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Financial Wellness for Gen X and Millennials – It’s About More than Investments

Part 1: Car Insurance

I’ve noticed a few recurring themes from financial plans this past year. They have nothing to do with investments, but they are in many ways, so much more important. It turns out, there are a few items in your financial life that require consistent maintenance. Dropping the ball could cost you quite a bit of money.

If you have any financial assets, you need full liability coverage car insurance. The state minimum amount will not be enough to cover you in an accident when you’re at fault, and the other party can sue you personally after the insurance maxes out. In Louisiana, the state minimum liability insurance is 15/30/25. That means $15,000 for bodily injury per person, $30,000 for bodily injury to more than one person in an accident, and $25,000 for damage to the other person’s vehicle. So, the next time you total someone’s $80,000 Tesla, you’re on the hook after the first $25,000. But the larger risk is the bodily injury limits. Have you ever seen a hospital bill, with an ambulance ride, for less than $15,000? If you carry minimum liability insurance, the injured person will be suing you for the remainder of their medical bills.

You need the maximum liability coverage of 100/300/100. That’s $100,000 bodily injury per person, $300,000 per accident, and $100,000 in property damage. In addition to full liability insurance, you might also want uninsured and under-insured coverage in case the other driver is at fault and doesn’t have enough insurance. To protect your assets further, you should consider purchasing an umbrella policy on your homeowner’s insurance that pays an amount above the maximum car insurance rates.

There are a few things you can do to lower your car insurance premiums. You might consider a higher deductible of $1,000 rather than $250 or $500. If you don’t owe anything on your car, and you have enough in savings to buy a replacement car, you might consider dropping collision coverage on your vehicle. If you run the numbers, self-insuring may be cheaper over the life of your vehicle.

Many car insurance companies are offering a discount to drivers who place a tracking device in their car for up to six months. This allows the insurance company to confirm the number of miles driven and analytical data such as speed and brake usage. Drivers deemed to be “safe” drivers are given a discount of up to 20% based on the data collected. This can backfire, however, if you’re a hot-rodder, so consider you’re driving style before taking this route.

Are you adding a teenage driver to your car insurance soon? Good luck! As parents before you know all too well, car insurance for teenage drivers is expensive. However, many insurance companies offer discounts for teens who have completed approved driver’s education classes and logged enough practice time behind the wheel with a parent. Teens can also get a discount for having good grades. Check with your insurance company to find out what information they need to apply for a teen driver discount.

I used to be the person who never changed car insurance, accepting the annual premium increase into infinity. It makes sense to shop your coverage every couple of years. Although the process is tedious, many people find significant savings by switching companies.

This is Part 1 of a series on financial wellness for Gen Xers and Millennials. Check back next week for a discussion on shopping your cash savings rate.

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3rd Quarter 2017 Market Commentary

Stocks continued to climb higher during the third quarter, with international and emerging market stocks increasing their lead on U.S. markets. S&P 500 earnings rose to an all-time high of $30.51 per share for the second quarter. International and emerging markets continued to soar, assisted by a declining U.S. dollar, low valuations, and strong earnings. Large cap stocks performed better than small caps, and growth stocks outperformed value stocks. Technology was the highest performing sector in the S&P 500, and was up 27.4% for the year. On the flip side, energy and telecom stocks have posted negative returns this year. Bonds posted small positive returns as short-term interest rates ticked higher. International and emerging market bonds outperformed U.S. bonds.

*US Stocks represented by the S&P 500 Index, International Stocks represented by the MSCI EAFE Index, and Emerging Markets represented by the MSCI Emerging Markets Index

Where is Volatility? Read more

Mark-up Disclosure for Bonds: It’s About Time

I’ve spent the better part of a decade trying to explain to investors that bond purchases are not free. But that’s a difficult task when the costs are hidden from investors. This will change in May 2018, when the SEC’s new bond mark-up disclosure requirement takes effect.

What is a Mark-up?

Unlike stocks, where investors receive a confirmation that explicitly lists the transaction fee or sales commission, bonds are offered to investors out of a broker-dealer’s inventory. The broker-dealer firm buys the bond at one price, then “marks up” the bond and sells it at a higher price to its customers. There’s nothing wrong with the broker-dealer receiving compensation for functioning as a liquidity provider between buyers and sellers. The problem is that mark-ups have never been disclosed to investors. As a result, investors do not have an opportunity to compare costs and create a market price for these transaction costs. While the costs to trade stocks, ETFs, and mutual funds have come down dramatically, bond transaction costs remain a mystery.

Here’s an example of a mark-up in action:

Source: https://emma.msrb.org/

This is real trade data from May 31, 2017 for a municipal bond from Illinois.

At 3:10pm a broker-dealer purchased 50,000 bonds for $100.9 for a total purchase of $50,450.

At 3:33pm the broker sold pieces of this bond to two customers for $102.679. One customer bought 10,000 bonds and paid a mark-up of $177.90, and the other bought 20,000 bonds and paid a mark-up of $355.80.

At 3:45pm the broker sells the final 20,000 bonds to a customer who pays a mark-up of $355.80. Total mark-up earned by the broker-dealer and paid by the customers = $889.50 or 1.76%.

For perspective, a commission rate of 1.76% to purchase 100 shares of Apple stock would be $269.60. Online brokers charge between $10 – $25 for this type of trade.

Arguably bonds do not trade on exchanges and require broker-dealers to take risk by holding them on their balance sheet as inventory, if only for a few minutes. This requires broker-dealers to employ more traders to handle bond transactions. I’m not implying the bond trades should cost the same as stock trades, but what I do know is that consumers have no idea what they’ve been paying to buy bonds. That will change next year.

Disclosure Requirements

Beginning in May 2018, mark-ups must be disclosed to investors on trade confirmations. Specifically, the broker-dealer must disclose a mark-up if it sells a bond to you out of its inventory, which is also known as a principal transaction. Additionally, the trade confirmations must include a hyperlink to a website containing publicly available data for the specific security traded. This will allow investors to see exactly what time (to the second) the broker-dealer purchased the bonds it sold to them at a what price.

Sunlight is the best disinfectant. Mark-up disclosure is long overdue. It will give investors a chance to compare prices and will create competition among broker-dealers. This is good for investors. Broker-dealers and their sales representatives will have to make adjustments to their business models. I suspect that long gone are the days of charging customers “2 points in and 1 point out.”

 

 

Footnotes:

1) Based on closing price of $153.18 per share on June 1, 2017.

2) A common mark-up charged by brokers to retail customers is 2 points (2%) to buy and 1 point (1%) to sell a bond.

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Blair duQuesnay One of FA Magazine’s 10 Young Advisors to Watch

ThirtyNorth CIO Blair duQuesnay was recently named one of FA Magazine’s 10 Young Advisors to Watch. The article states:

“Still in her 30s, Blair DuQuesnay has carved out a role as thought leader in her CIO and partner role at New Orleans’ ThirtyNorth Investments, a firm with $135 million in assets. She’s written papers on everything, questioning how cheap ETFs really are to showing the stock performance risks companies take when they have no females on their boards.”

Read the rest of her profile on the FA Magazine website by clicking here.

 

 

4th Quarter 2016 Market Commentary

Executive Summary

  • Year in Review – “Worst Start”, Brexit, Trump surprise victory
  • Small cap and Value stocks outperform
  • Interest rates decline mid-year, then rise to finish year higher
  • Will the US pass income tax and corporate tax reform in 2017?
  • Late innings for the current US economic expansion
  • The folly of forecasts 

In 2016, the US stock market reached new highs. You may recall that the market began the year with the “worst start” of any year on record. The “worst start” began early, with a 5% decline in the Dow Jones Industrial Average in the first four trading days in January. It continued in mid February, with US stocks down more than 11% for the year. By year-end the S&P 500 Index was up 11.96%. That’s a remarkable difference in market performance within the same calendar year. It makes the case for long-term thinking and following a disciplined approach to investing.

Last year was also a year marked by surprises. In June, voters in the United Kingdom voted to leave the economic agreement with the European Union. Prior to the voting results, almost every poll, and certainly the financial markets, expected a vote to remain in the EU. The reaction from financial markets to this surprise was initially strong. The Dow Jones Industrial Average lost 900 points in two days, and the British Pound declined below $1.30, a level not seen for over 30 years. However, within a week, global stock markets recovered their initial losses and even climbed higher. It was a remarkably fast reversal in market sentiment.

Markets reacted strongly to the surprise victory of Donald Trump in the US Presidential Election in November as well. This time, markets corrected even faster … literally overnight. On November 8, the day before the election, almost every poll predicted a win for Hillary Clinton. The New York Times gave Clinton an 85% chance of winning, and famed pollster Nate Silver of FiveThirtyEight predicted a 71.4% chance for a Clinton victory. To say that Trump’s win was unexpected is an understatement. What is more interesting, however, is the initial reaction and subsequent reversal in financial markets. As the election results became clear, Dow futures fell as much as 800 points. S&P 500 Index futures declined 5%, prompting a halt in trading. In Japan, the stock market was open overnight and closed down -5.4%. European markets initially traded down but finished the trading day higher than the open. US stocks initially opened lower on November 9, but recovered by mid-morning and closed in positive territory for the day. Stocks continued to rally through the end of the year. Read more

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It’s Smart to Use Common Sense

Just as you wonder when the bad news cycle or political campaign season will ever end, something is announced which encourages you to think positively about the future.

Recent business news included the release of Commonsense Principles of Corporate Governance, www.governanceprinciples.org . Before you quickly conclude that I need a real vacation (yes, it’s scheduled), let me explain why the contents of this release are important to all of us as investors.

Everyone invested in the stock market, through individual stock holdings, mutual funds or ETFs, relies on the quality and competency of the leadership of the corporations in which they invest. This leadership comes from both boards and management, but the focus of these principles is with board leadership.

The Commonsense Principles of Corporate Governance were offered by a group of corporate leaders and institutional investors, including Warren Buffett of Berkshire Hathaway, Jeff Immelt of GE, Larry Fink of Blackrock and Bill McNabb of Vanguard to name a few. The hope of the authors is that “our effort will be the beginning of a continuing dialogue that will benefit millions of Americans by promoting trust in our nation’s public companies. “

When something goes terribly wrong at a publicly held company, how often do you hear the question “Where was the board?”   Too often there is concern (sometimes justified, oftentimes not) that boards are just cronies of top management, unwilling to ask the challenging questions or overlooking their responsibilities as fiduciaries of shareholders. This sort of thinking erodes trust in the very corporations that provide economic growth and employment in our country.

The letter from the authors of the principles states “truly independent corporate boards are vital to effective governance”. The principles cover best practices in a wide variety of areas from board composition to responsibilities to the public.  It’s a virtual handbook of good governance, and much of it is applicable to private, governmental and non-profit entities as well as public companies. It even addresses diversity on boards, stating that “diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds and experiences”.

As an investor, I find the work of this group encouraging and applaud the leaders who participated. With the adoption of these guiding principles, we should all feel more confident of the actions of our corporate boards. How commonsense is that!

2nd Quarter 2016 Market Commentary

Despite tumultuous headlines, global markets finished the second quarter of 2016 on a high note. In the weeks since quarter end, major US stock market indices have reached new all time highs. US stocks were up 3.84% through the first half of the year, measured by the S&P 500 Index. Emerging market stocks snapped a pesky losing streak, gaining 6.41% through June. International developed stocks suffered a setback with the UK’s Brexit vote in late June. The MSCI EAFE Index was down -4.42% year to date. Interest rates plunged to new lows after the Brexit vote and global bond prices soared. The Barclays US Aggregate Index was up 5.31% for the year. Both real estate and commodities fared well during the first half of 2016. Global REITS were up 12.33%, and the Bloomberg Commodity Index was up 13.25%.

Brexit, What Brexit?

On June 23rd, the U.K. voted to leave the European Union. The “leave” vote, titled Brexit, was unexpected, and markets reacted violently. The Dow Jones Industrial Average fell more than 600 points on Friday, June 24th.  The British Pound fell more than 7% overnight, to levels not seen since the mid 1980’s.  The Pound has not recovered its loss as many other financial markets have in the weeks since the Brexit vote.

One-Year Chart of British Pound to US Dollar

Pound Chart

Source: Bloomberg.com

After a sharp two-day drop, most global stock markets recovered quickly after Brexit. Bonds rallied as interest rates dropped to new lows, in anticipation of a rate cut in the U.K. and continued delay of a rate hike by the Fed. But the U.K. economy, European banks, and the U.K. property market continue to suffer.  Michael Hasenstab, global bond manager at Franklin Templeton, expects a 2% – 7% contraction in the U.K.’s economy over the next several years.(1)  That is a brutal economic disruption, as the U.K. must negotiate every trade agreement with the European Union, presumably on less favorable terms.  Hasenstab expects a modest hit to the remaining EU economy of 0.5% and minimal negative effects for the U.S. and emerging market economies.  Markets do not like surprises, and the Brexit vote was unexpected.  However, after the steep initial decline in global stocks, cooler heads prevailed, realizing that Brexit’s impacts outside the U.K. are likely to be minimal and won’t take effect for some time. Read more

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DOL Fiduciary Rule

On April 6th, the U.S. Department of Labor (DOL) issued its final rule on the fiduciary standard for retirement accounts. The rule stipulates that brokers cannot give conflicted investment advice to consumers in 401k, IRA, or other qualified retirement plans. There is an exception that allows brokers to enter a Best Interests Contract agreement with customers to allow flexibility of services and products provided. This agreement stipulates that the broker will provide advice that is in the Best Interests of the client and opens the broker up to litigation, including class-action litigation, if the contract is not honored. Prior to the Best Interests Contract, brokers were able to force customers into arbitration agreements, keeping disputes out of the courts.

You might be asking yourself – Don’t brokers already have to look out for the best interests of their clients? The short answer, is no. The financial service community is broken into two (or three) types of regulatory regimes. Brokers, or registered representatives, operate under FINRA’s Suitability Rule. Brokers work for large and small broker dealer firms such as Bank of America’s Merrill Lynch, Morgan Stanley, Wells Fargo, and LPL Financial to name a few. Financial advisers, employed by Registered Investment Advisory firms, are held to a fiduciary standard. Insurance agents adhere to yet another set of rules, but many are also registered representatives who follow the suitability rule. The suitability rule is a lower bar than the fiduciary standard, allowing brokers to put their firm’s interest ahead of clients in many cases.

Read more

1st Quarter 2015 Market Commentary

The first quarter of 2015 was mostly positive for global financial markets. In a reversal of roles, US stocks lagged the rest of the world with a 0.95% return. International developed stocks, boosted by the announcement of the European Central Bank’s version of quantitative easing, were up 4.88%. Stocks in emerging markets were up 2.24% in the quarter. Bonds continued to muddle along and were up 1.61% for the quarter. Interest rates declined sharply during the quarter but recovered to levels similar to year-end by the end of March. Global real estate, measured by the S&P Global REIT Index was up 3.85%, while commodities continued their slide down -5.94% year to date.

Central Bank Policies Diverge     

On January 22, the European Central bank announced its version of quantitative easing, a bond buying program of 60 billion per month through at least September 2016. The goal of the ECB’s program is to stabilize prices by raising inflation to at least 2.0%.[1] While the ECB hopes to accelerate an anemic economic recovery since 2013, bank President Mario Draghi clarified the limitations of monetary policy saying, “What monetary policy can do is create the basis for growth. But for growth to pick up, you need investment; for investment you need confidence; and for confidence, you need structural reform.”[2] It remains to be seen whether ECB countries such as Spain, France, Italy, or Greece, facing political opposition and high rates of unemployment, can find any consensus on structural changes.

Meanwhile, the Bank of Japan continues arguably the largest quantitative easing program, dubbed Abenomics for its mastermind Prime Minister Shinzo Abe. Although the program saw progress towards its 2.0% inflation goal in 2014, Japan’s most recent consumer-price index hit 0% in March. To date, the Bank of Japan has purchased ¥150 trillion, with the BOJ’s balance sheet equal to 66% of Japan’s GDP.[3]Prime Minister Abe’s attempts at structural reforms have so far been muted despite his political party winning control of the Diet in the mid 2013 elections. Read more