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Welcome to the Chapel Hill Financial Advisor Blog!

My name is Kent Fisher, CFA® and I work as a Financial Advisor at Old Peak Finance in Chapel Hill.  Please stop by in the future for my thoughts, ideas and general ramblings about all things finance.  I might throw in some local color as well.

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Nothing on this site should be taken as financial advice – it is only the opinions and ideas of one person.  Only for entertainment purposes some might say.

Please visit http://www.oldpeakfinance.com for greater details.

or send me an email:  kent.fisher@oldpeakfinance.com.

Gun Violence: Your Investments Can Speak.

The recent events in Los Vegas can be depressing for two reasons; first, the tragic loss of life is horrific. On top of that is the realization that common-sense gun control is a political long-shot for the moment.

Is there anything one can do? Yes – two ways. Continue on with conventional political pressure – call your congressperson, senator, or any representative and let them know your views. At the same time – look at your investment portfolio.

Over the past several years there has been tremendous growth in SRI – Socially Responsible Investing. The premise is that investments must pass through Social Responsibility filters before they can be included in your portfolio. Currently, there are a wide variety of funds that do not invest – or limit investments – in gun manufacturers. I will not go into them here, I just want to touch on some common objections to SRI.

Objection #1 – Your returns will suffer. The magnitude of this issue will vary by manager and their investment style. If they run a concentrated portfolio and a social screen would kick-out one of their favorite investments, the impact could be meaningful.

If your manager utilizes broad diversification and factor tilts, the impact is lessened, as other investments can serve as substitutes. The result is just a negligible impact on performance (if at all).

Objection #2 – SRI is expensive. Yes, there is extra work for an SRI fund and it will raise costs somewhat. This issue is always present in investments, and can be mitigated by looking to the fund families that worry about costs. Vanguard, Dimensional Fund Advisors and TIAA (amongst others) are managers that have SRI offerings and worry about the final cost to investors.

The bottom line is that you can deploy your investment funds in a manner that is more closely aligned with your values. The SRI universe is much more developed and accessible today. It is maddening to feel there is little you can do to affect change, but knowing your capital is deployed in investments you can be proud of might help.

 

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Sad truth: Picking stocks is bad for you, but picking the stock market is good for you.

Sorry the title of this post is so long. That means it will generate little internet traffic. 6 to 8 words is the sweet spot – my bad. However, this is an important idea that does not get all the press it deserves. So I am here to help out.

The New York Times re-visited an interesting topic the other day. You can get the direct link here:  NYT Link . The basic message is that much of the wealth created by the stock market is the result of just a few tremendously well performing stocks. The average stock is more likely to be a dog. So, if you are building your own portfolio, you better hope you choose these super-star stocks that propel the entire market higher. (and do not sell even after it has quadrupled etc. etc.). If you don’t, the article explains, often you would have been better off in a one month T-Bill. (itself a pretty poor long-term performer).

One way to be sure you catch these Super-nova stocks is to buy the entire market. i.e. Passive Investing. Guaranteed to catch all the winners, losers, and the super-stars that help us all build wealth. Nothing magic about these concepts – it is simply that the range between best and worst performing stock is far more extreme than we are used to seeing in everyday life. That guy that speeding on the freeway? Likely he was going 20% faster than you, not 2000% faster.

The chances of picking a super-nova stock? The same as the chances of picking the worst stock out there. By buying all of the stocks in the market, (and tilting the weights to favor value, small cap, profitability etc.) you are guaranteed to capture the next rising star. You catch the wonder that is Capitalism and its ability to create wealth by taking on risk.

So, do the smart thing. Resist the temptation to pick individual stocks, and pick the smarter strategy – pick the stock market. Your retirement will be glad you did.

5 Key Concepts for the 25 Year Old Investor. (or any investor really)

1.  Wealth Accumulation is Doable.

Even in today’s messed up world, you can still retire comfortably.  Spending less than you earn, exposing your savings to the various risks in the stock market, and doing it for a long time is a recipe for success.  These three factors will interact mathematically to determine what you can accumulate during a 40 year career.  You’ll be surprised at what you can achieve all on your own.

2.  Taxes Matter.

Our economy needs both Labor and Capital.  It rewards the suppliers of both.  The government taxes earnings on both. Inefficient tax planning will greatly diminish your after-tax savings. Be smart with tax-deferred and tax-free investment opportunities. Take them to the max!

3.  Your ability to stick to your investment plan is more important than the investment plan itself.

Robo-advisors on the internet can give you a decent plan for pennies, but will you have the ability to stick with it? This is the critical question/behaviour.

4.  Investments are Easy.

The internet is full of great advice for the retail investor. Compare this to how you would have acquired the same info 30 years ago. This is the great age of the retail investor!

5.  Financial Coaching is a positive NPV expense.

Yes, getting advice and coaching around concepts 1 through 4 above is imperative. It may hurt to pay that bill, but a coached investor will beat an uncoached investor. Which do you want to be? $$ rich, or $$$ rich. I’ll take the extra unit of $ please!

 

 

Golf proposes new rules to limit coaching; the opposite of what an individual investor should do.

Golf season is about to pick up for me. The Chapel Hill Country Club is re-opening after a 8 week conversion to Bermuda greens. The greens look great and I cannot wait to get back out there!

In March 2017, the USGA and R&A (golf’s rules making bodies) put forth a series of proposed changes to the rules of golf that are scheduled to be in place on Jan 1, 2019. One of the key changes is what a caddie or partner can do for a golfer on the course.  The actual language is cut’n’pasted below from the USGA website. (I added the underlining, and left out some text to keep things short.)

Proposed Rule: Under new Rule 10.2b(3):

The current prohibition would be extended so that, once the player begins taking a stance for the stroke and until the stroke is made, the player’s caddie must not deliberately stand on or close to an extension of the line of play behind the ball.

Reasons for Change:

Although a player may get advice from a caddie on the shot to be played, the line of play and similar matters, the ability to line up one’s feet and body accurately to a target line is a fundamental skill of the game for which the player alone should be responsible.

They do not want a caddie helping a player with alignment on the golf course. Why? The coaching/advice helps the player be a better golfer. This is a competition, so they want to test the skill of the player not the caddie and the player.

Investing is not a competitive sport. You are free to get your alignment advice from wherever you want. In fact an entire industry exists to sell you all sorts of advice.

The modern investor seeks advice on tax related matters, education planning, retirement planning and risk management. Good coaching, in these areas, will have a large impact on his/her financial life.

So please, take advantage of what you are allowed to do in the investing world…………get yourself properly aligned with someone you think will help you achieve your financial goals.

 

Accumulation vs Decumulation: spending is more complicated than you thought.

In my last post, I promised some insight on how insurance products can be beneficial in helping reduce some of the key risks we face once we have decided to retire. However, I am going to start with a more general topic; Spending your nest-egg is more complex than building your nest-egg.

The accumulation phase of life is really quite straightforward: work hard, save hard, and invest wisely. The key piece of this challenge will be your ability to stick with an appropriate investment plan and not let your emotions get in the way. Pretty simple. Everyone one wants the highest return per unit of risk possible – no matter what their age.

Ironically, once the nest-egg is built, we now face the daunting task of spending it appropriately (decumulation). There are more questions to be thought about, and the solutions are more complex.

I am always perplexed when I meet an individual who says that now they are retired, they have no use for a financial advisor. Say that again? You used a financial advisor for the accumulation phase – which was simpler – but now that things are going to get more complicated, you want to go it alone? Not a good move in my book.

So, off my soapbox, back to the last post – longevity risk……..the risk you out-live your savings. One way to deal with Longevity Risk is to purchase an Immediate-pay Fixed Lifetime Annuity. This is a product that pays you a guaranteed sum each month for as long as you live. It turns part of your nest-egg into an income stream that never runs out. Pretty cool right?

The positives are that you never out-live the income stream, and the actuarial rates being used are taking into account the mortality of a large group of people. They can use an average life expectancy to price the product/risk. This helps solve the pesky financial planning problem of guessing how long one is going to live.

The negatives are that you have nothing left to leave for your children, and that you have locked in an interest rate for the rest of your life. If inflation or interest rates move higher over your retirement, this may not be such a good move.

Is this appropriate for you?  How much flexibility do you have in your monthly budget?What are your thoughts about bequests to your children?  During the accumulation phase, everyone wants the highest return per unit of risk. Now that we are decumulating we see a greater variety in desired outcomes. Getting more complex…….and this is just the tip of the iceberg. Let’s call it part of Decumulation 101.

For example, I just played around on the internet, and was quoted between $1,970 and $4,229 per month for a 55 year-old male with 1 million dollars to spend. The range of $1,970 to $4,229 depends on a variety of options I can choose. Some are OK, some not. But, they are another example of the complexity that pops up when thinking of appropriate spending plans.

Normally, spending is a source of fun (just ask my wife), but in retirement, spending appropriately is not as simple and straightforward as imagined! We will be back to this topic in future posts I can assure you. This is just a scratch on the surface.

Insurance vs Investments in Retirement?

Labor Day is around the corner. This is often the official change in season for many with the start of school. It has got me thinking about another key date in our lives…….the date we officially start to live off our savings.  Retirement Date.

As with the change in season, should we be doing something different with our nest-egg now that we are retired? I think the answer is yes – retirement means we now have a different risk exposure than before. Now, Sequence-of-return risk and Longevity risk are elevated and must be carefully considered.

Sequence-of-return risk is the risk that even though an average return is achieved over a long time frame, the order individual returns come at you matters. In the first years of retirement your nest-egg is as big as it will ever be.  If you get hit with big negative returns in the first few years – it will hurt a lot. If the bad years came later when your portfolio is smaller, the impact is less.

Longevity risk is simply the fact we do not know how long an individual will live. To be conservative, we plan for a long healthy life. Maybe too long. Maybe it would be better if we could plan for an “average” life?

I will let you know my bias immediately – I am not a fan of insurance products in general. They are often sold as the only form of risk management available when that is not true. In addition, they are often confusing, and contain a variety of fees that do not benefit the purchaser. However, that being said, insurance products may have a role to play in mitigating Sequence-of-return risk and Longevity risk.  (More detail in my next post.)

For today, I just wanted to focus on the concept that Retirement Date does mark a change in one’s risk profile. Normally one has been using investments in the accumulation phase of life. Now in retirement, we are looking at decummulation, and might have to dip our toes into the world of insurance a little. The risk sharing properties of insurance might be just what the change of season requires.

Market Too Expensive? – Reversion to the Mean at work.

As the Dow Jones Industrial Average hits new highs, there are many claiming it to be “over-valued”, “ready for a correction”, or “expensive”.  Most of these explanations share the same basic premise – reversion to the mean.

Reversion-to-the-mean (RTTM) simply implies that there is some “true” or “appropriate” level for valuations in the stock market.  Most of these values are derived from historical analysis.  Pundits compare today’s values to some sort of average (or mean) .  They then conclude that the market will be headed back towards its historical value in the future – hence the use of the term reversion.  So, the concept is that the market is off its long-term average value, and will be drawn back to this value over time.

Two big problems with these arguments.

1.  What is the “force” that drives the market back?  The RTTM concept works well in physical sciences where all behavior of particles is driven by the four fundamental laws of physics.  What fundamental law is at work here?  It’s just us humans using our minds.

2. The whole argument rests on the notion that we know what the “correct” or “appropriate” level is.  In statistics, they use sampling techniques to estimate what the “mean’ value is for a given population.  Works well if the population being studied is normal, follows fundamental physical laws, and the size of your sample relative to the size of the overall population is known.

But what do we know about the history of capitalism?  Will it continue for another 100 years? 500?  What makes us think what we have seen in the past is indicative or typical?  Maybe it was just an abnormal episode?  Do we want to look at the “mean” of an abnormal episode?

The best example of how these arguments can lead us astray was our last “great recession”.  We had only seen a national home price decline of large magnitude during the great depression of the 1930s.  We assigned AAA values to securities because we thought we knew the range of possible outcomes by looking back at history.  We were not ready for the national home price decline we ended up experiencing which was worse than implied by looking at the stats.  Oops.

All this to say that you need to know what you do not know.  We really do not know the ‘correct” or “appropriate” values for the stock market.  History can serve as a guide at times, but it does have fundamental flaws that will never be solved.  Be wary of the RTTM arguments that pop up every time we are above some long-term average – it really does not tell you much about where we are headed next.

 

Insurance part II – why competition isn’t everything.

This post is going to be simple and straightforward. Intense competition is not the appropriate solution for all the challenges we face. Insurance is one of them.

The insurance industry is regulated for a reason. The industry has a large informational advantage over its customers (most of the time), and failure by a firm can have devastating effects on its clients. You are counting on a back-stop that needs to be there. Life insurance, Home, Auto all need to have solid firms writing the policies, investing the premiums, and being in business during the time of need.

Purely competitive markets could have ill-timed bankruptcies leaving many clients out in the cold. Failure is part and parcel of a competitive market. By contrast, risk sharing is communal in nature, and very powerful when properly structured.

We still need some competition to help drive down costs and inspire innovation. However, it is unlikely that a purely competitive/highly de-regulated market is going to benefit the general public. It may work for television sets or other manufactured goods, but unfortunately, a highly competitive insurance industry might not deliver the outcome we are depending on. Wanna risk your little guy’s future on it? Didn’t think so.

 

Our understanding of Insurance…….Part I

It is interesting to watch the healthcare debate on TV as I study insurance theory. It seems we have fallen in love with the concept of insurance, and it is invading larger and larger parts of our lives. But is this a good thing?

Let’s start with what makes a risk that should be insured. Well….it would:

  •  Be unpredictable in timing,
  •  Infrequent,
  •  Large in negative outcome,

These are the characteristics of risks that are well served by insurance.

In this lens, let’s take a look at Dental Insurance…….I go every 6 months. Unpredictable? No. Infrequent? No – I go twice a year. Big in negative outcome? Maybe. This is the only grey area where I can see one can make the case for needing dental insurance. Normally the cost is relatively low. I have only had one root canal in 55+ years. Only time it really cost me. So overall, I have to give it a low insurability grade.

Another one worth looking at…….Eye/Vision Insurance. Unpredictable? No – I go for an appointment every year. Infrequent?  No – every year.  High Negative cost?  No – these are glasses that you can get at LensCrafters. This is a product/service that clearly fails Insurance 101. (I had someone tell me that as vision plans have become more popular, the price of glasses has doubled. Go figure.)

What these “insurance benefits” all share is the insurance company’s ability to separate paying for a service from receiving the benefits of that service. This is why costs sky-rocket. Once you have “paid” for your insurance, you become cost insensitive. Someone else is paying – gimme the best. Is this a good thing?   Maybe we are all going to pay the price in the long-run?…..

I Like Wine…..and prefer to alter my SWR, Thank You!

As time goes by, I am learning a lot more about personal finance blogging. There are literally thousands of sites out there where people are blogging about their financial lives. Someone once said a first cut to understanding these sites is to separate those that are savings maniacs from those that are chronicling their battle with debt. This site is neither……….it is about practical application of solid financial principals as a way to achieve financial peace of mind.

I am not in debt of any kind, and am not a maniac saver………I Like Wine! Wine can be an expensive hobby that offers great olfactory/gustatory rewards. However, it is kryptonite to the maniac saver. These guys/gals are saving like mad, retiring super early, and watching their pennies with a magnifying glass. Not my cup of tea.

SWR = Safe Withdrawal Rate. This concept is the rate at which one can safely withdraw funds from their retirement nest-egg and not run out of money during retirement. It is a big part of financial planning. For a maniac saver, it is the Holy Grail. Get enough money saved up so that you can live on a budget determined by your SWR, and kiss that job good-bye! However, the safer you want to make your SWR, the larger your nest-egg must be.

{For example, if your goal is to live on 100K, you need 3.3mm saved for a 3% SWR and  2.5mm saved to live on a 4% SWR. Big difference in savings required to generate the same yearly budget.}

There is an alternative to this draconian math – and that is to be flexible with your budget during retirement. If you are able to spend less in years when the market is down, and more in years where the market is up, you can use a higher SWR to help figure out the size of nest-egg you will need.  All at the same level of risk.  Pretty powerful stuff. (A good financial planner can help you set the “guard rails” for this approach)

So, this is all to say that I’ll continue to drink my wine and alter my overall budgetary expenses in retirement as opposed to obsessing over every nickel. Conversely, I can have a larger budget from the same nest-egg – if I am willing to be flexible with my spending as outlined above. This will allow me to retire sooner and enjoy the ride while getting there! Flexibility in your spending pattern is powerful. Cheers!