10/7/2014 A quick bit of market commentary I have been relatively quiet on posts lately, due to a spurt of busy-ness that kept me away from the office and the opportunity to gather thoughts for blog posts. While watching the market bump and sway in recent weeks, I have given some thought to how investing clients experience volatility, as well as how clients think about short term vs long term returns. The chart above shows the last month of data (September 5 to present) for 4 different stock market index tracking ETFs (exchange traded funds). For variety, I chose the SPY (S&P 500 index), IWM (Russell 2000 "small cap" index), the VT (Vanguard total world) and VTI (Vanguard total US stock).
Something that jumped out at me (apart from all of the sampled funds being "down" over the period) was the disconnect between the S&P fund and the others. The S&P 500 is not a "strategy" based fund, but rather a (mostly) passive vehicle for tracking the performance of 500 large companies. Therefore, the disconnect in returns over the past month must have to do with the sample of stocks held among those 500 versus the broader selection in some of the other funds. Or perhaps the relative size of the holdings -- as mentioned on this blog before, one stock in particular (Apple - AAPL) represents a significant portion of the S&P 500 (around 3.4% as of this writing). Apple had a decent month, while many other stocks fell -- maybe that is part of the disconnect in the S&P 500 and the other indexes tracked here. Another part of my thinking over this month of moderate declines is around how my clients and the rest of the investing public think about returns. When we say to ourselves "the market is up/down/unchanged on the day/month/year", which market do we mean? And when we compare our own personal performance to "the market", are we making reasonable comparisons? The basic idea behind comparing a given account or group of accounts to "the market" is called benchmarking. And at its core, benchmarking is relatively simple. If a given client (or account) elects to assign a risk tolerance and investment objective that seems pretty to similar to those exhibited by the S&P 500, then it may be reasonable to periodically compare the account's performance to that of the index. Or, if the account opts in to a risk tolerance and investment objective more consistent with a blend (say 80% S&P 500 and 20% 10 year bond rates), then a blended benchmark may be appropriate. However, in my experience benchmarking does not stay basic or simple for long. In the real world, clients needs for liquidity (taking cash out of an account) tend to complicate comparisons to the benchmark; similarly, clients with personal situations that evolve over time will require coincident evolutions of benchmark. The complications do not remove the value and need of benchmarking returns, but they do necessarily require a sophisticated and flexible approach to applying those measures. A provision in the Fair Credit Reporting Act gives everyone access to a free report once per year -- be sure to get yours and discover 6 potentially valuable chunks of information: #1 - a snapshot of your credit profileWhile this one may be the most obvious value proposition in your credit report, it also perhaps the most practical. Businesses and agencies access our credit reports all the time to gather insights into our financial conditions; I once worked a job that ran a credit check on me at least once a year to make sure I wasn't under significant financial pressures. When viewing your own report, take a minute to consider the information from the perspective of a potential employer or loan underwriter -- does anything stand out as particularly troubling? #2 - a quick test for identity theftThe three different reporting agencies that participate in this program all represent the data in their own way, but each report will summarize open lines of credit as well as offer details specific to each line. If you are concerned with the possibility of being a victim of identity theft, these reports should be a shortcut to finding evidence of such theft. Accounts that are listed as "delinquent" or as having "issues" may represent lines of credit opened in your name by someone else. Just skimming through the report may also reveal loans that you do not recognize -- a sign that something is likely amiss. #3 - a jog for the memoryThis one surprised me: your credit report includes data about your current and previous addresses, phone numbers, and employers. For some of us who have moved around a bit, this reference may be a useful reminder of the particulars of those pieces of history (seriously, can you remember all of the phone numbers used in your adult life?) #4 - loan specific infoSimilar to number 3 above, your credit report can also be useful in remembering specifics of important loans that may be a little old now. For instance, did you open that car loan in 2002 or 2003? What did you pay for it back then? On my own report, I was excited to find the actual Fannie Mae account number for my mortgage -- perhaps a random bit of trivia for most people, but if you get really interested in the life of your particular loan, this info is crucial. #5 - drags on your creditPeople with a long history of credit may find accounts on their report that have been long unused, maybe a department store card or a credit line opened to buy furniture that no longer carry a balance but represent a claim on their overall credit capacity. In these cases, people may wish to formally close those unused accounts to "free up" credit for other uses, and to prevent future fraud on those unnecessary credit lines. #6 - insights on your rightsThe fine print following my data on one report included this information on our rights as consumers: "You may limit "prescreened" offers of credit and insurance you get based on information in your credit report. Unsolicited "prescreened" offers for credit and insurance must include a toll-free phone number you can call if you choose to remove your name and address from the lists these offers are based on. You may opt-out with the nationwide credit bureaus at 1-888-567-8688 (888-5OPTOUT)." 9/4/2014 Sneaky Budget Tip #7Don't Go ShoppingBefore you say "Well, duh...", bear with me. My daily routine on the web includes checking some sale sites like Woot.com. Occasionally, I will see things that match up with my household wishlist; sometimes I see things that I know a friend has been looking for a deal on for a while. And in those cases, maybe, just maybe, it was worth me taking a look. But more often, what I find is that whatever is on sale suddenly looks appealing to me. Sure my drawer is full of socks, but that 12 pair pack seems so cheap!!The sneak budgeteer knows that the best way to avoid a severe case of the Wants is to simple skip the step where you see the deals. A more responsible approach to spending may be to collect, over time, a list of things that your family really needs and then do a bit of targeted shopping for a deal.
9/2/2014 The Question of CashEconomic decisions revolve around cash: companies concern themselves with consistently producing cash in excess of their operating costs; non-profits need regular infusions of cash to provide the service or content they organized to provide; households have to keep an eye on cash reserves to manage the flow of bill payments and to maintain a comfortable level of "cushion" against unexpected demands on the checking account. The investing world is similarly concerned with cash in a few specific ways:
As an investment adviser, I am constantly confronted with the decision to hold or invest cash on behalf of my clients. Today, as of this writing, approximately 3% of the funds under my management are held in interest bearing money markets, but as mentioned above the current interest rates are very low vs historical averages. Is 3% too much or too little to hold in cash? Is there an "ideal" level for all investors?The decision making process from my perspective is complicated by the fact that individual investors exhibit considerable variability in their particular situations. For some clients, the assets invested with my firm represent a small portion of their overall wealth, and those clients may very well be holding considerable cash in their personal bank accounts (or even in cash management accounts with another adviser or broker). In other cases, a client household may work with me very carefully to dial in to a targeted amount of money to hold on hand in the bank (typically a cash "operating" balance plus an emergency fund) and direct me to keep the rest invested in (potentially) productive assets for them. Still other clients fall along the spectrum, and may be using brokerage assets as a piece of their emergency fund, or have a stated objective of maintaining a target liquidity.
My approach is to consider each client (or client household) individually and try to balance their desire for return (in line with their risk and objective profile) with practical requirements related to liquidity, expense management, opportunity costs, and on and on. 8/19/2014 Sneaky Budget: Tip #6Forget keeping up with the Joneses -- try instead to get down with the Smiths. We humans, particularly in the States, have this built in awareness of the people around us, and how good they have it. Their grass may be greener because of the chemicals.We have this insatiable desire for MORE, and many of us hold the belief that a little bit MORE will make us Happy, Healthy, more FUN, WISE. The trick to all this is that research suggests that beyond a very basic level, MORE doesn't actually improve our condition.
So what's the sneaky budget lesson in this line of thought? Rather than seeing the neighbor with the BMW as an inspiration, look past her to the neighbor rocking the Honda and getting by just fine. Or after flipping through the house plans for 3000 sq ft suburban options for a 4 person family, jump online and check out the apartment listings in Tokyo. It is healthy to be reminded that there are plenty of people out there - not just getting by, but THRIVING - on LESS than we consider "normal". The Joneses may have more, bigger, nicer, fancier...but adjusting your budget to the Smiths who do just fine with less may just yield a positive nudge to your household budget and state of mind. 8/14/2014 Sneaky Budget: Tip #5Write it down. Be honest."we more or less spend one salary and save the other" "I "max out" my 401k" "the best cable package just costs a little more" People who are otherwise pretty sincere about wanting to be more intentional and responsible with their money will often fall into the trap of using approximate language when describing their spending. Best practice with the household budget is to be as explicit as possible, to put it in writing, and to be totally honest.
The difference between a $70 per month cable package and a $100 per month package is not "a little more", it's 42.8% more, $30 more per month, $360 more per year, etc. That's not to say that your family cannot choose the $100 package -- it just means that you really understand the impact to the household budget. 8/7/2014 Sneaky budget: Tip #4 Let's face it - sometimes we are all going to go "off budget" for a treat, a cheat, or a splurge. The sneaky budgeter approach is to make the "cheat" a part of the budget! That's right -- build the cheat right into your plan. Sweet, sweet anticipation! Research suggests that people get as much (or more) enjoyment out of planning a vacation and looking forward to it than they do the actual event. The same dynamic can apply to other uses of your household finances. You really like that fancy coffee drink? Pick an occasional schedule for enjoying it and do not splurge in between. By choosing to schedule the occasional budgetary indulgence, to plan it out and to approach that spending with intention, your budget benefits in several ways: you spend less, enjoy more, and exhibit more discipline. 8/1/2014 Yikes! (plus a silver lining) This has been a tough week or so in the stock market. All of the major index numbers are off significantly: Times like these tend to give some people indigestion, and it honestly can be a little trying to wake up each day and check in with the market only to see that, yep, it's down again today!
However, these times are actually something that "value" investors are always watching for, when other investors are getting scared and some stocks are oversold. The value screen that we run regularly at DRW Financial has been stuck on ~ 40 stocks that match our parameters for more than a month, but this morning the search turned back 54! Of course, all of those will not turn out to be a solid fit for our investing philosophy, but simply having more options is a positive thing. 6/25/2014 Sneaky budget: Tip #3Hear me out on this: Join the library.
Sure, you already know the obvious thing about libraries: free books! But if you are sincerely interested in sneaky ways to positively impact your budget, it is definitely time to revisit your local public library and see what's new. At the Chattanooga Public Library, for instance, your card also gets you audio books, eBooks (Kindle?), online courses from Treehouse, kids activities, homework help, access to 3D printer technology... That's a lot of stuff for free that would cost a lot elsewhere. Pretty sneaky, right? Looking for Tips #1 and #2? 6/24/2014 Sneaky budget: Tip #2Talk about being sneaky...tip #2 takes what you are already doing and makes it budget positive: switch your credit card use* to a cash back rewards card**. When the cash rebate comes in the mail, stick it in the bank! This is as "set it and forget it" as it gets for household financial management ideas.
*Caveats always apply, right? Credit cards can be a good thing when used to simplify and expedite purchasing, consolidating records, getting buyer protection / warranties, etc. Credit cards are not a good thing when you carry a balance and start paying interest. **Not all cash back reward cards are created equally. In my own use, the Costco member American Express has been great - no limits on reward accrual, "bonus" accrual rates on things like gas, travel, and groceries, and generally a base rate of 1% back on everything else. I also prefer cash back to "points" for a variety of reasons, but primarily because points encourage further consumption and cash can easily apply to savings. Did you miss tip #1? Find it here. |
AuthorDavid R Wattenbarger, president of DRW Financial Archives
June 2022
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