Frankly, My Dear

What a week! And it’s Thursday. Since last Friday, here’s what the S&P 500 has done every day:

Friday 2/2: -2.12%

Monday 2/5: -4.10%

Tuesday 2/6: +1.74%

Wednesday 2/7: -0.50%

Thursday 2/8: -3.75%

Wild! Honestly. It has been seemingly forever since we’ve seen any real kind of volatility. We went all of 2017 with nary a -3% drawdown ON THE ENTIRE YEAR! And here we are in the span of a week falling over 3% in a single DAY. TWICE. Hello, volatility. How good of you to drop by again. Thank you, sir, for the reminder that sometimes markets are crazy.

Do you know why markets are crazy? Because at their core, markets are people. Herding, hilarious, panic-and-greed driven people. Sometimes, those people write algorithms to trade stocks and bonds with some brilliant idea that they think will always make money, but it’s people all the day down.  One thing that has been funny about this little downturn is that I really haven’t seen anyone try to come up with some plausible-sounding explanation for why this happened. The economy isn’t teetering on the brink of disaster. There’s no black plague outbreak anywhere. No inflation running rampant. It just happened.

I’ll be honest. Right now I am finding this highly entertaining. Perhaps that’s a coping mechanism. But really, how else should you approach this? It’s total madness. Clearly the value of these stocks is not changing 4% on a daily basis. In the short run, markets are wildly irrational. This is pretty good evidence of that. So, it’s a good chance to laugh at ourselves.

And when you’re done laughing, the next question is always the same: What should we do?

If you’re reading this, there’s a really good chance that you know I’m going to tell you not to freak out. Musk’s spaceman (with credit to Douglas Adams) is right: Don’t Panic. But you know that. YOU aren’t panicked. Other people, maybe. But you get it. This isn’t a time to lose your nerve or lose sleep or start pulling your hair out. This is normal. It really is!

But there’s also this part of you that can’t help but think – surely, we should be doing something. This has to be an opportunity, right? Buy when there’s blood in the streets, right? Be greedy when others are fearful, right? Here’s the boring, cold, honest truth: a few (huge) down days is probably not going to change a thing for a diversified investor. Maybe your portfolio went from 72% stocks to 69% stocks this week, and your investment policy was 70% stocks. So, you get to do: nothing. You weren’t too overweight at 72% to justify rebalancing out of stocks, and you aren’t too underweight at 69% to justify rebalancing in to stocks. I’m sorry. I know how it feels. You want to demonstrate that you’re cool and calm and levelheaded enough to take advantage of the crazy people around you. But are you cool and calm and levelheaded enough to stick to the plan laid out in your Investment Policy Statement?

Are you?

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2017 In Review

(Since it’s the most pressing and biggest topic right now, I’m going to flip the script and start with updates on taxes and legislation out of DC).

Tax & Legislative Updates

On Friday December 22 President Trump signed the new Republican tax bill, making significant changes to both personal and corporate income taxes for 2018 and following years. Changes affect how taxpayers will take deductions from their income, tax rates that will be paid and treatment of business income. I’ll do my best to summarize how these changes will affect most tax payers.

  • Tax code will retain 7 tax brackets with new rates of 10%, 12%, 22%, 24%, 32%, 35% and 37%.
  • The Standard Deduction will nearly double to $24,000 for married filers and $12,000 for single filers. This is paired with the elimination of personal exemptions, formerly $4,050 per individual.
  • Itemized deduction of state and local income and property taxes will be capped at a combined $10,000 limit.
  • Home mortgage interest deduction limited to $750,000 of debt for purchase only for new mortgages. Home equity financing will no longer be deductible.
  • All miscellaneous itemized deductions, including payment of tax preparation and investment advisory fees, are eliminated.
  • The Alternative Minimum Tax impact is reduced, with a higher exemption limit ($109,400 from $86,200 for married filers) and a higher phaseout. AMT will impact a much smaller populace than in prior years, especially with more limited deductions of state and local taxes (a large use of which often triggered AMT).
  • The Child Tax Credit is expanded from $1,000 to $2,000 per child under 17, and the phaseout level is increased from $110,000 to $400,000 for married couples. A new $500 credit will be available for non-qualifying dependents, including children over 17 or dependent adults.
  • 529 College Savings Plans can now make qualifying distributions for the use of primary and secondary schools, including private schools. Especially in Colorado and other states with large deduction allowances, this makes 529 plans significantly more attractive for parents of children attending private school.
  • Pass-through business entities, including sole proprietors, will be able to deduct 20% of their business income from taxable income, subject to some restrictions. There are significant complications related to W-2 wage amounts and service businesses that should be discussed with a tax professional as it may relate to your personal situation.
  • Taxable business entities (C-Corporations) will see a large reduction in tax rate to 21%.
  • Estate and Gift tax exemptions are doubled up to $11.2M per individual after 12/31/17.
  • The individual health insurance mandate and accompanying penalty as part of the Affordable Care Act is repealed effective 2019.

The primary impact of these changes is that many taxpayers will no longer itemize deductions, given the increased standard deduction and limit on the deduction of state and local taxes. Most taxpayers will see an effective reduction in income taxes, though the changes are complex enough that is can be dangerous to paint with a broad brush. Planning opportunities will change in 2018, including the timing and use of charitable giving, college planning and business structure. Right now, most tax professionals and attorneys have had barely enough time to begin to understand all of the complexities, incentives and impacts that will come out of these changes, and we’ll be learning a great deal over the next several months.

Market Overview

In short, 2017 was an fantastic year for stock investors. Throw a dart and most equity asset classes are up double digits. Large caps, small caps, tech, developed international, emerging markets, the list goes on. For the first time on record, the S&P 500 was positive for every month during the year, one in which we had practically no volatility. The VIX, a measure of market volatility derived from options traders’ expectations, has been sitting at unusually low levels nearly all year. We haven’t seen a 3% correction since November of 2016!


Here’s a look at how major assets fared.

4Q2017 Markets

As I mentioned, large cap US stocks had a remarkably good year with gains of 21.83% in 2017. Small caps also gained, but did not keep pace, up 14.65%. International stocks, boosted for US investors by a weakening Dollar, finished the year up 25.03% and emerging markets had a tremendous year, up 34.35%, the best performing of major asset classes. Even bonds fared reasonably well, as the Barclay’s Aggregate gained 3.54%, enough to stay ahead of inflation. The bond bears were wrong for yet another year, and while bonds hardly added to the performance of a diversified portfolio, allegedly impending bond market carnage was not to be found.

We could spend hours discussing the current state of the markets. We can debate whether or not stocks “should” have gained so much this year, as if it’s something to decide we deserve or not. We can choose to worry about valuations and stay up all night fretting over the impact of CAPE ratios. You can sweat missing out on huge tech returns because you had a well diversified portfolio or a reasonable exposure to bonds.

Or, you could be happy, satisfied, pleased with a better-than-average year, and know that when years like this come, we take them. We don’t take it for granted, but we take it. And the consequences are pretty straightforward. If a great year like this one leaves your portfolio out of balance, you rebalance. After a year like this, you do what you said you were going to do after a year like this. Instead of fretting, instead of trying to guess if the rally will continue or when the inevitable correction will come, do what you said you were going to do. That’s the only way this works. Not changing your mind, not going with your gut instinct or making a move based on what you think the President will tweet next. Having a plan is the beginning. Having the discipline to stick to that plan is the other 95%.

Economic Update

Nearly all measures of economic growth and activity remained solid during 2017, and the fourth quarter showed little change in that pattern. Housing, employment, GDP, industry and consumer sentiment all point to a very solid year for 2017, as we’ll see below.

American consumers are in fantastic shape, and remain in a considerably better position than before the 2008 financial crisis. Household net worth continues to make all-time highs:

HH Net Worth

And personal debt, both as level relative to GDP and cash flow servicing as a percentage of disposable income, remains very low. American households are less leveraged than before the crisis and are spending less of their free cash flow servicing debt, in part thanks to the continued low interest rate environment.

Household debt

Consumer spending growth has been very steady, leading to a reasonably slow economic expansion but also indicating a lack of over-exuberance and borrowing.

Real PCE

Related, Real GDP growth remains steady but unexciting. Economic activity is robust but hardly the boom often associated with blow-off-top bubbles we have seen twice in the last 20 years.


Housing in the United States is robust by most any measure. National home prices have risen steadily since the financial crisis.

Case Shiller

This is certainly not unrelated to the fact that supply remains limited relative to pre-crisis levels. Housing starts are growing, but at a much lower level than the early to mid 2000’s.

Housing Starts

Partially as a result, home buyers have faced a market of limited supply that has essentially remained unchanged since the washout after the crisis.

Housing Supply

As with most economic factors, these above are linked. Reduced supply and constrained new construction contributes to increasing home prices nationwide. What may be more interesting is that recovering home values have not led to increasing consumer debt loads as we saw in the previous runup in home values from 2000-2007. Perhaps (a big perhaps) consumers learned some lessons about the dangerous of being too leveraged and are steering away from the house-as-ATM phenomenon we saw a decade ago.

Economic confidence is strong across both consumers and industry. University of Michigan Consumer Sentiment remains very high with the last reading at 95.9 in December 2017. The long term post-crisis trend is upwards.

UM Sentiment

The Institute for Supply Management’s Purchasing Manager’s Index is a reliable indicator for the health and expansion of the US manufacturing sector based on orders, inventories and other factors. A level above 50 indicates expansion, and the most recent data was a reading of 58.2


Of course all of this data is current or backward-looking. We can’t predict what happens next and most of the above should be mentally categorized as (maybe) interesting but probably not actionable.

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Lower future returns: What’s an investor to do?

Corey Hoffstein over at Newfound Research put up a great presentation on how investors should respond to lower expected returns in the future. First I’ll make the standard disclaimer that my industry has been calling for lower future returns for the better part of a decade now without much accuracy. But let’s take it a face value – what are we to do now?

Corey lays out several excellent points that I want to riff on a bit below. You should really go check out the presentation before reading further – these aren’t my original ideas.

I love that Corey calls these “compounding, marginal improvements.” That’s what I’m all about. Silver bullets don’t exist in finance or retirement planning. Much of what we talk about in finance is at the margin, and only a minority of those factors at the margin are actually in our control.

First up: fees. Mine and everyone’s favorite topic, right?! If you’re reading this you know how I feel about fees in the industry. The good news is that fee compression has been working through the financial services field, with the largest impact so far on investment product fees. A decade ago it was typical for an investor to pay 1% for common mutual funds, and closer to 1.5% for international stocks, emerging markets and other assets classes outside of core US stocks and bonds. Now an investor can get a plain-vanilla global stock portfolio in a single ETF for 0.11% or less. Right away investors are increasing expected returns there by over 3/4 of 1%. ETFs and other passive (or, if you’d prefer, less-active) products also have materially lower internal trading costs than traditional mutual funds. A fund with turnover of 50-100% could be reasonably expected to have additional costs over 0.50% annually, not reflected in fund expenses. A low-turnover passive product can easily reduce that figure by half or more.

So just with product fees, we can pretty easily assume 1% higher real captured returns than an investor thirty or more years ago when all of this safe-withdrawal rate conversation started.

The third rail among financial professionals is talking about investment advisory and financial planning fees. Advisors have been working hard selling clients on the benefit of lower fee investment products, moving to more ETF strategies, all the while ignoring that the majority of the cost burden put on investors comes from advisors themselves. For years and years advisors have been telling their clients that the 4% withdrawal rate is safe and sustainable in the face of 1% advisory fees AND 1% investment product fees (and 0.50-1% trading costs). I doubt too many advisors would admit that putting a net 6-7% expected return number into a projection might be a little too rosy if the client has a 2% fee hurdle they have to clear first, but that is what has happened for decades.

By reducing the 1% advisory fee (ideally by moving to a less conflicted, more transparent fixed or flat fee), investors can again increased their expected captured returns from their portfolios. Already by focusing on these simple changes, an investor could be increasing returns by 2-3% without making a single change to the more complex aspects of their portfolios.

The next most obvious step is the bite taken from taxes, and again we have two fairly simple strategies to control the impact.  First, reduce portfolio churn. Less frequent trading in fewer attempts to time the market and/or pick individual securities not only reduces transaction costs, but can significantly reduce ongoing realized capital gains (both short and long term) for investors with taxable portfolios. Year after year, investors with high-turnover actively managed mutual funds get clobbered by capital gain distributions, whether they sold shares or not. Lipper has estimated the cost of ongoing capital gains for active investors to be around 1% a year. 1% a year given to the IRS. For an investor with a 6% long-term assumption (or for better perspective, a 3-4% real return assumption), that is a massive chunk of their earned returns to be parting with. The fix is simple: don’t trade (or let managers in your portfolio trade) unless you need to.

A more complicated strategy for reducing tax costs is asset location – where do you own different slices of your portfolio, between taxable, tax-deferred and tax-free accounts. Some of this can get wonky and really thrown off by return assumptions, but the low-hanging fruit is easy. Tax-unfriendly asset classes like taxable bonds, TIPS and REITs belong in tax-sheltered accounts whenever possible.

If we can use lower turnover strategies and smart asset location to reduce tax drag from 1% to 0.50% a year, we are really cooking. We’re up to real captured returns 2.5% or more in excess of traditional investment strategies.

Corey’s piece keeps cooking. Next: more diversification.

One thing that drives me crazy about the “lower future returns” crowd is that this argument is nearly exclusively made assuming a very poorly diversified portfolio – typically 60% large cap US stocks (represented by the S&P 500 or similar) and 40% US Treasuries. In reality these asset classes make up a minority of the investable marketplace for today’s investor. International stocks, international bonds, emerging markets, real estate, corporate bonds, small caps and many other asset classes that may have higher expected returns are often left out to paint a dark picture. Simply owning a more well diversified portfolio is going to increase expected risk-adjusted returns without much to-do. I cannot think of a single good argument for only owning a US stock/Treasury portfolio. Don’t do that.

There are more great points made in the piece, ones that every investor and their advisor should be considering, including planning-centric topics like portfolio glide paths (probably an idea that has survived much longer in academia than in real life) and fixedly increasing 4% withdrawals (something I’ve never seen happen in practice). Those two topics are deserving of their own commentary, perhaps in the near future!

If you haven’t already been thinking about these things, or your financial professional hasn’t, it’s time to take a hard look at your decision making process and expert advice. This is where the rubber meets the road and the places where a thoughtful financial advisor actually has the opportunity to add value.


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Tiny Steps

I have a bit of an obsession lately with the idea of incremental change and its cousin, compounding. It started about a year ago with a podcast that Patrick O’Shaughnessy did with (I think) Trish and James Higgins of Chenmark Capital. One of them brought up the idea of “incrementally better tomorrow” and it laid an egg in my ear. And recently the idea keeps popping up. Carl Richards did a perfect sketch in a recent piece on his podcast, Behavior Gap Radio. It encapsulates this whole idea:


Then again recently Nick over at Of Dollars and Data wrote something else along these lines, about how small early changes can lead to tremendous outcomes.

And now I’m seeing, hearing and reading this idea everywhere and thinking about how it applies to nearly every facet of my life.

In 2016 I raced my first real mountain bike race and this year things got more serious for me on the bike. I took training more seriously and thought about more than “just riding.” I can look back over my fitness and handling skill and see that in 24 months I really have made huge progress on the bike. I am faster, fitter and a better descender than I ever thought I would be. I can’t pinpoint the moment that it happened. It wasn’t the result of a single training ride or book I read or skill I practiced. It was the result of hundreds of training rides, hundreds of descents. Trying small things and failing, and trying again. Recovery days and interval days and long, grind-it-out days were all part of it. It has been the series of small, regular decisions that has gotten me this far.

For most of my life I have been short-tempered. It is not a personality trait I’m too fond of. It has created barriers and caused unnecessary strain on my family. Losing your temper is also an objectively horrible feeling. Last year I set off do try to do something about it, and (among other things) I started meditating regularly. Just a simple practice of mindfulness for 10 minutes or so is all it has been. Meditation isn’t a medical cure-all and it’s not magic. I wasn’t instantly cured of all of my personality faults after the first week. But a steady practice over time has led to a material change in my mental state. I am calmer. I am more patient. I am less likely to lose it over chores not done and Legos stepped on and two wonderful little girls having a screaming match with each other. Again in another of Patrick’s podcast episodes, with Peter Attia, Peter brings up the idea of “Distress Tolerance.” I love this – a bank that you can build up to have the resolve to deal with distressing events in your life. If the bank is empty, getting cut off in traffic can bring out the worst in you. Meditation and mindfulness helps build my distress tolerance bank.

And the last but hardly least important reflection on incremental change and compounding in my life is this firm. Bason has been built one client at a time. There was no acquisition of another business, no massive marketing campaign, no coupon flyer that has led to the place I am today. It started with one client, and then a second. Then months of no new clients. And slowly, one client at a time, I found myself with a pretty full bus. It snuck up on me, to be honest. Sure, I can pinpoint a few events that pushed the snowball down the hill a little faster, including Jason Zweig’s early mention of the firm in his Intelligent Investor column in March 2014. But mostly I have found myself taking one new client at a time as they come. Suddenly (after five years, actually) I find myself with a robust practice and a bunch of wonderful clients that I’m hoping to keep around for a long time.

All of these little things compound. Yesterday’s suffering on the indoor trainer by itself isn’t much. But a full winter of building my base fitness is going to pay off next summer. Lifting at the gym Monday morning at 5:30 by itself didn’t make a noticeable change to my strength and body composition. But since I’ve been back in the gym since September, I can notice a small improvement and I know that by summer the increase in strength will be big. Meditating this morning will have a tiny impact on my day today, but meditating 5-7 days a week for a year and a half has had a huge impact on who I will be today. Bringing on one new client this month won’t make a huge difference to my personal bottom line, but doing that once or twice a month for the last 3-4 years has completely turned my life upside down.

And I’ll end my philosophical ravings with this: do one small thing today that, if repeated consistently, will change your life in five years. And try to do it again tomorrow.

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Insurance Premiums for a Nonexistent Death Benefit

It’s late 2017, and we’ve been riding a pretty stellar bull market in (at least) US stocks for over 8 years. Markets are up, and everybody is happy.

You know who is really happy? Insurance companies that offer Variable Annuities. They are ecstatic. They are collecting a gold rush of revenue to protect a liability that, for many customers, no longer exists. It’s called a Guaranteed Minimum Death Benefit, and here’s how it works.

Let’s say Joan puts $200,000 into a variable annuity contract. It’s a simple, no-frills contract that doesn’t have a fancy living benefits rider like a Guaranteed Minimum Income Benefit or a Guaranteed Minimum Withdrawal Benefit. It has a basic internal expense (in the insurance world, this is “Mortality and Expense” – in theory, the cost of providing insurance) of 1.75%. Some of this money goes to pay back the commission the insurer fronted your salesperson. But in most annuity contracts, there is a basic insurance benefit called the Guaranteed Minimum Death Benefit (GMDB). In short, the GMDB guarantees to pay at the time of Joan’s death the higher of the cash value of the annuity or your “initial premium” aka the amount you invested into the annuity.

So if Joan invested $200,000 into her annuity in 2007 and got hit by a bus in February 2009, this insurance benefit would likely have kicked in and paid her beneficiaries the full $200,000, even if her cash value had fallen to, say, $120,000. Not bad! Her 1.75% expenses paid her an insurance benefit of $80,000 – the difference between the current cash value and the GMDB.

But, 9 years later, it’s a different story. Joan’s annuity contract is certainly worth more than $200,000 now. Maybe $300,000, depending on how it was invested and how good(/terrible) the investment options were in the contract. So now Joan is paying her 1.75% internal fee to protect a GMDB that is 33% less than the current cash value of her contract. And – get this – she isn’t paying 1.75% of $200,000 ($3,500/yr). She is paying 1.75% of $300,000 ($5,250).

Higher insurance costs for an insurance benefit that becomes less and less likely to pay out any value over time. Even if her contract value fell by 50% and a piano fell on her, Joan’s heirs would receive an insurance benefit of $50,000 ($300,000 / 2 =$150,000.  $200,000 GMDB – $150,000 Cash Value = $50,000 Actual Insurance Benefit). So this year she pays over $5,000 for a death benefit that might be worth $50,000.  That is some insanely expensive life insurance right there, unless Joan is 99 years old and is relatively certain a 50% market decline is coming before her 100th birthday. And she’ll pay that $5,000 this year, and next year, and over time, markets go up, so will her insurance costs, all the while the actual benefit she stands to claim recedes further and further into the sunset.

If you have an old (>5 years) variable annuity contract, this math might apply to you. The good news is that there are a few no-load (“fee only”) annuities out there that have much smaller internal costs and skip the whole GMDB charade. And if there are no surrender charges on an older contract, it’s often very easy to move from one (expensive) annuity to another (much cheaper) annuity without taxes. In doing so you might just quit paying insurance premiums for a benefit you may likely never see.

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19 Questions

Jason Zweig recently wrote a piece titled “The 19 Questions to Ask Your Financial Advisor.”  I love Jason’s stuff and who doesn’t like lists?  So I thought I would take a run at answering some of these, and giving some commentary here along the way. So here we go!

1. Are you always a fiduciary, and will you state that in writing?

Yes, yes, yes. An all-the-time fiduciary even. No part-time status here. No “I’m a fiduciary when we do planning but then later I get to switch hats and sell you terrible products for huge commissions.” Every financial advisor in the country has this choice – be in business as a fiduciary or not. How you choose to practice says a great deal about your professional values.

2. Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services? (No.)

No. Every penny I earn in this business comes only from retainer fees or hourly fees paid directly by clients. I do not share revenue with product providers or custodians like Charles Schwab. No one cares what I recommend, least of all my wallet. I haven’t been taken out to a steak dinner or an Avalanche game in years.

3. Do you participate in any sales contests or award programs creating incentives to favor particular vendors? (No.)

No. Unfortunately for me there are no all-expenses-paid cruises waiting if I can just convince a few more people to lock up their money in some horrible annuity. Fortunately for me I sleep pretty well at night as a result.

4. Will you itemize all your fees and expenses in writing? (Yes.)

Sure thing, right here. It’s pretty straightforward. Clients pay $4,800 a year, charged quarterly in advance. That’s it. Nothing related to the size of your portfolio or your household income or your net worth. $4,800 per year.

5. Are your fees negotiable? (Yes.)

Nope. The fee is $4,800, and the services are the same for all clients. Comprehensive financial planning. Discretionary portfolio management. Here when you need me. No limits on questions/phone calls/emails/meetings (so far). If that arrangement works for you, it works for me. No need for negotiation.

6. Will you consider charging by the hour or retainer instead of an annual fee based on my assets? (Yes.)

Way ahead of you. Except that I don’t do hourly work any more. I think it is a fine business model if that is what people are looking for, but I’m here for the engaged, long-term relationship and a retainer is the best model for that. There are plenty of good advisors who do hourly work, and if you are looking for a one-time engagement the Garrett Planning Network or the XY Planning Network would be a great place to start.

7. Can you tell me about your conflicts of interest, orally and in writing? (Yes, and no adviser should deny having any conflicts.)

Of course. Every advisor, regardless of business model or form of compensation, will have some conflicts. I’ve tried hard to build a model with as few as possible. My motivations are fairly simple: I want you to remain a client for a long time, and pay me every year. I don’t care if you take money from your portfolio to buy something or invest elsewhere. I suppose if you wanted to buy a single premium annuity with the whole of your investment portfolio and collect a monthly check forever, you might not need my services anymore. Maybe you’d rather DIY your portfolio and pay an advisor hourly, in which case we aren’t a great fit. I also have a financial motivation to take on additional clients, and there is a potential conflict there. However, I’ve actively limited my client list for my own personal sanity and happiness.

8. Do you earn fees as adviser to a private fund or other investments that you may recommend to clients? (No.)

No. Again, my single source of any revenue is the retainer fee paid by my clients.

9. Do you pay referral fees to generate new clients? (No.)

No. I have good relationships with great CPAs and attorneys who sometimes refer me clients. Sometimes I take them to breakfast. Sometimes they take me to breakfast. No referral fees are or will ever be exchanged.

10. Do you focus solely on investment management, or do you also advise on taxes, estates and retirement, budgeting and debt management, and insurance? (Here the best answer depends on your needs as a client.)

I provide portfolio management and comprehensive financial planning services. That means that in addition to building a reasonable portfolio and managing it over time, we’re going to talk about cash flows, taxes, retirement savings vehicles, retirement spending strategies, Roth IRA conversions, life insurance, disability insurance, appropriate levels of liquidity, college savings strategies, estate and wealth transfer, charitable giving and the like. I don’t break down and analyze clients’ monthly bills from Comcast and Verizon or worry about how much your trash bill is.

11. Do you earn fees for referring clients to specialists like estate attorneys or insurance agents? (No.)

No, see #9.

12. What is your investment philosophy?

I’ve written about this in some detail here, but I’ll try to sum up. You should probably do less with your portfolio, and do it more efficiently. The odds of you picking a handful of stocks that can beat the broad market are not good. The odds of you picking a manager that can pick a handful of stocks that can beat the market are probably worse. And the odds of you picking a financial advisor who can pick  a manager that can pick a handful of stocks that can beat the market are worse still. So don’t try to do those things, okay? Diversify broadly into low cost and tax efficient investment vehicles. Be smart about where you locate those assets into taxable vs. retirement accounts. Develop an Investment Policy Statement that keeps you from making the wrong moves at the wrong time. Choose a plan/process/philosophy and stick to it. No switching horses when things “aren’t working.”

13. Do you believe in technical analysis or market timing? (No.)

No. There is a reasonable amount of evidence that momentum based strategies can, in some market enviroments, reduce portfolio risk. In others, these strategies can whip you around so fast you’ll get chewed up and spit out. They are also less tax-efficient than a broad buy-and-hold strategy. Personally I don’t have the mental constitution for getting in/out or heavy/light based on timing factors, so I don’t try. I don’t think most people should either.

14. Do you believe you can beat the market? (No.)

No. I think that historical factors exist (such as small caps and value stocks beating their larger, more expensive brethren), but that is market-based beta, not skill.

15. How often do you trade? (As seldom as possible, ideally once or twice a year at most.)

Probably less often than you think a portfolio manager/advisor should. If we have new cash to invest, that gets traded. If you need cash from the portfolio for living expenses or the like, that’s a trade. But rebalancing happens not more than once a year, and only after your portfolio is materially out of alignment (20% or more) from its targets. It takes a big move in markets to become that disjointed, and it’s normal for nothing to happen in your portfolio. That’s the goal, remember? To be a long-term investor. That means you don’t trade because of what North Korea did or what some guy said on CNBC, no matter how big of a bond fund he runs.

16. How do you report investment performance? (After all expenses, compared to an average of highly similar assets that includes dividends or interest income, over the short and long term.)

Clients receive quarterly formal performance reports, and have daily access to GIPS-compliant time weighted portfolio performance through an online portal. These numbers reflect all available costs (including my fee if it is deducted from the portfolio). I wish we could accurately report performance net of taxes but there are too many variables. Reports show the performance of relevant indexes as well.

17. Which professional credentials do you have, and what are their requirements? (Among the best are CFA [Chartered Financial Analyst], CPA [Certified Public Accountant] and CFP, which all require rigorous study, continuing education and adherence to high ethical standards. Many other financial certifications are marketing tools masquerading as fancy diplomas on an adviser’s wall.)

I am a Certified Financial Planner practitioner. It is the standard for financial planning, and it is important. I think it is the most straightforward bar to clear for financial planners who want to be taken seriously. I considered the CFA but felt that it had limited real-world application for someone working directly with financial planning clients and not actively managing stock or bond portfolios.

18. After inflation, taxes and fees, what is a reasonable estimated return on my portfolio over the long term? (If I told you anything over 3% to 4% annually, I’d be either naive or deceptive.)

Of course, it depends. But most people should expect nominal (before-inflation) returns of 6-7% on a somewhat balanced portfolio. Assume taxes might eat 0.50% of that, depending on your portfolio, and inflation is going to eat 2-3% of that, and you land pretty close to Jason’s 3-4% figure. Conservative clients should expect lower returns, and very aggressive investors may receive higher returns over long periods of time. I have absolutely lost prospective clients when I tell them these figures, and someone out there is promising them 9%. Good luck to them!

19. Who manages your money? (I do, and I invest in the same assets I recommend to clients.)

I do. I also think that it is perfectly reasonable for an advisor to have their own advisor. I don’t, but I have good friends in this business that I know I can rely on if I need an outside opinion. My portfolio looks like a (smaller and) more aggressive version of what most of my clients own. We all generally own the same funds and ETFs, just in different allocations. I’m 34 years old, and very comfortable with portfolio risk. So I have a much larger allocation to stocks and smaller allocation to bonds than a 55 year old client does. My portfolio gets managed the same way as my clients, I am just as boring with my money as I am with theirs. When I have new funds to deposit, I check my asset allocation and put cash to work where I am underweight. It is horribly boring, and effective.

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3Q 2017 Market Overview

Market Overview

It is getting really hard to feel that I am not writing the exact same thing about the markets each quarter. But gains continue to roll in. The S&P 500 had a strong quarter, up 4.48% from June 30. Small cap stocks also had a good showing after weakness earlier this year, up 5.67%. Over 12 months US large and small caps are up 18.61% and 20.74%, respectively. Very little to complain about there! International markets haven’t been asleep either, with the MSCI EAFE up 5.40% for the quarter and 19.10% over twelve months. Emerging Markets continue their current run, up 7.02% for the quarter and 19.73% over the last year. Bonds barely moved for the quarter with a gain of 0.85%% for the Barclays’ Aggregate Bond and 1.06% for Barclays’ Municipal benchmark.

Markets 3Q 2017

Market volatility has been unusually low to say the least. Any way you look at it, stocks have been steadily and quietly marching upwards. Daily market moves have been small, and we have barely had any kind of drawdown in 2017 to speak of. Like you, I’m not too sure what any of this means as investors, except that we should probably think “boy, this is nice” and “this probably won’t last forever.” It feels easy right now to make money in markets, and experienced long-term investors can remember that it isn’t always this way. There are scary times, economic calamities, international incidents and stock market disasters both in our past and in our future. So we’ll take the gains from a nice quiet period while the market offers them, and be prepared for the winds to change when they will. We’ll remain disciplined in our approach according to rules and systems previously established, and find long-term success in doing so.

Economic Update

The US economy still looks quite strong, if unexciting. I think I have been saying that for at least 5 years now. Thankfully, nonsensical discussion of looming recession seems to have disappeared, for plenty of good reasons. Second quarter real GDP growth was 2.2%, a number that has not varied significantly in some time. The labor market is in very good shape as job openings in the US reached 6.17 million in July, the highest number on record.

JOLTS - Job Openings

Real (inflation-adjusted) consumer spending has shown modest growth since the recession, a trend that steadily continues today.

Real PCE

After a long slide past the end of the 2008-2009 recession, real median household income has finally started to turn around, posting the highest levels over the last 30+ years.

Real HH Income

Inflation remains subdued, with August numbers coming in at 1.9%, below the Fed’s stated target and below long-term averages.


Housing markets in the US are healthy, and prices have ticked steadily upwards for several years. In July 2017 home prices gained 6.0% nationally over the previous 12 months.

Case Shiller Housing

In part thanks to housing and a robust stock market, household net worth in the United States continues to surpass all-time highs (note: this is what happens over time! Markets go up).

HH Net Worth

By all accounts, things have been pretty darn good. I don’t know what happens next and we should have learned by now to expect the unexpected. Something that we didn’t see coming or something that we underestimated is going to happen eventually. It always does. We should be mentally, emotionally and financially prepared for the good times to not last forever, in the economy and in the markets.

Tax and Legislative Updates

After a fair amount of drama, two GOP attempts to repeal and replace the Affordable Care Act (aka Obamacare) have failed. It seems that for now this will no longer be a legislative priority as congress shifts focus to tax reform. The President recently released the “Unified Framework for Fixing Our Broken Tax Code,” a proposal aimed at reducing corporate and individual income taxes and attempts to simplify parts of the tax code.  In broad strokes, the proposal would:

  • Roughly double the standard deduction (from $12,700 to $24,000 for married filers) and at the same time eliminate the personal exemptions ($4,050 per person);
  • Eliminate many itemized deductions include state and local income taxes;
  • Increase the child tax credit (to an undetermined amount);
  • Consolidated 7 tax brackets down to 3;
  • Eliminate the Alternative Minimum Tax;
  • Repeal the estate tax;
  • Cut corporate tax rates from 35% to 20%;
  • Introduce a cap on pass-through entity tax rates at 25%;

To be sure, this proposal includes some well-agreed upon changes (such as killing the AMT, which has evolved well past its original intended purpose) and many pieces that will be controversial and difficult to build consensus around (including the elimination of state and local tax deductions, very popular with representatives from high income tax states). Already this year we have seen Congress struggle to find consensus on allegedly popular changes to health care law, and it may be a long and difficult road to truly reform the tax code. Not everything proposed is a simplification – introducing a cap on tax rates for pass-through entities will involve complicated accounting as well as incentivize many tax filers to recategorize income. For more detail, the Tax Policy Center has an excellent writeup and review of the proposed changes: An Analysis of the House GOP Tax Plan.

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Familiar Hard vs. Unfamiliar Hard

This weekend my wife ran the Run Rabbit Run 50 mile race in Steamboat Springs. It was her first race at such distance, and when she finished she said it was the hardest thing she’d ever done (“That was harder than childbirth” she said). I believed her. (For the record, my wife is an absolute rock star of whom I am insanely proud. Just in case there was any doubt).

This morning I went for a fairly typical mountain bike ride at the local hill, some version of which I’ve probably done 100 times.  Today’s ride included a climb up the service road, a 1+ mile climb that averages about 11%, and exceeds 15% for a few stretches. For those of you who don’t spend your free time calculating grades, that falls in the category of “awfully steep, but not impossibly steep” on a mountain bike.

Strava tells me that I have ridden the full stretch of the fire road 58 times in the last few years. Climbing the fire road is not easy. I’ve never ridden it and thought “well, that was no effort at all.” It is hard. But it is a familiar hard, and once again a bike ride has me thinking about investing.

My wife’s race this weekend was both hard AND unfamiliar. She’d never run 50 miles before. She had an idea of what it would be, how her body would respond, what she might eat, how she might feel, how much she might suffer. But she didn’t really know it until Saturday afternoon when she ran across the finish. For me, climbing the fire road is a hard thing that is familiar. I know what to expect. I know it’s steep right near the bottom and again by the tree and leg-screamingly steep into the last switchback. I know I may suffer, but I know for how long and to what extent. I know where the end is, where the grade levels off and my heart rate can return to some reasonable pace.

Investing is hard. For most of us, it can be a familiar hard, but we always have unfamiliar hards. The first time in your adult life the market drops over 25%, it’s an unfamiliar hard. The first time it drops 25% when you have real money in the markets, when the dollar value of the fall is a significant portion (or multiple) of your annual budget, that’s an unfamiliar hard.

For most people, the worst unfamiliar hard is the first bear market of your retirement. I’m always telling newly retired clients this – the first bear market is awful. You will want to panic. You don’t know what it is like yet to be retired, to have no more income, to be living off of this bucket of money, and then see it drop by A FIFTH OR MORE. Booms, 4-5 years of living expenses disappear in what feels like an instant. I can tell you all of this in advance, remind you that we’ve done the planning, the stress testing, the scenario modeling, and the portfolio survives all of this.  But that’s a bit like telling someone that childbirth is hard or an ultra endurance race is hard. Nice to have explained to you, but some knowledge is only truly acquired first hand.

The trick is to remember that unfamiliar hards become familiar hards. By the time of your third bear market in retirement, you’ll get it. Yes, it’s scary. Yes, it’s discouraging to see portfolio values fall. But you know how this ends. My wife’s second 50 miler will be hard, but it will be a familiar hard. She’ll know what the dark places feel like, how they come and go. The dark places will still come, but there will be a comfort in the familiarity that makes them a bit more tolerable.

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Shame, Status and the American Dream

Something has been rolling around in my head for a while, and it’s about our house, our lifestyle and our appearance among peers.

Our home is unimpressive. I love it, don’t get me wrong. We are very, very comfortable. It is way more than enough space for our family of 4. Right now we’re even doing a full remodel of the basement. But I know that compared to many of my peers, our house isn’t the massive, brick laden, towering McMansion that says “we’ve arrived.” We bought our home days before I quit my last job and launched this firm. We paid $265,000 and financed almost all of it as I was hoarding cash for us to live on since we had zero income.

I’ve had one client visit our home after our youngest daughter was born and I remember distinctly a feeling of anxiety that our modest home wouldn’t measure up to expectations. What I felt bordered on shame. Would people think I was “successful” if they saw our home? Does it present a picture of someone who is responsible, intelligent and capable? Does it represent someone who should be entrusted with managing client assets that now exceed $150M?

I’ve come to terms with it, but these ideas still creep into my head. I like that we live well within our means. It brings me immeasurable happiness, quite frankly. But there is a lingering social pressure. A fear of a stigma that occasionally whispers from some deep recess in my mind. In general I’m not a person who is given to care much what other people think about me. (Seriously, ask my wife about this one). But even with that as a core position, I feel some unspoken social pressure to consider a “nicer” house. A newer house. A bigger house. Vaulted ceilings, big bathrooms, big closets, all of the accouterments that prove that I’ve made it.

If I can feel these pressures, I imagine they could be stronger for many others. A house is a man’s castle, after all. A giant, expensive, cumbersome representation of your value to society. What would you think if your successful doctor or lawyer or local business owner lived in an average middle class house? Is s/he in financial trouble? Recently bankrupted? Paying off bad debts? How many Americans would think “Wow, good for them. They have figured out what makes them happy and are spending/saving money in that way.”  Can’t say I think it would be many.

There’s more to this story, like my super-reliable-but-recently-hail-damaged 14 year old Subaru that you can have from my cold, dead hands. And the bike on top of it that’s probably worth more than the car. We love our home, and our lifestyle. We do things, and spend money on things, that make us happy. I try hard to be intentional about that, and we’re doing okay there. Maybe, just maybe, the bigger-shinier-stainlessier (that’s right) pursuit of the American Dream isn’t the key to happiness for everyone. At least, not for us.


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2Q 2017 Market Overview

Market Overview

It has been another solid, steady quarter in the markets since the end of March. US stocks both large and small posted strong positive gains of 3.09% and 2.46% respectively.  Tech continued to dominate with the Nasdaq posting gains of 3.87% over the last 3 months.

Broad bond benchmarks were also again positive recently with the Barclays’ Aggregate Bond up 1.45% for the quarter but off slightly -0.31% for the last twelve months ending 6/30/17. Municipal bonds (via the Barclay’s Municipal Index) also gained 1.96% for the quarter. Longer term bonds with more interest rate exposure performed best as long-term rates declined and the yield curve flattened.

International stocks had a great quarter, with developed economies (MSCI EAFE) gaining 6.36% over the quarter and 22.20% over the last twelve months ending 6/30/17. Emerging markets were also positive for the quarter, up 4.34%.

2Q 2017 Markets

Economic Update

US economic trends remain relatively unchanged over the last quarter. Unemployment is low and job gains have moderated. The Bureau of Labor Statistics reported that in May the domestic economy added 138,000 jobs, dropping the unemployment rate modestly to 4.3%, the lowest level since 2001. Over twelve months ending in May, 2.23 million jobs were added, a solid if not exciting figure.

Aided by low mortgage rates and a healthy economy, mortgage delinquency rates continue to fall. Although still higher than pre-2007 levels, we are slowly approaching historical averages.

Delinquency Rate

National home prices continue to move upwards. The S&P Case/Shiller National Home Price Index gained 5.5% year over year through April 2017. Current national average values are now above the 2007 peak.

Case Shiller National

In June the Federal Reserve Open Market Committee (FOMC) voted to increase the target Federal Funds rate 0.25% to 1.00-1.25%. While inflation concerns remain subdued, the FOMC saw reason enough to continue to increase rates in strengthening household spending and continued improvement in labor market conditions.

Inflation remains very low, with the seasonally adjusted Consumer Price Index coming in a just 1.87% year over year change in May, below the Fed’s 2% target for inflation.


In line with the FOMC’s reasoning to raise rates, average hourly earnings of non-supervisory employees was modestly above inflation and the Fed’s 2% inflation target, with year-over-year increase through May of 2.42%. The Kansas City Fed’s Labor Market Conditions Index (LMCI) has shown a gradual increase in labor market conditions over the past several years, with a modestly positive position currently. The LMCI is an aggregation of data points on unemployment, wage, job quits, long-term unemployment, initial claims, labor force participation and several other inputs. It is a tool used to guide the Fed’s policy making.


Even with the FOMC raising short-term rates, long-term rates have not responded in kind. 30-year mortgage rates have been on the decline again, down to a national average of 3.90% through the third week of June 2017.

30 Yr

One worthwhile note on inflation: it’s low. And that is important when we are considering financial asset returns. We can bemoan l0w interest rates on savings accounts and from bond yields, but we have to remember to adjust these figures for inflation. Sure, banks paid 18% in the 80’s but inflation was extremely high as well. In fact, the period of high real interest rates from 1980 – 2000 looks as though it may be more of an outlier than lower real rates today. 2-3% real rates were the norm before inflation and rates took off around 1980.

Real 10 Year

More on this topic in a long-term context from the New York Times’ Neil Irwin a few years ago:

Very low rates have often persisted for decades upon decades, pretty much whenever inflation is quiescent, as it is now. The interest rate on a 10-year Treasury note was below 4 percent every year from 1876 to 1919, then again from 1924 to 1958. The record is even clearer in Britain, where long-term rates were under 4 percent for nearly a century straight, from 1820 until the onset of World War I.

Our perspective is distorted by anchoring, and for many investors late in their careers, the exceptionally high rates of the 1980’s coincided with early working formative years. A longer view of history makes the current environment less extreme.

Tax and Legislative Updates

Legislative priorities in Washing D.C. have shifted from the beginning of this year from health care, to tax reform, to infrastructure and now at the end of June 2017 we are back to health care reform. The Republican party controls the House, Senate and White House, and have been outspoken in their desire to replace the Affordable Care Act with their own legislation.

As of this writing, the House of Representatives has passed its version of a bill, known as the American Health Care Act (AHCA). The House version of the bill would end individual coverage mandates, employer mandates, income-based premium subsidies and the 3.8% tax on net investment income, the 0.9% additional tax for high income earners and medical device taxes. The House bill also increases the annual allowable HSA contribution limits, increases the allowable difference between premiums paid by younger vs. older consumers and brings back lifetime benefit limit caps.

Right now the Senate version is similar, as far as we know. A vote originally scheduled for Thursday June 29th was delayed so that the Senate bill could be revised after several Republican Senators voiced opposition. It is, right now, too early to say what final legislation could look like, even if the Senate version can garner the 50 votes (assuming a Vice-Presidential tiebreak) to pass a reconciled bill.

The most likely outcomes of a passed bill affecting financial planning decisions of my readers include:

  • Eliminating the taxes introduced by the ACA, including the 3.8% investment income surtax;
  • Revocation of individual and employer mandates (with incentives for coverage in some penalty form);
  • Some change to HSA contribution rules, with likely higher limits;
  • A larger gap between premiums paid by younger vs. older consumers, where older consumer would expect private-market premiums to increase;
  • Changes to treatment and coverage of pre-existing conditions and lifetime limits.

Right now this remains speculation, as a vote will not occur until after the July 4th recess, and then we do not know what specifics the bill will contain, what could pass, and what could be reconciled with the House bill. For now, we have to take a wait-and-see approach, but it is possible that material tax planning opportunities may arise before year-end 2017, and that individuals purchasing private market insurance will have new rules to navigate when making selections.


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The IPO 10-Bagger Chase

It’s been 20 years since Amazon went public at $18 per share in 1997. The web today is littered with stories about how a small investment at the IPO would have turned us all into millionaires. These stories play on our most basic desires as investors: to have the once-in-a-lifetime shot at getting filthy, stinking rich without effort. “If only!” we cry out. If only we’d gotten in on Amazon or Microsoft or Apple at the right time. If only we’d stuck it out through the insane drawdowns these stocks went through. We’d be rich!

What’s missing from these get-rich-on-IPOs stories is all of the ones that don’t make you rich. Of course, Amazon wasn’t the only company to go public in 1997. Here’s a few that I found via a quick web search.

Metromedia Fiber Network. Backed by billionaire John Kludge, MFN had its sights set on bringing high speed internet to most major urban areas in the country. The company had less than $3 million in revenue in 1997 but high hopes. By 1999 the stock had risen to $42 per share, after splitting THREE TIMES in 1998 and 1999.

Metromedia filed for bankruptcy in 2002.

JD Edwards, a packaged software company, filed a $300M+ IPO in 1997. JDE was one of the first companies to develop a strong Enterprise Resource Planning program that was quickly adopted. The stock priced at $23 per share on 9/24/97. In 2003, after the tech bubble burst, competitor Peoplesoft bought out JD Edwards at $19 per share, at the time nearly a 20% premium over where the stock traded. Not exactly a home run.

On November 4th, 1997, AMF Bowling priced its IPO at $19.50, making it a $263M offering. AMF was the source and target of constant buyouts, sales, restructurings and conglomerates. By 2000 this company that was valued over $1B at the time of its IPO was delisted from the NYSE and moved to OTC trading as the stock fell to $1.

In 2001 AMF Bowling, sitting on over $1.3B in debt, filed for bankruptcy.

Here’s the thing: capitalism is hard. Business is competitive. Growing a large, scaled, public business is risky. Buying stocks in a single company is risky. Sure, if you throw some money at an IPO (and you can ride it through several near-failures), there’s a chance it will end up as the next Amazon. There’s an even better chance it will fail, end up in bankruptcy or be saved at the brink after huge losses by a bigger rival picking up scraps. Do yourself a favor: let go of the notion that you’re going to find the next Amazon. It is not doing you any good to read these stories. Quit it, and get back to the real work of building your financial future.



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Feature in Financial Advisor Magazine

I was pleasantly surprised to learn that I was nominated for Financial Advisor magazine’s “10 Young Advisors to Watch” piece in the May issue. I’m not sure I’m all that exciting to watch, but you can find the piece here:

Young Advisors To Watch


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