Posts in Economics

2016 Year in Review

February 2nd, 2017 Posted by Economics, Investment Strategy 0 thoughts on “2016 Year in Review”

If you were with us this time last year, you may recall that the markets were in a much gloomier state amidst a panic-driven sell-off. The demoralizing numbers were reflected in the early days of 2016, as well as in Dimensional Fund Advisors’ 2015 Market Review, released about a year ago. At the time …

  • USA Today reported on “the worst four-day start to the year ever for the broad U.S. stock market.”
  • The Financial Times reported a global “climate of fear,” following the temporary trade halt in China’s stock market.
  • Plenty of other headlines were crying out that we’d best prepare for the worst. “This year is a wake-up call to think about lower returns for the next several years,” one such prognosticator fretted at year-end 2015.

Not so fast. That may be the biggest take-away from Dimensional’s newly released 2016 Market Review, which we now share with you. While annual 2015 and early-2016 performance had been marred by nearly universal negative-to-low returns (especially from small-cap and value stocks), 2016 annual returns were nearly as polar opposite to that experience as returns can get.

“Many investors may not have expected global stocks and bonds to deliver positive returns in such a tumultuous year,” Dimensional’s 2016 review concludes. To say the least!

We invite you to take a closer look at this latest review and let us know if we can discuss any of the questions or ideas it may generate for you. We’re particularly fond of this key message:

“This [market] turnaround story highlights the importance of diversifying across asset groups and regional markets, as well as staying disciplined despite uncertainty. Although not all asset classes had positive returns, a globally diversified, cap-weighted portfolio logged attractive returns in 2016.”

What message were we delivering this time last year? We were urging anyone who would listen to avoid turning scary market risks into permanent personal damage by selling in fearful reaction to the near-term news.

On the flip side – but for the same, evidence-based reasons – we now caution you against reading too much into, or piling too many of your investments into, the recent outperformers. For managing market highs and lows alike, we are guided by the following sensible advice expressed in Dimensional’s 2016 review by Nobel Laureate Eugene Fama, a founding board member for the firm:

“There’s no information in past returns of three to five years. That’s just noise. It really takes very long periods of time, and it takes a lot of stick-to-it-iveness. You have to really decide what your strategy is based on – long periods of returns – and then stick to it.”

Well said. Please let us know if we can say more, or we can otherwise assist you with your planning for 2017 and beyond. Give us a call anytime at 203-985-0448.

[Photo Credit: reynermedia on]


Learning to Ignore Short-Term Fund Performance Relative to Indexes

July 28th, 2016 Posted by Economics, Investment Strategy, Investment Vehicles, Investor Behavior 0 thoughts on “Learning to Ignore Short-Term Fund Performance Relative to Indexes”

July 2016

Our clients generally understand that focusing on the short-term performance of a fund relative to another fund or an index is a waste of time. These differences rarely tell you anything important about long-term performance and, in fact, can lead to counterproductive behavior if you are prone to selling funds that underperform to move into funds that have outperformed. These performance differences, after all, tend to reverse more often than not. We call this “returns-chasing behavior” and it is one of the surest paths to poor long-term performance. Jared Kizer, OpenCircle’s chief investment officer through the BAM ALLIANCE, frequently receives questions about performance differences — from clients and advisors alike. He shares his insights below.

I have spent years thinking about this issue and analyzing hundreds of performance cases and performance attribution analyses. I find that there are two areas that drive a lot of these questions, and I hope to clarify both:

  • What do you mean by “short term”?
  • How big can performance differences be over short-term periods of time?

Before digging in, let’s talk about the structure of the funds we use in client portfolios relative to index funds.

Evidence-Based Funds Vs. Index Funds

The funds we use are rarely index funds, meaning by definition they will not precisely track well-known indexes. In fact, most of the funds we use have significantly different compositions from the indexes they are most frequently compared to. This is not an accident. We purposefully use funds that do not explicitly track indexes.

Going into all the details behind this is beyond the scope of this piece. In short, we want to maximize the benefits of indexing — low costs, generally low turnover of holdings, broad diversification and tax efficiency — and minimize the negatives. As great as index funds are, published research has shown they can have negatives. For example, some indexes rebalance in a way where other managers know the stocks (or bonds) that are likely to enter and leave the index on the rebalancing date. This degree of transparency can allow these managers to take advantage of index funds, which reduces long-term performance. This effect is most frequently documented in Russell’s indexes and some of the larger indexes like the S&P 500. Indexes also frequently do not target specific styles like size, value and momentum in ways we think make the most sense given what academic research shows.

Evidence-based funds can alleviate these problems, but that does not guarantee these funds will always outperform an index strategy or outperform similarly constructed evidence-based funds. In fact, they can underperform for long periods of time without offering an indication that the fund is designed poorly or managed poorly. Investors in these funds must remain disciplined during these periods to realize the expected benefits.

What Is “Short Term” and How Big Can Differences Be?

Investors are not always happy with my answer to the time horizon question. In truth, anything is possible for periods of less than five years — and by no means does even five years guarantee the expected result. I want to illustrate this point using performance comparisons over months, quarters and years. In the first figure on the next page, I take the month-by-month differences in return between the stock funds that compose our Risk Target 3 model and the indexes they are most frequently compared to. I then find the pair with the largest amount of underperformance (meaning underperformance of the fund relative to the index) for that particular month and plot that result over time. My analysis starts in October 2005 since that was the first full quarter where five of the seven stock funds in our Risk Target 3 strategy had live returns data. 

Figure 1: Differences in Monthly Performance

This analysis shows that in virtually every month at least one of the funds in our model portfolio has underperformed the index by 1 percent or more. In fact, there are multiple months where one of the funds underperformed the index by 2 percent or more. We also see that there are very few months where all the funds outperform their indexes. Let’s now move to quarterly returns.

Figure 2: Differences in Quarterly Performance

Here we see that the differences generally get larger, not smaller. There are now a decent number of periods where at least one of the funds underperformed the index by 4 percent or more. Keep in mind, this same concept holds true if we were comparing a particular fund to another fund (e.g., comparing DFA Small Value to DFA Targeted Value). We now move to annual returns.

Figure 3: Differences in Annual Performance

The first full year of annual returns data is 2006. While we have limited data to analyze, we generally see again that the differences get larger, not smaller. In fact, in 2008 one of the funds we use underperformed the index by about 13 percent. That does not mean the fund is bad and should be replaced. This is just the nature of shorter-term performance comparisons. We also now see that at least one fund underperformed its index over the full year in every period.

So, this analysis tells us that in periods going out to one year we can expect to see that some funds have underperformed their index by 4 percent or more. It also tells us there will be periods where a fund underperforms its index by even more. We expect and know this will happen with the funds we use.

If this degree of underperformance continues over even longer periods, our Investment Policy Committee has processes to evaluate results and determine whether anything is materially wrong with the fund’s strategy. Most frequently, we find that even longer periods of performance are completely explainable and not a reason to replace the fund. For example, for periods ending in 2015, many of the funds we use had underperformed indexes over longer periods of time because value stocks had done poorly relative to growth stocks. Many of our funds are deeply tilted toward value stocks when compared with indexes, so this was the main explanatory factor behind the performance result. In these cases, the funds did exactly what they were intended to do. It just happened to be a bad period for value stocks.

In summary, acting on short-term performance results is usually detrimental to long-term performance. By the nature of financial markets, the funds we use will periodically underperform indexes and other funds over longer periods of time. The key to seeing the expected benefits — as with many areas of evidence-based investing — is realizing this, not reacting to it, and having the discipline to stick with your strategy and the funds within it over the very long-term.

Survivorship Bias and Other Tricks of the Trade

July 21st, 2016 Posted by Economics, Investment Strategy, Investment Vehicles, Investor Behavior, Stock Options 0 thoughts on “Survivorship Bias and Other Tricks of the Trade”

One of the reasons we turn to evidence-based investing is to guide us past the misguided strategies that can otherwise cause an investor’s expected returns to run aground. That said, there is a lot of “evidence” out there. How do we determine which of it comes from sound science and which may steer you wrong?

Survivorship bias is one trick of the trade we must watch for when accepting or rejecting a performance analysis.

What Is Survivorship Bias?

Only the strong survive. This is a familiar adage because it’s often true – especially in our financial markets. That’s why it is important to remember the expression whenever we want to accurately assess a sample of past returns. Examples of a “sample” might be the returns from all actively managed U.S. stock funds during the past decade, or the returns from all global bond funds from 2000–2014.

Survivorship bias occurs when an analysis omits returns from in-sample funds that were closed, merged into other funds, or otherwise died along the way.

How Often Do Funds Go Under?

Some new funds are truly innovative, do well by their investors, and become familiar names. Less-sturdy ones may instead focus on trying to seize and profit from popular trends. For these, the expression “cannon fodder” comes to mind. They may (or may not) soar briefly, only to fizzle fast when popular appeal shifts.

In the competitive capital markets in which we operate, fund managers launch new products and discontinue existing ones all the time. Individual funds probably disappear far more frequently than you might think.

  • A recent S&P Dow Jones Indices analysis found that, for the five-year period ending in December 2015, “nearly 23% of domestic equity funds, 22% of global/international equity funds, and 17% of fixed income funds have been merged or liquidated.”[1]
  • As might be expected, the longer the timeframe, the higher the death rate. A January 2013 Vanguard analysis of survivorship bias looked at a 15-year, 1997–2011 sample of funds identified by Morningstar. The analysis found that 46 percent “were either liquidated or merged, in some cases more than once.”[2]
  • A May 2015 Pensions & Investments (P&I) article reported that Exchange-Traded Products (including ETFs) weren’t immune from the phenomenon either, having just reached the milestone of 500 products closed.[3] According to the “ETF Deathwatch” cited source, this represented a mortality rate of just under 23 percent.[4]
  • The same P&I piece cited Dimensional Fund Advisors and Vanguard analyses that estimated 15-year mortality rates for traditional U.S. mutual funds in the range of a 50/50 coin flip, or worse.[5]
  • A November 2015 article by financial columnist Scott Burns found similar survival rates for the 15-year period ending in 2014. “At the beginning of the period, there were 2,711 funds,” he reported. “At the end of the period, there were 1,139. Only 42 percent of the starting funds had survived.”[6]

Why Does Survivorship Bias Matter?

Why should you care about the returns of funds that no longer exist?

The funds that disappear from view are usually the ones that have underperformed their peers. The aforementioned Vanguard analysis found that, whether a fund was liquidated or merged out of existence, underperformance was the common denominator prior to closure.[7]

If these disregarded data points were athletes on a professional sports team, they’d be the ones bringing down their team’s averages. When assessing a team’s overall performance, it’s important to consider both the wins and the losses, right? Same thing with fund performance.

Instead, an analysis marred by survivorship bias is highly likely to report overly optimistic outcomes for the group being considered. While a degree of optimism can be admirable in many walks of life, basing your investment decisions on artificially inflated numbers is more likely to set you up for future disappointment than to position you for realistic, long-term success.

Moreover, survivorship bias is only one of a number of faults that can weaken seemingly solid reports. One way in which we at OpenCircle strive to add value to investors’ evidence-based investment experience is to help them separate robust data analysis from misleading data trickery. We hope you’ll be in touch if we can assist you with your own strategies and selections in a market that is too often rigged against the individual investor. Please give us a call at 203-985-0448. We look forward to speaking with you.

[1] Aye M. Soe, CFA, “SPIVA® U.S. Scorecard, Year-End 2015,” S&P Dow Jones Indices. Page 2.

[2] “The mutual fund graveyard: An analysis of dead funds,” The Vanguard Group, January 2013. Page 3.

[3] Ari I. Weinberg, “Learning from a walk through the fund graveyard,” Pensions & Investments, May 28, 2015.

[4] Ron Rowland, “500 ETF Closures,” Invest With an Edge, May 19, 2015.

[5] Weinberg, Pensions & Investments, May 28, 2015.

[6] Scott Burns, “The missing bullet holes problem,” The Dallas Morning News, November 13, 2015.

[7] “The mutual fund graveyard,” The Vanguard Group, January 2013. Page 2.

No Reason to Fear Brexit – Why We Prepare and Don’t Panic

June 30th, 2016 Posted by Economics, Foreign Investing, Investor Behavior, Politics 0 thoughts on “No Reason to Fear Brexit – Why We Prepare and Don’t Panic”

Throughout the first part of last week, polls in Europe predicted that the U.K. would choose to remain a member of the European Union (EU). Global stock markets rallied based on those forecasts. However, the opposite happened. The U.K. will spend the next two years determining how to disengage from the EU.

The “Brexit” vote is a perfect example of why we do not make investment decisions based on predicting or forecasting the future. What we do is PREPARE and PLAN for the unexpected. One way we do that is by owning high-quality U.S. bonds, CDs, bond funds and Treasury securities in all client accounts. When the unexpected happens in the financial markets, money leaves risker assets, like stocks, and flows into the safety of high-quality fixed income investments. The U.S. dollar improves. Global interest rates fall. Bond prices rise. Stocks decline.

So what? Now what?

Larry Swedroe, our Director of Research through the BAM ALLIANCE, recently shared some sage advice in an article he wrote on what to do in a similar situation. To summarize:

Avoid making things worse. Do not focus on the bad news and spiral downward into a cycle of negativity about the future. This cycle begins with a perfectly reasonable worry that snowballs into a perceived catastrophe. Do not go there. This emotional state leads to indecisiveness, and that causes investors to abandon well-conceived plans and investment discipline.

Imagine a positive outcome. Find the silver lining in the dark clouds. For example, European stock valuations are now more attractive than U.S. stocks. Lower valuations point to higher future returns for long-term investors. European stocks have positive earnings momentum, whereas U.S. stock earnings are close to a peak. European central banks will be providing increased liquidity while the Federal Reserve is less accommodative. Negative interest rates in Europe will cause investors to move into stocks once the dust settles.

Engage in “stage-two thinking” not “stage-one thinking.” “Stage-one” thinking perceives the risk in a crisis but cannot see beyond the event, so the stomach takes over investment decisions. On the other hand, Warren Buffett engages in “stage-two” thinking. He expects that a crisis will in turn lead governments and central bankers to come up with solutions to address the problem. While he doesn’t know specifically what those actions will be, he knows that the greater the crisis, the greater the response is likely to be. That allows him to see beyond the crisis at hand, enabling his head to keep control over his stomach and his emotions.

So what? Now what? There is no reason to fear the U.K.’s decision to leave the European Union, but expect that increased volatility will present opportunities to rebalance portfolio allocations into global stocks at lower valuations, thus providing the potential for higher future returns.

[Photo Credit: Flickr user James Cullen]

Brexit Votes and Market Outcomes

June 28th, 2016 Posted by Economics, Foreign Investing, Investment Strategy, Investor Behavior, Politics 0 thoughts on “Brexit Votes and Market Outcomes”

Here at OpenCircle, we get it. Following the Brexit referendum and its startling outcome, it’s hard to view current news without feeling your stomach twist over what in the world is going on. Whenever the markets shift dramatically downward, your instincts deliver a sense of unrest ranging from discontent to desperation.

Financial author Larry Swedroe has called this your GMO response: Get me out! The Wall Street Journal personal finance columnist Jason Zweig explains it this way: “Losing money can ignite the same fundamental fears you would feel if you encountered a charging tiger, got caught in a burning forest, or stood on the crumbling edge of a cliff.”

Basically, you can’t help it. These sorts of responses are being generated by basic reflexes in your brain, over which you literally have no control.

What’s Next?

So, first, take a breath. Now another one. Next, remember that there is a fine line between remaining informed about global goings on, versus letting an onslaught of news take over your brainwaves and trick you into rash reactions.

In that context, it doesn’t take long to realize that the Brexit news raises myriad questions, with few swift and comforting answers currently available.

In lieu of fixating on the bounty of in-depth analyses (when in reality the answer to exactly what is coming next is: “Who knows?”) it’s worth remembering that capital markets have been encountering and absorbing startling news for centuries. When viewed close up, the mechanics can be ear-piercingly loud, but they actually have a history of working marvelously well in the long run – at least for those who heed the evidence on how to participate in the upside rewards while managing the inevitable downside risks.

What Should You Be Doing?

If you are one of our clients, you know that we work to accurately position your portfolio to withstand high market risk when it occurs. This means that you have already prepared as best you’re able. And at this time you should be doing very little… which we understand, can be one of the very hardest things to (not) do. So let’s talk about that.

While the outcome of the Brexit referendum is certainly new and different, its impact on the market is old hat. These are the sorts of events we have in mind when we prepare and manage our clients and their portfolios. Using global diversification, effective asset allocation and careful cost management, the goal has been – and remains – the same. Our aim is to expose our clients to the market risks and expected returns they need for building or preserving their wealth, while minimizing over-concentration in any one holding. That way, they are best positioned to avoid bearing the “Ground Zero” worst of it when market crises do occur.

Even so, the unfolding events may cause some people to realize that they aren’t as keen as they thought they were on bearing market risk. Real life is very different from theoretical exercise.

If this is the case, we get that too. Still, we would strongly suggest that this is no time to act on those insights. In fact, it’s likely to be the worst time to do a “GMO.” First, it is likely to incur significant avoidable financial loss. Plus, while it may temporarily feel better to have “done something,” it leaves you with no plan for the future. That can generate more chronic unhappiness than it briefly relieves. Life is too short for that!

If you have a solid plan, but are still having your doubts, consider your current feelings an important and valuable insight about yourself, but please, please sit tight for now. Do give us a call right away, though, and we’ll explore how best to ratchet down your investment risk sensibly and deliberately. And if you are not our client and don’t believe you have a solid plan, give us a call about that, too.

In short, as an advisor, we’re all about safeguarding our clients’ best financial interests. We remain here for them as always. We hope you’ll let us know how you are holding up, and what questions we can answer about the unfolding news. Market analyses aside, we are living in “interesting” times, and would love to chat further with you about them, one on one. We look forward to hearing from you at 203-985-0448.

Rising Oil Prices

May 31st, 2016 Posted by Economics, Investor Behavior, Politics, Sectors 0 thoughts on “Rising Oil Prices”

Have you been following recent news headlines about oil prices? Here’s a sampling:

Oil Prices Rise as Supply Concerns Persist – Wall Street Journal, May 24, 2016

Oil price hits $50 a barrel – could it now go on to $55, $60 or $65? – The Week, May 26, 2016

Crude futures stabilize after rising above $50 a barrel –, May 26, 2016

Oil Prices Explained: Signs of a Modest Revival – The New York Times, May 26, 2016

We were enjoying the effects of deflated oil prices for a while. Who doesn’t like paying less to fill up their tank? But prices have recently been restoring themselves, due to lower supply and increased demand. We can feel the result in our pockets. Reading the headlines does not necessarily make us feel better, either.

The situation can feel worse if you have investment holdings in oil. So what should you do?

First of all, go ahead and read the news stories if you want to. Being better-informed does no harm, in and of itself. But be aware of how you may be reacting emotionally.

At OpenCircle, we always tell our clients to keep their impulsive feelings in check when it comes to making investment decisions. Financial matters should be handled calmly, with a clear head, and according to a well-thought-out plan. A good plan builds in healthy diversification across asset classes, so that your portfolio is not overly susceptible to fluctuations in one particular holding. And the best plan is designed to meet your goals, both short- and long-term. The important thing, is to stick to it.

Sticking to your plan on your own may be challenging. It is a question of staying calm and keeping your perspective. To help you do that, it is good to talk to someone you trust who understands your needs and goals and can support you in achieving them.

Whenever we see news that feels like it could threaten the status quo of our lives, it is natural to want to do something about it. So, you can worry if you are so inclined, but before taking any action, talk to someone who will not fan the flames of your worries. Talk to a professional who can help keep the bigger picture in your sights. We encourage you to give us a call at 203-985-0448. We look forward to speaking with you.

[Photo credit: Flickr user Soliven Melinda]

Does Diversification Still Work?

February 9th, 2016 Posted by Asset Allocation, Economics, Investment Strategy, Investment Vehicles, Investor Behavior, Stock Options 0 thoughts on “Does Diversification Still Work?”

When building an investment portfolio, you have often heard that you should consider your time horizon, risk tolerance and rate-of-return objective. You should also consider diversification in the allocation of assets. But given recent volatility, is diversification still a good idea?

We just completed the second consecutive year when US large-cap (large companies) stocks outperformed most other asset classes, including US small-cap (small companies) stocks, US value (distressed companies) stocks and international stocks. This development has led some investors to wonder whether diversification still works. We believe diversification should remain an essential part of a well-devised, long-term investment plan, and that investors should resist the temptation to re-allocate their portfolios toward strategies with high recent performance. Research shows that basing a current investment strategy on past performance typically leads to poor future performance because of the difficulty of successfully timing markets.

US large-cap stocks (using the S&P 500 as a proxy) had substantially higher returns in 2015 than most other equity asset classes. This performance is at odds with longer-term historical returns data, which show that both small-cap stocks and value stocks tend to earn higher returns than large-cap stocks. We continue to believe that portfolio tilts toward small-cap and value stocks are the most reliable way to enhance expected return. Such tilts, however, can go through periods of underperformance, in the same way that stocks can underperform bonds for extended periods of time. This underperformance of small-cap and value stocks is what investors experienced over 2014 and 2015.

Over the very long term, US and international stocks have tended to have similar returns, although performance can diverge significantly over other periods of time. In each decade starting in the 1970s, US stocks have significantly outperformed international stocks or vice versa. We now see some investors tempted to increase their allocation to US stocks after a period of strong performance. But will the outcome be better than moving more heavily into international stocks after the 80s? We don’t think so and would instead argue that the best approach is to maintain a long-term, substantial allocation to both US and international stocks, since no one knows which will outperform the other over the long term. Concentrating in only one country is not a prudent approach to portfolio diversification.

Market Timing

The temptation is to believe that seemingly long periods of past performance tells us something about future performance. What we know, however, is that it is very difficult for either individual investors or professional investors to successfully execute market-timing strategies precisely because past returns data tells us very little about the future.

A common strategy is to look back over three- or five-year performance periods and re-allocate assets into strategies that have performed well over those windows of time. This behavior is referred to as “returns chasing” and, unfortunately, is still a common method investors use to make portfolio decisions. But when we examine past evidence from 1931 forward, we see that the timing strategy would have earned markedly lower returns than the more straightforward approach of allocating assets equally across the four asset classes.


Although many investors have gone through a recent period of underperformance relative to market benchmarks like the S&P 500, we believe that broad diversification remains a crucial component of a well-thought-out investment plan. The long-run evidence shows that such periods will indeed happen, but investors are best served to avoid the urge to engage in returns-chasing behavior. Strategies that chase high recent performance tend to reduce – not increase – long term performance.

[Photo credit: Flickr user Team Dalog]

How to Respond to China’s Impact on Global Markets

January 7th, 2016 Posted by Economics, Foreign Investing, Investment Strategy, Investor Behavior, Sectors 0 thoughts on “How to Respond to China’s Impact on Global Markets”

Events in China have had an impact on the beginning of the New Year, and we’re not talking about fireworks. There has been concern for months about China’s economy, as we have watched a slowing down of growth. And just as we rang in 2016, there was some media drama around China’s stock market plunge and the negative reaction that was evident in our own US markets. Now, even as China’s government takes steps to stabilize the situation, people are wondering how they should respond individually, if at all.

The simple answer is, as always, stay calm. We have talked previously about having a well-thought-out financial plan and sticking to it. This mindset is as valid as ever.

Back in August of 2015, CNBC ran a piece by Jim Pavia about market volatility amid doubts about China. In it he interviewed Manisha Thakor, a member of CNBC’s Financial Advisor Council. As our Director of Wealth Strategies for Women via the BAM Alliance, she always talks to our clients about being prepared for market fluctuations.

“I explain how the money [clients] have in stocks is, by definition, money they don’t need to spend in the near term,” Manisha said in the August piece. “If they needed to spend it near-term, we would never have put it in stocks to begin with; it would have been allocated to high-quality fixed income.”

Manisha is also a member of the Wall Street Journal’s Wealth Experts’ Panel. On December 18, 2015, the WSJ posted Manisha’s article, “What Investors Should Have Learned from Recent Market Volatility.” The article is still so relevant that it could have been written yesterday. For your convenience, we are sharing excerpts here:

For me, the biggest lesson of 2015 was the vital importance of having a written investment policy statement. During August, I noticed that individuals who had a clear, concise and documented plan were least likely to have a knee-jerk (and all too often ill-timed) reaction to wild market movements….

I suspect investors with an investment policy statement were more likely to stay the course because they had a deep understanding of, and comfort with, the risk they were taking in their portfolios.

Developing this understanding before a period of volatility hits is the key. Just as the time to network is before you need to utilize a connection, the time to understand why your portfolio is constructed in the way that it is comes before that construction gets put through an inevitable patch of volatility.

What will 2016 hold? As my colleague, Larry Swedroe, says, “Ignore all forecasts. All crystal balls are cloudy.” He means that no living person on the planet knows with certainty what will happen in the future. That said, as we head into 2016, we’ll be watching and preparing for events that may include:

– Interest-rate hikes

– A rising dollar

– Recession in non-U.S. developed markets

– Falling commodity prices negatively impacting emerging markets

– The one thing we can always expect–the unexpected

Against this backdrop, it is likely that the VIX (a measure of the volatility of the market) will continue to rise and investors’ convictions in their investment plans will continue to be tested. So, if [recent events] made your stomach plunge along with the markets, it’s time for you to create or revisit your written investment policy statement.

You can read more about Manisha Thakor on our website.

To learn more about creating or reviewing your own written investment policy, please give us a call at OpenCircle, 203-985-0448.

[Photo credit: Flickr user John Keogh]

Making Sense of “0%” Credit Card Offers

December 17th, 2015 Posted by Budgeting, Economics, Family Finances, Loans and Debt, Saving 0 thoughts on “Making Sense of “0%” Credit Card Offers”

Are you unhappy with your credit cards? Does the “grass look greener” at other credit card companies? Are you maxed out on one or more credit cards and paying too much interest? Are you concerned about higher interest rates due to the rate increase that the Federal Reserve put into effect on December 16th? Whatever your motivation, you may be thinking about applying for a new “0%” card.

As we near the end of 2015, a number of credit card companies are still offering new customers 0% APR on purchases through 2016 and even into 2017. Many of them encourage applicants to transfer balances from their existing cards by extending the 0% offer to these transfers. This could look like the best of both worlds – wipe the slate clean on your old card and make a fresh start. After all, who can pass up an interest-free loan?

The beneficial features of these credit card offers are quite clear up front. The promotional material is designed to encourage your signing up, so the “perks” are highlighted. But as the proverb says, if it looks too good to be true, it probably is. It is essential to read the fine print. Here are some potential hazards to watch for:

  1. Annual fees

Some cards don’t have an annual fee, but many do. The cards that do have annual fees may waive them in the first year. Be sure you are aware of what the fee is or will be in the future.

  1. Other costs

There are lots of other charges that credit card companies may add on. These can include fees for late or returned (bounced) payment, which can be as high as $38 for each infraction. There may be a surcharge on foreign transactions. The interest rate on cash advances may be higher than on purchases. You could incur a fee for going over your approved credit limit. If you carry any balance at all, after the initial period, you may be charged a minimum interest fee. Make sure you know up front.

  1. Limitations

As stated above, the 0% rate may be applied to new purchases and balance transfers or only to one of those. The interest-free time period may be as long as 18 months or as short as 9 months. Even with a 0% offer on balance transfers, there may still be a transfer fee which could negate your potential savings. If you change card companies, you want it to be worth your while.

  1. Rewards programs

It is common for credit cards to offer rewards to their customers, in return for purchases on their cards. It is important to know that these cards may charge a higher interest rate in order to underwrite the rewards program. Some companies require a minimum spending amount before you are eligible for your earnings. Other companies may put a cap on your earnings. If the specifics of the program are not clear, insist on clarification.

Variable APR (Annual Percentage Rate)

The APR that a card company charges may be variable. Once the 0% period ends, you could be charged interest amounts that vary over time, with some APRs currently as high as 22.99% or more. Be advised that the rate on regular purchases could be different from the rate on balance transfers. And a late payment could cause your APR to rise, perhaps to as high as 29.99% or more.

  1. Fraud

When you sign up for a new card, make sure YOU are the initiator. Never accept a credit card offer over the phone unless YOU made the call. And never click on a link inside an email – if you apply online, do it through the company’s official and secure website.

A word to the wise:

Whatever credit cards you have, do your best to avoid carrying a balance. If you have an unpaid balance, chip away at it each month, because the interest you are paying is a negative investment. In other words, if you pay down your balance each month, the interest you save is money in your pocket.

[Photo credit: Flickr user Mighty Travels]

The Why and How of Fixed Income

December 15th, 2015 Posted by Economics, Family Finances, Investment Vehicles, Investor Behavior, Saving, Stock Options 0 thoughts on “The Why and How of Fixed Income”

Fixed Income. You read and hear about it in the financial media. You’ve no doubt heard that having some is a good idea, and you may actually have some fixed income holdings. But perhaps you don’t feel as though you have a good grasp of the actual role of fixed income in a balanced investment portfolio. Whether as a reminder or as a learning process, it never hurts to explore the subject in more depth.

First, let’s set the context by reviewing the basic categories of investments:

Stocks – Stocks are the most effective tool for those seeking to accumulate new wealth over time. But along with higher expected returns, they also expose investors to more volatility as well as increased uncertainty about ultimately achieving their goals, due to market fluctuations and risk potential.

Bonds – Bonds are a good tool for dampening volatility and serving as a safety net for when market risks are realized. They can also contribute modestly to a portfolio’s overall expected returns, but we don’t consider this to be their primary role.

Cash – In the face of inflation, cash and cash equivalents are expected to actually lose buying power over time, but they are good to have on hand for near-term spending needs.

Here’s another way of looking at it:

 Expected Long-Term Returns  Highest Purpose
 Stocks (Equity)  Higher Building wealth
 Bonds (Fixed Income)  Lower Preserving wealth
 Cash  Negative (after inflation) Spending wealth

By keeping your attention on these basic principles of stock/bond investing, it becomes easier to recognize that, even when your bond holdings are plodding along compared to the rest of your portfolio, the more important consideration is whether they are fulfilling their highest purpose in your total wealth management.

Bonds Are Safer, But They’re Not Entirely Safe

It may help to understand that bonds, compared to stocks, have historically exhibited lower volatility and market risks, along with commensurate lower returns. But they do exhibit some volatility and some market risk. Because bonds represent a loan rather than an ownership stake, they are subject to two types of risk that don’t apply to stocks:

  • Term premium – Bonds with distant maturities or due dates are riskier, so they have historically returned more than bonds that come due quickly.
  • Credit premium – Bonds with lower credit ratings, such as “junk” bonds, are also riskier, and they have returned more than bonds with higher credit ratings, such as government bonds.

When reading bond market headlines about interest rates, yield curves, credit ratings, etc., these are the two risks and commensurate-return expectations that rise and fall along with the news. But as alarming or exciting as bond market news may become, compared to stocks, the levels of volatility and degrees of risk need not – and really should not – be as extreme as what we must tolerate with equity/stock investing in pursuit of higher expected returns.

The decisions you make about the risks inherent to your bond holdings should be managed according to their distinct role in your portfolio, as we will explore next.

Act On What You Can Control

There are some proactive steps that you, as a long-term investor, can take to appropriately position fixed income investing to withstand varied market conditions.

Are your fixed income holdings the right kind, structured according to your goals?

Just as there are various kinds of stocks, there are various kinds of bonds, with different levels of risk and expected return. Because the main goal for fixed income is to preserve wealth rather than stretch for significant additional yield, we typically recommend turning to high-quality, short-to-medium-term bonds that appropriately manage the term and credit risks described above.

Are you keeping an eye on the costs, including taxes?

One of the most effective actions you can take across all your investments is to manage the costs involved. When investing in bond funds, this means keeping a sharp eye on the expense ratios and seeking relatively low-cost solutions. For individual bonds, it is important to be aware of opaque and potentially onerous “markup” and “markdown” costs. While these costs do not typically show up in the trade report, they are very real, and can detract significantly from your end returns. In choosing an appropriate fixed-income vehicle, it is also important to consider your tax bracket, to ensure that you get the best after-tax returns.

Are your solutions the right ones for the job?

Whether turning to individual bonds, bond funds or similarly structured solutions such as Certificates of Deposit (CDs), your fixed income portfolio should strike a harmonious balance between necessary risks and desired returns – within the context of your own plans and according to the distinct role that fixed income plays within those plans.

To achieve this delicate balance, it can make good sense to seek the assistance of an objective adviser to help you weigh your options, determine a sensible course for your needs, and implement that course efficiently and cost effectively. Your advisor also can help you revisit your plans whenever the markets or your circumstances may cause you to question your resolve. Should you stay the course? Are updates warranted? It can help to have an experienced ally to advise and inform you before making your next moves.

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