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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This is the easy part

These are our girls, 6 and just-a-few-weeks-shy-of-4.

20170310_165923 20170415_102435 20170310_163751

Yes, they are unspeakably adorable. I know.

It struck me this weekend that, all things considered, this is the easy part. To date we’ve had no broken bones. No broken hearts. No Ds and Fs on report cards. No friendships ended in a fiery blaze. No fighting over boys or clothes or jewelry. No cars backed into garage doors. Sure, we have daily temper tantrums and tears and complaints about dinner and incessant bedtime struggles. But in the grand scheme of things, this has to be the easy part. We get to camp and go for bike rides and fly kites and tell stories and read books. They WANT to spend time together and do fun stuff with mom and dad. They love Sunday morning bagels and chasing lizards in the desert. And, we’re past diapers and naps and all of the exhausting parts of babyhood. We’re in a nice spot.

I can’t remember the last time I had a conversation with a client concerned about recent portfolio performance. And for good reason – this is the easy part. Diversified portfolios of all stripes are having a nice stretch. Whether you’re 35 and super aggressive or 60 and dialing things back, it’s hard not to be happy, or at least satisfied, right now.

Year to date nearly every major asset class is up; some equity classes are up double figures. Most are building on top of a really wonderful 2016 return. Here’s a quick rundown:

Index YTD Return 2016 Return
S&P 500 7.16% 11.96%
Russell 2000 3.59% 21.31%
MSCI EAFE 9.97% 1.00%
MSCI Emerging Markets 13.42% 11.60%
Morningstar US Real Estate 2.52% 8.02%

And bonds are still holding their own. The Great Big Scary Bond Bear Market™ we’ve been expecting since 2008 is apparently still hiding out somewhere, as the Barclay’s Aggregate Bond benchmark is up 1.59% year to date and gained 2.65% in 2016.

To be sure, we’ve had some frights along the way. Brexit and a unexpected US election outcome last year weren’t the “certainty” the market allegedly loves. But I feel pretty confident saying it’s been easy going. So what do we do with this information?

  1. Acknowledge it. Practice some mindfulness about your portfolio. Just reflect on the general lack of anxiety you’ve felt about your investments over the last 18 months or so.  It’s been nice, no?
  2. Despite headlines and your memory, this is what the market does over time. It goes up more than it goes down. Perhaps we’ve had less volatility along the way in the last year or so, but most years end green, not red. So while we won’t expect things to always be so rosy, this isn’t an abnormality.
  3. Prepare yourself for when these occasional market tantrums and teary eyes turn into door-slamming, hate-proclaiming, top-of-your-lungs screaming real life bear markets. They’ll be here, and you’ll wonder what happened. There’s no avoiding those phases, and the more you recognize that and plan for it now, the less hair-tearing you’ll put yourself through.

Successful long-run investing is a mental game more than anything else. While you need a sensible portfolio, most of your success is going to come down to your ability to get perspective on the current moment in market history, good or bad, and have a plan for wherever you find yourself.

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Bason Asset Management is Moving!

I’m happy to announce that the office is making a short move to a new office space in Lakewood, just a few miles from the old office. I hope that clients will find that the new office is more accessible and a much more comfortable meeting space.  The new office is located in the Belmar shopping area on the southeast corner of Wadsworth Blvd. and Alameda Ave.

Bason Asset Management
355 S. Teller St.
Suite 200
Lakewood, CO 80226

There is free parking behind the building and paid on-street parking out front. The easiest access is to enter Belmar on Teller St. from Alameda and make your first right (West) into the parking area.   The main entrance to the building is on the West side of S. Teller Street in between Sur La Table and U.S. Bank, then take the elevator to the 2nd floor. A map below shows the parking lot and main entrance.


Of course if you need coffee, breakfast or lunch before or after a meeting, plentiful options abound in Belmar! I hope you’ll enjoy the new space.

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1Q 2017 Market Overview

Market Overview

The rally that began shortly after last November’s election continued early this year, with US large cap stocks yet again posting a very strong quarter, up over 6%.  International stocks fared even better, including Emerging Market stocks really turning a corner after years of significantly underperforming the S&P 500;  up 11.14% for the quarter. Emerging Market currencies have gained on the US Dollar year to date, further boosting returns for US investors in emerging markets. Bond returns were flat, despite continuous fears of rising rates, as the 10-year Treasury has remained largely unchanged. My takeaway remains the same: there’s no predicting what comes next. Markets and asset classes turn on a whim and we won’t ever accurately predict when and to what degree. We’ll have gains when the markets offer them and rebalance into underperforming asset classes as dictated by our investment policy statements. All else is madness!


Economic Update

What’s new in the economy? Not a whole lot. Fourth quarter Gross Domestic Product was revised slightly higher in March to 2.1%, down from the 3.5% year-over-year change in the third quarter. The fourth quarter brought full year economic growth up to just 1.6%, a lackluster result and the worst year since 2011. Growth in real personal spending remains positive, although slightly down from its recent peak rate.

Real PCE

The pace of borrowing from households has simply not come close to resuming its previous growth rate. For nearly two decades before the recession, liabilities grew at 5-10% per year steadily. Even now, 9 years out from the recession, we’re now only just above 2.5% annual growth in debt.

Debt Levels Growth

As we could expect in the latter half of an economic cycle, wage growth has been slowly ticking up over the past few years, putting the average worker on better financial footing.


This coincides with steadily falling initial jobless claims as the labor market is as robust as it has been in years, and well-below pre-recession levels.

Weekly Claims

The personal savings rate in the United States has remained steady and reasonably healthy.

fredgraph (3)

As mentioned above, the US Dollar has slowed its long term trend, peaking in late 2016. While we cannot know what happens next, what we’ve seen year to date is that this relative weakening in the Dollar relative to other currencies has been a boost to international investments for US investors.


Tax and Legislative Updates

Despite Republican majorities in both congressional houses and a sitting Republican president, we’ve seen little legislative impact to date. Republican plans to replace the Affordable Care Act (aka Obamacare) fell flat as house speaker Paul Ryan pulled the bill (the American Health Care Act) shortly before a scheduled vote after it became apparent the bill lacked support to get out of the House. According to Speaker Ryan as of late March, repealing the ACA will not continue to be a near-term legislative priority.

While it seems likely that tax reform would be the next priority, it is unclear how much consensus currently exists among various arms of the Republican party to get significant legislation passed. Because of the slim 51 vote majority in the Senate, a full bill requiring 60 votes is unlikely, and the more limited reconciliation process is probably the only way to get a legislative change passed in this environment.

President Trump also released his proposed budget in March. As expected, the proposal included large cuts to nearly all non-military discretionary programs alongside a $50 Billion increase in defense spending. Left out of the budget were President Trump’s announced plans for a $1 Trillion infrastructure spending program, details of which are allegedly forthcoming later this year.

It’s important to remember that a sitting president’s proposed budget is just that – a proposal. It is an advisory document at most. Ultimately Congress must define and pass a federal budget (or, as has been the case recently, operate under a continuing resolution without an officially passed new comprehensive federal budget).

If we’ve learned anything over the past 8 years, it is that it is really, really hard to get things done in Washington. Even with single party control over the White House, House and Senate, coming to consensus on spending, legislative and tax priorities may be harder than it once appeared. We may see tax reform this year or next, but trying to plan around such speculation is risky business. We can debate whether this fact is a feature or a bug, but for planning purposes, it is often best to assume the status quo.


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Tax Loss Harvesting: Enough is Enough

I recently had a conversation about the benefits of tax-loss harvesting, specifically about the benefits offered by several leading robo-advisors who perform “daily” tax loss harvesting, and if “traditional” human financial advisors are losing their edge in this space. Tax loss harvesting (TLH) and specifically aggressive TLH, is one of the primary selling points of robo-advisors.

Most of the robo-advisors claim that their aggressive TLH strategy will add nearly 1% per year (right now on Wealthfront’s website they are claiming a whopping 1.55% per year!) in additional risk-free return. I’m not going to take too much time taking apart their assumptions, but needless to say you need to be fairly creative with the math to get to that high of a number. And of course, tax loss harvesting isn’t perfect or free; there are costs and risks involved.

What costs and risks? Well here is just part of Wealthfront’s disclosure about their tax loss harvesting process.

Wealthfront’s investment strategies, including portfolio rebalancing and tax loss harvesting, can lead to high levels of trading. High levels of trading could result in (a) bid-ask spread expense; (b) trade executions that may occur at prices beyond the bid ask spread (if quantity demanded exceeds quantity available at the bid or ask); (c) trading that may adversely move prices, such that subsequent transactions occur at worse prices; (d) trading that may disqualify some dividends from qualified dividend treatment; (e) unfulfilled orders or portfolio drift, in the event that markets are disorderly or trading halts altogether; and (f) unforeseen trading errors.

Most major robos are quick to admit that:

1) One of the primary benefits, the ordinary income offset, is capped at $3,000 per year and

2) You would have to have annual realized short-term capital gains every year in the amount of the loss harvested to “maximize” the benefits of TLH.  So, basically no one. I have never had a client who has regularly generated a large amount of short-term capital gains. We’re long-term investors, why would we have so many short-term capital gains?

One thing missing from much of the discussion around TLH from the robo advisors is that over time, you run out of opportunities to take tax losses. Unless you are aggressively and substantially saving huge dollar amounts into an after-tax account each year, benefits as a percentage of your overall after-tax account are going to decline for a very simple reason: markets go up over time. You can take losses and reset your cost basis lower and lower, but eventually, markets go up. Eventually, your basis will be equal to the lowest point in the markets over a several-year period. You only have to look at a portfolio that has been invested for 10 years to see this: there aren’t going to be losses to harvest. So the idea that you will, forever, get a 1% or higher benefit from tax-loss harvesting is a misstatement at best.

My question ultimately is this: How much is enough? Do you need to be constantly turning over your portfolio to try to wring out every $15 tax loss from every position you own, and in the process generate a 40 page 1099 each spring? Or is there a “good enough” level of tax loss harvesting for most investors?

Out of curiosity I pulled some figures from actual clients over the past few years to see what kind of losses we had harvested in a large, very broadly diversified taxable portfolio. To give you an idea of where these opportunities were, let’s look at annual returns for some popular asset classes (note that these are not representative of actual client portfolios).

Fund 2013 2014 2015 2016
SPY 32.31% 13.46% 1.25% 12.00%
VB 37.70% 7.63% -3.76% 18.44%
VXUS 14.61% -4.74% -4.19% 4.81%
VWO -4.92% -0.07% -15.81% 12.21%
VNQ 2.31% 30.36% 2.42% 8.60%
VWIUX -1.48% 7.33% 2.94% 0.19%

You can see there were some funds with annual losses, and this doesn’t even take into account intra-year declines, which by default are nearly always worse than an annual return. If you owned international stocks or small caps or bonds, you probably had some chance to take losses in the last several years. That’s all I’m driving at.

Okay, time for some math. I pulled a handful of client account that had been around for at least a few years and looked at what amount of losses were harvested. For the random accounts sampled, in 2015 I harvested between 2% and 4% of the account value, and in 2016 between 1.5% and 4%. The variance depended primarily on asset allocation and inception dates. So in each of 2015 and 2016 you could estimate that we were taking around 3% of account value in harvested losses ($3,000 on every $100,000 in the portfolio). If you want to use some of the ridiculous math supported by certain robo advisors, you can get pretty close to that translating to 1.5% in tax alpha. But I think that’s absurd.

What you really get is a $3,000 current year ordinary income tax deduction, which is valuable. Yay! And then you get to bank any losses over and above that amount to offset future gains. Gains that you might take from rebalancing or from freeing up cash in a portfolio for retirement expenses. Again, this is a very good thing. You’re creating tax deferral in a taxable environment. Big win. But we arrived at these figures without constant daily trading of ETFs to pick up $10-$15 losses, risking bid/ask spreads, portfolio drift, trade execution risks and paying brokerage commissions. These figures were the result of reasonable, intra-year harvesting of substantive losses. No 40 page 1099-Bs required. Tax loss harvesting is great, but the presumed benefits of aggressive daily loss harvesting over a more “traditional” strategy are likely highly overstated.

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Knowing the count

I just finished Ed Thorp’s new autobiography A Man for All Markets and I really enjoyed it. Thorp is, among other things, the man who wrote Beat the Dealer in 1962, the first truly mathematical approach to beating blackjack. He was first to calculate that while betting strategy was important, it had to go along with the cards as they were dealt. It mattered what cards had been dealt, and what was left in the deck. Thorp’s research proved that the more 10s, face cards and Aces that were left, the better the player’s odds became over the dealer, moving from a basic house advantage to, at times, a significant player advantage. Thus card counting was born, a system of tracking which high cards (lowers the count) and low cards (raises the count) have been dealt. Beat the Dealer changed America’s fascination with gambling, created leagues of professional blackjack players and inspired stories like Bringing Down the House, the book that later became the movie 21 with Kevin Spacey.

As a guy who likes math and card games, I loved the first half of A Man for All Markets. Thorp opines on risk, betting and tradeoffs and eventually made his professional career in running a hedge fund trading strategy after he discovered how wildly mispriced the options market was before the advent of the Black/Scholes option pricing model (which Thorp himself essentially discovered a few years before the Nobel prize winners).

While there are parallels between betting at the tables and the investment markets, most people’s experience won’t be Thorp’s. For one, the low hanging fruit in options pricing that Thorp uncovered is now nowhere to be found.

But more importantly, making long-term investments isn’t playing Blackjack. At the table, several things need to happen to make counting cards work for the player. First, like any system built on probability, you need to play over and over and over again to effectively build a large enough sample set and eliminate noise. That means having a fairly large bankroll and lots and lots of patience. Even when the odds are well in your favor, you’re going to lose many bets. Thorp parlayed this into the hedge fund business because he could identify his opportunities (there were many!) and make multiple bets on multiple positions over and over and over again each day. Some went against him, but enough went for him.

For most investors, we only really get a few chances. A long-term stock investor in the prime of his/her earning and savings years will probably see 3-4 major market cycles for the rest of their investment lives. Not exactly a huge sample set for making probabilistic bets.

Counting cards in Blackjack works so well because it is a known, closed system. You know how many decks are in the shoe. You know how many of each card is in each deck. You know when the dealer re-shuffles the decks. You know the odds on each hand based on the dealer’s Up card. You can even sit with a cheat sheet that tells you how to act based on cards on the table!

Markets aren’t anything like this. There’s no closed system. You don’t know how many decks are in play, or if the dealer might add a few more without your knowledge. You could be “up big in the count” (let’s say that’s really cheap stocks by P/E or something similar) and the dealer could keep drawing 2s and 3s because his deck is essentially limitless. Remember, markets can remain irrational longer than you can remain solvent. You can go from stocks being worth 15x earnings to 10x to 7x to 5x. There aren’t any rules about how markets work. It’s not a card game.

Once more, think about how often “the count” is big enough to bet big. It’s less often than you think. At the table, you could reasonably expect the count to get above +5 or +10 on a somewhat regular basis depending on how many decks are being dealt. So your opportunities to increase your bet size come across pretty regularly. But big delicious fat pitches in the markets, if we’re talking about massively undervalued or overvalued stocks, aren’t so readily apparent. Most of the time we’re middling in the parallel of -3 to +3. Nothing too exciting to make a big bet on.

My advice is: don’t get overconfident about your ability to beat the dealer. Investment markets aren’t a closed, rule-based system. They are complex, messy organisms driven by the whims of humans.

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A most unusually average year

By now 2016 is far off in the mirror and everyone is focused on more current events, but I want to take us back a few weeks to reflect on the year that was, at least as it pertains to portfolio performance.

First, US stocks, measured by the S&P 500, finished the year up 11.96%, a wonderfully solid year. Long term average compounded returns for US stocks are in the 9-10% range (depending on how you’re counting), so this ended up being an average, slightly better than average year. Thanks to data from Aswath Damodaran at NYU, we know that the arithmetic average from 1928 is 11.42%, and the geometric average is 9.52%. So we’re right in the mix at just under 12%.  And while that’s roughly average, average isn’t all that normal.

This chart shows how common each range of annual returns has been over the last 89 years, with intervals of 5%.

SPY Histogram

So you can see that we do get annual returns of 10-15%, but it happens about 12% of the time. We’re practically just as likely to get returns of 0-5% and returns of 25-30%, and nearly as likely to get returns of -10 to -15%!

What’s more, many diversified investors found that in 2016, their balanced portfolio landed quite close to what they might like to see for long-term results. An overly simplified portfolio of 60% MSCI All-World Ex-US and 40% Barclay’s aggregate bond returned 5.92% in 2016. For balanced investors looking for a 6-7% return, that ain’t bad!  Of course, individual portfolios won’t look just like this, and varying allocations to real estate, small caps, emerging markets and changes in bond portfolio duration will affect returns somewhat.

The best thing about 2016 for diversified investors is that returns didn’t all come from the same place. We saw significant divergence among market, asset class and sector performance. Sure, US large cap stocks were up a nice middle-of-the-road number, but small caps (Russell 2000) were up over 21%, while developed foreign stocks (MSCI EAFE) were essentially flat at 1.5%, and bond returns were all over the map depending on credit quality and duration. Broadly allocated investors should rejoice, as this means that the broad idea of diversification is working. Some things (US small value, anyone?) we loved, others (Europe?!) we hated. Huzzah!

The other apparent risk from a year like 2016 for investors is complacency. I’ll admit, I heard very, very few calls after year-end reports went out. Nobody is complaining. “Finally, it’s working like it is supposed to!”  But I gotta tell you – yes, 2016 is how it is supposed to work. But so was 2014, when diversified investors were disappointed at best. Or 2015 when anything outside of US stocks wiped out what meager gains were to be had. This is how it always works – returns are lumpy, not smooth. We don’t get to choose when they come, how they come, whether we’re excited first and disappointed later or vice versa. Being a long term investor means passing up convenient, predictable, steady returns. Lackluster markets can and will stick around longer than you’d like. So while we get to be thankful for a year like 2016, we don’t have the luxury of assuming we’ll see anything like that on a regular basis.

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Remaking Retirement Savings in America

I think a lot about retirement savings. I do retirement planning for individuals, I manage individual and family retirement portfolios, I recommend and manage retirement accounts for small businesses. I help individuals work with their CPAs and TPAs to determine the right retirement plan for them. I deal with salaried employees and independent contractors. Small business owners and 401(k) plan participants. Private sector and public sector employees. The consensus among all of these individuals and groups is that retirement savings in America is a mess. A total mess.

If you’re a business owner, you have an absurd amount of decisions to make about retirement plans. Should I offer a plan? Who does it cover? Should I do a SEP, SIMPLE, or 401(k)? Should it have a Roth provision? Should it have a loan provision? What formula for profit-sharing calculations should I use? What formula for matching contributions should I use? How does the match affect my ability to contribute as the owner? Do I have to make contributions every year? What is all of this going to cost me? What is my liability with each plan type and subsequent decision? How does having a retirement plan incentivize me to hire full time vs. part-time staff? Am I responsible for helping staff make investment decisions? To what extent?

Not only that, but we have different plans for private vs. public sector employees. Different plans for sole proprietors/independent contractors, small businesses and large businesses. Public sector employees often have to choose between 403(b), 457 and possibly 401(k) plans, and then choose different investment platforms within those plans! Plan participants in all markets have to figure out how to enroll, what to defer, Roth vs. pre-tax, and how to invest. Then they get a new job and leave a trail of legacy 401(k) accounts everywhere they go. Or worse, they have to figure out how to get that money out, how to get it into a new plan or an IRA and do so according to the rules so they don’t get hit with taxes and penalties.

This is stupid, people. It’s stupid. So here is my grand, sweeping, start-all-over-again plan for retirement savings plans. You ready?

Sever the link between employment and retirement savings. No more company retirement defined contribution plans. As of 1/1/2018, every SEP, SIMPLE, 401(k), solo 401(k), 403(b), 457, etc.  gets converted to the new American Retirement Plan (ARP). By default, every dollar in a workplace plan will get rolled into the Thrift Savings Plan into a target date fund according to the owner’s date of birth. The average expense ratio in the TSP for 2015 was 0.029%. Less than 3 basis points. Cheaper than Vanguard. Starting in 2018, there are no more workplace plans. If you do not want to invest in the TSP, you can open an ARP at every major brokerage in the country.

Your employer is only required to set up payroll deposits into the Thrift Savings Plan. If you want to make regular contributions to your brokerage ARP, it’s on you. The tax treatment is identical. You can make Traditional (pre-tax) or Roth (after-tax contributions). The current Defined Contribution dollar limit for annual contributions is $54,000, so that’s the new limit. There is no limit on what percentage of salary you can contribute. If you want to save half of your taxable income into the ARP, go for it. A self-employed person can currently contribute $54,000 to a SEP or solo 401(k), so we’re going to make that the limit for everyone.

Every small business, large business, school, hospital and municipality in the country is immediately relieved of the administrative headache of offering a retirement plan. No more fiduciary responsibility for the dentist, baker, mechanic and restaurateur who want/need to offer employees a 401(k) plan. Every person in the country who receives a W-2 is automatically enrolled in the ARP at the Thrift Savings Plan the day they get their first paycheck, starting with a 3% deferral and an automatic annual escalation, eventually to 10%. Everyone can opt out of this or increase the deferral rate, but auto enrollment is the default setting.

Now, if this ever happened, I would lose business. I manage several small business 401(k) plans that would be eliminated by this plan. Lots of Third-Party Administrators would suddenly go out of business. Tax planning with your CPA would be simplified. People who benefit from information asymmetry in an absurdly complex system, including myself, including people who sell insanely expensive annuity platforms to school districts, would lose their advantage. Small business owners and school superintendents and self employed individuals could go focus on their work instead of the tax code. What a world!

The odds of this ever happening are rapidly approaching zero. But a man can dream, right?

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2016 In Review

Market Overview

Markets turned up the excitement in the fourth quarter, especially with respect to US stocks and domestic interest rates. Stocks were sharply higher after the election with small cap stocks leading the way on a truly impressive run. From November 7th through the end of the year, Vanguard’s Small Cap Value ETF gained 15.05%.


Over the same period, the yield on the 10 Year Treasury note jumped from 1.83% to finish the year at 2.45%. Overall 2016 was a great year for investors, particularly in US stocks, and should serve as an excellent reminder of how difficult it can be to predict market outcomes.

Imagine that in January I had told you that early in the year we would see a global stock bear market, that Great Britain would vote to leave the European Union and that Trump would win a poorly predicted US Presidential election. Would you assume that overall volatility would continue to decline, that interest rates would reach new lows and the S&P 500 would finish up just under 12%? In February many market strategists assumed we’d see a bear market in US stocks, and that was even before the Brexit vote. Needless to say, predictions are best left to carnival entertainers and sensible investors should focus on efforts under their own control.  Below is a summary of market returns ending at the end of 2016.


Economic Update

One of the longest economic expansion in recent history continues unabated. Real GDP  in the US increased again in the third quarter of 2016 with a solid 3.5% year over year change.


Of course, the strength of the recovery has been muted at best when compared to previous post-recession growth periods. The graph below from JP Morgan shows the cumulative economic growth through and after every recession since 1948, and clearly depicts the shallow nature of this recovery.


Since the recession we have seen lackluster gains in labor productivity, a major driver of GDP growth. Over the past several years, annual percentage gains have been well below previous economic recovery rates.


Another part of the story is that consumers have simply not returned to borrow-and-spend habits we have come to expect. Debt is inexpensive – the cost of servicing household debt has fallen dramatically in the last decade.


Even still, household debt relative to the US economy has fallen, not risen, throughout the recovery that began in late 2009. As the economy has grown, jobs have been created and consumer confidence has increased, it has not translated into consumer borrowing as shown below.


Despite lackluster consumer activity, the overall recovery has been steady. Unemployment remains low at 4.6% and the labor force participation rate is slowly increasing, despite demographic headwinds. The job market is very healthy for workers, with quit rates staying high and job openings in plentiful supply.



Increasing quit rates are also reflected in consumer confidence, which has been improving throughout the recovery and has been at or above pre-recession levels for most of the last two years.


Housing is a core component of economic growth, and US home prices continue to trend upwards across the country, with recent annual gains of 5.6% through October 2016. This puts home prices at their highest levels since before the recession.


It’s worth pointing out that in spite of broad economic recovery and higher home prices, new construction levels are still muted as excess inventory from the pre-recession period is still worked off. Housing starts continue to increase but are far from historically high levels. This indicates that we seem to be in little danger of another housing bubble.


Tax & Legal Updates

With the elections resulting in GOP control of the House, Oval Office and a slim majority in the Senate, speculation is running rampant about possible tax changes coming as early as 2017. We should recognize that no president has ever been able to perfectly accomplish 100% of campaign promises, irrespective of party control of Congress.  Without a 60 vote majority in the Senate, some compromise is to be expected. Some legislation can be changed through reconciliation, but major tax overhaul this way is unlikely. I think it is reasonable to expect we could see the 3.8% Medicare tax on unearned (dividend and interest) income rolled back in 2017. I am also inclined to believe that calls for a massive federal infrastructure spending program will be met with hesitation and skepticism from what has been a very fiscally conservative House.

Below are a few updated figures for 2017 account contribution limits for pertinent retirement and other savings vehicles.

  • IRA Contribution: $5,500 ($1,000 catch-up)
  • 401(k) Contribution: $18,000 ($6,000 catch-up)
  • HSA Contribution: $6,750 (family health coverage, $1,000 catch-up at 55)
  • Profit Sharing/Defined Contribution plan maximum: $54,000
  • Max compensation limit for SEP, Profit Sharing and DB Plans: $270,000
  • Notably, the Social Security wage base increased over 7% from $118,500 to $127,200

As the legislative process unfolds throughout 2017, we will assess any planning opportunities that may arise with pending tax changes. For now, it’s best to wait rather than act on speculation.

As always, you know where to find me if you’d like to discuss any of these topics and how they apply to your personal situation.

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Slow down to go faster

(Warning, bike metaphors ahead).

Last weekend I went out for an ice long ride on the mountain bike as winter is threatening on the front range. I headed for Mount Falcon, which is one of the most challenging climbs on the front range on a bike. Steep, technical, rocky, fairly long. I am pretty competitive with myself on the bike so this is a climb I’m regularly trying to improve my time on. I didn’t expect Saturday to be one of those days. We had been out of town for Thanksgiving for a week, it’s the offseason and I had been eating pie and drinking beer and generally relaxing. So when I rolled up to the trailhead, I wasn’t planning to put in a big effort.

My plan was to simply keep my heart rate in check, not get too deep into the red zone and try to ride as much of the climb cleanly as I could. (For the uninitiated, a “clean” ride is one where you don’t put a foot down or have to walk through any difficult sections). I did alright, riding cleanly through more of the climb than I had before, riding smoothly over water bars and keeping my balance through all but a few of the rockiest sections. Near the top I was holding off a strong runner who I had passed on a less technical section.

I finished the climb and didn’t feel as exhausted as I often do when I’m trying to keep my effort pinned on that climb. I enjoyed the rest of the ride (this particular loop includes some of the most fun descending on the front range) and generally had a great day out. I got home and reviewed the ride (I am addicted to Strava) and was really surprised to see that I had taken 30 seconds off of my fastest time up the climb.

My lesson from Saturday is that if I dialed back a bit and focused on riding better instead of riding harder I could go faster. This goes against every part of my brain, which is convinced the only way to be faster to to make my lungs and legs scream at me for as long as humanly possible and then a few minutes more.

And investing successfully is the same. We (and I say “we” because I am truly included here) get distracted by shiny objects and new strategies and spend time looking for some secret sauce, “working harder” on our investment portfolios, when 90% of the time that’s a waste of effort and the wrong thing to do. If instead we could focus on doing things better – sticking to a pre-defined process, minimizing obvious obstacles like transaction fees instead of bashing into them full speed, we’d get there faster. So here’s permission: quit trying to hard. Spend less time every week researching some new investment strategy and spend a few minutes realizing where you could have been better in what you are already doing. When did you deviate from your plan? When did you burn mental energy (and most likely money) trying to outsmart the markets? When could you have reduced transaction costs or deferred taxes? These little, easy things that are much more in your direct control are doing to do more than you think, and they’re easier than you think. Just because they are easier doesn’t mean there’s something better out there you should be doing.

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Finance Conferences: G.O.A.T.?

Much has already been written about last week’s Evidence Based Investment Conference in NYC. Put on by the fine gentlemen at Ritholtz Wealth Management and IMN, both the speaker and attendee list was a who’s-who of current and upcoming finance (Twitter) celebs. I won’t rehash sessions and speakers here, but if you’re interested, check out:

Part of me is inclined not to bother, but by midway through the day I came to realize there were a few very strong recurring themes that we kept coming back to. Whether it was a pure quant value manager like Wes Gray, a thoughtful writer like Morgan Housel, a legend like Charley Ellis or an author like Larry Swedroe, there were a few consistent core ideas that came out of nearly every mouth.

1) Investors must avoid errors. Of course, this is the core message from Charley Ellis’ famous Winning the Loser’s Game: most investors aren’t beaten by other investors, they beat themselves. Investors make too many decisions, make too complicated of decisions, work too hard trying to outsmart everyone else and convince themselves they are special, when what they should really be doing is simplifying the game. The average investor isn’t Yale’s David Swensen and shouldn’t invest like him. Tom Brakke sat on stage and reminded us that everybody chases performance – investors, advisors, institutions and consultants alike. To quote Charley Ellis, “Being a human being is a terrible characteristic for an investor.” We know what the errors are, but so far we haven’t made avoiding them automatic. Maybe we never will. At a minimum we need to have rules for ourselves set in place before the crisis comes, before our strategy underperforms, or we are absolutely setting ourselves up for failure.

2) Any evidence based-strategy only works in the long term. From Wes Gray‘s hilarious “For something to work, it has to suck” comment to recognition from every single panel member that any strategy is going to underperform, there was widespread agreement that a long-term focus is all that matters. Measuring any single investment strategy over a period of even three years is going to result in disappointment.

One of the hardest things for any investor to do is invest in a long-term strategy in a short-term real world. Talking about a 3-4 year period doesn’t sound like that much time in hindsight, but in real time it is a lifetime when your strategy “isn’t working.”

Jokes were made and stories told about hiding investment performance, hiding individual pieces of portfolios, corralling investors into better behavior, convincing people not to pull the plug when the inevitable stretches of underperformance come. Anyone who walked on stage had been through uncomfortably long periods of disappointing performance. Whether you own only the S&P 500 or a rules-based trendfollowing strategy, there has been and will always be a period that you absolutely hate it.

3) Everyone makes tradeoffs for success. I keep finding myself quoting Russ Roberts: “There are no solutions, only tradeoffs.” Investors, advisors and asset managers have to constantly navigate between a theoretical ideal portfolio and the one that a) functions in the real world and b) is one that you can stick with. Wes Gray sat on stage and acknowledged that momentum strategies look much better on paper than a pure momentum strategy can be made to work in real life. We are forced to choose between the ideal and the practical, both for for reasons of market execution and behavioral risk. The “ideal” portfolio on paper might mean owning tiny, near-bankruptcy stocks that don’t track the broad market at all, but how many people could (or would want to!) own such a portfolio? Historically on paper an “ideal” risk-adjusted portfolio might have had 30-40% in commodities and another 30% in emerging markets – how does that sound?
Larry Swedroe told the audience that the best investment strategy is one you can stick with, and advisors do investors a terrible disservice if the client invests in a strategy they don’t fully understand. I’ve talked about this separately – if we do not manage expectations for how a portfolio will behave, we will end up surprised, and surprised people make mistakes. Multiple asset managers acknowledged that keeping clients invested and committed to the strategy matters just as much as the strategy’s viability.

I’m generally no big fan of financial conferences, as most end up being full of useless filler sessions, product pitches and political nonsense. This was truly different. Even if it trended towards the occasional echo-chamber, I’ll take a room full of really smart people agreeing on the broad strokes of successful investing over anything else any day.

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