As financial planners, we constantly seek opportunities to steward our client’s assets. Protecting your identity is a critical aspect of this responsibility as many of our planning tools and custodian accounts can be accessed on any device at any time. In today’s digital age, identity theft is a growing concern. It has become easier for criminals to steal someone’s identity and wreak havoc on their financial and personal life. Fortunately, you can take steps to protect yourself from identity theft.

Here are 10 ways someone can protect their identity from getting stolen:

1. Create strong and unique passwords: One of the easiest ways to protect your identity is to use strong, unique passwords for all your accounts. A strong password includes a mix of uppercase and lowercase letters, numbers, and symbols. The longer the password, the better. Avoid using the same password for multiple accounts, as this makes it easier for hackers to access all your accounts if they guess one password. Our best advice is to try to come up with a “passphrase” instead of a password. For example, “#Cantwait4theWEEKEND!”  

2. Enable two-factor authentication: Two-factor authentication adds an extra layer of security to your accounts by requiring a code in addition to your password to log in. This code is usually sent to your phone or email, ensuring that only you can access your accounts even if your password is compromised. Do not provide this authentication code to anyone else.

3. Be cautious of phishing scams: Phishing scams are a common tactic used by identity thieves to trick people into giving away their personal information. Be cautious of unsolicited emails or text messages that ask for personal information or contain suspicious links. Always double-check the email sender or phone number to ensure it is legitimate.

4. Regularly monitor your credit report: Review your credit report for errors or fraudulent activity and report any unauthorized accounts or transactions to the credit bureaus and the affected creditors immediately.

5. Freeze your credit if you don’t need to tap into it: A credit freeze restricts access to your credit report, making it difficult for identity thieves to open new credit accounts in your name. Contact each of the three major credit bureaus (Equifax, Experian, and TransUnion) to request a freeze.

• Equifax: Call 800-349-9960 or go online.

• Experian: Go online to initiate, or for information, call 888‑397‑3742.

• TransUnion: Call 888-909-8872 or go online.

6. Shred sensitive documents: To prevent identity thieves from piecing together your personal information, shred sensitive documents such as credit card statements, bank statements, and tax documents.

7. Don’t give out sensitive Information: Don't give out personal, financial, or health-care information over the phone, mail, or the Internet unless you have a trusted relationship with the requestor and initiated the contact. Even with trusted contacts, it’s best to send secure information securely. Using online portals to upload information or password-protected files can be a way to protect your information.

8. Secure your devices: Keep your computer, smartphone, and other devices up-to-date with the latest security updates and anti-virus software to protect against malware and other threats. Require a passcode to access your phone or computer if they are idle for an extended period.

9. Be mindful of public Wi-Fi: Avoid using public Wi-Fi networks for sensitive tasks such as online banking, as these networks are often unsecured and vulnerable to hacking.

10. Limit your social media footprint: Be mindful of the personal information you share online, including on social media platforms. Consider adjusting your privacy settings to limit the amount of personal information visible to others. If you are a parent, be mindful of how much of your child’s personal information you share online. Personal information (birthdays, the street they grew up on, etc.) can make security questions and answers vulnerable to hacking in the future.

In today's digital age, protecting your identity is critical, and as financial planners, we encourage our clients to take proactive steps to safeguard their personal and financial information. If you believe that any of your logins have been compromised, our advisors and partners will work swiftly with you to protect your accounts.

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As a Charted Financial Analyst serving as the firm’s Director of Investments and Compliance, I oversee the construction and management of client portfolios. How we go about investing client capital involves evaluating a variety of factors that move the markets. Given the economic backdrop for 2022, I thought it would be helpful to address a few of the components impacting the economy and subsequent stock and bond market volatility.

Historical trends suggest the current high levels of inflation will not persist.

 Inflation is higher than it has been for decades, exceeding 7.5% in the March to October 2022 numbers, represented in the purple line below. The breakeven rate between a 5-year Treasury Inflation Protected Security (TIPS) and a standard Treasury is commonly used as a benchmark for what average inflation over the next five years is expected to be. The graph below shows this in orange below, hovering around 2.34%.

What is causing inflation?

There are broadly two types of inflation:

1. Demand-pull inflation occurs when there is too much demand for a limited supply of items (too much money chasing too few goods).

2. Cost-push inflation occurs when the costs of inputs for producers increase, and those costs are passed along to consumers (too few inputs to produce too many goods).

Both factors are helping push inflation higher. Government stimulus in response to COVID and global supply chains having to adjust in response to the pandemic have both had their part in increasing inflation, along with many other factors.

What brings inflation down?

Macroeconomic theory believes that inflation falls when an economy slows down. A slower economy usually means higher unemployment and less spending and investment. This means there isn’t too much demand-pull inflation occurring because higher unemployment means there are fewer wages chasing the goods produced. Higher unemployment also tends to lead to lower cost-push inflation because the cost of labor typically goes down when unemployment is high.

The Fed is still working on a soft landing.

Higher inflation is not healthy for an economy long term. Banks still want to make money even when inflation is high, so they lend at higher rates to ensure they still make a profit after accounting for inflation. Higher interest rates result in a higher cost of borrowing, making any investment (buying a house, going to college, launching a new business, building a new production facility, etc.) more expensive. Households and companies invest less, which means fewer productive and good investments happen, slowing down the overall economy.

Because high inflation is unhealthy for an economy, the Federal Reserve (aka “The Fed”, the US central bank) is raising interest rates. The Fed’s goal is to raise interest rates high enough to slow down the economy and bring down inflation. The concern is that The Fed will be too aggressive in raising interest rates and cause a sharp economic downturn. The hope is The Fed can execute a soft landing, slowing down the economy enough to reign in inflation but not slowing down so much to trigger a major recession.

The job market is still experiencing labor scarcity.

Currently, there are about 5 million more open jobs than people looking for a job. Unemployment is below 4%, near the historical lows we were experiencing pre-pandemic. Due to labor scarcity, employees are seeing their wages rise.

The overall economy is seeing consistent growth.

Gross Domestic Product (GDP) is the most used measure of the size of an economy. Real GDP (rGDP) accounts for inflation. The orange line is a “trendline” for real GDP, based on the average growth of rGDP from 2012 to 2017. As you can see, GDP is not far off from what would have been expected if the COVID downturn & recovery had never occurred. While the first half of 2022 had two-quarters of negative GDP growth (a common definition of a recession), Q3 2022 saw the economy grow.

Company earnings are still increasing despite downturns.

The following chart illustrates earnings growth compared to the S&P 500. The market tends is forward-looking, setting prices based on what is expected to happen. Current fears about inflation & The Fed triggering a downturn by raising interest rates too much too quickly are pushing the market down. Earnings reflect what companies earned in the previous three months. While there is a lot of anxiety about the state of the economy, companies are continuing to earn money and will continue to do so even in a downturn.

What does this mean for you and your portfolio?

In conclusion, there are contradictory messages. The economy quickly recovered from the global pandemic, and the workers are enjoying a solid labor market with wages rising. The positive economic news is contrasted with poor investor experience in the stock market. Concerns about high inflation and The Fed’s anticipated aggressive rate hikes to combat inflation have the market worrying about a recession. With all this happening, companies have continued to grow their earnings.

While there is conflicting information in the short term, we continue to anticipate long-term growth in the economy and stock market. Having a sound financial plan that accounts for downturns and uncertainties is crucial. Feel free to reach out if you have any questions about your plan or have had any changes in your financial situation.

All data courtesy of YCharts Nov 29, 2022.

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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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Did you Make Over $125,000 Individually or over $200,000 as a Married Couple?

There are two new local personal income taxes that became effective for the 2021 tax year. These two taxes, explained below, are specifically for single filers with Oregon taxable income above $125,000 and married jointly filers with Oregon taxable income above $200,000.

These two programs are local taxes, not state taxes. This means that the tax payments go directly to The City of Portland and require an additional filing. We expect high-income earners in the Portland-metro area to have at least three tax returns for 2021: US Individual Income Tax Return, Oregon Income Tax Return and City of Portland.

Like your federal and Oregon state tax return, these local tax returns are also due by Monday, April 18.

Local tax #1: Preschool for All (PFA) Personal Income Tax

In November 2020 Multnomah County voters passed The Preschool For All Program which will provide tuition-free preschool for children that meet the program criteria.

• This local tax is funded by a 1.5% marginal personal income tax on taxable income above $125,000 for single filers and $200,000 for those married filing jointly.

• This local tax is also funded by an additional 1.5% tax is imposed on taxable income over $250,000 for single filers and $400,000 for those married filing jointly

Local tax #2: Portland Metro Tax

In May 2020, Portland-area voters approved Measure 26-210 which will provide homelessness services like shelter, advocacy, and mental health resources.

• This local tax is funded by a 1% marginal personal income tax on taxable income above $125,000 for individuals and $200,000 for those married filing jointly.

• This local tax is also funded by a 1% business income tax on net income for businesses with gross receipts above $5 million.

• The Portland Metro area includes residents of Multnomah County, Clackamas County, and Washington County. For a full reference guide of the Metro jurisdiction use this online tool.

How can I Find my 2021 Taxable Income?

Taxes are complicated. Remember that your income (like your salary) is not the same as your taxable income. For example, you could earn a salary of $140,000 a year but have less than $140,000 of taxable income because of pre-tax retirement account contributions and taking the standard deduction or itemized deductions.

The easiest way to confirm your 2021 Oregon taxable income is to complete an Oregon Income Tax Return. Your taxable income is included on line 19 of your Form Oregon 1040.

If you are a single filer and your Oregon taxable income (on Line 19 on your 2021 Form OR-40) is greater than $125,000 or if you are a married jointly filer and your Oregon taxable income is greater than $200,000 then you likely need to pay your taxes by April 18, 2021.

FINDING YOUR TAXABLE INCOME IN TURBOTAX

1. Login and find the Documents tab.

2. Download your tax PDF. Scroll to the bottom of the PDF for the Oregon return.  

3. Find your 2021 Form OR-40. Line 19 includes your total taxable income.

examples of Calculating your local taxes owed

Preschool For All Tax: $0 because her income is below the $125,000 threshold for individual taxpayers.

Portland Metro Tax: $0 because her income is below the $125,000 threshold for individual taxpayers.

Preschool For All Tax: $6,000.
Tier 1: $400,000 - $200,000 = $200,000 of taxable income. $200,000 x 1.5% = $3,000
Tier 2: Then, $500,000 - $400,000 = $100,000 of additional taxable income. $100,000 x 3% = $3,000

Portland Metro Tax: $3,000.
$500,000 - $200,000 = $300,000 of taxable income. $300,000 x 1% = $3,000

Preschool for All Tax: $0 because they are not a Multnomah County resident.

Portland Metro Tax: $350.
$160,000 - $125,000 = $35,000 of taxable income above the threshold. $35,000 x 1% = $350

How Can I Pay for this Tax?

If you hire a CPA to prepare your individual tax returns, we recommend confirming that they will also file your City of Portland taxes for you. 

If you use an online tax software like turbotax, you will have to visit the Pro.Portland.gov website to submit your tax payments in a separate return. If you are a Multnomah County resident, this process will feel similar to paying your $35 Arts Tax.

What if my Taxable Income is Below the Limits for the PFA and Metro Tax?

You do not need to file anything to the city of Portland if your taxable income is below the limits for both local taxes in 2021. However, if you are a Multnomah County resident then don’t forget to pay your Multnomah County Art Tax for 2021. You can pay for it here: Portland Arts Tax Online Payment.

If you have more questions about the new local taxes, or would like to speak to a financial professional please reach out to us at hi@humaninvesting.com or 503-905-3100.

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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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Welcome to fall! Before we race to the pumpkin patch, let’s look back on July, August and September. We selected 5 different visuals from the past quarter to share with you.

1: The S&P 500 Reaches an All-time High

On September 2, 2021, the S&P 500 closed at an all-time high (see chart). While this is a record-breaking statistic, the S&P 500 has also experienced more than 50 all-time highs in 2021. Prior to this year, there are only six other calendar years with at least 50 record closes (2017, 2014, and 1995 are the most recent years).

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As a result of these market highs, we have noticed heightened concerns about a looming market crash. Because what goes up, must come down?? The two most common concerns we hear are:

1. “I know the market is at an all-time high. I want to sell my investments today and reinvest these dollars when the market crashes in the coming months”. See chart 2 for our typical response.

2. “I know the market is going to crash. I want to move all my money into something safe like cash or bonds. What do you think I should do?”

If you are someone that is worrying about your investments (maybe it’s something entirely different from the two concerns listed above), please reach out to our team so we can listen to your concerns and build an investment strategy for you going forward. To be frank, the timeline for spending 401(k) dollars impacts the advice we give. For example, we would give different advice to someone planning to spend their 401(k) savings soon than to someone in their mid-forties with no intentions of spending their 401(k) soon.

2: What About This Looming Market Crash?

If you have setup a 401(k) account, then you are investing your dollars every single pay period. This phenomenon is called dollar-cost averaging and it works really well for most retirement accounts. If you have a 401(k) account, we recommend leaning into dollar-cost averaging, setting up annual account rebalancing, and assessing your account strategy periodically. Of course, this strategy is not one-size-fits-all. Some investors prefer to intervene with their investments if they are predicting an upcoming market crash.

That being said, we recently found this article by Nick Maggiulli that compares gradually investing a consistent dollar amount (like per paycheck 401(k) contributions) to saving dollars up to buy a market dip. Please take the time to read the whole article, but if you want the cliff notes here you are:

• The article points out that stockpiling cash in anticipation of a market crash is an unlikely strategy to win out in the long run.

• Trying to buy the dip usually fails because large dips are rare. As a result, the strategy turns into stockpiling cash which is not a good idea for the long-term.

• If you do want to try and buy the dip, think about getting your cash invested in the stock market as soon as possible.

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For some help interpreting this chart, here is the text directly from Nick Maggulii’s blog post. “This chart shows that there is roughly a one in four chance of beating DCA when using a Buy the Dip strategy with a 10%-20% dip threshold. If you were to use a 50% dip threshold, the chance of outperforming DCA increases to nearly 40%. But this doesn’t come without a cost. Because while you are more likely to outperform DCA when using a bigger dip threshold, you also underperform by more (on average) as well.”

3: Monthly Child Tax Payments

July 2021 was the beginning of the monthly child tax credit payment for parents. Did you see our 20-minute webinar about the child tax credit, why it matters, and some financial planning considerations for parents?

Flash-forward a few months, and we have found a study of 1,514 American parents who received the monthly child tax credit payments. As you can see, most parents have saved their payments for emergencies which is a disciplined usage of the excess cash.

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4: Vanguard Announces Lower Fees for Target Retirement Funds

In late August, Vanguard announced they are lowering the expense ratio (the cost) of their target-date funds by February 2022. We believe this is good news for all investors using Vanguard target retirement funds!

Vanguard will lower the expense ratio to 8 basis points meanwhile they are committed to maintaining the same glidepath methodology and asset allocation.

To articulate the cost savings, we assembled a table showing the potential impact for someone invested in a Vanguard target retirement fund with the updated expense ratio. For someone with $100,000 in a Vanguard target retirement fund, this lowered expense ratio means immediate annual savings. Just to be clear, the $90 vs $80 are annual fees which add up to be meaningful cost savings for you over a long period of time. Cheers!

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5: Be Careful who you Get Advice From

How many self-proclaimed market savants are sharing their opinions with the world? So many! Be careful who you listen to. We couldn’t help but include some humor in this post. Feel free to relish in the ridiculousness of this chart.

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That concludes our Charts of Q3 2021 post. We will be assembling the next Charts of the Quarter post before we know it. Take care! — Your Human Investing Team

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In a recent interview Jason Zweig, a personal finance columnist for the WSJ, had a quote that resonated with me.   

  "Emotional discipline is the single hardest thing about the investment game."   

After accumulating over 30 years of writing and thinking about investing and personal finance, Jason points to emotion (not market valuations, stock picking, or market corrections) as the most difficult part of investing.  As financial advisors, we witness the struggle of emotional discipline firsthand. Recent news (and noise) around tech stocks, housing prices, federal spending, cryptocurrencies, inflation, and interest rates have made it more difficult for investors to maintain this discipline.  

are you an investor facing FOMO or FOBI?  

This lack of emotional discipline manifests itself typically in one of two ways:   

1. Fear of Missing Out (FOMO) in the market. If you are 15 years old, FOMO is seeing your friends doing something without you on social media. If you are an investor, FOMO is the internal dialogue of “I see my neighbor making money on ____, I need to buy ___.” Someone who has FOMO tends to follow the crowds. FOMO can lead an investor to think their rate of return is a benchmark for their success rather than achieving a return needed for a successful financial plan.

2. Fear of Being In (FOBI) the market. FOBI is the internal dialogue of “I have seen how this story ends. I need to sell ____.” Someone who has FOBI likely listens to news sources who make a profit off pessimistic news. Note: It is easy to push the sell button, it is always harder to get back in.  

FOMO and FOBI may seem different, however, both are ultimately trying to guess where the market will go next and are speculative in nature. Let 2020 be a great reminder that it’s difficult to predict how the market or a particular investment will do year to year.  

Periodic Table of Investment Returns from the last 20 years

One of my favorite charts to illustrate the difficulty to predict short-term performance is "The Periodic Table of Investment Returns". This graph ranks the annual returns of popular asset classes from best to worst over the last 20 years.   

Source: Blackrock; Past performance is no guarantee of future results. The information provided is for illustrative purposes and is not meant to represent the performance of any particular investment. Assumes reinvestment of all distributions. It is not possible to directly invest in an index. Diversification does not guarantee a profit or protect against loss.

An investor experiencing FOMO is likely paying attention to the top row, the best-returning asset classes over the last 20 years. This investor is likely trying to guess what will be the highest performing asset class in the coming year.  

Meanwhile, an investor experiencing FOBI is likely paying closer attention to the bottom rows, with a specific focus on larger market selloffs like 2001, 2002, and 2008. A FOBI investor is worried about being invested in the wrong asset class and will try to avoid the worst-performing asset class in the coming year.  

The Periodic Table of Investment Returns reminds me of three investing truths:   

1. It can be dangerous to try and guess what is next. Consider US small-cap stocks (Sm Cap – in light green), which had the highest average annual return over the 20 years. While small-cap stocks were the best performer they also showed the widest variance in outcomes. Guessing right in 2003 would have provided a positive return of 47.3%. Guessing wrong in 2008 would have provided a negative return of 33.8%. 

2. Past performance is not an indicator of future returns. Making investment decisions based on recent performance (e.g., looking at 1, 3, and 5-year returns) can be detrimental to an investment portfolio.  International’s performance as a prime example (Int’l – in yellow), over the five years from 2003-2007 international was the best performing asset class by a long shot. International seemed like the sure thing. Unfortunately, the investors who followed international’s high returns were greeted with a brutal 43% selloff in 2008.   

3. Portfolio diversification is the answer to combating FOMO and FOBI – See “Div portfolio” in purple along the middle rows.  Diversification is an investment strategy that aims to maximize a level of return for the risk desired. Diversification accomplishes this by strategically spreading money across different types of investments.   

 A diversified portfolio helps investors maintain emotional discipline. Diversification can avoid the fear of missing out on the next hot investment. Owning more of the market will naturally provide more opportunities to not miss out on the growth of specific sectors or individual investments. Diversification can also temper being fearful of being in the market and owning the next big loser. Diversification disperses your dollars across many asset classes, which means if one company is a dud it will not sink the ship.  

If you struggle with emotional discipline when investing, congratulations you are a human. If helpful, please use The Periodic Table of Investment Returns as a great reminder that emotional discipline is difficult. Putting a plan in place along with proper diversification can help investors make smart long-term decisions.

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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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Last week GameStop went viral as a topic unlike anything I’d seen in my 10 years at Human Investing. Probably just like you, I googled “Gamma Squeeze”, had someone two degrees of separation from me divulge they had been a part of wallstreetbets, and now have significantly more money, and felt like I was watching a version of March Madness play out real-time in the financial markets.

With the introduction of free trading and the gamification of trading stocks with apps like Robinhood, this past week was the culmination of many factors colliding (more on that later). Different than in The Big Short (2008 Real Estate Crisis) where select hedge funds were taking advantage of large investment banks being overleveraged in the housing market, this time it was retail investors taking advantage of hedge funds overleveraged in GameStop. If Michael Lewis or someone else isn‘t writing this book already I’d be shocked, and I can’t wait for the movie too.

Most of the questions our team has been fielding this week looked like a version of:

• Why GameStop?

• Why now?

• Explain this to me like I’m 5

• Is this a one-time occurrence or is something like this going to be happening more frequently?

• And probably most importantly what does this mean for me, my investments, and the markets as a whole?

To help me answer some of these questions I’ve enlisted our head analyst, Andrew Gladhill. In our office known as Glads. For those of you who haven’t spoken with Glads or seen his work, he’s a CFA and anyone who knows him would most likely have him on their Who Wants to be Millionaire “phone a friend” shortlist. Maybe most importantly, one of the ways Glads makes our team better is being able to take complex topics and break them down in very digestible terms. Take it away!

Some key terms you need to know

Shorting

The short answer: Shorting is betting that a price will go down (not up), and you benefit as the price goes down. For example, if you short a stock trading at $20, and it goes down to $15, you have made $5.

The long answer: Shorting works through a few steps:

• Step 1 – you borrow the stock today from someone who holds the stock (Let’s call them Emily) with a set date you must return the stock back to Emily. Emily lends you the stock because Emily charges you interest.

• Step 2 – you sell the stock today (say for $20)

• Step 3 – you must return the stock to Emily, plus interest (say $1) buying it at the current market price to do so (say $15)

• In this example, you have made $4 (Sold for $20, bought for $15, charged $1 interest)

Why do you short? Because you believe something is overvalued, and you want to profit from when the price goes down.

Short Squeeze

The short answer: When a shorted position has the price increase, those who are shorting it (the shorters) are forced to buy the position, driving the price up further.

The long answer: If the price rises on a short position, the shorter starts losing money. They can either hedge their losses by buying the stock before the return date, or wait to buy and hope the price falls. Remember, the shorter must return the stock to the original owner by a set deadline. Because the price of the stock can rise higher and higher, the shorter’s potential loss is limitless.

So a short squeeze is when the price of a company goes up because lots of people are buying a heavily shorted stock, increasing the price. The rise in price causes some shorters to close out their positions, which involves buying the stock. More buying activity causes the price to increase, causing greater losses for the shorters. If the price rises high enough, the losses get large enough that more shorters are forced to close out their short position to avoid having their total portfolio value go negative. This creates a positive feedback cycle of buying activity, pushing the stock price even higher.

Why WAS Gamestop ($GME) TARGETED?

The Short answer: GME had an unusually high amount of shares sold short, allowing the short squeeze to be possible. Retail investors gathered online & decided to try to make it happen.

The Long Answer: Short float is the number of shares sold short (borrowed & then sold) that have not yet been repurchased. Gamestop had a short float over 100%, meaning some shares of Gamestop had been lent out more than once. This happened because many believed Gamestop (a retail video game store) was the next Blockbuster and would go out of business. The share price would go to $0 a share, and they would profit from the price dropping. Some retail investors noticed the high short float on GME in an online community known as reddit wallstreetbets (aka WSB, aka retail investors). The retail investors saw an opportunity for a short squeeze due to the large short interest, and GME being a relatively small company.

The retail investors planned to force a short squeeze on GME. The retail investors would buy up as many shares of GME as possible, driving up the price. The retail investors would hold their shares, drying up the supply, pushing the price up even further. All this upward price movement would force a short squeeze, driving the price up even further, and the positive feedback cycle would result in astronomical price increases for GME as the short squeeze hits. Retail investors will be able to sell their shares at high prices to the shorters forced to closing out their position.

Why was trading restricted?

The short answer: Companies that execute trades (brokerages, i.e. Robinhood) must have money to cover trade differences with clearing firms (the back end companies that finalize trades) as collateral. The rapid, unexpected movement in GME brought some brokerages ability to do that into question, and they had to pause the trading until they could secure more funding.

The long answer: When you sell or purchase a stock, that trade isn’t finalized until settlement, which is 2 days later. This time is used to verify the transfer of cash & the security purchased. It’s like when you deposit a check at the bank, the bank makes sure the check clears before you can withdraw cash. Clearing firms finalize stock transactions. The brokerages (i.e. Robinhood, Fidelity, Schwab, e-Trade) are required by law to maintain cash deposits as collateral with clearing firms to cover any losses. The required deposits by the clearing firms for the brokerages went up because GME was having higher price volatility. Some brokerages had to pause trading in GME while they secured enough funding to make the deposits required by the clearing firms. The financial system rarely handles meteoric rises in stock prices in such a short amount of time, and certain parts of the system that normally work so smoothly we never think about them suddenly brought trading to a screeching halt.

what does this mean for me and my portfolio?

Thank you, Glads. This story and its ramifications are certainly not finished. As more details come out it will continue to paint a clearer picture of what it means for investors over the past week and looking forward as well. To bring this all home and answer the question, “what does this mean for me and my portfolio” a few thoughts:

While Gamestop took up all the headlines this past week, for most investors it had little to no impact on their portfolio. For example, the Vanguard Total Stock Market Fund (VTI), is a staple in many retirement accounts across the country, the fund was down 3.59% last week (in line with the market). GameStop contributed a positive 0.04% return to the fund (basically nothing!) despite being up nearly 655% on the week, a bi-product of how small of a company GameStop is relative to other companies in the fund that truly move the needle.

So should I get in?

Should you open up a trading account in preparation of the next public short-squeeze? The boring/correct answer is this is not the forum to be giving specific financial advice for your specific situation. If you’re truly speculating about that and want to talk to it through, PLEASE sign up for a Calendly link with one of our advisors and they are happy to talk with you about it.

My favorite book I’ve read in the past few months is The Psychology of Money by Morgan Housel. It’s one of the best (in my opinion) personal finance books because it focuses on behavior (potential controllable actions) rather than guessing what’s the next best stock is. He has an entire chapter devoted to the topic of, “People have a tendency to be influenced by the actions of other people who are playing a different financial game than they are.” This is the case for most people saving for retirement when thinking about GameStop, shorting, and what we’ve seen in the news. It’s Human to feel like you missed on an opportunity with GameStop and to want to hit it big on the next trade. But most likely that’s not your game.  Most likely your game (and mine too) involves saving and investing for a long time, letting compounding interest take care of the rest, and maybe most importantly staying out of your own way. And while that game doesn’t create the same headlines, as Housel writes in a different chapter it can create a different type of headline to aspire to.

See the full article here

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According to most research, although millennials are considered the most highly educated generation, we are the least informed when it comes to our financial decisions. Not only do we lack financial literacy, but pre COVID-19, 63% of millennials felt anxious when thinking about their financial situation, and 55% felt stressed when discussing their financial situation. I imagine COVID-19 has negatively impacted those figures even further.

There are many factors that affect our personal financial stress levels, but historically, the financial industry has felt inaccessible to those who lack financial literacy and/or feel insecure about their financial situation. How are we supposed to learn if we lack access to knowledge?

SAVINGS APPS TO SAVE THE DAY

I love the concept of savings apps, because it improves accessibility of investing and saving for a large population. Basically, if you have a smart phone and a few extra dollars, you can be a saver. A study conducted in 2019 found that individuals who used savings apps kept better track of their finances and were more resilient when faced with a financial shock. However, accessibility without education can be hazardous. So, here are two recommended savings apps that provide learning and saving opportunities.

• Mint is a free app powered by INTUIT (think Turbo Tax) that houses all of your financial information in one place. Mint uses a holistic view and budgeting tools to find extra savings for you. Not only do they provide you with custom savings tips, but they also have a hub of resources, ranging from building a grocery budget to investing advice, so you can learn along the way!

• Digit has the same philosophy as Mint: find savings within your current financial situation. With this philosophy, Digit analyzes your current income and expenses and then lets you know what you can afford to save. They invest your dollars in FDIC insured account using a portfolio based on your risk level and comfortability. You are also able to attach these savings to a specific goal – emergency savings, honeymoon, a doggo—you name it. There is a monthly cost of $5, but you do receive 1% annual bonus savings every three months.

NOT FEELING IT? FOLLOW THEIR SAVING PHILOSOPHIES

It’s okay if you don’t vibe with the savings app world. But if you do want a better grip on your finances, follow the philosophy behind the savings apps:

1. Keep track of your income.

2. Assess your spending habits.

3. See where you can save.

For me, that looks like walking past the gluten-free bakery every so often instead of into it (which is usually the case) and saving the extra $5. At the end of the month it can make a difference (Don’t believe me? See how much you can save by ditching your morning coffee here).

Finally, allow yourself to interact with financial resources without being too hard on yourself. The purpose of these apps is not to be a report card. The purpose is to empower you to make thoughtful decisions that will improve your financial health. If you have questions, check out our Financial Wellness Center or reach out! We are here for you.

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In March, we were inundated with updates about the coronavirus and the unknown ramifications to follow. In the same month that the NBA was postponed, children were sent home from school, toilet paper fled the grocery store shelves, the US stock market had three of the worst days in US history.

Behind the scenes

Unlike the year 2020, your 401(k) account is routine and emotionless. If there is no user interference (yes, that is you), your account will continue to invest in the stock market every paycheck. A 401(k) account can help alleviate market-timing decisions by adopting an investment strategy called dollar-cost averaging. Instead of waking up in the morning and deciding “is today a good day to buy some stock?”, your 401(k) systematically makes those timing decisions for you.

To review the ease of these timing decisions, I wanted to show investors what happened if you made a $50.00 contribution to your 401(k) account every paycheck during 2020. In this scenario, we assume employees were paid every two-weeks (starting on January 3, 2020) and invested in the Vanguard Target Retirement 2055 (VVFVX) fund.

Slowly building a foundation

These dollars represent the trading value of the Vanguard Target Retirement 2055 (VVFVX) on specific days. In this exercise, the lowest trading price was $31.16 on March 20th, and the highest trading price was $48.55 on November 27th.

Thank you, automation.

As you can see, the best time to invest in the stock market this year (March) was also arguably the most uncertain and scary time to be an individual investor. From a February 21st paycheck to a March 6th paycheck, the price of this target date fund dropped 9%. From a March 6th paycheck to a March 20th paycheck, the price dropped 21%.

When prices were falling, your 401(k) account bought shares at a lower price without panicking, consulting the news, or making impulsive decisions. For that reason, we should give 401(k) accounts a standing ovation for being a reliable, unemotional investment vehicle this year.

Let 2020 be a reminder that if your boxes are checked, outsourcing and automating your account is one way to ease your emotions.

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A week ago, I came across a chart that does a nice job representing the call volume we have been experiencing at Human Investing in 2020. While the amount of calls we receive does not equal the amount of times people search for CNBC, the two data points are certainly correlated.

The image is titled, “When Markets Fall, We Search”, and ultimately shows that individuals have been more likely to seek out CNBC (market related news) any time the market has fallen over the last 15 years.

I’d argue that you could replace ‘search’ with ‘speculate’ and both the phrase and the chart would remain true, “when markets fall, we speculate”. Given the state of current affairs and the upcoming presidential election, individuals are worrying about their retirement accounts. A growing number of conversations our team has with individuals inside of retirement plans sound something like this:

Caller: “I’m fearful of (X) candidate winning the election because I’m affiliated with (Y) political party (both sides are saying this). Additionally, there is uncertainty around COVID, and I don’t feel comfortable staying invested during these unpredictable times. I’d like you (Human Investing) to help provide me with a more conservative investment recommendation.”

Before I respond with market research, I want to reiterate that you aren’t alone with your concerns and fear. We hear you. At the same time, before making any decisions related to your portfolio, take the time to think through all the angles of your decision. The rest of this post will hopefully provide some anecdotes in your process. Here are few thoughts about what it looks like to plan for the end of 2020 and into 2021. Remember, it is better to plan than to speculate.

The correlation between your Politics and Your Portfolio

Generally speaking, there is low correlation between political parties and the stock market. However, that statement is easy to say and difficult to live out in practice. Tread lightly when reading articles that try to align which stock/sectors to own with the political party that takes office. This article from 2016 couldn’t have been more wrong prognosticating that energy companies (specifically Exxon Mobile) would be top performers for the proceeding four years. It goes without saying this was a massive miss.

The bigger influence: Are you a speculator or planner?

If you think like a speculator, you will make rash decisions around your investment accounts and have no plan for re-entering the market if you move your dollars to cash or to a conservative investment.  

If you think like a planner, you will use both quantitative and qualitative measurements to evaluate your decision. For example:

• If you have a long-term horizon (greater than 15-20 years), political changes should not impact your investment decisions.

• Irrespective of the political environment, review if your account is too aggressive or too conservative for your financial landscape.

• Have a clear understanding of both candidate’s tax policies. Changes to the federal tax code should be a factor in your financial planning for the remainder of 2020 and into the future. If you are working with a CPA and/or Financial Advisor, make sure they are staying abreast with any impactful tax code changes.

  • Biden Tax Proposal

  • Trump Second Term Tax Ideas
    

Ditching The Market

Trying to time the market when negative news arises (or the anticipation of negative news) is a dangerous game to play. Luckily, we have a recent case study of how dangerous it can be. From January 1st to March 23rd, the stock market fell 30%. Since then, the market has recovered all losses and then some. If you were thinking like a spectator, it would have been easy to create a narrative around mid-March to pull your money out of the market and wait for greener pastures. If an investor did so, most likely that investor is still waiting for the market to dip and has missed out on the recent recovery as indicated by the second chart.

If you think like a planner when the market is more volatile, sometimes taking some form of action itches a behavioral scratch. Here are some ways to take action while not compromising your account:

• Raise your contribution in your retirement account to take advantage of a decreasing market (buying more shares at discounted prices).

• Open a small “fun money” account to track if your predictions are correct.

• If the market does significantly drop, look at converting pre-tax dollars to ROTH.

The concept of thinking like a speculator vs. thinking like a planner represents the cultural moment we are living in right now.

Speculating = headlines, fast moving social media, and the potential for instant gratification.

Planning = well thought out strategies that take time and often require no action.

As we head into this season of elections and COVID uncertainty, I hope this post provides some perspective on how to approach your portfolio. As always feel free to reach out to our team to talk through your thought process. We are happy to help!

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