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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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Picking Out the Good Stuff

Written by Brandon Grundy, CFP®.

These are anxious times for many of you, I know. The stock market has been volatile lately and other news you're hearing may make it seem like things are going from bad to worse. There's good information out there, but sometimes we have to look for it.

We learned last week that our economy is continuing its strong run of over eight years of job growth. Our economy isn't perfect, of course, nobody's is, but the current 3.7% unemployment rate is near the lowest in history.

Wage growth is also picking up, climbing at a 3.1% annual rate, the highest since 2009. This is long overdue and will benefit many who have seen their wages stagnate against even the modest amount of inflation we've seen.

Additionally, according to the Department of Labor, the last several months have seen the number of job openings in our economy exceed the number of unemployed workers for the first time in history. Granted, fewer people are actively looking for jobs, but it's better to see more job openings as new this could tempt folks back into the workforce.

Perhaps due to these points, consumers continue to express growing levels of confidence. Interestingly, consumers are enthusiastic about their current financial situation while being less optimistic about the future. The following chart from Bespoke Investment Group shows this growing divergence.

consumer confidence - present vs future

While increasing consumer confidence and other data is largely positive, it is also indicative of an economy in the later portion of the economic cycle. But just because the next phase of the cycle is a slowdown or recession, it doesn't mean one's right around the corner. It also doesn't mean you should drastically alter your financial plans and start preparing for the coming zombie apocalypse (a link to the CDC's blog on the subject is below if you're interested...).

In all seriousness, it's important to frequently review the current market environment and the longer-term outlook. Don't just take it from me, however. Read below for a collection of excerpts from two recent JPMorgan research articles. The content is meant for advisors but it's worthwhile for anyone to see what some of the large institutional investors are thinking.

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The Search for Silver Linings

Written by Brandon Grundy, CFP®.

It can be hard staying positive amid what can seem like an onslaught of negative news. Whether it's the stock market, politics of the day, or even the horrible tragedy in Pittsburgh this past weekend, finding the silver lining can seem like searching for a needle in a haystack.

Through yesterday this has been the 8th worst October for stocks since 1928, with the S&P 500 down almost 10% and the Dow down about 9%. 1929 and 1987 both saw 20+% declines in October, while '08 saw a 17% drop. So, I guess the silver lining is that it can always be worse?

All sectors of the stock market have been getting hammered so far in October except for Consumer Staples and Utilities, more conservative sectors deemed too boring to grow much during the runup in stock prices. More exciting sectors, such as Technology, posted most of the gains earlier in the year but have been taking it on the chin as investors take profits.

Developed foreign markets (such as Europe) and emerging markets (such as China) are each down about 10% this month, with Germany and China in a technical "bear market" by falling at least 20% from recent highs.

The American Association of Individual Investors tracks investor sentiment. "Bullishness" has unsurprisingly taken a nose dive this month as investors have been spooked by recent market volatility. The current reading is well below average and indicative of investors who were perhaps rudely awakened to the fact that markets go up and down.

Is there anything positive to report as we near month's end? Bonds are finally showing some life. Still down this year and down a fraction for the month, bond prices were up last week as stocks fell. Gold is also up. Both asset classes demonstrate the risk aversion alluded to in the AAII sentiment survey.

How long will this volatility continue? The talking heads on TV can drone on and on about their predictions but truthfully, nobody knows. While major economic indicators aren't signaling an imminent recession, the stock market may get worse before it gets better.

Corporate earnings are solid but guidance from companies about future earnings is trending softer. Interest rates are still historically low, but the Federal Reserve may continue raising rates even as growth in the economy slows. Due to recent stock market volatility, some investors anticipate the Fed will hold off raising rates but once more this year and maybe not at all next year. Should the Fed continue raising rates it would likely lead to more market volatility even as the economy grows.

For me, in times of market stress it's helpful to fall back on the investing fundamentals of controlling quality, cost, allocation, and rebalancing. While these might sound obvious, they can be hard to do when markets get noisy. And there sure is a lot of noise.

This week I'm attaching another article from Jim Parker at Dimensional Funds about seven simple truths to investing. You may note that none of these deal with innovative ways to find the next hot stock or can't-lose mutual fund. Instead, they're mostly about building knowledge and dealing with the psychological aspects of investing. Nail those and the rest is a cake walk.

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