Keeping Up With Fiat

Giving Thanks

I don’t have anything clever or witty to say. I just want to share my gratitude for having the privilege to work with you all and do something I love. I hope you are all able to take the time to spend the holiday the way that I plan – spending time with family and friends. There are always going to be challenges, sure, but life if pretty grand when you stop to think about it.

Thanks,

Matt

Arbitrary Endpoints

Being a math major in college and learning about how to figure out probability and statistics is helpful in nearly any industry and especially in financial planning. However, in statistics classes we did not learn how to use statistics that came in other classes. There is a saying that goes there are lies, damn lies, and statistics. Stats can be created to argue both sides of a given point, and one way to do this is by picking arbitrary endpoints. I want to show you what that means to looking at charts in the market.

For all of these examples I want to use the SP 500 index. Over the last five years and eight months, since the bottom of the Great Recession, the SP 500 has risen 300% or 21.3% per year. When talking about investing we always talk about buy low sell high. This statistic tells us that the market is high and we should be worried.

However, if you look at the last seven years and one month, while looking at the peak of the market the market in the past 7.1 years is only up 31% over all or 3.9% per year. General buy low sell high strategy tells us that the market has not had a great run and we should get all of our money invested.

What I am trying to say is that no one really knows what is going to happen in the market and if they tell you they do then they are probably lying. Even if someone can use impressive sounding statistics try to take them all with a grain of salt and try not to guess what is going to happen because chances are we will all be wrong. What to do with this information? Well in my opinion we should continue to stay diversified, rebalance our investments twice a year and continue to save systematically into retirement plans, college accounts, and other investment accounts. Stay consistent and you will be better off in the long run.

Matt G.

#Creatingconnection

I am often asked what types of people I work with as clients.  In fact, I just answered the question this weekend while having dinner with some new friends and neighbors.  After fumbling my way through several ‘elevator speeches’ early in my career about working with high net worth clients, small business owners, pre-retirees, etc., I have managed to sum this up in one simple explanation.  I work with people I connect with, for some reason or another, and want to help for the next several years.

It is typical for a financial planner to work with a specific niche group such as doctors, lawyers, engineers or a group of employees from a specific company. From the planner’s perspective, this creates more efficiency as you don’t need to re-learn the compensation package, benefits options, tendencies, typical personality.

To heck with efficiency, I love the adventure.  I will make every other area of my practice efficient, not my relationships.

I love learning about the different ways people earn their livelihood.  I have met so many different people from different industries.  I have learned so much about each of their businesses.  I must know the details in order to guide them effectively.  And, sometimes, I have the privilege to connect these people with one another.  I just had the opportunity to connect two people last week.  It was an all around win – my client was looking for help, my friend was looking for work, and I want the best for both of them.

What better way to continue to learn and grow than to put the time and effort into learning more about the humans we work with and connect in a meaningful way.  So what if I have to immerse myself into a whole new data package that I have no experience with – here’s to new experience.

I may meet somebody that I would think I would never connect with, and after a 45 minute conversation we find that one thing that sparks the beginning.  That is a beautiful thing.  That is why I love what I do.

Overcoming Fear in Investing

I’m nervous.  We are all nervous if we really think about it much.

Look at all the scary things that are going on in the world.  There are 9216 cases of the Ebola virus, totaling 4555 deaths as of October 20th – and this number is believed to be low.  And the virus has now landed in the United States.  There have been pro-democracy riots in Hong Kong that, if escalate, could have world wide effects financially.  There is also Russia, which has been a headline hog as of recent – and is now slipping into recession and dealing with sanctions from the Ukraine conflict, which could greatly affect the world economy.

But I don’t let the unease make decisions for me – because I make a certain choice.

That choice is whether to focus on all of things that can go wrong or worse, or to focus on all of the advancements and the brightness of the future.

We all tend to forget things quickly – it’s human nature.  I could rewind to any day in the history of my career as a financial planner and find a short list of things that could have dramatic effects on an investment portfolio, let alone day to day life outside of investment management (which I am well aware exists).

Take December 2010 – the Arab Spring uprising began picking up speed.  Whatever the outcome may be, any event associated with “uprising” or “revolution” means big change.  Big change makes people nervous – especially those that are investors.

But let’s look at what happened during this time.  Twitter and Facebook played a major role in organizing the efforts in Egypt to revolt and overthrow Hosni Mubarak’s regime.  This gave a voice to all groups in Egypt and allowed them to speak their opinion.  The social media platforms had such a large effect on the efforts that Mubarak turned off the nation’s 3G network and internet services.   Facebook and Twitter weren’t even a concept to most people 10 years ago.  That is amazing.

Today, an iPhone in your pocket has more computer power than all of NASA back in 1969 when it placed two astronauts on the moon.  And you certainly couldn’t take pictures and call people while walking around with one of these computers.  That is incredible.

I recently had the opportunity to meet the management team of Miromatrix, a Minnesota based company that was born out of a University of Minnesota research project.  They are working on the cellularization of organs for organ replacement.  They are literally planning to create organs for people in need of replacement.  This is 2014, correct?

So, while there are always plenty of things to cause fear, please remember that there is always a parallel list of all the good things happening and endless opportunities out there.

Of course, as portfolio managers we are extremely aware of the potential risks – we must to be to effectively plan investment strategy.  But we also must focus on the positives.  Especially as humans, we focus on the positives.

 

Data Sources:

http://www.cdc.gov/vhf/ebola/outbreaks/2014-west-africa/case-counts.html  – Ebola data

The Future of the Mind: The Scientific Quest to Understand, Enhance, and Empower the Mind, Kaku, Michio – iPhone data

www.miromatrix.com – Miromatrix information

 

 

Market Update – August 2014

Dear Client,

August was an eventful month on the political and economic front, as concerns about the European economy joined the headlines along with the continued expansion of U.S. involvement in Syria and Iraq. Market participants continue to focus intensely on any indication that the Fed might behave differently than planned, or might even talk about behaving differently than planned. Stocks drifted slightly lower, as did bonds. Here is what happened in the capital markets, by the numbers:

Stocks & Bonds

In August Mario Draghi, head of the European Central Bank, announced additional money printing, driving the euro lower and sending the dollar to a 14-month high. U.S. equity and credit markets both benefited.   Inflation has jumped a bit in the last few months, although its annualized adjusted rate is still well within Fed parameters. By the numbers:

S&P 500 Total Return MSCI EAFE BarclaysAggregateBond Unadjusted CPI
August 4.00% -0.42% 1.10% -0.04%
July -1.38% -2.00% -0.25% 0.19%
YTD 2014 9.88% 0.46% 4.81% 2.21%

 

Commodities & Currencies

NYMEX crude prices declined slightly in August, from $97.32 to $95.96 per barrel. Gold prices were almost unchanged at $1,287.40 per ounce, holding on to a 3% gain year-to-date. As central banks weaken currencies around the world, the dollar suddenly is the less weak currency. On a trade-weighted basis the dollar gained 1.55% in August, and is now showing a gain of almost 3% year-to-date. A stronger dollar generally puts downward pressure on commodity prices, and many commodities have seen price declines this year. Iron ore, the primary component of steelmaking, is down about 38% year to date, boosting the fortunes of large and efficient mining operations in Australia. These gains have come at the expense of many smaller and less efficient mines in China and Brazil.

 

Economy

The Labor Department reported that CPI declined 0.2% in August, and has increased only 1.7% over the last 12 months. The Federal Reserve targets an inflation rate of 2%, so there is still no sign of inflation. Indeed, the Fed actually tracks a slightly different measure of inflation than the CPI, which is running even lower than 1.7%.

The unemployment rate ticked back down ever so slightly to 6.1% in August, from 6.2% in July. Employers added only 142,000 jobs, and the rate fell primarily due to discouraged workers leaving the workforce entirely. Moreover, wage gains are barely keeping up with increases costs of goods and services. For many Americans, the recovery exists primarily through articles in the newspaper telling them that we are having an economic recovery.

The Institute for Supply Management had continued good news, reporting that the manufacturing PMI in August was at 59, up 1.9 from July’s 57.1. A reading above 50 indicated economic expansion. As economic indicators in Europe and Japan point to slowing activity, economic data from the U.S. continues to be positive.

The National Association of Realtors releases data on existing home sales for the month of August next week, and this data will be included in our next monthly economic update.

Summary

The economic recovery is continuing, but shows signs of wear. Last week the People’s Bank of China, printed 500 billion yuan ($81 billion) and distributed it to the largest 5 banks in China to forestall a liquidity problem. This is not the first time in the last 12 months that the PBOC has intervened in the Chinese credit markets to deal with liquidity problems. As China’s growth has been a significant part of the global recovery, any slowdown there would have global consequences. The European Central Bank has also been on a program of ad hoc money printing, while the Bank of Japan has been on an outright mission to print yen in an attempt to finally reverse years of deflation.

These central banks are responding to real problems. Speculation abounds as to China’s true GDP rate, as the official government number reports growth of around 7%, but power generation dropped 2.2% in August which is not necessarily indicative of a growing economy. Japan recently enacted a sales tax hike to try to quell years of government deficit. In response, their GDP declined 7.1% on an annualized basis in the 2nd quarter. GDP in Germany declined 0.2% in the 2nd quarter, and the euro zone as a whole grew only 0.2% for the 2nd quarter, pacing 1.2% for the year.

So the U.S. GDP growth of over 2% looks strangely robust, and the U.S. also stands relatively alone as

its money printing program will conclude as planned next month. This looks relatively bullish for the U.S. dollar, which is often bullish for U.S. Treasuries and sometimes so for U.S. equities. This author is mildly optimistic for the American recovery, but 2% GDP growth and slack wage growth is hardly a reason to celebrate. The slowing economies around us, if uncorrected, could certainly throw a wrench into the works here at home.

 

Sincerely,

Greg

 

 

This material was prepared by Greg Naylor, and does not necessarily represent the views of Woodbury Financial or its affiliates. This information should not be construed as investment, tax or legal advice and may not be relied upon for the purpose of avoiding any Federal tax liability. This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. The S&P500, MSCI EAFE and Barclays Aggregate Bond Index are indexes. It is not possible to invest directly in an index.

Investing involves risks and investors may incur a profit or a loss. Past performance is not an indication of future results. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

 

Data Sources:

www.standardandpoors.com – S&P 500 information

www.msci.com – MSCI EAFE information

www.barcap.com – Barclays Aggregate Bond information

www.bloomberg.com – U.S. Dollar & commodities performance

www.realtor.org – Housing market data

www.bea.gov – GDP numbers

www.bls.gov – CPI and unemployment numbers

www.commerce.gov – Consumer spending data

www.napm.org – PMI numbers

www.bigcharts.com – NYMEX crude prices, gold and other commodities

http://data.bls.gov/timeseries/LNS11300000 – Labor participation data

http://www.bloomberg.com/news/2014-09-09/csn-and-gerdau-seen-by-goldman-losing-in-iron-ore-rout.html – Iron ore price data and mining commentary

http://www.japantimes.co.jp/news/2014/09/08/business/economy-business/gdp-contraction-revised-to-deeper-than-estimated-7-1/ – Japan GDP data

http://news.xinhuanet.com/english/business/2014-09/05/c_133624217.htm – Euro zone GDP data

http://in.reuters.com/article/2014/09/17/china-power-consumption-idINL3N0RI0OH20140917 – China electricity consumption data

 

Saving for College

We seem to be hearing more and more about the rising costs of a college education. And it’s true; the average cost of a four year state school in the state of MN is $7,300, a university is $13,000, and a private school is $36,000. These numbers are just for tuition if you include $1,000 per month for room, board, and books. The costs increase by $10,000 per year. (These numbers a from the MNSCU admissions website http://www.mnscu.edu/admissions/collegecostcomparison.html) Ten years ago the same education costs were $5,245, $8,263, and $21,463. (from http://www.ohe.state.mn.us/dPg.cfm?pageID=812) This is an average growth of 54% over the past ten years and this doesn’t include the rising costs of food, housing, and books.   If tuition continues to rise at that current rate then tuition in 2024 will be $11,242 for state schools, $20,000 for the universities, and $55,000 for the private schools and once again this doesn’t include room and board. I keep hearing that school can’t continue to increase at this current rate. But until it stops we are going to continue to plan on the increasing cost.

 

Having that much money ready for college in 10 years is overwhelming so much like retirement we want to begin saving early. How do you go about doing this? Well the first step is to save money, no matter where you invest your savings just having it is going to be the most important thing that you can do. So when strategically planning for college we talk about using investments that will grow to help save for college. There are many options to for which to save money for college including 529 plans, non-qualified brokerage account, Coverdell education accounts, UTMA/UGMA accounts, and cash value life insurance. Each of these accounts have their advantages and disadvantages you should see your financial advisor to see what type of account would make the most sense in for your own specific financial situation.

 

Whether you want to pay for all your children’s college education or just help them alleviate some of the costs of college to lessen the amount of loans that they need to take out. Consider investing as little as $100 a month as soon as your child is born and then increase it a little bit every year. Even this small amount of savings will help your child get a head start in life. $100 savings per month for 20 years for college getting a 9% return will give you $64,000 to be used for your child’s education.   http://apps.finra.org/Calcs/1/Savings

 

Talk to your financial advisor or get a hold of us at www.fiatwm.com if you have any questions regarding your specific college planning questions.

 

Matt Germscheid

Market Update – July 2014

July was an eventful month on the political and economic front, as the conflict in the Ukraine was joined in the headlines by renewed U.S. involvement in Iraq.  The Fed continued to unwind QE and is on pace to conclude all ‘money-printing’ within a few months.  Stocks drifted slightly lower, as did bonds.  Here is what happened in the capital markets, by the numbers:

Stocks & Bonds

In July the U.S. capital markets took a breather, although both U.S. equity and credit markets have seen solid gains.  International stocks were hurt somewhat by the strengthening dollar.  Inflation has jumped a bit in the last few months, although its annualized rate is still well within Fed parameters.  By the numbers:

 

S&P 500 Total Return MSCI EAFE BarclaysAggregateBond  Unadjusted CPI
July -1.38% -2.00% -0.25% 0.19%
June 2.07% 0.79% 0.05% 0.35%
YTD 2014 4.66% 0.88% 3.66% 2.25%

 

Commodities & Currencies

NYMEX crude prices declined in July, from $103.85 to $97.32 per barrel.  Year to date, prices are up about 3.5%.  A glut of oil and a soft global recovery are providing headwinds for oil prices, while tailwinds come from factors such as uncertainty in the Ukraine and Syria.  Gold prices declined about 3% in July, to $1,282.80 per ounce.  Year to date gold prices are up about 6.4%.  As central banks weaken currencies around the world, the dollar suddenly is the less weak currency.  On a trade-weighted basis the dollar gained 2.11% in July, erasing its year-to-date losses and leaving it up 1.77% for 2014.

Economy

The Department of Commerce released its second estimate of 2nd quarter GDP.  They estimated that the economy grew at a 4.2% annual rate in the second quarter of 2014, a sharp contrast to the first quarter’s contraction of 2.1%.  Many economists believe that the first quarter number was a fluke due to severe weather.  Inflation also appears to be muted, with government estimates for the 2nd quarter pegging it at 1.9% annualized.  Overall, it appears possible that the economy is on contract for another year of low single-digit growth.

The unemployment rate ticked up slightly from 6.1% in June to 6.2% in July as a meager 209,000 jobs were added to the economy.

The Institute for Supply Management had continued good news, reporting that July’s manufacturing PMI was 57.1, up from June’s 55.3.  A reading above 50 indicated economic expansion.

The National Association of Realtors (NAR) reported that the annual rate of existing-home sales in July fell by 4.3% from July 2013.  This is the best annualized rate of 2014, although this year’s sales are still below last year’s.  The national median price rose from the prior year by 4.9% to $222,900.  Foreclosures and short-sales, as a percentage of overall sales, were at 9%, much lower than the 15% reading of July 2013.

Summary

At this year’s annual Economic Policy Symposium, attended by key central bank figures from around the world, Mario Draghi made a variety of comments related to his concerns about a lack of growth in the Eurozone.  He reiterated the ECB’s commitment to protect the Eurozone, leading many observers to read between the lines and assume further ECB stimulus is coming sometime soon.  As the euro has declined for almost a year against the dollar, apparently markets might also be anticipating further euro stimulus.

As the Fed is on schedule to end its monthly bond purchases in October, the U.S. looks more and more alone amongst developed economies.  Both Europe and Japan are pursuing ad hoc or systematic currency weakening to try to spur economic growth.  The dollar looks like it may continue to gain strength if other countries continue to weaken their currencies.  This could be bullish for U.S. equities, and even U.S. bonds, relative to foreign equities and bonds.

In addition, the government deficit in the U.S. appears to be improving.  The CBO projects the deficit for this fiscal year to be 2.9% of GDP, lower than the 3.0% average of the last 40 years.

Sincerely,

Greg

This material was prepared by Greg Naylor, and does not necessarily represent the views of Woodbury Financial or its affiliates.  This information should not be construed as investment, tax or legal advice and may not be relied upon for the purpose of avoiding any Federal tax liability.  This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such.  The S&P500, MSCI EAFE and Barclays Aggregate Bond Index are indexes.  It is not possible to invest directly in an index.  

 

Investing involves risks and investors may incur a profit or a loss.  Past performance is not an indication of future results.  There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

 

Data Sources:

www.standardandpoors.com – S&P 500 information

www.msci.com – MSCI EAFE information

www.barcap.com – Barclays Aggregate Bond information

www.bloomberg.com – U.S. Dollar & commodities performance

www.realtor.org – Housing market data

www.bea.gov – GDP numbers

www.bls.gov – CPI and unemployment numbers

www.commerce.gov – Consumer spending data

www.napm.org – PMI numbers

www.bigcharts.com – NYMEX crude prices, gold and other commodities

http://data.bls.gov/timeseries/LNS11300000 – Labor participation data

http://www.bloomberg.com/news/2014-08-22/ecb-ready-to-act-as-draghi-sees-inflation-expectations-sliding.html – Mario Draghi comments

 

Four Traits of a Successful Investor

It only takes four qualities.  It takes four qualities to be a successful investor in order to reach our financial goals.  It doesn’t matter what that goal is – it could be retirement or a life changing trip somewhere across the world.  It is very rare for a person to have all four of these traits.  That is why our role exists, to fill one or all four of these areas for our clients.  Let’s talk through them:

Knowledge

This is where most folks think the largest gap exists.  It’s funny, that really is not the case.  Our clients are very bright people and many of them have backgrounds in finance or run their own companies.  This helps them to understand what makes a sound investment and that skill carries over well to making personal investment decisions.  If a gap does exist here, it is mostly in the details.  Clients may not fully understand how to read a balance sheet for a company to help find opportunity in investment strategy.

Time

This is a common lacking feature with a majority of our clients.  With all of the advances in technology you would think that we all were getting plenty of sleep, and meeting our friends and family for brunch everyday.  This doesn’t seem to be the case.  Many of us have little time between shuttling the kids to soccer, squeezing in some yard work, taking the dog for a walk, and setting aside some time to have a conversation with our significant other (personal perspective anyway).  I have personally found an incredible amount of peace in choosing to slow down, reduce my commitments, and focus on those things most important to me (family, friends, business, fun and overall health – more on this later).  However, there are still so many hours in the day to do what we choose – which is a great segway to the next quality…..

Desire

As I have said time and again, our clients are bright people.  However, this does not mean that they WANT to spend their free time and brain power researching investments and financial strategy.  Most people are busy these days, whether that be with family, friends, hobbies, or just doing something that really fires them up and makes them feel alive.  I have not meant many people that get fired up managing their financial plan – I have meant some, but not many.

Discipline

This is where we really get to put the coach hat on.  Many clients do possess every other trait listed above, but know that when challenged with balancing fear and greed – one of the two may get the best of them.  Too much of either emotion can lead to a less than desirable decision.  We help to balance out fear and greed to ensure that our clients make sound investment decisions to reach their goals.

As I said before, for us to provide value to a client there must be a lack in one of the traits above, if not all four.  We have the pleasure of helping fill the gaps in those qualities.