In today's challenging real estate market, prospective homebuyers face stiff competition and rising costs. However, there are creative ways to navigate these hurdles and secure your dream home, second home, or investment property. Here are nine strategies to consider, that can make a significant difference in your home-buying journey:

1. Seller Concessions

Don't hesitate to ask sellers for concessions to help cover your closing costs and escrow reserves. This can ease your financial burden during the transaction.

2. Borrow From Equity

If you own a home, consider tapping into its equity to fund your down payment and closing costs. Options like refinancing or taking out a home equity loan can provide the necessary funds.

3. Escalation Clauses

Work closely with your realtor to include an escalation clause in your offer. This can help your bid stand out in multiple offer situations by automatically increasing your offer amount to surpass competing offers.

4. Buying Points

Discuss the possibility of buying points with your lender. This upfront investment can reduce your interest rate and lower your monthly principal and interest payments over the life of your mortgage.

5. Rent-Back Options

Negotiate a rent-back option with the seller. This arrangement allows you to stay in your current residence for a period after closing, giving you more time to move.

6. 401k Loans

Consider taking out a loan against your 401k for your down payment and closing costs. Be sure to understand the terms and implications before proceeding.

7. Low-Down Payment Programs

First-time homebuyers should explore no-down payment and low-down payment programs. Many government-backed loans and assistance programs can help reduce your upfront costs.

8. Credit Union Referrals

Reach out to your credit union for real estate broker referrals. Working with an experienced and trustworthy real estate agent can be invaluable in navigating a competitive market.

9. Gift Funds or Equity

Explore the possibility of using gift funds or gift equity from family members to cover your down payment. Ensure you meet the lender's requirements for documenting these funds.

Be creative and resourceful

In conclusion, purchasing a home in a challenging market requires creativity and strategic thinking. By leveraging these approaches, you can enhance your chances of securing your purchase while managing the financial aspects of the transaction. Stay informed, work with experienced professionals, and be bold while exploring these options to make your home-buying journey successful.

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Two ways to approach low-risk investments

When considering safe investment options, two popular choices that often come to mind are FDIC-insured CDs (Certificates of Deposit) and US Treasuries. While both offer relatively low-risk investment opportunities, there are some critical differences between the two that investors should be aware of.

FDIC-insured CDs are certificates issued by banks and credit unions that offer a guaranteed rate of return for a specified period. The Federal Deposit Insurance Corporation (FDIC) insures CDs up to $250,000 per depositor per bank, protecting against bank failure. In contrast, US Treasuries are debt securities issued by the US government to finance its operations. They are generally considered one of the safest investments available because the full faith and credit of the US government back them.

One key difference between the two is their liquidity. CDs have fixed terms ranging from a few months to several years, and if you need to withdraw funds before the maturity date, you may be subject to penalties. On the other hand, US Treasuries can be bought and sold in the secondary market and can be liquidated easily, making them a more flexible option.

Another difference is the level of risk. While both investments are considered safe, FDIC-insured CDs carry some risk due to the possibility of bank failure. While the FDIC provides insurance protection, there is always a small chance that a bank may fail, and investors may not receive their full investment amount. On the other hand, US Treasuries are backed by the US government and are considered virtually risk-free.

When it comes to returns, FDIC-insured CDs offer fixed interest rates that are lower than the returns available through US Treasuries. US Treasuries offer a range of maturities and yields determined by market demand, with longer-term securities offering higher yields.

In terms of taxes, both FDIC-insured CDs and US Treasuries are subject to federal income tax, but US Treasuries are exempt from state and local taxes. Additionally, you may be subject to capital gains tax if you sell US Treasuries for more than their purchase price.

Risks of Return on Investment: CDs

It's important to note that the FDIC receives no funding from taxpayers. Instead, it is funded by insurance premiums paid by banks and thrift institutions participating in the program. These premiums are based on the number of insured deposits each institution holds and the risk they pose to the insurance fund. In case of bank failure, the FDIC uses these funds to reimburse depositors for their insured deposits up to the $250,000 limit. This funding system helps ensure the banking system's stability and integrity while protecting depositors from loss.

While the FDIC insurance pool can become insolvent, it is highly unlikely. The FDIC has many safeguards to prevent insolvency, and its record of accomplishment in managing bank failures has been quite successful.

Firstly, as mentioned earlier, the FDIC collects insurance premiums from participating banks and thrift institutions. These premiums are based on the number of insured deposits each institution holds and the risk they pose to the insurance fund. The FDIC also has the authority to increase premiums to maintain the insurance fund's solvency.

Secondly, the FDIC has the ability to sell the assets and liabilities of a failed bank to another institution, thereby minimizing the cost of the failure of the insurance fund. This process, known as a purchase and assumption transaction, allows the acquiring institution to take over the failed bank’s deposits and assume its liabilities. At the same time, the FDIC pays out the insured deposits.

Finally, if the insurance fund were to become insolvent, the FDIC would have access to a line of credit with the US Treasury to cover any losses. The FDIC can also assess additional premiums on insured institutions to replenish the insurance fund.

It is worth noting that while the FDIC has never become insolvent since its creation in 1933, it has come close to doing so during times of economic stress, such as the savings and loan crisis in the 1980s. However, the FDIC's ability to manage these crises effectively and prevent widespread bank failures has helped to maintain public confidence in the banking system and the FDIC insurance program.

Risk of Return on Investment: Treasuries

If the United States were to become insolvent, it could have profound implications for US Treasuries, as the full faith and credit of the US government backs them. The creditworthiness of the US government is a key factor in determining the value of US Treasuries. Default or insolvency could significantly decrease demand for US Treasuries, resulting in a sharp rise in interest rates.

In addition, if the US were to become insolvent, it could lead to a global financial crisis, as domestic and foreign investors widely hold US Treasuries. A default could lead to a loss of confidence in the US government's ability to manage its finances, which could cause investors to sell off their US Treasury holdings, leading to a domino effect throughout the financial system.

However, it is important to note that the likelihood of the US becoming insolvent is extremely low because the US dollar is the world's reserve currency, and the US government can print its currency. This gives the government greater flexibility to manage its debt than other countries.

Furthermore, the US has a long history of managing its debt and has never defaulted on its sovereign debt. Even during times of economic stress, such as the Great Recession of 2008, the US government has been able to maintain its creditworthiness and continue to issue debt.

Overall, while there are risks associated with US Treasuries in the event of a US government insolvency, the likelihood of this scenario occurring is considered low. US Treasuries are still widely regarded as one of the safest investments in the world.

Implications of Printing Currency: A Double-edged Sword

The implications of the US printing more currency are complex and depend on a range of factors, including the current state of the economy, inflation rates, and global economic conditions.

On the one hand, increasing the money supply can help stimulate economic growth by making more money available for borrowing and spending. This can lead to increased investment and consumption, driving economic activity and creating jobs.

However, printing too much money can also lead to inflation, as the increased money supply can cause prices to rise. Inflation can erode the currency’s purchasing power and decrease consumer confidence and economic stability.

Furthermore, printing more currency can also lead to a depreciation of the currency's value relative to other currencies. This can negatively affect international trade, as a weaker currency can make imports more expensive and exports cheaper, potentially leading to a trade deficit.

Overall, the decision to print more currency should be carefully considered, considering a range of economic factors. While increasing the money supply can help stimulate economic growth, it is essential to strike a balance between promoting growth and maintaining economic stability and confidence in the currency.

What’s Your Timetable?

In conclusion, both FDIC-insured CDs and US Treasuries offer low-risk investment opportunities, but there are some key differences between the two that investors should consider. While CDs offer fixed returns and are insured by the FDIC, they are less liquid and carry some risk due to the possibility of bank failure. US Treasuries, on the other hand, offer higher returns, are virtually risk-free, and are more liquid. Ultimately, the choice between the two will depend on an investor's financial goals, risk tolerance, and investment horizon.

Authors Note: This article was written using prompts in ChatGPT. (2023, May 8). The author has independently verified the accuracy of the responses. The author edited and formatted responses from the prompts for clarity.

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Credit unions are member-owned and member-governed financial cooperatives. The first financial cooperatives were established in Europe in the mid-1800s and spread to North America at the beginning of the 20th century. In Canada, Alphonse Desjardins is recognized for launching the first credit union in Quebec. Desjardins was also instrumental in establishing the first U.S. credit union in Manchester, New Hampshire, in 1908. Twenty-six years after creating the first U.S. credit union, the U.S. Federal Credit Union Act was passed, which was instrumental in providing structure around the credit union movement.

As of the end of 2020, according to the National Credit Union Administration (NCUA), U.S. credit unions had 124.3 million members across 5,099 federally insured credit unions. Despite the total number of members with a credit union relationship, their deposits are negligible compared to their banking counterparts. For example, data released by the Federal Reserve shows JPMorgan Chase Bank holding domestic assets above $2.2 trillion as of September 2020. Conversely, as reported by NCUA, federally insured credit unions had a combined $1.85 trillion of assets.

Better Service & Better Borrowing Rates

Banks' overall prominence is surprising given that credit unions are generally regarded as providing better support for their members than banks do for their customers. In addition to having the upper hand on customer service, credit unions generally pay more on member deposits and charge less when members borrow than traditional banks. For example, quarterly data provided by the NCUA examines the national average rate of credit unions versus banks in 23 different product categories ranging from CDs to car loans. In over 90% of the categories, credit unions beat banks. Based on this simple comparison alone, it is surprising why consumers would choose a bank over a credit union.

One of the first financial accounts a consumer opens is a checking account. From there, it is common for an individual to put some of their excess in a savings account for an emergency fund or future purchase. For many Americans, a CD is a first "investment." Based on the data from NCUA, if you assume a five basis point delta between credit union deposits and banks, and you compare domestic deposits of the three largest U.S. banks against the deposits of all credit unions, a seemingly insignificant delta becomes meaningful. On average, the top three banks together keep an extra $3 billion per year that if on deposit with a credit union would go directly to a member.

A car purchase is another area where consumers interact with their financial institution. For many individuals, a car provides the necessary transportation to a first job, in addition to the ability to get out of town to explore another part of the city or state. Most individuals finance a car purchase through a bank or credit union. In this particular category, the benefits of credit unions are even more apparent, with an average rate difference of about 1.97%.

Members get stronger together

So how are credit unions able to offer such a rate advantage on both deposit and lending products? Part of the answer resides in the unique structure of credit unions. First, credit unions are owned by their members, not shareholders. Therefore, the interests of the owners (the members) are aligned with the interests of the members (the owners). Member owners do not want to charge themselves more than is necessary to cover the cost of the product and the operation of the institution. Another reason credit unions can offer products and services that are more beneficial than banks is they are tax-exempt entities. That's right, under IRS rules, federal credit unions are tax-exempt under section 501(c)(1), and state credit unions are exempt under section 501(c)(14)(A). This allows credit unions a lower cost structure than most banks and allows credit unions to recycle profits to lower rates on loans and higher rates on deposits.

Despite the large number of Americans with a credit union relationship, banks dominate the wallet of U.S. households. This is surprising given credit unions' upper hand in offering members better rates for deposits and loans. One of the many reasons credit unions can offer better rates on consumer deposits and lower fees when borrowing is that 1) members are also owners, and 2) credit unions are tax-exempt organizations. The choice between a bank or credit union is a significant one given the potential economic loss associated with one, versus the financial gain related to the other.

This article was originally published on Forbes on June 10, 2021.

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One of my favorite market commentators is Dr. David Kelly, an economist whose research focuses on the investment implications of an evolving economic environment. His insights are rooted in theory and application, which help make the work he publishes comprehensive and practical. In his most recent article, he notes the following:

“As America emerges from the pandemic, there are still serious health concerns, a yawning political divide, rising autocracy around the world, a brutal war in Europe and the highest inflation in 40 years. Moreover, anxiety triggered by these genuine problems is being amplified by cable channels and social media which ever more efficiently gather their audience by appealing to fear and outrage.[1]”

— DR. DAVID KELLY

With this backdrop, I will try to share my thoughts on the market, economy, and implications for investors.  

Market declines: We’ve been here before.

Whether looking at the stock market, bond market, or commercial and residential real estate markets (to name a few), all are down for the year. With widespread asset price declines, renewed volatility is unnerving for many of us. These are challenging times to have capital deployed into the market. However, volatility and risk are the primary reasons investors in the market have achieved meaningfully better returns than cash over most market cycles.

The narrative surrounding this market cycle continues to evolve—the reasons "why" we are experiencing market gyrations and asset declines today differ from past times. However, I have great hope and confidence markets will normalize and begin their next run higher—in the same way they have done following each of the last downturns dating back to 1825. [2] In my 25+ years advising clients, I have experienced managing assets through significant market declines, with the most recent being Q1 2020, and most memorable 2007-2009, and 2000-2002. The cause for these markets was different, but the result was the same for those who managed their emotions through turbulence.

How is the economy responding to the current market?

Economic activity is beginning to slow. The most notable remark came from Fed-Ex, which reported a slowdown in shipments—a real-time data point highlighting growing constraints from corporations and consumers alike. Although the Fed-Ex announcement is one observation, it is congruent with analysis conducted by Dr. Kelly and others, highlighting a slowing economy domestically and abroad.

The Federal Reserve (the Fed) job is exceedingly tricky, given that inflation affects everyone and the primary defense for rising prices is interest rate hikes. At the same time, if interest rate increases are applied excessively, they stand to constrain the economy, which in turn could inflict pain on households through job loss and a decline in asset prices. Concern over Federal Reserve policy mistakes has begun to capture the headlines, with notable economists Mohamed El-Erian and Jeremy Siegel blasting the Fed for raising interest rates too aggressively.

The tension between the actions of the Fed and prominent economists may cause the Fed to exercise more constraints when deciding on interest rate policy in the future. Ultimately, we hope Fed Chairman Powell and his colleagues around the country can orchestrate a soft landing for the economy—which involves moderating rate hikes and extinguishing inflation while maintaining reasonable economic growth.

Our financial plans factor in these conditions.

Financial planning is essential to helping to create positive customer outcomes and providing wise counsel in all market and economic conditions. Recently, a retired client and friend called concerned about the market. They asked if they should reduce their overall risk and sell a portion of their equities. After a review of their financial plan, it was determined that despite the market decline, they were on target to maintain their spending goals; therefore, no immediate action was needed.

Our recommendation for this client included a study on their financial plan's probability of success. The probability analysis simulates their plan's likely outcomes based on good and bad markets. When coupling their planning inputs with their probability analysis and considering their cash and bond holdings, it is easier to look past the market and focus on their plan, including simulations for markets like we are in now.

Please know we understand how unnerving it is to see account balances drop and to feel that the world is unraveling. However, it is imperative that we remain objective and focused on our disciplined approach to both planning and investing. When speaking with your advisor, their answer may be "stay the course." This is our way of saying we have looked at your plan and are prepared for times such as these. Attempting to control the market or predict capital market outcomes sets us up for failure. However, focusing on what we can control, utilizing industry-leading technology, and leveraging a team of experienced credentialed experts are the best approaches with the highest probability of success for our clients and their plans. [3]

As has been the case since hiring Marc Kadomatsu, CFP to Human Investing, financial advice dispensed through the lens of financial planning has been the cornerstone of our service offering at Human Investing. Marc previously served as the head of the Financial Planning Association for Oregon and SW Washington. We have added to his team the recent promotion of Will Kellar, CFP, to Partner. Will has tremendous experience in advising clients through a planning lens. Moreover, Will is responsible for training the next generation of financial planners as he currently serves on the faculty of Oregon's only accredited financial planning program at George Fox University. 

Diversification may be the key to your peace of mind.

Emotion management is complicated—particularly for those whose primary source of income is their investment portfolio. To help manage the anxiousness that may accompany turbulent markets, please consider the concept of diversification. The term "diversification" means we don't put all your eggs in one basket. Although you have one account statement from your primary brokerage affiliation (Schwab, Fidelity, Betterment, etc.), you have various investments. Each investment serves a purpose in helping you achieve your goals. Some investments like cash and short-term bonds are what we tap into to provide necessary liquidity without having to sell at a significant loss. At the same time, equities are for longer-term appreciation to help your portfolio generate returns that outpace inflation and taxes.

Although your portfolio performance and holdings are aggregated into a single statement, we ensure that customers are adequately diversified into many different holdings. That way, when it's time to take a necessary withdrawal, we have many options for where we can go for the cash. There is no easy way to manage emotions in volatile markets. However, knowing ample investments can be accessed to provide the needed financial resources is something to consider when looking at the portfolio as a whole.

Markets of all kinds experience ups and downs—which has been my experience since 1996. The current downturn has several major markets down in excess of twenty percent year-to-date. Countries and regions go through economic cycles for various reasons and durations. The economy is showing signs of a slowdown, which could negatively impact consumers and businesses alike. With both the market and the economy on edge, we believe it is paramount for investors to stay disciplined, avoid acting on emotion and lean on their financial plan and advisor to help them make informed financial decisions.

[1] Kelly, D. (2022, September 19). Why the Fed should worry less about sticky inflation (but probably won't). Notes on the Week Ahead, JP Morgan Asset Management.

[2] Gladhill, A. (2019, September 12). Return histogram: Stock market annual returns 1825-2017. Investment Committee Q32019, Human Investing.

[3] Bennyhoff, D. G., & Kinniry Jr, F. M. (2016). Vanguard Advisor's Alpha®. Vanguard, June, http://bit. ly/2gXMDCs.

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Inflation can lay waste to portfolios and wages, which is one of many reasons why inflation is concerning for laborers and investors alike. Some speculate that the rise in inflation is from supply chain congestion, resulting from labor shortage due to the Coronavirus pandemic. Others hypothesize that a flood of liquidity into the global economy, which stems from quantitative easing dating back to the financial crisis in 2007-2009, is the cause of rising prices. Regardless of the reason, the concern is that gains in wages and market appreciation are muted, or worse, erased, by an escalation in prices for goods and services.

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Inflation’s History

It has been three decades since we've seen inflation at current levels and even longer since inflation averaged double digits (several different times in the mid-70s to early 80s)[1]. Clients of our firm who remember the 1970s recall long gas lines, borrowing for a home purchase at 15%, and investing in treasury bonds at over 10%.

Consider this: in October of 1981, the 30-year mortgage rate was 18.45%[2]. As I type, that sort of rate seems almost unthinkable, yet it's true. To illustrate how it would impact the average homeowner or investor today, imagine a $500,000 home purchase with a 20% down payment. An individual would be financing $400,000 and be left with a $6,175 payment!

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How Does Inflation Work?

Inflation works in a similar way with food, gas, and other products and services we use regularly. Inflation can be viewed as a tax that leaves consumers with less to spend at the end of each month. With consumers facing higher prices, the dollars they spend must go to the staples such as food, housing, and gas—while potentially having less to spend on discretionary items such as travel and entertainment.

To combat inflation, the Federal Reserve (the Fed) will typically increase short-term borrowing costs on member banks—which in turn, trickles down to the consumer. Managing inflation is a primary objective of the Federal Reserve. The inflation target for the Federal Reserve is 2%. With both headline and core inflation trending well above those targets, aggressive rate increases are warranted. Surely the invasion of the Ukraine by Russia has complicated the Fed’s rate decision. My previous article “War and the Market: What Does History Teach Us?” discusses this topic further. Despite the concern over the war in Ukraine, the question is not if the Fed will raise rates. Instead, it’s a matter of how fast the Fed will hike rates and when they will stop.

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Our Recommendations

First, revisit your budget. See where you are seeing the biggest increases as some individuals are impacted far more than others. For example, my brother is a sports fisherman who is impacted much more by the price of fuel than I am with a five-mile commute to work. At the same time, a family of seven will feel food inflation much more than my parents, who have been empty nesters for almost 30 years. Secondly, once you have revised your budget, a conversation with your advisor can be warranted. For some who are living off a fixed income, the process will require pairing back or needing larger distributions from your portfolio. For others, it may prompt a change in your investment mix. While for many clients, the process may entail staying the course.

Investors whose investment horizon is long-term should continue to invest in a diversified, low-cost, equity-leaning portfolio. However, for investors who are either uneasy with market gyrations or have a more condensed investment timeline, multiple levers can be pulled to potentially position the portfolio to hold up well during inflationary times. Many experts agree that treasury bills and private real estate hold up well during inflation. [3],[4] It is also important to note that during inflation cycles, equities do well; however, volatility can increase, making maintaining a portfolio heavy on stocks problematic for investors whose emotions can get the best of them.

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Guidance for Those who are Worried

If you are prone to worry about your investments, there are several actions to consider. First, consider looking at your investments less often. This does not mean a “head in the sand” approach. Instead, if you are looking at your portfolio a few times per day, consider a few times per week. Or, if it’s weekly, consider checking in on your accounts monthly. Second, look at history for context surrounding the volatility. What you will find is that the market, on average, experiences a 14% intra-year drops since 1980. This may not provide you all the peace you want , but having perspective on what is normal can be helpful in curbing emotions. To further combat mixing emotions with investments, read “How to Avoid the Investing Cycle of Emotions” by our own Will Kellar, CFP®. Finally, if the volatility is cause for sleepless nights, you may be someone that needs to take less risk, meaning a conversation with your advisor is warranted.

Because the course of this inflationary cycle is unknown, it is essential for all investors to track their spending to determine what impact inflation has had on budgets. For some, there is plenty of discretionary capital to absorb the increase prices; however, for others, it may be necessary to tighten the belt and prioritize essential spending, to minimize the impact of elevated costs.

[1] U.S. Inflation Calculator

[2] History of Mortgage Interest Rates

[3] Fama, E. F., & Schwert, G. W. (1977). Asset returns and inflation. Journal of financial economics, 5(2), 115-146.

[4] Crawford, G., Liew, J. K. S., & Marks, A. (2013). Investing Under Inflation Risk. The Journal of Portfolio Management, 39(3), 123-135.

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If you have feedback for us, have questions, or would like to hear more on other topics we’ve not already covered, please email us directly at hi@humaninvesting.com. We cherish the emails and questions and look forward to connecting with you soon.

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With Russia’s invasion of Ukraine this week, many are wondering how a conflict in Europe will influence their own finances. In addressing this headline for our firm, please understand that the loss of life and the disruption of peace weighs heavy on me and our team. While considering investor concerns, our goal is to provide a point of view which I feel we are uniquely positioned to share amid war as a financial management firm.

Markets trade on future expectations. For example, if the market expects new jobs or a strong economy, then people and businesses adjust their decisions today, based on what they believe is coming. Remember how the market crashed when COVID-19 first hit the United States, but bounced back a month later? That’s because people were making choices based on expectations, not necessarily reality.[1] Because war follows a circuitous route, forecasts are less clear. Researchers accurately note that “the impact of conflict on human lives, economic development, and the environment is devastating.”[2]

Previous Wars and Invasions Show That Market Reactions can Range Wildly.

For example, in 1990, Iraq invaded Kuwait and immediately the global stock markets declined.[3] In the three days that followed the Iraqi attack on Kuwait, the Dow Jones Index slid over 6%; yet in the first four weeks of Operation Desert Storm, the Dow gained 17%.[4] Additionally, the European Stock market responded positively to the second conflict with Iraq in early 2000. Stock market history has shown divergent reactions to war.

Surely, the economy of Ukraine will be devastated, but no one knows what the financial repercussions from this Eastern Europe conflict are. For example, when the news broke about Russia’s invasion, the European markets went down around 4%, but the US market went up by about 1.5% at the end of the day. We simply can’t predict the future, and the market changes moment-to-moment, day-to-day. The only real certainty is that volatility will resume as individuals and institutions place their bets on future predictions, and because of this, our client financial plans and asset mixes navigate all types of situations.

Finding your Footing in Uncertainty

Market related volatility is an un-welcomed but natural part of the investing journey, so our client portfolios at Human Investing are constructed with a plan and risk tolerance in mind. For example, a client that has cash needs to support their day-to-day expenses (such as a retiree) will often have a portfolio with equities that pay dividends, bonds that pay interest, and ample cash to cover upcoming obligations. On the other hand, investors who rely on equities should understand that stock volatility is the price we pay for the expected premium we receive in the long run over cash and bonds.

Although the headlines of “war” and “invasion” cause anxiety, the questions investors should ask are, “How is my plan working out?” and “Despite the market volatility, am I still on track?” Keep in mind that although the average annualized return of the S&P 500 since 1926 is approximately 10.5%, market swings may increase considerably. [5]  Investors should think about their financial plan, investment goals, timelines, and overall diversification to determine how well they are prepared to manage the ups and downs. Adjustments can always be made to ease the concern in the short term, but for most of our clients, their financial plan and current asset allocation take into account market downturns, caused by a myriad of events, including invasions and war.  Through it all, we at Human Investing are present in all of life’s ups and downs as we faithfully serve the financial pursuits of all people.

[1] Frazier, L. (2021, February 11). The coronavirus crash of 2020, and the investing lesson it taught us, Forbes. The Coronavirus Crash Of 2020, And The Investing Lesson It Taught Us

[2] Cranna, M. (1994). The true cost of conflict. New York: New Press. The true cost of conflict / | Colorado Christian University

[3] Richter, P. (1990, August 3). Markets react to Kuwait crisis: Stocks: Invasion rocks market; dow slides 34.66, Los Angeles Times. MARKETS REACT TO KUWAIT CRISIS : Stocks : Invasion Rocks Market; Dow Slides

[4] Schneider, G., & Troeger, V. E. (2006). War and the world economy: Stock market reactions to international conflicts. Journal of conflict resolution, 50(5), 623-645. War and the World Economy: Stock Market Reactions to International Conflicts

[5] Maverick, J. B. (2022, January 13). What is the average annual return for the S&P 500? Investopedia. S&P 500 Average Return: Overview, History, and Factors

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The term speculation[1] has been on the steady decline since 1840. The decline in use is somewhat surprising given the current market environment where speculation runs rampant. In recent weeks, our team inked a well-thought-out article about the speculation du jour titled, The Big Short: Volume II Starring $GME . Interestingly, they could have been writing about any of the past's speculations—like the Dutch Tulipmania in the 1630s and the roaring 20s that ran up to the 1929 crash. More recently, tech stock speculation reached a fevered pitch in the 2000s and was followed by an equally thrilling run-up in housing which peaked in Q1 2007.

“Speculation is easy to spot, but it is difficult to understand what brings speculative environments to an end.”

Memory Lane (1995-2000)

Speculation in technology stocks lasted for six years. Money managers and even the Federal Reserve Board Chairman Alan Greenspan noted the overall frothiness of the markets. In his 1996 public address, Chairman Greenspan pondered, "but how do we know when irrational exuberance has unduly escalated asset values…?" From 1995 to 2000, the Nasdaq grew sixfold (see Figure 1 below). Over several years, beginning in March of 2000, the tech-heavy Nasdaq stock index lost nearly 80% of its value. Even the "blue chip" tech stocks of the day: Cisco, Intel, and Oracle, fell fast. But because they had well established and viable business', they crawled from the rubble and thrived. But the road to recovery took 15 years as the Nasdaq crossed through its previous market peak set in March of 2000 in April of 2015.

Figure 1

Reason for the speculation?

As was the case leading up to the peak of the .com era, much of today's speculation has been brought about by venture capital (VC) investment. Key statistics surrounding VC investment are at or near all-time highs. This includes deal activity, VC-backed IPO's, and VC-backed M & A. You can learn more about VCs and speculation here. The influence of M & A on the market dynamics is meaningful—particularly for retail investors who see what VCs are doing and want a piece of the action. In the book, The Psychology of Money, the author notes that "people have a tendency to be influenced by the actions of other people who are playing a different financial game than they are." VC investors are some of the most sophisticated investors in the world.  Simply put, VC investors are playing a different financial game than most people who want to get a piece of their action.

One reason for concern is that a mass of money is being put into the capital markets, including VCs, with a speculative bent. This changes the market's disposition. The stock market can quickly turn from a place to save for retirement and invest for college to a casino or dog track, where a quick buck can be made. The bottom line is that investing and speculating are not the same thing. In the last 25 years, the most successful investors I have observed have relied on simple truths to accumulate their wealth. They make their money by saving and investing over a lifetime. To be sure, some speculators hit it big, and those will be the stories you hear about. Others, as is the case with most speculative investments, will lose everything.

Access, Gamification, and Human Nature

This go-around, the rise of speculative investing seems to have a social appeal. With stock trading commissions at zero and gamified investment platforms, both access and the fun factor are present at levels I've never seen before. On the one hand, I'm thrilled that more people are interested in the capital markets. But I wonder if tools and access make investing more like a casino or betting app than serious investors' tools to achieve lifelong financial goals. If investing is being marketed to fulfill all your dreams in a couple of keystrokes, why wait a lifetime?

It is human nature to want a piece of what is working—after all, who wouldn't?  We all know someone who made their money quickly. For every person who made an easy buck and won the lottery, millions of us are going to need to do it the hard way. Yes, the wet blanket approach to investing—like spending less than what you earn and putting a little away each month to an emergency fund. Forgoing a slice of your paycheck today so that you have something to live off when you are no longer generating an income from your labor. Driving the same old car so the payments you would otherwise have with a new car can go to your child's college savings account. I know what some of you may be saying, "he just doesn't get it." Maybe not, but what is true is that if investors do not choose a path, it will be selected for them. Or if not, they may bounce around from one path to another, making for a very emotional and disjointed investing experience. One path has a high probability of success because it relies on disciplined saving and investing behavior over a lifetime. The other approach is speculative, looks fun, is incredible to talk about, and has social equity—but unfortunately has a fractional probability of success.

Tesla and bubbles

There are plenty of speculative investments that will make an article like this seem out of touch and tired. Maybe so. Take the electric car manufacturer who recently booked its first full year of profits. Yep, the investor and media darling Tesla is worth $800 billion and just turned a profit in 2020 for the first time since it was founded in 2003. The only issue is that it is not from selling cars. The bulk of their profit comes from selling regulatory tax credits, not from selling cars. Read more about Tesla here. This is fine, and I own a few Tesla shares inside my low-cost Vanguard S&P 500 index fund. The point in sharing a story about Tesla is not to shame those that own the stock, nor is it a knock on the product as they make a good car. Instead, it highlights the influence of VC money and corresponding expectation for speculative investing and returns.

Dr. Olivier Blanchard, the most cited economist in the world, penned a 1979 masterpiece where he said this,

"Self-ending speculative bubbles, i.e., speculative bubbles followed by market crashes, are consistent with the assumptions of rational expectations. More generally, speculative bubbles may take all kinds of shapes. Detecting their presence or rejecting their existence is likely to prove very hard."

If speculation were a person, I would write it a letter. It would be short. It would go like this, "As for our families and how we advise Human Investing clients, we view each dollar as hard earned and essential to a well thought out financial plan. There is no play money or money we can afford to lose. As such, we are not much for speculation." Sincerely, your wet blanket.

[1] Merriam-Webster defines speculation as “a risky undertaking.” Thesaurus notes it is a “theory, guess, risk, or gamble.”

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On a recent financial planning call with colleague Amber Jones and a new client of our firm, we had a chance to discuss college savings for their daughter. It is always interesting to hear how families view college for their children and grandchildren. Some consider college a necessary expense, while others view college as an investment. Regardless of your college position, I thought it would be helpful to look at unemployment levels by education and income, based on the type of education an individual achieves. The numbers paint an incredible picture. Figure 1 underscores the importance of going to college. Not only are those with college degrees employed more consistently, but their annual earnings are nearly double those with a high school degree.

  Figure 1. Employment and income by education attainment

In short, Figure 1 makes a good case for encouraging your children (and grandchildren) to go to college. Yes, there are dozens of college alternatives, including starting a business or going to trade school. We all know successful individuals who never stepped foot in college or tried a university and decided it was not for them. I hope this article is taken in the way it was intended—that is, if college is an option, it is an excellent investment worth the sacrifice. 

Maybe you are a grandparent trying to think of a gift for your granddaughter—fund a college savings account. Maybe you are a parent wondering if college is a good investment—the answer is yes, fund a college savings account. Or possibly you are a teenager considering going to college—do what you can to make it happen. College is a sacrifice for families and for the one that is bold enough to attend.  Nevertheless, the payoff can be significant. As far as an investment goes, I can think of no better. 

If you have questions about college, funding a college savings account, or if you just want to have a thinking partner on the topic, call us; we would love to hear from you. College comes in many shapes and sizes. For example, a four-year degree, split between community college and Portland State University, averages less than $8,000 per year. Even if loans are required to meet tuition demands, the potential return on investment is immediate and over a lifetime, sizeable.

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What a season it has been.  I hope and pray that each individual and family member receiving this note is healthy and safe.  My goal over the coming months is to increase the volume of written communication.  These notes will not replace our regular scheduled tax, planning, or portfolio updates.  Instead, they will supplement those conversations and provide a financial perspective that can be communicated efficiently in writing.  The purpose of this note is to discuss our position on market timing and portfolio rebalancing.

Portfolio Rebalancing

We believe that the financial plan is the seminal document for investors seeking to accomplish long term goals. Each financial plan is prescriptive in the amount of saving and portfolio return that is required to accomplish the goals outlined in the plan.  The asset allocation decision is an important one—given it considers risk tolerance, time horizon, and financial goals[1].

The goal of rebalancing is to minimize risk and recalibrate, rather than to maximize return.  The process of rebalancing takes the imbalance that is created by certain asset classes over time and recalibrates those asset classes.  It takes the asset allocation that was originally prescribed by the financial plan and reorients the portfolio to its intended mix of stocks, bonds, and cash.

For most portfolios, recalibration should occur a few times a year.  This is particularly true in retirement accounts, given there is no tax liability for creating gains.  In trust accounts as well as individual and joint accounts, there is a sensitivity to tax gains as a possible consequence of rebalancing.  Every effort is taken to minimize tax liability in those types of accounts.  However, it can be hazardous to let the concern over taxes negate the discipline of regularly rebalancing.  I can think of too many instances where a client avoided rebalancing their account out of concerns for taxes—only to have the market go down. The tax liability for rebalancing was ultimately dwarfed by the loss of principle due to the market decline.  In short, it is rarely advisable to let the tax tail wag the investment dog.

Market Timing

The most common question I receive is, “when should we sell out?”  My typical response is never.  If an investor has a financial plan, which accounts for planning-based return expectations and subsequent asset allocation, the portfolio should always be properly positioned for risk and return.  If the goal of “selling out” is to reduce risk, the action of selling implies the original allocation was incorrect. 

In the past, there have been a few occasions where dramatically reducing risk by selling equities and raising cash makes sense.  Or, to sell a portion of the stock investment and place the proceeds in bonds.  But those reasons have to do with new information about the client situation, which prompt a change in the asset allocation. As an example, years ago, we had a client let us know that their business was struggling, resulting in the potential that their retirement account would need to be tapped for an emergency.  Liquidating equities in their account was a response to a change of plans and circumstances—this is a plan modification and not market timing. 

There is ample research dating back to the 1980s which suggests timing the market[2] or being able to predict the direction of the market is challenging at best[3].  Therefore, we believe in rebalancing “to recapture the portfolio’s original risk-and-return characteristics”[4], and we rely on the financial plan as the authoritative document to prescribe the proper mix of stocks and bonds for each client we serve.

Sources

[1] Zilbering, Y., Jaconetti, C. M., & Kinniry Jr, F. M. (2015). Best practices for portfolio rebalancing. Valley Forge, Pa.: The Vanguard Group. Vanguard Research PO Box, 2600, 19482-2600.

[2] Brinson, G. P., Hood, L. R., & Beebower, G. L. (1986). Determinants of portfolio performance. Financial Analysts Journal, 42(4), 39-44.

[3] Butler, A. W., Grullon, G., & Weston, J. P. (2005). Can managers forecast aggregate market returns?. The Journal of Finance, 60(2), 963-986. 

[4] Zilbering, Y., Jaconetti, C. M., & Kinniry Jr, F. M. (2015). Best practices for portfolio rebalancing. Valley Forge, Pa.: The Vanguard Group. Vanguard Research PO Box, 2600, 19482-2600.

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Every four years, our clients are eager to talk about the election’s influence on their portfolios and the broader economy. And, as has been consistent over the last 20+ years, our response is dreadfully dull. Let me explain.

Generally, the stock market is apolitical, showing no preference to either Republicans or Democrats (Li & Born, 2006). Historically, Democratic administrations are associated with more expansionary policies. With a more inflationary approach in mind, Democratic administrations are also more inclined to juice the economy with Gross National Product expanding at 5%, versus 1.2% for a Republican administration in their first two years (Alesina & Sachs, 1988). 

The market cares little about the president, the Senate, or the House. As Figure 1 below highlights, an investor who placed $1,000 into the stock market beginning January of 1926 amassed significant wealth, regardless of the political leanings and party affiliation of the President. 

Figure 1

You might be thinking, “but this time, it’s different”. Probably not. The chart above includes years with impeached presidents, wars, crisis, and plagues, and as you can see by growth over time, the stock market cares minimally about these events. Don’t just take my word for it. Read history and periodically look at Figure 1 as a reminder.

The data we have reviewed suggests that there is almost no evidence connecting stock market performance (good or bad) with a president and their political affiliation. Consequently, households should focus on their financial plan and the rate of return necessary to achieve their goals, and less about the election and its impact on the market. 

References

Alesina, A. and J. Sachs, 1988, Political parties and the business cycle in the United States, 1948–1984, Journal of Money, Credit and Banking, 63–82.

Li, J., & Born, J. A. (2006). Presidential election uncertainty and common stock returns in the United States. Journal of Financial Research, 29(4), 609-622.

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Through the end of 2019 and dating back 20 years, the S&P 500 returned 6.1%, as described in Table 1 below. During that same time period, a balanced account consisting of 60% stocks and 40% bonds returned 5.6%, while the “average investor” returned just 2.5%.

Table 1

The “average investor”, according to JP Morgan and Dallbar, is any investor investing in mutual funds. The report shows the flow of mutual fund buying and selling. The use of mutual funds is the best way to perform a field experiment and infer approximate returns for those buying and selling mutual funds. 

It is implied that those buying mutual funds are more individuals, households, and smaller institutions. Larger institutional clients typically own the investments directly.

So, what’s the deal with the average investor returns?

Why don’t more people invest 100% of their money into the S&P 500 or something similar? The short answer is that while any investor can put their money into the S&P 500, few are able to hold through the ups and downs.

Table 2

Looking at Table 2 (using the same 20-year time period), the S&P 500 has seen intra-year drops, that were on average nearly 14%. Investors owning just the S&P 500 would have had to hold tight over those 20 years to achieve the 6.1% return, which is easier said than done. To be sure, there is so much that goes into selecting an allocation for a portfolio. But given the times we are in, I thought it would be useful to lay out a framework for successful investing.

1. Diversify — In my nearly 24 years of advising clients, I have seen just a few that have been 100% invested in equities. Since 1950, the average all-stock portfolio return was a little over 11%. Interestingly, a 50% stock and 50% bond portfolio for that same period yielded just under 9%. Although an investor may not have the temperament for an all-stock portfolio experience (because of the volatility described in Table 2), they can still save and invest. Through a balanced portfolio, investors can experience a fraction of the expected volatility while still achieving solid returns.

2. Plan — It baffles me that so many investors focus on the return of the stock market. From my point of view, the only number that should matter is the return an investor needs to achieve their stated goals. Recently, we ran planning calculations for a client that needed 5.5% returns to make all of her financial goals come to fruition. Since working with Human Investing, she has achieved a 6% net return, allowing her to achieve all of her goals. Investors are best off spending time developing a plan and then building a diversified portfolio to achieve those plans. 

3. Stay in the market — Since your financial plan serves as your road map to achieve your financial goals, it is imperative to stick to the plan. Following the plan means staying invested even when the world appears to be falling apart. But, what if you decide not to follow the plan and get out of the market? It may not be so much about the getting out of the market but about getting back in. Table three describes the negative impact of market timing. Although market timing can be costly, the greater challenge may be the decision on when to get back into the market.

4. Investing is forever — Successful investors have a forever time frame they measure in a lifetime, not a day. The accelerating adoption of day trading, market timing, and other gambling-like tendencies go against everything I have ever read and learned about successful investing. Take, for example, Warren Buffett, whom many consider the greatest investor of our generation. He has amassed 95% of his wealth after the age of 65. Although I would place Buffett near the top of the list as the greatest investor of our generation, a key contributor to his wealth accumulation has been the length of time he has spent investing. This is a crucial lesson for those who look to get rich quickly and bypass the hard work of saving and investing over a lifetime.

Table 3

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Investors, savers, or even advisors rarely view a primary residence (the home you live in) as an asset in the same way a person would see a stock or bond.  Generally, I agree with this perspective—that a home is for raising children and creating lasting memories, and not viewed in the same light as Tesla, Microsoft, General Electric, or Apple.  However, there are three factors present in the market today that are cause for a new point of view.  That is, your home as an investment asset used to generate income or cash flow savings.

Factor 1: Money Market and Savings Account Rates

Money market rates have remained near zero for over a decade. This means for those holding money in checking, savings, and short-term bond investments, there is virtually no return on investment.  Include net of inflation, and investors are going backward.  Today, these shorter-term accounts serve the dual purpose of offering investors safety and liquidity, but little by way of yield.

Factor 2: Bond Rates

Bond rates have followed a similar "race to zero" that we saw in the money market and savings account rates.  As of today, an investor must go out ten years to receive .63% on a treasury bond.  In other words, a $1,000 investment yields just over $6 per year.  Bond investments are GREAT, and will forever be a cornerstone of a diversified portfolio.  However, too many investors and their advisors stockpile money into bonds as though it is the only safe way to make a return.  Importantly, like money markets, the "real" rate of return (after adjusting for inflation) is negative, going out 30 years!  You can find more exciting rate related info at the U.S. Treasury link here.     

Factor 3: Mortgage Rates

Mortgage rates have been at similar levels as today in both 2016 and 2012.  So, if you were lucky to buy your home or refinance at that time, there may not be much upside to a refinance.  For the rest of us, with the 30-year rate at 3% and the 15-year rate at 2.5%, now is the time to take a second look.  More rates from Rivermark Credit Union can be found here.

Your Home as an Investment

The opportunity for homeowners comes when they can look at these three factors (money market rates, bond rates, and mortgage rates) within an overall planning framework.  Below are a few examples of how this can work:

1. Mary and John are staring down retirement.  They have a 15-year loan at 4.5% that is five years from being paid off.  Their payment is around $1,900 per month, with a pay-off of around $100,000.  They have the choice of investing a final bonus of $100k from work at .63% and generating $52 per month income, or they can take that same bonus and pay off their home.  It seems like this should be a no-brainer—generate $52/month or save $1,900/month by not having a house payment.  But for whatever reason, the repetition of saving money (which is good) into safe investments (which is also good) is not considered within an overall planning context.  If acted upon, this scenario puts an extra $1,900 per month into this investor's pocket for paying off the home versus investing it into a bond.

2. Julie is 45 and has a goal of not having a house payment by the age of 60.  She has a $300,000, 30-year loan at 4%, and a payment of $1,432/month.  Julie has also accumulated $60,000 from real estate commissions she is looking to invest.  Investing in a 10-year Treasury would yield her $31.50/month.  A better alternative is to use the money to pay down her loan.  In doing so, she goes from a loan size of $300k to $240k.  Also, moving from a 30-year to a 15-year loan allows her to have no home loan by age 60.  Importantly, her rate is reduced from 4% to 2.5%.  Although her monthly payment is more by about $170/month, she saves $167,000 over 15 years in interest expenses—or $927/month! 

Conclusion

Recent events have presented opportunities for investors, savers, and homeowners.  Leveraging a comprehensive financial plan that considers your home, mortgage rates, and reinvestment rates could be the chance of a lifetime to save and earn. 

Join our forum on May 14

To learn more about how to leverage your home within a comprehensive financial plan, join Peter Fisher and Jill Novak for their forum, “How to Empower Homeowners during a Downturn” Thursday, May 14th at 9am PST. Sign up here.

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