Everything went according to plan. Now what? After a lifetime of saving, it can be difficult to justify spending on things that we once considered frivolous.
Meir Statman recently wrote a paper for the Financial Planning Association titled “Are Your Clients Not Spending Enough in Retirement?” that outlines an interesting conundrum for many retirees. Diligent savers sometimes find it difficult to switch from the wealth accumulation phase of life to the spending phase. The widely accepted narrative that there is a retirement crisis in the United States influences these savers to prioritize penny-pinching over their own happiness. Statman calls this “self-induced poverty”.
We’re not suggesting that you should go out and buy a solid gold toilet, but it is important not to lose track of the purpose of your personal wealth accumulation. If it was for a comfortable retirement, are you actively allocating to that? A financial plan is not necessarily a function to maximize wealth. It should also consider how you aim to enjoy that wealth through lifestyle, legacy, and peace of mind.
The Social Security Act was signed into law by President Roosevelt on August 14, 1935, as a social insurance net to protect the elderly from old age, poverty and unemployment. Today, more than 93% of American workers pay into and are covered by Social Security, and the total benefits paid out in 2017 are projected to be nearly $1 trillion dollars. Social security remains a critical safety net for low income Americans, as well as an additional income source for middle-income and wealthy retirees. But applying and selecting benefits can be confusing to many and the viability of the system itself is a source of much discussion as things are very different today than they were back in 1935.
The ghosts and goblins of Halloween are in the rear-view mirror so what keeps us up at night now? Are macroeconomic conditions a concern? What about political discord at home and abroad? Maybe the dreaded Black Swan event is our bogeyman? Our true fears are a bit more down to earth than these.
Big picture news stories may dominate the media, but our clients’ portfolios are not dependent on the outcomes of these events. While it’s difficult to predict what will happen, it’s impossible to predict how the markets will react to what will happen. The news cycle is beyond our control.
Wealth management is often associated with the word “No”. Got any hot stock tips? No. Should we be investing like that guy on TV? No and a speedboat is not an investment. Being negative all the time is no fun for us either, so here are some things to be positive about.
In the last 10 years, we experienced the worst stock market decline since the Great Depression, but an investment in the S&P 500 at the market top still would have doubled your money. Since the financial crisis, experts have predicted an extended period of low single-digit returns for equities. Folks that listened to these experts missed out on a huge bull run.
Domestic equity valuations are elevated, but by much less than is commonly reported. The cyclically adjusted price/earnings (CAPE) ratio is the most cited example of rich valuations with today’s CAPE about 80% higher than its historic average. That average goes back to 1881, though, and using it as a timing device would have kept you out of the stock market since 1994. Comparing today’s CAPE to the average over the last 20 years, however, shows valuations only 12% higher than average. Again, this isn’t a signal to buy or sell stocks, but it’s a reminder that it’s never as bad as they say on TV.
It has been nearly 18 months since we recapitalized Fairway Wealth Management, buying out our outside shareholder and making the firm 100% employee-owned. It’s been a positive stretch for our clients, with investment portfolios generally up nicely. And it’s been a positive stretch here, as we’ve continued to grow and expand our team and services. As such, I wanted to send you a brief update on some recent activity here at Fairway:
We’ve recently hired two new employees:
Franco DiLiberto joined us in August as an Associate Wealth Manager. Franco, a Baldwin Wallace University graduate and CPA, spent the first three years of his career as a tax advisor with a regional public accounting firm. He will be helping support a number of client relationships while starting to work on his CFP designation.
Sarah Romanini joined us in June as our receptionist, office manager, and client service associate, replacing Erica Robinson who moved to Texas with her family. While we will all miss Erica, we are excited to have Sarah aboard. A graduate of John Carroll University, Sarah spent the first 6 years of her career in social work, then spent the previous 5+ years with a private equity firm, serving as an executive assistant and office manager.
In other employees news:
Chris Martin passed the Certified Financial Planner (CFP) exam and is now officially a CFP. Congratulations Chris!
Laura Reifschneider has been accepted into the executive MBA program at Baldwin Wallace University.
Dina Leader has completed the education and certification requirements to reinstitute her CPA license.
In the community:
Kristen Kuzma recently served as the Pro-Bono Director of the Cleveland chapter of the Financial Planning Association (FPA).
Korby Collins is in her fourth year on the board and finance committee of the West Side Catholic Center, an organization that assists those in need with food, clothing, shelter, and advocacy.
Fairway will be an upcoming sponsor of the Northeast Ohio Polycystic Kidney Walk, an organization that supports Polycystic Kidney Disease, and RhizoKids Night at the Races, an organization that supports Rhizomelic Chondrodysplasia Punctata (RCDP). These are two organizations that are near and dear to Fairway employees Matt Garrott and Chris Martin and their respective families.
Fairway also sponsored two events over the past summer, Moving Day Cleveland for the Parkinson’s Foundation and the West Side Catholic Center’s Pancake Run.
Fairway now serves nearly 200 clients, residing in 22 different states, with approximately $1.3B of regulatory assets under management.
We have recently rolled out a “Next-Gen” investment advisory service, targeted at the children/grandchildren of our clients that may not meet our normal account minimums yet, but that have started to accumulate some wealth and would benefit for our independent and planning-focused approach. Please let us know if this service is something you’d like to know more about.
Fairway, along with our partners Charles Schwab and Black Diamond, continue to introduce new technology tools. Tools are there for electronic check deposits, online account openings and wire transfers, consolidated portfolio access and performance monitoring, an electronic document storage portal, and more. If you are interested in learning more, contact your advisor or reach out to Maria Hinton and her operations team.
As we continue to expand our team and as our employees get more and more experience with us, we further increase our capacity to serve additional like-minded clients. We remain open to accepting new client opportunities and most of our new client growth comes directly from introductions from our existing clients and our close advisory relationships. So we want to thank you for your continued trust and support and we wish all of you a prosperous and healthy conclusion to 2017 and beyond.
James Bond movies and the TV series Seinfeld are both classics and cultural touchstones, but the conflicts in these stories could have been resolved more quickly than they played out. Goldfinger could have just shot Bond instead of strapping him to a table under a slow-moving laser. Seinfeld episodes like The Parking Garage (the gang splits up to look for their car and hijinks ensue as they struggle to meet back up) would unravel with one small change: the cell phone.
Just because conflict could have been avoided doesn’t mean these aren’t great stories. They are great stories because of the conflict. We don’t want the murder to be solved 10 minutes into a cop drama. We want to see the struggle because that’s what we experience in the world each day.
This is why so many have been wrong-footed by the low volatility in the stock market recently. It shouldn’t be this easy. “Just” sitting in an S&P 500 index fund has felt unsatisfying. The S&P 500 hasn’t had a correction of 10% or more for over a year. We haven’t even had a drawdown of 5% in the last year. No secret underground lairs. No convoluted plot involving Art VanDeLay.
It can be tempting to poke a portfolio and tell it to do something so we can create a narrative for the movement. If we can resist that urge, though, we can be more objective and drive better outcomes. Leave the search for a plotline to the financial entertainers. After all, Seinfeld’s key was that it was a “show about nothing”. Your portfolio doesn’t need drama to be great, either.
The month of May marks the 7th anniversary of the first Bitcoin transaction, an exchange of 10,000 Bitcoins for 2 Papa Johns pizzas. Reaction to the trade at the time was mixed. There were many people who thought it was neat that someone finally bartered the digital currency for an actual item. Many people also thought the pizza seller got ripped off. While 10,000 Bitcoins was theoretically worth $41 at the time, there was almost no way to spend them outside of hooking up with a fellow enthusiast on an online forum. In 2010 the world’s entire mined Bitcoin inventory was worth about $1 million. Headlines say that if you had bought $100 of the cryptocurrency Bitcoin in 2010, it would be worth over $70 million today. Continue Reading →
Capital Group is pushing back hard against the passive investing crowd. They make the case that some basic screens (low expenses, manager investing in their own fund, etc) can reveal good managers. I agree with that. The screens I use at Fairway are kind of hilariously basic relative to the universe of modern portfolio theory statistics and Greek symbols I could choose from. You really don’t need to layer on too many filters before you get a list of a dozen or so good managers in any particular asset class. What I do take exception to is the ‘Why settle for average?‘ argument they put forward. The Capital Group folks are some of the brightest folks around and yet this is the tagline? I tackled this on my personal blog last year here and here. I also posted a direct response to the Capital Group marketing here.
No One Expects a 40% Return for the S&P 500 This Year
I defy you to find a pundit optimistic about the stock market. Is anyone predicting double digit returns? Low to mid-single digits seems to be the popular view among those shouting the loudest. Short term returns have been stellar as the S&P 500 gained almost 12% in 2016. Intermediate returns have been stellar with the S&P 500 averaging 14.65% for the last 5 years.
So we’re due for a hefty pullback, right? Let’s look at the time frame that’s important to investors.
Long term returns have actually been sub-par. The S&P 500 returned short of 7% per year over the last 10 years. The historic average is 10%. If the market is due for a correction because the short and intermediate numbers are above average, does it also have room to run to the upside over the long term?
As usual, Warren Buffett’s letter to shareholders of Berkshire Hathaway is a must-read. It is well known that he advocates low-fee indexing for most investors. As his famous bet with a hedge fund of funds manager winds down, Buffett unleashed both barrels on high-fee money managers:
“The underlying hedge-fund managers in our bet received payments from their limited partners that likely averaged a bit under the prevailing hedge-fund standard of “2 and 20,” meaning a 2% annual fixed fee, payable even when losses are huge, and 20% of profits with no clawback (if good years were followed by bad ones). Under this lopsided arrangement, a hedge fund operator’s ability to simply pile up assets under management has made many of these managers extraordinarily rich, even as their investments have performed poorly.
Still, we’re not through with fees. Remember, there were the fund-of-funds managers to be fed as well. These managers received an additional fixed amount that was usually set at 1% of assets. Then, despite the terrible overall record of the five funds-of-funds, some experienced a few good years and collected “performance” fees. Consequently, I estimate that over the nine-year period roughly 60% – gulp! – of all gains achieved by the five funds-of-funds were diverted to the two levels of managers. That was their misbegotten reward for accomplishing something far short of what their many hundreds of limited partners could have effortlessly – and with virtually no cost – achieved on their own.”