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.

Gifts That Give Back

‘Tis the season. The holidays are a great time to experience the joy of giving to friends and family. It is also the time of the year when people opt for gifts that benefit the greater good.

For philanthropic and aspirational shoppers, there are plenty of gift options from companies that produce “sustainable products” (conservation of natural resources, sustainable farming) or products designed for “social good” (handmade products that support women and children in the developing world).

It used to be that values-based investing was exclusive to large private foundations and very affluent individuals. But our world is changing in dramatic ways, and there is a heightened global awareness. Investors and companies recognize that doing good and doing well financially should go hand-in-hand. People want to invest in companies with values and business practices that are congruent with their own. With a values-based objective, investors are willing to exchange financial benefits for the greater good.

In 2015, we will introduce a series on values-based investing. Our objective is to leverage our practice by seeking options for our clients who desire to align their personal values with their investment portfolio. We invite you to be part of this conversation.


Don’t Believe Everything You Read About Investing

A client of ours forwarded us an email she received from a financial news organization to which she subscribes. It reads as follows:

A handful of billionaires are quietly dumping their American stocks . . . and fast.

Warren Buffett, who has been a cheerleader for U.S. stocks for quite some time, is dumping shares at an alarming rate. He recently complained of “disappointing performance” in dyed-in-the-wool American companies like Johnson & Johnson, Procter & Gamble, and Kraft Foods.

Buffett’s holding company, Berkshire Hathaway, has been drastically reducing his exposure to stocks that depend on consumer purchasing habits. Berkshire sold roughly 19 million shares of Johnson & Johnson, and reduced its overall stake in “consumer product stocks” by 21%. Berkshire Hathaway also sold its entire stake in California-based computer parts supplier Intel.

With 70% of the U.S. economy dependent on consumer spending, Buffett’s apparent lack of faith in these companies’ future prospects is worrisome.

She was scared, and who wouldn’t be after reading that? Warren Buffett is a legendary investor, and if he is worried about stocks perhaps you should be too.

The only problem is that Mr. Buffett is not selling Intel or cutting back on Johnson & Johnson now. He already did that—in the summer of 2012. Although the email was dated November 3, 2014, it contained “news” from 2½ years ago.

If you want to know what Mr. Buffett thinks about stocks today, all you have to do is run a quick internet search. During last month’s stock market pullback, he told CNBC he was buying stock in “names you’d recognize.”

Whatever the author’s motivation, the content is misleading. But don’t let it be damaging to your portfolio by blindly following it. Do a bit of research to check out the author’s claims. Or do what our client wisely did: forward it to your investment advisor for his or her opinion before you act on an impulse.

Market Analysis Video –
October 2014

It is not unusual for stocks to experience a wild ride in the month of October. Since 1970 nearly one day in three in October has produced a +/-1% move in the S&P 500 Index. In comparison, all of the other months are in the one-in-four to one-in-five range. The 2014 version of October generated even more volatility than usual as over half of the trading days last month saw the S&P 500 move by at least 1%.

Despite the heightened volatility, U.S. stocks managed to move ahead last month with the S&P 500 Index gaining 2.4%. Foreign stocks continued their run of underperformance versus U.S. stocks. The MSCI EAFE Index declined -1.4% in October…

Please watch the video below for our complete Market Analysis.

Click here to read our complete Market Analysis.

Ben Bernanke Makes a Bold Forecast About Inflation

Former Federal Reserve Bank Chairman, Dr. Ben Bernanke, is not worried about inflation. Before an audience of over 3,000 Registered Investment Advisors, Financial Planners and Investment Managers at the Schwab Institutional IMPACT Conference in Denver on November 5, 2014, Dr. Bernanke was remarkably confident about the future of tame inflation in the USA for years to come.

He has been widely criticized for executing the Quantitative Easing (QE) programs at the Fed which allows the U.S. central bank to buy longer term bonds in the open market thereby raising their market price and lowering their yield. Many fear that the QE programs already executed will lead to rampant inflation, but after five years since the beginning of QE, inflation is still very tame at 2% or less. Dr. Bernanke speculated that it could be another five years before inflation becomes a problem, and when it does appear, he believes the expanded toolkit now available to the Fed will make future inflation easier to control.

Dr. Bernanke also asserted that the Troubled Asset Relief Program (TARP) invented during the 2008 financial crisis was one of the most successful government programs in the history of the United States while simultaneously being one of the least popular. The TARP loans and asset purchases have been repaid at a significant profit to the U.S. government.

Another controversy is that the Fed allowed Lehman Brothers to fail in 2008 and chose to bail out American International Group, Inc. (AIG). Dr. Bernanke explained that AIG had capital so that it could be rescued while Lehman Brothers had no capital.

Dr. Bernanke is simultaneously proud and humble regarding his legacy as Fed Chairman. He is humble by nature. He is proud that the U.S. economy has the strongest recovery in the world from the 2008/2009 financial crisis, and he is proud that all of his hard work and the hard work of the Federal Reserve Bank staff contributed to this result.

The Failed Succession “Plan”
of Bill Gross

We have been engaged in succession planning at Bell Investment Advisors for the past
14 years. We also offer workshops and write about succession planning to help other business owners with the process. Naturally, we enjoy learning about other succession plans—the ones that work and the ones that fail.

Take Pacific Investment Management Co. (PIMCO) as an example. Bill Gross founded the company 40 years ago and built it up to a $2 trillion investment management giant. Bill is such a superstar among bond managers that he is often referred to as the “Bond King.” Superstars have special challenges when it comes to succession. The most successful successions occur when an organization has achieved institutional independence, its strength and reputation established beyond its identification with a superstar. This requires founders to develop and delegate power and recognition to their younger teammates, and Bill Gross tried to do this by bringing in Mohamed El-Erian, another titan in the investment management world. Soon El-Erian was appearing on television more than Bill Gross. This was a smart move—sharing the power and press with someone else.

Earlier this year, however, El-Erian left under sudden and strained circumstances. Bill Gross is apparently not very good at relationship management. In addition, because of the trouble he was having getting along with people, Gross, himself, suddenly also left the firm he founded—before he was pushed out by the management team. (Mr. Gross promptly hitched his wagon to Janus, a smaller fund manager where he can focus more on investment and less on management.) Founders and superstars are rarely good at succession planning. They stay in place too long. Letting go and building relationships
are crucial skills.

We believe that the team remaining at PIMCO without a superstar is deep and strong. We believe PIMCO will prevail with greater sustainability now that it can more easily achieve institutional independence. On October 4, The Economist commented: “Analyzing the global bond markets, with their many different countries, currencies, maturities and credit ratings is not a one man job.”

The Endowment Effect

Deciding when to sell a stock or a mutual fund can be difficult, especially when that unwanted stock or mutual fund resides in a taxable account. To be sure, there are a number of strategic reasons to hold positions you want to sell. This is the time of year, for example, when many investors resist the urge to sell because they would prefer to push the capital gains into the next tax year. But many of the reasons that investors hold onto positions are not so strategic in nature.

In their book, Why Smart People Make Big Money Mistakes, Gary Belsky and Thomas Gilovich examine a host of psychological mental tendencies that make selling any investment, even a bad one, so challenging. Research demonstrates, for example, that most investors tend to overvalue whatever it is that they already own. This is described, according to behavioral finance, as the “endowment effect,” and its influence is very powerful.

To illustrate the power of the endowment effect, Richard Thaler divided a Cornell economics class in two. Half the class received school coffee mugs as a gift; the other half received nothing. Then Thaler held a coffee mug auction. The students who did not own a coffee mug already, on average, were willing to pay only around $2.75 to acquire a mug. The students who already owned a coffee mug, however, had much greater sense of the value of their mug. On average, these students needed to be offered around $5.25 to sell their mug. This study and others like it, demonstrate that one of the primary side-effects of already owning an asset is the owner values that owned asset as much as twice as much as it is actually worth.

With the endowment effect in mind, it is easy to understand why so many portfolios are littered with positions that should be sold but are not. The psychology behind the impulse to hang onto what you already have is understandable, but it should be kept in mind because it is not always helpful or strategic.