Actions Speak Louder Than Words: The Visit of China’s President Xi Jinping to America

President Xi Jinping of China arrived in America the week of September 22 (during the same time that Pope Francis and India’s Prime Minister Narena Modi were touring the U.S.) His first stop was Seattle to meet with 25 major U.S. business leaders, including Warren Buffett, Tim Cook, Mark Zuckerberg, and Satya Nadella. The September 19 issue of The Economist previewed the meeting between Xi and Obama as “nothing to smile about.”

Growing Tensions
From the U.S. point of view, there are several growing tensions with China:

  1. The alleged hacking by Chinese cyber spies in April of 22 million personal records of U.S. government employees’ (including CIA) from the Office of Personnel Management
  2. Accusations that China is manipulating its currency to make Chinese exports cheaper
  3. China’s island building for military purposes in the disputed territory of the South China Sea
  4. The U.S. presidential election candidates contributing to a rise in “China-bashing”
  5. The botched attempts in August by the Chinese government to prop up the Chinese stock market
  6. Americans worrying about the excesses and deceptions of Chinese state capitalism, making the term “state capitalism” an oxymoron.

When Xi met with U.S. business leaders in Seattle, they confronted him about the rampant theft of intellectual property that continues to take place; they complained about the Chinese demand that U.S. companies doing business in China transfer their technology to their Chinese partners; and they protested the many ways China unfairly discriminates against U.S. business. The main services of Google and Facebook are blocked in China, which is why Mark Zuckerberg met with Xi in Seattle and was seated next to him at the White House state dinner. (Incidentally, Zuckerberg’s wife is a Chinese physician, and both he and his wife speak Mandarin.)

Xi and Modi contrasts/Internet
In his meeting with U.S. business leaders, Xi was unwavering on China’s tough internet control and censorship. The contrast with India’s prime minister could not have been more striking: Modi regularly uses Twitter and Facebook, and he is taking the world by storm with his “Digital India” campaign. He implores U.S. business to help make India an “Internet powerhouse.” Like China, the Indian government engages in censorship, but it pales by comparison with China’s complete blackout of many services.

Although U.S. business still covets access to China’s huge market, when Modi and Xi are side-by-side, India shows up as more attractive. U.S. business is beginning to realize that India today is like China five years ago, and with a progressive leader like Modi, India looks very positive with less political baggage than China.

Unfortunately, Xi refused to admit to any hacking and cyber theft by the Chinese government, in spite of compelling evidence, but he did pledge to cooperate with the U.S. on cybersecurity issues with a signed agreement that “neither country’s government will conduct or knowingly support cyber-enabled theft of intellectual property.” Xi agreed to informational exchanges and legal cooperation for investigating cyber-crimes, including regularly scheduled meetings between U.S. and Chinese officials on cyber security violations. The agreement also established a hotline between the two nations should there be an escalation of issues. Xi also agreed to participate in the United Nations effort to establish appropriate norms of state behavior in cyberspace.

All this is well and good, but the editorial staff of The Wall Street Journal, September 28, 2015, is right to point out that all these agreements are tied to each country’s “respective national laws.” From the U.S. perspective, the Chinese Communist Party is above the law as it regularly invents interpretations to advance its power and control.

On the Bright Side
On the positive side of the ledger:

  1. China helped broker the nuclear deal with Iran in April (not everyone agrees that this is positive).
  2. China is supportive of America’s concerns about North Korea.
  3. President Xi is waging a strong campaign against corruption in China.
  4. Beijing has agreed to put a cap on carbon emissions and put a price on carbon for Chinese industries (virtually every country is now offering to pitch in to help limit carbon emissions).

The U.S. Government and the Obama Administration should exercise and pursue to the max the informational exchanges and legal cooperation China has agreed to regarding breaches of U.S. cybersecurity and the theft of intellectual property, as well as participate fully in regular scheduled meetings.

  1. The U.S. should impose sanctions on Chinese business if cybersecurity violations are not resolved appropriately.
  2. The U.S. should check and monitor the Chinese territorial grab in the South China Sea by practicing international maritime access standards.

The overriding question is:  Will Chinese actions follow Chinese words?

Planning for Market Volatility and the Trouble with Target-Date Funds

As part of our ongoing financial planning work, we assist our clients by recommending an allocation for their retirement plan accounts (401k, 403b, etc.) that cannot be directly managed by us because of plan regulations. We analyze the fund options within the plan and recommend an allocation to ensure the asset breakdown of the account is in line with their managed accounts and the optimal investment strategy advised by the client’s financial plan.

We recently completed this analysis and annual recommendation for a client who later asked us why we avoided all the target-date funds at his disposal. We have always been wary of target-date funds, primarily due to the lack of individual customization. Every person invested in the same target-date fund is assumed to carry the same risk tolerance, return objectives and time horizon. This, of course, will never be the case.

An August 31, 2015 article issued by CNBC, Some Target-Date Funds Miss in the Market Turmoil, details another concern we have with this type of fund. Each target-date fund (even those associated with the same retirement date) has a different makeup of bonds and stocks that is governed by the fund’s glide path. From that CNBC article: “Much of a target-date fund’s performance is determined by the fund’s ‘glide path’. That’s the formula a target-date fund uses to determine its mix of assets over time. All target-date funds get more conservative over time, shifting out of stocks and buying more bonds as they approach the target date.” Some funds have a glide path that ends, with no future allocation changes, at the retirement date, and others glide right past it and continue to get more conservative for years following. If you are invested in a target-date fund, it is important to understand the current allocation of the fund and the ultimate path it will take.

A fund’s unique glide path will determine exactly how conservative the fund will be upon reaching the target-date year. This makes for impactful allocation and performance differences between funds that one might otherwise misperceive to be quite similar. This concept is especially obvious during times of stock market volatility.  “For example, take two target-date funds designed for investors who retire this year: The Fidelity Freedom 2015 fund, which has more than 43 percent of its holdings in bonds and cash, lost 2.5 percent for the month through August 27, while the Wells Fargo Advantage Dow Jones Target 2015 fund, which has a nearly 71 percent stake in bonds and cash, lost only 0.87 percent over the same period.”

The Fidelity Freedom 2015 fund has 28% more exposure to equities than Dow Jones Target 2015 and, therefore, it experienced a more dramatic drop during the recent market correction than its counterpart. Losing 2.5% in less than a month can be devastating to someone who plans to retire this year and needs their retirement account to fund their lifestyle. If an individual has other sources of income, it may be less painful, but target-date funds have put the onus on the investor, or perhaps the investor’s Certified Financial Planner™, to know the fund’s equity exposure and whether that exposure makes sense for his or her retirement goals.

In summary, we prefer to customize retirement accounts to meet our client’s specific needs and reassess the appropriateness of the allocation on an annual basis. A person’s financial plan should be the investment guide rather than a fund family’s preconceived notion about how universally conservative a retiree should be.

From The Women’s Roundtable:
Four Tips for Women Investors
(that also work for men)

A study conducted by Fidelity last year showed that women are more cautious with their investing compared to men.  This more conservative mindset seems to make sense during weary economic periods, but remember: avoiding risk all together can jeopardize your ability to grow your savings.

A cautious approach has advantages, as well as disadvantages. How does one find the right balance and still achieve a risk-versus-reward strategy that is appropriate and less stressful? You can apply these four tips to your investing strategy to find the right conservative/risky balance:

1. Diversify.
Help dampen the impact of the market swing (up or down) with a well thought out and strategic investment mix.

2. Remember stocks offer the most growth potential.
U.S. stocks have consistently earned more than bonds over the long term, despite ups and downs.

3. Check In, but not too often.
Periodically check your investment mix and make changes when necessary. Make sure that you understand and you are comfortable with your stated risk/reward parameters.

4. Turn to a professional.
Work with a trusted advisor to help you understand the investments you own or any you need to add to your portfolio. Ask questions.

Following these four tips will help you find that investment target that is oriented toward long-term growth, yet does not make you nervous when the markets go up and down.


Is There an Opportunity in
Energy Stocks?

In our investment management experience, investors fall into one of two camps when looking at an investment that has dropped in price significantly. Investors in the first group steer clear, not wanting to “catch a falling knife” as the old Wall Street adage warns. They can be described as trend-following investors. However, the second group of investors sees opportunity in a depressed price. These are the value investors.

With the S&P Energy Sector off over -20% from its all-time high set just about a year ago, how should you view beaten-down energy stocks? Should you take the value approach and look for opportunity? Or should you stay away, expecting the sector to continue to underperform?

If you rely on history, you should expect the latter. According to Ned Davis Research, after major bottoms in the price of oil (which we believe occurred in March), oil prices tend to recover and continue upward, but energy stocks tend to outperform the broad stock market for a couple of months before starting to underperform again.

This time around, energy stocks have followed the historical pattern almost identically. After oil’s bottom in March, energy stocks outperformed the stock market for  one and a half months before underperforming again. As a result, we continue to recommend avoiding energy stocks despite the recovery in the price of oil.

Market Analysis Video –
March 2015

Stocks pulled back in in March. Despite two down months in the first quarter, stocks were able to produce a small positive return in the first three months of the year thanks to large gains in February.

Many of you have expressed concern about increased volatility in the stock market in 2015. This feeling is exacerbated by frequently-quoted statistics in the financial media like this one from Bloomberg on March 23: “The S&P 500 has gone 24 consecutive sessions without back-to-back advances, the longest since a 24-day stretch in 2008.” Statistics like these are interesting, but they represent just one data point. Upon reading it, one could assume that we are experiencing volatility comparable to the bear market in 2008, but that would be far from the truth…

Please watch the video below for our complete Market Analysis.

Click here to read our complete Market Analysis.

Consequences of a Strong Dollar

The value of the U.S. dollar relative to other world currencies has grown by approximately 22% in the past year. That means if the average investor outside the United States bought a U.S. stock in dollars one year ago and the stock purchased stayed flat (did not go up or down), that foreign investor would show a gain of 22% on average just because the U.S. dollar appreciated 22%. This demonstrates the principle that investors want to invest where the local currency is strong.

This dollar strength is helping exporters in weaker economies like Europe because the dollar goes a long way in purchasing goods and services denominated in Euros as the Euro gets weaker. It is common to hear people on Wall Street say that this is the time to book your vacation in Europe because the U.S. dollar will convert into many more Euros than it did a year ago.

Unfortunately for the emerging economies of the world, they are being hurt by dollar strength. The March 21 issue of The Economist reports that emerging market countries have borrowed $4.5 trillion in dollar-denominated debt. As the dollar gains in strength, emerging market currencies are growing weaker, and the debt in dollars becomes more and more expensive to service. This creates economic drag and uncertainty for emerging market countries.

The March 25 issue of The Wall Street Journal reports that African nations are being hit especially hard by the strengthening dollar and the decline in commodity prices. Shopkeepers throughout Africa cannot afford to import goods to stock their shelves.

The relative strength of America is highlighted by Europe and Japan being stuck in neutral or first gear and China, along with other emerging markets, slowing. The International Monetary Fund predicts that the U.S. economy will grow by 3.6% in 2015. With our Federal Reserve preparing to raise interest rates as other central banks are going the opposite direction, this all leads to the consequence that investors make higher returns in dollar-denominated assets.

25% of profits earned by S&P 500 firms are earned in foreign currencies. A stronger dollar causes these goods and services to be more expensive and less competitive. The stronger dollar will hurt foreign earnings by U.S. companies. Ironically, dollar strength mutes inflation because foreign goods and services are less expensive in dollar terms. Inflation is driven by goods and services becoming more expensive. Inflation in the U.S. year-over-year is -0.1%, while core inflation (excluding food and energy) is +1.6%. This is still well below the Federal Reserve target of 2% inflation as a cause for raising interest rates. The Fed may continue to talk about raising interest rates, but they may not act, because inflation under 2% does not call for higher rates.

Conclusion: Invest in the relative strength of the USA. Invest where the currency
is strong.

Why We Don’t Like Bond Indexes

Most investors know that most stock indexes like the S&P 500 are weighted by size or market capitalization as it is known in investment parlance. That means that the larger companies—in terms of value—comprise a larger proportion of the index. Apple is the largest company in terms of market cap, so it is the largest company in the
S&P 500 Index.

However, most investors don’t realize that bond indexes are weighted in the same manner—by size. The more debt a country, company, or county issues the larger the weight it holds within the index. Within the United States, the U.S. government is by far the largest issuer of debt, so it holds the largest weight in the Vanguard Total Bond Market Index Fund (58.6%).

This weighting methodology is why we recommend that our clients avoid investing in bond indexes. Automatically allocating funds to the most indebted countries, companies, and counties runs counter to prudent credit risk analysis. And the more debt these issuers take on, the larger their representation in the index becomes.

As a result, we advise steering clear of passively-managed bond index funds. Instead find an actively-managed bond fund, where the portfolio manager can decide which countries, companies, and counties deserve to borrow your hard-earned dollars. After all, to paraphrase the famous quote, bond investing is less about the return on your capital than the return of your capital.

Market Analysis Video –
February 2015

Stocks bounced back in February after declining to start the year. U.S. stocks enjoyed their best month since October 2011 and more than made up for the losses incurred in January. Bonds followed their best month in six years with declines in February as interest rates moved higher, but like stocks, they remain positive for the year as well.

In last month’s letter, we discussed how the defensive sectors of the stock market performed well in January. A persistence of this trend would be troubling as the strong relative performance of defensive sectors over more cyclical sectors is one of the conditions that often arise prior to a bear market. However, that condition proved transitory as cyclical sectors led the charge in February. In fact, the utilities sector, which is among the most defensive areas of the stock market, was the only sector to decline…

Please watch the video below for our complete Market Analysis.

Click here to read our complete Market Analysis.

Investing in Ourselves
at Various Life Stages

Whether we like it or not, life and money will always be inextricably linked no matter what stage of life we are in. As our life progresses, so too does our financial focus. Whereas we would likely be focused on repaying student loans or landing that first job in our 20s, we proceed to our 30s and 40s with a different set of needs and goals. Perhaps it’s buying our first home, settling down, raising children, having a career, or all of the above. From there, our financial focus will move toward savings—that is, retirement savings, as our working years evolve and we look forward to retirement. Knowing and understanding what financial milestones will come and when to expect them will help ensure that we don’t get caught off-guard!

We invite you to join us on March 18 over wine and cheese for an evening discussion about the unique financial issues we commonly face at each life stage. The event, part of The Women’s Roundtable series, “Taking Charge of Your Financial Future”, will be held 6 – 7:30 pm in our Bell Investment Advisors’ downtown Oakland office. Please make reservations at 800.700.0089, ext. 100 or email Jaye Roundtree. We look forward to having you with us!


Strengthening Your Financial Plan
with Retirement Account Contributions

As we get closer to April 15, tax day in the United States, this may be a helpful reminder: you are still eligible to make certain retirement account contributions for last year (2014) even if you missed the December 31, 2014 date. Making contributions to your retirement accounts is a good way to strengthen your financial and retirement plan. Follow these tips to keep your retirement on track.

1. Did you max out contributions to your employer-sponsored retirement account in 2014? Will you do so again in 2015? If so, think IRA contribution!

If you have maxed out your employer-sponsored retirement account salary deferral last year and are likely to do so in 2015 (2015 max: $24,000 with catch-up), pat yourself on the back: Good job! Then consider making a contribution to an IRA (Individual Retirement Account) or Roth IRA for tax year 2014. There is still time to make this contribution for last year right up until the tax filing deadline date of April 15. If eligible, you are allowed to contribute up to $5,500 to either an IRA or Roth IRA (but not both) plus $1,000 catch-up for those 50 or older.

❯ Note: Eligibility to contribute to any type of IRA is dependent on having earned income in the contribution year, and you may be subject to income phase out rules, so please check with your tax advisor regarding eligibility rules, income limits, and deductibility rules.

2. If age 50 or older, take advantage of catch-up contributions.

If you are age 50 or older, you are allowed to make additional (known as “catch-up”) contributions to your employer-sponsored retirement plan [401(k), 403(b), 457, or TSP] and/or to a traditional IRA or Roth IRA.

For employer-sponsored retirement accounts:

  • For 2014, you are able to defer the catch-up amount of $5,500 in addition to $17,500 for a total maximum deferral amount of $23,000.
  • In 2015, the catch-up increases to $6,000 in addition to the increased amount of $18,000, for a total maximum deferral amount of $24,000.

For IRA or Roth IRA, for both 2014 and 2015, you can contribute a catch-up amount of $1,000 for a maximum contribution of $6,500 annually.

3. Are you self-employed and have a retirement plan already established for your small business?

If you are self-employed, you have the right to contribute part of your income to a self-employed retirement savings plan like a SEP IRA (Simplified Employee Pension); a solo 401(k), i.e. a (i401k); or SIMPLE IRA (Savings Incentive Match Plan for Employees). Setting one up, or maxing out your contribution for the current year if you have one, is an excellent way for those self-employed to shelter income.

You still have time as the employer to make your 2014 employer contribution to the plan. Be sure to check with your tax advisor for the exact amount you are able to contribute, but remember: sheltering taxable income decreases your taxable income for the year, which in turn builds up the strength of your retirement plan.

❯ Note: Check out the IRS website for IRA Contribution Limits.,-Employee/Retirement-Topics-IRA-Contribution-Limits

In summary, if you are wondering how to prioritize your retirement savings, we generally recommend maxing out your employer-sponsored retirement account first before funding a traditional or Roth IRA. Focusing on your employer-sponsored retirement account is especially important if your employer matches a percentage of your contributions—so you do not miss out on that free money. If your employer does not offer a plan and you are not self-employed, then an IRA (traditional or Roth) can be a great place for retirement contributions. Please remember, you should discuss your own situation with your financial advisor or tax expert before making any major financial decisions.

Be kind to yourself, and help your retirement plan by making retirement account contributions for 2014 before it’s too late!

Two Upcoming Bell Events That May Interest You:

3/18/15 – Wine & Cheese: The Women’s Roundtable: Taking Charge of Your Financial Future. Email Jaye Roundtree to register or for more information.

3/25/15 – Webinar: Financial Literacy & Behavior for Adults and Young Adults. Click here to register or for more information.