Sniffed Links - Silly

Below are your reads for the week. As always, let us know if you want to discuss.

This article hit the news cycle this week. The headline is what catches people’s eye. Meanwhile the actual article shows a clear bias from a hedge fund manager facing a period where hedge funds…stink.

Luckily, one of the best investment writers out there pretty much lit the previous article on fire. 

Lastly, Ara addressed this very “issue” back in February. 

Market Commentary - September 2019

Ara Headshot Edited.jpg

Most investors nowadays are diversified in the traditional sense of the word. Rarely do we see someone with a bulk of their money in one fund or one stock. However, being properly diversified means more than just holding a bunch of different investments. This month I want to take a deeper dive into diversification and how it actually works when done properly. Often the "value" of diversification is shown during prolonged market sell-offs. Examples include the 2008 Financial crisis, the European debt crisis of 2011 and the 4th quarter of 2018.

While many equity asset classes have experienced prolonged bouts of volatility over the past few years, the S&P 500 has been somewhat spared. The last time the the S&P 500 experienced four consecutive monthly declines was during the 2011 European debt crisis. Since then? Only once have we seen three consecutive monthly declines. It's resiliency has been amazing. So, why not just load up with the S&P 500 in your portfolio? While much has been made of the S&P's dominance over the past 5 years, 2000 to 2010 paints a much different picture (S&P 500 is represented by the blue "Large Cap Equity" style box). It was a middle or lower tier performer for 10 consecutive years! It is extremely difficult to stick with an underperforming investment for that long, especially if it's a majority of a portfolio. Remember it's not just how much your portfolio gains, it's also how much less it loses. As investors, we all have a "pain threshold" that prompts us to wave the white flag. One of the most important things in investing is to avoid reaching this pain point and the best way to do this is usually by being properly diversified.

When analyzing portfolio returns, most desire to see all their investment holdings increase at the same rate. This sounds reasonable and logical right? It's actually a dangerous strategy. If all your investment are highly correlated, what happens when one sharply declines? The answer is they all decline sharply. The pain often ends up being too much and poor and emotional decisions usually follow. Diversification helps avoid market timing. If an investor is significantly overweight in an underperforming asset class, odds are they will not only sell at the wrong time, but likely start chasing performance. The idea of "doing something" during a market sell offis a psychological response. It is human nature to see a problem and think "I have to do something now".

Many did take actionduring the 2008 Financial crisis. Most timed it poorly and missed out on the recovery which can often seemingly come out of no where and happen so fast that it is easy to miss out on double digit returns. While most equity asset classes were pummeled during 2008, many only suffered a fraction of the losses. In fact several types of bonds flourished. Proper diversification and stoicism in the face of a market decline is what kept many investors from panicking. This allowed them stay the course and reap the rewards when the market started to recover.

For the first time in nearly half a decade, bonds are outperforming nearly all equity asset classes over a rolling 12 month period. The irony is bond performance significantly lagged equities from mid 2016 to mid 2018. If one focused solely on the individual returns, they would have likely sold bonds at the exact wrong time. This also applies to the various equity asset classes. Currently U.S. stocks comprise ~52% of the global market. If investors ignore international and emerging markets, they are in a sense leaving out almost half of the worlds market cap. The outperformance of International and Emerging markets from 2003-2007 was nothing short of breathtaking. While there are instances where it may make sense to slightly over/underweight certain asset classes, being properly diversified is a must. This is partially why we focus more on the collective portfolio returns and not individual investment returns.

It can be tough to convince yourself of this fact but the truth is your portfolio should almost always have several investments that are lagging the others by a noticeable amount. If not, that is when action should possibly be taken. The goal is to earn an efficient risk adjusted return while reducing volatility via diversification. It is not to have only the top performers over a given period of time. Does this strategy work perfectly? Over the short term the answer is no, but over the long run it does. Solely focusing on individual investments returns does not paint a proper picture and as history has shown, it more often than not leads to lower long term total returns as investors tend to end up chasing returns. Think of your portfolio as a baseball roster. When assembling it, ideally you want a mix of speed and defensive minded players along with contact and power hitters. This way if one or two struggle, the others can pick up some of slack. Would it be fun to assemble an entire roster of power hitters? Sure, but what happens when they go through a prolonged slump? Attendance will surely drop and the fan base will demand a roster shake up. Successful organizations tend to have a proper balance as relying on one is not a successful long term strategy. The same can be said with an investment portfolio. To quote Aristotle, "the whole is greater than the sum of its parts".

Sniffed Links - Consumers

Big week at Divergent Planning as we welcomed Karly to the team!

Recession fears also remained a top news headline. One headline I saw pointed to Bank of America CEO saying the consumer will keep a recession from happening. I actually tend to agree. But is an economy truly “healthy” if it is relying solely on the consumer? This is why the beginning of 2019 was so important. If the markets hadn’t recovered so quickly it could have driven consumers to consume a less and thus sending the economy into a slowdown sooner.

Below are your reads for the week. As always, let us know if you want to discuss any of them. 

If you don’t do anything else, at least scan the highlights of this post. I have it bookmarked so I can refer back to it regularly. 

Vanguard has an industry favorite article explaining how advisors may add up to 3% of value to a client’s portfolio. Morningstar looks at this also and although the numbers come in lower they do admit that in certain years the value is MUCH higher. 

We have mentioned before how state pension funding is a big concern. No we are starting to get a look at how municipalities are handling it. 

Sniffed Links - Dog Days

Below are your reads for the week. As always, let us know if you want to discuss further. 

Two articles with important “warnings”.

We have been having this discussion with clients for years. Retirement isn’t what it once was. 

Interesting read on Modern Monetary Theory and potential repercussions.

I am eagerly awaiting Ray Dalio’s part 2 of this article. He leaves us hanging after mentioning gold? 

Market Commentary - August 2019

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As good of a year 2017 was for equity markets, 2019 is on pace to be even better. Obviously there is a long way to go and while the performance of the first seven months of has no bearing on the remaining five, what a run it has been! With the US Federal Reserve and the European Central Bank likely planning further rate cuts it seems central banks are not ready to let go of low rates. Mixed corporate earnings and the ongoing trade war seem to be on the back burner and the market is focusing on rate cuts and more stimulus.... for now.

While 2017 was an exceptional year, only Emerging Markets, European Markets & the S&P 500 experienced 20%+ returns. Many asset classes and sectors did not fully participate and a few actually experienced negative returns. 2019 has been a different story as equities have rallied across the board along with REIT's, commodities & bonds. These did not participate in much of 2017's rally and are on pace for their best returns this decade. Nearly every S&P 500 sector is already up double digits for the year. While it's extremely rare for all equity asset classes to experience positive returns in the same year, that is exactly what has transpired so far this year. While higher asset prices are always welcomed, there seems to be a disconnect between asset prices and the underlying fundamentals.

As discussed in my May market commentary, bonds were off to a great start for the year and the returns have only increased over past three months as central banks have doubled down on additional stimulus and rate cuts which in turn makes bonds "more attractive". Many bonds are increasing in value not based on their fundamentals, but more so because there is not a better alternative. Cash rates do not appear to be going any higher anytime soon.

It is important to remember markets can be irrational for extended periods of time and just when people think they have things figured out, the opposite occurs. John Maynard Keynes' great quote is very appropriate here, "The market can remain irrational longer than you can remain solvent." While returns this year have been stellar, it is important to keep things in perspective and remember how quickly things can change. At some point the pro-stimulus central banks will run out of stimulus to pump into economies. The global economy will need to stand on its own.

Sniffed Links - Back

I returned from family vacation this week. It has been a bit quiet on the reading and posting front. Seems the industry picked my “down” time to come up with some really solid articles. The first is of particular note. Written by a CFA (Certified Financial Analyst) who explains why even he doesn’t invest much in individual stocks.

How to Read Financial News Redux: Process Determines Priorities

The Surprising Reality of Financial Decision Making As We Age

New Financial Apps Aim to Protect the Elderly

When All You Feel is Reward - The Irrelevant Investor

Market Commentary - July 2019

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Rates Dropping

It appears the race to zero percent interest rates is back on. Currently, over $12 trillion bonds are trading with negative yields! France, Germany, Japan & Switzerland have either zero or negative yielding 10 year government bonds. That's right, if you hold these until maturity, you are guaranteed to break even or even lose money! This total is only likely to increase after the ECB recently indicated it's unlikely to increase interest rates before mid 2020 and stands ready to add more stimulus. While its helped push asset prices higher, the impact on economic growth has been questionable at best.

In the U.S., expectations have shifted drastically. Nine months ago the Fed was signaling for two to three interest rate hikes in 2019. Now expectations are for two interest rate cuts. In addition, President Trump has been continually applying pressure on the Fed to follow the rest of the globe with cutting interest rates. While lower interest rates reduce the cost of borrowing and can make goods more affordable for individuals and corporations, it also tends to fuels speculation and lead to "bad" investments being made. This can lead to the formation of asset bubbles if interest rates are kept low for too long. If the Fed were to move forward and cut rates, their options are limited on what they can do when the next downturn hits. While a prolonged trade war with China has emerged, the sharp u-turn from the Federal Reserve has left many wondering if a global recession is on the horizon or if they merely caved to political pressure.

In June, we witnessed a slow down in job creation (75,000) and a continued unresolved trade war with China. Despite this, global markets are on pace for their third best monthly performance in over 3 years. How? In short, a majority of this negative data has been shrugged off as the hopes for interest rate cuts and additional monetary stimulus have increased. This is not to say all economic data has been disappointing as retail sales have ticked up. The question is how much additional economic growth would arise from a 0.25% to 0.5% interest rate cut? Would it truly spur economic growth or merely help push stock and bond prices higher? While asset prices have increased tremendously in 2019, central banks continue to pile up record levels of debt and Eurozone GDP is lower today vs. 2015 and U.S. GDP is not much higher and that includes the corporate tax cuts in 2018.

The growing concern is the global system has become too dependent on low interest rates which have had a diminishing impact on spurring economic growth. The U.S. is in a tricky spot as their economic growth is stronger than most but at the same time a majority of developed countries continue to cut or maintain low interest rates. The Fed must either follow suit or risk having the US dollar appreciate which could have a negative impact on growth. One thing is clear, the longer interest rates remain this low, the larger the potential risk down the line. If inflation were to unexpectedly spike, things would get tricky as central banks would be forced to raise rates to combat inflation and global markets would surely be spooked. As worrisome as this can be, trying to decipher when a prolonged downturn will commence and for how long has been proven to be near impossible. In addition, right now both good and bad economic data is being cheered and boosting stock and bonds values. As mentioned in my market commentary last month, avoiding making rash investment decisions based on headlines is always recommended and those who stayed the course were rewarded handsomely in June.

Sniffed Links - Less Privacy

Privacy issues in tech are not going away. Neither are their users. Governments can fine and regulate Facebook all they want. For a large amount of users Facebook is their internet. They don’t search the web themselves to learn things. They go to Facebook. They are too big to fail.

I don’t know what has to happen for users to leave. By and large, users don’t care.

Facebook Lawyer Says Users ‘Have No Expectation Of Privacy’

Facebook Worries Emails Could Show Zuckerberg Knew of Questionable Privacy Practices

Apple promises privacy, but iPhone apps share your data with trackers, ad companies and research firms

Market Commentary - June 2019

Ara Glasses Headshot Edited.jpg

S&P Continued Dominance

The escalating trade war with China has gone from a nuisance to a big pain as things worsened over the past month. Still, it has had minimal impact on the performance of the S&P 500. Sure, it has created some volatility but not as much as one may think. Other markets have not faired as well. The S&P 500 is only ~3% off all time highs as of this writing. There will always be periods of time where one asset class outperforms the others. 

Why the discrepancy between the S&P 500 and other indices? Here are my thoughts.

  • Hope - Most are hopeful a deal will get done and the damage will be contained. Hope is not a strategy but markets seem to give the benefit in these types of situations and assume cooler heads will prevail. The issue is both sides seem to have dug in their heels and are blaming one another for the recent breakdown in talks.

  • Interest Rates - Earlier this year, the Federal Reserve signaled it would hold back on rate hikes for the foreseeable future which helped put a temporary floor on markets. The thought is if the trade war continues, the Federal Reserve will cut interest rates and doing so would make bonds and equities more attractive than the alternative (cash, money markets CD's). While this is not always the case, the past five years has pretty much played out this way. The concern is April's slow down came before the latest round of tariffs and if the trade war escalates, additional stimulus and lowering of interest rates will have a minimal impact as the global economy could slip into a recession.

  • Buybacks - This has been mentioned in several of my market commentaries but its importance can't go unnoticed. The tax cut and jobs act significantly benefited corporations who in turn used a majority of the tax savings to buy back shares and/or boost dividends. The numbers are staggering and 2019 is shaping up to be another record year. To put things in perspective, Apple recently announced they would be repurchasing an additional $75 Billion of its own shares. This is in addition to the $100 billion buyback announced in May of 2018. This sort of thing can be part of the reason the S&P 500 seems to bounce back so quickly and continues to outperform other equity markets. While buybacks will continue, the year over year rate at which they are increasing is likely to slow over the coming years which has some worried that the S&P 500 will pay the consequence once this wears off. That remains to be seen but there is no question that buybacks have helped boost US large cap stock prices.

The immediate impact is always hard to identify as it takes time to see the net effect. Some estimates suggest a 0.5% hit on China's GDP and a 0.3% hit to US GDP from the current tariffs in place. While not devastating, this assumes the trade war does not escalate. If it does, the estimates are closer to a 1-2% hit on GDP which would certainly wreak havoc on global markets. It's important to remember the Federal Reserve has less ammunition in its arsenal to fight the next economic down turn as we are in the late stages of this economic cycle and interest rates by a historic measure are still very low. If inflation were to spike, cutting interest rates would backfire as the incentive to lend would diminish as the interest earned would be less than inflation.

While everything above can seem scary, it is not a reason to take action because we could wake up tomorrow with a trade agreement. What an investor should be doing is reviewing their portfolio risk to make sure they are comfortable as this trade war could become another minor bump in the road or the start of the next significant market downturn. No one knows the answer and attempting to guess isn't recommended, so take the time to review your portfolio risk and make sure it is at a level that will allow you to sleep at night.

Sniffed Links - Comparisons

Trade War, threats made, market declines, blah blah blah. A lot was written this week. A lot of what was written was also written a few months back. And a few months before that. On and on we go.

Clients and prospects seem to like to know where they stand in relation to “others”. Below is Fidelity’s most recent retirement study. One stat of note is that average 401k balances have more than doubled since 2009. This is great news. The bad news? The average account is about $100k. Still, that’s WAY better than the 2009 number of about $50k.

Fidelity Retirement Study

Bond-Proxies Peaking Our Interest

Sniffed Links - Bounce

We received some surprising economic news last week as the first quarter was stronger than expected. I think this had a lot to do with the market bounce back. The economy followed with a bounce back of its own. Of course, like most data over the past 10 years there are different ways to view it. Some are positive and some are negative. Economists Assemble!

Why US economic growth isn't as strong as it looks

15 Months of Fresh Hell Inside Facebook

Mapping the US Gastronomic Borders

Digital Minimalism: How to Simplify Your Online Life

Market Commentary - May 2019

Ara Glasses Headshot Edited.jpg

What About Bonds

While much of the spotlight has been on the breathtaking rally in equities, what has transpired in the bond market might be more impressive. Both are off to their best starts in a decade. The rally in equity markets has probably benefited from the massive spike in stock buybacks. US corporations were large beneficiaries from the tax cut and jobs act and on pace to buy back more shares than the record breaking amount in 2018. Bonds have benefited from the Federal Reserve signaling it would hold back on rate hikes for the foreseeable future. 

Of course this is all in stark contrast to the way 2018 ended. Similarly most of the headlines in the fourth quarter focused equities and their sharp decline. But, several bond classes were in the midst of one of the largest quarterly declines since 2008! 

It is likely the Federal Reserve and central banks helped put a floor on markets in the short term. The underlying issues of a slowing global economy coupled with rising deficits still exists and needs to be addressed in the coming years. Currently global debt sits at $244 trillion, which is three times the size of the global economy. Estimates are for this to increase over the next year. If rates are left low, corporations and governments will continue to borrow and the debt pile will swell. But, if interest rates rise, there could be difficulty servicing the debt which could lead the global economy to come to a screeching halt. Again, however, it is important to point out that economies and markets often go in different directions so these sort of concerns are more for tracking and watching and less for taking action.

Sniffed Links - Filtering

Sticking to my discussion from a few weeks back, I want to further explain how I consume “news”. I think clients probably assume that as financial planners and investment advisors we stay on top of “breaking news”. This is somewhat true. We stay on top of the headlines so we know what clients may be reading or hearing. But, a financial advisor who reads “breaking news” is likely ineffective in terms of their ability to stick with a plan. Breaking news can make you feel like you have to do something as a reaction to everything you read. The way we invest (and the way we think every long term investor should invest) doesn’t lend itself to needing to know breaking news related to the economy or markets. Sure, we know what’s going on but we don’t sit around waiting to react. Instead, we study long term trends, philosophies, and strategies. These are more important to keep up with.

Summary of Upcoming TSP Withdrawal Changes

The Day the Dinosaurs Died

Active Fund Managers Get Blown Up Again After Hot Start to 2019

The $800,000 Card

The best apps to block robocalls on cellphones

Market Commentary - April 2019


Stock Picking

This month's commentary is a continuation from my post in February. Every so often you may hear people in the industry talk about how it's a "stock pickers market" or about a firm that just launched a fund based on its "best investment ideas". We always ask ourselves, "why are now and based on what data?" Stock picking is not what it once was. The rapidly free flow of all information has turned stock picking from a skill to a game of risk and gambling. The reality is many stocks underperform the broad market. Since 1973, only 22% of rolling 10 year periods were the number of stocks that outperformed the S&P 500 at 50% or higher. Unless someone is lucky enough to consistently picks winners their performance will lag the benchmark. Not to mentioned likelyhigher total fees.

Let's look at some other data and statistics provided by VanguardJ.P. Morgan.

  • Since 1980, ~40% of all stocks have suffered a permanent 70%+ decline from their peak value in the Russell 3000 Index. This percentage spikes when looking at technology, biotech & metals/mining stocks.

  • Since 1980, 320+ companies have been removed from the S&P 500.

  • Two-thirds of all stocks underperformed vs. the Russell 3000 Index, and for 40% of all stocks, their absolute returns were negative.

  • From 1987 to 2017, ~47% of stocks were unprofitable investments and ~30% lost more than half their value. On the other hand, roughly 7% of stocks had cumulative returns over 1,000%.

Pretty eye opening stuff which makes me wonder why so many try to "beat" the market when the odds aren't in your favor from a risk/reward basis. There will always be a small percentage who outperform, but that is the exception, not the norm. If you're picking stocks and don't own the 7%, good luck keeping up with the index. Also, if you miss on the 7%, the tendency is to attempt to close the gap by chasing returns/performance which rarely works.

I get it, many think they can find the "next" Apple or Amazon, and a few will. Even if you were lucky enough to invest in both early on, each have experienced multiple 50% to 75% declines and sticking it through is extremely difficult especially when it's a large percentage of ones portfolio. Not to mention for every Apple and Amazon there have been countless stocks that have wiped out shareholders. We consistently preach the key to investing is managing risk. There are few who can handle multiple 50%+ corrections without reacting. The reality is most investors make portfolio changes based on emotions (greed or fear) and not based on fundamentals. While I understand why this happens, the key is avoiding it. 

Sniffed Links - Reading

My consumption of financial news is “old school”. I get most of it from RSS feeds and some from trusted sources Twitter. To call RSS old school is laughable to those who still read newspapers but considering most people get their news from Facebook or LinkedIn, I am a dinosaur. In the financial industry consuming information is a skill and a process that takes time to develop. There is so much out there and unless you know who to trust and where to go you can get completely lost. That’s why we try to only share what we think is worthy of reading. The best stuff out there are from people who are writing content as a way for them to organize their own thoughts and ideas. The worst stuff out there is from people who are trying to get clicks or to sell newsletter subscriptions. It’s a shame, really.

Recessions: It's Been a While

The Twenty Craziest Investing Facts Ever

Former Fed Chair Janet Yellen: Far from retired, nowhere near done

Sniffed Links - Privacy Piracy


With technology being such a large part of markets it’s important to keep an eye on the trends in the sector. One that we have mentioned many times is privacy. Just when we thought Facebook couldn’t get more scummy new broke that the number you use for two factor authentication “security” settings is being used in ridiculous ways. What’s scary is I bet Facebook isn’t the only one doing this. It’s disgusting. They keep promising to get better but they are too big to get better

Now Facebook is allowing anyone to look you up using your security phone number

Your friends’ social media posts are making you spend more money, researchers say

Sniffed Links - Cycle


People are wondering why the market is soaring despite economic headwinds and weak earnings. The simple answer is that this is more common than you may think. Ara will discuss this more in his market commentary. One think economists seem to be able to agree on is that we are nearing the end of a cycle. Of course, they can’t agree on how long the “end” of a cycle can last.

The Heat Grows on Indexing

Spending Happily

Climate Change Could Hit Norwegian, Merck, and These Companies Hardest

Market Commentary - March 2019

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After experiencing one of the worst 10 week declines this decade, markets have followed up with one of the best two months to start a year in history. Yet another example of why marker timers have been crushed so many times since 2008. The average investor is better off neverlistening to market headlines and traditional news outlets. There are always a few touted "geniuses" who call a certain market correction but over the long run a majority of these market prognosticators are wrong far more often than right. I'm not picking on them as they are being paid to make predictions. No wants to write a story about investment managers who don't take wild guesses as to the next downturn.

I will be the first to acknowledge that the global economy is facing several headwinds and the economic data isn't getting any better. In early January we received earnings warnings ranging from Apple, Intel, Constellation Brands & FedEx to name a few. But investors who sold because of this have watched stock markets rallyfor six consecutive weeks. And volatility has all but ceased for the time being. Sometimes the only thing that makes sense about markets is the fact that they don't always make sense.

How could markets rally nearly double digits on the back of weaker earnings? Some are calling this quarter an "earnings recession" yet the market keeps climbing. The fact is this is not uncommon. Surprisingly, since the 1930s a majority of times when earnings were down, stocks actually ended the year higher. This is a head scratcher for many but the truth is the markets and the economy don't always go hand in hand. Markets are shaped by many variables and corporate earnings growth is just one. Data points such as inflation, wages and interest rates play an important role along with politics and central bank intervention. Relying on one as the basis of an investment decision is a fool's game. History seems to back this up.As Ben Carlson points out in his great piece, the 1930s saw earnings growth of -42% while the S&P 500 was nearly flat. The 1950s saw modest earnings growth of 46% but gains in the S&P 500 of nearly 500%! In fact, in 2018 earnings rose by 19.2% yetthe S&P 500 FELLby 4.4%. 


Trade wars, rising interest rates and a looming government shut down spooked many investors and triggered a massive sell off. Two months later, the sell off has almost been wiped out as the Federal Reserve backed down from their interest rate hike projections of threeor fourrate hikes in 2019 to one or zero! This along with what appears to be some progress in the U.S./China trade talks sparked a breathtaking rally.

Too often investors want to find a silver lining for the basis of why they believe markets should react a certain way when in reality no one knows with any certainty. Investing isn't easy and when emotions get involved, it becomes even more difficult. Market corrections, bear markets andcrashes are what makes markets work. Without risk of going down there would be no chance of markets going up. While never enjoyable, an investor should accept the fact that over their lifetime they will experience multiple of these and the key is being in a risk adjusted portfolio that will allow you to sleep at night and avoid the cardinal mistakes of selling out of a plan that is working. 

Sniffed Links - Political


I haven’t shared links in a couple of weeks and I may be doing so more sporadically because its very hard to find anything worth reading that isn’t political at the moment. Also, the market seems back to the theme it has followed most of the decade; blind resiliency. Earnings season hasn’t been great. Consumer spending is showing possible signs of slowing. Nothing, however, is able to push the market from its current trajectory. Look, we are not complaining about near double digit returns in 6 weeks but we also have to be realistic.

I’m ready for Spring.

This Is Your Brain Off Facebook - The New York Times