I met with a client today to talk about planning. He runs a successful business and is in the process of expanding it, and at home he has a young child with his wife.
The time to plan is something most people put off. They are either afraid to discuss finances with someone, or don't like the idea of having to follow a path with THEIR hard earned money. I sympathize with these fears. It can be scary to disclose that you have not saved anything or have large debts. It can also be uncomfortable to realize you curtail spending on some "creature comforts." But this is something I take very seriously, and I never judge clients based on past mistakes or events.
A lot of the time, a person can be thrust into a situation that is not their fault. And it can feel as if there is never a good time to meet with a financial planner. But sometimes we have to do things to plan ahead. A team or army or business never flies blindly, without goals and steps to meet those goals. Likewise, a person and their family should not go through life without some sort of plan.
If we weigh: the slight discomfort and time it takes to meet a planner versus the satisfaction of knowing why we are saving and that we are on the right path, the choice can become clearer. Imagine the satisfaction in knowing that little by little, debt is being paid off while we also save for retirement and a child's education. The assurance of knowing you are working towards a goal is the key to advancing in life.
That brings me back to my client today. Even though it was tempting for him to hold off planning and saving so that he could pay for business expenses and family comforts, the truth is he can do both. And most people can do both, as long as they accept that the amounts may start out small. Imagine agreeing to set aside $50 per week to begin saving. Starting small is better than not starting at all. That first financial plan can lead to greater benefits down the line. It can also provide peace of mind.
Whether the plan suggests a ROTH IRA and term life insurance, a 529 plan for a child, or a Simple IRA with employee group benefits, the willingness to sit down for the planning session is the most important thing. My client today saw that. Do you?
Obviously when you're evaluating a dynamic issue, you need to gather information from multiple sources, including sources your disagree with. You need to get as close to complete information as you can.
That said, it is also sometimes useful to look for the simplest answer. When we look at what is happening in the economy right now, the simple solution is probably the following:
For 7 years, the Fed has kept bonds bid and forced investors into risk assets. That included equities. Now that the Fed is raising rates and implementing quantitative tightening, bonds (treasuries) are able to move down (yields going up). This makes shorter term government bonds more attractive. Some conservative investors that were forced into equities after the Fed began quantitative easing, will start to eye 10 Yr Treasuries. The yield plus safety is hard to pass up for these investors. As a result, there will be downward pressure on equities.
So what does that simple answer mean that stocks can't go up? No. It means that there will be a battle between earnings growth and bond yield appeal. It will likely be a bumpy ride until the end of this economic cycle.
Usually it pays to be cautious, but also to remember that long term economic power and dynamism in the United State has fueled stocks to gains hard to find elsewhere. So with that in mind, I'd like to list some of the key current concerns for investors.
The FED carried on the largest prop trade in history when it implemented its quantitative easing programs following the financial crisis. It has since begun raising short term rates, and soon will be reducing its bond portfolio. They are removing money from the financial system and this has deflationary effects. In a nutshell, that can be bad for the stock market if it's not offset by economic growth.
I believe that is what the FED expects. They believe that the tax changes and the prospect of infrastructure spending, will have inflationary pressures, and can absorb the deflationary shock of tightening. What happens if they are wrong? They tighten us into a recession. I think this is the biggest risk going forward. The FED always raises us into recessions. It's just a matter of where at. Since the supply they are taking out of the system is massive, it may speed up the time it takes for them to slow down out economy. [Note: This provides a counter pressure to the following fear of Inflation.]
The steel and aluminum tariffs (and other tariffs) have the potential to start a trade war with China. Trade Wars are almost by definition inflationary. You are removing a cheaper (foreign) supplier and replacing it with a more expensive (domestic) supplier. It may benefit workers in that industry, but anyone that uses that product will pay more. That will cause upward price pressure and may boost inflation numbers going forward.
There is some debate about whether this is simply a negotiation tactic by President Trump. But that ignores the fact that the Chinese are terrific negotiators. They may not be easily persuaded to accept worse trade conditions, even if it would be fair. This is a looming issue that should pay out in coming months.
While inflation has not been a concern for over a decade, the recent stock market gains combined with the tax legislation, have fueled some speculation about inflation. Bond rates have risen quite a bit lately, and it was probably caused by inflation risks.
In addition to the economy naturally heating up, the recent tax legislation will likely result in some added inflationary pressures because companies will likely use the extra cash to increase wages, construct plants, and perform buybacks. This will increase demand, which results in upward pricing pressures.
War is always a possibility, but give the current administration and its recent cabinet changes towards hawks, and it seems that a major war is more of a threat now than at any time in the past decade. North Korea is always a wild card, but they now have nuclear capabilities and the upcoming meeting with Kim Jong Un could lead to unpredictable scenarios, especially considering Trump and Kim Jong have a history of belligerent actions/words. This is a low risk event, but still higher than it has been for a long time.
Finally, perhaps the most important element is valuation of the market. I like to look at Robert Schiller's CAPE ratio. Below is a chart of it. You can see that we are historically pretty high. Some could say that the mean ratio has been rising, and that we aren't in bad shape. I would disagree. If you consider that interest rates are now rising, especially on the short end, high multiples make less and less sense.
With rates rising, and volatility rising, portfolio managers should start to reprice risk. This means a few things, but one of them is that they will be willing to pay incrementally lower prices for company earnings, thus lowering P/Es.
It is hard to tell when that will happen, but given the list of risks above, any one of them could provide the "excuse" to selloff. That is what we've seen the past few weeks. It is what we could continue to see. Who knows where the market will decide to reprice P/Es to? Not me.
So what is an investor to do? They can allocate more of their portfolio to cash. If they are hesitant to do that they can buy protection in the form of SPY puts. At a minimum, investors should understand the value of a properly diversified portfolio. In any case, it pays for investors to not stick their head in the sand.
These risks may not result in a bear market, and they may even counteract each other (quantitative tightening vs inflation), but regardless, there are a lot of swirling factors at play and this far into an economic cycle it's smart to pay attention.
Disclaimer: As always, the above post should not be construed as investment advice because individual circumstances vary.
Business owners and creatives are always asking me how to invest their (passive) incomes. My favorite method (but by no means the only strategy) is to use what is called a Core & Satellite strategy. I will describe it below.
[Disclaimer: Building your investment portfolio will depend on a number of factors, such as your risk profile, your time-horizon and your individual goals. This article should in no way be considered advice. You should meet with an adviser than can take into account your situation, when planning your portfolio.]
In order to maintain a well-balanced and diversified portfolio, a common strategy is to split your assets into ‘core’ and ‘satellite’ investments. The goal with Core and Satellite strategy is to increase diversification, while providing the potential for higher returns than a index fund alone might provide.
This strategy typically involves investing the ‘core’ of your portfolio in lower cost and (hopefully) lower risk funds, while your smaller ‘satellite’ investments tend to be more tactical. These tactical 'satellite' funds can also be passive, but they may be actively managed as well.
Why core and satellite funds?
The idea behind the core/satellite strategy is to give your portfolio some sort of structure. A portfolio lacking structure can lead to a mishmash of investments, which can result in unknown risk levels. Risk is something that all investors should understand.
Core and satellite is also relatively simple to rebalance every year, and it is visually easy for some people to understand -- a core with smaller funds surrounding it.
What should form the core of your portfolio?
Your core holdings should provide stability to your portfolio and should match your risk tolerance and investment horizon.
One option is to invest the ‘core’ of your portfolio in low cost index funds and your smaller satellite investments in actively-managed funds. Another option is to invest in an active “balanced” fund that has low fees. The goal is for a broad based fund with low fees and above average performance.
The core will make up 60-90% of the portfolio, and since it is low cost, you keep overall fee levels down on the portfolio. I prefer funds that aren’t overweight the mega-cap stocks. Rather, I like funds that are spread fairly equally between large, mid, and small stocks.
We also prefer that the core have exposure to developed foreign markets, like Europe, UK and Japan. We can get our emerging market exposure in one of the “satellites.”
What should form the satellite of your portfolio?
Satellites are commonly sector-specific or thematic funds in tech, biotech, energy, emerging markets, commodities, high yield debt, REITS or energy to name a few.
The satellites are a good place to rely on industry expert fund managers. A fund manager may have decades of experience evaluating a sector or country. This can be place to seek alpha -- or outperformance.
I hope that is a decent enough description of how the Core and Satellites strategy can work for someone. There are no hard and fast rules, but it does provide an overall framework to work from. If you have questions, let me know.
The Trump tariff idea may just be a numbskull off-the-cuff idea by the man-child in the Executive Office, but it is rumbling markets. This is a dangerous move at a time when the market is also concerned with the Fed attacking inflation data with higher rates.
It has been common knowledge in the economics profession for many decades that tariffs can lead to trade wars, and trade wars don't benefit anyone. On the whole, it will put pressures on our GDP and may result in higher input costs. This will result in either higher prices or lower earnings. Not a good position to be in.
There are ways to tackle Chinese dumping and benefit U.S. industries, but broad tariffs are not it. Let us hope that Trump backs down from this idea. Otherwise, the market (and the US as a whole) will probably suffer in the longer term.
Sorry for the hiatus. I have been busy with clients, opening IRAs and building financial plans. I took the last 6 weeks off of writing to accomplish work tasks, but never again. I work my day job as financial adviser to my clients, and still write some posts before bed.
While on hiatus, I received lots of questions from readers about whether I was shutting down permanently. I didn't expect it, but I had to reassure them that I wasn't shutting down completely.
I intend to set a new fairly consistent schedule for producing new content every day or two. I think that from a SEO standpoint, more consistent blogging would be good to increase search results.
I also have so many small topics I would like to cover with you guys, I think digestible posts would help me cover more while also giving you the chance to read quickly. For example, I want to have posts that you can open your smartphone to while you wait for coffee or watch a commercial -- short and sweet content -- that teaches.
Remind me to write about "Getting Down The Mountain," fee based accounts, and volatility buffers in the near future.
After reading many books on blogging, I thought I'd share one of the more basic ideas for people looking into setting up a blog. Darren Rowse and Chris Garrett wrote Problogger, and in it there is a short section that I liked.
People think that you have to have this one amazing idea for a blog and then work at it until it is making you 4 or 5 figures per month. That is possibly, but it overlooks other options. So here are three top models for bloggers.
1) One Excellent Blog. The first, and most direct method, is for someone to focus on one blog. The benefit to this is that you can make sure you are producing enough content for that blog. There are no other tasks pulling you in different directions. Focusing on one blog is probably the best strategy for people new to this craft. It is best to build your chops on one blog before branching out.
2) Running Multiple Blogs. The idea behind having multiple blog is simply, you may not have that one killer idea, but maybe you have 3-5 pretty good ideas. It is still possible to build these blogs out and make moderate amounts of money off of each blog. And all of this blog income combined together can produce a livable wage for you. The other benefit of this method is that if you are just naturally inquisitive and have multiple hobbies/interests, you can write, teach, learn about all of them on your blogs. It can keep things interesting.
3) Freelancing. Once you have established yourself as a quality blogger that produces consistent content, other blog owners may hire you out to write for them. This not only provides you with income. It also introduces you and your blog to another audience. This audience can then begin visiting your blog and become potential clients for you.
4) Flip or Flop. You've seen the HGTV shows where people buy dilapidated houses and make them look nice before selling at a profit. You're probably also aware of tech startups that build their business with a main purpose of selling it to a larger company. This is actually a method for bloggers. They build out a blog with impressive content, and gain consistent blog visitors, and then sell the blog to someone else. This can be lucrative, depending on the amount of web traffic that the blog gets.
So there you have the four main blog building models. Any of the four can be the right fit for you, but you have to choose wisely because experience can play a major role in your success. A new blogger may want to attempt to master building one blog, before attempting to Build & Flip a blog.
Hope you like this. If so, please like and share on your media platform of choice!
Hellooooooo. I hope you are well. Christmas is fast approaching and this year has flownnn by. I hope Christmas and the rest of the holidays treat you well!
For the week ending Dec. 8, income totaled $536. Of that, $205 was from 2 books I have listed on Amazon. $331 is from affiliate marketing.
I am exploring ways to increase traffic to this site, including potentially using giveaways. I know I need to ramp up my posts, so I will definitely be doing that. Get ready for an explosion of content and passive income advice. I may try to find some guest writers in the new year too. I think it can be valuable to get diverse views and experiences involved in talking about passive income and saving strategies.
Have a great weekend! Laissez les bons temps rouler!
I heard a great analogy yesterday. Actually, I read it in a book about stories used to illustrate financial ideas. See the picture below? What do you think it is? Don't skip ahead. Just take a guess.
What do you see? Two boxes? Okay, you are forgiven for not knowing because I am not an artist. Those boxes are two elevators and the cables supporting them. Which one would you ride in? The one with multiple cables obviously.
This is an analogy for why you should diversify. You want a second/third/fourth cable in case one snaps. The cables are representative of assets in your portfolio. It's about safety, peace of mind, and strength. You want multiple independent cables supporting your savings for retirement.
Have a nice Thanksgiving. I'll be smoking sausage and stuffing my face with turkey, pecan pie, and possibly some Glenlivet 18 yr here in Chicago's burbs.
An example of this is the sale of a mutual fund. While the majority of the income is taken by the broker up front, there are small trails of income associated with them. Another job that has components of passive income are insurance sales. Whether disability insurance, life insurance, or health insurance, there are varying levels of passive income that get paid to the agent for years into the future.
This just goes to show that not only should you strive to produce products that deliver income long after you build them, but you can also look for passive income in your career. This can result in benefits long into your future, as you may move on to another job or career, but still receive payments on work done 10 years prior.
Good night and good luck.
Founder of a fee-only, ethical investing firm. We specialize in assisting millennials tired of traditional financial advisers.