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The Importance of History

Written by Brandon Grundy, CFP®.

Being diversified and having an appropriate asset allocation is boring. That's what many people think, especially after the stock market has been on a tear for a while. A year like we've had so far helps accentuate this sentiment. When you're diversified, you don't have a large amount of your portfolio invested in the so-called FANG stocks (Facebook, Amazon, Netflix, and Google) that have done so well this year. You might have a small amount invested in them, so your portfolio does benefit, but you're not seeing the outsized returns that can come from investing heavily in a few stocks that happen to be doing well at the time. But you're not in danger of being bitten either. That's the tradeoff and it can be a tough pill to swallow sometimes.

It is important to remind ourselves of this tradeoff and recalling the lessons of history helps in this regard. Last Friday, September 15th, marked an important day in the history of the markets as the day in 2008 when Lehman Brothers failed. The 158-year-old investment bank was doing extremely well but, in hindsight, had massively overleveraged itself in the subprime mortgage market. As that market collapsed, Lehman found itself without a chair when the music stopped. Going into the weekend of the 12th the future of the bank was truly uncertain. Many market commentators and investors believed that someone somewhere, another company, or even the government, would swoop in to save the firm. But by late Sunday night everyone was shocked to learn that Lehman was doomed to bankruptcy. That Monday the stock market was down a ton and experienced massive volatility during the following days. Then, as we're all aware, an already precarious market and economic environment turned further south and the Great Recession ensued.

Why is the history of Lehman Brothers important to remember? Wouldn't we rather forget nasty market conditions and instead recall the market's recent upsurge? Of course! It's human nature to want to accentuate the positive, but remember that very little about investing is intuitive. It's hard to take the long view as parts of the market, or even individual stocks, race past you as they perform well for a time. And it can be harder still during times of market disruption, as with Lehman Brothers. So, we must remind ourselves that we're in this for the long run and that there will always be someone or something outperforming you in the short-term. What matters instead is performance over the long-term, and this is where being diversified and having an appropriate asset allocation show their worth.

The following article from Dimensional Funds illustrates this well (emphasis mine), especially as we near the 10-year anniversary of the market highs before the onset of the Great Recession...

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Another Data Breach

Written by Brandon Grundy, CFP®.

Last week was a busy news week, what with the aftermath of Hurricane Harvey and the coming of Irma. Because of this you may have missed that Equifax, one of the three largest credit reporting agencies in the US, announced a massive data breach impacting millions of people. After several security problems in recent years, it's natural to feel exposed, whether our information was part of the breach or not. And it's natural to wonder what we can do to help protect our personal information online.

The simple fact is that we are all exposed when it comes to our personal information. The ubiquity of the internet brings with it many positives but there absolutely are negatives. So, the first thing you should do is to consider clicking this link and checking to see if your information was involved in the breach. Next, read the article below (emphasis mine) from Bob Veres, a thought leader in the financial planning industry, on prudent steps to take to mitigate your risk. These steps can get complicated and the credit reporting agencies can be challenging to work with, but this is worth your time. If you have questions, please don't hesitate to ask me. 

https://trustedidpremier.com/eligibility/eligibility.html)

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Just a Little Faster

Written by Brandon Grundy, CFP®.

Trade settlement isn't something most investors think about, but it's important and has an interesting history. We tend to take for granted that which we don't see and the process of settling an investment transaction is one of these seemingly invisible things. It just happens. In the past the process has taken several days and sometimes weeks, but a recent change going into effect today is making the process just a little faster.

Hundreds of years ago in Europe, when an investor bought a stock they would have to wait up to two weeks to receive it and become a shareholder. Why so long? Well, that was how long it took to physically transfer the paper shares and money to settle the transaction using a courier. Just buying the shares is not enough. To become a shareholder the transaction also needs to be recorded by the company the shares are for and this used to require lots of manual effort and time.

If you were in London and wanted to buy shares of a company traded in Amsterdam, you could (and often would) do so. Imagine how long it took for a trip on horseback and then a boat ride to make the exchange. Even within London (and eventually New York), couriers would zip back and forth on horseback or carriage carrying payment and delivering shares. Consider not just the time and expense, but the risk involved. What if the courier was robbed, or the ship carrying him sunk?

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So Complicated

Written by Brandon Grundy, CFP®.

There has been an evolution, of sorts, moving slowly through the financial services industry in the last several years. You've heard about this before, how there's a wave of interest in all things fiduciary. Investors are seeking more transparency around conflicts of interest, fees, and issues like that. But a large part of this is a reaction to just how complicated it is to invest these days. Tens of thousands of mutual funds, active versus passive, publicly-traded and private investments, annuities, alternative investments, the list goes on and on.

Investing is complicated, nobody will argue with that. But as an industry we do a great job at making this worse. By layering on product after product we perpetuate a system that, frankly, scares the bejesus out of retail investors. There are simply too many options to choose from. Ironically, the recent popularity of index funds, which are branded as simpler options, has only made investing more complicated given that index funds are anything but simple.

The industry tends to whipsaw based on the perceived ebbs and flows of investor sentiment. Investors used to favor actively managed funds, so their numbers grew rapidly. Then with the rise of index funds, actively managed funds are on the wane and more index funds are coming to market. And then, almost like clockwork, the industry came out with actively managed index funds. Everybody likes having options but some of the products coming out lately are just a tad bit whacky. The following essay from Don Phillips, a Managing Director at Morningstar, summarizes this issue nicely.

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The Biggest Risk in Retirement

Written by Brandon Grundy, CFP®.

What's probably the biggest risk retirees face? Is it the performance of the stock or bond markets? Is it inflation? Maybe spending too much or living too long? Or, how about the POTUS Twitter account? All kidding aside, the biggest risk isn't any of these, though each poses its own complications. As retirees look ahead and try to plan for a long, happy retirement, future long-term care (LTC) expenses are probably the biggest unknown factor and have the highest potential to derail an otherwise unsuspecting retirement plan.

With all these other risks, why are LTC costs so large a problem? Mostly this is due to the overall risk being a mash-up of different risks that are each fundamental and lack simple solutions.

The first is timing. Since we won't know in advance when you'll need care, and for how long, these expenses are hard to plan for. If we knew the need was, say, 20 years in the future, we could run the numbers to see how much cash you would need to set aside today, or save over time, to cover the future expense. We could allow for growth on your savings and it becomes a simple time value of money calculation. But then we also don't know how long you'll need care and what type you'll need. While the national average is about 2.5 years of care in a nursing home starting at age 79, this is skewed to the low-end by folks who only need shorter-term rehab stays. You may need much more time if you or your spouse ends up suffering from Parkinson's or Alzheimer's, for example. This and more makes the timing problem huge.