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.

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.




Market Analysis Video –
January 2015

“As January goes so goes the year,” used to be a well-known and useful adage on Wall Street. From 1970 to 2000, the direction—positive or negative—the stock market took in January predicted the direction for the entire year 84% of the time. In recent years, the relationship between January’s performance and the entire year’s performance has broken down with an accuracy rate of just 57% since 2001. That is fortunate for equity investors as stocks started 2015 in the hole.

At this point, we are not seeing enough evidence that we should reduce the risk of our current allocation. Defensive sectors like utilities, health care, consumer staples and telecom held up best in January, but this is only a one month phenomenon. Prior to January, we were seeing a mix of defensive and cyclical sectors performing well. Before we witness an extended period of weakness in the stock market, we expect to see defensive sectors take the lead over cyclical sectors for a few months. This is something that we will be watching closely in the coming weeks and months….

Please watch the video below for our complete Market Analysis.

Click here to read our complete Market Analysis.

The Joy and Anxiety Produced
by Low-Priced Oil

We were amused on January 23 when our Time magazine arrived, dated February 2. We wish we could be so clairvoyant. In any case, we know that a trend is revealed when cheap gasoline makes the cover of Time.

Brent crude oil, the global benchmark, has fallen from $110 per barrel to $50 per barrel in the course of one year. Thanks to advances in technology, including horizontal drilling and hydraulic fracturing, U.S. oil production has risen to nine million barrels per day from five million in 2006, pushing reserves to their highest levels in 80 years. If gas prices fall by two-thirds as oil has done, the average American family could save $2,000 in 2015, equivalent to a 4.5% pay raise.

The rapid change in oil prices has been so dramatic that it has caused anxiety as well as joy. Joy comes because consumers have more money to spend; anxiety stems from the fact that energy is a major player in the U.S. and global capital markets.

Previously falling oil prices were interpreted as weakening demand and a weakening global economy, but the January 17 issue of The Economist asserts that the fall in oil is caused by plentiful supply and not by weak demand. The problem is that although the extra money in the hands of consumers will create new jobs, the cuts in energy production threaten existing jobs. This is why low-priced oil is not all joy.

Creating middle-class-level jobs has generally been a problem for the U.S. economy, although the energy sector has been very effective at creating higher-paying, middle-class jobs. As the global market price of oil falls, American producers are cutting back as they can no longer make a profit. This dynamic creates winners and losers. The American consumer is definitely a winner along with the airlines, China, and Japan. Venezuela, Russia, Iran, Nigeria, and Alaska are big losers. Oil taxes account for 90% of Alaska’s state budget. Alaska collects no sales tax or income tax. Alaska is the poster child for the non-diversified economy. In the long run, it appears that the plentiful supply of oil will persist. American technology will continue to boost production. Saudi Arabia is choosing not to cut production, as they have in the past, to reduce supply and raise prices. They may be trying to destroy or inhibit producers they consider to be enemies (Iran and Iraq). In the U.S., conservation efforts are paying off as Americans are driving less and fuel efficiency continues to increase. As this new normal for energy prices develops, low oil prices will produce more economic joy than anxiety.

Lose the Weight

The top New Year’s resolution, according to USA.gov and the Journal of Clinical Psychology, is to lose weight, but what about trimming down in other areas of our lives?

In financial planning one of the most important “levers” or tools available to improve the strength of a financial plan is a reduction in living expenses. A low-expense plan that can be fully covered by guaranteed sources of income (like Social Security and pension payments) is generally a very strong one. The validity of the plan results is lost, however, without an accurate living expenses figure. This makes it crucial to a financial plan and demands time and effort to better understand.

Anecdotally, we have noticed most people have a very clear idea of what they make, but little clarity around how much they spend. An estimate can be calculated by reducing gross income by annual savings, taxes and other required deductions (like Social Security, Medicare, State Unemployment Insurance and State Disability Insurance). This is a helpful baseline, but to get a more detailed look and determine where to trim, further dedication and examination is required.

The tool we use, the Bell Budget Worksheet, assists with tracking by separating expenses into broad categories including personal, child, recreation, medical, home, etc. Within each group the expenses are sliced thinner. For example, clothing/accessories, club memberships, magazine subscriptions, personal care (hair/cosmetics) can all be found under the category, personal expenses.

Although not a small amount of work, the process can be extremely useful and eye-opening. Generally participants focus on discretionary spending, but fixed expenditures should not be ignored as possible areas for reducing costs. Refinancing or downsizing can have a dramatic impact on the strength of a financial plan.

If you are still searching for a resolution or simply some motivation, why not make this year the year to improve your financial health? Speak with your Certified Financial Planner™ today to review spending and lose the weight.


Register for the February 4 Lunch & Learn “How to Make Your Life Work Financially”. Find out how you can maximize cash flow while minimizing risk and the importance of financial planning for your financial success. For inquiries and/or reservations email Jaye Roundtree.


Market Analysis Video –
December 2014

The month of December proved to be a microcosm for the year in terms of foreign versus domestic stock performance. Stocks outside the United States struggled with the MSCI EAFE Index posting a loss of -3.4%. Meanwhile U.S. large-cap stocks finished a strong year by holding up much better than foreign stocks in December with a loss of just -0.3%.

Diversification plain and simply did not work for equity investors in 2014. Recognizable U.S. large-cap names that comprise the headline indices fared well, resulting in the Dow Jones Industrial Average and the S&P 500 posting returns of 10.0% and 13.5%, respectively, in 2014. Despite a “risk-on” environment for much of the year, U.S. small-cap stocks produced returns last year that were less than half those of large-cap stocks, with the Russell 2000 Index up just 4.9%. Outside the U.S., both developed and emerging markets lost money…

Please watch the video below for our complete Market Analysis.

Click here to read our complete Market Analysis.

Two Important Trends for 2015

As an equity investor, there are two important historical trends to be aware of that apply to 2015, both of which are positive for stocks: the Presidential Term Cycle and the Decennial “5” Pattern.

In looking at the performance of the Dow Jones Industrial Average historically during each year of the Presidential term, you can see on the accompanying chart that year three, which 2015 will be, is the best year by far of the Presidential cycle. Since 1897, the Dow has produced an average price return (i.e. pre-dividend return) of 12.2%. The median return is 14.4%. Perhaps more interesting is the lack of downside market volatility in the third year over the last 80 years. When factoring in dividends, the Dow has not lost money in the third year of a Presidential term since 1931. And that was in the middle of The Great Depression when there were obviously some other headwinds for the stock market.

This trend makes sense when you think about it. Politicians need to pull out all the stops to make sure that they and/or their party remain in power, which usually leads to economic and market-friendly policies. It has not mattered what the valuation of stocks has been coming into the third year or how the market has performed leading up to it or who has been in power. It is a very powerful trend with 20 consecutive positive years.


The second trend to be aware of this year is the Decennial “5” Pattern. For whatever reason, years that end in the number five have been unusually strong for the stock market when compared to all other years. Since 1897, the Dow has produced an average price return of 31.4% in years ending in five. The median return is 30.0%. To put the strength of this trend in perspective, the next best group of years is those ending in eight with an average return of 15.3% or less than half of what years ending in five have been able to produce on average historically. In terms of downside volatility, there has not been any. When including dividends, there has never been a losing year for the Dow in a “five year.”

This trend is most likely a statistical anomaly as it is a small sample size with only eleven years to analyze. Also, there is really no good reason for it (at least that we can think of), so the correlation is probably spurious. Regardless, given the strength of this trend historically, it is one to be aware of and monitor as 2015 plays out.

Market Analysis Video –
November 2014

Stocks started their historically strongest six-month period (November to April) with gains. U.S. stocks managed to produce a return of 2.7% in November according to the S&P 500 Index. Foreign stocks, as measured by the MSCI EAFE Index rose 1.4%. It was the seventh consecutive month of underperformance for foreign stocks relative to domestic stocks, confirming that the U.S. stock trend is firmly entrenched. Since the start of May, the MSCI USA Index has outperformed the MSCI EAFE Index by 14.3%.

We exited the remainder of our exposure to European stocks last month. While we continue to have concerns about the valuation of the U.S. stock market as a whole, there are areas within the U.S. stock market that are not overvalued, such as the technology and health…

Please watch the video below for our complete Market Analysis.

Click here to read our complete Market Analysis.