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Preparing for Volatility

Written by Brandon Grundy, CFP®.

With the S&P 500 and the Dow up this year 17% and 20%, respectively, individual investors are finally getting more bullish about growth prospects. Usually late to the party, these investors are often looked at by the institutional folks as a contrarian indicator.

After many months of quiet gains in the stock market it's natural that some investors start assuming this will last forever, that we've entered a new low volatility growth paradigm, or something like that. But markets don't go up in a straight line indefinitely. It's during the good times that we need to remind ourselves of market fundamentals, and sometimes even of Newton's law of universal gravitation.

As I have written previously, volatility in the stock market has been very low for most of the past year. The market's "fear gauge", the VIX, has been stuck around a historically low reading of 10 for months, only showing minimal and brief spikes this past spring and summer. As quick as volatility rose it subsided and the stock market barely budged during these short stints of "fear". The futures markets would often indicate a negative opening for stocks, but prices made a habit of grinding higher during the day. This, on top of the market seeming impervious to any number of negative-sounding headlines, has led many to nickname this the "Teflon market".

The S&P 500 has only experienced a daily decline of 1% or more four times this year. This is the fewest number of days for this metric since 1964, still the least volatile year on record. The S&P's average daily change of plus or minus 0.31% is the lowest since then as well.

So, we have a situation this year where stocks have been making repeated record highs on record low volatility. In reality, we haven't seen meaningful amounts of volatility since 2015 and then a rather muted response to Brexit during the summer of 2016. This is leading some commentators to call current market conditions "boring". Well, on one hand I see their point, but on the other hand it's important not to let boredom truly set in as it can easily lead to complacency.

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Upping the Ante

Written by Brandon Grundy, CFP®.

Every so often we have to make the decision to raise our level of play. As you know, a big part of why I left the brokerage firm environment a few years ago was to work solely in the best interest of my clients. I had grown weary of needing to constantly serve the corporate master and instead wanted to provide financial planning an investment management services without the conflicts of interest that are so pervasive within the industry.

For a while now there has been a slow but growing movement of advisors like me who have left the brokerage industry behind. This has mostly been driven by the public wanting more well-rounded financial advice, but also more information about who's providing the advice, how they're compensated, and the full cost of investing. In short, the public has been seeking better quality services that are more transparent. Not too much to ask in my opinion.

This change has also been driven by the ethics of advisors who, like me, developed an understanding of how the industry works and saw firsthand how unfavorably the cards are stacked against the public.

Over the last several years it seemed as if industry regulators were finally catching on. The Department of Labor, which regulates retirement plans and IRAs, had proposed what became known as the "fiduciary rule". The rule sought to level the playing field a bit by increasing transparency in the advisory industry and allowing customers to sue their brokers more readily, and even form a class action if needed. The rule wasn't perfect, but it was a good step in the right direction.

As you might have heard, the rule was partially thwarted by industry lobbyists and was delayed shortly after the new administration took office. Just last week, the delay was delayed again, now until mid-2019. Industry watchers speculate this latest delay could prove indefinite.

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The Behaviorist

Written by Brandon Grundy, CFP®.

Behavioral finance has been a big topic in financial circles lately. Occupying a branch of the economics tree, a "behaviorist" studies the effects that psychological, social, and emotional issues have on the financial decisions people make.

Most economic models tend to focus on people as completely rational actors who would make the correct financial decision at every opportunity. This makes for simpler math and cleaner outcomes, but we are people, of course, and not financial robots. Accordingly, the decisions we make are often irrational and fundamentally at odds with the view of traditional economics.

Behavioral research, however, has generated insights into how people make all kinds of decisions, like how we look to rules of thumb, helpful anecdotes, cognitive biases, and stereotypes for assistance when making difficult or risky decisions.

Concepts around risk tolerance, risk aversion, the herd mentality, and why it's so easy to logically make the wrong decision, all stem from behavioral research. This is incredibly useful for financial planners since it helps us better understand how our clients interact with such abstract topics as investing and planning for the future.

So, it was exciting when this year's Nobel prize for economics was awarded to a prominent behavioral economist, Richard Thaler. Thaler is know is some circles as the "people's economist", and his work has illuminated the complicated way in which we tend to make decisions. Hopefully this recognition means that more attention and funding will flow into understanding the human side of finance and economics, and we'll all benefit.

The prize was awarded earlier this month, but the fires got in the way of posting on the topic. Click the link below for a short article on Thaler from one of my industry colleagues, Bob Veres...

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Important Updates

Written by Brandon Grundy, CFP®.

With the recent fires being 90+% contained as of this morning, let's review some of the important announcements by the Social Security Administration and the IRS in the last couple of weeks.

Social Security benefits for more than 66 million beneficiaries will increase by 2% in 2018. As a refresher, the Social Security Administration (SSA) reviews Consumer Price Index data for the third quarter (which ended in September) and compares this versus a year ago. Since the index, specifically the CPI-W, or Consumer Price Index for Urban Wage Earners and Clerical Workers, increased by 2% during the period, this sets the increase amount for beneficiaries the following year.

The increase marks the highest pay raise for retirees in several years. In fact, in three of the past ten years the Cost of Living Adjustment (COLA) was zero. 2016 was one of these years and the increase for 2017 was a whopping 0.3%. So, 2% is a good step forward. Or, it would be if not for projected increases in Medicare premiums.

While Medicare premium numbers won't be out until later this year, it's likely that expected increases will sap most, or all, of the increase to Social Security payments. Many criticize how the SSA views inflation given that the CPI-W doesn't necessarily accurately capture healthcare costs for retirees. Nonetheless and unfortunately, this relationship between SSA's annual COLA process and rising Medicare premiums could be with us for a while.

The IRS announced changes to contribution limits for retirement plans in 2018. Here are some of the highlights:

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File that Claim

Written by Brandon Grundy, CFP®.

As the fires continued to wreak havoc in our area this past week, I kept wondering what this upcoming blog post should be about. The loss of life. The loss of property. Lives upended but a community coming together to support neighbors and strangers alike. What we've witnessed during this tragedy is too hard to put into words. People more talented than I will come later and put all of this into beautiful prose and poetry. But as a financial planner I keep coming back to the financial impacts associated with this disaster.

As of this writing the estimate is that over 3,000 homes were destroyed locally during the fires, with close to 6,000 buildings destroyed across Northern California. According to Santa Rosa Mayor Chris Coursey, this amounts to roughly 5% of the local housing stock and about $1.2 billion in damage. Housing availability was tight before the fires and who knows how long it will be until much of what was lost is rebuilt. For those without renter's or homeowner's insurance, the road ahead is long. But even for those with insurance, the future can be uncertain and full of challenges.

My post last week dealt with the general concepts of successfully navigating a homeowner's insurance claim. This week, here's my summary of some guidance from the State of California Department of Insurance about the claims process after wildfires. Follow the two links below if you'd like more information.