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Don't Believe the Hype

Written by Brandon Grundy, CFP®.

The stock market has felt brutal the past several weeks, no doubt about it. The widely-reported point swings on indexes like the Dow and NASDAQ seem eerily reminiscent of the 2008 Financial Crisis, so it's natural to be concerned. This is all a bit overhyped by the media, but that goes with the territory.

We've been reviewing definitions to key finance terms lately, but with the stock market going through another manic phase, I wanted to address some of your concerns. I'll do so by presenting a few graphics and then explaining the significance of each.

While there are any number of risk factors to consider, let's review one that came up in the media last week – inverted yield curves. You may recall prior posts where we discussed the yield curve and its importance as a recession indicator. Short of rewriting those here, this is one of those areas of finance that's not intuitive and the details get pretty wonky, so please let me know of any specific questions.

The gist of monitoring the yield curve has to do with its near-perfect ability to predict an impending recession. When the yield curve "inverts" (when short-term bonds yield more than long-term), this signals risk aversion, declining business and personal investment and, ultimately, a slowing of the economy typically leading to recession.

Investors monitor several different curves, but the most important are the difference in yield between the 3mo and 10yr Treasury bond, and the 2yr and 10yr Treasury bond. Those curves are "flattening" (the difference in yield is getting smaller) but are not yet inverted. They can stay flat for a long time and inversion isn't a forgone conclusion. But last week the less important 2yr and 5yr Treasury curve did invert and caused a bit of a stir.

Some members of the media took this news and ran with it, implying that a recession was right around the corner. What they didn't say was that the curve in question isn't as good an indicator and that the more important curves hadn't yet inverted. This seemed borderline irresponsible and helped stoke the volatility fires last week.

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Round Three

Written by Brandon Grundy, CFP®.

This week we'll define some more finance terms, but first let's review a headline from the past few days.

You have likely heard that George H.W. Bush passed away on Sunday. What you may not have heard is that the stock market will be closed tomorrow as part of a national day of mourning for the former president.

The stock and bond markets traditionally close following the passing of former presidents and vice presidents, but they have also closed for a host of other reasons, such as blizzards, coronations and funerals of kings and queens, the beginnings and endings of World Wars 1 and 2, and in August of 1917 for "heat". And of course, the market was closed for four days following the September 11th terrorist attacks.

There have also been partial closings for local traffic jams and computer system malfunctions, and whole days off to allow office staff to catch up after heavy trading during the Great Depression. A list of historical NYSE closures reminds me that with all the technology underpinning global markets these days, they're still fundamentally human institutions.

Continuing our theme from the past two weeks, here are two more finance terms from the YouGov report that roughly 60% of Americans profess to know little about: Roth IRA and Annuity. Entire books have been written about these terms, but I'll do my best to condense the definitions down to a few short paragraphs.

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More Definitions

Written by Brandon Grundy, CFP®.

Continuing our theme from last week, let's review three more of the finance terms folks report having little knowledge of: asset allocation, bull and bear market, and endowment. You may know these terms already and, if so, that's great. But since about 50-60% of Americans are either unaware of or aren't confident about the terms, let's dive in.

Asset Allocation – Asset allocation is a foundational component of financial planning and investment management, so it pays to know at least something about it. Weighty scholarly works have been written about the topic and it's hard to condense a definition down to a few paragraphs, but I'll try.

Asset allocation is a strategy that helps determine your investment return and the downside risk you'll have to endure to get it. Since more risk equals more return (and vice versa), the asset allocation process mixes riskier investments, such as stocks, with less risky investments like bonds and cash, to find the optimal blend for an investor.

Mixing different categories of investments together turns asset allocation into a series of tradeoffs. Do you want more growth over time? If yes, this means you'll need more stocks and will have to endure more downside risk in the short-term. Want more stability? If so, your allocation will require more bonds, cash, as well as lower expectations for growth.

Ideally, your asset allocation is based on your tolerance for risk and how hard you need your money to work for you. If created appropriately, your allocation should stay the same for a very long time and would only be altered if something fundamental changes in your life (not just because the market is down, political concerns, etc).

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Happy Thanksgiving

Written by Brandon Grundy, CFP®.

It's been a tough year for many of you and it's a good time to acknowledge all we have to be thankful for. Personally, I'm thankful for many things, including the trust you place in me as your financial planner. So, from my family to yours, Happy Thanksgiving.

Last week we discussed how one of the main impediments to increasing investor transparency is how complicated the financial services industry is. A big part of this has to do with jargon.

Every industry has its own language, but finance, perhaps along with medicine, has the added distinction of being dangerous if you don't understand the lingo. One of my jobs, so far as I see it, is educating you about the terms, themes, and jargon that's most important to your financial health over time.

Without basic knowledge it's hard to know what questions to ask and if the answers you're getting are sufficient, leaving you open to missteps or even fraud. In other words, what you don't know can hurt you.

While everybody's knowledge level is different, it's helpful to get a sense for where we are as a country. Earlier this year research firm YouGov surveyed about 1,200 American adults to gauge awareness of 35 financial terms.

Folks have a decent understanding of fundamental terms like "Savings Account", "Net Worth", "Asset", and "Liability", with over 70% of respondents reporting confidence about those terms. But the numbers are almost reversed for terms like "Index Fund" and "Amortization", with 60-70% reporting being uncomfortable with, or having no knowledge of, the terms.

These terms, and the others on the YouGov list (see the link below), are essential to one's financial health. Accordingly, over the next several weeks I'll be starting at the bottom (the least understood terms) and choosing a couple or so to define and comment on. Yes, you could easily look these terms up in Google, but I'll attempt to give you the real-world-financial-planner definition. Hopefully this will provide some clarity and increase your understanding.

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Looking for Clarity

Written by Brandon Grundy, CFP®.

Sometimes when doing research for these posts I stumble across an information goldmine. Case in point, the Ethics Unwrapped project from the McCombs School of Business at the University of Texas at Austin.

I was searching the web for a concise definition for "conflict of interest" and found this collection of short videos and educational resources. The content covers personal and professional ethics and does so in a way that's fun and easy to digest. If you have some time and are curious, I'd highly recommend perusing the website (a link follows at the end of this post).

Conflict of interest: A conflict of interest arises when what is in a person's best interest is not in the best interest of another person or organization to which that individual owes loyalty – From Ethics Unwrapped

As you no doubt have heard me say before, various agencies of the federal and state governments have been working to make financial relationships and the process of investing more transparent. They've had limited success. There was the so-called "Fiduciary Rule" from the Department of Labor, which sought to hold advisors to a higher ethical and legal standard when working with retirement accounts. That rule ultimately failed at the last minute early in 2017.

The latest rulemaking attempt comes from the Securities and Exchange Commission with its "Regulation Best Interest" (who names this stuff?). The regulation seeks to reduce conflicts of interest by increasing transparency around the differences between broker-dealers, investment advisors, and fee-only folks like your humble financial planner.

A critical piece of the proposed regulation is the Client Relationship Summary (CRS), an up to four-page document that investors would receive prior to starting a new relationship with a broker, advisor, or planner. The idea is to show a side-by-side comparison of the services available, conflicts of interest, details about fees, and other information. The goal being to help investors make better informed decisions about which service best fits their needs.

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