Fun Facts

Fun Facts Newsletter | December 2016

In the spirit of the holiday season, here is a list of early New Year’s resolutions and fun things to do in 2017!

  1. Remember, cash flow (income versus expenses) is the key to long-term financial success. If you are gainfully employed, you should save 15% to 25% of your income. If you are retired or not fully employed and are drawing on your investment portfolio, your total annual withdrawals should be 3% to 5% of your portfolio value or less. If your savings rate is low or withdrawal rate is high, review steps to increase your employment income or reduce your expenses.
  1. Insurance is the foundation of sound financial planning. Home and auto insurance, umbrella liability coverage, health insurance, life insurance, disability and long-term-care insurance all require regular review and updating. Funding a health savings account (HSA) warrants consideration. If you own or are considering long-term-care insurance, pay particular attention to and understand the inflation protection options.
  1. Are you maximizing your internet safety and protection by using different passwords, using long and complicated passwords and changing your passwords at least once a year? We highly recommend that you use a password manager program such as Dashlane, LastPass or RoboForm so you can have many different and complicated passwords but you only have to remember one password for your password manager program.
  1. Do your children or grandchildren have employment income that could be used for a Roth IRA contribution? If applicable, have you funded 529 college savings plans for the calendar year for children or grandchildren?
  1. Does a trusted person know where you keep your website usernames, passwords and answers to security questions? Do your family members know where to locate important personal financial papers and how to contact your professional advisors in case of an emergency?

Have a safe and happy holiday season. Take good care of yourself.

As always, please contact us with any questions, news or comments.

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Fun Facts Newsletter | November 2016

I have the challenge of writing this one week from election day. Some of our clients have expressed concern about the impact of the election on the stock market. The attached chart confirms our perspective that we have had good and bad economies and stock markets under both political parties and that patient, long-term investors are rewarded. Regardless of the election, we will continue to manage your investments soundly.

The words “Financial Management” in our company name were not chosen by default. In personal financial management, we emphasize managing what is within our control.

We cannot manage the world economy or U.S. politics or legislative or judicial decisions beyond our control.

We can manage individual decisions and actions to plan for the future and be good stewards of our financial resources, whatever they may be.

We can manage to get a good education to enable productive employment.

We can manage to live within our means or beyond our means.

We can manage to be adequately insured for auto and property risk, liability, disability, health, life and long-term-care risks or choose to accept those risks without insurance.

We can manage our income and investments to minimize income taxes.

We can manage a strategically designed, broadly diversified, low-cost, tax-efficient investment portfolio, or we can assume unnecessary risks and taxes.

We can implement an estate plan to prepare for the potential inability to act or make decisions during our lifetime and to distribute our assets at our death to the people we want and when and how we want, or we can let the laws and courts decide.

We can identify short-term and long-term financial goals that are consistent with our lifestyle and values and priorities, or we can drift along an uncharted course.

We can manage what’s within our control, or not. Which way do you vote?

Remember, your financial peace of mind is always our primary goal.

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Source: Dimensional Fund Advisors.

As always, please contact us with any questions, news or comments.

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Fun Facts Newsletter | October 2016

“Don’t chase past performance” is one investment mantra that makes sense but is hard to live by. It applies to both asset allocation decisions (let’s double up on large cap growth stocks since they have been up the most over the last three years) and individual mutual fund selections (let’s buy XYZ Fund—it’s up 50%!). If you need a well-researched reason not to chase past fund performance and another good reason that supports our investment strategy, we have the Fun Facts for you! Standard & Poor’s publishes “The Persistence Scorecard,” which tracks how top-performing funds in one time period continue to perform in future time periods. Bottom line, relatively few funds consistently stay at the top. Specifically, out of 641 U.S. stock funds that were in the top 25% as of March 2014, only 7.3% managed to stay in the top 25% by the end of March 2016. The longer the time period, the lower the persistence: Only 0.78% of large cap funds and no mid cap or small cap funds stayed in the top 25% after five years.

Fortunately, for our clients, we manage and reduce this risk by using asset class or index funds. These funds have a much higher probability of matching their underlying asset class performance due to their broad diversification and low cost. Hopefully, this helps you sleep better at night and increases your financial peace of mind!

Shifting to seasonal highlights, October is National Cyber Security Awareness Month. So appropriate for Halloween! While we are not technology experts, we do recommend that you use long and complicated passwords for financial accounts and websites with personal confidential information, and different passwords for different websites, which may include simpler passwords for websites like general news or sports subscriptions.

Last month I said I had one and only one comment on the presidential election, but here is one more to consider: The stock market reacts strongly to unexpected news. This presidential election and its candidates are more controversial than we have seen in several elections, but all public news is already reflected in the stock market. We know that one candidate will get elected. The stock market isn’t spiraling down in fear that one candidate or the other will get elected. You shouldn’t live in fear either.

Happy October and happy Halloween! As always, please contact us with any questions, news or comments.

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Fun Facts Newsletter | September 2016

Happy 40th birthday, Vanguard 500 Index Fund! The Vanguard Group First Index Investment Trust (now the Vanguard 500 Index Fund) launched on August 31, 1976, with only $11.3 million in assets, far short of the goal of $150 million. According to The Wall Street Journal, critics called the fund “un-American” and a sure path to mediocrity.

Going back further in history, in 1963 legendary financial analyst Benjamin Graham had advocated for the creation of an index fund. In 1971, a division of Wells Fargo launched a $6 million indexed portfolio of New York Stock Exchange stocks for the pension fund of luggage manufacturer Samsonite. In June 1975, American National Bank in Chicago was running about $300 million in several index funds, and one of the investment officers was Rex Sinquefield, who went on to be one of two co-founders of Dimensional Fund Advisors (DFA Funds).

Today the Vanguard 500 Index Fund holds more than $252 billion (with a “b”) in assets, and index mutual funds and exchange-traded funds tout nearly $5 trillion in assets.

Did you know that September is Life Insurance Awareness Month? Insurance—in the form of auto/home/liability, health, disability, life and long-term care—is the foundation of a financial plan and a pillar of financial security. Let’s face it: Most people don’t like insurance companies and insurance agents. (News flash, right?) Nonetheless, life insurance is important, and a well-defined, well-thought-out strategy is essential. Feel free to contact us to review your life insurance plan.

Speaking of insurance, fall is also open enrollment season for many employer benefit plans and Medicare. Again, take the time to evaluate your needs and goals and the options available. Make sure employer life insurance beneficiary designations are accurate and include a primary and secondary or contingent beneficiary. We are not experts in Medicare Supplements but can make referrals if you need assistance.

Finally, one and only one comment on the presidential election: We have had good and bad economies and stock markets with both Democratic and Republican presidents over the years. The president is only one person and doesn’t control the economy or stock market. Don’t put too much emphasis on what may happen with a new president.

Enjoy these final summer and early fall days! As always, please contact us with any questions, news or comments.

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Fun Facts Newsletter | August 2016

There is an old stock market saying, “Sell in May and go away,” based on historical cycles that the stock market slumps during the summer (not to mention “going away” to the beach or vacation is more fun!). As with many stock market clichés, this adage is not always consistent given that the summer of 2016 has been strong in both June and July. I know summer isn’t over until after August, but with schools starting earlier every year, summer seems to keep getting shorter! Remember, “the stock market” is not the Standard & Poor’s 500 Index but rather the MSCI ACWI (All Country World Index). The MSCI ACWI rose 4.42% in July and is up 5.7% year-to-date. International stocks as measured by the MSCI World ex USA index were up 5.05% for July but a more modest 2.65% year-to-date.

Our broadly diversified strategy was supported in a recent Wall Street Journal article by personal finance columnist Jason Zweig. In his July 29 article “Your 401(k) Is Not Safe at Home,” he emphasized the risk of having too much of one’s 401(k) plan in employer stock. While the risk of loss is obvious, he pointed out (as we frequently do) that it is what you don’t own that may hold down your returns. He states: “In 2013, when the Wilshire 5000 stock index gained a spectacular 34%, one-fifth of all stocks lost money. … In 2014, although the total U.S. stock market gained 12%, more than four out of every 10 stocks went down anyway. In 2015, only five companies—Amazon, Alphabet (Google), Microsoft, Facebook and General Electric—accounted for well over 100% of the return of the U.S. stock market.” His advice: “Invest in all companies at once, through a total stock-market index fund, and you eliminate your risk of missing out on every other winner out there.”

Two nice personal notes from our office: Donna’s son, Cameron, just graduated from Army National Guard training with honors and will be enrolled at Wright State University this fall. Kathy’s son, Andrew, passed his state boards and is now a licensed physical therapist. Congratulations, Cameron and Andrew!

Enjoy these summer days! As always, please contact us with any questions, news or comments.

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Fun Facts Newsletter | July 2016

As I communicated in my interim monthly communication via email and blog, the Brexit event was not the “market plunge” that the media made it out to be.  For the month of June, the MSCI ACWI (remember that is All Country World Index, our primary benchmark) was down 0.72% and is up 1.36% for the year. The MSCI World Ex USA  international stock index was down 3.19% in June, again hardly a “plunge”. The biggest and shortest term effect has been in foreign currency exchange rates. The British pound and Euro have declined in value versus the U.S. dollar. A stronger dollar increases the costs to foreign buyers of U.S. exports and decreases the costs to U.S. buyers of foreign goods. This exacerbates the recent trend of a strong U.S. dollar reducing foreign investment returns. But a trip to Britain is now cheaper!

The longer term impact is potentially negative since it reflects a trend towards nationalism and less global free trade. Exactly how this will unfold remains to be seen.

T. Rowe Price recently published interesting research on the historic returns between U.S. stocks and international stocks. Since 1973, returns have cycled back and forth with the median time for either U.S. or international stocks to outperform each other ranging about 3 to 4 years and the longest period of outperformance of either asset class being 6.25 years. We have now past the longest time period for U.S. stocks to outperform international stocks. The pendulum will swing back for patient investors.

Should we make more changes more often in your portfolio? I have cited Warren Buffett in recent writings. His 2005 Annual Report to Shareholders referenced Isaac Newton’s three laws of motion and cited them as works of genius. To this Buffett added a Fourth Law of Motion: “For investors as a whole, returns decrease as motion increases.” The more changes one makes, the more one risks being wrong. Investing is contrarian!

We welcome Joanne Skinner to our staff as a part-time Client Service Assistant. We have grown over the years and are increasing our staff to continue to provide the best client service that we can. Joanne will be working 20 hours a week and we look forward to having her as part of our team.

Enjoy these summer days! As always, please contact us with any questions, news or comments.

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Fun Facts Newsletter | June 2016

Since summer is beginning, I’ll keep “Fun Facts…” short and let you get started on your summer reading list, which I’m sure will be more enjoyable, but not as “Fun…”. Don’t leave home without the Four Core Principles of Our Investment Philosophy….

  1. Total Portfolio ApproachWe manage your total portfolio considering all accounts whether they be single, joint or trust taxable accounts or retirement account like IRA’s, Roth IRA’s or 401k’s. We consider “asset allocation” for the total portfolio as well as different types of accounts (for example, a Roth IRA may be more aggressively invested for growth and future inheritance).  We also consider “asset location” wherein tax-inefficient investments like REIT’s may be limited to retirement accounts.
  1. Broadly Diversified PortfolioInvestment management is a contrarian process where “buy low and sell high” is easier said than done. Diversification helps smooth the peaks and valleys although it is challenging not to load up on the most recent best investment and avoid the most recent dog. Discipline helps achieve long term goals and avoid strike-outs. (a great summer analogy, wouldn’t  you say?)
  1. Risk and Return are Related (The 3 R’s)Nothing demonstrates this better than the seemingly perpetual period of low interest rates that we have been experiencing. Low risk yields low return and higher returns require accepting more risk and potential volatility.
  1. Minimize Fund Fees, Expenses and Income Taxes.Simply said, net returns are what count! Low fund fees are a good predictor of future relative performance.

Enjoy these early summer days!

As always, please contact us with any questions, news or comments.

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Fun Facts Newsletter | May 2016

As the World Turns was a popular soap opera for 54 years on CBS from 1956 to 2010. While I never watched it, the title is applicable to investment management in our increasingly global and rapidly changing world. The investment pendulum swung strongly in our favor in both March and April with international and value-style stocks being strong performers. The dog of the past few years—commodities—has been the best performer in 2016. What will the future bring? Stay tuned! Remember: The world does turn, and the stock market goes up and down. A bull market is defined as a time period when the stock market goes up more than 20% from its prior low and never falls more than 20% from a recent high. We are now in the second-longest bull market in history. Much of this bull market, which began in 2009, is recovery from the carnage of 2008. But remember that sharp stock market downturns have not been repealed, and as we wrote recently, recoveries are faster than people think or realize. For you statistics buffs, the longest bull market was October 1990 to March 2000. Those were the days!

U.S. economic growth poses a challenge, with the economy growing only 0.5% in the first quarter of 2016, versus 1.4% in the fourth quarter of 2015 and 2.0% in the third quarter.

We have preached for years that low-cost funds serve our clients better and high-cost funds pose a hurdle that is hard to overcome. This is included in our Investment Philosophy Core Principle #4, “Manage fees and expenses.”

Morningstar recently published updated research on the value and importance of using low-cost funds. Morningstar Director of Manager Research Russ Kinnel defines and summarizes the results of his research as follows (emphasis added in bold): “… the problem with only looking at returns is you generally have survivorship bias … So, success ratio is a way of folding those funds that got killed off back into the performance … It turns out costs do matter … and what's really powerful … is how big the impact is, so for instance, the cheapest quintile of equity funds over the five years and in 2015 had a 62% success ratio versus 20% for the priciest quintile. Meaning, you are three times more likely to be successful shopping in the cheapest bin than the priciest bin. And what's also striking is just how consistent that is. Look at any time period, look at any peer group, asset group and it works and almost always it's that same stair step. So, it's really a remarkably consistent indicator of performance.” I couldn’t have said it better, which is why I quoted him!

As always, please contact us with any questions, news or comments.

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Fun Facts Newsletter | April 2016

March demonstrated once again that the stock market is unpredictable and volatile in the near term. For the month, the MSCI ACWI IMI world stock market index was up 7.56%, thereby recouping all of the losses from January and February and putting the year-to-date return at a positive 0.30%. So if only you had been on a desert island since January 1 and not checked the news or any websites, you would return to the real world to learn that the stock market was basically flat for the first quarter of 2016 and you missed the roller-coaster ride in between. March was a good month for our strategy, with almost all asset classes outperforming U.S. large company stocks. On a year-to-date basis, international emerging markets, real estate securities, U.S. small cap value and small cap and commodities are leading the way with positive returns.

Warren Buffett, Chairman of Berkshire Hathaway Inc. and credited as one of the greatest investors of all times, writes an annual Chairman’s Letter in the shareholders’ annual report that is worth a Google search and complete read of all 30 pages or so (OK, you can skim some of it). He offers an encouraging outlook in his 2015 Annual Report letter:

“It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do. That view is dead wrong: The babies being born in America today are the luckiest crop in history. American GDP per capita is now … a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents. … U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well. … All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. … Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious. … The good news, however, is that even members of the ‘losing’ sides will almost certainly enjoy—as they should—far more goods and services than they have in the past. The quality of their increased bounty will also dramatically improve. … For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.”

I like to be positive and optimistic, so let’s take his perspective to heart!

As always, please contact us with any questions, news or comments.

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Fun Facts Newsletter | March 2016

This edition of “Fun Facts to Know and Tell” truly lives up to its name as we review long-term investment return numbers, which are now updated through 2015. Remember these “Fun Facts”:

Compound Annual Returns from 1926 to 2015 (90 Years Inclusive)

12.0% Small U.S. stocks

10.0% Large U.S. stocks

5.6% U.S. Gov't. bonds (takeaway: stock returns are two times bond returns)

3.4% U.S. Treasury bills

2.9% Inflation

Risk of Stock Market Loss over Time

27% 1-year returns

14% 5-year returns

0% 15-year returns

Historical Performance of Premiums over Rolling Time Periods

Total U.S. Stock Market Beat (Safe) U.S. Treasury Bills

15 years 96% of the time

10 years 85% of the time

5 years 78% of the time (this means 22% of the time it didn’t!)

1 year 69% of the time

U.S. Small-Company Stocks Beat U.S. Large-Company Stocks

15 Years 82% of the time

10 Years 72% of the time

5 Years 64% of the time (this means 36% of the time they didn’t!)

1 Year 57% of the time

U.S. Value-Style Stocks Beat U.S. Growth-Style Stocks

15 Years 97% of the time

10 Years 88% of the time (but not the 10 years ending 2015!)

5 Years 77% of the time (this means 23% of the time they didn’t!)

1 Year 61% of the time

Stock Market Downturns and Recoveries

Sept. 2000 to Sept. 2002 25 months down 49 months to recover
Nov. 2007 to Feb. 2009 16 months down 37 months to recover

  Recovery is a long time, but about four years or less is reasonable for a long-term investor.

As always, please contact us with any questions, news or comments.

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Fun Facts Newsletter | February 2016

You are not alone. No one likes to lose money.

No one likes a drop in the stock market.

No one likes the media hype of panic and losses.

No one likes volatility and uncertainty.

Investors are many times more sensitive to losses than to gains. It is a fact.

  • A 10% loss hurts; a 10% gain barely gets noticed.

You are not the only investor who may be suffering from pain and anxiety.

Take a deep breath. And then another. And then do it again.

Try to relax. Everything will be just fine. But easier said than done!

The best remedy is to be well informed and to act rationally.

Stated simply, stocks go up and down. But they go up more than they go down.

Investors get rewarded for the risk and uncertainty of owning stocks by earning higher returns over time.

Even when stocks go down, dividend income is generally secure and grows over time.

Market recoveries after downturns are much faster than most investors realized.

  • Most losses of 10% to 20% are recovered within 6 months.
  • The 50% loss from Nov 2007 to Feb 2009 was recovered in 37 months (3 yrs+)
  • Bonds cushion the volatility of stocks. Few investors have a 100% stock portfolio.

Losses are only “on paper” until investments are sold. Nothing sold, nothing lost.

Measure your historic return over a minimum of a five year time period.

  • If you measure your portfolio from the last peak you will always be disappointed.

Invest for future, expected gains, not past returns. Think 5 years+ in to the future.

As always, please contact us with any questions, news or comments.

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Fun Facts Newsletter | January 2016

The 2016 new year: a time to refresh one’s perspective on the financial markets, both past and future. The global financial crisis of 2007 and 2008 seems like ancient history now.

The Federal Reserve lowered interest rates to near 0% to stimulate the economy, and eight years later we are still waiting for stronger economic growth.

The U.S. gross domestic product (GDP), a measure of broad economic growth, grew only 2.0% in the third quarter of 2015. The U.S. is the largest economy in the world, followed by China and Japan. Given our size, 3% or 4% is good growth, but we are at half of that level. China’s GDP has been in the 6% to 7% range and slipping, but still substantially higher than the United States. Japan’s economy has been flat for years.

Since 2008’s drop of 42% in the MSCI All Country World Index, the global stock market has had positive returns in five of the seven years. Modest losses of -7.89% and -2.19% were posted in 2011 and 2015, respectively.

U.S. large-company stock market returns have been positive in all seven of those years, although 2011 and 2015 were modest at +1.97% and +1.25%, respectively.

We have not had a calendar-year major stock market decline of over 10% in seven years. Stock market declines of 10% to 20% can happen at any time without warning, and like the law of gravity, stock market losses have not been repealed.

Risk and return are related, so on the positive, rewarding side, the MSCI ACWI index of global stocks was up 16% and 24% in 2012 and 2013, rewarding disciplined, long-term investors and providing above-average historical three- and five-year stock market returns.

Dividend growth has also rewarded stock market investors in 2015. Companies increase their cash dividends as revenue and profits increase, and this rewards investors separately from share price changes. Stock dividend income has also proven to be a pretty reliable source of income and offers income growth better than bonds.

Here are the annual dividend growth percentage increases for 2015 vs. 2014 for commonly held mutual funds:

  • Vanguard Total Stock Market Admiral Shares: +11%
  • Vanguard 500 Index Fund Admiral Shares: +12.5%
  • Vanguard Dividend Appreciation Fund: +15%

Turning to the future, what is our outlook? Our crystal ball is no clearer than yours, and we do not make future forecasts. Nonetheless, some basic data serve as indicators.

Inflation is low, measuring 0.7% for the 12 months ending 11/30/15, compared with 3% to 4% long-term historical averages. Inflation is projected to be 1.5% to 2.5% annually over the next five years. Low inflation is good, but it can result in low interest rates for investors.

The S&P 500 P/E ratio is 23, which is high and indicates below-average future returns.

The S&P 500 dividend yield is 2.1%, which is low, but higher than safe U.S. Treasuries.

International stocks, both developed and emerging markets, provide better stock market valuations than U.S. stocks and therefore better future growth potential. Time will tell when the pendulum will swing back in favor of international stocks, and patience may be required over the next few years. The strength of the U.S. dollar versus foreign currencies continues to weigh down international profits converted back to U.S. dollars.

Emerging markets are particularly affected by low commodity prices in oil and metals. Commodity prices have dropped dramatically, including oil, natural gas and precious metals like gold. This has had an unprecedented impact on many countries, industries and companies. This may be a long-term trend with long-term impact as adjustments are made throughout the global economy.

Interest rates remain low, and any future increases are expected to be slow and modest.

The key benchmark for any investment portfolio should be inflation and maintaining and increasing purchasing power through price appreciation and increased dividend income.

With low inflation and a slow-growing economy, investment returns are likely to be lower in the years ahead. While historically inflation was 4% and investment returns of 6% to 8% were targeted, with an expected 2% inflation rate, portfolio investment returns of 4% to 6% will achieve the same result.

Our motto for 2016: Investors should adjust investment return expectations to be more modest, but be confident that long-term goals are still achievable given low inflation.

Remember a few key lessons for 2016:

  • Successful investing is a contrarian process. Sell high, buy low and be willing to do what your gut tells you not to do. Don’t follow the crowd.
  • Successful investing requires a tolerance for volatility and a long-term focus.
  • A strategic asset allocation in a broadly diversified, multi-asset portfolio emphasizing passively managed funds is a sound investment strategy.

As always, please contact us with any questions, news or comments.

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Fun Facts Newsletter | December 2015

Flat. That’s probably the best way to describe the investment markets in 2015. -0.33%            MSCI ACWI IMI, a benchmark of the global stock market

+3.01%           Standard & Poor’s 500 Index, a benchmark of US large companies

-0.41%            MSCI USA IMI Value, a benchmark of US value style stocks

-3.85%            MSCI ACWI Ex USA, a benchmark of international stocks

-4.02%            MSCI World Ex USA IMI Value, international value style stocks

-13.23%         FTSE Emerging Markets All Cap, international emerging markets stocks

+0.97%           Barclays U.S. Aggregate Bond Index, benchmark of US taxable bonds

Putting this in perspective, flat is not a bad thing given we have had nearly 7 years without a major annual stock market decline of 10% or more, which is a long stretch. We are not forecasting a major stock market decline, but stocks can drop 10% to 20% at any time without advance notice. Like gravity, this principle has not been repealed.

There has been a huge performance differential between international and U.S. stocks, with international returns much lower. The pendulum of US and international stocks was in favor of international stocks from 2002 to 2009 (7 of 8 years).

The pendulum has been in favor of US stocks from 2010 to 2015 (5 of 6 years).

Over the past 15 years, US stocks have been superior in 7 years and international stocks have been better in 8 of the 15 years. While we can’t predict the exact timing, the pendulum will swing back in favor of international stocks in the future.

Turning to news from our firm, we are pleased to introduce Kim Masco to you as our new Client Service Assistant, replacing Tricia Smith. Kim joins us from Macy’s where she was an Executive Assistant in HR Finance, Benefits Administration and Health Plans. Prior to that she was Administrative Manager for a real estate development company. Kim’s email address is kim@bernofinmgt.com and her telephone extension is #3. We look forward to introducing you to Kim!

Best wishes for a joyous and healthy holiday season! As always, please contact us with any questions or news or comments.

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Fun Facts Newsletter | November 2015

October turned out to be a strong month for global stocks and not “spooky” at all. The MSCI ACWI IMI index of global stocks (you know, our favorite stock market index that no one has ever heard of) was up 7.5% for the month, recovering most but not all of the losses of August and September. The index was down 3.3% over the last 3 months. No one likes losses, but this loss is relatively modest for 3 months. Year-to-date 10/30/15, the index stands relatively flat at a positive 0.3% return.

U.S. and large company stocks continued to fare better than foreign stocks and U.S. mid and small company stocks. In October the S&P 500 was up 8.4%, S&P 400 Midcap index up 5.6% and S&P 600 Small cap index was up 6.1%.

One lesson learned in October 2015, as many times before, is that one can’t predict the short term direction of the stock market. But that doesn’t keep people from wanting to do so or trying and, more importantly, it doesn’t keep the media from making forecasts headline news. Like most free advice, it is best ignored.

Last month we wrote about low inflation and the news carried forward in October with announcements that there will be no cost of living adjustment increase in monthly Social Security checks in 2016. Likewise, the retirement plan contribution limits for IRA’s and 401k’s and other retirement plans will remain the same in 2016 as 2015; $18,000 for 401k contributions, $24,000 if you are age 50 or older.

Medicare premiums could have potentially increased for select individuals under this no Social Security cost of living increase scenario, but such an impact was negated by H.R.1314 The Bipartisan Budget Act of 2015.

The Bipartisan Budget Act of 2015 (don’t you love the name?) also made important changes to Social Security benefit claiming strategies for individuals near Social Security retirement age. Rather than try to summarize the changes here (and, quite frankly, we are still learning about them ourselves since it was just signed today), we will be reviewing the changes and their specific impact on individual clients on a one-on-one basis with you. Believe me; you don’t want to read a long explanation! But if you have any immediate concerns or questions, feel free to contact us directly.

Thanksgiving is one of my favorite holidays and I think the spirit of gratitude is so important. So enjoy the season of Thanksgiving and we sincerely thank you for the opportunity to serve you and for your confidence and trust in us. Happy Thanksgiving!!!

As always, please contact us with any questions or news or comments.

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Fun Facts Newsletter | October 2015

Kids get sick. It rains on vacation. Your favorite team loses a close game. Life happens. The stock market goes down. It happens.

Stock market downturns happen often and they are painful but not fatal.

As reported by Dimensional Fund Advisors, the S&P 500 declined 12.35% from May 21 to August 24. Declines of greater than 10% are generally called “a correction.”

U.S. large cap stocks have had 28 corrections since 1926 with an average of -14.26%.

International large cap stocks have had 9 corrections since 2001 with an average of -13.33%.

International emerging markets stocks have had 15 corrections since 1999 with an average of -14.04%.

Here are the annualized compound returns for the years after the corrections:

Asset Class Next 1 Year Next 3 Years Next 5 Years
U.S. Large Cap +23.56% + 8.89% +13.33%
Intl. Large Cap +24.73% +12.69% +12.89%
Intl. Emerging Markets +42.33% +13.36% +11.20%

  History is history and averages are averages and there are no guarantees. But investing is a contrarian process and it is best to be holding and buying when everyone else is selling.

Meanwhile, income from stocks tends to grow over time. Here are the quarterly stock income increases for September 2015 vs. 2014 for some commonly held funds:

Vanguard Total Stock Market Fund Up 9.3%
Vanguard 500 Index Fund Up 8.6%
Vanguard Dividend Appreciation Fund Up 15.2%

  Low interest rates continue to pose a challenge, with the U.S. Treasury Note 10-year rate at about 2.0%. The Federal Reserve Bank is expected to raise rates in 2015.

Good news continues in a remarkably low inflation rate. While it may not seem like it, inflation was only 0.33% for the 12 months ending August 31, 2015. For the past five years it has averaged 1.80% per year, which is remarkably low compared with a 3%+ longer-term average. Beating inflation over a long time is the most important investment benchmark.

As always, please contact us with any questions or news or comments.

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Fun Facts Newsletter | September 2015

August provided a great “back to school” lesson for long-term investors. Risk and return are related (the 3 R’s); stocks have greater returns but higher risk.

Investors may have forgotten this because the global stock market, as measured by the MSCI ACWI IMI, has enjoyed positive gains for five of the last six calendar years (down 7.89% in 2011) since the global financial crises in 2008. While the MSCI ACWI IMI was down 6.7% in August, it has a more modest loss of 3.23% year-to-date August 31, 2015. No one likes to lose money, but a 3.23% loss should not be as painful as the media thinks.

Five years or longer should be the best time period to measure your investments, and the five-year historical return ending August 31, 2015, on the MSCI ACWI IMI was 9.83%. Remember that!

Here are a few other “Fun Facts to Know and Tell” right now:

China has captured front-page news about a slowing economy, but its economy has averaged 8% to 10% growth since 1980 (as high as 15%) and has “slowed” to 7% with forecasts that it may slow to 6%. Compare that with the U.S. plugging along at 2%+ (just recently bumped up to the 3%+ range), and it puts the world in perspective.

U.S. exports to China total less than 1% of U.S. gross domestic product (or GDP—the measure of economic output).

The Dow Jones Industrial Average fell more than 10% in five days in August, which is a dramatic but rare decline. Here are the number of trading days it took to recover from previous 10%+ losses in five-day periods:

1987 Black Monday 419 trading days (about 14 months)
1998 Russia default 48 trading days
9/11 attack 40 trading days
2008 financial crises 304 trading days (about 10 months)
2011 U.S. govt. downgrade 62 trading days

  Finally: Gains and losses are only real when you sell; otherwise they are just paper.

As always, please contact us with any questions or news or comments.

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Fun Facts Newsletter | August 2015

What will happen to my bond funds when interest rates increase? This is a very common question from investors. The Federal Reserve has not increased interest rates since 2006, so long ago that most people don’t remember it.

Fortunately, as long as any future interest rate increases are slow and gradual, the answer to the question is, “Not much!” In fact, a slow and gradual increase in interest rates could be good for savers and investors, as long as the inflation rate does not increase faster than interest rates.

Why is “Not much!” the answer to this basic investing question? In a simplified explanation, as long as we have a positively sloped interest rate curve where longer term bonds earn higher interest than shorter term bonds, bond prices increase as they get closer to maturity and may do so enough to offset an interest rate increase. For example, over a 5 year range, U.S. Treasury Notes now earn about 1.75% for a 5 year maturity, 1.50% for 4 years, 1.15% for 3 years, 0.70% for two years and 0.25% for one year. The year over year difference is 0.25%, 0.35%, 0.45% and 0.45% respectively. So when a 5 year bond purchased today at 1.75% becomes a 4 year bond one year from now, assuming interest stay the same, it will be priced higher than a new 4 year bond priced at 1.50%. If interest rates go up 0.25%, pricing will be about the same.

If we have two interest rate increases of 0.25% over the next 12 months, the effect on bond prices may be negligible. Even if rates go up 1% over the next 12 months, bond investors would eventually benefit from the higher interest rate income. If we have a 2% increase in interest rates in a 12 month time period, bond fund investors could lose 5% to 10% of principal value, but that would be recouped by higher interest income over time.

While trying to make this all sound simple, remember that the real measure of investment returns is relative to inflation. Buying a 15% CD in the early 1980’s wasn’t very beneficial when inflation was 13%. Compare that to a 1.5% CD today when inflation is near zero; about the same. The real measure of investment returns is relative to inflation so given our very low inflation rate of 1.76% per year over the last 5 years and 1.20% over last 3 years and -0.23% over the last one year (negative inflation means deflation) ending June 30th, earning 1.5% to 2.5% from bond funds still keeps investors ahead of inflation without stock market risk. Hope that helps you sleep well!

Enjoy these final summer days!

As always, please contact us with any questions or news or comments.

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Fun Facts Newsletter | July 2015

I love data. Especially data from reliable sources (not everything you read on the internet is true!). I love data even more when the data confirms and supports our investment strategy. So even though as recently as May 2015 “Fun Facts…” we wrote about the lack of consistency and persistency in mutual fund performance, the Standard & Poor’s Corporation recently published new research on the same subject. Before jumping in to the “Fun Facts” numbers, you may be asking yourself, “Why is this important and what does it mean to me?” It is important evidence in the on-going debate of active vs assive management (stock pickers vs index or asset class investors) and therefore answers the question, “What is the best way to invest my money?” We hope you agree that is an important question.

Now for some numbers as of March 31, 2015…

Of U.S. stock funds as of March 31, 2011 that were in the top 25% of best performers...

...only 31% were still in the top 25% after one year

...only 5% were still in the top 25% after two years

...only 1% were still in the top 25% after three years

...only 0.28% were still in the top 25% after four years

Moral of the story: don’t chase last year’s best performers. Consistency is important. We look for funds in the top half of relative benchmark comparisons and strive to avoid funds in the bottom 25%, although consistent funds may dip in the bottom periodically. This is why we use market index funds from The Vanguard Group and asset class funds from DFA (Dimensional Fund Advisors). They will have good consistency and their low fees contribute to strong relative performance over time.

For you real trivia buffs, the Dow Jones Industrial Average finished the first 6 months of 2015 down 1.14%, breaking a four-year streak of positive first half gains. Don’t take it as too much of a predictor, though. In 118 years of Dow Jones Industrial Average history, a negative first half was followed by a negative second half only 40% of the time. For the first six months of 2015, the best day was up 323 points or 1.84% and the worst day was down 350 points or 1.95%. This is proof that daily volatility doesn’t affect long term investors as it all averages out over longer time periods.

Enjoy your summer days (and long days)!

As always, please contact us with any questions or news or comments.

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Fun Facts Newsletter | June 2015

As high school and college students and their families celebrate graduations, the focus quickly turns to the next stage of life. For high school students transitioning to college and college graduates transitioning to the real world, this is a prime opportunity to emphasize learning about basic personal financial planning. There are many resources but two that we are familiar with are “Personal Finance in Your 20’s for Dummies” by Eric Tyson. It is available on Amazon and part of the yellow book cover “….for Dummies” series that seems to cover everything. This book covers a broad range of financial topics such as basic budgeting and planning, insurance, loans, investments and how to save money on major purchases. One can read it from cover to cover or just the chapters that cover relevant topics, so it can be used as a quick reference book. The book is educational and does not sell any products.

Another resource is Dave Ramsey which offers complete information at DaveRamsey.com. His organization sponsors the “Financial Peace University” hosted at many churches. The site offers a “Graduate Survivor’s Guide” and an “Every Dollar” software program that tracks expenses and helps with budgeting.   Granted this site and program has more marketing flair than I’d like to see but that’s the nature of the beast.

The best teacher is parental guidance and encouragement and “teaching by example.” Certainly the key is getting young adults off to a good start and building a base of knowledge for a lifetime of financial security and success.

Turning to investments, we have written in our 2014 recap that international stocks have lagged U.S. stocks for the past few years, dramatically so in 2014. As diversification would dictate, the pendulum has turned in 2015 and international stocks have outperformed U.S. stocks substantially. Our crystal ball is no clearer than yours and we don’t know how far the pendulum will swing and when it will swing back but, in the meantime, diversification continues to serve you well!

Lastly, back to kids and young adults, remember that a Roth IRA is a great long term saving vehicle and can be funded by parents or grandparents up to 100% of employment income up to $5,500 that the child earns in a job. So if you fund a Roth IRA starting with their first job they can accumulate a substantial retirement plan at an early age. This is a great introduction to the importance of saving and basic principles of investing. Sounds like a win-win! Let us know if we can be of help.

Enjoy these lovely early summer days (and long days)!

As always, please contact us with any questions or news or comments.

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Fun Facts Newsletter | May 2015

Over the years we have frequently written about two important principles in mutual fund selection as part of the portfolio management process:

  1. Most funds don’t beat a market benchmark over time
  2. Fund winners rarely continue to be winners

Dimensional Fund Advisors recently published updated research supporting these principles. Here are the humbling facts.

On January 1, 2010, a mutual fund investor had 4,255 stock funds to choose from. Five years later only 24% had outperformed their respective benchmark.

On January 1, 1995, a mutual fund investor had 2,955 stock funds to choose from. Ten years later only 18% had outperformed their respective benchmark.

On January 1, 1990, a mutual fund investor had 2,711 stock funds to choose from. Fifteen years later only 19% had outperformed their respective benchmark.

Do winners keep winning? The answer is no, and the results over 3, 5 and 10 year periods are fairly consistent in the 25% range.

For the five years from 2010 to 2014, from the previous time periods ending in 2009, only 25%, 26% and 28% of the three, five and ten year winners repeated successfully.

Moral of the story: buy index funds in multiple asset classes for broad diversification.

Speaking of forecasting, one of the stock market’s popular fables is “Sell in May and go away” based on the fact that May to October has historically been the worst 6 months of the year for the stock market. As reported in USA Today, since 1950 the Standard & Poor’s 500 index has averaged a 1.7% gain from May through October vs a gain of 13.9% for the November to April period. But slicing and dicing the data further, as done by Ari Wald, a technical analyst at Oppenheimer, the S&P 500 tends to perform better in May, June, July and September when it’s in an uptrend, as it is now, heading into the summer months. What’s more, stocks tend to rally into September in the third year of the four-year presidential cycle, especially in pre-election years with a sitting second term president like President Obama. Investors who sold in May 2014 missed out on a 7.1% gain for the next 6 months. All of this supports our mantra that our crystal ball is no clearer than yours and predicting the short term direction of the stock market is easier said than done!

As always, please contact us with any questions or news or comments.

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