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The Cordant Blog

Where Do We Go From Here?

by Isaac Presley, CFA on November 10, 2016

The results of Tuesday’s presidential election were surprising to many and concerning to some, but they’ve left pretty much everyone asking: where do we go from here?

In an attempt to answer this very natural question, we now have the very same pundits, prognosticators, and seers who couldn’t predict the outcome of the election lining up to tell us exactly what will happen over the next four years.

But what do we think? Honestly, our crystal ball is a little cloudy. We don’t know, and neither does anyone else; someone telling you otherwise is probably either lying or selling you something—maybe both.

If we’ve learned anything in 2016, it’s that the prediction business is not a business you want to be in as an investor. First, the “Brexit” vote which few saw coming and now, a billionaire real estate developer with no political experience, has been elected to serve as the 45th President of the United States. Heck, even the Chicago Cubs snapped a 108-year drought and won the World Series.

So, despite the lessons of this year, the desire to know the future remains. We still crave certainty. It’s why the prediction business, no matter how bad the track record, will never go away.

Let’s look at some examples of how difficult it is to predict the future, let alone make money by doing it. Then we will give our thoughts on what you should be doing now.

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What To Do With Your Company Stock: A 3-Step Plan

by Isaac Presley, CFA on November 04, 2016

Barron’s recently published an article titled ‘Does Your Company Give You Stock? Great. Sell It.’ As our clients will know, this is our default advice when it comes to company stock. Sure, it makes sense to evaluate company stock holdings in light of your unique financial situation—maybe it makes sense to hold from a tax perspective or to fund future charitable giving—but even still, it’s best to put a plan in place now. Don’t let the inertia of past decisions continue to influence your decisions today.

So, why does Barron’s (and many others) recommend selling your company stock? To quote the article, “Your financial future is already reliant on your employer’s fortunes. Don’t double down.”

Let’s review why it’s risky to concentrate wealth in your company stock and then conclude with suggestions on how you can take action today.

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Diversification: More Important Now Than Ever

by Isaac Presley, CFA on October 27, 2016

Diversification has gotten a bad rap as of late. Over the last five years, due to the strong performance of US equities, a simple 60% US Stock / 40% US Bond portfolio would have been one of the best portfolio allocations—outperforming the majority of more diversified asset mixes, especially anything including an allocation to international stocks.

Increasing correlations between asset classes are often cited by those claiming that diversification is no longer helpful. That, coupled with the US market’s recent outperformance means many are questioning the need of going beyond this simple 60/40 portfolio.

The problem with this logic, though, is that what’s worked best recently won’t necessarily work best going forward—investing isn’t that easy. For several reasons, which we are about to see, building a diversified portfolio allocation may be more important now than ever.

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The Difference Between Smart Financial Advice and Smart Financial Advice For You

by Isaac Presley, CFA on October 21, 2016

The best strategy in theory might not be the best strategy for you. How can this be?

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How Not To Evaluate Investment Performance

by Isaac Presley, CFA on October 11, 2016

Harvard’s Endowment has been making headlines recently due to its $2 billion investment loss in the fiscal year 2016. And the Crimson (the student newspaper) is up in arms about this “unacceptable” loss.

From their article The Urgency of the Present come the following gems:

Harvard Management Company announced a $2 billion loss for the fiscal year 2016.

Let’s not mince words: this is unacceptable.

Now, a $2 billion losses certainly catches attention and grabs some headlines, but it’s only a major loss in dollar terms. Because of the endowment’s size (a good thing for Harvard) it’s not a major loss in percentage terms as the paper admits:

“…help to bridge this small (in percentage terms) loss.”

The editorial continues with some advice of sorts:

“We also recognize that we are not investment advisors. College students have no business telling seasoned analysts and managers where to invest the endowment. Instead, we wish to urge the administration to prioritize endowment performance before Harvard falls further behind peer institutions.”

From my vantage point[1] this is a case study on how NOT to evaluate your investment performance. Let’s take a look at what we can learn from this example.

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How Concentrated is Too Concentrated? A Mistake That Costs You the Whole War

by Isaac Presley, CFA on October 07, 2016

During the First World War, Britain had the greatest Navy ever assembled in world history. And yet, through most of the war, it used its Naval superiority to play defense, not offense. 

Dan Carlin in his excellent podcast Hardcore History describes the situation as follows:

“The opportunity was there for the numerically superior British fleet to apply their numbers and kick German tail, but the problem was Naval outcomes were quite variable. One lucky punch could turn the tables and in this case, remove the British numeral advantage.”

He continues, quoting Winston Churchill directly:

The great disparity of the results at stake in a battle between the British and Germany navies can never be excluded from our thoughts.”

This “great disparity of the results” and the quite variable outcomes could produce a major victory, but it could also produce an unacceptable outcome. Again to quote Churchill:

“The chance of that happening [a British loss] may not be great, but if that happens, it could cost us the whole war.”

The strategy was to stay alive and play the long game—Not to make some grand, heroic strike.

You should apply a similar strategy with investing as well.

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Q3 Investment Update: The Election's Impact on Your Portfolio

by Isaac Presley, CFA on October 04, 2016

After starting the year down around 10%, markets have rallied since early February (including the June Brexit blip) and through the third quarter global equities are up 6.6% for the year. But, the question on everyone’s mind is: will this continue? With an election looming five weeks away, many are expecting market volatility to pick up.  And everyone is wondering what impact the election of a new president will have on their portfolio.

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Using Buffers to Become a Better Investor

by Isaac Presley, CFA on September 29, 2016

“To attain knowledgeadd things everyday. To attain wisdomremove things every day.”

― Lao Tzu

 

One of the wonders of the modern world is our access to information. The answer to (or at least someone’s opinion on) every question under the sun is right at our fingertips, just a google search away.

But this limitless information and the apparently continuous increase in the pace of modern life presents a challenge for investors. Additional data at an ever faster pace create more decisions and tempt one to increase their activity. But with investing, the quality of decisions matters more than the pace. 

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What To Do With Your Intel Pension When You Retire? [Plus free excel analysis tool]

by Isaac Presley, CFA on September 23, 2016

Recently on the blog we’ve looked at a few key decisions anyone retiring from Intel must make once they stop working. We saw how to generate a paycheck via a rebalancing process and learned how ‘withdrawal order’—a seemingly simple change—can have major ramifications on your ending wealth and the amount of taxes you end up paying. Another key decision those leaving Intel must make is what to do with their pension benefit.

We’ve outlined before how the Intel minimum pension plan works. But, here we want to break down the decision that comes at retirement: should you take the monthly pension income benefit or a lump sum withdrawal from the plan? (And don't forget to download your free excel tool to help with this decision)

Intel pension analysis tool

Like so many decisions with wealth management, this is an individual decision that must be made in light of one’s goals, objectives, other assets and income sources, and risk tolerance. There is no global rule. Option A or B isn’t always optimal. The monthly income isn’t the best choice in all cases and neither is the lump sum. There are advantages and disadvantages to either option. The key is making this decision in light of your personal situation.

The remainder of this post will highlight the key decision criteria to weigh when making the pension decision with the goal of optimizing the result for your specific situation.

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How much can I spend in retirement? Our Take on the 4% Rule

by Scott Gerlach, CFP on September 16, 2016

How much can I spend in retirement? For many, that’s the million-dollar question – literally.

The first step taken of any retirement planning should be developing a baseline financial plan, and understanding the appropriate withdrawal rate is paramount to this process. During the early stages of plan development for our clients, we often get questions about the 4% withdrawal rule and how it applies to their situation. The popular financial “rule of thumb” was the result of research done in 1994 by a financial planner and MIT grad, Bill Bengen, and produced what is now known as the 4% Withdrawal Rule.

Trying to do right by his clients, Mr. Bengen sought out to produce something that wasn’t yet available – a framework for providing guidance that was rooted in research and data. Here’s what he came up with – a “rule of thumb” that posits that retirees who withdraw 4% of their initial portfolio at retirement, and then adjust that amount for inflation, can sustain that spending amount for 30 years and not outlive their money. The research assumed the retirees’ portfolio consisted of an equal mix of stocks and bonds (S&P 500 & Intermediate Government Bonds) and was rebalanced annually. From there, he tested every rolling 30-year period dating back to 1926 to determine the maximum withdrawal rate that would survive all periods. For that time period, the worst-case scenario in U.S. history produced a 4.15% withdrawal rate. Thus, the 4% rule was born.

Words of caution - Oversimplification

When it comes time to make the decision on retirement, and answering the ultimate question of, “Do I have enough?”, using the 4% Rule to help answer that question is a decent starting point. However, for a variety of reasons, we caution against blindly accepting this rule and applying to your situation.

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