Financial Plan Archives

Inflation Surprise, Really?

May 18, 2021 by Justin M. Follmer, MBA, CFP®, AIF®

It’s been a volatile week. For the better part of six months, investors haven’t seen a material pullback like we are seeing right now. Several newsletters ago (available only to clients), I stated “a strong recover is likely, but we can’t rule out a market correction on any potential negative catalysts.” It seems we now have that catalyst in the form of a spike in inflation.

Let’s put this in perspective so we are all on the same page.

Wednesday’s Consumer Price Index (CPI), the widely accepted measure of inflation, came in at 0.8%, the highest in 13 years and was much higher than the 0.2% predicted. This pushed the year-over-year number to 4.2%, much higher than the 2.6% from March’s reading. But we have to take this in context…what was happening in March/April 2020? You guessed it, lockdowns.

Since then, we’ve seen massive amounts of stimulus, a 25% increase in the M2 money supply, a 2×4 piece of lumber almost double in price, housing values significantly higher, and extra unemployment compensation that’s causing a labor shortage and price increases. Are we really surprised by a spike in inflation?

So if it was kind of expected, why are the markets acting like an angry toddler? In my opinion, markets were overextended from the past several months of rallying. Any negative catalyst that could imply the Fed tightening monetary policy sooner than they’ve stated was enough to cause this pullback. Recall the Fed “not even thinking about thinking about raising rates?” Yeh, they may consider “thinking about it” now if next month’s CPI reading runs even hotter. In my opinion (and history is on my side), raising rates gradually, methodically, and transparently is far better for markets than trying to chase higher inflation with drastic increases to control it. The latter typically causes a recession. Being proactive is the key here and I certainly hope Powell & Co. (slang for The Fed) are smarter than me.

Am I allowing this to change my clients’ investment strategies? A resounding, no. These past few weeks have seen an increase in selling on the growth/tech side of the style box and buying on the value side. This has pushed value stocks higher and my clients have benefitted from this. Even during broad market down days, we see the value side perform less-badly than growth. Why are we positioned this way: Our Investment Philosophy.

Should we add inflation hedges?

The best long-term inflation hedge is equity exposure, in my opinion. Even during these short-term bouts of volatility, equities are typically the best bet. Other inflation hedges are Treasury Inflation Protected Securities (TIPS) and ultra-short bonds for conservative clients. Real estate exposure and commodities (gold, oil, raw materials, etc.) are hedges as well. But none of these have the long-term track record that equity exposure provides. Since my clients are globally diversified, most of them own all of these already. I can’t make a case for timing our way into and out of concentrated positions specifically to hedge against inflation. Recall that we aren’t traders, we’re investors.

Higher inflation is a drain on purchasing power. So too are higher taxes. Both of which we are likely facing in the coming year. These questions remain:

How “hot” will inflation run before Fed intervention?
How much will taxes actually increase under President Biden’s proposal?
What other catalysts are we likely to face through the fractured reopening of America and the world?

For clients of Coastal Wealth Advisors, I monitor this information, among many others, daily and keep clients informed of issues relevant to their invested dollars, like inflation surprises. We maintain a passive approach to our investment philosophy, but an active approach to monitoring and rebalancing as needed. Monitoring is the final step of the financial planning and investment management process. It is in this phase of the process where I believe value is created. It’s crucial to be in contact with your advisor often. When’s the last time you heard from your advisory team? If your answer is more than a year, let’s chat. I believe there’s a better investment experience waiting for you. Get in touch here.

5 Real Things + Bonus Offer you can do Right Now to Address the Coronavirus and your Investment Account.

April 1, 2020 by Justin M. Follmer, MBA, CFP®, AIF®

Here’s 5 Real Things + Bonus Offer you can do Right Now to Address the Coronavirus and your Investment Account.

As the country continues its best efforts to slow the spread of the coronavirus, it seems that everywhere you turn, you cannot help but run into some article, podcast, Facebook post, television special or Tweet about the latest COVID-19 projections. We, investment advisors, are no different. In just a quick sample of my email inbox, there isn’t a single email within the last 3 weeks that hasn’t mentioned either “COVID-19” or “Coronavirus” and how to help clients address it through their investment account. Some of the common themes among these emails include:

“Here’s our fund that has beaten the S&P 500 year-to-date.”

“Buy this leveraged ETF to protect downside risk.”

“Sell this fixed insurance product to weather the current storm.”

“We offer a suite of software solutions to address market volatility.”

And so many others…that just get deleted.

None of these would help any of my clients and they likely won’t help you either.

Here’s 5 Real Things + Bonus Offer you can do Right Now to Address the Coronavirus and your Investment Account.

#1 Don’t Sell Anything

I’m not simply repeating what all financial advisors say during this time. I’m telling you that there is far more evidence in favor of not selling than there is in support of cashing in and choosing to buy back at another point in time when things “feel safer;” take a look at returns following market drawdowns. There’s one caveat to this: if you’ve been laid off and need money to pay your bills during this difficult time, that would be a reason to choose specific positions to sell to free up cash to live from.

How does this help you? Selling for selling sake is an emotional response. Many people struggle to separate their emotions from investing making it one of the single hardest things to do as an investor. When you sell, you miss rebounds. And some of the best market days are immediately following the worst days. If you aren’t invested, you’ll lock in losses without the ability to earn gains. Stay invested unless you fall into the caveat above.

#2 Understand Why Your Account Dropped in Value

Is it just your account or is it everyone else too? You likely own several investments within your account. These investments could be in the form of a mutual fund, an exchange traded fund (ETF), or a money market fund. There are many other types, but let’s focus on those three since they are the most prevalent in the typical investment account. Each of the different positions in your investment account are designed to pursue a specific strategy outlined in its governing document. This document is called a prospectus and you received a copy of it when you first bought the fund (hint: it’s that massive book you threw out a long time ago that was too big and boring to read). This document outlines the goal of the fund and how and why it invests the way that it does. You could call the fund company and request a copy and read it as you practice social distancing -or- you can take a shortcut. Head over to www.morningstar.com and enter your fund’s ticker symbol to get some quick, current data about the fund.

Let’s use an example. One of the most popular funds widely available in company sponsored retirement plans is the Vanguard Total Stock Market Index Fund, ticker symbol VTSAX. When you enter this ticker symbol in the search bar on the Morningstar website, it produces a page that shows you how the fund is invested. In this example, it’s a mutual fund that comprises of about 3,500 companies and is designed to track the entire US Stock Market.

How does this help you? If you know that the entire US Stock Market has decreased in value over the last several weeks as a result of both market panic and expectations of the future, it stands to reason that this fund would follow that same trajectory. Having this understand of why your fund decreased in value can help bring back perspective and understanding where you may not have it. Considering looking up each fund you own to gain this perspective.

#3 Understand How Each Fund in Your Account Works Together

Now that you know how to look up each fund, considering putting them together to fully understand your account in its entirety. To do this, you may need to purchase a paid version of Morningstar (costs about $200/year but there’s likely a free trial available) so you can see how each fund interacts with the others in the account.

How does this help you? Owning one total stock market fund, for example, diversifies your risk across the entire US stock market. But you can spread this risk even further. You can add other funds to see how they may have affected the recent drop in value. By adding fixed income or alternative funds that may be uncorrelated to the stock market, you can ensure parts of your portfolio don’t drop at the same rate as the general market. This is the very definition of diversification.

#4 Determine your Risk Score

The risk tolerance questionnaires in use by many firms are antiquated. There’s no other way to state this: they are terrible and do nothing to address the actual investment account level risk. They are also easy to game in that you can look at the answers and choose the ending outcome based on the range of answers. Several years ago, I partnered with Riskalyze to offer a unique scoring method to pinpoint my client’s specific risk metric. Think of it like the Sleep Number Bed System but for your investment account: you are scored between 1 and 99.

You can score yourself here.

BONUS OFFER: For as long as South Carolina is under a COVID-19 State of Emergency, I’ll take this a step further and add your investments to the scoring system so you can see if your portfolio matches your risk score…at no charge. Send a quick email to justin@coastalwealthadvisors.com for this offer with the subject: “Limited Time Offer: Risk Matching Request.”

How does this help you? When you invest your account to match your risk score, you have a far likelier chance of staying invested while working towards your financial goals. This helps you make better investing decisions through Riskalyze’s mission: “empowering the world to invest fearlessly.”

#5 Review your Beneficiary Designations and Estate Planning Documents

An often overlooked thing about an investment account is what happens to it following your expiration. Give your custodian (the company holding your investment account) a call and ask this question: “if I die, what happens to this account?”

You may be surprised to hear that a beneficiary isn’t listed or there’s “no record available.” Paperwork at custodians gets messed up all the time; trust me, I deal with them every day. Use this time to review your Beneficiary Designations, WILLs, Healthcare Directives, and Power of Attorney appointments to ensure the correct people are listed. If not, reach out to your estate planning attorney to start the update process. If so, please be sure your documents are signed and fully executed. I can’t think of anything more unfortunate than spending thousands of dollars on an estate plan and then having unsigned estate planning documents. Unsigned documents are not executed and won’t accomplish your wishes upon your expiration.

How does this help you? Our lives change all the time and it’s important that long-term plans reflect those changes. Close family members that may be listed as a trustee or executor may not be so close now. Staying on top of these things is very important. The last thing you want to happen is the very thing you’ve planned against while having the ability to ensure it doesn’t.

During this historic time in our country where economic activity has come to a halt and when markets have struggled to find direction, it’s tough to stay motivated and focused. We hope that you can follow these 5 Real Things and take advantage of our Bonus Offer that you can do right now to address the coronavirus and your investment account.

Here at Coastal Wealth Advisors, I work with each of our clients on all the above steps – and so many more. I do all the heavy lifting for you by spending countless hours with each family to address their financial goals and risk tolerance in order to implement financial plans and manage investment accounts on their behalf. I’d love nothing more than to help you right now. I’m equipped to work virtually and am fully dedicated to helping clients through all market climates. Consider reaching out today to learn more.

Please stay safe and healthy and remember, this too shall pass.

Sailing with the Tides and Winds

March 22, 2018 by Justin M. Follmer, MBA, CFP®, AIF®

Embarking on a financial plan is like sailing around the world. The voyage won’t always go to plan, and there’ll be rough seas. But the odds of reaching your destination increase greatly if you are prepared, flexible, patient, and well-advised.

A mistake many inexperienced sailors make is not having a plan at all. They embark without a clear sense of their destination. And once they do decide, they often find themselves lost at sea in the wrong boat with inadequate provisions.

Likewise, in planning an investment journey, you need to decide on your goal. A first step might be to consider whether the goal is realistic and achievable. For instance, while you may long to retire in the south of France, you may not be prepared to sacrifice your needs today to satisfy that distant desire.

Once you are set on a realistic destination, you need to ensure you have the right portfolio to get you there. Have you planned for multiple contingencies? What degree of “bad weather” can your plan withstand along the way?

Key to a successful voyage is a good navigator. A trusted financial advisor is like that, regularly taking coordinates and making adjustments, if necessary. If your circumstances change, the investment advisor may suggest you replot your course.

As with the weather at sea, markets can be unpredictable. A sudden squall can whip up waves of volatility, tides can shift, and strong currents can threaten to blow you off course. Like a seasoned sailor, an experienced investment manager will work with the conditions.

Once the storm passes, you can pick up speed again. Just as a sturdy vessel will help you withstand most conditions at sea, a well-diversified portfolio can act as a bulwark against the sometimes tempestuous conditions in markets.

Circumnavigating the globe is not exciting every day. Patience is required with local customs and paperwork as you pull into different ports. Likewise, a lack of attention to costs and taxes is the enemy of many a long-term financial plan.

Distractions can also send investors, like sailors, off course. In the face of “hot” investment trends, it takes discipline not to veer from your chosen plan. Like the sirens of Greek mythology, media pundits can also be diverting, tempting you to change tack and act on news that is already priced in to markets.

A lack of flexibility is another impediment to a successful investment journey. If it doesn’t look as though you’ll make your destination in time, you may have to extend your voyage, take a different route to get there, or even moderate your goal.

The important point is that you become comfortable with the idea that uncertainty is inherent to the investment journey, just as it is with any sea voyage. That is why preparation and planning are so critical. While you can’t control every outcome, you can be prepared for the range of possibilities and understand that you have clear choices if things don’t go according to plan.

If you can’t live with the volatility, you can change your plan. If the goal looks unachievable, you can lower your sights. If it doesn’t look as if you’ll arrive on time, you can extend your journey.

Of course, not everyone’s journey is the same. Neither is everyone’s destination. We take different routes to different places, and we meet a range of challenges and opportunities along the way.

But for all of us, it’s critical that we are prepared for our journeys in the right vessel, keep our destinations in mind, stick with the plans, and have a trusted navigator to chart our courses and keep us on target. Ready to plot your course? Contact us today to see how our financial advisor can help you and subscribe to our weekly newsletter to stay in touch.

Written by Jim Parker, Outside the Flags series, Dimensional Fund Advisors, LP with edits by Coastal Wealth Advisors.

Negative Interest Rates

October 31, 2016 by Justin M. Follmer, MBA, CFP®, AIF®

Nominal interest rates are currently below zero in many countries, including Germany, Denmark, Switzerland, Sweden, and Japan. With new acronyms like ZIRP (Zero Interest Rate Policy) and NIRP (Negative Interest Rates Policy), these levels have turned the common belief that zero is the lower bound for such rates on its head. While negative interest rates are a relatively new phenomenon, periods of widespread negative real returns across countries have been quite common.

WHAT ARE AND WHY CARE ABOUT REAL RATES OF RETURN?

In 1970, a loaf of bread cost 25 cents. A gallon of gas cost 36 cents. Today, an average loaf of bread and a gallon of gas each cost around two dollars.¹When the prices of goods and services increase, consumers can buy fewer of them with every dollar they have saved. This is called inflation, and it eats into investors’ returns.

Real rates of return are adjusted for inflation, so they account for changes in the purchasing power of a dollar over the life of an investment. Because inflation affects the cost of living, investors must consider the inflation-adjusted—or real—return of their investments. When inflation outpaces the nominal returns on an investment, investors experience negative real returns and actually lose purchasing power.

BRIEF HISTORY: TREASURY BILL RETURNS

Exhibit 1 shows the annual real returns on one-month US Treasury bills. From 2009 to 2015, the annual real return was negative. This circumstance is not unprecedented. Since 1900, the US has had negative real returns in over a third of those years. And negative real returns on government bills are not exclusive to the US. All countries listed in Exhibit 2 have had negative real returns on their respective government bills in at least one out of every five years from 1900 to 2015.

Exhibit 1. Annual Real Returns of One-Month US Treasury Bills

Source: Dimson, Marsh, and Staunton (DMS); Morningstar.

Exhibit 2. Percent of Years with Negative Real Returns on Government Bills, 1900-2015

Source: Dimson, Marsh, and Staunton (DMS); Morningstar.

BOND INVESTORS MAY GET MORE THAN THE BILL RETURN

In the current low-yield environment, rolling over short-term bills may not seem appealing to investors keen on protecting their purchasing power. Exhibit 3 shows that the return of one-month US Treasury bills has not kept pace with inflation² over the past 10 years. But even when the real return on bills is negative, a relatively common occurrence, bond investors may still achieve positive expected real returns by broadening their investment universe. The bond market is composed of thousands of global bonds with different characteristics. Many of those bonds allow investors to target global term and credit premiums, which in turn may provide positive real returns even in low interest rate environments. Exhibit 3 also shows that the Barclays Global Aggregate Bond Index has outpaced inflation while maintaining low real return volatility of 3.4% annualized over the past 10 years.

Exhibit 3. Trailing Annualized Returns

Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Trailing returns are as of June 2016. The Barclays Global Aggregate Bond Index is hedged to USD. Real Return = [(1 + Nominal Return)/(1 + Inflation)] − 1. Sources: Barclays, Morningstar. Barclays indices copyright Barclays 2016.

Global diversification is often thought of as a tool for reducing risk. However, when it comes to fixed income, global portfolios can also play an important role in the pursuit of increased expected returns. Even if the expected real returns of bonds in one country are negative, another yield curve may provide positive expected real returns. The flexibility to pursue higher expected returns by investing in bonds around the world can be an important defense against low, and even negative, yields.

SUMMARY

The goal of many investors is to grow some (or all) of their savings in real terms. Even in a low or negative interest rates environment, there may be bond investments that can still achieve this goal. In particular, investors who target global term and credit premiums should be better positioned to pursue higher expected returns.

During our on-boarding process, there is extensive analysis of the current portfolio positions. We often ask new clients to explain the reasons they own certain mutual funds or other positions in their portfolios. The most common answer is “not sure, our financial advisor did it.” And this lack of attention is precisely why I do what I do. I believe education surrounding the “why” in a client’s portfolio is crucial to a positive investment experience. Owning just U.S. stocks or just U.S. bonds is doing yourself a disservice. There is a world of opportunity to invest in that can match your long-term financial goals and risk tolerance. We work with all types of wonderful people and if you want to experience a different way of investing, get in touch today.

1. Source: Bureau of Labor Statistics

2. Measured as changes in the Consumer Price Index (CPI), which is defined by the US Department of Labor, Bureau of Labor and Statistics.

3. Written by Dimensional Fund Advisors with edits by Coastal Wealth Advisors, LLC.

Should Recent Events Change your Investment Strategy?

August 31, 2016 by Justin M. Follmer, MBA, CFP®, AIF®

Should recent events change your investment strategy? Should anticipated future events change your investment strategy? When news breaks and markets move, content-starved media often invite talking heads to muse on the repercussions. Knowing the difference between this speculative opinion and actual facts can help investors stay disciplined during purported “crises.”

At the end of June this year, UK citizens voted in a referendum for the nation to withdraw from the European Union. The result, which defied the expectations of many, led to market volatility as participants weighed possible consequences.

Journalists responded by using the results to craft dramatic headlines and stories. The Washington Post said the vote had “escalated the risk of global recession, plunged financial markets into free fall, and tested the strength of safeguards since the last downturn seven years ago.”²

The Financial Times said “Brexit” had the makings of a global crisis. “[This] represents a wider threat to the global economy and the broader international political system,” the paper said. “The consequences will be felt across the world.”³

It is true there have been political repercussions from the Brexit vote. Theresa May replaced David Cameron as Britain’s prime minister and overhauled the cabinet. There are debates in Europe about how the withdrawal will be managed and the possible consequences for other EU members.

But within a few weeks of the UK vote, Britain’s top share index, the FTSE 100, hit 11-month highs. By mid-July, the US S&P 500 and Dow Jones Industrial Average had risen to record highs. Shares in Europe and Asia also strengthened after dipping initially following the vote.

Yes, the Brexit vote did lead to initial volatility in markets, but this has not been exceptional or out of the ordinary. One widely viewed barometer is the Chicago Board Options Exchange Volatility Index (VIX). Using S&P 500 stock index options, this index measures market expectations of near-term volatility.

You can see by the chart above that while there was a slight rise in volatility around the Brexit result, it was insignificant relative to other major events of recent years, including the collapse of Lehman Brothers, the eurozone crisis of 2011, and the severe volatility in the Chinese domestic equity market in 2015.

None of this is intended to downplay the political and economic difficulties of Britain leaving the European Union, but it does illustrate the dangers of trying to second-guess markets and base an investment strategy on speculation.

Now the focus of speculation has turned to how markets might respond to the US presidential election. CNBC recently reported that surveys from Wall Street investment firms showed “growing concern” over how the race might play out.⁴

Given the examples above, would you be willing to make investment decisions based on this sort of speculation, particularly when it comes from the same people who pronounced on Brexit? And remember, not only must you correctly forecast the outcome of the vote, you have to correctly guess how the market will react.

Should recent events change your investment strategy? We don’t believe so. Should anticipated future events change your investment strategy? In our opinion, your investment strategy should change only when your long-term financial goals change. What we do know is that markets incorporate news instantaneously and that your best protection against volatility is to diversify both across and within asset classes, while remaining focused on your long-term investment goals.

The danger of investing based on recent events is that the situation can change by the time you act. A “crisis” can morph into something far less dramatic, and you end up responding to news that is already in the price.

Journalism is often described as writing history on the run. Don’t get caught investing the same way.

Working with a fiduciary can sometimes shed light in a new way, thereby, providing a perspective you may have been missing. Give us a call today and perhaps we can show you a few things about your current strategy and what changes, if any, could help you build more purpose to your financial goals.

Image Credit: frankieleon

Post authored by Jim Parker, Outside the Flags, with edits by Coastal Wealth Advisors, LLC. Original article here.
“Brexit Raises Risk of Global Recession as Financial Markets Plunge,” Washington Post, June 24, 2016.
“Brexit and the Making of a Global Crisis,” Financial Times, June 25, 2016.
“Investors are Finally Getting Nervous about the Election,” CNBC, July 13, 2016.