Tag: market volatility

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Inflation

Inflation: Why it’s So Destructive and Why the Fed Must Kill It

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses”

- Jerome Powell, August 26, 2022

Upon utterance of these words the equity markets promptly tanked ending the day with a cascade of selling and the S&P500 finished down over 3%. The selling continued over the next several days. Some have jokingly been referring to the Fed Chief as “President” Powell as the markets currently care little about anything else other than analyzing every word he utters for any hint as to whether theFed is dovish (lower interest rates) or hawkish (higher interest rates).

Well, after hearing the above quote, market participants deemed this to be hawkish, which means it was time to sell. News reporters seemed to think the markets were waiting for a sign from the Fed that they were going to back off the rate hikes they have indicated are coming. Why they would think that when inflation (CPI) is currently running 9% year over year is beyond me. We want the Fed to raise rates. Let me explain.

There is no greater drag on our collective financial futures than inflation. Even more than higher taxes or investment fees. Over the last 50 years (Aug 1972-Aug 2022), the S&P 500 has returned a nominal 10.5% CAGR (Compound Annual Growth Rate) with dividends reinvested. After adjusting for CPI, that figure drops to 6.3%. The difference in real dollar amounts is staggering. After 50 years, a $1,000 investment turned into $147,269. However, in purchasing power terms this only increased to $21,215!

The average CPI over this time period was very close to 4%. Think about what 9% would do to our hard-earned dollars over any extended period of time. I want the Fed to keep raising rates, even over 4%, if necessary. Monetary policy(Fed actions)got us into this(along with some fiscal stimulus) and now must get us out. If the Fed needs to induce a recession to get inflation down, so be it. The equity markets will likely recover, and we will be much better off in the long run with lower inflation. The S&P 500 is down 20% YTD as of this writing, what if the recession is already priced in? On the topic of interest rates, I’ve had a number of clients and friends inquiring about whether they should wait for mortgage rates (currently ~5.9%) to decrease before they buy. To be blunt, this makes little sense. As mortgage rates go higher, housing prices must come down (at least on a nationwide basis). The vast majority of homes are purchased with a mortgage, and there is an upper limit on the payments that households can afford. Always remember that the maximum mortgage amount a bank will lend you is based on the monthly payments and their relation to your income, not the home price or interest rates. For example,a $500,000house with 20% down requires a $400,000 mortgage. At 3%, P&I on this home is $1,686per month. At 6%, this jumps to $2,398/month, a 42% increase! To keep payments at the original $1,686/month, the maximum mortgage amount would drop to $281,200.Combined with the original $100,000 down payment, this suggests a home price of $381,200, a decline of over 20%!

I think this is very realistic, particularly in areas of the country with the highest appreciation over the last few years (think Texas, Florida, and Nevada). The bottom line is you are much better off with cheaper property at a higher interest rate than the other way around. You can always refinance later if rates come back down. If you find a house that you can afford and plan to live in for at least ten years, I wouldn’t be concerned about the interest rate but instead, focus on the purchase price.

 

 

Important Information:

Leading Edge Financial Planning LLC (“LEFP”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where LEFP and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.leadingedgeplanning.com.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

Categories
Education Rob

The Fiduciary.

Fiduciary,Duty

The Fiduciary.

The first time I heard the term "fiduciary," I said to myself, "fidu…what? Sounds fancy." Then I fell asleep. Admittedly, this topic appears boring and could put my 16-year-old boy all hopped up on Mountain Dew to sleep. But, here is a wake-up call - knowing who is and who is not a fiduciary is the first step in finding someone actually to help you with your money.

So, what is a fiduciary?
A fiduciary is someone who acts on behalf of another person and has a fundamental obligation to put their clients' interests ahead of their own, with a duty of undivided loyalty and utmost good faith. Fiduciaries are bound both legally and ethically to act in the client's best interests.  SEC Chairman Jay Clayton defined the fiduciary responsibility this way, "This duty - comprised of both a duty of care and a duty of loyalty - is principles based and applies to the entire relationship between the investment adviser and the client."

When someone is a fiduciary, it applies to the "entire relationship," not parts of it. It is the highest standard in the financial world. You may be saying, "Okay. Great! Aren't all financial advisors fiduciaries?"  I would say, "NO!"  Unfortunately, the term financial advisor is very nebulous and can apply to brokers (registered representatives), IARs (Investment Advisor Representatives), or hybrid advisors who are dual-registered and can act as both a broker and IAR. The bottom line is only IARs who are only IARs (not dual-registered) are fiduciaries always. They must do what is in your best interest, even if it hurts them. They are like financial knights, putting your kingdom before their own monetary gain.

You, "Great Rob, what about Bernie Madoff? Wasn't he a fiduciary?"  You are absolutely correct!

Yes, Madoff was a fiduciary advisor  (before that, he was a highly successful broker). I am definitely not saying that just because someone is a fiduciary, they will do what is best for you and your money. However, I am saying, by law, they are supposed to do precisely that (Madoff was sentenced to 150 years in federal prison). There are criminals in the world, and you need to take steps to make sure they are not defrauding you. Fortunately, many changes have taken place since Madoff and, perhaps one of the most important was the shift to a custodian system. A custodian system is where your advisor does not hold your money. Instead, a custodian like Charles Schwab retains it, and you can independently check your accounts to make sure it is where you think it is…not off in a Ponzi scheme. So, make sure your fiduciary IAR has a third-party custodian, and they don't hold your money themselves.

You, "How did you gather this knowledge?"

I have been interested in investing ever since I was knee-high to a grasshopper. However, I acquired this fiduciary knowledge several years ago when I was a newly minted first officer before becoming an IAR and before Reg BI (discussed below). At that time, I began a journey to find a trustworthy financial advisor for myself. As a military officer, money had not been a primary concern, and, to be honest, I didn't have enough of it to matter. But as I began my major airline career (2013), I realized I would soon have enough money that I had better start thinking about how to manage it.  I knew I needed help. My focus was on learning how to be a First Officer while still juggling my Air Force Reserve career.  Many questions ran through my head. The biggest and most important was, "How can I protect my money?" The money I had worked so hard to accumulate. What I found surprised me.  

Many investment advisors wanting my business were brokers. Some of these brokers were very intelligent and could sell with the best. One problem, they only had a "suitable" duty of care to me and my money.  What does "suitable" mean? It means they only had to put my money into investments they deemed…wait for it…adequate. They did not need to give me advice that was best for me. To be clear, I am sure there are many respectable, ethical brokers out there; I am not saying there aren't. But, with a suitable standard, they had no legal obligation to do right by me and my money. 

For example, say I had two financial advisors: an IAR (fiduciary) and a broker (suitable in 2013). Let us say they both had the option to put me in one of two identical funds, except one fund has higher fees. The IAR, legally, could not put me in the higher fee fund. The broker could legally put my money into the higher fee fund and likely would if they were getting paid to do so, as long as they deemed it adequate.

You, "Okay, but that was then, right? What about now and Reg BI?"

Regulation Best Interest (Reg BI - effective January 1st, 2020), has attempted to change the relationship and move the ethical bar higher for brokers. Instead of only having a suitable duty, they are now supposed to have a "best interest" duty. The regulation takes several steps to raise the bar (like having to disclose conflicts of interest); however, it does not change the dynamics of how a broker operates. A broker is still paid by a 3rd party to put their client's money in certain funds. This relationship has not changed. Now, however, the SEC expects them to use the client's best interest.

You, "How can they do what's in my best interest if they are getting paid by someone other than me to put my money into particular funds?"

Great question; you are not alone asking this. Some say Reg BI hardly moves the bar; some say it moves it a lot. Here is my take…  The regulation does not and cannot change the dynamics of how a broker operates via a 3-party exchange. The broker will still have the broker, the client, and the entity paying the broker to put the client into their particular funds (3 parties). This higher standard is potentially good, but brokers still get paid by people other than the client. IARs, on the other hand, are fee-only, meaning the client is the only one who pays them (i.e., IARs are not paid by mutual funds or companies to get you to invest with them).  Per the Investment Advisors Act of 1940, IARs have always had a higher fiduciary standard and deal with this 2-party exchange. There is the client and the IAR, that's it (2 parties). There is no incentive for an IAR to put your money into funds that may not be in your greatest interest.

You, "So how are IARs paid?"

Typically, IARs are paid by you quarterly. They get paid a percentage of how much money they manage for you. In the business, this is called AUM (Assets Under Management). It means, if you do well, they do well (Leading Edge charges pilots 0.85 % up to the first $1 million). So out of every $1,000 you have invested, you will pay us $8.50 per year (paid quarterly - $2.13) or less than 2 cups of Captain lattes per year (This is different from a broker who is paid to sell you a product and gets paid regardless if your money does well or not).

You, "Why would I pay someone a percentage of AUM?"

Well, think about having a wingman, co-pilot, or workout buddy. You are more likely to get where you want to go if you have someone helping you and encouraging you to get there. IARs help you stay the course when times get tough (Extremely wealthy people pay hedge funds similarly, but a much higher percentage of AUM). You do it because of the value you get from it.  Vanguard has studied certain financial advisors' value and determined that advisors can add 3% to the client's portfolios. This sounds like a pretty good investment to me!

You, "Okay, so I pay you $8.50 per $1,000, but you can add value of $30 per $1,000?"

Although this is not guaranteed, this is precisely the idea. Generally speaking, if an advisor starts guaranteeing returns, tell them you'll call them back, but our job is to add value.

You, "How or why is this?"

Morgan Housel (the author of The Psychology of Money) has a great point - Napoleon once said, "a genius is the man who can do the average thing when everyone else around him is losing his mind." A good advisor is someone who can help you be average when everyone else is losing their mind. If you can do this, you can make a lot of money. Good advisors help you do just that.  Think of being an airline pilot; much of our training deals with emergency training. What is the goal? To get us to do the average thing when most people are losing their minds. IARs can help instruct you through these market emergencies.
Furthermore, IARs give you comprehensive financial planning. Comprehensive financial planning may include Estate Planning, Tax Planning Strategies, Risk Management, College Savings, Employee Benefits Optimization, Insurance Planning, Career Planning, and Financial Independence Planning. These services can help you sleep better at night knowing you have taken care of your future self and loved ones, which in my book is priceless.

You, "So I get access to all of these types of planning with my 0.85% payments?"

Yes, most IARs offer many of these services, included with your quarterly fee. If you are familiar with a retainer, this is similar. You pay quarterly fees and have access to all kinds of advice/planning all year long. At Leading Edge, all of these services, and more, are offered and are included with your quarterly 0.85% payment.
In airline terms, when passengers pay for a ticket, that ticket includes deviations around thunderstorms, ATC delays, de-icing costs, etc. When you pay an advisor, you get almost all of the fixings with investment advice.

You, "Sounds great, but what does fee-only mean?"

Fee-only means you are paying both commission (and other custodial fees) and advisor fees. Simply put, when any trade is made establishing an investment position, there are commissions paid to brokers. Brokers make the trades but are simply the mechanism for buying and selling. In this capacity, they do not act as advisors and are not part of the decision making process. They do not get paid by the IAR and do not pay the IAR. These trades are separate from a broker selling you a product for a fee.  Now brokers giving advice, not acting as fiduciaries, may come up with all kinds of reasons why they are better for you than an IAR. It should only remind you of a quote by Upton Sinclair, "It is difficult to get a man to understand something when his salary depends upon his not understanding it."  I believe this is what Reg BI attempts to do. It tries to get brokers to act in the client's best interest, but their salary often depends on him not doing so. I fear that many brokers will continue finding ways to put clients in funds that pay the brokers. Even in the regulation itself, the term "best interest" is ill-defined and very open to interpretation. Time will tell how the SEC enforces Reg BI, but it will not change the dynamics of a 3-party (broker) relationship vs. a 2-party (IAR) relationship.  A fiduciary IAR is the highest standard and likely will be for the foreseeable future.  Reg BI does take steps to ensure brokers disclose conflicting relationships, which is a good thing. However, the fact they have to admit the relationship is irrelevant, in my opinion.  It makes me think of getting hit with a rock by a bully. His parents have come along and told him he has to tell me he is hitting me with a rock before he does it…but he can still hit me with the rock.  Understand, the bully can be quite crafty when explaining why hitting me with the rock is best for me, but I still get hit with a stone at the end of the day. Why would I sign up for that? I wouldn't, and I didn't. 

Now, if you have fallen prey to some of these brokers, take comfort in knowing you aren't alone. Many hardworking people have trusted these people to do what was in their greatest interest, not knowing these brokers had no such obligation. Several studies have shown that most investors don't understand their financial advisor's duty (or lack thereof). Many people believed their brokers were always legally bound to do what was best for them. Unfortunately, this was and is not the case. Again, only IARs (Investment Adviser Representatives), who do not wear broker hats ever, have a fiduciary duty to you at all times.

Back to my hunt for an advisor (pre-Reg BI)… Armed with this newfound fiduciary/suitable knowledge, I arranged a meeting with an advisor through my airline company's 401k plan.  During the conversation, I asked, "Do you have a fiduciary duty to me?"
What should have been a simple yes or no, was instead a bunch of hemming and hawing, but no real answer. Not to be deterred, I asked again. This time I received another vague response, so I asked again. Finally, this advisor told me he only had a suitable responsibility (today, he would have told me he had a best interest responsibility).  Case closed. He may have been a great advisor, but he had no legal obligation to do what was right for me. If he put me in a poor investment and lost all of my money, I had very little to no recourse.        

Today, instead of deeming that same investment "suitable," there will likely be brokers who find ways to make those same investments "best interest."  What I wanted was someone who had a legal obligation to me and my money. I wanted my financial advisor to do what was in my highest interest. Furthermore, I wanted someone who had no incentive to put me in a particular fund. For me, the fiduciary is the answer.  

You may be saying, "Great Rob, but how do I find out if someone has a fiduciary responsibility to me?"  This one is easy.

Ask the following question, "If I hire you as my advisor, do you always have a fiduciary duty to me?"If the answer isn't a fairly quick, "Yes." I advise looking elsewhere.  If it is, follow it up with, "To be clear, you never put on a broker hat and always have a fiduciary responsibility to me?"  The answer should again be, "Yes."  Beyond asking, you should also be able to find out by looking at the disclosures on their website or looking at their Form ADV Part 2A/Firm Brochure or the new Client Relationship Statement (CRS) mandated by Reg BI.

When I became an advisor, I knew I wanted to do it the right way and only become an IAR (fiduciary). Thankfully, Leading Edge Financial Planning (LEFP) shares this belief. Our Form ADV Part 2A says this:

Item 10: Other Financial Industry Activities and Affiliations
No LEFP employee is registered, or has an application pending to register as a broker-dealer or a registered representative of a broker-dealer.  LEFP only receives compensation directly from our clients. We do not receive compensation from any outside source nor do we pay referral fees to outside sources for client referrals.

If you have gotten this far and not fallen asleep, I thank you. As you now know, I am a fiduciary and vow to protect my clients’ hard-earned money with the highest devotion to their goals. If you want to chat further about this or any other subject, please give me a buzz at (707) 712-9387 or shoot me an email at robert@leadgingedgeplanning.com. Until next time, I hope you have only tailwinds and blue skies!

Robert Eklund, Financial Planner

Rob is a Southwest Pilot and soon to be retired Air Force Lieutenant Colonel. He grew up working on his family’s ranch in Colorado and went to high school in Alaska.  In 2000, he graduated from the United States Air Force Academy, earning a Bachelor of Science degree in Legal Studies.  Rob has served over twenty years in the Air Force, ten years on active duty, and over ten in the Reserves. During his military career he flew the C-130 while stationed in Germany and the KC-10 in California. Rob has accumulated over 700 hours of combat flying hours and participated in multiple Operations.  He was hired by Southwest Airlines in 2013 and became a staff officer at USNORTHCOM’s Domestic Operations Division in 2016. While holding this position as an Air Planner, Rob helped areas recover from Hurricane disasters; specifically, he was called to active duty to aid in recovery efforts following Hurricane Maria.

While studying at the Academy, Rob discovered his enthusiasm for the study of personal finance and investing.  As his military service comes to a close, he is excited to combine his passion for helping and protecting others with his enthusiasm for personal finance.  This culminated in 2020 with Rob passing the Series 65 Uniform Investment Advisor Law Exam and joining the Leading Edge team as a fiduciary advisor.  A fiduciary’s role comes naturally to him as he enjoys helping people whether that benefits him or not.  Rob knows the tremendous trust clients place in their financial advisors, and it is his goal to grow that trust through the highest level of transparency and integrity.  In his personal life, Rob married up to the love of his life and has been married for 18 years. He is overwhelmingly proud of his son, whom he recently donated a kidney.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 03/18/2021 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie Education

“The Envious Investor”

 

 

“My neighbor invested all of his portfolio in TESLA and now I’m envious!  It feels like I’ve FOREVER missed out.  And I might have less money in retirement because I missed the hot stock, ETF, Mutual Fund, etc.?” 

 

“As an investor, you get something out of all the deadly sins—except for envy. Being envious of someone else is pretty stupid. Wishing them badly or wishing you did as well as they did—all it does is ruin your day. Doesn’t hurt them at all, and there’s zero upside to it."

 

"If you’re going to pick a sin, go with something like lust or gluttony. That way at least you’ll have something to remember the weekend for.”

 

Warren Buffett

We understand these concerns and feelings because we’re investing for retirement too!  Furthermore, as investment advisors we hear these concerns almost every year.  If you’re a diversified investor, there will always be an asset class, a high-flying stock or mutual fund that has higher returns than your diversified portfolio.   

Does this mean we’ll have less money for retirement than our neighbor who’s ONLY investment last year was TESLA?  Historical evidence says you’ll likely do just as good or better over the long-term.  The “over the long term” part of the sentence presents the challenges.  In other words, it’s really hard to be a long-term investor when it feels like the world is falling apart around you AND your drinkin’ buddies are killing it with their daily newsletter stock picks!   

We all feel the pressure (envy) of missing out on great investments that we should have known were going to do better than all the others.  The good news is that diversification still works.  It’s never really “cool” nor does it ever feel great.  However, we believe, and the evidence supports the fact that your chances of success are better in the long run.  Check out the numbers from the chart below from BlackRock.   

 

Take a look at our short video where Charlie discusses what it was like in 2020 as investor.  How challenging it can be to stay the course and not chase recent returns.  Furthermore, the difficulties of feeling like you’ve forever missed out if your returns weren’t as high as your neighbor who invested in TESLA, Bitcoin, etc.   

Thank you! 

Charlie & the Team at Leading Edge Financial Planning 

 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 03/12/2021 and are subject to change at any time due to the changes in market or economic conditions.

 

Categories
Charlie Education

What Lies Ahead? The Top Ten Investing Principles for Getting Through the Next Market Downturn, Pandemic, Recession, etc.

What Lies Ahead?

Not even Hollywood writers could have created a story like we lived out in 2020. In this video, Charlie Mattingly and one of Leading Edge’s newest advisors, Rob Eklund, discuss what this year has taught us, how to better prepare in the future, and thoughts about the markets and economy going forward.   

Leading Edge financial advisor Rob Eklund, a First Officer for a major airline and a retired Air Force Pilot, review what investors can learn from mission planning in the Air Force and airlines.  For example, how can we be proactive instead of reactive? Many times, people may remark how pilots need quick reactions to be successful.  As Rob and I know, if you are frequently reacting as a pilot, it’s a good indication you did not plan sufficiently.  We believe it’s the same with investing and retirement planning.   

Although, it is to prepare prior to a recession or market downturn, there are many things we can do during the event itself. Vanguard posted the following graphic listing just a few of the value-added strategies that are critical to consider during any market decline.  

 

In addition to the checklist above from Vanguard, we believe there are ten essential principles to help all of us remained focused and less stressed during the next market downturn or recession.  

 

Embrace the efficiency of the markets in the long term.   

 

In the short term, the stock market reflects investor phycology (and many other unpredictable factors).  However, over time, equity prices tend to represent the future cash flows of a business.  We can all share in those future profits if we have the discipline to remain invested.

Don’t try to outguess the market. 

Although there is some debate within the finance community on the exact level of impact on investment returns, most will agree that strategic asset allocation and the amount of time in the market (not market timing) have the most considerable influence on investor returns.    

Resist chasing performance.  

Do not select investments based on past returns.  Funds that have outperformed in the past do not always persist as winners in the future.  Past performance alone provides little insight into a mutual fund or ETFs ability to outperform in the future.  

Let markets work for you.  

The financial markets have historically rewarded long-term investors.  We have the opportunity to earn an investment return that outpaces inflation by supplying capital to the companies we invest in. (I.e., stocks, mutual funds, exchange-traded funds) 

Consider the drivers of returns.  

Evidence shows that buying investments at a fair price (value factor), buying companies that demonstrate a consistent trend of profitability (profitability factor), and companies that tend to be smaller (small-cap premium) point to differences in expected future returns.   

Practice smart diversification.  

Diversification helps reduce risks that have no expected return.  Global diversification can prove beneficial over the long term while reducing the short-term volatility of a portfolio.   

Avoid market timing.  

You never know which market segments will outperform from year to year. Time in the market is much more profitable than attempting to time the market.   

Manage your emotions. 

It’s challenging to differentiate the short-term ups and downs of the market from the long-term returns needed to outpace inflation. In reality, the most significant risk we face is losing purchasing power over the long-term, during retirement, versus the risk of short-term losses in the market.   

Look beyond the headlines.  

There will ALWAYS be a news headline that could prevent you from investing in the stock market.  The news headlines will either attempt to scare you out of the markets or lure you into the latest investing trend.  Either strategy increases viewership, which in turn sells more commercials.   

Focus on what you can control.  

As we mentioned at the beginning of the article, just like pilots plan for their missions in great detail, we believe thorough planning is the best way to ensure a successful investing experience plus a fulfilling and prosperous retirement.   

Please don’t hesitate to call or email us anytime.  We’d love to hear from you! 

Charlie Mattingly

Charlie@leadingedgefinancialplanning.com 

865-240-2292 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/18/2020 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie High Income Pilots Retirement Mistakes

Trust Your Instruments, Not Your Gut, When it Comes to Flying AND Investing!

​As a brand-new pilot, one of the first things you learn is how to mitigate the risk of the potentially deadly physiological phenomenon known as spatial disorientation or spatial-D. In pilot speak, spatial-D is when your body is telling you one thing and your flight instruments (and airplane) are telling you something completely different. Sadly, spatial-D has claimed the lives of many pilots.

In this video, one of our newest Leading Edge team members and previous Marine F/A-18 fighter pilot, Mark Covell discusses just one example of spatial-D.  Mark shares how carrier pilots tend to feel like they are pitching up as they are launched off the carrier at night due to the massive acceleration from the catapult. During daytime, VFR conditions this is probably a non-issue. However, in weather, or at night, this type of spatial-D is potentially deadly.

What does spatial-D have to do with investing and retirement planning? Personally, I feel like all of 2020 could be compared to being catapulted off a carrier at night and not knowing what is up or what is down.

During the heat of the battle from February until the markets settled a bit in early April, investor emotions were all over the place. Years of stock market gains evaporated in days, even hours. Furthermore, many people thought, and the news media quickly suggested we were headed for the second Great Depression. And don’t get me wrong, anything was (and is) possible. Sometimes, the unknown can be truly scary.

One slightly humorous example of investor spatial-D was early in the pandemic when the shares of ticker symbol ZOOM shot up due to investors buying up shares as quickly as possible. Zoom Technologies, a so-called penny stock had risen more than 240% in the span of a month before the SEC suspended trading. Unfortunately, the traders failed to realize the ticker symbol ZOOM did not represent the Cloud Video Conferencing company Zoom they thought they were purchasing – Ticker symbol ZM.

Here is the headline from MarketWatch.com dated February 27, 2020.

In the airplane, pilots must fight spatial-D by cross-checking and TRUSTING their instruments. If, as an investor, you did not trust your instruments during 2020, it may have been very costly.

So, it’s a dark night and the weather is terrible.  What are the instruments you trust?  What is your primary and backup instrument? Here are four instruments that I think can save your investments as well as your financial sanity during uncertain times…

1. Cash reserves – Emergency Funds.

    • Having extra cash can prevent withdrawals from retirement accounts or excessive credit card debt in emergencies.  Studies also show having cash in a bank account makes people happy. In an article posted on PYMNTS.com,  “Can Cash Really Make You Happier”, Joe Gladstone, research associate at the University of Cambridge in the U.K. and co-author of two recent studies about money and happiness said,

“We find a very interesting effect: that the amount of money you have in your bank account right now is a better predictor of happiness than your aggregate wealth,” Gladstone explained. “Having more money in their bank account makes people feel more financially secure, which leads to an increase in happiness.”

2. Have a working knowledge of financial history.

    • You don’t have to be an expert or financial historian, but I believe being familiar with financial history is akin to training before you go on a flying mission.  Pilots call this chair flying.  Athletes and musicians use a technique called visualization that helps them prepare for uncertainty and reduce anxiety for a sporting event or concert.

3. Admit that times are scary, and you do not know what’s going to happen.

    • This may sound silly, but I’ve seen many people get themselves into a “square corner” because they assumed that something was going to happen when in fact there was no indication or possible way of knowing what the future may hold.  We have heard investors say “my gut tells me…” many times.
      • Some of the best investors in the world invest with the mindset of preparing to be wrong. That’s why diversification is not popular or “sexy” because it’s like admitting you don’t know what’s going to happen in the future, so you must prepare for multiple scenarios.  However, diversification can feel disappointing but prove to be a profitable strategy over the long term.

BlackRock Investment Management Company posted the graphic below on their investor education website about diversification and “S&P Envy” over the last 20 years.

4. Prepare and Plan by having a clear vision of your goals and priorities.

    • If you don’t understand the “why” behind your investments as well as why you’re investing and saving in the first place, you will most likely bail-out of your plan during difficult and uncertain times.  Changing your investment plan mid-crisis creates a very high likelihood that your investment returns will be significantly lower.
    • Simon Sinek started a movement by encouraging businesses to “Start with Why.” It’s a powerful mindset that leads to trust, inspiration and success.  I believe the same applies to your financial and investment game plan.

5. Remember that you are invested in companies – not politics.

    • Sometimes our politics clouds the investment and retirement planning picture.  This rule falls under the axiom; “control the controllable.”  If you’re allowing your politics to affect your investment game plan than you may want to see rule number 2 above.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/09/2020 and are subject to change at any time due to the changes in market or economic conditions.

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Uncategorized

Luck and Airline Pilot Retirement

Luck and Airline Pilot Retirement

How much does luck have to do with building a successful retirement nest egg?  Consider what would happen if immediately following your retirement there is a recession.  Talk about bad luck!  Unless… you planned for it.  

At Leading Edge we plan under the assumption that a recession may happen at the time of your retirement.   In this video, Charlie and Kevin discuss how to run your plan through a financial simulator in order to forecast what your financial picture might look like if the market turns south when you turn 65, and discuss what you can do NOW to insure against a “bad luck” scenario.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 07/20/2020 and are subject to change at any time due to the changes in market or economic conditions.

October 20, 2022

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Charlie Education Kevin

Why Not Buy Individual Stocks?

So, you want to be a stock picker? This video may make you think twice. There are stories of someone getting lucky with a homerun stock return but it’s rare.  (More than 50% of stocks do not beat their market). Kevin explains why it’s so difficult to successfully invest in individual stocks and the effect of skew. He also examines the history of investment returns when owning the top 5 stocks individually versus owning those stocks within a diversified portfolio.  The information may surprise you!

Explaining Skewness (from Investopedia.com)
– Skewness, in statistics, is the degree of distortion from the symmetrical bell curve in a probability distribution.
– Distributions can exhibit right (positive) skewness or left (negative) skewness to varying degrees.
– Investors note skewness when judging a return distribution because it, like kurtosis, considers the extremes of the data set rather than focusing solely on the average.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 06/08/2020 and are subject to change at any time due to the changes in market or economic conditions.

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Charlie Education Kevin Pilots

Warren Buffet Hates Airlines… So What?!

Warren Buffet Hates the Airlines... So What?!

Berkshire Hathaway recently sold its entire stake in Delta, Southwest, American, and United Airlines and stock prices fell after the announcement.  What is interesting is all but one out of the four of the airline’s stock prices have gone higher since the low on May 4th when Warren Buffett’s sale was made public.

Stock pricing adjusts daily to numerous events.  The decision of one investor, albeit a highly successful and world-renowned investor, should not be your only guiding principle of how to handle your investments.  Mr. Buffett has had biases against investing in airlines.  Here is one of his famous quotes from the 2007 Berkshire Hathaway Annual Letter:

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

— Warren Buffett, in the 2007 Berkshire Hathaway shareholder letter

Even Warren Buffet isn’t exempt from making the occasional mistake. Time will tell if his decision to sell was the right one or not.   Individual stocks and market prices are set by the collective knowledge of all investors.  In this video, Kevin discusses how to take advantage of this collective knowledge rather than follow the few outliers who are trying to outsmart the system.

October 20, 2022

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 05/21/2020 and are subject to change at any time due to the changes in market or economic conditions.

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Charlie Education Kevin

Don’t Abandon Your Financial Plan in Response to Headlines – This is Why

It’s tempting to abandon your financial plan when the world is experiencing unprecedented circumstances.  Although the pandemic is new and scary, don’t let the headlines play on your fears and knock you off your path.    

History shows that recessions and recoveries are filled with short term spikes and falls. These short term events often serve as a distraction to our long term goals.  Having a financial plan and sticking with it through the ups and downs has proven time and again to give you the best chance of success.  

In truth, the greater potential danger to our financial plan is not the pandemic and market volatility – it’s inflation (the loss of purchasing power in the future). If you react to the headlines and lock in your losses by withdrawing from the market you are also pulling your money from the opportunity to keep up with inflation and therefore, running out of money in retirement.

Stand firm and trust your plan.  Feeling unsure?  Give us a call, 865-240-2292.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 05/06/20 and are subject to change at any time due to the changes in market or economic conditions.

October 20, 2022

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Charlie Education Kevin

5 Things You Can Do to Prepare for This Bear Market

Who could have imagined we would start with the spread of a virus, add in some political election turmoil, and now we have an OPEC price war.  Wow!

Although we can’t control viruses and oil price wars, there are many things we CAN do to prepare for this bear market or recession.  Here are five things to do in order to not freak out and bring peace to your financial life:

1. STOP WATCHING THE NEWS AND START READING IT.

It’s important to be informed.  However, the 24-hour news cycle, selling fear and anxiety, is at an all-time high. Instead of watching TV or sensationalized videos, read your news from reputable sources. This will help reduce your emotional reaction while helping you stay knowledgeable and informed. Call us if you would like suggestions of reputable sources.

2. EVALUATE YOUR PERSONAL BUDGET & BALANCE SHEET.

For those of you that have very low debt and a sufficient emergency fund, you can rest easy.  Even if you’re laid off or furloughed you will have sufficient cash to prevent you from raiding your retirement funds.  If this is not you, consider the following:

● Develop a spending plan to eliminate all short-term, high-interest debt as soon as possible.
● Refocus your spending on necessary items only.
● Increase your emergency savings through automatic payroll deductions.
● Avoid new purchases unless cash is available.

3. CONSIDER A REFI ON YOUR MORTGAGE.

A good friend, and client, recently refinanced his mortgage to a 15-year 2.56% interest rate. This past week we saw mortgage rates fall to the lowest level in almost 50 years. That’s a game-changer for retirement planning!

4. STAY IN THE FIGHT.

You don’t have to be invested in 100% equities all the time, but staying in the market in some capacity is required to capture the long term market gains that are available to all of us.  It’s been shown that leaving the market only to return later may diminish your returns significantly.  In fact, if you miss out on just a few of the positive days in the market, your long-term stock averages could suffer tremendously.  You have to manage risks in the stock market – not avoid them completely.

 

The chart below shows how $10,000 invested in the S&P 500 index, for the 20-year period of 1999 through 2018, would have performed under various scenarios.

5. FOCUS ON YOUR GOALS & YOUR INVESTMENT TIME HORIZON.

Remember, the money you will need in one to five years is not at risk in stocks.  It’s only a paper loss until you sell the stocks. You wouldn’t sell your house or rental real estate property just because the price declined so why would you sell your stocks?  Furthermore, more conservative portfolios recover faster from downturns than aggressive ones.  For example, according to Charlies Schwab, a portfolio with more than 70% stocks and the rest in bonds took more than two years to recover from the 2008 financial crisis, compared with just seven months for a portfolio with more than 70% in bonds and the rest in stocks.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 03/12/2020 and are subject to change at any time due to the changes in market or economic conditions.

October 20, 2022