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On Investing and Entertainment: John Oliver’s Take

Thanks in part to our evidence-based approach to investing, we don’t have to eat our words or advice very often. But recently, we discovered that we stand corrected on one point. Fortunately, it’s a point we’re happy to concede:

Evidence-based investing doesn’t have to be such a boring subject after all.

In his recent “Last Week Tonight” HBO segment on retirement plans, John Oliver showed the world that even the typically eye-rolling conversation on why fiduciary advice matters to your investments can be delivered so effectively that it goes viral … or at least as viral as financial planning is ever likely to get, with nearly 3.5 million views, and counting.

Oliver’s masterful combination of wit and wisdom is worth watching first-hand. If you’ve not yet taken the 20-minute coffee break to check it out, we highly recommend that you do so.

The best part? It’s hard to say. He covers so many of our favorite subjects: avoiding conflicted financial advice, reducing the damaging effects of excessive fees, and participating sensibly in expected market growth.

We also are hopeful that Oliver’s segment will help strengthen the impact of the Department of Labor’s recent rule, requiring all retirement advice to strictly serve the investor’s best interests. We can’t quite bring ourselves to share the analogy that Oliver used to bring that particular point home, but here are a couple of our other favorite zingers:

On stay-the-course investing: “There is growing evidence that over the long term, most managed funds do no better, and often do worse, than the market. It’s basically the plot of ‘Charlie and the Chocolate Factory.’ If you stick around, doing nothing while everyone around you <messes> up, you’re going to win big.”

On hidden fees: “Think of fees like termites. They’re tiny, they’re barely noticeable, and they can eat away your future.”

Lacking Oliver’s comedic timing, our own frequent conversations on these same subjects are unlikely to ever reach 15 million viewers. But that doesn’t diminish our equal levels of passion and enthusiasm for how important it is to safeguard your financial interests by embracing the few relatively simple, but powerful principles that Oliver shared.

One thing we do have over Oliver: We are quite serious about actually serving as a fiduciary advisor, protecting and promoting your highest financial interests. If you are aware of other investors who could use a similar helping hand, why not share Oliver’s video with them? We hope you’ll also offer them our name along with it, in case they’d like to continue the conversation.

Survivorship Bias and Other Tricks of the Trade

One of the reasons we turn to evidence-based investing is to guide us past the misguided strategies that can otherwise cause an investor’s expected returns to run aground. That said, there is a lot of “evidence” out there. How do we determine which of it comes from sound science and which may steer you wrong?

Survivorship bias is one trick of the trade we must watch for when accepting or rejecting a performance analysis.

What Is Survivorship Bias?

Only the strong survive. This is a familiar adage because it’s often true – especially in our financial markets. That’s why it is important to remember the expression whenever we want to accurately assess a sample of past returns. Examples of a “sample” might be the returns from all actively managed U.S. stock funds during the past decade, or the returns from all global bond funds from 2000–2014.

Survivorship bias occurs when an analysis omits returns from in-sample funds that were closed, merged into other funds, or otherwise died along the way.

How Often Do Funds Go Under?

Some new funds are truly innovative, do well by their investors, and become familiar names. Less-sturdy ones may instead focus on trying to seize and profit from popular trends. For these, the expression “cannon fodder” comes to mind. They may (or may not) soar briefly, only to fizzle fast when popular appeal shifts.

In the competitive capital markets in which we operate, fund managers launch new products and discontinue existing ones all the time. Individual funds probably disappear far more frequently than you might think.

Why Does Survivorship Bias Matter?

Why should you care about the returns of funds that no longer exist?

The funds that disappear from view are usually the ones that have underperformed their peers. The aforementioned Vanguard analysis found that, whether a fund was liquidated or merged out of existence, underperformance was the common denominator prior to closure.[7]

If these disregarded data points were athletes on a professional sports team, they’d be the ones bringing down their team’s averages. When assessing a team’s overall performance, it’s important to consider both the wins and the losses, right? Same thing with fund performance.

Instead, an analysis marred by survivorship bias is highly likely to report overly optimistic outcomes for the group being considered. While a degree of optimism can be admirable in many walks of life, basing your investment decisions on artificially inflated numbers is more likely to set you up for future disappointment than to position you for realistic, long-term success.

Moreover, survivorship bias is only one of a number of faults that can weaken seemingly solid reports. One way in which we strive to add value to investors’ evidence-based investment experience is to help them separate robust data analysis from misleading data trickery. We hope you’ll be in touch if we can assist you with your own strategies and selections in a market that is too often rigged against the individual investor.

[1] Aye M. Soe, CFA, “SPIVA® U.S. Scorecard, Year-End 2015,” S&P Dow Jones Indices. Page 2.
[2] “The mutual fund graveyard: An analysis of dead funds,” The Vanguard Group, January 2013. Page 3.
[3] Ari I. Weinberg, “Learning from a walk through the fund graveyard,” Pensions & Investments, May 28, 2015.
[4] Ron Rowland, “500 ETF Closures,” Invest With an Edge, May 19, 2015.
[5] Weinberg, Pensions & Investments, May 28, 2015.
[6] Scott Burns, “The missing bullet holes problem,” The Dallas Morning News, November 13, 2015.
[7] “The mutual fund graveyard,” The Vanguard Group, January 2013. Page 2.

Fixed Income Investing: What To Do in Lieu of Chasing Yield

In a recent series, “Investing for Retirement Income,” we covered the reasons why we do not recommend shifting into high-yield (“junk”) bonds or dividend-yielding stocks when higher-quality bonds aren’t delivering as hoped for. Rather than stretching for extra yield with stand-alone solutions, we typically suggest taking a total-return approach, seeking an appropriate risk/reward balance among all sources for earning and preserving your investment returns. These include tending to share value, interest and dividends, and aggressive cost management.

The Role of Bonds in Your Portfolio

With a total-return approach, we typically want you to reserve your fixed income/bond investments for their primary purpose in life, which is to provide a stabilizing counterbalance to your equity/stock holdings, while offering a modest investment return – typically in that order.

Over the long-term, stocks have delivered higher returns than bonds, based in part on the different kinds of risk you’re assuming by investing in them. But to actually receive those higher expected returns, you must be prepared to sit tight during the wilder ride that equity risks entail.

Setting aside a portion of your investments in relatively high-quality bonds or similar holdings is essential to helping you maintain your resolve during periodic stock market downturns. Taking on too much bond market risk detracts from that important role, and is not expected to add more value than could be had by building an appropriately allocated stock portfolio.

Enhancing Your Fixed Income Investments

Even though it’s a good idea to take a “safety first” approach to your bond and bond-like holdings, we understand that it can be hard to see them earning next to nothing without wondering whether there is anything you can do to improve on things. Fortunately, there is. Here, we offer several ways to make the most of your fixed income.

Heed the Yield Curve

Just as the stock market has its ticker tape of ongoing pricing action, the bond market has its continuously changing yield curve, which offers us a rough guide on how far it may be worth extending your bonds’ due dates (also known as terms or maturities). This idea applies whether you are investing in individual bonds or bond funds.

In other words, even in your fixed income investments, a bit of risk exposure may be acceptable. You don’t always have to invest in the highest possible credit rating and shortest possible terms.

For extra insights, check out Monevator’s “Brief guide to the point of bonds,” as well as this BAM ALLIANCE video, “Understanding the Current Fixed Income Market” (recorded in 2013, but every bit as relevant today).

 Ladder It

To be clear, we are NOT endorsing chasing bond yields by frequently jumping in and out of particular bonds, bond funds, or the market as a whole. But one way to come close to having your cake and eating it too is to build a laddered bond portfolio, investing in a basket of relatively high-quality, short- to mid-term bonds that are set to come due at varied times (or to invest in a bond fund that does this for you). Like rungs on a ladder, staggered due dates structured for your lifetime goals offer regular opportunities to reconsider your investments and their liquidity in light of then-prevailing market conditions.

 Consider the Alternatives

Depending on market conditions and your own circumstances, there may be times when other bond-like investments may fulfill the risk-dampening/modest-return role in your portfolio even more effectively than bonds or bond funds. In the US, Certificates of Deposit (CDs) may offer slightly higher returns for similar levels of risk. Guaranteed Investment Certificates (GICs) are roughly the Canadian equivalent to CDs.

But it’s important to look beyond just the face-value interest rate before taking a leap. A higher rate may also bring added risks – such as a longer lock-in period when you won’t be able to withdraw your money without incurring penalties. Different investments may also generate different taxable outcomes, so it’s worth comparing your choices on an after-tax basis.

 Watch Your Costs

If you’re investing in bond mutual funds, you should be able to find a fund’s expense ratio in its prospectus or by looking up its ticker symbol on an independent investment research site such as Morningstar’s. Because added costs only detract from your end returns, we usually recommend looking for the lowest-cost fund for your needs.

That doesn’t necessarily mean finding the cheapest fund out there. If a fund’s investment objectives do not align with yours, saving on the cost of investing in it won’t help. First identify the funds that do meet your goals, and then let the costs involved be an important factor in making a final selection.

If you’re building your bond portfolio with individual bonds, be on the look-out for trading costs known as markups and markdowns. While these are easily the subject of another article entirely, suffice it to say that they are always there – even if your broker tells you that there are no trading costs. What he or she really means is that there are no obvious trading costs.

Markups/markdowns are the difference between the “wholesale” costs that bond brokers pay for the bonds and the “retail” prices you pay. To avoid paying more than you should for your bonds, it’s best to align yourself with an advisor or fund manager who has the experience and resources to keep a close eye on these and other hidden costs that may eat away at your end returns.

 Revisit Your Risk Tolerances

What is the balance between your stock and bond holdings today? Half and half? Mostly one or the other? Do you also have allocations to real estate, commodities or other investments?

If you’re not sure what you’ve got, we recommend finding out first, before making any adjustments. Identify your asset allocation wherever it may be (taxable and retirement accounts, pension plans, annuities, profit-sharing programs, etc.), and in whatever form it may take (stocks, bonds, REITs, hard assets, private ventures, etc.). You may discover additional opportunities to shift your investments around to better reflect your unique risk/reward profile.

Are you holding more fixed income than you realized – maybe more than you really want or need? You may be able to shift some of it into stock investments to pursue higher expected portfolio-wide returns.

Are your stock holdings heavily allocated to less-risky stocks (with lower expected returns)? Even if your stock-to-bond ratio is appropriate, your stock holdings may be internally out of balance for your goals. You may be able to shift some of your holdings into the kinds of stocks (asset classes) that have offered higher expected returns, while leaving your safety-net bond holdings intact.

These are just a couple of possibilities. Bottom line, if you’ve not taken the time to assess your total portfolio’s risk/reward balance lately, this is one of the most important steps you can take to ensure that your investments are doing all that they can for you.

How Can We Help?

Have yield curves, asset allocations and expense ratios left your head spinning? We’ve got one more tip for pulling it all together and bringing clarity to your wealth strategy. Hiley Hunt Wealth Management is here to help you with all of these details and more, in current and future markets.

Our goal is to help you achieve your goals. One of the ways we accomplish this is by tending to a total portfolio that makes sense for you, your investments and your range of related financial interests. Let us know if we can lend you a hand.

 

Let’s Play “Guess Who Said It?”

Let’s play a spring-time game. Here are three statements from the financial press. Where do you think each one came from?

A recent quarter-end headline: “Epic collapse and recovery: Stocks’ 1st quarter”

An excerpt from another quarter-end recap: “[President and CEO of Radius Health Bob] Ward said while millions of patients are suffering from osteoporosis, a full two-thirds of them are never diagnosed or treated for the disease. That’s what makes Radius’ drugs so exciting.”

An excerpt from a June 2015 blog post: “Financial journalism is in the change business: focusing on whatever has just changed, and focusing most intently on whatever has just changed the most and the fastest. … As a result, being an intelligent consumer of financial news is harder than it sounds.”

If you correctly guessed, in order, USA Today, Jim Cramer’s “Mad Money,” and The Wall Street Journal’s“Intelligent Investor” Jason Zweig, give yourself a gold star. Heck, give yourself three. Even if you didn’t know the exact sources, enjoy a solid pat on the back if you realized how silly the first two seemed, compared to Zweig’s excellent observations. (And please read Zweig’s entire post, “Consuming Financial News Without Being Consumed By It.” It’s a gem.)

Speaking of fleeting news versus timeless truisms, let’s consider your current quarterly report. If you’ve heeded our advice to remain globally diversified in low-cost investments structured to reflect your personal goals and risk tolerances, then you’ll probably find that your year-to-date returns are in the solid range of “not bad.”

That’s great, because that’s part of your long-term plan. Still, we understand if you might be wondering whether you could be doing better. It’s hard to remain focused when the most irritating elements in the financial press never stop nipping at our heels, worrying our resolve and feeding on our self-doubts.

So let’s take a moment to reinforce our ongoing position: Invest for the long-term. Capture available market returns within your risk tolerances and according to the best available evidence. Aggressively manage the factors we can expect to control and disregard the ones that we cannot.

These principles guide the actions we’ve advised all along. We will continue to embrace them unless compelling evidence were ever to inform us otherwise. They are the ones that serve your highest financial interests, which is our highest priority.

Recently, Dimensional Fund Advisors released a helpful video that features like-minded advisors sharing insights similar to our own. For additional ideas, we encourage you to view, “Is Now A Good Time To Be in the Market?

Investing for Retirement Income: Straw, Sticks or Bricks? Part II

In Part I of our three-part series on investing for retirement income in low-rate environments, we explained why we don’t advise bulking up on dividend-yielding stocks as a reliable way to generate retirement cash flow. Like the Three Little Pigs’ straw house, dividend-yielding stocks can disappoint you by exhibiting inherent risks just when you most need dependability instead.

Another popular tactic is to move your retirement reserves into high-yield, low-quality bonds. Let’s explain why we don’t typically recommend this approach either.

Part II: High-Yield Bonds – Sticks and Stones Can Break You

We can see why it would be appealing to try to have your bonds pull double-duty when interest rates are low: protecting what you’ve invested and delivering higher yields. The problem is, the more you try to position your fixed income to fulfill two essentially incompatible roles at once, the more likely you will underperform at both.

Risk and Return: The Same, Old Story (Sort of)

In investing and many other walks of life, there’s nothing to be gained when nothing has been ventured. This relationship between risk and expected return is one of the strongest forces driving capital markets. But decades of academic inquiry helps us understand that the risks involved when investing in a bond – any bond – are inherently different from those associated with investing in stocks. These subtle differences make a big difference when it comes to combining stocks and bonds into an effective total portfolio.

Because a company’s stock represents an ownership stake, your greatest rewards come when a company’s expected worth continues to improve, so you can eventually sell your stake for more than you paid for it, and/or receive “profit-sharing” dividends along the way. Your biggest risk is that the opposite may occur instead.

A bond is not an ownership stake; it’s a loan with interest, which defines its two biggest risks:

  1. Bond defaults – If all goes well, you get your principal back when the loan comes due. But if the borrower defaults on the loan, you can lose your nest egg entirely.
  2. Market movement – You would like your bond’s interest rate to remain better than, or at least comparable to those available from other, similarly structured bonds. Otherwise, if rates increase, you’re left locked into relatively lower payments until your bond comes due.

As such, two factors contribute to your bond portfolio’s risks and expected returns:

  1. Credit premium – Bonds with low credit ratings (“junk” or “high-yield” bonds) are more likely to go into default. To attract your investment dollars despite the higher risk, they typically offer higher yields.
  2. Term premium – The longer your money is out on loan, the more time there is for the market to shift out from under you, leaving you locked into a lower rate. That’s why bonds with longer terms typically offer higher yields than bonds that come due quickly.

Bond Market Risks and Returns

If you’re connecting the dots we’ve drawn, you may be one step ahead of us in realizing that, just like any other investment, bonds don’t offer higher expected returns without also exposing you to higher risks. So, just as we do with your stock holdings, we must identify the best balance between seeking higher bond yields while keeping a lid on the credit and term risks involved.

With stocks – Taking on added stock market risk has rewarded stalwart investors over time. The evidence is compelling that it will continue to do so moving forward (assuming you adopt a well-planned, “buy, hold and rebalance” approach as a patient, long-term investor).

With bonds – Taking on extra bond market risk is not expected to add more value than could be had by building an appropriately allocated stock portfolio. Moreover, it is expected to detract from your bond holding’s primary role as a stabilizing force in your total portfolio … and it often does so just when you most want to depend on that cushioning stability.

For example, in “Five Myths of Bond Investing,” Wall Street Journal columnist Jason Zweig dispels the myth that “investors who need income must own ‘bond alternatives’” (such as high-yield bonds). He cites BAM ALLIANCE Director of Research Larry Swedroe, who observes that “popular bond alternatives … provide extra income in good times – but won’t act like bonds during bad times.”

The Monevator piece we referenced in Part I offers a similar perspective: “[B]onds are meant to be the counter-weight to shares in a portfolio. They are the stabilising influence that tempers the turbulence. Equities are from Mars and bonds are from Venus, if you will. … [Use] Equities to deliver growth, and domestic government bonds to reduce risk.”

Your Essential Take-Home

Given these insights, logic dictates:

If you must accept higher risks in search of higher returns, take those risks on the equity (stock) side of your portfolio; use high-quality fixed income (bonds) to offset the risks.

As we’ve been hinting at throughout this series, there is one more critical component to investing for retirement income. Beyond optimizing your bond portfolio with the right kind of bonds (high-quality, short- to mid-term), and avoiding chasing dividend stocks for their pay-offs, among the most important steps you can take with your retirement income is to adopt a portfolio-wide approach to money management, instead of viewing your income and principal as two isolated islands of assets. We’ll explore this subject next.

Good Advice

As we face a year that is kicking off with a series of sickening market swings,  it can be a time where you look for advice to make sense of the economic environment and how it impacts your personal situation. But there is a difference between advice, and good advice.

So, what is “good advice”?

Good advice is timeless … and timely. At its essence, good financial advice never goes out of style. Its principles are permanent: It should be brave and true, and meant for you. At the same time, good advice must remain relevant in an ever-changing world. Your adviser should be able to help you embrace promising new opportunities and insights, while avoiding the false leads and frightening challenges that are as formidable as ever in today’s markets.

Good advice looks at the parts … and the whole. Good financial advice helps you manage your investment portfolio for preserving or increasing your wealth according to your goals. It also helps you plan, implement and manage your myriad related interests: taxes, insurance policies, estate planning paperwork, philanthropic pursuits, executive compensation, real estate holdings, business activities and more. Beyond that, what are your goals? How can we relate your total wealth to your relationships, resources and realities? Good financial advice should bring a unifying whole to your multifaceted parts.

 Good advice is personalized … and persistent. Good financial advice is essential for making good decisions – not just in general, but for you: your money, your interests, your life. It’s about being in a relationship with an adviser who is there for you, not only during the promising planning stages when everything makes sense, but when your resolve is being sorely tested in turbulent markets. or when your own life’s events have knocked you off-course. Good advice helps you find your way when you’ve been sideswiped by the unexpected.

Good advice is wise … and compassionate. Good financial advice is grounded in enduring academic evidence, structured process and informed experience. But for all that, financial advice is nothing if it fails to contribute to that which brings joy to your life, to help you protect the ones you love, and to reassure you in times of trouble. For this, a good adviser must not only advise you; he or she must listen to you. This brings us to our most important point.

Good advice is in your highest financial interests, period. Above all, good advice should always and only be in your highest financial interest, even when it means the adviser must take a hit to deliver it. This is where things get particularly confusing. Around the world, various advocates (including ourselves) are pressing for legislation to govern best-interest advice. Such efforts are unfailingly met with resistance from those who would undermine this sensible ideal. As a result, the financial advice you choose to use will probably always call for a “buyer beware” perspective. As Vanguard Group founder John Bogle has wryly observed, “There are few regulations that smart, motivated targets cannot evade.”

We wish it weren’t so. That which best serves investors ultimately best serves their financial advisers as well, so we would warmly welcome a world where good advice reigns supreme. Until then, we hope you’ll be open to good advice when you hear it – the kind that sees you through turbulent times, onward to your relevant financial and life goals. If this advice sounds a little different from the status-quo stock tips or market-timing tactics you may be used to hearing, that’s because it is.

May we offer you additional advice about good advice? We hope you’ll be in touch.

Reviewed Your Portfolio Lately?

You’d be surprised how often we speak with families who don’t know exactly what they’re invested in, how well or poorly those investments have been doing, and where their various assets are located. If you are in similar circumstances, don’t feel too bad, because it’s quite common. But do know that it doesn’t have to be this way.

To add uncommon insights into your wealth and your life, Hiley Hunt Wealth Management offers complimentary, no-obligation portfolio analyses.

When is the last time you or anyone else took a good, hard look at your current investments?

At Hiley Hunt Wealth Management, we believe strongly that confident financial decisions are best made when we – and you – favor solid evidence over distracting emotions. Let us show you the evidence with a detailed portfolio analysis, so you can see the numbers for yourself, plainly and clearly.

If you are doing well, we will not hesitate to tell you so. If we see room for improvement, we won’t be shy about telling you that either – along with how we can assist should you wish to proceed.

Please contact us today to get started.

Market Mania and Investor Resolve… Again

If it weren’t for the fact that it represents real wealth, it would be nothing short of fascinating how the market reflects its human participants – in all of our enterprising glory as well as all of our quirky behavioral foibles, including herd mentality. The current climate provides a picture-perfect illustration of the latter, in which a run of trades begat a larger run of trades.

That’s a fancy way of explaining the panic by saying, “Who knows?” The global news hasn’t really changed all that much. All of the social, political and economic promises and threats that existed yesterday still exist in approximately equal measure at this time. There have been no asteroid crashes. So why is it that the market, in its collective wisdom, chose the beginning of this year to stage such a significant decline?

Even a brief scan of the financial news headlines yields any number of plausible explanations and a plethora of predictions on what is to come next. The truth is, we don’t know. Nobody knows. Whatever is about to unfold – or not – does not change our recommended strategy for your investments.

We know it can be painful and hard, but with reason as your guide, as scary as headline news may be, market drops also serve as excellent, real-life illustrations of a message we’ve shared many times before: Withstanding market risk when it actually appears is easier said than done.

And yet, withstand the risk we must do – together – because it’s exactly this type of market risk that we have deliberately built into your portfolio, and globally diversified among stocks and bonds alike, in pursuit of achieving the expected returns defined within your personal Investment Policy Statement.

There are several problems to the alternative of succumbing to herd mentality and reacting to the bad news with active trades:

  1. By the time you’re aware of good or bad news, the rest of the market knows it too, and already has incorporated it into existing prices.
  2. It’s unexpected news that alters future pricing, and by definition, the unexpected is impossible to predict.
  3. Any trades, whether they work or not, cost real money.

Rather than try to play an expensive game based on information over which we have little control, we continue to recommend investing according to market factors that we can expect to control, such as:

  1. Minimizing costs
  2. Forming an investment plan to guide your way – and sticking with that plan
  3. Capturing returns available by participating in expected long-term market growth
  4. Maintaining diversified holdings to dampen market risks

We may have told you this before, but it bears repeating whenever market risk resurfaces. Stick to your long-range plans – or work with us to deliberately revisit them if those plans no longer meet your personal goals. If we can help you further analyze current market conditions, or review or clarify your own investment plans, please let us know. We are here for you.

We would love to invite you to learn more about Hiley Hunt Wealth Management and who we serve in Omaha, NE –Financial Planning and Investment Management.

Giving Thoughts

As year-end nears, we hope you’ve saved time in your busy holiday schedule to pause and give thanks. At Hiley Hunt Wealth Management, we have so very much to be thankful for! To share our gratitude, we’d like to give you some thoughts. Thoughts on giving, that is.

As the London-based Charities Aid Foundation (CAF) describes it, “The impulse to give, to help others if you can, is a natural human instinct.”

It’s easy for that “data point” to get buried in the barrage of news we read to the contrary. But what if we adopt the same long-term perspective for investing and personal giving alike?

If you view our global capital markets close up and colored by the heat of the moment, it’s easy to grow disheartened and lose faith in the market’s ability to prevail. That’s why, as an investment advisor, we are forever stressing how important it is to consider your investments from a comfortable distance, through the clarifying lens of empirical evidence, and in the context of patiently participating in decades of rich – and likely enriching – human enterprise.

It might help to think about charitable giving from the same vantage point. Thanks to research-oriented organizations such as CAF, http://givingusa.org/, GivingPledge.org and many others, the evidence on our giving proclivities becomes clear, with much room for optimism to be found.

Myanmar, one of the world’s poorest nations, is also THE most generous. In its annual World Giving Index, CAF assesses “generosity” on three levels: helping strangers, donating money to a charity, and donating time to an organization. Based on its most recent data, CAF found that Myanmar ranked highest in donating both time and money, with a whopping 92 percent of those surveyed allocating a portion of their hard-earned money to charity.

Some of the world’s wealthiest families have been dedicating the majority of their wealth to philanthropy. Most recently, Mark Zuckerberg and his wife Priscilla Chan made headline news by informing their newborn daughter that they were going to pledge 99% of their Facebook shares to a giving mission, to make the world a better place for her.

GivingPledge.org has been quietly accumulating a collection of similar pledges for years from ultra-wealthy families, both famous and unknown. As Warren Buffett described in his pledge: “Were we to use more than 1% of my claim checks (Berkshire Hathaway stock certificates) on ourselves, neither our happiness nor our well-being would be enhanced. In contrast, that remaining 99% can have a huge effect on the health and welfare of others.”

Most of the rest of us appear to be doing our bit as well. For example, according to a June 2015 Giving USA press release: “Americans gave an estimated $358.38 billion to charity in 2014, surpassing the peak last seen before the Great Recession.” The figure represented the highest level of giving measured in the organization’s 60 years of reporting on it, with more than 70 percent of the donations coming straight from individual donors. Here’s to us regular folk!

Will our giving cure all that ails the world? The evidence tells us this might be a tall order indeed. But we’ll echo one of the lesser-known GivingPledge.org participants, Indian-American businessman and 5-Hour Energy mogul Manoj Bhargava: “We may not be able to affect human suffering on a grand scale but it will be fun trying.”

We wish you and yours a prosperous and fun-filled 2016.

We would love to invite you to learn more about Hiley Hunt Wealth Management and who we serve in Omaha, NE –Financial Planning and Investment Management.

Avoiding “Tracking-Error Regret”

One way that many investors measure financial success is by comparing their returns against popular benchmarks like the S&P 500 Index. It can be comforting to know how your investments compare to others … but there’s a catch. If you are comparing apples to oranges, the results can misinform rather than enlighten your decision-making, knocking you off-course from the very success you’re seeking to achieve. The financial industry has a term for this: tracking-error regret. One of our key roles as your advisor is helping you recognize tracking-error regret, and avoid succumbing to it.

Tracking-Error Regret: Cause and Effect

Tracking-error regret occurs when your carefully designed investment portfolio underperforms popular market benchmarks. For example, it’s not uncommon to see popular headlines like these in the financial press:

“The S&P 500 is up 19% year to date!”

“International stocks offer double-digit returns in Q2!”

“Top variable annuities deliver 15%+ performance in 2012!”

If your own portfolio’s growth seems anemic in comparison, you may regret the decisions you’ve made and wonder if you’d best make some changes to go after that greener-looking grass. Before you switch gears, ask yourself: Are you using the right gauge for the measurement? The above figures may be accurately reported, but what do they really mean to you and your wealth?

How Do You Measure Financial Success?

To us, financial success isn’t defined by how closely your returns happen to match a common benchmark. Instead, it’s about you and yours. On those terms, financial success happens when…

  1. You and your family have enough wealth to achieve or sustain your desired lifestyle according to your personal goals.
  2. You are able to focus the majority of your time and energy on doing the things you enjoy with the people you love, instead of worrying about financial headlines.

We achieve this measure of success in several ways. The general rule of thumb is to concentrate on actions you can expect to control and avoid being entangled by those you cannot.

Investment Management Entangling Activities
Minimizing investment costs Hyperactive (expensive) trading
Forming a personalized investment plan Second-guessing your carefully laid plans
Building and maintaining a customized portfolio that reflects that plan Trading based on reactions to outside events
Measuring success according to whether you are on track to achieve your personal goals Assuming failure if your portfolio doesn’t always track a common benchmark

Investing as a Personal Journey

The final point in the table above gets to the heart of why it’s critical to avoid tracking error regret. To offer an analogy, imagine you decide to take a cross-country journey from Miami to Los Angeles – except, en route, you want to visit every state that begins with the letter “A.” Working with a professional travel agent, you spend hours charting out the best schedule at the most reasonable prices to achieve your personal goal of adding Alabama, Alaska, Arizona and Arkansas to your itinerary.

You’re all set to buy the tickets. Out of curiosity, you visit one of the popular discount travel sites and you notice they’re running a special on flights between Miami and L.A. for half of what you’re about to spend.

In this scenario, you’d probably quickly recognize that the popular site’s offer, while ostensibly a much better deal, fails to reflect your personal goals. With only a minor twinge of regret, you’d probably stick to the plans you’d made.

Think of your custom-built portfolio in the same way. Its highest purpose is not to slavishly track a common index, so it should come as no major surprise when your portfolio and its components periodically deviate from their closest benchmarks. Your portfolio should instead be designed for – and measured against – a far greater purpose: You and your desired destinations. If you ask us, that’s the only way to roll.

We would love to invite you to learn more about Hiley Hunt Wealth Management and who we serve in Omaha, NE –Financial Planning and Investment Management.

You, Your Financial Well-Being and the Federal Reserve

Since December 2008, the U.S. Federal Reserve (the Fed) has held the federal funds rate at zero percent, seeking to bolster an ailing economy in the aftermath of the Great Recession. Economists agree that the position is unusual, and highly unlikely to go on forever – drastic times called for drastic measures. Then again, they’ve been agreeing on that for seven years. Each year, the Fed has had eight opportunities to ease into rate increases, and they haven’t yet.

Will rates move upward in December? Fed Chair Janet Yellen has been suggesting that the answer is at long last … probably. Let’s take a moment to put the unfolding news into context.

What Is the Federal Reserve?

As described on its consumer education site, the Federal Reserve is the central bank of the U.S. It was created by Congress as an independent government agency in 1913 to “provide the nation with a safer, more flexible, and more stable monetary and financial system.” Yellen is its board of governors’ chair. Ben Bernanke was chair before her, and Alan Greenspan before that.

Yellen and her board of governors are based in Washington, DC. They also oversee 12 regional reserve branches across the country and are tasked with three main roles:

  1. Monetary Policy – Promoting “maximum employment, stable prices and moderate long-term interest rates”
  2. Supervision and Regulation – Overseeing U.S. banks and gathering information to understand financial industry trends
  3. Financial Services – Serving as a bank for U.S. banks as well as for the country’s monetary operations – issuing currency, managing the government’s bank accounts, borrowing money in the form of U.S. Savings bonds and more

What Is Going On?

While you wouldn’t want to run a developed country without all three of these roles in place, monetary policy is where much of the headline-grabbing action has been, as the Fed has been grappling with when, by how much, and how frequently it should raise the federal funds rate.

The Federal Reserve sets monetary policy through its Federal Open Market Committee (FOMC), which includes the Fed’s seven board members and a rotating representation of Reserve Bank presidents.

The FOMC holds eight regularly scheduled annual meetings to consider what actions to take (if any). In the days before those meetings, the financial press often reports on expected outcomes as if they were a done deal, and markets often respond accordingly. In reality, until those meetings have taken place, nobody knows for sure what the outcome will be. We saw this in September 2015 when a widely anticipated rate increase did not come to pass after all.

Ordinarily, the FOMC has a number of ways to seek balance among the competing demands of the economy. But while the federal funds rate remains at zero, their usual arsenal has effectively been reduced to a single bullet: Will they or won’t they raise that rate?

It’s no wonder the question has become the central focus of recent FOMC meetings. It’s also no wonder that investors have been bombarded with the usual volume of conflicting coverage on what is and is not at stake. Depending on who you heed, rising rates could be anything from a panacea, to a global scourge, to a non-event in the markets.

What Does All This Mean to You and Your Money?

First, it helps to understand that there is an intricate interplay between developed nations’ monetary policies, global interest rates and the markets in general – and that these components are nowhere near one in the same. Anyone who claims to know exactly what will happen in one arena when we pull a lever in another had best be able to present a functioning crystal ball if he or she is to be believed.

To understand the complexities involved, consider this insightful article by Bloomberg View columnist Barry Ritholtz: “You’re the Fed Chairman. What Would You Do?” In short, monetary policy-setting is neither as easy nor as obvious as you might think.

It’s also worth emphasizing that the only interest rate the Fed has direct control over is the U.S. federal funds rate, which is the rate at which depository institutions (mostly, banks), lend and borrow overnight funds with one another.

The resulting cash flow is the grease that turns the wheels of our federal banking system, so it’s an important factor. But that doesn’t mean that there is a consistent cause-and-effect relationship between federal funds rate movements and other yields-based financial instruments such as U.S. or international fixed income funds, interest-earning accounts, mortgages, credit cards and so on.

As this Wall Street Journal article describes, “Think all rates would tick a little higher as the Fed tightens? That isn’t how it works. … The impacts will be uneven. Some borrowing costs are likely to rise closely in sync with short-term rates, but others won’t.”

Why is this so? It’s the result of those multiple global factors at play, with the Fed’s actions representing only one among them. A post by “The Grumpy Economist” John Cochrane even suggests that the Fed’s actions may be one of the less-significant factors involved, as he comments: “Lots of deposits (saving) and a dearth of demand for investment (borrowing) drives (real) interest rates down, and there is not a whole lot the Fed can do about that. Except to see the parade going by, grab a flag, jump in front and pretend to be in charge.”

What Should You Do?

Whenever you’re wondering how best to respond to a shifting landscape such as that wrought by rising (or falling) interest rates, begin by asking yourself: What can I do about it?

Unless you are Janet Yellen, there is probably nothing you can do to personally influence what the Feds are going to decide about interest rates, or how the global markets are going to respond to the news. But there is plenty you can do to help or harm your own wealth interests.

First, if you already have a solid financial plan in place, we do not recommend abandoning it in rash reaction to unfolding news. If, on the other hand, you do not yet have a well-built plan and portfolio to guide the way, what are you waiting for? Personalized financial planning is a good idea in all environments.

Next, recognize that rising or falling interest rates can impact many facets of your wealth: saving, investing, spending and debt. A conversation with a professional wealth manager is one way you can position yourself to make the most of the multi-factored influences of the unfolding economic news.

Together and through varied interest rate climates, we can help put these and many other worldwide events into the context they deserve, so you can make informed judgments about what they mean to your own interests. The goal is to establish practical ways to manage your debt; wise ways to save and invest; and sensible ways to spend, before and in retirement.

These are the factors that matter the most in your life, and over which you can exercise the most control – for better or for worse.

We would love to invite you to learn more about Hiley Hunt Wealth Management and who we serve in Omaha, NE –Financial Planning and Investment Management.

Go-With-the-Flow Investing

The way we view your investment experience is significantly different – in a good way – from what you typically find on Wall Street. Let me explain.

If you’ve ever gone river rafting, there’s one lesson you learn almost immediately. It’s tough to paddle upstream. Go with the flow, and you’ll find it much easier to steer around the obstacles and reach your destination. Plus, you get to enjoy more of the scenery along the way.

Your investment journey likewise is best made by observing the laws of financial nature. No doubt about it;  markets are a strong and wild force. A wise strategy for moving along your way is to harness that energy and direct it toward your personal goals, accepting what you cannot change and managing what you can. Try paddling upstream, and you’ll not only have to work very hard, but your efforts are likely to get you nowhere fast, stuck between a rock and a wet place.

To invest accordingly, three sensible steps serve as our guides:

  1. Planning – Before we embark, we plan. Where do you want to go? How far away is it? How much time have you got to get there? We put this plan in writing as your Investment Policy statement, to serve as your personalized map.
  2. Education – More than merely telling you what to do, we want to help you understand why you’re doing it, so you can proceed with confidence. Every step of the way, we take seriously our responsibility to offer clear explanations, in language that’s meaningful to you.
  3. Application – We also equip you for your financial journey with solutions that are right and fitting for you and your particular needs. In other words, we won’t pack a suitcase if you’re planning to go for a hike.

As your investment advisor and wealth manager, we see our role as that of experienced travel guide. We use deep discovery to help you properly plan, education to help you stay the course and sensible application to maximize your odds for success. Then we remain at your side, to make adjustments as needed along the way, equipping you with evidence-based investment strategy and manageable portfolio construction factors:

In short, at Hiley Hunt Wealth Management, we strive to make it easier for you to go with the flow of a successful investment strategy, guided by the straightforward essentials of sound investing and personalized care.

We would love to invite you to learn more about Hiley Hunt Wealth Management and who we serve in Omaha, NE –Financial Planning and Investment Management.