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Three Reasons to Consider Private Equity

Three Reasons to Consider Private Equity

Many investors think “Private Equity” is an asset class reserved to Wall Street billionaires and Silicon Valley titans. That’s not right – but those billionaires and titans have private equity in their portfolios for good reasons.

Like all other investments, private equity has its own unique attractions and risk factors. It isn’t for everyone, but more stock investors should take a look. The category has much to offer.

Reason #1: Better Value

Suppose you have money to invest and you want to buy a small business. You find one that looks like a good prospect. The current owner agrees to talk.

You learn that in recent years the business made profits, after payroll and other expenses, of approximately $1 million per year. Prospects for the next few years look about the same. You decide to make an offer and ask the current owner for a price.

The asking price: $16 million.

Are you tempted? Probably not. You like the business, feel confident it will do well, but $16 million is way too much when $1 million a year is all you expect to earn. You’d need 16 years just to break even – and that assumes nothing goes wrong.

A more reasonable price might be in the $3 million to $5 million range. Buying a business at 3x earnings, 4x earnings or 5x earnings gives you a good shot at recovering your cost and earning a profit within a few years.

Would anyone pay 16x earnings for a profitable business? Yes, they would.

People do it all the time, whenever they buy an S&P 500 index fund. The combined forward-looking price/earnings ratio for those 500 companies is about 16x. That’s a little above average, but certainly not “expensive” by public market standards. It was up to 24x in the 1990s dot-com craze and as low as 10x in the 2008 financial crisis.
 
This raises an important question. Why do investors willingly pay so much more for publicly traded businesses than for the same profits generated by a privately-owned business?

The answer: buying stock in a public company gives you additional benefits beyond just a share of the profits. For one, you don’t have to buy the whole company. You can buy as little as one share if you wish. This isn’t possible in most private companies.

Another benefit is liquidity. You can buy and sell shares of a public company any time the stock exchange is open. The price will vary, but the exit door is always right there if you ever want to use it.

Again, this isn’t true in a private company. You can’t sell your shares unless you find a buyer. It’s possible but takes time and effort. A few mouse clicks won’t do the trick.

Liquidity isn’t free. If you want the ability to invest in small increments and sell anytime, you have to pay for it. You do so via that higher profit multiple.

Reason #2: More Choices

Investing in private companies vastly expands your choices, too. The U.S. has millions of small and mid-size companies but only about 6,000 have publicly traded stocks. The vast majority of successful businesses are privately owned.

If your goal is to be a long-term shareholder, participating alongside management as the business grows, then the liquidity of owning a public company ought to be a secondary consideration. Far more important is that the company has superior leadership, sound financials and a solid business plan.

Those characteristics are all rare individually. Finding all three in the same company is harder still. Beginning your search by instantly ruling out 96% of the candidates simply because they aren’t publicly traded makes little sense. Yet that is what most investors do.

Private Equity investments give you access to a kind of “emerging market” right here within our own borders. Like foreign markets, information gaps and irrational fears deter most investors. That means not only more choices, but less competition for the best ones.

Reason #3: More Information

One of the benefits of owning stock in a public company is that regulations require them to release certain information. Shareholders receive quarterly and annual financial statements as well as other important company news.

This visibility has a downside, though. For one, everybody else gets the same information at the same time. Investors try to react quickly, leading to hasty and often wrong decisions that can hurt other shareholders.

Another issue is that companies tend to release only the information required by law. If you want to know more, you are out of luck. Securities law and liability concerns encourage them to say as little as possible beyond what they must.

In a private company, with only a handful of shareholders, managers have much more flexibility. Large investors can demand – and receive - free access to the company’s financial records. They can speak with officers and directors. Management treats shareholders as long-term partners.

How to Learn More

You may have heard of Blackstone Group or other famous private equity companies. They raise money mostly from large institutional investors, then use it to buy entire businesses. Other firms offer similar services if Blackstone is out of your league.

Finding those providers can be a challenge. Securities regulations often prevent them from advertising or soliciting investments publicly. It is a network-driven market where investors usually learn of opportunities through friends and business associates.

At Republic, we’re familiar with private equity investments and how to gain access to them. We offer clients unbiased advice on the advantages and disadvantages, and can help you decide if private equity is appropriate for your financial situation. Feel free to ask us during your next account review and we will tell you more.


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.

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Eye On Money: Retirement Saving at Any Age

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

  • Building Retirement Savings at Any Age
  • Three Long-Term Care Mistakes to Avoid
  • What is a Bond or CD Ladder?
  • Test Your Insurance Knowledge
  • Charitable Giving with a Donor-Advised Fund
  • Quiz: Test Your College Smarts

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Eye On Money: 40 Things You Should Know By 40

The July/August 2016 Eye On Money is now available on Republic Wealth.com, featuring stories on:

  • 40 Financial Things to Know by Age 40
  • Individual 401K: Big Benefits for the Smallest Businesses
  • What is a Dividend?
  • Test Your Retirement Planning Knowledge
  • Student Loan Repayment Tips
  • Why invest globally?

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VIDEO: David Levy on Republic's Client Portal

This month I went to a major investment advisory business event called the Advisor Summit. While there I appeared in a video interview about the online client portal technology we use here at Republic Wealth Advisors.

Along with an advisor from another firm, I talked about the way our clients appreciate the chance to see their investment information in real time instead of waiting for a quarterly report. Most people don’t look very often, since they know we are always watching over their accounts, but we want them to have clear, accurate information at those times when they need it.

One feature many clients find very useful is to add reporting on accounts held at other institutions. This gives both the client and Republic a more comprehensive “big picture” look at their financial situation.

We’ve used the client portal technology several years now, and we especially appreciate the way it encourages interaction with our clients. As always, we reach out proactively to update clients each quarter, but the portal helps us answer any questions immediately. This deepens our relationships and should ultimately help clients meet their financial goals.

You can watch the full video (5:00) below or at this link.

 

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.

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Money Market Funds Aren't Risk Free

Money Market Funds Aren't Risk Free

Money market funds are supposed to be easy, low-risk places to park your unused cash. Most of them achieve that goal, most of the time – but low-risk is not the same as no-risk. Investors should pay attention to some changes that might add new risks to these popular havens.

Unlike other mutual funds, money market funds strive to keep a stable $1 share price. Sponsoring firms will do almost anything, even pitching in their own cash, to avoid “breaking the buck” when the fund’s holdings lose value. The 2008 financial crisis exploded in part because several large sponsors almost had to bail out their money market funds in this way.

The episode taught fund sponsors and regulators an important lesson: implicitly guaranteeing stable value in money market funds made investors think the funds were safer than they really were. A market-wide liquidity crisis could make such expectations impossible to meet.

Now, years later, the U.S. Securities & Exchange Commission is taking steps to change this. Starting on Oct. 14, 2016, so-called “prime institutional” money market funds that hold non-government securities will have to let their share prices float in line with the market value of their holdings.

How much will prices vary? Probably not much, but investors may see the share price shift a penny or two above/below the $1 mark. Even pennies count, though. Buying into such a fund at $1 and withdrawing at 99 cents will hand you a 1% capital loss. (The rule excludes retail money market funds as well as funds that hold only Treasury or government securities.)

Another change: certain funds will be able to temporarily suspend redemptions or impose “liquidity fees” on investors requesting withdrawals in volatile market periods. This would be aggravating but the fee will be easy to avoid. Don’t withdraw your cash in a crisis, or don’t park it in such funds in the first place.

We follow those practices at Republic Wealth Advisors. When we hold idle cash, we use government-only money market funds that are exempt from the new rules. All our programs follow a disciplined strategy that adjusts market exposure in stages instead of all at once.

We also work hard to find other kinds of defensive investments as alternatives to cash in weak markets. With interest rates still barely above zero, we can often find better risk-adjusted returns in other asset classes.

Investors are most likely to see the new rules in their 401K plans. Many plans offer employees funds that fall under the new rules. One expert told the Wall Street Journal, “The days of offering 401K participants a dollar-in, dollar-out money market fund are likely going away.”

This may be a good thing. 401K investors tend to be too conservative with what should be their long-term retirement savings. The new rules may nudge them into growth-seeking funds or managed accounts.

Money market funds were far more useful years ago, before the Federal Reserve and other central banks pushed interest rates so low. With returns now negligible, we use them mainly to conserve capital for short periods between other investments. The new SEC rules will nudge more investors to adopt that view.



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.


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Skip the Purple Rain and Write Your Will

Skip the Purple Rain and Write Your Will

Fans everywhere are mourning Prince, the artist who tragically left us at the height of his fame last month. We should both mourn his passing and draw an important lesson from it.

The lesson: Everyone needs a will because everyone, at some point, will die. Prince didn’t have one and now his family and business associates face a major and completely unnecessary ordeal.

People die “intestate” (without a will) all the time. Some estimates say as many as six in 10 Americans fail to create a will before dying. This leaves their property and obligations in the hands of a court that may or may not follow their wishes. It may not even know their wishes. So why would someone as wealthy and famous as Prince not have a will?

We can’t know for sure, of course. Prince no doubt had many lawyers supporting his various businesses. Maybe they urged him to develop an estate plan and he simply refused, or thought he would get to it later. 

Confronting our mortality isn’t high on anyone’s priority list. Yet doing it is actually an act of great love for your family. It will help ease the pain they feel at losing you and save them the need to make important decisions under great stress.

Remember, also, that your estate plan covers more than death. What happens if you become disabled or stricken with dementia? What sort of life-extending medical treatment would you want or not want? A good estate plan will make sure your family knows your wishes even if you can’t tell them.

In Prince’s case, his only survivors are a sister and five half-siblings. A Minnesota court may award them ownership of his very substantial estate and business holdings. At least part of Prince’s estate – his song library – will remain a very valuable asset for decades. Are the siblings prepared to manage it effectively? If they each get only a share, can they work together in harmony? We don’t know, but an estate plan would have arranged a solution.

We also learned that Prince had deep charitable interests that he kept private during his lifetime. He missed the chance to include them in his will. It is quite possible that money he would have left to charity will now go to pay estate taxes.

Estate and inheritance taxes can take a huge cut of estate taxes. The top federal rate is 40% and the $5.43 million lifetime exclusion won’t be much help for Prince’s reported $700 million estate.

Many states have death taxes as well, including Minnesota where Prince died. His estate may have to pay an additional 16% tax on top of the federal tax. Add in legal fees other final expenses, and it is entirely possible that government will take more than 60% of Prince’s wealth.

 
[Chart source: Ritholtz.com]

So what should Prince have done? The Purple Rain would have left the sky blue had he taken three simple steps.

First, he should have asked his accountants, or whoever prepared his tax return, to keep him informed of potential estate tax liabilities. Seeing those numbers might have spurred him into action.

Second, Prince should have hired a board-certified estate planning attorney to review and restructure his wealth, then execute a will to implement it.

Third, Prince could have slashed his estate tax liability by simply moving to another state than his native Minnesota. He could have done this and still stayed close to home. Wisconsin is only a few miles away from Minneapolis and has no estate or inheritance tax.

While it’s too late for Prince to make these moves, it’s not too late for you. Here are some estate planning stories we’ve prepared for Republic Wealth Advisors clients.

•    Why You Need an Estate Plan
•    How to Pay No Estate Tax
•    Planning for When You Can't Plan
•    Leaving Your Estate to Charity
•    Planning for Your Own Disability
•    Estate Planning for Special Needs Children 
•    Your Estate Plan Should Take Care of Business, Too
•    Trusts: Key Estate Planning Tool
•    A Will and a Way: What to Tell Your Survivors

At Republic we aren’t attorneys, but we can refer you to some we know and trust. We can then coordinate with them to integrate your financial plan and estate plan so they work together.

Having a comprehensive estate plan isn’t something we think about often, but it may be one of the greatest gifts you can leave your loved ones.


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.




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The Long and Short of Investment Success

The Long and Short of Investment Success

The way to make a profit in stocks seems simple. You buy shares of companies with good prospects, wait for the price to go up and then sell for a gain. Then you do it again.

In practice, success doesn’t come quite so easily, but the broader point makes sense. You make money from stocks then they rise in price. You likewise lose money when they fall.

That second part isn’t always true. Short selling is a trading technique that turns the math on its head. When you have a short position, falling prices equal gains and rising prices equal losses.

Short selling is a risky strategy and we don’t recommend anyone try it on their own. However, when done under a professional manager as part of a broadly diversified portfolio, short selling has historically shown it can enhance overall returns and/or reduce overall risk.

With the stock market benchmarks currently near record highs even as corporate profits and economic growth look weak, having something in your portfolio in something that have the ability to deliver positive results in all market conditions is an attractive idea. We call these “alternative investments” and have been using them for several years (see Charting an Alternative Course).

Long/Short Equity funds are one type of alternative investment. These funds combine normal “long side” investments with a short-selling component. Some Long/Short funds are “market neutral” and have equal long and short allocations, while others have a bias in one direction. In either case, the presence of both long and short positions enables the fund to move up or down independently of broad market trends.

Here is a fictional example of how such funds work.

The manager might identify 50 stocks that are likely to outperform the broad market, and another 50 that look like they will fall. The fund then buys the 50 stocks that look bullish and sells short the 50 weak ones.

If the manager is correct across the board, the stocks the fund buys will rise in price, giving the fund a gain. Meanwhile the stocks the manager expected to fall really do so, the short positions will gain value too. This would be the ideal outcome.

What if some sort of sudden event makes the entire stock market collapse? The short positions will gain value while the long positions lose. The net fund return should be near breakeven.

Likewise, a sudden burst of market-wide optimism that drove all stocks up would hurt the short positions but help the long ones. Again, the net return should be about even.

The worst-case scenario would be where all the stock picks are completely wrong. The names the manager thought would rise actually fall, and the ones he expected to fall actually rise. The fund-level return would show a loss.

A long/short allocation can be valuable over time even if it experiences occasional losing periods. The key is for its performance patterns to show low correlation with the other assets in a portfolio. This makes long/short a diversifier, similar to the way adding bonds to a stock portfolio can reduce volatility and enhance long-term results.

Long/short funds can also be valuable on their own. Notice in this comparison how the Credit Suisse Long/Short Equity Index had roughly the same long-term results as the S&P 500 index but substantially improved risk scores. Its standard deviation was lower, meaning less volatility, while its maximum drawdown was less than half that of the S&P 500.

 
The Credit Suisse index shown above is a composite that includes Long/Short funds with a variety of approaches. Some have been more successful than others. We pay special attention to funds that have shown the ability to provide protection in bearish periods while still deliver gains in strong market conditions.

Of course, past results are not indicative of future results. We can’t know if the future will look like this historical picture. Nevertheless, at Republic we believe a long/short equity allocation can significantly enhance investment results from both a risk and return perspective over time.


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.




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What is a Fiduciary and Why Should You Care?

What is a Fiduciary and Why Should You Care?

Last week the U.S. Labor Department, which has jurisdiction over retirement plans, revealed a new “fiduciary” rule. Financial advisors and brokers who help investors with their Individual Retirement Accounts (IRA) or 401K plans must now put the client’s best interest first.

If you think this sounds odd, you aren’t the only one. Many investors thought their advisors were on already their side.

In fact, sometimes the person helping plan retirement has been on the investor's side, and sometimes not. The new rule will help protect retirement investors from inferior or even harmful advice.

Here is the core question: is the financial advisor your “fiduciary” or not? To answer this, we have to think about this word means.

A fiduciary relationship is one in which the other party is legally or professionally required to put the customer’s best interest ahead of the fiduciary advisor’s interest.

For example, your physician is a kind of fiduciary. He or she should treat your illness without regard to how much revenue it will generate. Doctors have to tell you if, for example, a specialist would be better able to treat your problem. Lawyers, accountants and others who give professional advice should do the same.

In the investment business we have stock brokers (Morgan Stanley, Merrill Lynch, Charles Schwab) and registered investment advisors like Republic Wealth Advisors. In practice, brokers and RIAs often do many of the same things, but they work under different standards.

•    Brokers are required to only recommend investments that are suitable for you.
•    RIAs must recommend the investments they believe are best for you.

What’s the difference? “Suitable” is a lower standard. A suitable investment is one that probably won’t hurt you, but isn’t necessarily the best choice. For example, a broker can recommend their firm’s own proprietary mutual funds, even if others have lower fees and better historical performance.

That relaxed standard has long been permitted in the brokerage business, and still is for non-retirement accounts. The new Labor Department rules will require brokers to follow the stricter “fiduciary” standard when giving advice on an IRA, 401K or other retirement account.

Registered Investment Advisors like Republic are and always have been fiduciaries for everyone we serve, whether you are planning for retirement or something else. Our regular practice and our professional obligation is to develop and execute the best possible investment strategy for you. We don’t consider the fees it will generate and we don’t accept compensation from anyone else. We work for you and you alone.

While many stock brokers deliver good service and hold themselves to very high standards, they still have to work within a different structure. Inevitably, conflicts arise between serving the brokerage firm and serving the clients. This is one reason many brokers are leaving their firms behind and become Registered Investment Advisors like Republic.

Republic Wealth Advisors welcomes these newcomers to our side of the table. We’ve been here a long time and we find it works much better.


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.

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Eye on Money: Simplify Your Finances

The May/June 2016 Eye On Money is now available on Republic Wealth.com, featuring stories on:

  • Three ways to get your federal student loans forgiven
  • The financially savvy way to leave a job
  • How to simplify Your finances
  • New savings option for people with disabilities
  • Eight things Boomers need to know about RMDss
  • Why invest globally?
  • Newly extended tax breaks

 

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How Much Does Safety Really Cost?

How Much Does Safety Really Cost?

At Republic we think of our client relationships as a kind of partnership. Our role is to develop and execute a financial plan that lets you reach your long-term goals. We want you to understand our decisions, so we are always glad to answer questions, no matter how small or uncomfortable.

Recently we’ve received several questions about our stock market positions. Specifically, they ask why we are still mostly out of stocks even though the market bounced the last few weeks.

This is a reasonable question. Part of the answer is in our March 10 Special Report, Staying on Defense. Our cautious position is one reason the year-to-date performance of our programs that use stocks is around breakeven or slightly negative. Meanwhile the Dow, S&P 500 and other benchmarks have bounced back after a rough start in 2016. Why are we not participating in this rally?

The quick answer is that we remain very concerned about the risk of another selloff in the near future. We were already defensive when the year began, and we became more so during January’s sharp downturn. The underlying weakness that caused us to make those moves has not disappeared, so we believe the risks do not yet justify the potential gains of moving back into stocks.

The underlying economic picture is also mediocre at best. Corporate earnings growth is still low and even negative in some sectors. Persistently low energy prices chopped capital investment and consumer spending has not yet picked up the slack. Even the Federal Reserve is uncertain how to respond.

Any active strategy that varies market exposure will go through periods when it looks out of sync. This is nothing new. We have seen many days, weeks and even months in which we were either out of the market while it rose, or in the market when it fell. We believe that controlling risk brings superior long-term results, but it can also bring short-term discomfort.

It would be much easier to simply “buy and hold” a fixed stock portfolio. Then we would be guaranteed to be in the market every time it goes up. We would also be in the market every time it fell. Is this a good strategy? We don’t think so.

What really counts is not whether you capture every rally, but whether you are on track to reaching your long-term financial goals. I talked about this last year in an article called Why You Don’t Want to Beat the Market. Here is a short excerpt.

"Investing is not a competitive sport. You don’t get a prize for doing better than your neighbor does. You can get a prize that you define for yourself, however.

"For example, after determining your financial goal is to retire at age 67, financial planning software indicates you will need $3 million in savings. A little math can determine what annual returns you need to reach that goal. What you then need is a strategy that gives you a reasonable probability of doing it. Whatever percentage the market returns over that period has nothing to do with you reaching your goal.

"If the math says you need to save a certain dollar amount per year and achieve 5% annual returns, any year in which you do those two things is a winning year."

Whatever your goal, losing money won’t help you reach it. This is why we place so much emphasis on risk control. Avoiding losses is the first step to capturing gains and reaching your investment objectives. Safety has short-term opportunity costs, but we believe the long-term benefit of avoiding major losses makes caution the better strategy.

What next? The stock market can go either up, down or sideways.

•    If the market should move higher in the coming weeks, this would be a bullish sign technically.  However, we would want to see an improvement in the fundamental picture before we significantly increase our stock exposure.

•    Likewise, if the current momentum can’t carry stocks up from here, we would expect further weakness. Our current allocations have us in a good position for this scenario, though we might make some small adjustments.

•    A sideways move would mean uncertainty prevails for a while longer. We would want to stay relatively neutral until a new trend showed itself.

We also have access to alternative investments that can perform well regardless of market direction. For some time, we have increased our exposure these alternative investments while reducing typical exposure to stocks.

We don’t know what the future holds. Our goal is to stay on the right side of major trends and avoid major losses. It is not an easy task, but we do our best to help you reach your goals. We appreciate your confidence and look forward to many more years.


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.




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