You Have To Watch The Commercials Too!

I don’t watch a lot of financial TV but a couple weeks ago, an economist I respect was on one of the two major financial networks.  I tuned-in a few minutes early.

While I was waiting, the channel ran four commercials from:

           

            a)     A reverse-mortgage lender,

            b)    A delinquent-tax negotiator,

            c)     A time-share liquidator and

            d)    Someone selling electronic patches for back pain.

I’m no marketing genius but I’d say the advertisers were targeting people who can’t pay their bills, can’t pay their taxes, make poor real estate choices and/or have sore backs.

That’s no accident.  Networks design content to target the customers their advertisers want to reach.  Time is not on their customers’ side.  You need to turn a quick profit or dump assets when the IRS is breathing down your neck. 

I hope my clients don’t use those products …

… except maybe for the back-patches.  We’re not as young as we used to be.

Our objective is to patiently own investments that mature in the fullness of time.  Time has a habit of smoothing the bumps.

Almost everyone is forgiven.  Viewers are hoping to learn something that improves their lives.  Advertisers and stations have the right to sell their wares.  My economist showcased his firm’s services to a national audience.

But I’m on shaky ground.  If an idea I got here blew-up in my face, there would be nobody but Skip to blame.  My clients would rightly think so.

So when you watch financial TV, if the ads are for products you pray you’ll never need, remember who the content is for.

Ah!  My back feels better already!  Sh

The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. Investing involves risks, including the loss of principal. Past performance does not guarantee future results. Please consider potential transactions carefully and read all appropriate materials before investing or sending money. Securities offered through LPL Financial, Member FINRA/SIPC

Visit to OLLI - Part 2

Welcome back.

Last week I re-answered a question I received at the OLLI class at UNC Asheville.  Most of the attendees were people who make their own financial decisions.  Maybe not a brilliant marketing strategy for HelmsWealth but I love talking about finance and usually learn something myself.  We can swap yarns in good fellowship because none of us risks our trust.

Before the bell, I said that investors with full-service financial advisors didn't need to know anything about portfolio mechanics.  Instead, they absolutely must answer these three questions about their advisor:

          1)  Do I like this person?

          2)  Do I trust this person? and

          3)  Will he (or she -- usually he) do what I need?

You need three confident "yes" answers whether you are interviewing a prospective advisor or have known him for 12 years.  If you get all three right, managing the money is his job from them on.

After class, I was asked to expand on that statement.  I’m glad of the opportunity because it comes down to the trust I think is the hallmark of the essential family advisor.

"Trust" and "like" are separate questions for a good reason.  When it comes to money or family, trust is the higher standard. 

President Reagan famously said, "Trust, but verify."  Verifying trust with your financial advisor can be daunting.  But you have to do it.  You are the only one who can.  I can't give you much emotional support from a blog page but I can share some ideas how to start your search.

Investors are between a rock and a hard place.  On one hand, Wall Street sells investments.  Sales incentives can include rewards or pressure depending on how much freedom advisors have to choose what you own.

On the other hand, financial advisors have an ongoing fiduciary duty to place their clients' interests above those of their firm.

How your advisor and his firm handle those competing forces determines where their loyalties lie. 

That’s also the easy (and discreet) place to look for conflicts-of-interest.  If you really want to know where you stand, test the integrity of your advisor's product supply chain.

My personal favorite fiduciary responsibility is maintaining the transparency of the investments in my clients' accounts -- both what they are and how they get there.  We shop hundreds of investment sources using a fee-based platform so none of the vendors have any economic leverage to force their way into the portfolio.

That's crucial because part of that essential duty is to intervene in the product flow when I see strategic threats or opportunities.  As things change, there is always a Plan B without duress from suppliers.

It's not so simple when firm-wide revenues depend on favoring one vendor.  Plan B means a one-sided talk with your boss about being "a team player".  If you distribute for a single-line manager, Plan B means looking for another job.

Let's do some verifying in your best interests:

Start with the low-hanging fruit.  Does your advisor's firm or parent corporation frequently pay huge fines for stealing?  That's a clue. 

Can your advisor only sell (or does he only sell) products or strategies his company manages?  That's another clue – although not a deal-killer if they're competent.

My big red flag is when advisors are paid to keep you on their company's glide-path (last week's blog).  Funds, wrap accounts, annuities – the platform doesn't matter if you are just a dot on the chart.  Managing one big account is more profitable than managing 80,000 little ones.  That doesn't mean it's better for you – or even cheaper.

Case-in-point:  Last week I said I think rigid asset models are a strategic threat for retirees when used instead of on-going vigilance.

I've been wrong before.  Maybe I'm just the only advisor who can't squeeze 6% out of a 3% bond.  Right or wrong, markets create plenty of other dangers without my help.  When I spot one, I can act without someone breathing down my neck.

If you haven't done the 5-minute exercise at the bottom of last week's blog, please do that now.  You need to know your asset allocation before you ask why you have it.

Innocently ask your advisor how he would change your investment strategy if he felt you, his portfolio process or even his firm was on the wrong track.

Then listen.  He has one chance to get this right.

A good answer is that he constantly monitors client portfolios and chooses investments from independent sources without duress.

A bad answer (stated or unavoided) is that he hasn't had any portfolio input since your account was opened.

The bad answer means there is no Plan B if his firm implodes, uses self-serving products or forces him to sell you things you wouldn't touch with rubber gloves. 

They may never happen – but you are trusting him to tell you if they do.

Sometimes I imagine investors embracing these truths and flocking to my door.

That doesn't happen very often.  Trust is deeply personal.  Verifying it can be uncomfortable.  Many investors won't even risk the pain of learning (or finally admitting) their trust has been misplaced.  If they get that far, they have to find somebody new without any idea how to look.

One of the reasons I've made my practice so transparent is to save clients the embarrassment of asking if I'm honest.  I explain how I handle those conflicts-of-interest early in the conversation so they always know it's OK to hold me accountable.  If you advisor has earned your trust, he won’t mind either.

Find the courage to verify the trust your advisor must earn every day.  It makes everything better.  You may even like him more.  sh

PS-  Or just come see me!  

The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. Investing involves risks, including the loss of principal. Securities offered through LPL Financial, Member FINRA/SIPC. OLLI, Helms Wealth Management, and LPL Financial are separate entities.

Visit to OLLI - Part 1

On August 5^th I had the pleasure of visiting the investment Special Interest Group of OLLI at UNC Asheville.  The Osher Lifelong Learning Institute is a program for “experienced” people to continue their education.  This was my third visit and I hope they want me back.

After the meeting, I was asked to clarify a couple of the things I said.  I think I did a better job the second time and I’m going to expand on those answers for the next two blogs.  If you happened to be there, I hope you’ll share these with the group since I’m not sure if the folks who asked the questions are on the blog list.  

The first question was about the relationship between bond prices and yields.

I’ve always made a mess of trying to connect all the moving parts conceptually but I wrote a blog last year with a practical example that does a credible job.  If you will click here for the backstory, I’ll add some practical context.

My example was very bearish.  For the last 34 years, the bond market has been in a strong bull market.[i]  Rising bond prices have dropped yields from all-time US highs to all-time world-wide lows. 

This is a chart from the US Federal Reserve showing the yields on the US 10-year Treasury note going back to 1981.  They peaked at 16% and closed last week at 1.59%.

When I talk to bond investors, they don’t always realize that individual bonds only ever pay as much as their scheduled interest and maturity payments.  Rising prices only affect when you enjoy the benefits.  Gains you book over the life of the investment are actually prepaid interest you won’t see in the future.  New buyers and reinvested dividends buy new bonds at higher prices but you have to split the lower income more ways.

Last year I shared my concern with the way my industry markets, manages and enforces inflexible asset-allocation models.  By that I mean portfolios with preset percentages of stocks, bonds and cash.  Some of them periodically rebalance to those ratios while other follow a “glide-path” and automatically increase fixed-income holdings as the owner gets older.

If you’ll take a quick peek at the opening chart on my target-date podcast, you can see that by retirement, this version has roughly 2/3 of the portfolio in either bonds or cash.  Most of these allocation models were adopted 10 to 15 years ago.  Rates were a lot higher then.  Once the prospectus is printed, the asset mix is set.

This is where I think investors need to be smart.  Asset allocation modeling is the industry-standard for the retail investment business.  Tens of trillions of dollars are managed on some version of that glide-path.  Years ago, managers bet the farm that those income projections would hover around historical averages. 

They didn’t.

The market meltdown drove rates lower than they have ever been.  It would take a crippling bear market like in my example to drive them up to anywhere near those levels again. 

Admitting this would be a disaster for the industry.  For 25 years, the business has told investors those allocations were sacred – that they must buy-and-hold through all market conditions to benefit from the long-term trends.

Who’s going to tell millions of retirees they might run out of money?  Who’s going to tell them and millions more 401(k) participants they have to reallocate to more volatile holdings?

Nobody.  Better to keep getting paid and let customers figure that out for themselves.

Calm down.  This is good news. 

If you are a long-term bond owner, you’ve already gotten most of the income you ever will as appreciation.  Bonds are still at all-time high prices.  Let the next guy keep your 1.59% along with the potential volatility of rising yields.  If they rise, you will be adding more volatility anyway so do it in something with more upside potential.

Here’s a little homework to see if you are on a glide-path that isn’t going where you want:

  1)    Open your statement and calculate the percentage of your portfolio in bonds and money-markets.  Is it close to your age?  Double-check it on the glide-path chart.

  2)    Divide the current income those investments produce by the value of the investments.  Is that percentage enough to cover inflation, taxes and spending money?

  3)    Then tally what percentage of your portfolio can’t reasonably support your lifestyle anymore.  Who came up with that idea?

Next week I’ll take a stab at a deeper question.  See you then, sh

The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. Investing involves risks, including the loss of principal. Past performance does not guarantee future results. Please consider potential transactions carefully and read all appropriate materials before investing or sending money. Bonds are subject to market and interest rate risk of sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. Securities offered through LPL Financial, Member FINRA/SIPC. OLLI, Helms Wealth Management, and LPL Financial are separate entities.

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[i] My interest rate references come from the US Federal Reserve FRED website.  

$8 Advice

Have you noticed the discount brokerage firms from before the meltdown are now in the financial advice business? 

It makes sense. 

Those firms know exactly how well or badly their clients did.  Ten years of trading hot-tips at eight bucks a pop didn’t work for everybody.  Either you help them pick-up the pieces or someone else will.

I don’t know if this is an opportunity for me.  We haven’t seen a lot of do-it-yourself investors over the years.

The ones who figured it out don’t need my help.

The ones who didn’t figure it out would rather show me a prickly rash than their portfolio.  It’s hard.  

When they do show me (their portfolio, that is), it’s usually because she decided they are not going down with the ship.

Bottom-line; a lot of people never developed the skills and confidence to manage their own investments.  There must be millions of them for the discounters to completely retool their marketing and operations from trading to advice (well, robo-advice, that’s another can of worms in a previous blog).

If you are in that leaky boat, look for an experienced advisor – someone you can look in the eye.  

Talk goals first, investments second.  If he starts with investments, keep looking.  When you get to your investments, relax – we’ve seen worse portfolios than yours.

I’d steer clear of junior 800-number advisors.  This is a tough business with a wicked learning-curve.  

Find someone who always knew you needed help.

Ask a friend who she uses.  You can call me.  Do your homework.

For heaven’s sake, pay for the quality your family deserves. 

Good luck.  sh

PS:  Please forward this to recovering traders you love.  They will thank you someday.  sh 

The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. It is not possible to determine the top or the bottom of the market. Investing involves risks, including the loss of principal. Past performance does not guarantee future results. Please consider potential transactions carefully and read all appropriate materials before investing or sending money. No strategy assures a profit or protects against loss. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC 

Market Timing Follow Up

The prequel to the three-part timing blog comes from real life.  It gives me the chance to offer you a peek behind our curtain on how the advisory business works when it works well.

In early February, a prospective client came in to see me.  He was very concerned about the steep market decline in January and wanted to know my strategy for waiting to buy until the market was about to turn up again.

I told him I didn’t have one.  He said he’d get back to me.

In early April, a couple (who did become clients) came in to assess our services.  He (always he) was concerned that the market had rallied too sharply and wanted to know my strategy for timing the pullback.

I tried not to smile.  If you know me, you know it didn’t work.

I told him I didn’t have one.

I added we would be purchasing a portfolio that was probably worth between 90 and 110 cents on the dollar.  It would take a year or two before we even knew that.  The object was to own securities with a reasonable chance of being worth more than either of those two numbers when the money was needed.

If they were already retired, I’d have said the object was to buy securities with a reasonable chance of producing the income they need and keep up with inflation.

Basically the same portfolio in both cases.  Maybe the yo-yo is low that month and we catch a break.  Maybe not. 

Here’s the one thing I absolutely know about market timing:  Markets couldn’t care less when people come to our door.  Bear markets make clients in damaged financial relationships more receptive but most folks come by because they just retired or sold a condo or moved here and want face-to-face service.  I often meet them though a happy client.

Now for the insight into my business:  I’m not betraying any sworn secrets here but this doesn’t come up in most conversations.

Well-run financial practices have defining disciplines for asset management.  It limits the range of the practice but to be good, you have to concentrate on the needs of core clients.

A broker just starting out will take almost any account under almost any condition.  If a prospective client only wants companies that start with the letter “S”, that’s what he gets.  When dad told mom to never sell their bank stocks, you’ll watch them for her.

Then the market drops 20% and you find out just how many plates you had spinning on sticks.  Notice I said “had”.

That night, you realize every minute you spent researching “S” stocks or watching banks crash that you can’t sell was time you didn’t devote to the people who believe in you.  You don’t sleep much.

The next day, many of us decide to do our very best for our clients.  We take ownership of the client experience. 

You feel reborn.

So the next guy comes in and says his brother-in-law thinks XYZ Corp. is poised for big gains.  He wants you to put 50% of his account in the stock and send him daily research bulletins.  You simply say you only follow companies in your carefully monitored investment discipline.  Straying from those guidelines compromises the care you owe your existing clients.

Either he decides he needs yet another inexperienced advisor who can’t refuse his reckless strategy or he realizes your advice is more valuable than his brother-in-law’s.

If you don’t get the account, you won’t miss it long.  One of your happy clients is about to introduce you to his best friend. 

This approach doesn’t leave much room for timing entry-points. 

At shops where you sell what you’re told, compensation doesn’t start until the money hits the account.  You turn the management over to people chosen for your client’s needs and they make the calls from there.

At shops like mine where we make the buy and sell decisions, we still can’t play hunches – ours or yours.  Everyone with the same objective gets the same basic portfolio.  Every holding has a reason to be there.

Happy long-time clients may have nice gains in positions that have seen their share of ups and downs.  Newer clients may have bought the same position at a recent top and wonder why our timing isn’t better. 

So now you know a little more about how successful advisory practices keep their focus.  We reach a point professionally where we have to dedicate as much time as possible to the people who trust us most. 

Be one of them.  sh 

The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. It is not possible to determine the top or the bottom of the market. Investing involves risks, including the loss of principal. Past performance does not guarantee future results. Please consider potential transactions carefully and read all appropriate materials before investing or sending money. No strategy assures a profit or protects against loss. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC 

On Market Timing - Part Three

What do we do now?

In the first blog I focused on the perils of short-term market timing. 

In the second I made my case that making 30-year commitments to any asset class is dangerous.  If you are paying for investment management, get it.

My very best (and hard learned) advice is to find how long your cherished financial goals will take and build your strategy around that.

Let’s say your primary investment goal is to make a balloon payment in 18 months.  You could put your money in T-bills or an insured savings account.  You won’t earn much but the check will be ready when needed.

Another strategy (which I don’t recommend) would be to purchase short-term speculative holdings like coffee futures or lottery tickets.  You create an opportunity for higher returns but greatly increase the chance of severe losses.

Investing in long-term holdings like stocks or real estate might not make sense because the year-to-year results are too unpredictable. 

My last chart is from J. P. Morgan showing market returns for stocks and bonds when held for 1, 5, 10 and 20-year time periods.

The green bars show the S&P 500 going back to 1950.  On the far left, returns for any given year have fluctuated wildly.  A lot of those years are below the 0% line.  If you need next year to be a good year, you are market timing.

My domain is further right.  I believe you need a minimum five-year commitment to stock portfolios.  I’m expecting a great year, a terrible year and three somewhere in the middle.  Maybe a market timer can tell you which order that will happen – if it happens at all – but I won’t try.[1]

On the five year bar, we’ve averaged our great and rotten years.  Very few of the five-year holds are below the zero line.  On the ten year bar, the only losing decade was 2001-2010. 

Now let’s say your primary investment objective is to live a comfortable retirement over the next 30 years with a rising income.

Putting more than a couple years’ reserves in savings won’t work.  You can’t even keep up with inflation – much less earn any spending money.

I hope you aren’t thinking about speculating in coffee futures to make balloon payments. 

You have long-term needs.  Have a leisurely cup of coffee and look for long-term strategies – maybe one of those mature green bars.

Remember the little girl and her yo-yo.  You have thirty steps.  What the yo-yo does on any one of them doesn’t really matter. 

It matters to the man who needs a balloon payment in 18 months.

It matters to financial entertainers hawking their products.

It really matters to people who don’t know it doesn’t matter.

But it shouldn’t matter much to you.

That’s it for now.  Thanks for sticking with me for one of my more technical blogs.

If I can help, give me a call, sh

The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. It is not possible to determine the top or the bottom of the market. Investing involves risks, including the loss of principal. Past performance does not guarantee future results. Please consider potential transactions carefully and read all appropriate materials before investing or sending money. No strategy, such as asset allocation or diversification assures a profit or protects against loss. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC

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[1] I keep a picture of a Lehman Bros. employee leaving their London headquarters with his personal possessions in a cardboard box.  Whenever I get full of myself and think I know it all, I pull that picture up and remind myself just how humbling this business can be.  sh 

On Market Timing - Part Two

“You can’t time the markets!”

Last week I shared some thoughts on why “pure” market timing is so hard.

This week I’m going to talk about why we still include some element of market timing in regular investing.

Any attempt to diversify or allocate assets is a de facto timing strategy.  If you put more of your money into US stocks than coffee futures, you are taking the position that: 1) stocks could earn more than coffee, 2) stocks could earn more quickly than coffee, or 3) stocks could earn more steadily than coffee (usually it’s #3).

We know both investments can be volatile.   But we also know that they don’t always go up or down together.  By diversifying between the two (or many more), we may reduce the chances they both go down at the same time or speed.

Here at Helms Wealth Management, we try to own strong investments in strong markets.  But we know that we will never have all the information.  Some choices will not succeed.  The strategy is to own an array of promising investments, so weak ones can’t derail the whole portfolio. We always wish we had more of the big winners- but that’s the trade-off.

I did say “promising” investments.  All eligible candidates must offer the potential to achieve your investment objectives whether they pan out or not.  Over-diversifying into every possible investment because you don’t know which of them can help you is expensive and frustrating.

Owning similar investment packages from multiple vendors isn’t diversification either.  The same stock in three portfolios is still the same stock.

I believe in diversification.  Most of my research time is spent trying to find strength among asset classes, and culling the weak ones. 

I’m less thrilled with static asset allocation.  I’ve railed about that in most of my podcasts.  If this blog hits a nerve, please have a look.

Packed asset allocation is a comprehensive investment process that assigns pre-set mixtures of stocks, bonds, cash and other assets based on a client’s age and risk tolerance.

The theory is that the long-term risk and return performance of each asset has a high probability of repeating in the future.  Blends of assets that produced successful returns are offered in different volatility ranges so consumers have comfortable choices.

The paperwork that comes with these investments clearly states “past performance does not guarantee future results” but past performance is better than nothing if you design an investment strategy with permanent stock, bond, and cash ratios.

I think this takes not trying to time the markets too far.  If you aren’t a client, and you want to know the essential portfolio management difference between Helms Wealth and many other advisors, you just found it.

I firmly believe we should not have irrevocable faith that investment performance will repeat.  If it doesn’t, I want a process to detect it- and I want an exit strategy for my clients.

My favorite whipping-boy for this is the bond market.

This is a chart from the Federal Reserve. It shows the yield on 10-year US Treasury notes going back to 1953. That covers the bond market cycle up to a few years ago.

For the first 29 years, bond values declined sharply.  Falling prices drove interest rates to the highest they have ever been in our country.  If you tried to get a mortgage in 1980 you know what I’m talking about.

From 1982 until now, bond prices have steadily appreciated causing yields to go as low as they have ever been.

Wall Street (bless their hearts) considers a full market cycle at between 20 and 30 years.[1]  Using that methodology, they only count the extraordinarily good half of this chart when designing ready-made investment strategies.  They can’t change it.  More correctly, they haven’t yet.

When I stare at this chart, I can’t get past the fact that we are below where the last 29-year bear market started.

Next week I’ll wrap-up by explaining what I think you need to do about this.

Thanks for reading!

Call if you need more details, SH

The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. It is not possible to determine the top or the bottom of the market. Investing involves risks, including the loss of principal. Past performance does not guarantee future results. Please consider potential transactions carefully and read all appropriate materials before investing or sending money. No strategy, such as asset allocation or diversification assures a profit or protects against loss. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC

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[1] See my podcast on yield forecasts.