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A Trip Down Memory Lane

Written by Brandon Grundy, CFP®.

You've likely heard on the news and elsewhere that this month is recognized as the ten year anniversary of the stock market collapse and the start of the Great Recession. While anniversaries normally entail celebrations to remember happy times, this one has tended to give me the chills. It was, after all, ten years ago this past week when Lehman Brothers was allowed to fail and the global economy felt like it was unravelling faster every day.

Having been in the business at the time I can tell you that September 2008 was a wild and uncertain month. Market and economic news seemed to worsen by the hour and people were scared. There were many phone calls with folks asking questions like, "Are we going to be okay?" and, "Is this the end of the financial system?" and even, "How quickly can we sell everything and find a mattress, or maybe jars to bury cash in the yard instead?".

While there are many takeaways from that period, for regulators, investors, and yes, also for advisors, a primary lesson should be something that we often discuss: When it comes to investing, focus intently on what can be controlled and try not to worry too much about the rest, even though it can be gutwrenching sometimes.

Quality, cost, allocation, and rebalancing are critical to investing successfully over a long period of time. Let's look at the latter two and how they would have helped us get through 2008 in one piece.

Here's a series of charts showing how an investor would have fared if they had stayed the course with their allocation and rebalanced during the Great Recession, instead of heading to the mattress store.

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What’s with Emerging Markets?

Written by Brandon Grundy, CFP®.

A common topic lately has been the problems with emerging markets and why the asset class is down so much this year. It's important for investors to examine these problems because the asset class is expected to generate excess returns over time but is underperforming now. We know we're supposed to "buy low and sell high", but in practice it's a very hard thing to do, especially when it comes to more complicated parts of the global stock markets.

Let's define what we mean by "emerging markets", or EM. Technically speaking, EM is an asset class driven by a major index provider, Morgan Stanley Capital International (MSCI). The firm maintains the primary index meant to represent stock markets around the world not including developed markets such as the U.S., Europe, and Japan.

Currently, 33% of the index is made up of Chinese companies, with the next largest weightings being South Korea at 15%, India at about 9%, and Brazil and South Africa at around 7% each. The remainder of the index is spread across the rest of the developing world, including countries like Turkey (about a 1% weighting) whose currency woes have made news recently.

Over time the index, and the funds that track it closely, have performed well. This outperformance is expected to continue. Compared with growth assumptions for U.S. stocks of about 6.5 – 7.25% on average over the next ten or so years, EM is expected to grow by 8.25%.

But higher expected returns come with higher expected volatility. Just as with the bonds versus cash debate from last week, or any publicly traded investment versus cash for that matter, you're going to have to endure periods of underperformance if you want greater return potential over time.

After a solid year in 2017, EM is down almost 10% year-to-date and has fallen just a hair over 20% from the index's high in late-January, as seen in the following chart from Bespoke Investment Group (1,923 basis points is 19.23%, by the way). This performance stands in stark contrast to U.S. indexes that have returned almost 9%, 12%, even 15% so far this year. What caused this reversal in EM performance?

em performance gap

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CDs Versus Bonds

Written by Brandon Grundy, CFP®.

When rates on CDs are higher than bonds, why invest in bonds at all? If most bond prices are negative so far this year, why not sell them and just deposit the money at the bank where we can earn a couple percent? Anything positive is better than something negative, right?

These are good questions and it's important to explore the answers since some (or many) of you have probably asked yourselves similar questions lately. The issue is that, so far this year, bond investments are mostly negative while yields on cash investments like CDs have turned up in recent months and seem more appealing.

Year-to-date, the total return (including dividends) of core bond index funds like Vanguard's Total Bond Market and iShares Core Aggregate Bond Index are down around 1% - 1.2% while 1yr CDs, for example, currently offer almost 2.5%.

It's entirely reasonable to consider dumping underperforming bonds in favor of nice, safe, comfortable CDs at the bank. The problem is that it's the wrong thing to do. Or, at least it's the wrong thing to do with your long-term savings.

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What to Know About Blockchain

Written by Brandon Grundy, CFP®.

Of the many destabilizing forces in the world today, blockchain may be one of the most misunderstood. We've all heard how this mysterious process is what powers bitcoin and other cryptocurrencies. Some of us may even have heard how major companies, including asset managers and brokerage firms like Vanguard and TD Ameritrade, are experimenting with the technology. But what is it? How does it work and what is it good for?

Known as a type of "distributed ledger technology", blockchain has the potential to transform how information is stored and transferred around the internet, making the process faster (even instantaneous?) and more secure. As such, it's something important to know at least a little about.

The following is from a "Blockchain for Beginners" article in an industry magazine that arrived in my office last week. I think it does as good a job as any at summarizing the key points. There's also a link to another site at the end of this post that offers a deeper dive.

There's a lot of hype around blockchain – and perhaps for good reason. Blockchain, with its cheaper and faster processes for digitizing transactions, could transform financial services. It not only has the attention of technology startups, but Fortune 100 companies such as IBM, Amazon, and Microsoft are investing as well.

And if you're still thinking: "Okay, but WHAT does blockchain do?" ... you're not alone. Here are a few answers.

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Stashing Cash

Written by Brandon Grundy, CFP®.

A common question lately has been about what to do with cash at the bank. Interest rates have been rising and have finally started lifting yields on certificates of deposit (CDs). But are rates good now or should you wait for them to go up? What about online banks, are they a good option? And how much money should you have in CDs anyway?

Before we can answer these questions it's best to define what we mean when we say "cash". As I see it, there are three primary types of cash and clearly differentiating them is important:

"Cash-Cash": My technical term for what should be in your checking account. This is cash-flow money needed for day-to-day spending, paying recurring bills, and so forth. In theory, this would have the lowest balance of your various accounts and only hold money that's realistically going to be spent within the next few months.

Portfolio Cash: This is cash in your retirement and brokerage accounts. It's not just lingering but is part of your overall stock/bond/cash allocation. This money is gettable in a pinch but should not be considered for month-to-month cashflow needs.

Emergency Fund Cash: While it's generally suggested to have 3-6 months' worth of spending stored in a special account, many people want to (and should) have more. For our purposes, let's define emergency fund cash as occupying that middle ground between money that's not needed immediately and money you're uncomfortable investing in your retirement account, for example. It could be saved for something specific or just be a buffer against the unexpected.

Let's focus on emergency fund cash and where to stash it, since that's the obvious place for something like CDs.

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