Thursday, October 31, 2013

Who’s impacted by the Fed’s announcement yesterday?

Yesterday, the Federal Reserve announced that it would continue its current policies: buying $85 billion in Treasury and mortgage-backed securities each month, and keeping short-term interest low.

This has the most direct impact on the bond market. Investors of all stripes hold bonds, but particularly retirees who are typically looking for income and relative safety. The irony is, this year the bond market has been anything but safe. It’s been highly volatile as the market contemplates a change in Fed policy. Many bond portfolios have generated negative returns as bond prices have fallen.

What can an investor do? There are some strategies that a professional financial advisor can put in place to help. As we’ve discussed in previous blog posts, our strategy has been to focus on bonds with shorter maturities in order to avoid price volatility.

For investors looking for income, we’ve implemented different strategies—beyond bond portfolios—to try to meet that goal. While interest rates are beginning to rise, they’re still extremely low by historical standards, so alternatives such as our Paid in Advance® strategy may offer a more suitable answer for income-seeking investors.

--Nick Asmus, Wade Financial Group Investment Department

Tuesday, October 29, 2013

Earnings calls—a chance to look under the hood

Yesterday, Apple disclosed its third-quarter earnings…and opinions are all over the map! (Disclosure: Wade Financial Group owns stock in Apple.)

This often happens. Earnings calls give a snapshot of the company, and there’s a lot of different data, that can be interpreted in a number of different ways. It’s a science…and an art.

Apple is a case in point—you could look at different aspects of the earnings call and take away completely different stories. 
  • Sales of iPhones and iPads are up over last year—great! 
  • Guidance on future profit margins did not meet analyst expectations—not so good. 
  • What are the possible new products? 
  • What are the expectations for holiday sales? 
  • What else is the company saying?
Earnings calls like this give investors a chance to “open up the hood and examine the engine” on a company. Individual investors can take the time to investigate fully and form their own opinion, independent of the market. For instance, bad news could send the stock sliding…which could be a buying opportunity, if you’re able to recognize it.
But, it takes a lot of time and energy—not to mention objectivity—to do that thorough work. And not just on one company, of course—on a full investment portfolio.  Just reading the headlines and trying to jump on market bandwagons is not going to cut it.

That’s why it’s so important to engage a professional, who is looking at these stocks and companies day in and day out…so you don’t have to.

--Nick Asmus, Wade Financial Group Investment Department

Thursday, October 24, 2013

What can an individual investor learn from Icahn’s $800 million Netflix profit?

Earlier this week, the news spread like wildfire: Carl Icahn had sold part of his stake in Netflix—making $800 million in the process. How did he do it?

Icahn follows a contrarian, value investing philosophy—similar to Wade Financial Group’s ConVal® process. The main idea is simple—buy quality companies when their price is low, and then sell when the price recovers.

This much easier said than done. It’s easy for individual investors to get caught up in the emotions, and not want to sell their stock. They’re proud that they “made” so much money (because the stock price has risen) and maybe a little greedy…thinking that if they just stay in a little longer, they can make even more.

Trouble is, no one can tell exactly when a stock has hit its peak…so the investors are liable to get caught holding too much of a stock when its price starts to slide.

As an investor, you have to spread your risk. Remember, it’s not what you make, it’s what you keep that counts. An independent financial advisor can help take the emotion out of investing, and help you make those difficult decisions.

That’s how Icahn made this money—he not only got in when the stock price was low, he got out when the stock price was high. Where is the Netflix price going to go from here? Who knows. Maybe he could have made a bit more by staying in. Maybe he got out at just the right time.

Regardless, I think his $800 million profit will help him feel good about his decision.

One final thought—a common theme I see with many investors is that they hold too much stock in the company where they work. They’re proud to be employees. They love the company, its products, and their friends working at the company. They think the company is on the right path. This opens them up to a lot of risk:
  • That they’re over-invested in a single company, which by itself is extremely risky
  • Not only their investments, but their day-to-day income is tied up in that same company!! What happens if something goes wrong!
Overinvesting in one company—even a company you love—is a bad financial idea, but a trap that many fall into.

--Jerry Wade, CFP®, CFS
Chief Investment Officer
Chief Wealth Advocate

Thursday, October 17, 2013

How is your advisor making money?

If there’s one common denominator that links many Wade Financial Group clients, it’s that they came to us as a result of another person—sometimes a financial advisor, sometimes not—who gave them bad advice...and occasionally that person profited from the deal.

Recently we met with a person who had had just that experience. He and his wife had been working with a family friend as an advisor, who had sold them an annuity for his IRA.

Now, that just doesn’t make sense on the face of it. The advantage of an annuity is that it’s tax-deferred…but the IRA is already tax-deferred. So, the couple was paying extra in fees for zero added advantage.  Meanwhile, the “family friend” made a nice fat commission on the sale of that annuity.

Another example: in the news, we’re seeing reports of some doctors and dentists who are suggesting financing arrangements to their patients. The patients, who trust their care providers and need the money for health procedures, accept it. Only later do they find out that they’re in the hands of a predatory lender. In the example quoted in The New York Times, the patient was paying 23 percent in annual interest, with a 33 percent penalty rate kicking in if she missed a payment!

While many doctors and dentists have rightly refused to participate in these financing arrangements, you can understand their motivation to work with these lenders: they get paid 100% upfront for their work. That’s a powerful motivation.

All of these point to a larger story that we see repeated all the time at Wade Financial Group: people get hurt financially by someone they trusted—maybe without understanding the incentives behind that person’s actions.

How can you avoid this?

At a basic level, you have to understand how the person who is advising you is making money. That’s why I strongly recommend that people work with a fee-only, fiduciary financial advisor, such as Wade Financial Group. Being “fee only” (not “fees plus commissions” or some other arrangement) means that the advisor is not making commissions based on what they recommend. Their compensation is tied to the overall wealth of the client—so they’re incentivized to act in the best interest of the client.

And as a fiduciary, the advisor is legally bound to act in the best interest of the client.

As a consumer, you should insist on transparency surrounding how the person you’re working with is being compensated. If they can’t tell you—or won’t—that should be an immediate red flag.

Tuesday, October 15, 2013

What does the Nobel Prize mean for investors?

Two of the three winners of this year’s Nobel Prize in economics have developed investment approaches that are critical to investment success.

Let’s look at the work of Eugene Fama and Robert Shiller, and figure out what the implications are for individual investors.

Eugene Fama
Overall, I take away two main points from Fama’s work: 

  1. Buy value versus growth stocks. These are stocks that may not be the Wall Street darlings you hear the pundits discussing, but they have a lower price-to-earnings ratio. This may be less exciting, but they may make more money in the long run.
  2. “Size matters.” Smaller companies tend to be more profitable.
 One company has pioneered investing with this approach: Dimensional Fund Advisors (DFA). They only work with Registered Investment Advisors (RIAs), not individual investors. If you’re an individual investor, I recommend that you work with an RIA like Wade Financial Group to get access to these funds.

Robert Shiller
If you follow my blog, you’ll know that one of the tools I use is the Shiller Price-to-Earnings ratio, known as the Shiller P/E ratio. This compares stock prices with company earnings. What does this mean for you?

Currently, the Shiller P/E ratio is very high—which suggests to me that the market is overvalued and we could see a drop, as I wrote about last week. Shiller P/E suggests that now is the time to lighten up on U.S. stocks…if you want to avoid buying high and selling low, that is!

Bringing it all together...

Looking at the work of these two economists together, here's where I'm seeing opportunities:
Currently, I’m looking at small, value stocks outside the U.S. (Brazil and India are where I’m seeing the opportunities). These have a low Shiller P/E.
I don’t want to buy into U.S. stocks any further right now, given the high Shiller P/E. Where's the market going to go? We can only guess, but I want to avoid getting caught in the “market buzzsaw” by buying high, and selling low!

--Jerry Wade, CFP®, CFS
Chief Investment Officer
Chief Wealth Advocate


Thursday, October 10, 2013

Danger Ahead for Gen X and Y!

A lot of attention is being paid to generational differences between the wealthy, particularly the differences between prosperous Gen X and Y’ers, and their boomer parents. Several recent studies have looked into this, notably the Fidelity Millionaire Outlook, which looks at the financial behavior of millionaires of different generations.

Understandably, the younger generation wants to find their own path. I’ve experienced this firsthand, with two of my kids. When they each bought a house, they chose their own agents, and their own mortgages. I was more than willing to help with my professional expertise, but they wanted to make their own choices.

The danger is that this deep level of engagement, which is fantastic, is often not matched with a deep knowledge of financial matters….and that, like all people, Gen X and Y’ers tend to be trend followers. Without the benefit of professional advice, they may be more likely to buy high and sell low—and see the financial damage that results.

Some of the Fidelity study results bear this out. It’s really easy to feel knowledgeable and successful in an up market like the one we’ve been experiencing. Mistakes are masked…if you’re in the market, you’re most likely making money. The study shows that Gen X and Y’ers are making an average of 30 trades per month…probably following the advice of pundits like Jim Cramer.

These folks are paid to make bold and knowledgeable-sounding predictions…but they aren’t paid by how accurate those predictions are! I would advise investors to look at sites like, which tracks the performance of pundit recommendations. I’d also suggest that they read a great whitepaper produced by Davis Distributors, Timeless Strategies for the Successful Investor.

Predicting the day-to-day movement of the market is next to impossible…and a high level of self-directed trading is, to me, a huge red flag. Many of my current clients are former self-directed investors, who did some damage to themselves, and then luckily realized in time that they needed professional help.

If you’re looking for a financial advisor, I’d suggest that you check out the Consumer Advocacy page on our website. There are many types of advisors, and they are not all created equal!

Gen X and Y’ers are correct to shy away from commission-based advisors who get paid based on the products they sell you. But, professionals can help you avoid getting hurt by the next market downturn. Picking a NAPFA-certified, fee-only, fiduciary financial advisor, whether that’s Wade Financial Group or another firm, is the best move you can make…and then you can focus on your career and family!

--Jerry Wade, CFP®, CFS
Chief Investment Officer
Chief Wealth Advocate 

UPDATE: Jerry Wade was interviewed on WCCO radio on this subject on Thursday, October 10. Listen to the full audio.

Tuesday, October 08, 2013

Is the stock market overvalued?

According to a recent survey of company CFOs, nearly half believe that the stock market is overvalued. At Wade Financial Group, we have the belief that what goes up, must come down. We’ve seen 50 percent drops in the stock market twice in the past 15 years—in 2000 and 2008. We’re now riding a 5-year rise in the market…which means that we may be poised for ugly results over the next 5-10 years.

Let’s look at the Shiller Price-to-Earnings ratio, commonly called the Shiller P/E ratio. This is an equity valuation that divides the market price per share by the earnings per share. Here's a chart from, looking at the ratio.

At the time of this writing, the Shiller P/E ratio is 23.6 (the red line), which is higher than the average of 16.49 (the gray line). What does that mean? Company stock prices are high compared to company earnings.

Global investment companies like PIMCO look at that; PIMCO just this summer released a forecast that annual returns will be in the area of 4.2% over the next five years, and a dismal 1.5% over the next 10 years.

As we mentioned before, we’re riding a 5-year rise in the markets…which means we may face a possible correction that will hurt investors:

What happens when you buy at the peak? Let’s look at history. What would you have earned if you bought stocks at the peak of the tech bubble in 2000 and just held them until today?
  • 10.5% total return over 13 years
  • 0.81% per year—before fees and taxes
If you bought today, my feeling is you would have the similar returns over the next 5-10 years.

What can investors do?
If you’re looking for income, there are a few areas I am recommending to my clients:

  1. Carefully selected high yield bonds
  2. There are mutual funds where you can buy $1 worth of tax-free muni bonds for 0.85 cents.
  3. Carefully selected dividend stocks in US
  4. Consider selling covered calls for a more reliable income stream.
  5. Global bonds
If you’re looking for long-term return, I would consider emerging markets, which have been beaten up badly in the past few years. We've blogged before about the opportunity we're seeing with emerging markets. Their Shiller P/E ratio is in the 10-15 range—or below average. While there are no guarantees in investing or in life, this may signal a higher return over the next 5-10 years.

--Jerry Wade, CFP®, CFS
Chief Investment Officer, Wade Financial Group

UPDATE: Jerry was interviewed on this subject on WCCO radio, on Tuesday, October 8. Listen to the full audio of the interview.