Commentary

This is some blog description about this site

Eye on Money: Year-End Tax Planning for 2016

The November/December 2016 Eye On Money is now available on RepublicWealthAdvisors.com, featuring stories on:

  • Year-End Tax Planning for 2016
  • Should You Convert to a Roth This Year
  • Should You Undo a Roth IRA Conversion
  • Know Your Options Before Exercising Them
  • Beaver Creek, Colorado: On a Mountain High

Download PDF (1.0 MB)

Continue reading
335 Hits
0 Comments

Turning Weakness Into Strength

Turning Weakness Into Strength

Adapted from “Three Generations from the Outhouse” a book by Fred Hanish of Republic Wealth Advisors

The Charles Schwab Corporation, which today has over $2.6 trillion in assets and serves over nine million client brokerage accounts, was, of course, founded by Mr. Charles Schwab. Now, while Charles Schwab did in fact graduate with both a BA in economics and an MBA from Stanford University—today considered one of the best schools in the world—he managed to get these degrees while having a substantial case of dyslexia which remained undiagnosed until he was 40 years old (when his own son was diagnosed and he created a foundation to assist children with this disorder).

So how did he do it? Well, he almost didn’t, barely graduating from Stanford and flunking English twice. In a 2003 interview in USA Today, Schwab said:

 “I didn’t quit, because I was really good in other things, terrific in math and science and anything that didn’t deal with words. I was good in sports. I had good skills in dealing with people…. Many things are important. Character, ethics, communications skills, consistency, analytical skills, relationship skills. Those are important for leaders…. It was painful, but not completely debilitating. I made sure I worked damn hard on things I could do well. You find out what you can do well, and you focus on it and work double hard. I worked hard on this company and the creation of different financial services over 25 years. But I don't think it was a reaction to overcoming dyslexia. Everyone likes to do well in life. We aspire to do the best we can with what we’re dealt with.”

Let’s re-read that last line: “We aspire to do the best we can with what we’re dealt with.” That’s why it’s so important to invest in yourself, so you know what you can and can’t do, and so you can compensate in whatever ways are necessary to guarantee your success. In fact, many successful entrepreneurs—including Bill Gates and Steve Jobs—became entrepreneurs because they had no choice. They had to do something, and that’s when they were forced to go out and start their own business. In fact, many very successful people who have ADHD or dyslexia or other challenging conditions realize early on the importance of hiring competent staff members who can handle all the tedious administrative paperwork, technical details, and computer-related time killers that would otherwise drive them insane.

Essentially, these folks have learned to outsource their weaknesses and focus on their strengths. In my last four or five years at Russell Investments this concept really struck home. I discovered I didn’t want to finish my career in a big-time corporate job, especially with regard to many of the day-to-day tasks I was charged with. I retained a life coach back then, and he said to me, “Why are you doing that? You stink at it. Find a way to outsource it. Do what you’re good at instead.” This can be kind of tricky, because we have a natural instinct to try to concentrate on what we’re bad at so we can do a better job of it. But my coach said, “Look, Fred, there are people who make a small fraction of what you make that do this function a thousand times better than you do. Hire them, and have them do it.”

The same principle applies to managing your wealth. You might enjoy researching investment ideas. You might even be good at it. But is it the best, most profitable way to use your time? Probably not. Your highest payoff will more likely come from doing more of whatever made you wealthy in the first place.

Far better, then, to outsource your wealth management to specialists like Republic Wealth Advisors. This will free you to focus on your best work, and to enjoy time with your family and friends.


IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.

Continue reading
644 Hits
0 Comments

Republic Adds New Asset Allocation Technology

Austin’s Republic Wealth Advisors today announced a strategic alliance with Active Allocator, Inc. ("Active Allocator") to deliver cutting-edge asset allocation and portfolio construction methods to Republic’s clients and others.

Active Allocator owns and operates ActiveAllocator.com, the world’s first portal to seamlessly integrate traditional, illiquid and alternative investments in performing strategic asset allocation, portfolio construction and manager selection for financial advisors. ActiveAllocator’s proprietary algorithms build on and optimize the assets an investor already owns. In seconds ActiveAllocator analyzes a client's existing portfolio on a forward looking basis, generates numbers and metrics and makes recommendations to reallocate or add new sub-asset classes to complement and enhance existing holdings.

The ActiveAllocator alliance gives Republic Wealth Advisors new and unique abilities to evaluate an integration of a wide variety of asset classes including actively managed funds, passive index funds and ETFs as well as alternative investments such as hedge funds, managed futures and private debt within client portfolios. ActiveAllocator also proposes allocations across illiquid assets such as real estate and private equity, allowing Republic Wealth Advisors to evaluate potential benefits in incorporating them alongside an investor’s liquid holdings.

“With ActiveAllocator we can give our high net worth clients a truly comprehensive look at their portfolios, including illiquid assets, and recommend adjustments that we believe will improve their investment results,” said Republic CEO Kenny Landgraf. “Portfolio design is kind of like picking a football team. A squad with eleven great quarterbacks will still lose every game because it won’t have an offensive line. ActiveAllocator will help us put exactly the right player in every position.”

Sameer Jain, Active Allocator’s co-founder, said “We’re excited to be working with Republic Wealth Advisors. They have a top-notch team and a sterling reputation in the industry as a technology innovator. We think it’s a great match and look forward to a long fruitful partnership.”

ABOUT REPUBLIC:
Republic Wealth Advisors (RepublicWealthAdvisors.com) is a fee-only Registered Investment Advisory firm based in Austin, Texas with an additional office in Houston. Founded in 2001 by Kenny Landgraf, Republic offers active investment management services to high net worth individuals and institutions.

ABOUT ACTIVE ALLOCATOR:
ActiveAllocator.com is the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. A fintech digital disruptor, it offers RIAs and broker-dealer’s financial advisors a simple way to understand and explain alternative investments’ benefits within the context of their particular client’s holdings; to allocate appropriately, as well as to access exposure by investing with the right set of active manager funds.

View news release at PRWeb

 

MEDIA CONTACTS:

David Levy, Republic Wealth Advisors, 512.506.9395 x2
Sameer Jain, Active Allocator Inc., 312.498.1903

Continue reading
480 Hits
0 Comments

Do Gold and Silver Belong in Your Portfolio?

Do Gold and Silver Belong in Your Portfolio?

Occasionally someone asks if I think precious metals are a good investment. The answer, as with most such questions, is “It depends.” What’s right for me may not be right for you, and vice versa. I can give you some general ideas, though.

The first question to ask is: How do you think gold or silver will help you? Do you have some reason to think they will improve your financial condition? Usually people don’t know the answer. They ask because they saw an infomercial, or because someone said gold was going up. Often they fear some kind of social disorder and think gold and silver might help them survive.

So what we really have here are two different questions. On one hand, will gold or gold-related assets help improve your portfolio’s risk/reward balance? And on the other hand, how can you protect your family and assets from natural disasters or man-made chaos? Let’s deal with these separately.

First, I don’t recommend anyone try to trade gold (or anything else) on a short-term basis. You will almost certainly lose unless you are well-capitalized and willing to make it your career. Most people just aren’t equipped to compete against Wall Street’s algorithms. If you have money to invest, I suggest doing more of whatever kind of work earned you the money in the first place. You know you can succeed there.

If you are a Republic Wealth Advisors client, we have already invested your assets under a plan designed to achieve your long-term financial goals. We monitor gold and related asset classes along with many others. If we see convincing evidence that gold exposure will improve results, we can add them to the mix. We might well do it before the thought even crosses your mind.

That covers gold as an investment. What about gold as insurance – against unthinkable disasters or societal breakdown? That’s a different question.

“Insurance” is something you buy and hope to never need. You insure your car and home because you know there is a small chance you will have an accident, or your house could burn down. You willingly pay the premiums so you don’t have to worry about those risks.

The kind of situations in which owning gold might help are much less predictable, but we can’t call them impossible. Sometimes the worst, however you define it, really happens. I’m not a “prepper” but I suspect .22 long rifle cartridges might become the most valuable asset you can own if the unthinkable happens.

Silver may also be more practical than gold in those scenarios, too. It is relatively easy to buy and more divisible than even the smallest gold coins. I know people with actual gold bars in their safe, which to me seems very impractical. Remember also that the government actually confiscated gold in the Great Depression. Silver has many industrial uses so it is less likely to draw attention.
 
I view gold and silver generally as “Economy insurance.” Like most insurance, it is fine to have but don’t overdo it – and hope you never need it.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.



Continue reading
703 Hits
0 Comments

Where Real Estate Fits in Your Portfolio

Where Real Estate Fits in Your Portfolio

Owning your home is the “American Dream.” Unlike most dreams, this one can be reality if your income is even a little bit above-average. Those in the upper tier can make real estate part of their investment strategy.

Like any other asset class, real estate can be hazardous to your wealth, too. Property ownership should be one component of a broader wealth plan. Today we’ll look at how to make it fit.

The first step in developing a financial plan is to account for all your assets. Only then can we help you determine if you’re using them in the best possible way. This is fairly simple for “tradable” assets like cash, stocks, bonds, and mutual funds. You receive account statements that say how much you have, and we can look back to see how the assets performed for you.

Real estate is harder. Unlike shares of stock, every real estate property is unique. Assigning a valuation can be pure guesswork in the first place, and then it can change based on property condition or conditions in the surrounding area. Sometimes people acquire real estate in bits and pieces – timeshare condominiums, vacant lots bequeathed in a relative’s will, etc. Because these details make real estate assets hard to categorize, they often get pushed aside and forgotten while you focus on more liquid assets like stocks.

Another problem comes when people buy real estate as an investment and underestimate the associated time burden. Rental homes are a good example. Gurus tout them as a way to generate retirement income. That’s certainly possible, but finding good tenants and keeping up with maintenance can be an intrusive chore when you’re supposedly “retired” from work.

At Republic Wealth Advisors, we look for better solutions. How can we get the diversification, tax and other benefits of real estate without the headaches and distractions?

We generally think the key is to own professionally managed real estate instead of individual properties. Done properly, this has the potential to outperform self-managed property ownership and work in harmony with your other investments.

At the simplest, you can do this by placing your real estate allocation into one or more REITs, Real Estate Investment Trusts. These are pooled vehicles, similar to mutual funds but with buildings and land instead of stocks or bonds. A professional manager handles the underlying properties. Some REITs trade on stock exchanges, giving you far more liquidity than is possible when owning properties directly.

Liquidity cuts both ways, though. Assets that are easy to buy and sell also tend to deliver lower total returns over time. That’s because liquidity is not free. Structuring and arranging assets so they can be bought and sold on short notice restricts the manager’s flexibility. Investors pay for it in the form of lower returns.

Placing real estate in a security that trades all the time is questionable for another reason. Does a building’s value change from minute to minute, like stocks, bonds or commodities? Of course not, so the daily fluctuations in REIT prices may or may not represent the property portfolio’s true value. No one is actually buying or selling the properties at those prices.

If you don’t need daily liquidity, many private equity firms offer real estate funds or partnerships. These give managers much more leeway, allowing them to maximize long-term value in ways they can’t do when investors might bail out tomorrow. The performance difference can be significant over time.

In the past, many real-estate focused private equity funds had very high minimum investments, creating a barrier to entry for all but the wealthiest investors. Fund sponsors have worked to reduce this problem and the choice is much wider now than it was a few years ago.

Another innovation is the “interval” mutual fund. Structures vary, but generally you can invest in these funds on any business day but only sell you shares at stated intervals, typically quarterly. This makes them well-suited for illiquid asset classes like real estate.

Public and private real estate investments have different risk-reward profiles and should be evaluated individually. In either case, owning real estate via pooled funds gives it greater visibility and helps you monitor its progress alongside your other assets. This can help when it’s time to rebalance or make periodic adjustments.

Over time, your desired allocations to different assets and asset classes will drift away from the targeted amounts, simply because asset prices go up and down. Many investors respond by reducing exposure to the assets that have done well and adding to those whose prices dropped. Illiquid real estate assets often get lost during this process. You can’t sell a few shares of a building just because property values or up. But you can make incremental additions or withdrawals to professionally managed real estate.
 
Republic Wealth Advisors uses sophisticated software to track and evaluate all our clients’ investments so that we can give the best possible advice. We recognize the potential benefits of owning investment real estate alongside financial assets. Our goal is to give you truly comprehensive advice and information to help you reach your financial goals. Real estate is part of your wealth and we’re ready to help you make the most of it.


IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.


Continue reading
689 Hits
0 Comments

Is the Stock Market Roller Coaster For You?

Is the Stock Market Roller Coaster For You?

If you read the fine print at the bottom of most financial articles or advertisements, you find some variation of “Past results are not necessarily indicative of future results.” This disclosure is there for two reasons. The second one is that regulators require it. The main reason for this warning is that it’s true.

With careful analysis, the past can give us useful guidance and help us discern patterns in the economy and financial markets. It is not so simple as just observing that Investment A had higher returns than Investment B over the last year, five years, or even ten years.

Recently someone asked this question:

Fred, I see that [Investment X] only matched the S&P 500 stock index over the last several years. Why is it any better than just buying an S&P 500 index fund?

This is a very good question. It’s also quite timely as we continue to read in the financial press that it is “common knowledge” that all one really needs to invest in is an S&P 500 index fund. Sadly, wisdom is not too common. The financial press wrote the same thing back in the late 90’s before that bubble burst and ended in tears for most folks. Still, the person asking it is on the right track, so we’ll offer not one but two answers.

First, we know that current valuations for the S&P are historically expensive. You can see this in our recent Climbing the Worry Wall report. Based on the trailing price/earnings ratio, the S&P 500 is now at its most expensive point since February 2010 – more than six years ago. Further, if you adjust price/earnings for inflation and cyclicality (Robert Shiller’s CAPE ratio), valuations are even more stretched.

Does it make sense to pay a historically high price to “buy” a smaller share of corporate earnings? Probably not. It might make sense to buy into the S&P 500 now if you are doing it as part of a disciplined entry strategy, like dollar cost averaging. Plunging in with a lump sum under these conditions is more risk than I would recommend for most people.

The second answer: return is only part of the equation. Risk is just as important. In fact, it may be more important. If you take too much risk, you may not receive the returns because you will have already given up.

The stock market doesn’t travel in straight lines. It goes up and down, usually in small moves but sometimes it moves very fast. Ideally, if you are committed to a buy and hold strategy, you would ignore short-term movements and stay with your index fund even when its down. Very few people can do this.

Is it wrong to be scared? No, not at all. Fearing the unknown is human nature, especially when your life savings are at stake. We’ve known some people with iron stomachs who can sit through the craziest market turmoil, but they are the exception in our experience. Most people bail out when the pain gets too great… often just before the bottom. The market then recovers without them, which makes the pain even worse.

This is why we often suggest investments we believe can deliver stock-like returns over time but with less volatility. We’ve found that investors are far more likely to stick with these alternatives. They are more likely to keep the returns instead of selling in a panic at just the wrong time.

For instance, look at the hypothetical investment in this table. You see a number of statistics compared against the same figures for the S&P 500 Total Return Index (the S&P 500 index plus dividends).
 
Notice the annualized returns are not much different: 11.9 % vs. 12.3%. But the alternative does far better than the S&P 500 on several measures of risk: % Positive Months, Standard Deviation, and Maximum Drawdown especially.

That last figure is particularly important. Drawdown tells you the depth of the worst losing streak. It’s how much you would be down from the highest point to the subsequent lowest point. In this case it was -16.3%.

If you look at your account statement and see your account has dropped more than 16% since the last time you looked, would your first impulse be to send Fred some flowers? Probably not. You would call and ask what in the world happened.

Now consider the alternative. You could have been in the alternative investment and had a worst-case drawdown of less than 1%, and still had the same upside. To us, this is the obvious choice.

Of course we have to caution you, we’re looking at the past here. The future could be much worse. Still, would you rather own the fund that has a history of wild swings or the one that didn’t?

You can look at this another way, too. Maybe you are the rare person who can sit through wild swings and not be scared out of the market. If so, then you deserve to be compensated for the risk you take. Maybe you should look at more aggressive benchmarks than the S&P 500.

In either case, you want to think through the issues systematically and make decisions than consider your personal situation and financial goals. Guiding investors through that process is our specialty. We are always glad to help.


IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.




Continue reading
1063 Hits
0 Comments

Is Now The Time to Refinance Your Mortgage?

Is Now The Time to Refinance Your Mortgage?

With long-term interest rates recently touching new lows, homeowners are again being afforded the opportunity to refinance their mortgage loans at lower rates. Is now the time? Will refinancing improve your financial situation?

Both are excellent questions, but neither has an easy answer.

While no one knows for certain where interest rates will be next week, much less years from now, a 30-year mortgage at 3.5% or even less appears to be a great opportunity. Maybe grabbing it now will prove to be the right move. But that depends on assumptions about the future.

The decision to refinance depends on more than the loan rate. The first consideration should be how long you plan to stay in your home. You’ll likely incur transaction costs which may include points on the loan, title insurance, appraisal fees, and maybe more. The new rate will need to be low enough to offset those costs within a reasonable time.

If you move forward, make sure you have clear goals in mind. Do you want to …

  • Reduce your monthly payment?
  • Use your home equity to finance improvements?
  • Shorten the term and pay off your mortgage faster?
  • Get rid of mortgage insurance?

Refinancing may help you achieve these goals and others. The more important question is whether the goals make sense in your situation. For instance, if you refinance to a shorter term that will pay off your loan sooner, then home equity will start accounting for a bigger portion of your net worth. That can be helpful in some ways, but could also reduce your overall diversification and leave you overexposed to housing prices.

For some people, the predictable yearly mortgage interest provides a “base” tax deduction that lets them itemize and deduct other items like charitable contributions. Paying down your mortgage faster than expected can impact your tax planning.

Mortgage interest has the advantage of being tax deductible (within certain limits). Other things being equal, it’s better to pay tax-deductible interest than taxable. But other things aren’t always equal. Optimizing your personal balance sheet requires careful planning that considers multiple factors.

Sometimes the answer is easy. If you have 20 years left on a 7% mortgage, then refinancing down to 3% is likely a good idea. Usually the answer is not so obvious. You need to make the decision in light of your broader financial plan, looking at everything from tax considerations to retirement, estate and investment strategies.

Refinancing also has risks you should consider.  If you use a rate and term refinance, you may extend the time needed to pay off your debt.  Even though your payment goes down, you may be paying for many more years (i.e. switching from a 30-year mortgage at 5.25% with 20 years left to a 3.5 mortgage with 30 years left).

A “cash-out” refinancing where you take equity out of your home for other uses may also seem appealing. However, home values don’t always go up. You might add risk to your overall financial situation if you pull out equity and then the value of your home falls.

Helping make an informed decision is one of the services we provide for Republic Wealth Advisors clients. We can help evaluate your circumstances and give you a neutral opinion whether to pursue refinancing. If the answer is yes, we can direct you to mortgage professional whom we have found to be reliable and trustworthy.

What you don’t want to do is rush into a major financial move without considering all the possible consequences. Refinancing your home is a major decision that deserves careful thought. Republic Wealth Advisors is here to help.

 

IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.

 

Continue reading
1746 Hits
0 Comments

Climbing the Worry Wall

Climbing the Worry Wall

View as PDF

According to an old saying, every bull market “climbs a wall of worry.” If so, the last few weeks may be one of the highest walls we’ve ever seen. At the same time, denying the momentum in U.S. equities is impossible.

The S&P 500 Index reached a new all-time high in mid-July – something it had not done since May 2015. That makes it hard to call this anything except a bull market, however worrisome it may be.

We noted in our midyear report that stocks spent the second quarter recovering from sharp January/February losses. The June 23rd UK Brexit referendum sparked a brief fireworks show, but the major benchmarks recovered and some kept going to new highs.

Our Republic strategies rely on a combination of fundamental and technical market indicators. They guide our decisions on whether to own stocks at all, and which industry sectors to own when we are bullish. Presently the picture is mixed; our technical models are more bullish than the fundamental picture seems to justify.

Below we’ll examine some of the “wall of worry” factors that tell us to be cautious.

Interest Rates

The bond market is one important concern. In a “normal” bull market, inflation tends to be rising and long-term interest rates rise in tandem. Right now the opposite is happening. In fact, the ten-year Treasury yield posted a new all-time low while the S&P 500 scored a new all-time high.
 
 
This isn’t supposed to happen, yet it did. Why? We think the bond market is behaving abnormally due to central bank action. The Bank of Japan and European Central Bank have been trying to stimulate their economies with large-scale “quantitative stimulus” asset purchases and negative interest rates. Meanwhile our Federal Reserve is trying to normalize its policies, eight years after the financial crisis that launched them, even as the rest of the world still struggles.

For now, this means U.S. interest rates are the highest in the developed world. Capital from Europe, Japan and elsewhere is flowing into U.S. assets. Treasury bonds are the most liquid dollar-denominated asset, so they are the incoming capital’s first stop. This pushes T-bond prices higher and yields lower. The federal government’s smaller issuance of new debt further reduces supply. Historically low interest rates are the natural result. Mortgage rates are also dropping, causing a rush of refinancing activity.

This weirdness can’t go on indefinitely, but it could push bond yields even lower. Lower yields make stocks, especially dividend-paying stocks, look attractive in comparison. That probably explains some of the buying activity that is pushing the stock market higher. Other factors are at work, too.

Earnings: Forward vs. Trailing

Stock values ultimately depend on company earnings. More specifically, stock prices reflect current perceptions of a company’s future profitability. Financial analysts measure this with a forward price/earnings ratio. “Forward” means these are estimates of future earnings, not actual earnings.

The chart below shows the forward P/E ratio for the S&P 500 Index going back to 1990.
 
 
Over this roughly 25-year period, the average forward P/E ratio was 15.9x. The average price for stocks in the index was 15.9 times the expected earnings. At times the ratio dropped much lower, as you see in 2008. This indicates extreme pessimism. You can also see it went much higher in the late 1990s tech boom, reflecting excessive optimism.

With the forward ratio currently at 16.6x, market valuation is just slightly above average. Stocks look a little bit overvalued, but not alarmingly so. This suggests stock prices could still move higher.

The picture changes when we look at the trailing P/E ratio. Instead of analyst estimates, this method measures actual corporate profits earned over the last twelve months. As of July 15 it stood at 19.4x – the highest since February 2010. Before then, the last time we saw such extremes was in the early 2000s bear market.

The trailing 12-month P/E ratio is now above its 5-year, 10-year and 15-year averages, shown as dotted lines in the chart below. Stocks are historically expensive by this standard, though not to the extent they were in the early 2000s or 2009.

 
The trailing P/E ratio went from 17.9x at the end of 2015 to 19.4x now. That’s a big leap in a relatively short time period. It did this even though earnings fell about 2.5% in the same time.

In other words, investors are paying higher prices for lower historical profits. Analysts call this “multiple expansion.” It means each dollar of expected future profits has a higher current value. This makes sense only if you believe profits will rise significantly in the near future. Is that a good bet?

Profit Recovery

We see two short-term barriers to higher earnings. One is strength in the dollar against other major currencies. This makes U.S. exports more expensive for foreign buyers, which means U.S. multinational companies receive fewer dollars when they repatriate profits earned abroad.

The other important factor is crude oil prices. The sharp drop from over $100 in 2014 to below $30 earlier this year decimated many energy and energy service companies. The spillover effect on capital spending held back suppliers from other industries, too, and also reduced consumer spending and confidence.

Corporate profits should rise if the greenback and crude oil can settle into a trading range somewhere between the recent extremes. Then the year-over-year comparisons won’t look so discouraging. This, in turn, would justify higher valuations and push stock prices up. Not every stock or sector will rise, or rise at the same rate, but the overall trend should be bullish.

Earnings season is underway right now as companies report results for the April-June period. In addition to their past results, most companies will issue guidance for the quarter now underway. This will help reveal whether the higher earnings multiples are really justified.

We also pay attention to seasonal factors. The warmer May-October period is historically the stock market’s weakest time of year. The ongoing summer rally is unusual but may yet peter out. We would normally expect markets to pick up momentum around late October, but this is an election year. With so much uncertainty in the U.S. presidential race, we won’t be surprised if some investors wait until mid-November to make any major moves.

As of now, we have equity exposure for Republic clients whose risk profile permits, but we’re using alternative assets as well. We’ve identified attractive opportunities in REITs, private equity, leveraged loans, high yield bonds, and other non-stock segments and we allocate capital to them whenever possible. 

In our view, now is not the time for big bets on any one asset class, especially a stock market trading at record highs. We are not in a race against the S&P 500 or any other index. Our mandate is to help our clients make reasonable progress toward their financial goals, and that is what drives all our investment decisions. Feel free to call us any time to discuss your own assets.


IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.




Continue reading
1313 Hits
0 Comments

2016 Republic Halftime Report

2016 Republic Halftime Report

View as PDF

At the halfway point, domestic stocks have made little progress this year.  The second quarter brought a recovery of January/February losses but was not otherwise impressive.  Similarly, positive year-to-date returns in many segments represent nothing more than a recovery of 2015 losses. Despite generally quiet trading, much was happening beneath the surface.

With benchmarks staying in a fairly tight range, the second quarter was much less volatile than the first.  The trips outside that range marked two important moments.  The first was the Labor Department’s release of the May employment report in early June.  The data showed only 38,000 net job growth in May, far less than economists expected.  This, combined with revisions to past reports, called the ongoing economic recovery into question, and in turn reduced expectations the Federal Reserve would raise interest rates.

The other important moment was the United Kingdom’s June 23 “Brexit” referendum.  Few observers expected it to pass, but it did and immediately threw European politics and economics into confusion.  The British pound plunged and it appears likely the UK will go into recession.  Worse, Brexit fallout could roil the already-fragile Eurozone financial system.

How this will affect U.S. markets is unclear.  The pound’s fall makes UK assets less expensive in dollar terms, which gives British companies a competitive advantage for global business.  This could affect some US exporters.  We’ll learn more as companies release mid-year earnings reports and forecasts in the coming weeks.

Looking at the quarterly numbers1, the S&P 500 gained 2.5% in this three-month period.  Value stocks again outperformed growth in both large-cap and small-cap benchmarks by a wide margin.  As happened in the first quarter, the difference was starkest in smaller stocks: The Russell 2000 Growth Index fell 1.6% while the Russell 2000 Value Index gained 6.1% for the quarter.

Outside the U.S., emerging markets continued to outpace the developed world.  The MSCI Europe, Australasia and Far East Index (EAFE) dropped 4.0% in USD terms and an even worse 6.8% in local currencies for the first half.  The MSCI Emerging Markets benchmark rose 6.6% in US dollars and gained 3.6% in the home currencies.  Brazil’s main MSCI index rose a stunning 46.5% in USD and 18.6% in the local currency.  Global stock returns are much less impressive when you look back further.  Many markets are flat over the last two years and the EAFE is nearly flat over the last ten years.  Earnings growth has been modest or negative in many equity markets.

Treasury bonds outpaced most equity benchmarks in the second quarter.  The ten-year Treasury yield made a dramatic move to end the quarter at 1.49%, down from 1.78% three months earlier.  Yields fall as prices rise, so strong safe-haven buying from abroad continued to make U.S. Treasury bonds the world’s refuge of choice.  American investors did well too, notching a 7.95% year-to-date total return (income plus price gains).2 The Barclays Aggregate Bond Index had a 2.2% total return for the quarter while investment grade corporate bonds returned 3.6%.  The emerging market bond index had another strong quarter, up 5.1% in U.S. dollar terms while the high-yield bond benchmark gained 5.5%.  

In economic news, slow but steady growth kept the U.S. recovery alive, with inflation-adjusted Gross Domestic Product growing at an annualized 1.1% in the first quarter.  This is well below the 2.8% 50-year average and below the 2.1% average since the last recession ended.  The unemployment rate dipped to 4.7% in May, but job creation appeared to be slowing.3

On the inflation front, the U.S. Consumer Price Index rose 1.1% for the year ending rate in May, while “Core” CPI (which excludes food and energy prices) rose 2.2%.  Core inflation was higher because falling energy prices pulled the headline rate lower.  Consumer finances look stronger, with debt loads stabilizing and household spending up.  Average existing home sale prices are almost back to the previous October 2005 peak.  Commercial real estate also performed well, making real estate investment trusts (REITs) an attractive income category.    

Crude oil prices recovered some lost ground after a sharp decline earlier in the year.  The European Brent crude oil benchmark ended June at $48.37, up from recent lows but far below the $111.93 level where it ended just two years ago in June 2014.  Gold prices had a very strong quarter, rising from $1,234 at the end of March to $1,321 on June 30.4

As we move into the second half of the year, we remain confident in your investment strategies.  We will continue to monitor progress toward your financial objectives.  Please remember to contact us if there are any changes in your financial situation or investment objectives or if you wish to impose, add, or modify any reasonable restrictions to our investment management services.  A copy of our written disclosure statement discussing our advisory services and fees continues to remain available for review upon request.

As always, we welcome and look forward to the opportunity to spend time with you to address your unique financial goals.  If you have any questions regarding these reports or other questions about your investments, please contact us at (512) 506-9395 or (281) 408-2538.


______________________
1 MSCI, Inc. Russell Investment Group, Standard & Poor’s, FactSet, JPMorgan Asset Management
2 Barclays Capital, FactSet, JPMorgan Asset Management, St. Louis Fed, Federal Reserve
3 Standard & Poor’s, FactSet, FRB, BLS, BEA, JPMorgan Asset Management
4 U.S. Department of Energy, FactSet, JPMorgan Asset Management, Thomson Reuters, WSJ Market Data Group

IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.

Continue reading
807 Hits
0 Comments

Why Successful Investing is So Hard Now

Why Successful Investing is So Hard Now

Almost halfway through 2016, it has been a frustrating year for many investors. The stock market opened the year with a steep dive, staged a furious recovery and then entered a mostly sideways pattern.

Adding to the confusion, news headlines speak of central bank confusion and geopolitical risks that never seem to end. Few investors care about these things. They just want to preserve their capital and hopefully make a decent return on it.

So how should investors approach this puzzling situation? Investment success usually boils down to one key detail: How much risk you take. All other things being equal, taking more risk should lead to greater gains over time.

The problem is that all other things aren’t equal. Furthermore, all our risk measurements are backward-looking. We can see what happened when certain conditions prevailed in the past, but those same conditions might bring a different result today.

So what do today’s conditions tell us about risk? In our view, market risks are currently well above average. Look at the S&P 500 Index over the last 14 months.
 
The S&P 500 posted an all-time high last May. Conditions then deteriorated into summer, culminating in a late August one-day panic.

Following that crisis, the index recovered into the fall, then deteriorated and plunged again in January. A sharp rally brought the index back near its previous high in April, and since then it has been back in another slow period.

You can spin this action either bullishly or bearishly. A bull would say the market keeps bouncing back and will eventually break to a new high. A bear might respond that this market has had plenty of chances to move higher but is right back where it was a year ago.

Who is right? We take a cautious view. Not only are we now in a seasonally weak period, but fundamentals suggest stocks are either fairly valued or overvalued. Corporate profits have been declining over the last year while valuations barely budged.

This mismatch can’t persist. Either stock prices must fall to reflect lower earnings, or corporate earnings must rise enough to justify current stock prices.

Increasingly bizarre central bank policies are complicating the picture. Government bond yields are now below zero in most of Europe and Japan. Quantitative easing policies are pushing some corporate bond yields into negative territory, too. These unconventional moves are not yet restoring economic growth but have other perverse consequences. Homeowners in Spain, for instance, are suing to demand the bank pay mortgage interest to the borrower instead of the other way around.

Needless to say, this isn’t normal. Negative interest rates are a new risk factor no one is quite sure how to handle. For this and other reasons, successful investing is far more difficult than it used to be.

A recent Callan Associates study, reported in the Wall Street Journal, underlines the point. Suppose your target annual return goal is 7.5%. Back in 1995, you could be confident of reaching your goal with a portfolio invested entirely in bonds.

That wasn’t true ten years later. To reach the same 7.5% return in 2005, you would need to shift 48% of your portfolio out of bonds and invest it in a combination of U.S. stocks, foreign stocks, real estate and private equity.

Roll forward another decade to 2015 and the hurdle is even higher. Now the only way to make 7.5% is by having 88% of your assets in stocks, real estate and private equity. Your bond allocation would be no more than 12%.

Standard deviation, a measure of volatility, almost tripled from 6.0% in 1995 to 17.2% in 2015 – without generating any additional return.

The Callan Associates study suggests that compared to twenty years ago, today’s retirement investors must accept three times as much volatility just to generate the same returns.

How did this happen? It is a consequence of central banks holding interest rates historically low for years on end. We used to call Treasury bills and bank accounts “risk-free” assets. You could make 5% or more with very little risk. Now, there is no such thing as a risk free asset. To make any return at all, your only choice is to buy stocks or other risk-driven assets.

Successful investing is a much more daunting task than it used to be. You can’t simply invest in the S&P 500 and the Barclays Aggregate Bond and expect to earn reasonable returns.  At Republic, we find that thinking outside of the box and looking to alternative strategies and alternative investments are integral in today’s environment and continue to become a larger piece of our typical asset allocations.


IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.




Continue reading
908 Hits
0 Comments

Newsletter Sign Up


Austin | Houston | Bartlesville
Tel: 512-506-9395 | 281-408-2538
Toll-free: 866-453-6565
discovery@republicwealthadvisors.com