What Would You Have Done?

She was sobbing hysterically in the luggage claim area of the airport. All by herself. No one helping her.

I realized I had seen her a few minutes early, at 7:30 pm in the main terminal, begging an airport staff person to help her. "I lost my cell phone. No one is helping me."  Assuming she would be helped, I just kept walking.

In luggage claim, she needed help. I stayed with her. I kept asking a nearby airport visitor information volunteer to call security, the police or EMS. "I can't find my license. I can't find my cell phone. I have no boarding pass. How can I get back through security?"   She was young, scared and overwhelmed. She was having a panic attack. She looked like she was going to pass out. I bought her a bottle of water. The volunteer said he made phone calls but no officials appeared.

"I have friends at gate 5a. They have my carryon. I don't have my medication. I need medication."   She would calm down, then another panic attack would overwhelm her. I could not leave her. She found her boarding pass. I got her first name, her mid-20s age. I got the name of a friend at gate 5a, but no one from the airport was contacting them. She could not remember her mom's phone number. She was flying from California to upstate New York. She finally found her drivers license.  She finally remembered her dad’s phone number. She couldn't breathe. She couldn't stand up. She needed help. What should I do?

I stayed. I helped.

I was returning from the 2013 BAMAlliance National Conference and BAM Masters Forum meeting. I had been in St. Louis for 5 days and was tired and needed to meet my wife to take her for a medical test. But I needed to stay. This young woman needed help. So I stayed, as she needed me more than Felicia did at that moment.

Speakers at the conference talked about relationships, authenticity, trust, doing the right thing, taking chances, showing up, giving first and without the expectation of anything in return. Seth Godin. Jerry Greenfield. Dr. Robert Cialdini. Carl Richards. Jason Womack. They were all different, but essentially their messages had a common thread. Care. Be present. Do the right thing. How could I just walk away and ignore her?  She needed help.

 She could get through security, but she was not physically able to get up. She kept collapsing. "Where are the police?," I asked the volunteer. “Can you get EMS?  She is close to passing out” I kept repeating.

Finally, after almost 30 minutes, one police officer arrived. I gave him the information I had written down on a yellow sheet of legal paper. Her name. Her friend’s name. Where she was going. Then another officer arrived. They said I should go. They would handle it.

So I left. Worried. Would she be OK?  Would she be physically able to make her 9:25 pm flight to NY state?  I got on the shuttle bus to get my car. The only other person on the bus worked at the airport. “Is she OK?”  he asked. I was startled.  What was he talking about? He said he had seen me with that woman in the luggage area. He said he saw the whole thing. “Did I know her?”, he asked. No, I said. I was just trying to help her.

As I drove from the airport to get my wife, thoughts flew through my head. Why did the airport employee I talked to on the shuttle bus, who watched this all unfold, do nothing? Why didn’t he try to help?  Why didn’t the people in the Delta office help? Or just make a phone call?  Why did it take so long for the police or other emergency people or even security personnel at the airport so long to respond?

Today, the next day, I feel good that I tried my best to help this young woman. I didn’t even think about it. On Monday morning, in the calm of a beautiful hotel, surrounded by colleagues and friends, Seth Godin said to do what our gut tells us to do. Be vulnerable. Take chances. (And to write more). Last night, on Tuesday evening, I wasn’t thinking about Seth Godin’s speech. I was just trying to help another human being who was going through a crisis situation. 

I can’t get her out of my mind. I don’t know if she was able to overcome the panic attacks to make her flight or if she needed further medical treatment. I’m worried about her. At some point in this 30 minutes with her, I wrote down my cell phone number for her on the back of my business card, if she needed more assistance. 

I hope I hear from her. I just want to know that she is OK.

Nobel Prize in Economics, Our Firm and You

“The envelope please.  And the winner of the 2013 Nobel Prize for Economics is…”

We’re quite sure that not many of you were glued to your TV for this announcement at around 7 am Monday morning. However, one of the 3 winners has had a significant impact on our firm, our investment philosophy, and thus, your investments and your life.

Who is Eugene Fama and why is his research important?          

Eugene Fama was awarded the 2013 Nobel Prize in Economics for his research that attempts to pick stocks and time the markets were often fruitless. This research led to the development of index funds and our approach to investing. Fama is widely recognized as the “father of modern finance” for his academic work in developing this “efficient market hypothesis.”

Fama was the principal scholar whose groundbreaking research inspired the founding of Dimensional Fund Advisors (DFA), the mutual fund company through which we primarily implement our stock investment philosophy. DFA is now one of the top 10 mutual fund companies in the US, managing over $300 Billion. Fama serves on Dimensional’s Board of Directors and its Investment Policy Committee. Fama has been a professor at the University of Chicago Booth School of Business since 1963.

What does this mean for stock picking?

Fama was selected for his research beginning in the 1960s which show that stocks prices are “extremely hard to predict over short (time) horizons.”  As stock prices react so quickly to any new information, he argues this leaves little opportunity for profitable efforts by actively managed mutual funds and hedge funds.

At a conference in September, Fama said that since markets are efficient, he challenged the Wall Street notion that investment managers such as high-fee hedge funds could outperform market returns. His advice “…would be to avoid high fees. So you can forget about hedge funds” and other high cost mutual funds.

How has our firm incorporated Fama’s research into your investments?

We believe in the thesis of Fama’s research, which won him the Nobel Prize for Economics. To extend his research, we do not feel it is possible to identify in advance investment managers that will consistently outperform a respective benchmark over a long period of time. There is a significant academic research which supports this position, especially if fees and trading costs are considered.

Thus, we adhere to an index or “passive” philosophy, which minimizes your costs and invests in a particular asset class. We have chosen to primarily utilize DFA’s mutual funds to implement this strategy based on their performance and very low costs.

Fama has continued to play a major research role in the investment approach of DFA.  Further research developed the strategies to tilt towards small and value companies, both domestically and internationally, as they have greater expected returns.

Conclusion

It is our role to be independent, intellectually curious, and advise you in the manner that is best for your interests. We are pleased that Professor Fama has been internationally recognized for his research that has led to such a rationale and successful investment approach. His continued guidance and work with DFA is truly valuable. Keith and I have each heard him present at conferences in the past and look forward to this even more in the future.

Note: This is the letter that is accompanying the third quarter, 2013 statements being sent to our clients.

Federal Shutdown, Investing and Your Planning

The Federal government is again on the brink of another self-imposed "crisis" brought on by political dysfunction. The impending Federal government shutdown is the result of Washington being unable to govern in an effective manner.

It is not our role to point fingers and assess blame. As we often say, we focus on things which we can control. We cannot control or affect Washington (thankfully!).

What are the implications of the Federal shutdown and how should investors react?

We do not believe that investors can accurately time the market on a day to day basis. We focus on the long term. As the Federal shutdown continues, it is possible or likely that the stock market may decline. When the matter is resolved, it is likely that the market will rebound. We do not advise selling investments with the intent to repurchase them when you anticipate that the Federal shutdown will be resolved. You have to be right twice; timing when to sell and when to buy. Also, you have to know the information before others do, as the markets react immediately.

The lesson from similar government situations in recent years is that patience is generally the best strategy. While it may not feel good during a crisis, you should recognize that "doing nothing" is an important decision. While others may react and try to trade on the daily volatility of the markets, most will not do it successfully. You will be more successful over the long term by adhering to your investment plan.

Do you have an investment plan?  Have you reviewed it recently? Have you tracked your investment performance against appropriate benchmarks? If not, maybe the lack of planning in Washington is a good reminder that you should have a well developed investment plan. We can't help Washington, but we can help you.

A Great Book and a Not So Good Op-Ed Piece

Reading a book can have a lasting impact. It can educate.  It can provide new and vivid perspectives, even to events which have recently occurred.

The outstanding book The Alchemists, by Washington Post writer Neil Irwin is one such book. The Alchemists, Three Central Bankers and A World on Fire provides insight to the challenges that the world's central bankers faced during the financial crisis since 2008 (and still face now). Irwin explains how they dealt with the non-stop issues, how they interacted with each other and how they developed new and innovative approaches to economic challenges.

I read and closely follow financial matters on a daily basis, through many types of print and electronic media. Still, I was amazed by how much I learned by reading this book. Irwin's work reflects how perspective and information can sometimes only be gained through reading a book.

What did I learn from this book?  How will it benefit my clients, as their financial advisor?

Irwin started the book by attributing central bank actions (or inactions) in previous time periods as causal factors to economic depressions and worldwide instability, such as wars. Irwin vividly showed that Bernanke and the other world financial leaders needed to be brave and take actions that were often "wildly unpopular."

Bernanke's academic background as a student of The Great Depression, his ability to build consensus and develop creative responses to unpredictable events helped to prevent further economic catastrophe. While some may disagree with the central bankers' policy decisions, I agree with Irwin's conclusion.

Will this book help me to predict the future of interest rates?  No.

Will this book help me predict who the next Fed chairman will be? No.

Will this book help me to explain economic events more clearly to my clients?  Absolutely yes. And that is one of our roles as their financial advisor, to provide clarity and explanations of complicated topics.(Note: Chapter 20 on the Chinese economy and their banking system are particularly worthwhile, as were sections on regulatory legislation after 2008-09.)

Having just completed this book, I was quite surprised to read the August 20th Op-Ed column in the New York Times titled Wanted: A Boring Leader for the Fed, by Amar Bhide, a professor at Tufts University. He said "we need to return the Fed to dullness and the chairman to obscurity."  Further, the author wants to "scale back what we can expect of" the Fed.

After living through the turbulence since 2007 and reading The Alchemist, I cannot disagree more with Bhide. While one can argue about specific decisions that the Federal Reserve and Bernanke have made, I do not want in the next Fed chairman to be boring. Boring is defined as monotonous, tedious (which implies dull slowness), tiresome, humdrum (commonplace, trivial, or routine) and uninteresting.  

The Fed chairman should be the direct opposite of boring. The chairman needs to be strong, bold, innovative and a leader willing to take risks that he or she feels are necessary for the good of the country and world. While Bhide calls for the Fed "to return to dullness" and the chairman relegated to "obscurity," the opposite is necessary.

The Fed chair has to rapidly deal with unexpected events, such as the collapse of Lehman Brothers and AIG, as well as set monetary policy. The Fed chair needs to effectively interact with world bankers, fellow Federal Reserve governors and staff, politicians and the media. 

The Fed needs to continue to clarify and improve its communication to the financial markets. The financial markets react negatively to uncertainty. The chair needs to act with decisiveness and be willing to speak publicly, as Bernanke has done by adding press conferences after certain Fed announcements. 

The term of Federal Reserve Chairman Ben Bernanke ends in January, 2014. President Obama's naming of Bernanke's replacement is surely one of Obama's most important decisions. I hope it will be an effective and experienced appointment, who can lead with consensus. But not a boring choice. 

What if something happens to your Financial Advisor?

Do you work with a financial advisor or stock broker? Do you work with one person, or do you have a relationship with a team of financial advisors?

What if something unexpectedly happens to him or her, or the team?  Have you planned for this? Has your advisor thought how this would impact you, as his client? We have thought about this and we did something about it.

We have a fiduciary responsibility to plan for our clients as well as ourselves. We want our clients to plan and be prepared. They should expect that we would do the same. And we have.

Our firm uses a team approach, so that my partner and I generally meet with most clients. We are both familiar with our clients and their investment strategy. We work together, as it benefits our clients to have both of our input.

If something happens to both of us simultaneously, as unpleasant as this is to consider, we have made arrangements to provide continuity for our clients. We recently completed an agreement with our back office firm, BAM Advisor Services, for them to immediately take over our practice if this were to occur.

While this scenario is very unlikely, this is an example of the kind of forward thinking and coordination we have with BAM. We want to ensure that our clients are provided for in the future. We have confidence in the long term benefits of our investment strategy. We have confidence in BAM, as our partner, that they would take excellent care of our clients.

We have planned for the unexpected, so that our clients can be confident of their future and sleep well at night. Isn't that what you want from your investment advisor?

What are the key factors in selecting an investment advisor?

When you are deciding to work with an investment advisor or financial planner, what should be the key factors? 

Trust and connection:  Do you trust the advisor and firm? Do you feel a connection and bond with them, so both you and the advisor can be open and honest?

Investment philosophy: Do you understand the firm's investment philosophy? Do they have a good track record? Do they have a "reproducible" methodology that is not based on market forecasting and guesswork?

Fee structure:  Does the firm have an easy to understand and transparent way of being compensated?

• Is the fee structure designed so the advisor is only making recommendations with your best interest in mind? 
• We are fee only advisors. We do not accept commissions or other forms of compensation for the advice that we provide. We have a fiduciary duty to only act in our clients' best interest. 

Other factors:

·         Does the financial planning firm provide advice on other important matters in your life, beyond just investments?

·         Can they assist you to move forward with your estate planning? Do they provide creative ideas and work as a team with your estate planning attorney?

·         Will they provide advice with your retirement planning and college funding?

·         Are they comprehensive planners, so they can function like your family's CFO?

·         Do they really help to minimize your taxes?

These are just some of the factors you should consider when retaining an investment advisor. The experience and credentials of the advisor and firm are also important.

Does it matter where the investments are held? Is that a key factor?

In real estate decisions, location matters. In insurance, if you hire an Allstate Insurance agent, they are going to purchase Allstate Insurance for you. We are different. We make investment decisions based on what is in your best interest and consistent with our investment philosophy, not based on the custodian (where your assets are held). In working with an investment advisor, as long as the custodian of your assets is a well known and reputable firm, the actual “location” (custodian) should be a secondary factor.

As independent investment professionals, we have selected Fidelity Investments or Charles Schwab as the custodian of the assets that we manage. This is the place where your assets are securely held.

When a new client begins to work with us, we generally move their assets to one of these two custodians. We prefer Fidelity, as they provide our clients with the best combination of low costs, efficient service, easy to read monthly statements and a website that is secure and user friendly.

Think of the custodian as the holder of your assets. As we are independent advisors, we can recommend and purchase nearly any mutual fund, bond or CD that would be in your best interest. Because we recommend to custody your investments at Fidelity does not mean we recommend primarily Fidelity mutual funds. Far from it.

Our investment decisions are completely separate from the decision of where to custody (hold) your assets. Doesn't that make sense? 

"August can be a very tricky month. Be Careful."

As I drove to meet my son for lunch on Monday, a Wall Street analyst on CNBC made the above comment, which I heard while listening on Sirius radio.

Is this a realistic comment? Is this the kind of advice you want from your financial advisor? Is it really helpful?

Do you want planning and recommendations for the long term?  Or do you want investment advice focused only on the next month?

Do you want a financial advisor who will advise you with your investments, as well as assist with your estate planning, retirement planning and reducing your taxes?  Or do you want predictions and guesses?

Do you want a financial advisor that utilizes a rational investment philosophy that is understandable and provides you with comfort, peace of mind and security? Or do you want an advisor that tries to time the market with unproven forecasts?

We do not know what August will bring. We don't know what will happen in any future month. Do you?

We do know that we can provide you with comprehensive financial guidance and advice that will be valuable to you and your family. We do know that it will be more valuable years from now than a prediction for the month of August, 2013. 

Honesty

At dinner Friday night at a crowded Bella Piatti restaurant in Birmingham, the most striking part of the evening was the honesty of our server.

When ordering appetizers, our server was very clear which items he recommended and a few to avoid. He provided advice and was helpful. When he returned with the appetizers, they were all wonderful and we were pleased with his guidance.

After a while, it was time to order our entrees. Again, when asked about certain dishes, his verbal and facial responses made it clear what his recommendations were. We had quickly developed trust in him. His clear recommendations were so much more helpful than the usual "everything is good" reply. He guided us in the right direction, as all 5 people at the table enjoyed their main courses.

As the evening continued to desserts, he again advised us which items were very good and which are not his preferences. Being a huge fan of cannoli's, I disregarded his advice against getting the "deconstructed cannoli." When it arrived, we enjoyed it (shared amongst the group), but he was right. It was good, but not great.

During the evening and on the way home, we discussed how much we appreciated his recommendations and advice. One person asked why he was so forthright, much more so than at most restaurant experiences. My thought was that the more we enjoyed our meal, the more likely we are to return. Every business desires repeat business and he was doing his part to ensure this.

As Billy Joel's song "Honesty" says...

     "Honesty is such a lonely word
      Everyone is so untrue
      Honesty is hardly ever heard
      And mostly what I need from you"

As a financial advisor, we are morally and legally obligated to act in our clients' best interest. This is not the standard for all investment advisors and brokers. We are very transparent about how we are paid. We are fee-only financial advisors. We do not get paid commissions from any of the investments that we recommend. Unlike brokers at major financial institutions, where fees may be hidden or not fully disclosed, we are open and honest about our fee schedule.

The server of our delicious meal gave us the best opportunity to have a great experience at the restaurant. Our interests as a wealth management firm are fully aligned with our clients so they have the best opportunity to have a positive long term investment experience.

At our firm, our fees are based on what we manage for a client, not on what fund or product we sell (as we do not sell anything). If your investments increase, we both do better. If your investments decline, we both feel the pain. Doesn't that make sense?

Isn't honesty and clarity the best way to build a relationship and do business?

A Philosophy You Can Stick With

"The important thing about a philosophy is that you have one you can stick with." David Booth, founder and chairman of Dimensional Fund Advisors (DFA).

  

Prior to founding this firm in 2003 after the tech bubble crash, I spent many years researching how best to provide investment advice. How would we be different? How could we provide a better experience for our future clients than they were experiencing with their existing financial advisors or by investing on their own.

I read extensively. I went to conferences. I read more. And more. I attended my second AICPA Personal Financial Planning conference, in Philadelphia. I went from exhibitor to exhibitor and talked to many firms. And then, it happened. I got the book that would change my business life and the lives of my clients. It was my "aha" moment.

On the Friday afternoon train ride after the conference ended, I started reading "The Only Guide to a Winning Investment Strategy You'll Ever Need," by Larry Swedroe of The BAMAlliance . I could not put it down. I didn't want to put it down. And I didn't. I read it that night and throughout the weekend. I had found an investment philosophy that we could stick to. Over a decade later, I believe in it more every day.

Most people view investing and the stock market in some form of trying to make accurate predictions or forecasts. They think:

•      Is Ford a good buy now? Great, then I'll buy it. But what if it isn't a good time? How do you know?
•      Is it safe to invest now, since the economy seems to be recovering? Great, in which case I'm going to move $XXX,XXX from cash into stocks. But what if the market has already made a big move? How do you know the right time?
•      A few years ago everyone thought Apple was a great company and could do no wrong. The stock price was soaring. Onwards to $700 per share, until suddenly things changed and now it trades in the $400s. How? Shouldn't someone have been able to predict this? 

We take a different approach. One that is rational, understandable, consistent and provides our clients with peace of mind.

• We do not have a crystal ball. We don't make forecasts and readily accept that we cannot see the future (just like Warren Buffet). Doesn't this make sense?

• We don't believe that active mutual fund managers can consistently beat their respective benchmarks over a long term period. And even if they could, can they be identified well in advance, and consistently? We don't think so.

• We believe in using mutual funds with very low costs. Focus on what you can control.

• We believe in holding mutual funds that each own a group of stocks (say US small value or International Value) that most of the time will outperform actively managed mutual funds (where the manager is trying to predict which are the best stocks to own). And we have tons of academic data to support this.

• We spend a lot of time talking with our clients. We educate our clients about our philosophy. We want them to be prepared for bad markets, as they occur every 3-5 years, on average.

• We emphasize international investments and owning small company and value company stocks. Why? Because they provide better diversification and greater expected (and historical) returns than just owning US large company stocks (which is what most people own). And we have lots of data to support this too.

Having a philosophy that we believe in passionately enables us to provide our clients with a better investment experience.  It enables us, and them, to be more disciplined and adhere to their financial plan. We are fee- only financial advisors. This enables us to be independent and always act in our clients' best interest.

There is much more to our philosophy, but I will save that for future blog posts or personal conversations.

Sticking with our philosophy has allowed our clients to feel comfortable and secure. It allows them to sleep well...and isn't that what is most important?

And even though we are responsible for millions of dollars of our clients' money, because we have a solid philosophy we believe in and stick to, we also sleep well at night. And that is comforting also.

Learning, Connections and Dinner

I read a lot. I consume information from many sources (newspapers and books, both in print and electronic, as well as via Twitter). I have always been this way, just the sources and methods have changed. Since I was a teenager working at my local public library, I have read the Wall Street Journal every business day.

An essay I read on Monday has stuck in my head. David Butler of  Dimensional Fund Advisors wrote about the "Currents of Success" that flow through great financial advisor firms. He wrote that one aspect of successful financial advisor firms is "intellectual curiosity." He wrote that "building a great firm requires genuine intellectual curiosity and openness to new ideas..."

Which leads me to dinner last night. I attended an event sponsored by Lynne Golodner, of  Your People, LLC  a Southfield Michigan public relations, marketing and business development firm. I joined a group of 10 other business owners and Lynne, to share thoughts and ideas about our businesses and learn from her.

The food was delicious (glad I finally got to go to Cafe Via in Birmingham). The conversation was good. Interesting. Thought provoking. Questions were direct and challenging, but in a respectful manner.

As I drove home, my mind connected the DFA essay and the dinner together. Why had I attended? To learn more, as I always learn more by attending a conference, seminar or hearing a speaker. For the same reason that I traveled to Florida to spend a day with Bob Burg and many other speakers in May, 2012. For the reason I spent 3 days with  Michael Port in 2011 outside of Philadelphia. Why I spent years working with John Bowen and I now participate in the Strategic Coach program. For the same reason I participate in a peer group phone call with my BAMAlliance financial advisor colleagues nationally, every two weeks and attend many BAMAlliance seminars throughout the year.

Attending events or programs like these can be expensive, both in time and money. But if viewed as an investment, as a way to grow, to learn and improve, and possibly to build new relationships, then the investment is almost always worthwhile. There is always more to learn to better serve and advise my clients, as well as to grow intellectually.

Each time I attend an event or conference, there are new ideas to implement, things to change and new people that I've met. The challenge is to implement and develop the personal connections. The challenge is to prioritize to adopt new habits. Lynne challenged us to blog more. Share our ideas. Write in a more personal manner. I know if I blog more there will be benefits.

Will I blog more regularly in the future? If I do, then the evening with Lynne will be even more worthwhile.

Detroit Bankruptcy and Important Lessons

The bankruptcy filing by the City of Detroit is the culmination of decades of decline. As a wealth management firm based in suburban Detroit, with clients in metro Detroit and nationwide, we hope this difficult step is the beginning of a process that will have long term benefits. What can be learned from it?

Pensions

For the retirees of the City, the future of their retirement benefits is now unknown. These benefits will be subject to litigation and the outcome of the bankruptcy process. As I'm not an attorney, I can't provide a legal opinion. From a financial standpoint, as these are segregated pension assets, it would be reasonable for future benefits to be actuarially recalculated based on the existing assets, not practically eliminated. However, that is far from what may occur. (See my disclosure below)

Nationally, the pension benefit issue could have dramatic implications. If the bankruptcy courts determine that these pension benefits can be drastically reduced, it could set a wide-ranging precedent for other municipalities throughout the country. Thus, this is a major legal issue.

A national problem

This should be a wake-up call for voters/citizens and leaders of other organizations (the Federal government, state governments and other municipalities, companies and non-profits that provide retirement and health care benefits). Many entities of all types have huge unfunded pension obligations and are not taking steps to reduce them. They continue to kick these liabilities down the road. Leaders from Washington to local governments need to be realistic about their investment assumptions and figure out how to balance their budgets. For more on this topic, see the excellent article, "Detroit, tip of pension liability iceberg" by the Guardian's financial journalist Heidi Moore, http://t.co/0pcM04URGi

This is an urgent need. Politicians can no longer put off resolving tough issues. We as citizens need to realize that if we are not going to pay more in taxes, then our governments must reduce the benefits and services that we receive. Washington needs to take steps such as addressing social security benefits (reducing them for the wealthiest Americans?). Congress has to find a way to make logical but difficult political decisions. The pain of these choices must be shared. It is time to close post offices in many remote areas and reduce Saturday mail delivery. We cannot continue to have our cake and eat it too.

Small actions today can result in pay significant long term benefits. Change can be difficult and unwanted, but change can also eventually be good. If these issues are not addressed, there will be future crises and bankruptcies like the City of Detroit's, in other parts of the country.

Municipal bond investors

The action by Detroit may have negative ramifications for municipal bonds throughout the entire State of Michigan, and possibly beyond. The lesson: muni bond investors should invest in a much more diversified manner, not just primarily in one state. All too often, residents of one state concentrate their muni bond holdings in their state of residence, for the state tax exemption.

We have recommended to our clients to invest in municipal bonds across the country, so they are diversified by states and localities, not just in their state of residence. Detroit's bankruptcy shows that municipal bankruptcies are possible, and depending on how the courts handle the pension liability issue, the risk of other bankruptcies may be more likely in the future.

As with so many aspects of investing, diversification is vital. Broadly diversifying a portfolio of municipal bonds across states is even more important now. Will investors review their portfolio and make the needed changes?



Disclosure: My stepfather is a City of Detroit retiree and recipient of Detroit pension benefits.

Federal Reserve actions: A "Q & A" to explain recent events

Our goal is to provide our clients with comfort and security.  To achieve this, providing clarity and understandable explanations about financial matters is important.

What is the mission of the Federal Reserve?

The Federal Reserve has a legal dual mandate: to foster maximum employment and price stability (which they have defined as keeping inflation around 2% annually). The Federal Reserve feels inflation is currently running below 2% and longer term inflation expectations remain stable. The Fed wants to bring the unemployment rate to at least below 6.5%, from its current level of around 7.5%.

What occurred at the Fed meeting on June 19th?

Last Wednesday, the Federal Reserve held their regular meeting, which concluded with their written press release regarding interest rates and the economy. Fed Chairman Ben Bernanke then held a press conference and further elaborated on Fed policy.

The Fed's statement following their June 19th meeting did not change significantly from their May meeting. To meet the above goals, the Fed plans to continue their current asset purchase program (referred to as QE, for quantitative easing). They will continue to purchase $40 billion per month of mortgage securities and longer term US Treasury securities of $45 billion per month. The Fed feels these steps are needed to maintain downward pressure on long term interest rates, support mortgage markets and "make broader financial conditions more accommodative."

How have interest rates been changing?

Interest rates, as defined by the 10 year US Treasury note, have risen dramatically over the past year and since the Fed meeting in particular. The 10 year rate was around 1.6-1.7%% during June-September 2012.  In January 2013, it had risen to around 2.0%. From June 3 to June 24, 2013, the rate rose from 2.13% to 2.5-2.6%.

What is our view of future interest rates?

While we do not have a crystal ball and do not make interest rate predictions, a few things are clear. Interest rates have been historically low due to the long time it has taken for the economy to recover. We think the bond market may have over-reacted to Bernanke's comments.  There was initial fears that the Fed was going to influence long term rates to rise higher and sooner than many on Wall Street had anticipated prior to June 19th.

We think short term interest rates will be still be very low for the next year, and maybe longer, based on the Fed's comments. The vast majority of Fed governors expect short term rates to continue very low until 2015 or 2016. The Fed has a harder time "controlling" longer term interest rates, such as mortgage rates and the 10 and 30 year US bonds. The Fed's intent is to hold these rates low until either the unemployment rate has declined to 6.5%, or even lower, and/or inflation expectations are greater than 2%.

What do we think of the recent rise in longer term interest rates?

As shown above, rates have been rising for a year, though not in a straight line. The rise did not begin just in the past few weeks. As many economic indicators show, the economy has improved from 2008-2009 levels (such as car sales, housing starts and sales, housing values, employment growth). We think the rise in interest rates is a gradual process that is good and healthy for the economy, as long as the increase is not too fast or high. We do not anticipate this occurring.

What actions should you take or consider, based on these events?

As interest rates rise, the prices of bonds and bond funds will drop in value. For nearly all of our individual clients, we have recommended to hold individual bonds for this reason. While a bond's price may temporarily decline, it will not be a permanent loss upon the bond's maturity. If you hold a bond fund, you will incur a permanent loss in value as interest rates rise. If you own a bond fund or know someone who does, particularly intermediate to long-term funds, please contact us to review whether a change in your portfolio is in your best interest.

If you have not refinanced in the past few years, and you can qualify, you should begin the process immediately.  Though mortgage rates have risen, they are still historically low and refinancing still makes tremendous sense.

Given the very low historical interest rate levels that currently exist, we do not recommend paying additional principal on mortgages and other low interest rate debt. We think debt at these interest rate levels will be viewed very positively in the next 3, 5 and 10 years. So, it generally does not make sense to pre-pay these debts at this time.

What is the impact on the stock market of the recent events?

The stock market in the US has been quite strong for the first 6 months of 2013, up over  10%. We think volatility will increase, as Wall Street tries to understand and predict future Fed actions. Wall Street will also have additional anxiety over the naming of the next Federal Reserve Chairman, which will play out through the remainder of 2013.

We continue to be long term investors and have a long term positive view of companies and countries' general resilience and ability to adapt and innovate. It is not possible to accurately time the stock market. Thus, we will continue to adhere to our core investment principles, which are not affected by the rise in interest rate increases.

Please contact us if you would like to discuss these matters further.

The Value of an Expert, for Planting and Investing

What a success. Or so I thought.

 Last summer, I planted a number of Canna Australia plants on my front porch in two large pots. I watered them diligently. As the summer was extraordinarily hot, many days I watered them before work and again in the evening. As I was enjoying their progress and growth it was well worth the effort.

I was thrilled with the results. When I purchased them, the little marker said they would grow to 4 – 6 feet and a colorful flower would develop at the very top. And grow they did, as both sets seemed to be my own “Jack and the Beanstalk.” Their deep purple stalks and leaves reached well over 6 feet tall. And near the end of the summer, a few beautiful orange flowers appeared from some of the shoots of the plants. A glorious success!

This weekend, I went to purchase the same plants for the same pots. I told the "salesperson" at the gardening store about my success of last year. She asked if the plant flowered all summer, as she told me this was the real highlight of Canna Australias. “No,” I told the woman, as mine only flowered a few times toward the end of the season. She was quickly going from a salesperson to a "plant expert." She asked a series of questions, mostly about how much sunlight the plants received.

I learned the lesson of receiving good advice from a knowledgeable expert. I thought I had done well. However, I was like many investors who think he or she has done well, but do not really know how well they have done.

• Most investors do not track and monitor their performance against proper benchmarks over a long period of time. Your portfolio may have gone up, but could it have done better with the assistance of a skilled advisor?
• Could an advisor have reduced your costs or minimized your taxes by selecting tax efficient stock funds?
• With rebalancing, could your portfolio have done the same or better, with less risk (which is even better)?
• Would you have had more money or a more successful investment experience as a result?

My plants needed to be placed in full sunlight. Due to trees in my front yard and the porch which extends above the plants, they did not receive adequate sunlight last summer. Thus, while the plants grew well, they did not blossom and reach their full potential.

With good advice, I purchased the plants and placed them in my backyard over the weekend, where they will receive full sunlight. They should grow even better and orange flowers should bloom throughout the entire summer, not just in August.

This morning, thanks to a caring plant expert, the first orange flower blossomed. An expert advisor can provide many benefits.

Great Relationships, Advice and Wine

To strive to provide better guidance and service to our clients, both Brad and Keith have participated in “study groups” for many years. Since 2005, Brad has participated with approximately 25 advisors in the BAM Masters Forum, meeting at least twice a year with advisors nationally affiliated with The BAMAlliance.

Brad’s Masters Forum group met in Napa, CA last week. A highlight of this meeting was spending Monday afternoon and Tuesday morning with David Booth, CEO of Dimensional Fund Advisors (DFA).  http://www.dfaus.com/ David very openly shared his views with us on a wide range of topics and we had an excellent Q and A session with him.

David provided perspective on being in the financial business since 1981, the market downturn in 2008-09 and the increases in the financial markets since then. He stressed the importance of investor behavior. A key to investor behavior is a client's relationship with a good financial advisor, as the advisor can assist the client to adhere to their financial plan and stay in the market.

David made complex topics simple. Structure a globally diversified portfolio. Rebalance it. Have a long term perspective. Do not be jumping in and out of the stock market. DFA's strategy of stock investing should outperform most "active" money managers due to less frequent trading and lower fees charged to clients.

To reap the rewards of the long term upward trend of the stock market, one must remain invested. Booth noted that only DFA and Vanguard, of all major mutual fund companies, had positive stock market fund inflows during the downturn in the financial markets. These investors who added to their portfolios, or stayed the course and did not sell, have been rewarded for doing so. The lesson is that while the stock market has risks, which often appear, the stock market provides rewards to those who are able to be patient enough to reap these rewards.

With this consistent philosophy and methodology, DFA has grown to become the 9th largest mutual fund company in the country, managing $290 billion.

Monday evening, Booth then hosted us on a visit to his Booth Bella-Oaks vineyard and the neighboring Staglin Family Vineyards. http://staglinfamily.com/ We met with the two vineyards' winemaker. The winemaker, a former hedge fund manager, explained how technology is used to monitor the development of the grapes. With computer networks and current technology, he can now monitor the vines and grapes continuously. The improved technology allows him to have more information and improved decision making as the grapes develop. Even with this technology, there are still many factors beyond his control which affect how successful the wine will eventually become. As we cannot control or forecast the financial markets, they cannot control the weather or other important factors which are key to producing great wine.

David explained some of the structural changes he has made to his vineyard since purchasing it in 2010. He has uprooted and will replace many acres of vines to grow better quality grapes. This means that no grapes will be harvested from these acres for at least a few years. He is investing for the long term, with the expectation of a greater return per acre in the future.

Booth is changing the direction of the new vines, from vertical to diagonal, so the grapes will get more balanced exposure to the sun. The vineyard used to be planted with only one type of grape. He is planting numerous varieties of Cabernet Sauvignon grapes. The winemaker will then combine these grapes in various combinations after the harvest to optimize the taste of the resulting wine. Like a financial portfolio, he is restructuring his investment to give it the best chance to produce a good outcome, but the actual result is not guaranteed.

David has a vineyard, but his property lacks equipment to actually make wine. However, he has developed a close relationship with his neighbors, Shari and Garen Staglin of the Staglin Family Vineyards. After seeing David's vineyard, we went to the Staglin's winery. We entered into their vast, spotlessly clean caves built into a mountain where hundreds of barrels of Chardonnay and Cabernet Sauvignon are stored. They will produce thousands of cases annually. As the Staglin's had excess space and production capability, as well as a winemaker who could efficiently share his services between the two vineyards, Booth's grapes will be made into wine at the Staglin facility.

This neighborly relationship (and good friendship) will benefit both Booth and the Staglin's, just as our clients benefit from the close relationship we have with DFA and my fellow advisors in the BAM community. As we had dinner at the Steckter House on the Staglin property, we learned more. Shari and Garen Staglin explained how they renovated the house, built in the late 1800s. They added solar panels on the grounds, which now produces power for the house and its executive kitchen. We toasted a family ancestor, who provided the inspiration for one of their wines. The Staglin's talked passionately about their charitable values and efforts. The family has raised and donated nearly $725 million, primarily to mental health research. All the proceeds of their Salus Chardonnay and Cabernet Sauvignon brands are donated to this cause. http://staglinfamily.com/philanthropy.html

Shari Staglin talked to me about the houses and properties near their winery, all dating back over 100 years. Like their neighbors, the Staglin's view themselves as stewards of this land, which they will maintain and improve, then pass on. Their vineyard is now certified organic, as Booth's is planning to become. The Staglins were gracious and warm as they educated us about wine, their property and their personal values.

Opposite from the entry to the Staglin caves, was a large bench. On the bench’s huge backing, is the following inscription:

Staglin Family Vineyards: where shared values are the keystone of relationships.

The meetings I had with my fellow advisors and the time spent at the two vineyards shared a common message. Having shared values with our clients will produce great client relationships. Having great business partners that we can trust and interact with, like the BAMAlliance and DFA, will benefit our clients. It will enable us to provide our clients with a successful lifetime of integrated financial experiences, so our clients can be comfortable and secure.

Wealth, Sports and One Shining Moment

I was the student. I paid for college on my own with 4 years of work-study and other jobs and 10 years of student loans, which I proudly repaid. I didn’t have time for extra-curricular activities.

He is now the student, a junior, a writer and is passionate about sports. He is my son, attending my alma mater, the University of Michigan, 25+ years later.

Money can’t buy happiness

My business is now the business of money. Investing. Financial planning. Relationships. Helping people fulfill their dreams and wishes with solid financial guidance.

When he was young, starting at birth, his mother and I saved $200 a month for his college education. Grandparents and great-grandparents also contributed to his college education fund. He does not have to “work” to pay for college, as we have provided that for him.

Since he didn’t have to work to pay for college, he was able to join the Michigan Daily sports staff as a freshman. He covered wrestling and baseball. He took advantage of the opportunity and made the most of it. He drove to Philadelphia and captured the pain and thrill of a Michigan wrestler overcoming an injury to win a national championship.

“Wealth is more about discretionary time than money” from Thrive, by Alan Weiss

While he does not yet have financial wealth, he has made the time to continue reporting, writing and being named as one of the sports editors. His skills enabled him to cover the Michigan basketball team as a sophomore. He traveled to Hawaii for a 2011 tournament, with financial assistance from the Daily and his family. He met Coach K. He created memories. He covered their excitement as they exceeded expectations in 2012, only to be eliminated early in the NCAA tournament.

While not getting the glory of Trey Burke or Tim Hardaway, he traveled by car to games in New York, Minneapolis, Bloomington, IN and other Big Ten locations to report for the Daily. He attended every home game, to “work,” as he says. He is not part of the “Maize Rage,” as he surely would be. He sits in the press area. He would not head out to the bars immediately after a Saturday night victory, as he would be writing for hours after the game ended.

He wants to write. He wants to cover this team. Because he does not have the financial pressures that I had, he is able to allocate the time to write for the Daily. He used this “wealth” and the related discretionary time to create memories, for him, and for others. While money can’t buy happiness, money can buy experiences. Money can create memories that will last a lifetime. Memories which make parents, grandparents and teachers proud.

“One Night and One More Time”

On his March break, my son conducted interviews and transcribed them for hours. He wrote a fitting, lengthy tribute of the senior captain of the basketball team, Josh Bartelstein, a player who was not in the limelight but spent hours dedicated to Michigan and provided leadership to a young team. They both care, are diligent and determined.

I have questioned the time he spent writing and editing for the Daily. The many long road trips. Was it taking too much time away from his academics? But deep down, I knew it would be worth it.

Last Wednesday, he traveled to Dallas to cover the Michigan basketball team, as they began the Sweet Sixteen weekend. While I was watching with friends in Michigan Friday night as the game progressed, I knew he had his game story written, to tell of defeat and a valiant effort against a stronger Kansas team.

Then, within minutes, it all changed. Michigan made a heroic comeback, grasping victory from an assured defeat. And it brought out the best in my son the writer. He rewrote his game story. He wrote a separate column until 5 am the next morning, capturing the emotions of players and non-players alike. He would not stop until it met his very high standards. He wrote One Night and One More Time I could not have been prouder.

One shining moment

On April 1, his game coverage of Sunday's Elite Eight victory by Michigan over Florida is the only article on the front page of the Michigan Daily, along with pictures of a triumphant team with their trophy. As a former Daily editor tweeted to him over the weekend, his words documented Michigan history.

I’m not sure whether Michigan will win in the Final Four this weekend. I'm not sure what my son will write, but I know he will capture the story and the emotions. He will have a memorable experience. He has earned it.

I’m not sure where his future and career will lead. Through diligence and hard work, he has created great opportunities for himself. He has taken the “wealth” of discretionary time, and put it to good use. Those are lessons that I hope will always remain with him.

How Did You Handle Apple Stock? Our View.

I love my iPhone. I love my iPad. But loving Apple’s products and loving it’s stock are two very different things.

After a phenomenal period of rapid rise over many years, Apple’s stock has taken quite a tumble, from its all-time high of $705 in mid-September, 2012, to its closing price of approximately $450 per share on January 24, 2013. That is a decline of $255 per share, or 36%.

The decline in Apple’s stock is a reminder of some important investing lessons:

• Discipline is required in buying and selling
• The lack of value of Wall Street “analysts”
• There is a better way

Discipline in buying and selling:

It takes great discipline to sell a stock like Apple, which has terrific business prospects and success. Why sell when it had only continued to go higher? What will the top be? Won’t it just keep going higher, as more phones and iPads continue to be sold? Unfortunately, as with many other high growth companies in the past, the growth eventually slows, margins begin to decline, and the stock tumbles very quickly.

It is difficult to be accurate twice, identifying both the right time to buy and the right time to sell individual stocks. It is even harder to be able to do it on a consistent basis over a long period of time, which has led us to some of our core stock investment philosophies.

For the majority of your investment portfolio, we do not recommend purchasing individual stocks, as it is too hard to consistently predict the right time to buy a stock and the right time to sell that stock. For an Apple shareholder who purchased shares years ago, they should still have significant profits. However, there are many others who may have purchased the stock above the current $450 price or even worse, those who had huge gains, but did not sell some of their shares as the stock seemingly rose unabated, towards $700.

The lack of value of Wall Street Analysts:

We do not feel Wall Street analysts add value. Observing the two days surrounding Apple’s most recent earnings release very clearly re-enforces this.

Wall Street analysts provide advice to retail clients of their brokerage firms, as well as to mutual fund and hedge fund managers, who pay for their advice. If Wall Street analysts were providing real value, you would think they should have recommended selling Apple stock sometime prior to the earnings release on January 24, 2013. During this period of time, the stock had fallen from $705 to $500.

Before the earnings release, Apple stock closed on Wednesday afternoon at around $500 per share. The stock opened the next day at $460 and closed at $450. This shows clear evidence of the difficulty of predicting a company’s earnings and its stock direction, as well as the analysts’ reluctance to recommend selling a popular stock, such as Apple. If it is their full time job to track the company, shouldn’t most analysts have anticipated the earnings report correctly and recommended selling the stock at some point in the last 6 months or at least recommended to stop buying more shares?

However, before the market opened the day after the earnings release, 25 Wall Street analysts had issued new opinions (“refreshed their calls”). What did they say? Twenty one (21) of them still had buy, overweight or outperform ratings on the stock. Four analysts had neutral or hold ratings. None recommended selling the stock.

It is also important to note that it is impossible to “beat the market” once new information is released, as the price dropped $40 per share immediately at the open after the new data (the quarterly earnings report) was made public.

The impact to you: there is a better way

For most investors who desire a long-term, positive investment experience, we recommend a different approach.

• We structure a globally diversified set of mutual funds for our clients, and provide the discipline to monitor and rebalance these funds to remain in accordance with your personal asset allocation target.
• This removes the guesswork of when to buy or sell an individual stock, or how to select the next hot money manager or mutual fund.

This example of Apple stock, with its tremendous growth as a company and of the stock, followed by the recent huge stock price decline, is very representative of many “growth stocks.” Based on many years of academic research, this has led us to favor “value” stocks (stocks that are out of favor and not “loved” by Wall Street).

• Value stocks have outperformed growth stocks over the long term, and we structure our clients’ portfolios with this in mind.

Our approach has more aspects to it, such as tax-efficient investing, broad diversification and very low costs. But most importantly, we strive to provide our clients a greater sense of security and comfort through our approach to investing. Without the guesswork.

Guidance on New 2013 Tax Law

The following are highlights of the major provisions of the “American Taxpayer Relief Act,” which was negotiated and passed over the past few days (and nights!).

While the top federal income tax rates will increase only for those earning greater than $400-450,000, there are other measures that were previously enacted as part of the Health Care reform legislation that will cause nearly all working taxpayers to pay more Social Security taxes effective January 1, 2013.

Tax rates:

• Tax rates remain the same, except for taxable incomes above $450,000 for married taxpayers and $400,000 for single filers. A new top rate for taxable income above these levels is raised from the current 35% to 39.6%.
• Note that someone’s income can be well above $450,000 before the 39.6% rate is effective, as that rate is after itemized deductions, such as mortgage interest and charitable contributions. 
• For those with taxable incomes of less than $400-450,000, there will be no increase of current federal income tax rates.  
• As part of the health care reform passed in 2010, an additional Medicare tax of 3.8% will apply to unearned income (investment income, such as interest and dividends; capital gains and rental income), for married couples with income above $250,000 and single taxpayers above $200,000. This is already law, and is not part of the recent legislation.
• Also as part of the 2010 health care legislation, income from self-employment and wages will be subject to an additional FICA tax of 0.9% (employee portion only). This applies to the combined compensation of married couples in excess of $250,000 and single individuals in excess of $200,000.

Payroll Tax Cut not extended: There was NOT an extension of the Social Security payroll tax cut. This represents a tax increase for all workers as of January 1, 2013, from 4.2% to 6.2%.


Capital Gains and Dividend Tax Rates:

The capital gains and dividend income rate will increase from the current 15% to 20% (plus the above 3.8% tax rate increase from the health care reform act), only for taxpayers with incomes that fall into the 39.6% rate (as stated above). For married taxpayers, if your taxable income is less than $450,000, then the capital gains and dividend rates will remain at 15%.

AMT (Alternative Minimum Tax): The legislation provides a permanent fix by enacting AMT indexing for inflation. This has been an issue for years, and has frequently been temporarily extended. This provides needed clarity and corrects a measure that Congress usually fixed anyway.

Itemized Deductions and Personal Deductions:

There will be a phase out of these benefits, for incomes above $250,000 - $300,000, which is an indirect tax increase.

Estate taxes: The estate and gift tax exclusions were retained at $5 million, indexed for inflation. The top tax rate increases from 35% to 40%, effective January 1, 2013. This is a significant compromise by both sides, as it permanently (at least for now) increases the exemption amount, so most estates will not be affected by the estate tax, in exchange for a rate increase on those who are impacted. The portability “election” provision, which allows an unused exemption amount to be used by the surviving spouse, was made permanent.

Other items:

• Tax credits were extended for 5 years, such as college tuition, child and dependent care and the child credit.  
• Tax free distributions will be permitted for 2013 from IRAs to charitable organizations (one year extension, not permanent).

Impact on Investment Strategy: The increased tax rates on top income levels, in addition to the Medicare tax of 3.8% on investment income (such as capital gains), makes our firm’s investment strategy, which is very tax efficient, even more valuable.

If you would like to discuss any of these matters further, please contact our office.

Also, please feel free to forward this post, or a link to this post, to others who may find this information valuable.