Four of the Most Reliable Words in Investing, Coaching, and Parenting.

Patience, Discipline

“It’s tough to make predictions, especially about the future.” Yogi Berra

Armed with brainpower, insider information, and sophisticated tools, even the most powerful global institutions cannot outguess economic data and financial markets. One such institution, the U.S. Federal Reserve officially diverged from other central banks with a much anticipated December monetary policy  announcement, and Fed Head, Yellen, steadfastly exuded confidence in an ability to execute on central plans. While seemingly small now, this historic event does signal added change, uncertainty, and hypersensitivity to future news-flow.

Default risk, volatility and extreme downside in security prices were reintroduced in 2015. Well-intended 2016 forecasts are on the way to our inboxes, and these notes often serve only to confuse yesterday’s confident beliefs. Stocks, bonds, commodities, emerging markets, and currencies will continually jostle investors and prognosticators.

No crystal ball or “black-box” strategy guarantees consistent and successful market timing, so let us briefly examine four words able to more reliably trigger clearer thinking in times of added stress.

Patience, Discipline, Process and Customization have proven a helpful and mightily resilient decision-making framework throughout a career of investing, coaching, and parenting.

#1 Patience helps to promote less emotional decision-making. We have all been in that daunting place, a moment where reactions, words, and instructions are paramount to a more successful outcome. Take a mental moment or even physically remove yourself from a tough situation. Intentional breaths also enhance one’s ability to patiently respond when control is momentarily lost.

Quick Tip: Avoid an immediate investing decision if you have recently been exposed to the flashing of red and green price-change indicators.

#2 Discipline reinforces adherence to well-grounded investment strategies and financial plans. The temptation to impatiently chase the latest fad, change styles, or to abandon the “game plan” out of fear, often leads to instability more detrimental than whatever short-term deficit or problem exists.

Quick Tip: Avoid compromises or exceptions only made to make a decision work this time.

Fearful headlines and twitter feeds sell ads and keep people glued to screens, but fear does not make money in the stock market.

#3 Process translates into effective execution of less emotional disciplines. Successful investors, coaches, and parents rely on consistent process methods to evaluate reward-to-risk relationships. This ability is wired into survival–Is that a stick or a snake? Should we kick an extra point or go for two? What will tomorrow bring if the kids win the battle to stay up too late? Investors should define and document reward and risk targets to compare with current prices. Key stats and ratios can help to set the limited price you are willing to pay and the point at which a sale is appropriate for each holding. This preparation should be done prior to the potential constraints of euphoria or despondency.

Quick Tip: A scheduled routine to review financial plan health, asset, sector and security allocations, tax efficiency, all-in expenses, and risk-adjusted performance is important and helps to avoid random thoughts and decisions.

#4 Customization can produce more optimal bottom-lines over robotic or glide-path plans. Armed with patience, discipline, and a process for execution, the flexibility to adjust for the conditions on the field is critical. Hard-earned wealth is proactively built, so unique circumstances deserve collaboration and measured decisions. Simple strategies to achieve low cost, diversification, and risk management can be achieved while paying attention to the changing complexities of taxes, special requirements, and crazy markets.

Quick Tip: Be wise with model recommendations found in newsletters, popular media, or other widely distributed platforms. While often good advice on the surface, what is right for your neighbor is not always right for your family.

Happy New Year and Best Wishes for 2016!

It is tough to predict any 12 month period. This investing year is especially difficult with so many large players like China, the U.S. Federal Reserve, and the European Union attempting historic shifts alongside a daunting list of uncertainties. Besides turbulent markets, our basketball team is struggling, and we “welcome” our first teenager into the house. The written words of Patience, Discipline, Process and Customization will literally be turned to as reliable triggers to handle tough decisions (see pictured office whiteboard).

ABOUT THE AUTHOR:

Michael loves to empower investors with his expertise in securities and economic analysis, goals-based wealth management solutions, and FinTech smart decision-support tools. While directly managing over $5 billion in growth and retirement assets; his proactive advice and software innovations have influenced thousands of fiduciary advisors to better their practices and service to clients. He enjoys spending time with his wife and three boys, competing in USTA tennis, and mentoring others to succeed.

Email | Michael@empoweredportfolios.com

Twitter | @MichaelHakerem

CHINA: YEAR OF THE SCAPEGOAT 2015?!

scapegoat

It is a mistake to place sole rationale and therefore sole resolution in headlines like: China Fears Slam Stocks. China Data Hits Markets. China to Blame. Occupying the 8th position in the Chinese Zodiac, the Goat (or Sheep) symbolizes such character traits as creativity, intelligence, dependability, and calmness. Half-way through the Chinese New Year that began in mid-February, investors are steered to solely focus on Beijing’s corruption, lack of control, manipulation, and extreme volatility.

There is no doubt that China is HUGE in terms of the mood of her populous, politics, internal objectives, economy, and massive historical demand for Western luxury goods and infrastructure inputs like Copper, Iron Ore, and Concrete. It is disturbing to read stories of the Chinese government arresting and detaining traders to “resolve” its stock market problem. An extremely tense Pacific will become further inflamed as China celebrates the 70th anniversary of the defeat of Japan in WWII. A parade of 12,000 troops, 200 aircraft and dozens of tanks and missiles are expected to march down Beijing’s central Avenue of Eternal Peace and through Tiananmen Square on Sept. 3 — the day after the Japanese army surrendered to Allied forces in 1945. Still, global stock market turmoil, plummeting currencies, crashing commodities, and economic instability are problems not entirely “Made in China.”

The Maestro (I admit the pic is my cMaestroopy.) of the real orchestrated manipulation that impacts us today dates back many Lunar
cycles and from the United States. With complete humility, I will note there is no crystal ball at my shop. However, the source of the 2015 pullback is potentially deeper, more problematic, and more painful than simply laying blame on the recent Chinese stock market rout and slowing manufacturing data. The U.S. Federal Reserve as directed by Greenspan to Bernanke, and now Yellen, have led the world’s most powerful central banks into the most manipulated (no matter how well intended) and experimental monetary phase of our lifetimes.

The lack of control, manipulation, and volatility your investments are experiencing is most likely not China-centric so do not ignore the plethora of other concerns, risks, and opportunity sets. 

Unconventional tactics were used to counter the late 90’s Asian currency crisis, hedge fund blowups, and Y2K cash build-out. The bursting of the dot-com bubble in 2000 kicked off massive interest rate cuts via the Effective Fed Funds from 6.5% to 1% (2000-2003) with a repeated playbook during the 2008-09 Financial Crisis. When interest rate options ran dry, Fed Chair Bernanke revealed experiments like Operation Twist and a series of so-called Quantitative Easings (QE). The Fed balance sheet has skyrocketed from $600 billion to $4.5 trillion! Perhaps the counter-factuals would have been worse–the unwind from unconventional to normalcy represents an unknown larger than China.

Throw away advice lines like “normal pullback,” “another buy the dip opportunity,” or “healthy return to volatility” are less useful for concerned families no matter what happens this fall. 

Zero interest rates plus QE1, QE2, and QE3 created a massive misallocation of capital that has affected everything from rental properties, fracking, high yield bonds, share-buybacks and dividend payments, the US dollar, and stock market valuations. These trends have been on a tear so perhaps the recent weakness is the painful process of deflating back to reality–you or your trusted advisor should not completely discount this possibility.

So what is useful?

An emphasis on market-timing, outguessing economic releases, or using gut feel to manage portfolios is foolhardy for most of us. There are tremendously positive innovations in medicine, technology, and consumer goods worthy of your hard-earned investments. You still need to identify and navigate the right investing paths, know your portfolio’s return and risks trade-offs, and plan for the future with foundations based on your family’s realities.    

  •  Real communication and proactive, goals-based wealth advice: Watch out for canned, standardized, and biased steering.
  • Implementation should include a combination of core strategic investments, tactical satellite investments, and a relentless focus on client-centric management of risks, taxes, and fees: Watch out for mass produced, standardized, and advice that comes too quick and easy.
  • Special attention should be paid to the more controllable aspects of planning, spending, saving, and an extra margin of safety: YOU are the best qualified and most accountable for this part.

ABOUT THE AUTHOR:

Michael loves to empower investors with his expertise in securities and economic analysis, goals-based wealth management solutions, and FinTech smart decision-support tools. While directly managing over $5 billion in growth and retirement assets; his proactive advice and software innovations have influenced thousands of fiduciary advisors to better their practices and service to clients. He enjoys spending time with his wife and three boys, competing in USTA tennis, and mentoring others to succeed.

Email | Michael@empoweredportfolios.com

Twitter | @MichaelHakerem

5 Truths to Take Back the Wheel: Is Your Portfolio Driver-less?

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Steve Jurvetson via Flickr

Riding in the back of a Google robocar is probably thrilling! Now imagine your family, your business, and your hard-earned assets shaken side-to-side with sole reliance on a machine. Financial advice can often times focus on the rear-view mirror, drive the same speed for all passengers, and suffer from numerous blind spots when it comes to risk management.

Machines Can Break & Markets Can Bust Through the Cones

  • The #NYSE (New York Stock Exchange) was halted from 11:32 AM to after 3 PM on July 8th due to a computer error.
  • United Airlines issued a statement saying it suffered from “a network connectivity issue this morning” that grounded 4,900 flights worldwide.
  • The #ChinaMeltdown in equities has more than 50% of A-share listings halted for volatility. Since June 12, the Shanghai Composite has lost an unnerving 32%. The Shenzhen market, which has more tech companies and is often compared to America’s Nasdaq index, is down 41% over the same period.
  • Resolutions for #Greece have strong implications for the euro zone and contingency plans for larger neighboring countries. Importantly, what avalanche could this snowflake unleash?
  • Second-quarter earnings reporting season is set to ramp-up in a few weeks. Volatility and surprises are sure to come even as bottom-up operating earnings estimates for 2015 ($115.5 per S&P) have already dropped double-digits since the beginning of the year with an implied above-average multiple of 18X.

Take Back the Wheel or Hire An Experienced Driver

Global central banks, regulators, and governments are constantly manipulating the course and the rules of the road. Whether you are a fiduciary agent or an individual investor, please seek a powerful combination of smart decision-support tools and human wisdom to help navigate the potential bumpy environment ahead.

Radar Charts are a great method to easily visualize portfolio attributes. Below is a generic illustration I created in two minutes with Excel to view credit risk and interest rate sensitivity scores for different fixed-income groups. You could do the same for “Comfort-Score,” Forward Price-Earnings Ratios, Expected Yield, and other easily obtainable data items.

1) Rear-view mirror: Modern Portfolio Theory, historical standard deviations and 5-Year Betas are only useful starting points. Like a family budget or business proforma, portfolio stress testing and awareness should use a majority view through the windshield. You do not have to outguess the stock market or own a crystal ball on interest-rates, inflation, or economic growth to know what investments you own, why you own them, and the most likely sensitivities under different scenarios. Taken a step further, you can assign a probability structure like 50% confident interest rates stay the same and 25% each to interest-rates jump or interest rates retreat again.

2) Differentiation: Plan Scores and Probabilities of Success produced by finance software serve as great baseline assessments and help to facilitate deeper conversations. However, be wary of any tool, product, or advisor that claims an ability to properly and holistically gauge your comfort “speed” in just a few standardized questions. Your age, planned retirement date, and view that you “wish to make as much money as possible without experiencing a historical market drop” is rarely a view complete enough to evaluate your portfolio needs.

3) Risk Management: An experienced driver has proven techniques and disciplines to manage varied roads, traffic, and driving conditions. Here are five categories important for my family of passengers.

Seek Five Truths To Protect Your Hard Earned Money 

  1. Stewardship: A business culture based on a higher order of care that originates from a passion to serve and protect the long-term well-being of others. Even the trend of marketing “legal fiduciary” has gotten jaded when disclosures and conflicts are buried in the paperwork and the advice model still favors business-centric decisions. This is probably the most important and sometimes the most difficult to ascertain by those outside the financial services industry. Do your homework and start here!
  2. Integrated, Goals-Based Wealth Management: Builds collaborative long-term and shorter-term trading road maps on the foundations of a client’s unique and multifaceted goals, constraints, preferences, sensitivities, legacy holdings, financial wherewithal and emotional elements. How many other investors have the exact same portfolio as my family? 
  3. Proactive Asset Management: Defines “Style” as agile and flexible with an approach to evaluate rewards and risks. Will use passive & active strategies, strategic & tactical allocations, and quantitative & qualitative assessments where and when most suitable. Are my investments always an up-sized or downsized version of my previous holdings even when analysis reveals opportunities to target specific buys and sells that could improve my portfolio, tax situation, or risk profile?
  4. Humility: While considered an expert, the experienced driver is willing and able to admit mistakes or seek input from other seasoned professionals. Able to pivot unemotionally with the client’s financial interests taking precedence over the pride of the professional and the firm.
  5. Uses Technology to Implement Strategies–Not Sell Products: Faster, smarter, and prettier tools are available to empower clients and advisors throughout the four primary phases of wealth management (Discovery, Planning, Implementation, and Monitoring). Unfortunately, technology also enables product-steering, standardization, and mass distribution of advice. Slick reports, colorful pie charts, and mesmerizing statistics can also provide cover for lack of expertise and the effort put forth on your family’s behalf. Honestly, excluding the 24 hours before this review meeting, when was the last time you looked at my portfolio? Why does this tool always recommend your firm’s proprietary funds?

I welcome your thoughts in the comments section below. 

ABOUT THE AUTHOR:

Michael loves to empower investors with his expertise in securities and economic analysis, goals-based wealth management solutions, and FinTech smart decision-support tools. While directly managing over $5 billion in growth and retirement assets; his proactive advice and software innovations have influenced thousands of fiduciary advisors to better their practices and service to clients. He enjoys spending time with his wife and three boys, competing in USTA tennis, and mentoring others to succeed.

Email | Michael@empoweredportfolios.com
Twitter | @MichaelHakerem

9 Bond Fund Risks To Evaluate

10-Year Yields last year

Now that’s price volatility! Government Agencies, Exchanges, Major Bond Investors, and Main Street Investors are again preparing for the long awaited upward shift in interest-rates and a potential collapse in bond market prices and liquidity. Deja Vu, right? Know your risk exposures and understand the location of your hard earned dollars!

The thought of bond market liquidity evaporating or double-digit drops in bond investments is unnerving enough; however, I am especially concerned where investors are exposed to two trends often seen in 401(k) plans, 529 College Savings Plans, Target Date Funds (TDF), and certain other ‘glidepath’ robotic advice formulas: 1) massive use of bond funds and exchange-traded funds (ETFs) in lieu of direct bond ownership and, 2) traditional advice of raising allocations to bonds as investors age or move closer to goal dates. As an illustration of size, Vanguard expects TDF adoption to hit 50 percent in 2015 and reach 63 percent of the 3.9 million participants enrolled in Vanguard-administered plans by 2018.

Fun Fact: Outstanding U.S. bond market debt
has grown from $31.7 trillion in 2007 to
$39.2 trillion in 1Q 2015. Source: SIFMA

No wise Advisor can assign certainty to the proximity nor consequences of this highly anticipated change in U.S. monetary policy. There are plenty of reasons to believe a Federal Reserve driven rate increase may be postponed beyond 2015due to deflationary forces such as weak global growth and employment, instability in Europe, Middle East, and Asia, shifting demographics, and the exponential price destabilizing impact of technology. However, Fed Chair Yellen seems determined to continue a stated gradual path to “normalcy,” and any move away from the 0-0.25% range in the Fed Funds target will be highly symbolic.

Suitable bond mutual funds and ETFs used in isolation or in combination with individual bond strategies can be very effective. Still, financial market participants may collectively induce higher interest-rate risks, so take heed of nine not-so-obvious risks to evaluate in your bond exposures.

  1. The “Bond” label is not always synonymous with conservatism or lower risk. For illustrative purposes, the opening graphic plots daily percent yields for the “risk-free” U.S. 10-Year Bond from 6/19/2014 to 6/19/2015. Price movement in this key benchmark rate is likely to experience historic volatility in the future. Other segments (high yield, municipal, emerging, mortgages) of the massive bond market are smaller and less liquid than Treasuries.
  2. Principal, maturity, and credit features are not guaranteed or insured–Many investors do not realize, understand or appreciate that bond funds can fall in price. Bond funds are not insured or guaranteed by FDIC, the U.S. Securities Investor Protection Corporation (SIPC), or by any other government agency, regardless of underlying holdings, or how a bond fund is purchased or sold—whether through a brokerage firm, bank, insurance agency, financial planning firm, registered investment advisor or directly.
  3. A net asset value (NAV) of fund shares is no guarantee. An ability to sell fund shares on any business day does not translate into the characteristics of “liquidity” in the sense of price and bid protection for underlying holdings. Funds make assumptions in their daily pricing matrices and actual future sales (especially forced) of holdings can receive prices much lower than modeled assumptions. Note: Closed-end bond funds trade at premium and discounts to underlying NAVs.
  4. Embedded leverage–The proverbial double-edged sword. Funds use yield enhancement strategies to try and boost returns and market their portfolios to attract or maintain investor dollars. This activity can translate into less obvious risks and the use of reverse repos, commitment agreements, and exposure to floating-rate credit lines with banks or bank syndicates should be noted too.
  5. Is the Fund 100% committed to owning actual bonds? Whether due to Fund size or purposeful strategy, additional counter-party and contract liquidity risks are introduced with the use of synthetic positions. Derivative contracts may also involve implied or economic leverage.
  6. Date & Data Matching on Fund Report Cards. Always check the “As of” date on top holdings, risk metrics, returns, credit weightings, and asset breakdowns. Look closely, and you may see inconsistency with the published report issue date–Are you sure you know what you own?
  7. Speaking of Holdings. Among other reasons, unprecedented low rates and high prices have forced some fund managers to reach for yield outside stated comfort zones or core competencies. For example, “conservative” funds with heavy exposures to potentially high risk Puerto Rico and Tobacco bonds.
  8. Metric Effectiveness. Listed durations are very popular and convenient numeric gauges of interest-rate sensitivity. Unfortunately, these generic stand-alone descriptions of price sensitivity can mislead investors due to straight-forward assumptions and limitations. Realized prices and actual market bid adjustments always trump mathematically derived estimates. Any assumed downside needs to consider the size of yield changes, yield volatility, and the new shape of the yield-curve. Most bond funds consist of hundreds or even thousands of bonds across a spectrum of maturities, sectors, credits, and bond features–so accurately portraying a full portfolio’s risk is more complex.
  9. Historical “average” returns, dispersion of said returns, and the degree of like movement with other assets should not be extrapolated. The chart below shows a clear example of unprecedented U.S. Central Bank activity beginning in 2008; whereby, the Federal Reserve increased the size of its balance sheet five‐fold from $900 billion to $4.5 trillion. Translation: Objects as seen in the seven year rear-view mirror are very distorted.

Key Rate Factor: Federal Reserve Activity

On June 17th, the FOMC reiterated that “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”  In March 2015, 15 of 17 FOMC participants judged that the first increase in the target federal funds rate (now 0-0.25%) would occur in 2015 even though the same contributors expect inflation to be well below the 2% target with a central tendency at 0.6% to 0.8% in 2015.

Key Rate Factor: Inflation Expectations

Below is a representative graph of the Fed’s preferred inflation gauge, PCE Inflation—as measured by the percent change in the personal consumption expenditures (PCE) price index is headed downward. Graph retrieved from FRED, the excellent resource at the Federal Reserve Bank of St. Louis: https://research.stlouisfed.org/

It has been more than a decade since the Federal Reserve raised interest rates and nearly seven years since the fed funds rate was set near zero. Still not a forgone conclusion that a new rate regime starts in 2015, government agencies, exchanges, major bond investors, and private investors are again preparing for significant changes. So join them in preparing your mind and portfolios.

A choice not to lose can be a winning strategy, and prudent portfolio management always considers potential reward units versus potential risk units. Each investor and their trusted advisors should follow a continuous wealth management process of Discovery & Diagnostics, Planning, Implementation, and Supervision. As you work through the review steps, note that the “bond” label is not always synonymous with conservatism, low risk, or stability. Please evaluate your obvious and not-so-obvious risk exposures to bond funds and exchange-traded funds.

I welcome your thoughts in the comments section below. 

ABOUT THE AUTHOR:

Michael loves to empower investors with his expertise in securities and economic analysis, goals-based wealth management solutions, and FinTech smart decision-support tools. He has directly managed over $5 billion in growth and retirement assets, and his proactive advice has influenced thousands of fiduciary advisors to better their practices and service to clients. He enjoys spending time with his wife and three boys, competing in USTA tennis, and mentoring others to succeed.

Email l mdhakerem@gmail.com
Twitter | @MichaelHakerem

How’s Your Form: When Only A Few Will Know?

All Rights Reserved

One demonstration of character is how YOU go about YOUR business with just a few audience members. Perhaps the sole observer is the person you see reflected in the mirror.

The Xfinity Center, the indoor arena that serves as the home of the University of Maryland Terrapins, holds capacity crowds at nearly 18,000. Imagine the vibration as thousands of fans pile in to cheer, boo, and watch soon-to-be professional basketball players. Boom! Feel the chills and goosebumps on a made three-pointer or “And 1” play. Instant results, instant performance review, all recorded in history for the world to see…

You could hear a pin drop on a recent Sunday morning in College Park. A young player with hopes and dreams stepped up to the line for a technical foul shot. Just #3 and the referee. An opportunity to give less? An opportunity to make excuses? As parents, coaches, and business leaders, we are proud when a child, player, or corporate teammate strives for the perfect form. It is especially gratifying to witness hard work and effort with an awareness that the results and performance may go mostly unnoticed and fade away in time.

Some professionals will play to full arenas and receive national recognition while most of us have our best high-five moments to no cheers or big awards. Some professionals choose the easier way or take advantage of situations where the boss or clients “will never know the difference.” You know these folks, their timing for the right spotlight is impeccable. Meanwhile, most of us will often realize our best professional form on a Saturday morning in an empty office. Is it worth it?

ZZZZZZZZzzziiiiiiiiiipppPPP.

The sweet sound of a swish of the net remains unmistakable–even if it is just YOU. “Yes,” that satisfied smile is worth it–that look in the mirror is worth it.

With Gratitude, Michael

An Ark, a Speedboat, a Tight Bathing Suit

Famous investor, Warren Buffett is credited with the following quote, “You never know who’s swimming naked until the tide goes out.”

ArkBoatSuit

China, Japan, and Europe are cannonballing into high tides with new stimulus announcements. Downward global GDP growth and lower price pressures are clear on the horizon, even as metrics ebb and flow. At the same time, the U.S. central bank has indicated an end to one element of its monumental wave of Quantitative Easing (QE).

My Asset Allocation Strategy

Ark: This core and stable vessel is built to last, to withstand storms, to leave mostly untweaked in times of stress–emotional or market related. This majority of my portfolio should be untethered to a reliance on any one central bank, one asset class, one direction of interest-rates, or my ability to outguess new bulls or bear markets. This is not to say that significant shifts in underlying investments simply stay put forever or that damage will not occur.  More importantly, this reliable piece of my asset allocation remains steadfast in its character traits.

Speedboat: This satellite and more aggressive watercraft is built for quick maneuvers, possibly fun and entertaining, and an opportunity to impress myself (or teach humility). This smaller allocation should demonstrate my most active portfolio management, style, and security selection skills. Rockin’ and Rollin’, these investments better take advantage of great ideas, dislocated markets, and short-term behavioral mistakes made by my fellow investors. These vehicles provide an opportunity to earn much greater returns than those generated by the more passive portion of the portfolio.

Tight Bathing Suit: I wholeheartedly pay attention to risk management. Famous investor, Warren Buffett is credited with the following quote, “You never know who’s swimming naked until the tide goes out.” A rising tide of asset prices like we have lived through since 2009 can make a lot of people and investments appear intelligent. Over my twenty-year career, many of my most important lessons occurred when I realized just how dumb I could be. More importantly, with so many boats lifted in the high tides, consumers of financial advice and even Do-It-Yourselfers may miss indiscretions, poor advice, lack of stewardship, and inferior tools and techniques. You worked hard to build wealth so avoid getting caught showing your assets at the wrong time!

Central-Bank activity, global interest-rates and currencies are interconnected with your portfolio and retirement goals!

The European Central Bank (ECB), led by Mario Draghi, holds its next monetary-policy meeting January 22nd of next year with high anticipation for its own bond buying QE program. Somewhere in the vicinity of a 2% sustained pace is the goal-line target for official inflation measures. Germany is close to 1% price increases, however, the rest of the Eurozone is struggling at 0.3% in November as energy prices fell. Source: Eurostat. Data prior to 1996 are estimated on the basis of non-harmonised national Consumer Price Indices (CPIs).

Stage 3 graph

The Federal Open Market Committee (FOMC), led by Janet Yellen, concludes its next monetary-policy meeting December 17th with high anticipation for the associated Summary of Economic Projections release and press conference. Yellen has clearly reiterated that the timing and path of the target federal funds rate is data-dependent. Financial market reactions and preemptive interpretations by systemically important financial institutions will be important inputs.

Sales at the holidays are good, right?

Like most things in life, balance and stability are the keys to success. Central banks attempt to stop severe deflation (price drops), along with severe inflation (price increases), in an attempt to keep the excessive volatility in prices to a minimum.

Deflation is in almost all cases a side effect of a collapse of aggregate demand – a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. -Dr. Bernanke

Deflation is viewed as the greater and less “controllable” threat, and it can be caused by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to economic depression. For example, Eurozone headline unemployment stands at 11.5%.

U.S. asset investors have benefitted greatly from the reflation of stock and bond prices. The FOMC leads an interesting experiment on how to safely exit the high tide environment of unusually accommodative or even emergency-like monetary-policy. U.S. growth, prices, and employment are thought to be stable. China, Japan, and the Eurozone are not in exit mode. In fact, Japanese Prime Minister Shinzo Abe’s ruling party may claim a fresh mandate for his economic revival policies as his coalition is projected for victory in recent elections; after all, the Japanese stock market (Nikkei) is at 7-1/2 year highs.

Thoroughly review all your taxable and tax-deferred accounts. Make sure you and the advisors who work on your family’s behalf have coordinated strategic (long-term) and tactical (short-term) estate, asset allocation, and margin-of-safety plans. The tides will inevitably change so do not wait to hear the thunder before the next big storm!

Please visit my October 29th piece on the U.S. central bank’s policy dilemma and scroll to the conclusion for an investor checklist of more controllable factors, ex. Take charge of the collaboration amongst your tax, legal, and business advisors to maximize your family’s financial, tax, and investment planning–do not assume this is taking place without your encouragementhttp://bit.ly/1vsCTRk

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I welcome your comments.

Michael embodies client-stewardship in all his work and happens to be a passionate expert in securities analysis, asset allocation, economic analysis, and wealth management solutions.

Email: mdhakerem@gmail.com & Twitter: @MichaelHakerem

One Blessed Encounter with a NYC Squeegee Man

Squeegee Man & Car
It cannot be, but this man resembles one who treated me honorably more than two decades ago in NYC and inspired me to share this piece. The New York Post declared, “Squeegee men are back terrorizing NYC streets.” I, too, recall the quickening of my pulse, checking the door locks, and looking back and forth between the ever approaching men spraying car windshields and the traffic light that just will not turn GREEN! While many of these men are rightly termed notorious and infamous for intimidating behavior, I can attest that even the targeted squeegee men are capable of a generous spirit.

It was the summer of 1990, and this west side story began as the night sky quickly darkened and the breeze accelerated, cooling the air and prompting an ominous swirl of clouds. My heartbeat accelerated and my pace quickened as I passed through Hell’s Kitchen on my way to Pier 76 in Manhattan. Empty handed and nervous, every shadow seemed to reach out. Suddenly and despite my lack of a vehicle, an aged and rugged street window washer approached me for spare change. Within seconds of my shaken response, the generous man handed this young college student two quarters for phone calls, pointed me in the right direction, and wished me many blessings.

As it is written, “The one who had much did not have too much,
and the one who had little did not have too little.”

Despite my education, family, and resources, prior to that moment of receiving, I was destitute. By contrast, a man who struggled every day to find a meal, prior to that moment of giving, saw me as an opportunity to add money to his own pocket. Nearly 25 years later, I faithfully believe that wealth can never define a man’s true character. Still, this investment professional finds great personal purpose in enabling families and institutions to relieve three primary wealth burdens: Is their financial advisor trustworthy and rich in integrity? Can they comfortably sleep at night with a fully transparent and understandable portfolio of assets? Are these assets coordinated in order to meet their unique objectives? Wow! Those fifty-cents helped to shape a lifetime career for me.

(Read to the end to access bonus websites for empowerment)

Millions of Americans will soon celebrate a 65th birthday at a
rate of approximately 8,000 per day. The most pressing financial concern of these current or future retirees: Will they outlive their money? This great generation is facing more than just pen to paper analysis on their own spending, saving, budgeting, and views of risk. They must consider the challenge to agree on a financial plan that may include support for children and elderly parents. Extremely low interest-rates and looming entitlement and pension deficits threaten incomes while the costs of living, educating, and staying healthy are escalating. Although making assumptions about the future is complicated, greater threats reside in dark and unpleasant clouds elsewhere. This pending storm troubles me greatly, and I feel compelled to share my two cents.

It is painful to write this; however, when it comes to your financial matters, do not completely trust anyone and verify everything you read, see, or hear. This advice pertains to every corner of Wall Street and Main Street where wolves often lurk. It also reins true to be careful of every magazine cover, news report, website, government statistic, and yes, even your well-intentioned friends and family. No, a Ponzi-schemer or high-frequency trader does not lurk beyond every corner ready to separate you from your hard-earned savings. Instead, quality information, fair dealing, and truly customized guidance are difficult to discern and consistently secure. You probably spent 40 years or more building your nest egg, so spend more than 40 minutes protecting it. Your loved-ones’ futures depends on it!

“What is the chief end of man? To get rich. In what way?
Dishonestly if we can; honestly if we must.”
— Mark Twain-1871

Too often, the motivations of the financial services industry, not unlike most industries, is unbalanced in favor of business goals versus client advocacy. For example, merger headlines frequently highlight the need for more distribution of product to more customers. How often do you read, “We executed this merger to ensure our success in providing outstanding advice, personal service, and the very best strategies on behalf of our cherished clients.” I am curious, did your Financial Advisor reveal all the reasons they left one major firm for another? It is possible they received as much as a seven-figure incentive to move while all you received was the inconvenience of new paperwork, passwords, and quarterly statements. Are you paying high fees for standardized portfolio models or index funds while your Financial Advisor’s golf handicap gets lower? The Securities and Exchange Commission has targeted so-called “reverse churning” where investors are placed in accounts that pay a fixed fee but generate little or no activity or services to justify that fee.

It upsets me to read so many stories of improper behavior that are sometimes criminal and every so often just morally wrong. It will take some work on your part to look past clever marketing, impressive technology, and the veil of fiduciary standards claims to find those professionals who will truly be your family’s trusted financial advocate. Face-to-face interviews and introductions from your other trusted advisors, such as tax and legal consultants, will move you in the right direction; unfortunately, this is not enough. Family members must gain a sufficient understanding of financial services and capital markets in order to be savvy consumers of advisory services. I encourage you to take your time and ask tough and pointed questions. The best Advisors will listen, proceed at your desired pace, and encourage detailed inquiries.

Getting fleeced by an auto repair shop or swindled by some other domestic service
is bad enough. The mistrust of mainstream finance has actually increased
fraudulent pitches across smaller communities with an estimated negative impact
measured in multiples of tens of billions of dollars.

It is rare that a gang of unruly villains dressed in business suits is the only powerful threat to retirement success and financial peace of mind. Look no further than the trustworthy person you see in the mirror. Studies show that eligible plan participants do not save enough, and they make unnecessary asset allocation mistakes. Many investors do not heed the simple yet sound advice of saving more and spending less. Human nature gets in the way too, as we are often our own worst enemy when greed, fear, and other behavioral mistakes blur our vision: An abrupt and emotional change to well-reasoned financial plans lowers your odds of retirement success. Some people say it takes money to make money, look no further than the sad bankruptcy statistics for professional athletes and lottery winners. As is true concerning your physical health, you are your own best advocate when it comes to your financial well-being. My advice is for you to stay comfortably engaged with the processes and critical inputs necessary to create and adjust your family’s unique financial plan and investments–DO NOT delegate 100% responsibility and authority.

The National Endowment for Financial Education cites research estimating
that 70 percent of people who suddenly receive a large sum of money
will lose it within a few years.

It has been more than two decades since my journey through Hell’s Kitchen. I remember as if it were yesterday when a man with so little, who struggled to survive the streets of New York City, helped me not only at that moment in Manhattan, but more importantly, often reminds me that no amount of wealth can define our character. I, too, recall the chilling of my heart, checking a friend’s portfolio and fee schedule, and looking back and forth between the faces of the iWolf & Sheepnnocent couple and the ever approaching wolves on their street. We all have an opportunity to be generous stewards of our moral fiber, and I believe it is a mistake to measure our success in financial terms. Yet, issues of money always top the worry list for families. New Stock Market highs and IPO media blitzes may cause two problems: disguise bad advisor behavior and promote investors’ vulnerability to chase the promises of riches. Despite signs of economic recovery and exciting prospects for growth, the global population faces great uncertainty, financial imbalances, and challenges.

Dedicate time to the below checklist, and you will find more trust in your own ability to make sound financial decisions, be better suited to select trusted advisors, sleep more soundly, and improve the odds of your asset’s ability to meet your unique objectives!

Action Checklist:

Read The Millionaire Next Door to explore the impacts of spending and saving (New York: Simon & Schuster, 1996)

I know this will be overwhelming; however, please visit the below websites to explore basic and advanced investing topics:
CFA Institute http://www.cfainstitute.org/learning/investor/Pages/index.aspx
Employee Benefit Research Institute http://ebri.org/
National Endowment for Financial Education http://www.smartaboutmoney.org/
American Institute of CPAs http://www.aicpa.org/Pages/default.aspx
Council for Economic Education http://www.councilforeconed.org/
Investopedia (great for quick definitions of financial terms and jargon) http://www.investopedia.com/
Research individual brokers, firms ,and investment advisers at the U.S. Securities and Exchange Commission (SEC) website under the “Education” heading http://www.sec.gov/investor#.VC19WfldXOM

Squeegee Man Photo by Rich Docherty:  Wolf & Sheep Illustration: The Economist, 2012;
Clouds Over Manhattan Photo: Andrew Dallos

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I welcome your comments.

About Michael Hakerem, CFA:

Michael embodies client-stewardship in all his work and happens to be a passionate expert in securities analysis, asset allocation, economic analysis, and wealth management solutions.

Email Michael at mdhakerem@gmail.com
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