the yield curve reflects investor expectations of future interest rates at any given point in time. Thus, if investors in aggregate expect rates to rise (fall), the yield curve will slope upward (downward). If they expect rates to remain unchanged, it will be flat. Figure 2 depicts three different curve shapes that can result.

You, the Yield Curve and Your Investments

It’s rare for the yield curve to invert, with long-term yields dropping lower than short-term. But it happens. This happens when the Federal Reserve (or another country’s central bank) tightens monetary policy.  The result of tightening monetary policy is to drive up short-term rates to fight inflation. An inverted yield curve is often followed by a recession – although not always, and not always universally.

Does this mean you should head for the hills if the yield curve inverts or takes on other “abnormal” shapes? Probably not. At least not in reaction to this single economic indicator.

As with any other data source, bond yield curves are best employed to inform and sustain your durable, evidence-based investment plans, rather than to tempt you into abandoning those plans every time bond rates make a move. This typically means investing in bonds that offer the highest yield for the least amount of term, credit and call risk. (Call risk is realized if the bond issuer “calls” or pays off their bond before it matures, which usually forces the bond’s investors to accept lower rates if they want to remain invested in the bond market.)

The yield curve is an important tool for determining how to efficiently execute this greater goal. It helps explain why we typically recommend holding only high-quality bonds, minimizing call risk.  We seek to strike a middle ground between short-term versus long-term bonds. Similar principles apply, whether investing directly in individual bonds or via bond funds.

In short, it’s good to understand the yield curve, and then to look past it – toward your long-term financial goals. Please contact us at PLC Wealth if you’d like to talk about how fixed income/bond investing best fits into your investment plan.

How much do I need to save to retire?

July 17, 2018

We recently read a Wall Street Journal article called “Five Ways to Improve 401(k)s”, and thought one part of the article, “Raise the default savings rate,” was important enough to justify an entire blog post.  In the article, the author discusses the possibility of the federal government encouraging employers to set employees’ default savings rates higher in 401(k)s.  WSJ notes that many plans “set initial contribution rates under automatic enrollment at 3% [and]… gradually raise the level to 10%.”  The article then says that if instead, contribution rates began at 6% and rose to 15% over time, employees would be in much better shape at retirement.

An obvious question is, is this amount too much, too little, or just right?  Like most answers, it depends.  How many years do you have until you retire?  How much of your previous earnings were you spending?

Another important question to ask is, “What will it take to get there?”  Said another way, this question could be phrased, “How much do I need to save to retire?”  If you don’t know where the finish line is, you will never know when you cross it.

Introducing the Savings Rate

The good-news answer to this question is, regardless of whatever the federal government does with 401(k) rules, the largest single variable in this equation is under your control.  How much you save, as a percentage of your income, is the biggest contributor to the success or failure of your retirement plan.  The impact of your savings rate on your retirement plan outweighs the impact of higher returns.  And increasing your savings rate is much simpler and more reliable than chasing exceptional returns.

Of course, we can offer endless caveats to this insight.  The timing of your savings going into your retirement accounts, when the “good” return years happen, and what the returns environment is like when you begin to take distributions all figure into the probability of success or failure of the plan – basically whether you, the investor, ever run out of money or not.  When we run goal-projections for PLC Wealth’s clients, we will use a Monte Carlo simulation software to model the probabilities of various outcomes, but those results cannot be easily shown here.  For this article, we will make simplifying assumptions to illustrate the impact of savings rate.

Basic Assumptions

  1. The only variable we change is savings rate.
  2. We ignore inflation for salary and expenses, but apply it to the portfolio. All dollar-figures shown are 2018 dollars, and we use a 5% post-inflation rate of return for the portfolio.
  3. We ignore taxes in the distribution phase.
  4. We assume the investor can access his or her own or spousal accounts to save this much money in qualified accounts. Even if this last assumption was invalid, the impact of the higher savings rates is still valid even if the savings is done in taxable brokerage accounts.
  5. We assume 4% is a safe withdrawal rate in perpetuity (we know this assumption is debatable, but we believe this is a helpful jumping-off point).

The Data

Looking at these numbers, we can see where planners get their “save 10% – 15%” mantra.  Investors who set aside this amount of money, and receive Social Security, stand a very good chance of retiring successfully at age 65.  Additionally, if reported statistics are to be believed, a 10% – 15% savings rate is much higher than the national average.

Notice too that as you raise your savings rate in retirement accounts, the taxing authorities become your partners in growing your wealth.  Part of your increased savings is coming directly from tax savings, a fact most investors enjoy.

Raising the Savings Rate

Once families begin hitting savings rates of 20% or more, they put themselves in the position to retire early.  Or to downshift at some point in their career.  Or to make meaningful gifts to people and organizations they love.  Saving 30% of their income, this family lives on $36,851 per year.  After thirty-five years, they will have investments capable of supporting annual spending of $85,353 per year – a $48,502 annual income buffer!

In the 5% savings-rate analysis, increasing nominal portfolio returns to 12% results in a portfolio value of $881,718.  This portfolio should support about $35,269 in annual withdrawals.  A 12% expected return is unrealistic for financial planning projections.  And $35,269 per year is considerably lower than the $53,069 this family has been spending.  Investors are better served to increase their savings rate to 15% or 20% of your income (or even more), and to anticipate more realistic returns from your portfolio.  Then, if your investments do better than expected, you’ll have some extra money to enjoy or give away.

The Benefits of Raising the Savings Rate

As lifespans extend, “spending down” a portfolio until some anticipated terminal date is daunting.  With large enough investments and flexible consumption needs, a portfolio becomes a perpetual-motion machine.  With sufficient assets and flexible budgeting, your portfolio should continually generate returns that exceed your annual needs in perpetuity.  This is a very comfortable position as an investor or retiree.

When you consider your own situation, you may think, “But I don’t have thirty-five years left in my career!”, or, “I don’t have access to employer-sponsored retirement accounts!”  Nevertheless, the message to take to heart is: Increasing savings rate increases retirement security.  At PLC Wealth, we can help you work through the unique details of your personal situation.  In an article like this one, our goal is to raise awareness among investors of tools at their disposal to tilt the odds of retirement success in their favor.

In our experience, increasing your savings rate is the fuel for the fire of achieving and maintaining financial independence.  Savings rate rises when you invest more, pay off debt, or grow assets in a private business.  No matter where you put the money, it’s this elevated savings rate that can power you to financial independence.  It’s a rewarding journey and a worthwhile destination.  Happy Investing!