Investment Newsletter for November, 2018

The common wisdom (an oxymoron) is that we had another ugly month. Major downswings, panicked phone calls to your favorite investment advisor. The reality, however, is that the market was up for the month. You all made money.

I have mentioned before that I am not against stocks if we can get them to fit into a disciplined plan. I am particularly ok with high dividend stocks as a replacement for some of the bond funds. The bond funds pay very low interest and have very low risk. I use them to moderate the risk from the stock funds. The 2% interest really hurts, however.

My son and I have identified six (so far) high dividend stocks from very long-established big companies. These companies have typically only had small range between high and low for the year (in other words, not much fluctuation). As an example, Royal Dutch Shell is an international conglomerate that has almost no chance of going out of business. The company has been in existence since about 1810. It also has a 6% dividend. There is still some fluctuation even though it is small. The bond funds of course have no fluctuation. The fluctuation is part of risk. Therefore, the higher return.

My own portfolio was about 60% stocks and 40% bond funds. I have now put in my personal model each of the six stocks at 3% each and reduced the 40% bond funds to 22%. I am taking a little more risk but substantially juicing up my return.

The key here is that I am putting the dividend stocks in my model. If a stock goes substantially off the 3%, I will rebalance. I will either buy or sell an amount to bring the item back to roughly 3%. I am still using this dividend stock as a shock absorber to partially moderate market risk.

If you are interested, we should address these stocks (or others) in our next planning meeting. Or give me a call. I will do some planning right away with you on the phone. The percentages have to be right for your situation. To keep the overall risk the same, I may recommend a reduction in the allocation to stock funds. You also may object to owning a certain stock for personal reasons. We need to talk.

All of you know that my son has worked for me for many years. Eli’s work is increasingly becoming valuable to the practice. The dividend stocks, in fact, were originally his idea. He recently obtained professional investment licensing. Effective January 1, 2019, I am transferring to him 10% ownership of Dollinger Management, Inc.

Thank-you for your business and your trust.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

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Investment Newsletter for the end of October, 2018

This month’s stock market was extremely ugly. The fear turned into a stampede. There were no news events. The US economy was a roaring success. Trade and tariff battles went quiet. But heck, let’s not let facts get in the way of a good panic. Sometimes the forces of fear win the battle. Sometimes the forces of greed win instead. Investing is about long-term allocations.

Today, I want to discuss the financial planning process. Financial planning is the prediction of how to allocate your financial resources to best match your needs. There are two relevant questions: what are your resources and what are your needs?

Of course, there are many guesses. Planners call them assumptions. We have to guess your future income, how long you will live, future investment returns, future inflation, future expenses, etc. There is very little value in fine tuning these guesses. Putting detail on a wild guess does not make the result more accurate. A better solution would be to make your best guess and update the plan every year. By revisiting the process, I get smarter.

Your financial resources include your anticipated income, investments and cash on hand, anticipated inheritances, divorce settlements, etc. It is essentially a list of your assets less your debts. Notes:

  1. All assets are listed at fair market value.
  2. I include future income as a resource. I am 59 years old. I have more or less 10 working years left. Hopefully more. 10 years of future cash flow has a value today.
  3. I do not include your personal home as a resource. Yes, it has significant value. But you spend money for your comfort not for the resale value. My landscaping makes me happy not rich.
  4. For this conversation, needs and goals mean the same thing. It is what you want to achieve and when. Common goals could be “ability to retire,” “not to run out of money before I die,” “accumulate money for Junior’s education,” and so on. The time frame matters. Retiring in one year is different than retiring in 30 years. You would have a different amount of time to accumulate resources. Risk would be very different as the young person would have much more time to fix mistakes.
  5. Because of the planning process, we can make incremental changes in life style. We can raise or lower spending, delay retirement, etc. These changes are the whole point of the process.
  6. Insurance is a good way to reduce the risk of failure. It is not, however, the only way. And insurance, generally, is a very poor investment choice.

I have worksheets set up for you to use. They are “A Very Simple Statement of Financial Condition” and “A Simple Statement of the Future.” I would be happy to send them to you. Send me an email.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

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Investment Newsletter for the end of September, 2018

This month almost all of you are down a little. This quarter, you are all up a little. Both small amounts.

It occurred to me that I have not explained my beliefs correctly on stocks versus mutual funds. The misconception out there is that I am saying stocks are bad and mutual funds are good. I am not.

As you all know, a mutual fund is a big collection of stocks. The mutual fund advantage is that it has lower risk. The company risks (non systematic is the technical term) blend out. The weird good and bad cancel each other out. The mutual fund is only left with the market risk. The cost of reducing this risk is the mutual fund fee. DFA and Vanguard have very low fees but they are not zero. A mutual fund will thus have slightly lower profit than the total of its stocks. For most investors, the benefit of diversification (lower risk) is worth the slightly lower profit. Of course, you can buy a collection of stocks (essentially your own mutual fund) creating diversification. Meaningful diversification takes about 30 stocks. Otherwise, you accept the risk.

Individual stocks can be very profitable. There is no mutual fund management fee. Also, expertise and judgement can juice up the returns even more. The price of a stock is set by the actions of a very large group of buyers and sellers. Pretty much everyone thinks they have better judgement than the group. The truth is that almost none of them do. Some few, however, can out guess the group. They can look at the numbers and ignore the emotion.

You have heard me say many times that I think the crowd is an idiot. It sways back and forth with greed and fear. It listens to friends who boast. It listens to the talking heads on TV. It is the same crowd whether you are talking about a stock or a mutual fund. Investor emotion is short term and is usually wrong. If you can divorce yourself from the crowd, you can make money. This divorce means that when everyone you trust and love is buying some stock (or mutual fund), you are selling.

In order to force discipline, to force emotion out of the decision making, I use percentage allocations. 20% small cap, 10% large, etc. is an example. I could just as easily use percentages for a stock or group of stocks. They or it needs to be part of the model. I do not agree that you should buy a stock and ignore how it fits into the model. I do not care if the stock is Nike, Bank of America, Apple, Starbucks, etc. Assign an allocation, fit it into the model, and then buy and sell to keep the percentage.

I have personally owned stock in Royal Dutch Shell. I bought the stock when oil prices were crashing, everyone was talking about electric cars, and the press was talking pollution and disasters. I saw a strong balance sheet, an international conglomerate (some diversification right there), a 5% dividend, and a company that had been in business since 1810 or so. I made a lot of money when the emotion turned into greed.

Many years ago (20), I owned Phillip Morris stock. I bought it because of the same reasons as Shell. I sold it because I could not live with myself. Which brings up another disadvantage of stocks. The evil (which is in the eye of the beholder) is all yours and not hidden inside a mutual fund.

Thank-You

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

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Investment Newsletter for the end of August, 2018

Despite the drama this month, despite who said what stupid thing, despite the international crisis because of the trade and tariff battles, all of you had a great month. The Dow is just below its all-time high. The S&P and Russell 2000 have set new records. As I mentioned before, different indexes behave differently and they all represent parts of the market. The base, of course, right now is the booming economy.

My topic today is taxes. Your return on investments does not matter for financial planning. What matters is your return after taxes. What matters is how much you get to keep after the government gets it’s cut.

First and most important, investment positions should be held at least one year. Short term trading, if you are LUCKY enough to win, generates high taxes. Losses are restricted to $3,000 per year. Long term trading is taxed at sharply reduced capital gains rates. While losses are still restricted, they are less likely. The economy with the back and forth over the years will gradually go up. Taxes are not relevant to IRA accounts but my comment on the economy is.

The order you withdraw your savings matter. At 59.5 you can draw money from your IRA (traditional, SIMPLE, 401K) but you do not have to. At 70.5 you have to start taking money. It is taxable as you take it. You can not roll it over to another IRA after 70.5. I recommend drawing your taxable accounts (personal, joint) first. Hold off of drawing the IRA’s until you are retired at least, if you can. If the withdrawal is taxable, I want you in a low tax bracket. Since your income will be low, the percentage tax (the tax the government gets from you) will low.

Do not take IRA money before 59.5. If you do so, half the money will disappear to taxes. First, you are likely in a high federal and state tax bracket. Second there is a 10% penalty for early withdrawal.

I would also hold off drawing out Roth IRAs as long as you can. They are not taxable when you withdraw money, but the economy will gradually improve their value. I would draw a Roth after your personal accounts and before your traditional IRA’s.

Your mortgage on your personal home is an investment. Technically, it would be a negative investment. You are paying 3.5% fixed every month. Paying off this loan saves you 3.5%. It doesn’t mean the same thing as earning 3.5% fixed on a bond. Under the new tax rules, most of you will not be itemizing deductions for federal. The standard deduction is now so high ($12,000 for a young person, $24,000 for a young couple, $26,000 for an old couple), that itemized deductions will not matter. If a bond paying 3.5% is taxable income and a negative bond, aka your mortgage, has no tax benefit, paying down your mortgage becomes better planning. To equal your 3.5% mortgage, your investment better be earning over 5% (depending on your tax bracket). I am recommending paying down your personal mortgage if you can. Do not pay off your rental property debt, until you have all other debts killed. Rental mortgages are still deductible.

In fact, I do not like any debt. I suppose that makes me a dinosaur. Oh well. Pay down debt in order of the interest rate after tax. Pay the most expensive loan first. Pay the 10% loan before the 9% loan. Pay the 9% loan before the 4% loan, etc.

Thanks for your continued business.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

 

Investment Newsletter for the End of July, 2018

All of you had a great month. Portfolios have recovered all past upsets and are at the highest point for the year. In fact, highest point ever. Obviously, this rally will not last forever. At some point there will be a reversal. We, mere mortals, do not get to know when.

The Dow went up about 2.8% YTD, but you are not invested in the Dow Jones Industrial Average. Nobody is. It is just 30 stocks out of the thousands in the market. It is a fast snapshot of the market. It is the first thing I look at every morning.

The S&P 500 Industrial average went up 5.3% for the seven months, much nicer. It is still not representative of how you are invested. I bias the portfolios towards small cap. The S&P is very large industrial companies. It is interesting that it did so much better than the Dow. I guess the Dow is the wrong 30 stocks.

The Nasdaq went up 6.8%. This index is mostly high-tech stuff. This area is always exciting. It is also difficult to understand the fundamentals behind many of the companies. Come on, Tesla does not even have a glimmer of hope of making a profit and the stock is at $300 per share. The risks in this index is also high. The cost of this high level of return is that every so often you get your tail handed to you.

The Russell 2000 index went up a sweet 8.8% for the YTD. This index represents smaller companies and particularly those with a value tilt. It is similar to how I invest. Most of you have a substantial investment in DFSVX (DFA US small cap value). This fund and the Russell 2000 have heavy overlap. They both hold similar positions. Over long periods of time (many year periods), small cap will out-perform large. It does not always do so. This YTD was certainly nice. There is no promise for the next five months. This higher return has a cost in that it swings around more than the bigger indexes.

On another topic, there is a tax proposal to mention. I do not think it will be enacted but it has been a conservative goal for decades. Capital gains are currently not indexed for inflation. You buy a thing (land, stock, whatever) 30 years ago for $100. Because of inflation, you can now sell it for $200. Inflation was 100%. You are now no better off than you were 30 years ago in terms of purchasing power. But, you now have capital gains tax on the $100 in gain. The proposal is to adjust out of the gain the portion that is pure inflation. You would only be taxed on the part that beats inflation. The problem is that it drops tax revenue, a lot. It is hitting the news again. I am watching for it. I am not judging right and wrong in terms of policy, but if it is out there I will take advantage of it for you.

I am still waiting for many of the details for the tax legislation from late last year. It appears to cut taxes for almost everyone. Obviously, there are some groups that win more than others. It is not just about rich groups and poor groups although that is the popular conception. My world is about details. I am the guy who reads the little print at the back first. Most of the regulations have not yet been released. I should know much more by late in the year in case any of you have questions.

Thank you for your attention.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

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Investment Newsletter for the End of June, 2018

The market this month was essentially flat. For the quarter, it was way better than flat. Almost all of you show nice profits. The exceptions concern some clients who just started and some clients with concentrated stock positions that went the wrong way (positions I am not allowed to touch).

Today, I wish to write about bubbles. Bubbles are when prices go up to irrational levels. By definition, the price increases make no sense. A mania occurs where the greedy herd of investors rush in so that they can be there before the next guy. Prices then go up because of the demand. In economics, we call this “the greater fool theory.” Of course, the price does not keep going up forever. Bubbles eventually pop. The problem is that there is no way to determine in advance when they will pop or how. They could blow fast or hiss out over years. Maybe it starts now and maybe it starts next year.

Bubbles are not restricted to the stock market. They occur in real estate, art work, and anything else that has value. They also occur in bitcoin which never had any value. I have written about the stupidity of bitcoin several times. Bitcoin’s only value is that you think someone else will pay even more for it later.

Two days ago, the San Francisco Chronicle published “Bitcoin bloodbath nears dot-com levels as many tokens go to zero.” They paper called it “one of the biggest speculative manias in history.” It is by the way now down 70%. The dot-com crash many years ago was 78%. There are a lot of reasons for the crash. Regulators around the world stepping down on fake currencies is one, but in my opinion, not the main one. I think the greed ran out of steam. Bitcoin is still worth some money. Ether and Litecoin are worse off than bitcoin. There are apparently 800 other tokens that are now worthless.

By the way, it was not even close to the largest bubble. In Holland several centuries ago, tulip bulbs became a speculative mania. At its height, people were spending the price of small houses for single bulbs, the only reason was they thought someone else would pay even more for them. Of course, the bubble crashed. Tulip bulbs were only worth a few pennies. It seems funny now but then it had ugly results. Holland went into a deep recession for over a decade and many people were financially destroyed. Incidentally, they were a small number of rich families who cashed out their bulbs halfway up, left the country, and were never heard from again. Smart, dirty, and very modern. By the way, does anyone even know who is behind bitcoin?

Bubbles are irrational greed. The opposite is irrational fear. Run for the door screaming. I call it a fear pit. We saw a greed bubble in real estate and in stocks before 2008. The high valuations of both made no sense. It was greed. It was fear that someone else would get your opportunity. In December 2007, the bubble ran out of steam. Both, however, really did have a fundamental value. By late 2009, stocks had declined by half. Real estate dropped about the same. Eventually the fear pit ran out of screaming-for-the-door people. Both markets had a fundamental value. I do not know what this real value was. Certainly, it was more than half. When the fear fit ran out of screaming people, only the bargain hunters were left. And then, both markets boomed.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

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Investment Newsletter for the End of May, 2018

When I was thinking about what to write this month, I was certain the market was down. I have been hearing trade tariff this and that, the market has been swinging up and down, and clients have been calling about the turmoil. Well, the emotion is not correct. It comes from fear. The market was actually very decent this month.

The Dow was up 252 points, about 1%. Very Large Cap Index.

The S&P 500 Index was up 35 points, about 1.3%. Large Cap Index.

The Nasdaq Index was up 376 points, about 5.3%. Technology Index.

The Russell 2000 Value Index was up 78 points, about 1.4%. Small Cap Value Index.

A few observations are appropriate here.

Fear is magnified by the news cycles. It sucks up everybody. It has a side effect of toxic stupidity. The real answer to long term profits is discipline to a system. Unless you can predict the news cycle, do not try to time the short market swings. If you can predict future news events, please give a call so we can start a company together. We will not invite anyone else.

All four indexes are up two months in a row. Your portfolios are all well up also. The large cap indexes have not recovered all of the beginning of the year decline but have made a very significant dent. The Russell 2000 Value Index and Nasdaq have recovered everything and then some. I have slanted your portfolios towards small cap value. The Russell 2000 Value Index is the appropriate measure to compare against. Remember, the Dow is convenient and fast to look at but THE DOW IS NOT THE MARKET. The Dow is a small slice of the market.

In general, small cap (size) stocks will do better than large stocks and value will do better than growth. It is logical. When you are smaller than Intel, you have more room in front of you to grow. Intel has a much harder time getting bigger. As for value, everyone loves a bargain. Of course, the higher profit is not risk free. You have bigger swings. We all know that swings can last years (both upswings and down swings). To control risk, I use mutual funds and a bond allocation. 

As always, I thank you for your business and trust. Please call me if you have any questions.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

Logo

 

Investment Newsletter for the end of April, 2018

The market was decent this month and your portfolios have been recovering well from the first quarter’s mini slump. The Dow has recovered less well than you have. You are not invested in the Dow.

Today I want to discuss risk. Risk and returns are related. As one goes up, so does the other. It is not possible to have a risk free – high return investment. But, there is only a certain amount of risk that works for people. My 94-year-old mother cannot financially handle a two-year stock market crash. The money is needed now for assisted care. Risk is individual and changing over time.

I control risk several ways. I use mutual funds which are large collections of holdings and I allocate a significant portion to bond funds. Short-term bonds do not vary much with the boom and bust cycle of stocks. Therefore, a weighting towards short-term bonds will dampen the overall portfolio fluctuation. It means, however, that my portfolio allocation will not go up as much as the market when the market is hot. It also means my portfolio will not crash as bad when the market stinks. The particular weighting is specific to the client.

When the market is hot, clients often give me grief because of the bond weighting. Many of my competitors are nearly 100% stock. They will generally out-perform my portfolios in great markets. In bad markets, they lose clients. People’s memories are very short. In boom times, I will occasionally lose a client because “your returns are not as good as your competition.” My agenda is not short-term return. I am going for outperforming the market over long periods and is adjusted for risk. I have gradually built an investment practice with about $28 million under management from a starting place of zero. I still have my very first client.

Evaluating risk tolerance is tricky. I can easily put together or purchase a quantitative survey. Client x is 60 years old, with this much money, this much income, etc. The magic box then spits out an allocation towards bonds. The problem here is that there is an emotional component to risk. People react differently to stress and sometimes they lie even to themselves. I do not like treating everyone the same.

My solution to evaluating the emotional side of risk is to use a sensitivity analysis. This question sequence should be familiar to all of you.

Let’s say your portfolio goes down 10%. What are you feeling? Are you comfortable or freaking out? Now, it is down 20%. Same questions. What are you thinking? Now it is down 30%, etc.

My question sequence is attempting to judge emotional reactions to downturns. Most clients have a spot that hurts so bad they cannot stand it. I build portfolios by trying to make sure that spot does not happen in real life. Some clients still lie to themselves. My test is abstract and not in the emotional drama of the news cycle. Also, people change over time. I like to repeat the test each year. That change in risk, however, makes sense. Different ages have different emotional reactions, different cash flow needs, etc. Young people also have more time to wait out cycles.

Thank-you,

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

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Newsletter for the End of March, 2018

Everyone’s portfolio is down for the quarter and flat or a little up for the month. “Say what! The market was lousy this month. How could I be flat?” So, what is going on?

The Dow went down this month by 926 points (3.7%). The S&P went down this month by 78 points (2.9%). You would expect that your portfolio would have gone down by something similar. There are three things here that you are missing.

  1. The Dow and the S&P are not the whole market. They are just what we look at really fast to visualize the market. The turmoil with trade tariffs and threats affected mostly large cap stocks. Smaller companies’ stock prices did not react. I look at the Dow many times every day. But, it is not what you are invested in. Your portfolios have a weighting towards small cap.
  2. A month is a very short period. Stocks and categories of stocks jiggle back and forth constantly. One-month long movements are meaningless noise. Next month could be very different or more of the same. Small cap will outperform large cap, but to really trust the result you need to look at multi-year long periods.
  3. I am magnificent. It is true but alas not for this reason. My input is to keep you steady and disciplined in the market. I try to keep fear and greed out of the portfolios, out of your thinking, I hold to plan. I have no control over whether the market has a fear fit or some politician says the wrong thing. I know to discount nonspecific investment news as meaningless. Sure, the market can go way down for a few days because of a meaningless trade fear. It may even stay down for a few months or longer. But, there is no way for me to predict what portion of the market will be trashed and what portion goes happily forward.

I wrote about the tariff/trade drama last month. I do not count news unless it is specific. General fears, threats without dates and amounts, etc. are not specific. I said last month I wanted to watch. Now we are hearing about countries getting waivers and exceptions (European Union). We are hearing that South Korea renegotiated their trade agreement with the US. In exchange for more imports of US auto parts and a cut in Korean steel exports, South Korea now gets a waiver from the steel tariffs. In short, I do not believe the tariff fear fit meant anything.

The new “crisis” stories are Trump criticizing Amazon for sales tax and shipping issues, Facebook being a jerk about privacy issues, and Tesla running out of cash. Their stock prices sharply dropped as a result. There is always something to scream “the sky is falling” about. And remember, I use mutual funds not individual stocks.

I wish to thank all of you for your business and trust.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

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Investment Newsletter for the End of February, 2018

We had an exciting month. Big declines followed by big increases with another decline on the last day. Everyone lost about the same amount in February that they gained in January, more or less. I personally do not like exciting. Slow and boring fits me much better.

I have a problem with exciting. Peoples’ brains disengage from their wallets. I realize that I have better knowledge of the market than you do. That reason is why you hire me after all. Nonetheless, I wish to share with you how I evaluate news events and market swings.

When there is a large swing in the stock market, everyone’s instinctive reaction is to want to know why. The news outlets will make up stories as necessary. My first reaction is to ask the question is there a specific reason that makes sense? “Someone said something,” “inflation uncertainty,” etc. are all babble. They are not specific nor can anyone explain how that relates to the stock market prices. An actual increase in interest rates, a tower getting blown up, a strike called, etc. are specific. If I cannot see an obvious connection, then I go on the assumption that it is emotional reaction. As I have said many times, emotions overreact.

The market on one day mid-month went down 1,600 points. Some bank official hinted that there might be an interest hike. He had no power to cause a hike. And duh, everyone knows interest rates will have to go up at some point. It did not matter, the news broadcasted “inflation fears.” Investors ran for the door and a bunch more ran after them and the sheep went over the cliff. The computer algorithms that the big quant funds use saw the decline and sold even more. Two days later, it started recovering very nicely. You see nothing changed economically. It was stupidity.

A few days ago, Trump proposed fairly severe import tariffs on steel and aluminum. The market is down 700 points since then. This news is specific but I am uncertain as to the connection to the market. Yes, I understand that users of these metals will have higher prices and those higher prices will filter eventually through the economy. Please explain how these tariffs relate to the stock price of Home Depot, Shell Oil, Tyson Foods, Intel, etc. These companies do not use these metals. The future connection is fairly remote. The second part of the argument is that it will ignite a trade war. China, etc. will now not take our imports. That part is a non-specific maybe at some point in the future. Fear.

In general, I do not like tariffs for I think they yield a net loss but the story isn’t simple. They reduce the national economy. The effect, though, is long term not in the next year or two. The story is different in terms of some local economies. In places such as Ohio, Pennsylvania, etc. a steel tariff might enable people to pay their mortgages. The tariff would give those people more buying power and thus they would be able to contribute more to the economy. My point is that predicting the future consequences of an event such as a tariff is very difficult and must be done with caution.

On this news, I am going to wait for more details before I react.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

Logo