What is Your Financial Advisor’s Net Worth?

Potential clients rarely ask me about my own financial situation.  This has always surprised me.  During the initial due diligence process, I ask them very detailed questions about their goals, assets, income, liabilities, etc.  I’m sure they would feel a bit awkward asking me the same questions, but it’s a relevant and appropriate topic.  I actually appreciate and respect the courageous individual who asks me for this information because they will see that I’m doing everything I’m asking of them and that I’m invested in many of the same investments which I am recommending to them.    

The last time a client asked me for this information was about 6 months ago.  I had met with this couple multiple times, and this meeting had the air of “decision time” to it.  She started off asking me detailed questions about the benefits and compensation I offered to my employees (this was also important to her) and then asked me whether she could see a copy of my net worth statement.  I walked back to my office and printed it out – I keep this on my computer and update it quarterly.  The entire conversation on both topics took maybe 10-15 minutes, but that gave her and her husband the comfort they needed to move forward.  There was a sense of “we’re in this together, and we share similar values.”    

 You might be uncomfortable asking for this information, but why would you invest your lifetime of savings with someone who was not also successfully working towards their own financial goals?  On what authority could they possibly make recommendations for financial success when they haven’t followed their own advice?  How can they know your emotional ups and downs during market volatility if they are not invested, too?  Finally, it might simply prompt a better discussion with your advisor – for example, what advantages do see with Money Manager ABC over Money Manager XYZ? 
    
Ask the questions.  You’ll do it in a tactful way.  And your financial advisor – if they’re worth entrusting your life savings to – will appreciate the opportunity to share his or her success with you.

 

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Investing in 2014

My inner contrarian investor gets nervous when I begin to see such optimism about investment markets, and I’ve certainly noticed a positive change in investor sentiment lately.  A year ago in early 2013, clients and prospective clients were still voicing a lot concern.  You might recall that the “fiscal cliff”, sequestration, tax hikes, etc. dominated the media.  That seems to have mostly faded from investors’ minds, and stock indexes are powering to record highs as I write.         

 For those of you who read this newsletter, you know that I’ve been relentlessly optimistic on stocks for the last five years, and I remain so for longer-term goals.  But given the recent highs and improving sentiment, I’m feeling the need to calm client expectations for 2014.  I will, however, lay out both sides on how stocks might perform this year.  

My job is to keep clients focused on their longer-term goals and away from the latest noise in the news.  As always, consume the caterwauling media at your own risk.  But we’ll talk 2014 because it might be best to temper expectations going forward.  We haven’t seen euphoria in a long time, and we’re not likely collectively there, yet.  But given the tremendous rise in equity values since March of 2009, it’s important to remember that euphoria can destroy an investment strategy as easily as fear.  

I don’t believe U.S. stocks in general are overvalued.  Looking at historical metrics, they appear fairly valued.  Earnings are strong, inflation is low, there doesn’t seem to be any “irrational exuberance” in most markets, the U.S. is becoming a major force in energy production[1], the emerging middle-class megatrend continues, U.S. government debt is coming down (as a percentage of GDP), and gridlock in Washington is restraining the government from trying anything too stupid – well, mostly anyway.   

International stocks actually look cheap in ways.  Emerging market stocks lagged all year, and it appears that opportunities for bargains are emerging  in Europe. 

Many investors argue that QE is driving the U.S. stock market and that stock prices are artificially inflated.  Perhaps to a degree, but stop and break that argument down.  First, most of the QE money is not making its way into the economy.  It’s hard to push a string, and most of the QE funds still sit on bank balance sheets as reserves (in other words, it’s not being loaned).  Second, it’s primarily earnings and dividends that drive stock prices, and these numbers look solid.  Third, companies have become very lean and cost conscious and are sitting on a tremendous amount of cash.  Companies could be well-positioned to take advantage of near-term opportunities. 

The concern going forward is that a large percentage of earnings growth is still coming from cost-cutting, stock buy-backs, and low interest rates…QE has helped large companies refinance debt to lower rates.  And it is here that QE has helped publicly-traded companies.  How will the “taper” affect things?  QE is truly unprecedented, and nobody – I repeat nobody – knows for sure how the Fed withdrawal from QE will play out.  

I believe QE has done its job – and QE could now be harming the economy by distorting markets and restraining banks from lending.  Remember that interest rates are simply the price of money over time periods, and the Federal Reserve is distorting the price of money by forcing this price lower.  Negative, real interest rates (“real” – meaning, after inflation) have traditionally caused inflation and misallocated capital to projects and investments that otherwise would not get presently funded.  Many economists believe that this “malinvestment” ultimately results in a lower U.S. standard of living.  Low interest rates and over-regulation of banks are causing tighter lending standards than we would normally see in a recovery – thereby perpetuating a stubborn, though improving, unemployment problem.  In the last newsletter I argued that long-term interest rates probably need to increase more before banks are properly incentivized to lend money to small businesses, which are the primary job creators in the economy.  (A huge segment of the homeowner population – with good, but not spectacular – credit could also benefit from this.)  Small businesses must rely on bank financing because they do not have access to capital markets.[2]  Let’s use an example of how government pricing might distort markets:  what if the government, pursuant to some larger, benevolent public policy goal, ordered dairy farmers to lower the price of milk to 50 cents per gallon?  How would dairy farmers respond?  Considering the costs of production and running a business, I imagine they would stop producing milk and look to other farming activities for income.  Less milk would be available and perhaps more meat would show up in grocery stores – all distortions caused by the government pricing of milk. Banks are responding in similar fashion.


[2] For example, your local bakery cannot issue stocks or bonds to raise cash for expansion. 

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Which Political Party Has Been Best for Stocks?

The answer might surprise you…it surprised me.  This chart came from an e-mail to me from Oppenheimer as part of a larger article.  Interestingly, stocks have performed poorly under a Republican president with a Republican Congress.  Political stalemates appear to have worked best for stocks when a Democrat was in charge of the White House with Republicans in charge of Congress.  I wouldn’t read too much into this chart, but I also wouldn’t automatically assume one political party is best for markets.

S&P 500 Index Annualized Returns/1928 through July 31, 2012[1]

President       Congress        Return

Republican      Republican      2.1%

Republican      Democrat        8.6%

Republican      Split                 13.4%

Democrat        Split                 13.9%

Democrat        Democrat        14.1%

Democrat        Republican      18.2%

Stay invested, my friends.

[1] Bank of American Merrill Lynch, “Election 2012” August 16, 2012.  Standard & Poor’s 500 Composite Index is a market-capitalization-weighted index that tracks the stocks of 500 primarily large-cap U.S. companies chosen for market liquidity and industry group to represent U.S. equity performance.  Indexes are unmanaged.  Their results include reinvested dividends and/or distributions but do not reflect the effect of any sales charges, commissions, or expenses.  Past performance is not an express or implied guarantee of future results.  Individuals may not invest directly in any index.


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