How to Lower the Volume on Social Media Noise

December 5th, 2016 Posted by Investor Behavior 0 thoughts on “How to Lower the Volume on Social Media Noise”

Does this scenario sound familiar? In the morning, you pick up your smart phone or sit down at your computer and, immediately, little numbers alert you to emails, texts, voice mail, and notifications from your apps. You delete the ones you don’t need or want.  You process as many quick actions, and skim as many messages and articles, as you can before the actual business of your day begins. You feel that maybe you have today under control.

But then, as the day progresses, you get beeps or banners begging for yet more of your attention. And if you have to be away from your digital screens for any length of time, you are buried under another barrage when you return. It doesn’t help that the flurry of social “noise” around current events has increased stress levels around issues that are already stressful.

We have at our fingertips immense amounts of information, as well as disinformation. It is more than one person can thoroughly process. It can be overwhelming. But deal with it we must, if we do not want to be left behind as the rest of the world rushes by in sound bites and visual distractions. So how can you juggle everything and maintain any sense of calm?

We will share some thoughts here, keeping in mind that the response to all this noise varies from one person to the next. If you are someone who thrives on frenetic activity, you do not need to read further. If you think you are ready to give up and get rid of all your sources of electronic information, you can stop here as well. But if you are looking for a happy medium that can bring your life into more balance, read on. We will focus primarily on email and touch on some other forms of electronic communication.

Email consists of mass marketing, personal conversations, business communications, and more. There are ways that you can manage the deluge. You can trash a message immediately, of course. You can send quick replies when appropriate, saving thoughtful replies for a dedicated time you have set aside (as people did when writing letters on paper was the norm). Ultimately, you can label and file emails for future reference in separate mailboxes organized by subject matter. If you do not want to file, keep only what you need and use your server’s search engine to find an item you need to look at again. Starring or flagging email messages is helpful, too, if you don’t overdo it.

There are other options for dealing with mass emails you don’t want. You may mark them as spam or junk, so that future messages from the same source go directly to your junk box. But remember to check your junk/spam box occasionally to make sure you haven’t missed an important item. Finally, you can take a moment to locate the unsubscribe option buried somewhere in the content. Click on it and confirm, or choose to receive fewer messages, if that choice is provided. (A word to the wise here—only unsubscribe from things that you know you signed up for. Some senders you don’t recognize will offer the unsubscribe option just to lure you into their system.) Gradually, you will see a meaningful reduction in the amount of time you spend reviewing and deleting messages.

When sending an email, do yourself and your recipients a favor. Unless you are writing a rambling letter, limit the action items or vital information to what can be summarized in the subject line. You may end up sending more messages, but they will be easier for people to identify and to assess what is urgent. The replies you receive will be more efficient, as well.

Texting, Instagram, Snapchat, Twitter, and other “instant” messaging can add to the clutter of your day. Just because they are instant does not mean they all need instant action. One of the nice things about texting is that you can send a message and not worry about disturbing someone with a phone call at a bad time. But how often do we feel impatient when someone doesn’t reply right away? If you need to reach someone about an urgent matter, follow up with a phone call. If the person doesn’t answer, at least they will know that you are serious about reaching them (if they have their device on and within reach).

Now a bit about Facebook: Manage your settings so that you receive fewer (or no) notifications via email. Categorize your friends so that your closest ones appear higher in your newsfeed. If you enjoy scrolling in your leisure time, go for it. Otherwise, discipline yourself not to scroll when your focus should be elsewhere. You’ll feel less scattered.

LinkedIn, Pinterest and other apps can also be demanding. Be sure to manage your settings so that you are only receiving alerts that you want. You can designate special times of the day to deal with these apps, so that you have a more cohesive experience with each of them.

Finally, here is our pledge to you:

The emails we send you will be useful and not too frequent. If you have preferences, please let us know and we will honor them. Our website blog and social media postings offer helpful information that may stand alone, or may link to related items. We generally post on a weekly basis, unless unusual circumstances deem otherwise. Our goal is to keep you informed. And, of course, if you ever have any questions, please give us a call at 203-985-0448.


[Photo credit: Flickr Philips Communications]


Tax-Loss Harvesting: Opportunities and Obstacles

November 22nd, 2016 Posted by Investor Behavior, Taxes and Tax Management 0 thoughts on “Tax-Loss Harvesting: Opportunities and Obstacles”

So much of investing is beyond our control (picking stock prices, timing market movements and so on), it’s nice to know that there are still a number of “power tools” we can employ to potentially enhance our clients’ bottom line. Tax-loss harvesting is one such instrument … although the analogy holds true in a couple of other ways: It’s best used skillfully, and only when it is the right tool for the task.

The (Ideal) Logistics

When properly applied, tax-loss harvesting is the equivalent of turning your financial lemons into lemonade by converting market downturns into tangible tax savings. A successful tax-loss harvest lowers your tax bill, without substantially altering or impacting your long-term investment outcomes.

Tax Savings

If you sell all or part of a position in your taxable account when it is worth less than you paid for it, this generates a realized capital loss. You can use that loss to offset capital gains and other income in the year you realize it, or you can carry it forward into future years. We can realize losses on a holding’s original shares, its reinvested dividends, or both. (There are quite a few more caveats on how to report losses, gains and other income. A tax professional should be consulted for how it all applies in specific cases.)

Your Greater Goals

When harvesting a loss, it’s imperative that you remain true to your existing investment plan as one of the most important drivers in achieving your ultimate financial goals. To prevent a tax-loss harvest from knocking your carefully structured portfolio out of balance, we reinvest the proceeds of any tax-loss harvest sale into a similar position (but not one that is “substantially identical,” as defined by the IRS). Typically, and when appropriate, we then return the proceeds to your original position no sooner than 31 days later (after the IRS’s “wash sale rule” period has passed).

The Tax-Loss Harvest Round Trip

In short, once the dust has settled, our goal is to have generated a substantive capital loss to report on your tax returns, without dramatically altering your market positions during or after the event. Here’s a three-step summary of the round trip typically involved:

  1. Sell all or part of a position in your portfolio when it is worth less than you paid for it.
  2. Reinvest the proceeds in a similar (not “substantially identical”) position.
  3. Return the proceeds to the original position no sooner than 31 days later, as appropriate.

Practical Caveats

An effective tax-loss harvest can contribute to your net worth by lowering your tax bills. That’s why we keep a year-round eye on potential harvesting opportunities, so we are ready to spring into action whenever market conditions and your best interests warrant it.

That said, there are several reasons that not every loss can or should be harvested. Here are a few of the most common caveats to bear in mind.

Trading costs – You shouldn’t execute a tax-loss harvest unless it is expected to generate more than enough tax savings to offset the trading costs involved. As described above, a typical tax-loss harvest calls for four trades: There’s one trade to sell the original holding and another to stay invested in the market during the waiting period dictated by the IRS’s wash sale rule. After that, there are two more trades to sell the interim holding and buy back the original position.

Market volatility – When the time comes to sell the interim holding and repurchase your original position, you ideally want to sell it for no more than it cost, lest it generate a short-term taxable gain that can negate the benefits of the harvest. We may avoid initiating a tax-loss harvest in highly volatile markets, especially if your overall investment plans might be harmed if we are unable to cost-effectively repurchase your original position when advisable.

Tax planning – While a successful tax-loss harvest shouldn’t have any impact on your long-term investment strategy, it can lower the basis of your holdings once it’s completed, which can generate higher capital gains taxes for you later on. As such, we want to carefully manage any tax-loss harvesting opportunities in concert with your larger tax-planning needs.

Asset location – Holdings in your tax-sheltered accounts (such as your IRA) don’t generate taxable gains or realized losses when sold, so we can only harvest losses from assets held in your taxable accounts.

Adding Value with Tax-Loss Harvesting

It’s never fun to endure market downturns, but they are an inherent part of nearly every investor’s journey toward accumulating new wealth. When they occur, we can sometimes soften the sting by leveraging losses to a client’s advantage. Determining when and how to seize a tax-loss harvesting opportunity, while avoiding the obstacles involved, is one more way we seek to add value to our clients’ end returns and to their advisory relationship with us. Let us know if we can ever answer any questions about this or other tax-planning strategies you may have in mind. Feel free to give us a call at 203-985-0448.

[Photo Credit: Flickr user B. Gilmour]

Post-Election Reflections

November 10th, 2016 Posted by Investor Behavior, Politics 0 thoughts on “Post-Election Reflections”

Whether you’re feeling elated, deflated or mostly just jaded about what just happened in the U.S. elections, we wanted to share a few thoughts related to the “What’s next?” that may be on your mind.

First, a word: There are more than enough political analyses available from even a single Google search, so we won’t enter into that fray ourselves.

With respect to our clients’ investments, here’s a quick reminder of how we feel about that: Ample evidence informs us that it is unwise to alter your well-thought-out, long-term investment strategy in reaction to breaking news, no matter how exciting or grim that news may seem, or how the markets are immediately responding.

As we saw with the unexpected outcome of this summer’s Brexit referendum, the biggest surprise may be how resilient markets tend to be, as long as you give them your time and your patience. In fact, early results indicate that the markets may already have priced in the possibility of the relatively long-shot outcome that occurred.

That said, if any of our clients want to make changes to their investment portfolio in the aftermath of Tuesday’s election, we urge them to be in touch with us first, so we can do the job they hired us to do. Specifically, they can count on us to advise and assist them based on our professional insights, their personal goals and – above all – their highest financial interests.

In the meantime, consider these words by billionaire businessman and “stay put” investor Warren Buffett, from his 2012 letter to Berkshire Hathaway shareholders:

“America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful). American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. … The risks of being out of the game are huge compared to the risks of being in it.”

Buffett published these sentiments on March 1, 2013, shortly after the last presidential election cycle. If you review the volume of his writings, you’ll find that he has expressed similar viewpoints on many occasions and through many markets, fair and foul.

Presidential terms are four years long. If you are one of our clients, your investment portfolio has been structured to last a lifetime. Remember that as you consider your personal “What next?” … and please call us if we can assist. And if you are not our client, we still encourage you to give us a call at 203-985-0448. We’d be happy to answer your questions.

Structured CDs: Buyer Beware!

September 29th, 2016 Posted by Investment Strategy, Investment Vehicles, Investor Behavior 0 thoughts on “Structured CDs: Buyer Beware!”

Most investors are familiar with Certificates of Deposit (CDs). You purchase one, and the bank pays you a bit of interest on it, plus your principal back. They don’t yield much, but they’re nearly as dependable as it gets. As such, CDs can often serve as sensible tools for offsetting the risk inherent to pursuing higher expected returns in the stock market.

Wall Street’s product pushers, however, have figured out a way to swipe the name from this traditional household workhorse and turn it into a monster money-maker … for themselves, that is. We’re talking about “structured” or “market-linked” CDs. The name may seem familiar, but the rules of engagement are quite a bit different.

A recent Wall Street Journal article, “Wall Street Re-Engineers the CD – and Returns Suffer,” exposed the ways that big banks are peddling these products. It starts with a tempting pitch that goes something like this: As long as you hold the product to maturity, your principal is returned. If the stock market goes up (as defined by whatever market “basket” the providers happen to choose) you also receive a percentage of the increase.

At a glance, what’s not to like about this sort of “heads you win, tails you don’t lose” appeal? Unfortunately, there are usually plenty of traps lurking in the fine print. Positive returns are typically capped to single-digit annual percentages, while negative returns can plummet much more steeply before they’ll no longer impact your end returns. And the fees can run into multiple percentage points of the structured CD’s face value.

The WSJ article reports (emphasis ours): “The adviser who actually sells the [structured] CD, for example, can get commissions of up to 3% of the CD’s value, according to information sent to brokers reviewed by the Journal. ‘Banks have to be delighted with these structured products,’ said Steve Swidler, a finance professor at Auburn University. ‘There’s virtually no risk to them, and [the banks] sit back and rake in fees.’”

It may be easy to overlook the significance of these costs and imbalances, especially if you’ve decided that you’re okay with paying extra for the promise that you will not lose your nest egg. But in fulfilling their role as a safe investment, structured CDs can be more than a little skewed in favor of the big banks. From the WSJ article:


  • “[O]f the 118 structured CDs that were issued at least three years ago, only one-quarter posted returns better than those of an average five-year conventional CD. And roughly one-quarter produced no returns at all as of June 2016.”
  • “[M]arket-linked CDs issued since 2010 by Bank of the West … revealed a similar pattern. Sixty-two percent produced returns lower than an investor would have received from a five-year conventional CD, while almost a quarter have yet to pay any return at all.”


Given how many other far less complex and costly ways there are to expect similar results, why start with an uphill climb? The WSJ article noted how one investor, a 79-year-old widow, was shocked to see her $100,000 investment immediately drop to $95,712 after incurring upfront fees. The fees had been disclosed in the 266-page description that came with her purchase, but she hadn’t read it. Would you have?

“This was not a CD as I know a CD,” she complained.

Our preferred approach?

  • Insist on transparent costs and clear, understandable performance reports.
  • Be highly skeptical of one-off products that promise both higher returns and lower risks. There are almost always expensive tricks and traps lurking in the fine print.
  • Focus instead on investing according to a well-thought-out, customized plan that positions your total portfolio to reflect your long-term goals and risk tolerances.

These essential concepts may not be fancy or new-fangled, but unlike those allegedly higher returns that a structured or market-based CD is supposed to deliver, they’re far more likely to see you through to your own end goals.

Questions? We would welcome your call at 203-985-0448.


What If Everyone Were an Evidence-Based Investor?

September 16th, 2016 Posted by Investment Vehicles, Investor Behavior 0 thoughts on “What If Everyone Were an Evidence-Based Investor?”

For as long as we’ve been in business, we have encouraged investors to adopt a patient, long-term approach to capturing the market’s expected returns. In industry parlance, some have categorized our approach as “passive,” versus active attempts to beat the market. We prefer to think of ourselves as evidence-based.

Call it what you will, a frequently asked question remains.

What if everyone were a passive investor? Wouldn’t the markets collapse?

The question has resurfaced in a recent AllianceBernstein client note entitled “The Silent Road to Serfdom: Why Passive Investing is Worse Than Marxism.” Its authors reportedly proposed that a “supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active market led capital management.”

If every investor embraced evidence-based investing, it is true that markets as we know them would cease to exist. But does that put passive investing on level with Marxism, or worse?

Is passive investing “unfair” or bad for the economy?

In “Indexing Is Capitalism at Its Best,” AQR Capital Management’s Cliff Asness counteracts the presumption that passive investing is an enemy to free market economies: “[T]he use of price signals by those who played no role in setting them may be capitalism’s most important feature. … That most of us and most of our dollars don’t have to pick stocks, or to price air conditioners, is a great benefit and taking advantage of it makes us honest smart capitalists, not commissars.”

In other words, we arrive at relatively efficient “supply and demand” pricing in our capital markets the same way we do in any other market around the world. Whether it’s for stocks or socks, donuts or dollars, all it should take is a handful of active, engaged players to create relatively fair pricing that interested buyers and sellers can agree to.

It’s also interesting to note that the players who object the most to allegedly free-loading passive investors are usually the same ones whose profits are being squeezed down by the market forces at work when passive investors avoid hyperactive trading costs.

In his review of the note, Morningstar’s John Rekenthaler observed: “Whenever active investment managers write about indexing, the suspicion arises that they arrived at the conclusion first, then searched for their reasons later. This AllianceBernstein paper does nothing to change that view.”

How many active investors does it take to keep the markets chugging along?

There is no definitive answer on how many active investors are required to set reasonable trading prices. In his column, financial author Larry Swedroe explains that passive investors “receive all the benefits from the role that active managers play in making the financial markets efficient without having to pay their costs. In other words, while the prudent strategy is to be a passive investor, you don’t want everyone to draw that conclusion.”

Swedroe suggests that “at least 90% of the active management industry could disappear and the markets would remain highly efficient.” Vanguard founder John Bogle (who launched the world’s first public index fund) also has estimated that a 90% passive market should be sustainable. Burton Malkiel, author of the classic, “A Random Walk Down Wall Street,” has set the number even higher. “[W]hen indexing is 95 percent of the total, I might start to worry about that,” he says. “But I think with indexing [at] 30 to 35 percent of the total, there is [sic] still plenty of active managers out there to make sure that information gets reflected quickly. And in fact I think it’ll always be the case.”

How plausible is it that we’ll reach a breaking point, with too many passive investors?

Malkiel’s comments bring up another good point. Let’s say we’re wrong. What if, to remain relatively efficient, the markets need a lot more active players than we’re suggesting?

We’re still not worried about it.

Echoing Malkiel’s estimates, Swedroe observes of the U.S. markets: “Despite their growing share of the market (passive funds now control perhaps one-third of all assets under management), they still account for only a small percentage of trading activity. According to a Vanguard spokesman, on a typical day, only 5–10% of total trading volume comes from index funds.”

In other words, there are still plenty of active trades taking place for effective pricing, and there is good reason to believe that this necessary level of price-setting will persist indefinitely.

Behavioral finance is alive and well. The study of behavioral finance informs us that investors are, after all, only human, and are often driven by chemically generated instincts and emotions that have nothing to do with solid evidence and rational decisions. We see examples of this every time investors chase the latest trend or flee real or perceived risk en masse. Behavioral traits such as herd mentality, recency, and tracking-error regret take over, and are reflected in the market’s prices. This is not passive investing; it’s active. And it appears to have remained highly pervasive, among individual and institutional investors alike.

Capitalism is also alive and well. In their purest sense, “active” and “passive” investing represent opposite extremes on a vast spectrum of possibilities. A wholly passive investor would simply buy and hold the entire market and accept its returns. A fully active investor would always seek to trade profitably by forecasting future prices.

In reality, most investors are neither fully passive nor fully active. They are often more one or more the other, especially when we consider global markets. This means we should expect price-setting participants to remain a substantial force in the markets … regardless of what we call them, and which label may be more prevalent.

As Malkiel observes: “That’s the wonderful thing about capitalism. If you have free markets and somebody can jump into the markets if there is an opportunity, you can count on the fact that somebody will. … If in fact it was the case that markets were getting less and less efficient in reflecting information, believe me, there would be a profit motive for somebody to jump in.”

Evidence-Based Investing in Capital Markets

Where does that leave an evidence-based investor? To help us chart a sensible course in an environment where even our own instincts can steer us wrong, we turn to the best evidence we can find on how to effectively manage our money in markets that mostly set fair prices.

Practically speaking, that evidence informs us that generating long-term returns calls for a patient approach, focused on managing the market risks involved, minimizing unnecessary costs, and avoiding the many behavioral traps that otherwise lead investors astray.

If we can serve you by helping you invest according to these and similar principles – if we can serve your highest interests and personal financial goals – we believe you can expect that the capital markets will continue to serve you well, as well. If you have any questions, please give us a call at 203-985-0448.

Presidents, Politics, and Your Portfolio: Thinking Beyond Stage One

August 31st, 2016 Posted by Investment Strategy, Investor Behavior, Politics 0 thoughts on “Presidents, Politics, and Your Portfolio: Thinking Beyond Stage One”

It’s no surprise that this year’s U.S. presidential race has become a subject of conversation around the globe. In “Why Our Social Feeds are Full of Politics,” Canadian digital marketing executive Tara Hunt observes, “American politics, it seems, makes for high-intensity emotions far and wide.” The intensity will probably only increase as the November 8 election date nears.

We are by no means endorsing that you ignore what is going on in the world around you. Politics and politicians regularly and directly affect many aspects of our lives and our pocketbooks. But as you think through this year’s raucous race, remember this:

The more heated the politics, the more important it is to establish and maintain a well-planned, long-term approach to managing your investments.

So go ahead and talk politics all you please – and if you are an American, be sure to vote. But when it comes to your investments, it’s best to ignore any intense emotions and the dire or ebullient predictions that spring from them, as dangerous distractions to your financial resolve.

Thinking in Stages

Have you ever heard of stage-one and stage-two thinking? They’re terms popularized by economist Thomas Sowell in his book, “Applied Economics: Thinking Beyond Stage One.” Basically, before acting on an event’s initial (stage one) anticipated results, it’s best to engage in stage-two thinking, by first asking a very simple question:

“And then what will happen?”

By asking this question again and again, you can more objectively consider what Sowell refers to as the “long-run repercussions to decisions and policies.”

Investing in Stages

In investing, we see stage-one thinking in action whenever undisciplined dollars are flooding into hot holdings or fleeing immediately risky business. Stage-two thinking reminds us how often the relationship between an event and the world’s response to that event is anybody’s guess and nobody’s certain bet. A recent Investopedia article, “Does Rainfall in Ethiopia Impact the U.S. Market?” reminds us how market pricing works:

“No one knows how any of these events will impact markets. No one. That includes financial advisors who have access to complex computer models and investment strategists in the home office with cool British accents. They don’t know, but their livelihood depends upon appearing to know. Few of them are ever held accountable for the innumerable predictions they got wrong. They simply move on to the next prediction, the next tactical move.”

Investors should avoid trying to predict future market pricing based on current market news.

Reflections on Presidential Elections

Stage-two thinking is especially handy when considering the proliferation of predictions for anything from financial ruin to unprecedented prosperity, depending on who will next occupy the Oval Office.

Again, the problem with the vast majority of these predictions is that they represent stage-one thinking. As financial author Larry Swedroe describes in a US News & World Report piece, “Stage one thinking occurs when something bad happens, you catastrophize and assume things will continue to get worse. … Stage two thinking can help you move beyond catastrophizing. … [so you can] consider why everything may not be as bad as it seems. Think about previous similar circumstances to disprove your catastrophic fears.”

In the current presidential race, we’re seeing prime examples of stage-one thinking by certain pundits who are recommending that investors exit the market, and sit on huge piles of cash until the voting results are in. At least one speculator has suggested that investors should move as much as 50 percent of their portfolio to cash!

And then what will happen?

Here are some stage-two thoughts to bear in mind:

  • Regardless of the outcome of the election, there’s no telling whether the markets will move up, down or stay the same in response. By the time they do make their move, the good/bad news will already be priced in, too late to profit from or avoid.
  • In the long run, the market has moved more upward, more often than it moves downward, and it often does so dramatically and when you least expect it.
  • Moving to cash would generate trading costs and potentially enormous tax bills. Worse, it would run contrary to having a sensible plan, optimized to capture the market’s unpredictable returns when they occur, while minimizing the costs and manageable risks involved.

In this or any election, stage-two thinking should help you recognize the folly of trying to tie your investment hopes, dreams, fears and trading decisions to one or another candidate. Politics matter – a lot – but not when it comes to second-guessing your well-planned portfolio. If you still have questions, please give us a call at 203-985-0448.

OpenCircle’s Fixed Income Methodology

August 24th, 2016 Posted by Investment Strategy, Retirement Planning, Saving 0 thoughts on “OpenCircle’s Fixed Income Methodology”

For a deeper understanding of how we approach fixed-income investments based on academic evidence, this analysis will help. Learn how we balance credit risk, interest rate risk, and reinvestment risk. To discuss further, please call us at 203-985-0448.

The Role of Fixed Income

OpenCircle’s fixed income philosophy starts with the premise that most portfolios contain elements of equities in addition to fixed income. Both asset classes have their specific roles to play: equity for capital appreciation and fixed income as a portfolio stabilizer and a diversifier of portfolio risk. It is important for both asset classes to maintain their clearly defined roles throughout the life of the portfolio. For fixed income, this means ensuring the fixed income portfolio is not stretched in search of additional yield by assuming imprudent risks. Purchasing low-credit-quality bonds or bonds in risky market sectors are strategies that fall into the risk-stretching category.



Academic Evidence

There are three primary risks within the fixed income markets: 1) credit risk, 2) interest rate risk and 3) reinvestment risk. We will discuss in detail these risks and how our approach to fixed income can combat them.

Credit Risk

Credit risk is the risk that a fixed income security will not pay all principal and interest. Arguably, any security that is not a Treasury bond (or a bond issued by another highly rated government entity) has some measure of default risk. The primary way to assess the reward of bearing credit risk is to look at the credit premium, which is measured by comparing the returns between investment-grade corporate bonds and their Treasury counterparts. One difficultly with measuring the credit premium is that high-quality data only goes back to the late 1980s, unlike most other market data that can be traced to the 1920s. Despite this relatively short period of data, we can still draw some interesting conclusions.

From 1989–2015, the investment-grade credit premium averaged only 0.43 percent per year, with volatility around 6.6 percent and a Sharpe Ratio (a measure of risk-adjusted returns) of only 0.07.

This last figure compares rather unfavorably to the Sharpe Ratio of 0.40 for the equity risk premium (stocks – bonds) over that same time period, making the equity markets much more advantageous from a risk/return perspective. Lastly, the investment-grade credit premium has a positive correlation to the equity markets, meaning they both tend to underperform or outperform at the same time. This makes investment-grade corporate bonds less effective as a portfolio diversifier.

Investment-grade bonds are only half of the credit spectrum in the fixed income markets. To properly evaluate the full credit spectrum, the high-yield credit premium must also be measured. From 1989–2015, the high-yield credit premium averaged 2.9 percent per year. While this premium looks enticing on the surface, it comes at a price in the form of much greater volatility of 16.3 percent. Factoring in the increased volatility, the Sharpe Ratio for the high-yield credit premium drops to only 0.18, which is still well below the equity risk premium of 0.40. More alarming, the high-yield credit premium is the correlation to the equity markets, which is very high at 0.61.

Due to their low Sharpe Ratios and high correlations to equities, we avoid both investment-grade and high-yield corporate bonds.

Interest Rate Risk

This is the risk that a fixed income investment’s value will change due to a change in the level of interest rates. Longer-term bonds are more sensitive to interest rate risk than their shorter-term counterparts. Longer-term bonds do carry higher yields to compensate investors for accepting more interest rate risk. The question then becomes how far out should an investor go on the yield curve to get the proper balance between yield and interest rate risk?

The first thing we want to look at is the term premium, which examines whether interest rate risk has been rewarded. Traditionally, the term premium has been measured as the difference in returns between short-term Treasury bills and the five-year Treasury note. From 1927–2015, the term premium averaged 1.9 percent with a Sharpe Ratio of 0.37. The risk-adjusted return of 0.37 compares very favorably to the equity risk premium of 0.40 over that same time period, indicating that extending to the intermediate portion of the curve is an attractive option. Another important piece of data to note is that the term premium has zero correlation to the equity premium, making it an ideal diversifier.

Much like the credit premium, we also need to look at the full yield curve and examine term premium for the long-maturity portion of the curve. This is best examined by comparing the returns on long-term Treasury bonds and the five-year Treasury note. Over that same 1927–2015 period, the longer-term premium was only 0.7 percent, which is well below the 1.9 percent premium for the intermediate portion of the curve. The risk adjusted returns as measured by the Sharpe Ratio are also significantly less at 0.12 versus 0.37 for the intermediate-term premium. This data clearly shows that extending to longer-maturity securities has not been rewarded historically.

Based on this evidence, we invest in short- to intermediate-term bond portfolios in an attempt to capture the term premium. We avoid long-term bonds and their lower risk-adjusted returns.

Reinvestment Risk

This is the risk that future interest and principal payments, when received and reinvested, will earn less than the prevailing market interest rate. Traditionally, bonds with long maturities will have less reinvestment risk because they lock in the rate of interest earned on principal for a longer period of time.

Our Fixed Income Philosophy

The next logical question: How do we most effectively balance these risks associated with fixed income? The most effective way to combat these risks is through the use of a well-constructed bond ladder. A bond ladder is a portfolio of fixed income securities with equal weights that come due in varying maturities. For example, if a client had $1 million to invest in fixed income and wanted to create a 1–10-year bond ladder, he or she would purchase bonds in $100,000 increments in each year from 1–10 years.

A bond ladder is such an effective tool because it is able to strike a balance between both reinvestment and interest rate risk while also helping mitigate credit risk. Credit risk is the easiest of the three risks to hedge because it is the most straightforward. This risk can easily and effectively be reduced in a portfolio by limiting fixed income purchases to only high-quality bonds.

Reinvestment risk and interest rate risk are much harder to hedge as they compete with each other. For example, the most effective way to reduce interest rate risk is to buy only short maturities in the portfolio. Unfortunately, this strategy greatly increases reinvestment risk because principal and interest will need to be reinvested often. On the opposite end of the spectrum, purchasing longer-term bonds would be the most effective solution to fully hedge against reinvestment risk because that would lock in the yield on the portfolio for a greater period of time. The downside is these long-term maturities would increase the interest rate risk in the portfolio. A bond ladder balances these risks. The short-term maturities help protect the portfolio against interest rate risk while the intermediate-term maturities help reduce reinvestment risk. The ladder strikes a balance between these two risks by lowering the overall volatility of the portfolio while diversifying equity risk.

Although not a portfolio risk, per se, asset location is another important consideration when investing in the fixed income markets. Asset location is the process of determining what asset classes to place in tax-advantages accounts (Roth IRAs, IRAs and other retirement plan accounts) versus taxable accounts (joint accounts, individual accounts, etc.). The logic here is simple: If possible, strategies with high effective tax rates should be sheltered in tax-advantaged accounts. Fixed income fits this definition because the bulk of the return is generated from coupon interest, which is taxable at a client’s marginal tax bracket. Because of this, fixed income is sheltered in tax-advantaged accounts as much as possible.

Constructing Fixed Income Ladders

Now, let’s discuss how bond ladders are constructed. To deliver the best after-tax returns, we build customized fixed income ladders with targeted durations between three and five years using the most optimal mix of taxable, tax-exempt and inflation-protected securities. The duration and mix of securities is all predicated on the asset location and tax status of each individual client as no two portfolios are constructed the same.

Distinguishing Features

A pure, academically based philosophy relying on peer-reviewed literature:

  • Optimize risk-adjusted rates of returns.
  • Do not incur expenses attempting to “beat the market” by forecasting interest rate movements or selecting mispriced securities.
  • Minimize costs by reducing price markups and avoiding costly infrastructure expenses of an active portfolio management approach.
  • Maximize after-tax returns by strategically locating tax-efficient assets in taxable accounts and tax-inefficient assets in tax-advantaged accounts and tax-loss harvesting year-round.

True customization based on a client’s individual circumstances:

  • A thorough discovery process uncovers a client’s needs and objectives, including financial objectives, risk tolerances, current and future income needs, tax status, health status, gifting requirements, and philanthropic desires.
  • Create a written fixed income investment plan tailored to each investor.
  • A comprehensive approach considers assets across all investable accounts.

Diversified instrument implementation:

  • Employ both taxable and tax-exempt securities to provide the best after-tax yield.
  • Use TIPS to hedge against unexpected higher inflation.
  • Use both individual securities as well as bond funds when appropriate.

Portfolio maintenance:

  • Screen portfolios daily for any changes in credit quality.
  • Monitor portfolios weekly for upcoming maturities and redemptions.
  • Monitor portfolios for 18 other material events that could affect credit quality.


Parenting Your Wealth in Uncertain Markets

August 18th, 2016 Posted by Investment Strategy, Investment Vehicles, Investor Behavior 0 thoughts on “Parenting Your Wealth in Uncertain Markets”

In the face of political drama at home and abroad, it’s certainly been a summer for trying our patience, hasn’t it? For anyone who has ever been a parent or a child – that is, for everyone – there are several comparisons we can draw between good parenting and good wealth management. For both, plenty of patience is one of the most important qualities to embrace.

Patience Is Your Greatest Strength

As an investor, you probably have plenty of “those days” when you wonder whether your money is ever going to grow up. It doesn’t do as you hoped for. It misbehaves. It runs with the wrong crowd. It ignores your best efforts to protect it from harm.

But then there are those other days. Suddenly, your money hits a growth spurt, exceeding all expectations! It’s then that you realize that many of the greatest challenges you and your investments faced along the way are the same ones that are contributing to its strength and shaping its character over time.

In the Markets, “Unusual” Is Business as Usual

As much as we would prefer our wealth to mature in a calm, orderly way, there is solid evidence to demonstrate that returns are far more likely to occur in these sorts of anxiety-generating fits and starts.

For example, you may recall that January 2016 was an unsettling time in the market, with particularly petulant returns. Some pundits blamed China and oil and what-not. Especially in retrospect, there was no incredibly obvious reason; it was just in one of those moods.

On the flip side, in the wake of the June 23 Brexit referendum, when we might have expected the market to remain in a funk for a while, it took a dive but then mostly continued upward, especially in the U.S., where stock market indexes experienced a number of record highs in July.

During the January doldrums, Vanguard published an overview of how common it is for markets to lurch into correction territory or lower, despite their overall upwardly mobile track record. Vanguard observed, “Since 1928, the Standard & Poor’s 500 Index has spent 40% of the roughly 88-year span in some sort of setback – a correction or bear market. Over that same period, however, the index has produced an average annualized return of about 10%.”

Vanguard concluded: “A review of corrections and bear markets suggests that patience and discipline are the best responses to market turmoil.” Our point exactly.

No Favorite Child

That’s not to say that you should plan for 10% annual returns in your financial future. Most investors are wise to offset the heated risks involved in pursuing higher expected returns with an appropriate helping of “cooler” holdings. We also suggest employing global diversification to manage the market risks that you do take on. Spreading your risks among multiple kinds of holdings around the world can be compared to raising several children, without choosing a favorite. Each is expected to contribute in its own special way.

The Importance of Being There

What parents don’t have days when they wish they could bypass some of the drama and skip straight to the good stuff? And yet we know that child-rearing requires us to be there for our offspring 24×7, through thick and thin, on good days and bad.

We also know that, even though we give it our all, there are no guarantees. The most you can do is the best that you can – day in, day out – with the most accurate information you can find. If patience is your greatest virtue, consistence and persistence are your power tools to maximize it.

So it should be with investing, where you should avoid the temptation to jump in and out of uncertain markets. We know they are going to often misbehave and sometimes disappoint. We even know that they may never deliver as hoped for. But once you have done everything you can to position your portfolio for the outcome you have in mind, you’ve also done everything you can to stack the odds of success in your favor. The rest is where that patience comes in.

The Power of Patience

Consider the article by Chicago Tribune financial columnist Jill Schlesinger, “Time in the market – not market timing – is the secret to investment success.” In it, Schlesinger shares stock market research dating back to 1927, finding that “for those who invest for a single day, the chance of losing money is 46 percent, but for those who invest with a 10-year investment horizon the chance of success improves dramatically – to 87 percent.”

The Wall Street Journal personal financial columnist Jason Zweig offers us a visual of the same phenomenon in his article, “Volatility: In the Eye of the Beholder.” There, he considers a year’s worth of S&P 500 returns:

“Viewed daily over the 12 months that ended March 31 [2016], the S&P 500’s moves look superficially like the EKG of someone having a heart attack. Viewed quarterly, they resemble a shruggie emoticon without the smirk. And seen over the full sweep of the last 12 months, the market’s moves look like a whole lot of nothing happening in slow motion.”

Zweig describes how time has a way of smoothing out the best and worst days, and tilting the odds in our favor. As a bonus, a patient investment strategy also tends to minimize trading activities, and the costs involved, which can further contribute to your end returns.

By thinking of your wealth from this perspective, it might help you take a deep breath and carry on as this year’s politics unfold – or whenever you face difficult decisions on how to best care for your precious holdings. By sticking with a disciplined plan, day in and day out, you stand the best odds for raising wealth that you’ll be proud to call your own in the end.


Women and Investing: Facts, Myths, and Financial Self-Care

August 11th, 2016 Posted by Budgeting, Family Finances, Investment Strategy, Investor Behavior, Life Planning, Marriage and Finances, Retirement Planning 0 thoughts on “Women and Investing: Facts, Myths, and Financial Self-Care”

Women control $5 trillion in investable assets in the United States, and the potential for future growth is enormous. Today, women represent more than 51 percent of the workforce and are starting businesses at twice the rate of men. On the flip side, men’s retirement account balances average more than 50 percent higher than women’s. The gender retirement gap is further compounded by the fact that women tend to live an estimated five to six years longer than men.

The data shows that, on their own, many older women have less money saved to draw from, as well as higher expenses. All too often, this dangerous combination results in financial insecurity. It’s imperative to understand why this gender retirement gap exists, and what can be done about it.

  • The Gender Pay Gap: Statistically, for every dollar men take home, women earn 79¢. That means women will make an estimated $530,000 less over their lifetimes, thus also reducing the amount of money they have to invest. We need to address this inequity as a society, but in the meantime, women in the workforce should not shy away from asking for a raise.
  • Family Responsibility: Many women take more time off work than their male counterparts to raise children or care for elderly parents. Not working outside the home means more than just losing a paycheck. It also means having less disposable income to invest in the long term and may translate into lower Social Security benefits.
  • Cost of Living: Life as a woman actually costs more. For starters, think wardrobe and personal care. And while there may be little we can do to reduce some of these costs, there are still ways to combat this problem. For instance, women often end up paying more for items such as mortgages and cars. By vigilantly researching the best loan rates available, women can negotiate from a stronger position and potentially reduce excessive costs over a lifetime.
  • The Gender Investment Gap: Although women actually save more of their disposable income than men, they tend to invest less of it, leaving a lot of their money in cash or low-yield savings accounts. But when women put together personal plans to bridge the gender investment gap, it can have dramatic, positive consequences for their financial lives. Before we explore ways to move forward in a positive direction, let’s talk about why women often show hesitancy when investing. It’s likely that they’re buying into one or more of the many myths about women and money.

Negative stereotypes and myths about women and finance:

  • Men are better investors than women. Not so. Research shows that when women invest, they tend to be highly successful, outperforming men. Not to mention that funds managed by women consistently outperform their alternatives.
  • Women are too risk averse to invest successfully. True, many women are risk averse. But wait. Can’t caution in investing actually be a virtue that helps you better weigh your options and avoid making poor or rash decisions? Yes – so long as you keep in mind that some risk must be taken in order to realize the returns needed to grow your wealth. This shouldn’t present a problem for women, or any investors, when the connection between their values, goals, financial plan and investments is clear and all are in alignment.
  • Women don’t have enough financial education to make a financial plan. Although this myth represents a gross generalization, there’s no denying that everyone could benefit from getting a better financial education. Not having one, however, has never stopped men from investing.

Moving ahead with saving and investing as a form of self-care:

  • Budget: Try to think of budgeting as less about numbers and more about personal awareness. It’s a check-in to see whether you are spending on the things that matter to you most. Set boundaries that ultimately will set you free to create and pursue the life you desire.
  • Save: Putting aside money is actually a way of caring for your future self. The rule of thumb is to save 15-20 percent of your income, but if you can’t do that, save as much as you realistically think you can. Just as you go in for regular health check-ups, do frequent check-ins on your financial well-being. Ask yourself if there isn’t more you can do to protect your financial welfare.
  • Invest: The need to invest can be compared to our need for exercise. We exercise to fight the corrosive power of aging and maintain our health. We invest to fight the corrosive power of inflation and maintain our financial health. Your savings should be invested, rather than kept in a money market fund with low interest rates. Otherwise, inflation will erode the value of your assets.
  • Insure Yourself: It’s a little-known but important statistic that 80 percent of men die married while 80 percent of women die single. Life insurance and long term care insurance should be seriously considered in women’s financial planning.
  • Take Responsibility: You would never cede big decisions in your life to other people, like who to vote for or how to take care of your kids or aging parents, so make sure that you are also participating in financial planning. It is highly likely that, someday, you will be the only one responsible anyway. A study performed by the National Center for Women and Retirement Research estimates that 90 percent of all women – single, divorced or widowed — will be in charge of financial matters at some point in their lives.

To create the best possible future for yourself, start planning for and investing in your future today. We would be happy to have an exploratory, no-obligation conversation with you. Feel free to give us a call at OpenCircle, 203-985-0448.

Reflections on Real Estate Investing

August 4th, 2016 Posted by Asset Allocation, Foreign Investing, Homes and Mortgages, Investment Strategy, Investment Vehicles, Investor Behavior, Loans and Debt 0 thoughts on “Reflections on Real Estate Investing”

Just as the natural world around us comes from the elements found in the periodic table of elements, capital markets are made up of asset classes, broadly organized into stocks, bonds, and hard assets like commodities and real estate.

As elemental as asset classes are to investing, it may make sense to include some real estate investments in your globally diversified portfolio. That said, as with any investment, there are better and worse ways to go about implementing an otherwise sound strategy … with a lot of misleading misinformation out there to add to the confusion.

If you intend to invest in the market’s risks and potential rewards with informed discipline rather than as a speculative venture, most of the same principles apply, whether it’s for real estate or any other asset class. To help you avoid hanging out with the wrong elements (so to speak), let’s review those essential guides.

Seek Global Diversification

As with stocks, it’s wise to spread your real estate risks around by diversifying the number and types of holdings you own. By diversifying your holdings across a number of investments and a mixture of property types, you are best positioned to earn the returns that the asset class is expected to deliver, without being blindsided by holding-specific risks such as property damage, deadbeat tenants or unscrupulous property managers.

One way to achieve diversification is through a well-managed, low-cost Real Estate Investment Trust (REIT) fund, or a “fund of funds” combination of multiple REIT funds. As one REIT fund prospectus describes, this enables you to own hundreds of properties across a diversified range of domestic and global companies “whose principal activities include ownership, management, development, construction, or sale of residential, commercial or industrial real estate.”

Understand the Risks and Expected Rewards

Why bother with real estate? The magic word is “correlation.” As Forbes contributor Frank Armstrong III wrote in 2013, “It’s really nice in times of volatile markets like now to have an asset class that may zig when traditional stocks and bonds zag. An asset with low correlation to others in your holdings can both reduce risk at the portfolio level and increase returns.”

In his July 2016 column, “The best performing asset class no one talks about,” Reformed Broker Josh Brown observes that, “Going back to the year 2000, REITs are the best performing asset class in the market, according to JP Morgan, up 12% on an average annual basis. … [I]t’s weird that people generally don’t focus on them.”

So, real estate can serve as a stabilizing force and a source of returns in your portfolio. But, like any investment, potential rewards are accompanied by notable risks.

  • Taxes – Real estate investing tends to be relatively tax-in Domestic and international tax codes vary and change, with different treatments required for different kinds of real estate investments. Due to potentially unfavorable tax treatments on distributions, they are best located in your tax-sheltered accounts, lest the taxes incurred exceed the benefits.
  • Liquidity – Unlike publicly traded stocks, which can usually be traded with relative ease in busy markets, real estate ventures can be relatively illiquid investments that don’t always lend themselves to being bought and sold on a dime. This can be tricky for an individual investor purchasing them directly. It also can impact a fund investor. If the fund manager is forced to place ill-timed trades to meet popular demand, the trades can be costly for all shareholders.
  • Volatility – Although an allocation to real estate can contribute to decreased volatility in your overall portfolio, the asset class itself typically exhibits a wide range of performance along the way. Some providers may try to mask this reality by playing fast and loose with their reporting strategies, but you really should expect a relatively bumpy course with your real estate holdings, whether or not it’s being reported to you as such.

Investors discovered these risks in 2007–2009 when a U.S. and U.K. housing market collapse generated a global credit crisis. Investors had been treating any and all real estate prices as sure bets, despite the underlying risks involved. We’re seeing these risks play out again in the U.K.: Due to heavy sell-offs, investors in Open Ended Property funds are discovering that the return “smoothing” they thought they were enjoying may have been built on a house of cards. As one columnist observed: “Just because risk is not immediately visible, does not mean it isn’t there.”

Select an Appropriate Allocation – for You

In light of its potential returns and known risks, evidence-based investment strategy suggests that stocks and bonds are typically the staples in most investors’ portfolios, with real estate acting more as a flavor-enhancing ingredient.

Beyond this general rule of thumb, your personal circumstances also may influence the allocation that makes sense for you. For example, if you are a real estate broker, or you own a rental property or two as a side business, you may want to hold less real estate in your investment portfolio, to offset the real estate risks that you’re already exposed to elsewhere.

Incidentally, we suggest you avoid treating your home as a real estate investment. If it happens to appreciate over the years, that’s great. But don’t forget that its highest purpose is to provide you and your family with a dependable roof over your heads. This is one of several reasons your home is best thought of as a consumable expense rather than a reliable source of investment returns. At the very least, you do not want to over-expose your home to the risk of loss.

Manage the Costs

As always, the less you spend on your investments, the more returns you get to keep. Given that there are well-managed REIT funds that offer relatively cost-effective and efficient exposure to the asset class being targeted … why would you choose a more complicated alternative where the costs may be both insidious and excessive?

Adopt a Long-Term Perspective

While it can often make sense to include real estate in your globally diversified portfolio, the advantages are accompanied by portfolio performance that may often deviate from “the norm.” That’s by design, to help you achieve your own financial goals, not some arbitrary norm. Given these practical realities, it’s essential to embrace a patient, long-term approach to participating in real estate’s risks and expected returns. If your time horizon or risk tolerance isn’t in line with such an approach, you may be better off without the allocation to begin with.

Use Investment Vehicles That Best Complement All of the Above

If an allocation to real estate makes sense for you and your financial goals, the final ingredient to successful application is to select a fund manager whose strategies align with yours. Look for a fund that clearly discloses the investments held, the approach taken, the risks realized, and the costs incurred. Consider a provider who scores well on all of these counts; offers diversified exposure to domestic and global markets; and appeals to disciplined investors like yourself, who are less likely to panic and force unnecessary trading during times of stress.

Also, note that you may already be invested in real estate without knowing it. It’s not uncommon for a stock or hybrid fund to include a shifting allocation to real estate. Unless you read the fine print in the prospectus, it’s hard to know just what you hold, in what amounts.

Ask for Help

Is real estate investing right for you? If it is, how much should you invest in, which holdings make sense for you, which account(s) should hold which assets, and how can you maintain control over your target allocations? These are the kinds of questions we cover when helping investors with their real estate investments, embracing each family’s highest interests as our personalized guide. Please be in touch at 203-985-0448 if we can help you with the same.

[Photo Credit: Flickr user thinkpanama]