Month: November 2023

In early 2014, during the months of training for a one-week winter climb in the Rocky Mountains, past successes had led to a complacency that resulted in too few hours in the gym. The corresponding seven pounds of unproductive weight that I was not accustomed to carrying in the mountains, coupled with colder temps and higher winds than were forecast on Day One, produced a horror that nearly cost me my life, one the Lord knows I shall never forget. Artificially easy credit, coupled with artificially low lending rates over the past decade, have produced a similar false confidence in consumers, and is financially as life-threatening as my Rocky Mountain ordeal. Following the fastest rate increases in 40 years, ‘would-be’ wealth producers are wise to consider the following principles for effective debt management.

• Always remember debt is financially beneficial only when the borrowed money is invested productively after associative expenses, taxes, and inflation. View every temptation to borrow through this lens.  

• Never carry consumer debt. This means settling all credit card balances monthly. Use a card only when funds are pre-allocated for payment. Freeze your cards in a block of ice so you can think about the importance of each purchase while it thaws!   

• Buy certified, pre-owned vehicles with the largest possible down payment, pay the remaining loan off expediently, and drive the vehicle as long as feasible. The cheapest car is almost always the one you already own.

• Never refinance a mortgage or home equity loan without proving it’s to your ultimate financial benefit. When refinancing, DO NOT increase the balance or extend loan duration. Realize a lower rate does not alone prove refinancing is beneficial. Never assume an “interest-only” loan.

• Become debt free before retiring, and never assume new debt while retired. Giving up earned income while in debt is like a mountaineer who plans to borrow the spare goggles from other climbers in a deadly storm; it’s a request for life-threatening injury!

• Avoid margin investing, as investment returns are to be earned, not presumed.   

• Don’t assume rates will stay low long-term, and as a rule, avoid variable rate loans. Why should you bear the risk of rate increases? If you can only afford a loan using a variable rate, the loan is beyond your means, let it pass. 

Manage debt like you would a pet scorpion; keep it to one, cage it carefully, starve it into fragility, and if it hisses at you, exterminate it!

Think about it, Shaun.

“Do not withhold repayment of your debts.”  ~Proverbs 3:27

The rich rules over the poor, and the borrower is the slave of the lender.” ~Proverbs 22:7

“Owe no one anything except to love each other.” ~Romans 13:8

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

It is an established fact that returns on investment are more attributable to sector allocation than all other factors. The financial successes of Benjamin Graham, known as “the father of value investing”, and his star pupil, Warren Buffet, are largely ascribed to their respective and predominant appropriation of invested assets to the single industry of property & casualty insurance. Myriads of investors have been bankrupted for concentrating precious capital to single, ill-timed ventures; in fact, the regional bank failures of 2022 were caused by the disproportionate allocation of reserves to long-term Treasury bonds immediately preceding the biggest rate hikes in 40 years. The examples proving the supreme importance of sector allocation are innumerable. Consider how market dynamics today indicate a considerable reallocation of investment holdings may now be advisable, a concept stock investors have thus far noticeably failed to perceive.

• Low and perpetually declining interest rates in recent decades, in particular from 2009-2021, discounted present cash flows and placed a premium on future cash flows. This caused businesses to build things they’d otherwise not have built, and led to unprecedented mal-investment. It also encouraged investors to abandon fixed-income securities in favor of stocks and other riskier ventures, and led to new records in borrowing and leveraged investing.

• We believe ultra-low interest rates are unlikely to return for several reasons. Low rates weaken the dollar, already experiencing deteriorating confidence globally due to America’s unpayable debt load. The Fed recognizes its error of keeping rates too low for too long and is unlikely to soon repeat the mistake. Inflation has reached the dangerous stage of entering the mindset of consumers and will likely re-surge if rates decline.

• Higher rates mean lower corporate profits, which tends to diminish asset appreciation. It also makes borrowing and avoiding default more difficult for profitless and heavily indebted companies.

• While certain assets are more challenged in a higher interest rate environment, others, like lending, credit, and fixed income investing benefit. Today fixed income investors can receive a positive real (after inflation) return on cash instruments, like CD’s, money market funds and Treasury bills, and hope for equity-like returns from non-investment grade debt instruments. Famed investor, Howard Marks, refers to the new dynamic of higher rates as a “Sea Change”, one he believes will last, and is, therefore, worthy of your observation as an investor.¹

It stands to reason that if market dynamics have fundamentally changed, the best performing investment strategies before the change will likely be replaced by a very different list of winners. The evidence for sustainably higher interest rates suggests that credit, an asset class loathed by investors in recent years, may now be worthy of a larger portion of an investor’s capital.

Wise investors “lean”, they do not jump. This is not a call to abandon stocks, especially the ownership of great, capital-efficient businesses! Rather, it is an observation of a significant, and probably lasting change in the investing landscape. It’s also a call to consider a corresponding and prudent sector reallocation, the investment factor most influential to future returns. Think about it, Shaun.

“Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.”  ~Ecclesiastes 11:2

1 Oaktree Capital, ‘The Memo’ by Howard Marks, “Further Thoughts on Sea Change”, October 11, 2023  

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.

Bonds and other fixed income investments may result in the loss of both interest and principle in the case of a default. Rising interest rates result in a lower present value of held bonds. Par value and the return of principle is sure only if bonds are held to maturity.

Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

Because of their narrow focus, investments concentrated in certain sectors or industries will be subject to greater volatility and specific risks compared with investing more broadly across many sectors, industries, and companies.​

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

As a young mountaineer, terrifying fear quickly taught me that, short of learning how to assess risk, distinguish calculable and incalculable risks, and manage risks assumed via careful planning and the use of every technical advantage available, my climbing career would likely be brief. Ultimately our fate is in the hands of our Creator, but He has equipped each of us with intelligent minds and diverse talents to thoughtfully employ in every earthly endeavor, which very much includes investment risk-taking. Consider the following factors as you carefully evaluate your own tolerance for, and acceptance of investment risk.

Investment risk begins with cash and equivalents, progresses with ownership of bonds, which involves lending money to governments or corporations, and culminates with taking ownership in the stock of public companies. Low risk investments involve little or no volatility in values, but also offer the lowest long-term potential returns and least probability of realizing a positive return after taxes and inflation. High risk investments involve periods of significant volatility in value, but also offer the highest long-term potential returns and greatest probability of realizing a positive return after taxes and inflation. Before deploying hard-earned capital, it is critical for investors to understand the level of risk required to earn the return needed to help achieve their financial goals. It would be foolish for a climber to choose the most dangerous route up the mountain to rescue an injured friend! Retirees living on investment income must also limit portfolio risk to that which will allow them to recover from temporary market losses while generating income distributions. Hundreds of formidable mountains are littered with the corpses of former climbers who failed to understand this concept!

Assumption of risk should also consider:

• Proximity to retirement; Recovery from temporary losses generally requires time. Never ask a down market for that which it may be unwilling to give.

• Investment objective; the protection of capital, income generation, and asset appreciation each involves differing levels of risk. Your investment independence requires a compatibility between your goals and the amount of risk your investments are actually exposing you to.¹  

• Emotional capacity to endure temporary loss; never ask for the endurance of more pain than your weakest self will accept. Discover this through deep consideration as opposed to experience.  

Think about it, and may God bless you in the matter risk-taking, Shaun.

“He who observes the wind will not sow, and he who observes the clouds will not reap” ~Ecclesiastes 11:4

“Have I not commanded you? Be strong and of good courage; do not be afraid, nor be dismayed, for the Lord your God is with wherever you go.”  ~Joshua 1:9

1 Dr. Eifrig’s Health & Wealth Bulletin, “I Dread This Question”, November 2, 2023

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.