How Good is Recent Employment Data

Very good.

Good news doesn’t sell, but the employment statistics are very strong, and have been for some time.  Unemployment claims data this week have brought the 4 week running average unemployment claims number down to the lowest it has been since April 2000.  Remember early 2000?  I do – I was trying to hire people to staff a growing company and had trouble finding applicants who were even remotely qualified for the positions we needed to fill.  Michael Shaoul, Chairman of Sincere&Co asset management, pointed out in his newsletter today that the April 2000 stats were the best since 1973.  He also demonstrates that if you adjust today’s unemployment claims numbers for the larger size of today’s workforce, it indicates that fewer people are getting laid off as a percentage of the workforce than at any time EVER since they started collecting data.

Now that doesn’t mean that it isn’t hard for many to find a job, or that they will like the size of the paycheck they get.  But it does indicate that employers are loathe to lose the employees they currently have, and that indicates, I think, a certain sense of confidence on the part of corporate America about the near term business outlook.

James Kinney is a fee only financial planner and owner of Financial Pathway Advisors in Bridgewater New Jersey. 

How to Answer the Question: How Are My Investments Performing?

This seems like it should be an easy question to answer, but in fact it is very difficult. There are a few ways to look at the question.

Compare to Need. This is the easiest way to measure performance. Let’s say you have created a detailed financial plan that says that if you earn 5% average rate of return on your money, you will be able to achieve all of your goals (assuming a 3% annual increase in the cost of living). Periodically you look at the total amount of assets you have available, compare to the plan and see that you are on or ahead of the projected path. You might choose to sit back and relax and assume that all is well.

The beauty of this approach is that it frees you from chasing returns by taking more risk than you need to take. Who cares what the stock market does?   As long as you average 5% return year after year, you can relax, right?

The problem with this approach is that it doesn’t look at how much risk you are taking to earn the return you are earning. Consider

Compare to Your Neighbors. Your neighbors brag about the hefty returns they earned on the stock portfolios in 2013 and 2014. There is some temptation to compare your own results to their reports of fabulous returns. If they can earn those returns – why can’t you? After all, isn’t keeping up with the Joneses our national pastime?

The problem with this approach is that neighbors only tell you when they are doing well. No one brags about their investment IQ when their portfolio is down 25%. Again, what is missing (as with above) is a measure of risk.

Compare to “The Market”. To most people, “the market” means the S&P 500 index. But does this make any sense? Some years the S&P 500 performs spectacularly – such as 2013 and 2014. In those years, the only way you could keep up with the S&P 500 is to invest in an S&P 500 index fund. Other years (2000-2002, 2007-2008, and…at least so in 2015) the S&P trails most other asset classes and you could beat the index with bank CD’s. About the only portfolio it makes sense to compare to the S&P 500 is an all domestic stock portfolio. If you are in a diversified portfolio (as most investors are) then comparing to the S&P 500 index tells you more about how the S&P 500 did than how your portfolio performed. If your diversified portfolio exceeded the S&P 500, then the S&P likely underperformed other investments (like bonds, international stocks, real estate, etc.). If your portfolio underperformed, chances are the S&P was flying pretty high.

The importance of measuring risk. The problem with comparing any portfolio to ANYTHING else is that you can’t compare performance without comparing risk. Consider the following two portfolios – both of which produce the exact same return over a five year period, and see which one you prefer:

Year Portfolio 1 Portfolio 2
1 +30% +10%
2 -20% -5%
3 +40% +10%
4 -30% 0%
5 +25% 10%


OK, let me save you the math. Both portfolios generated an average return of 5%. But almost any rational person would have preferred Portfolio #2 during this time period, all other things being equal. Why? Because although past performance can’t predict the future – it sure seems likely that the risk of a big loss is much bigger in Portfolio 1 than in Portfolio 2. More importantly, I was not paid to take on that risk – I earned 0 excess return. An investor in Portfolio 1 could have done just as well in another portfolio and gotten much better sleep at night.

How to Incorporate Risk into Portfolio Performance Measures.

Comparing to Need. As we just demonstrated, not all 5% portfolios are created equal. To what extent can you anticpate that you will continue to receive 5% in the future? How exposed is your portfolio to a future market shock? Considering the past “volatility” or variability in returns can help answer these questions – but you can’t do this solely by comparing your average return to what you hoped to receive.

Comparing to your Neighbors. If I am in portfolio 2 and my neighbor is in Portfolio 1, chances are he is trying to mock my relatively modest return in year 3. He conveniently forgets his dreadful result in year 2, and is overexposed to risky investments which will cause him to give back most of his stellar return in year 4. But unless my neighbor shares his IRA statement with me, I don’t know how much risk he is taking compared to my own portfolio – so any comparison is pointless.

Comparing to an Index. There are two ways to incorporate an allowance for risk into a benchmark comparison. First you can compare to a blended index which you believe should have a risk profile that meets your own investment goals. More knowledgeable investors will look at something called “risk adjusted return”. When looking at a portfolio analysis report for the above two portfolios, Portfolio 1 would have a much lower “risk adjusted return” than Portfolio 2. It would in effect be assessed a performance penalty for the additional risk it took on. One commonly used measure of risk adjusted return is a statistic called “Alpha”. If a portfolio analysis report shows a portfolio has a positive “alpha” compared to a benchmark that means that the return after adjusting for risk is favorable.

This may be more detail than most investors want to go with their statistical analysis – but we need to go there if we want to compare your portfolio performance to any benchmark. Otherwise, you are prone to making the mistake of sitting in Portfolio 1 thinking you are doing just fine because your long term rate of return is the same as Portfolio 2!

NOTE TO FINANCIAL PATHWAYS INVESTORS. For all the reasons described above I will be changing benchmarks on performance reports this quarter and next to offer a more risk appropriate performance comparison. For instance, income portfolios will be compared to a blended index that is 40% stocks and 50% bonds and 10% cash. Moderate portfolios will be compared to a blend that is 60% stocks, 35% bonds, and 5% cash, while Growth Portfolios will be compared to a blend that is 80% stocks and 20% bonds. Some of you may see the new benchmark on this quarters reports, others may not see it until next quarter.



Sorry, you don’t have enough money to qualify for government assistance!

OK, I can’t stand it! I am going to risk treading into political commentary.

The Affordable Care Act needs to be fixed! It is complete lunacy. I don’t know what Congress was drinking when they came up with the mechanism for “subsidizing” health insurance premiums, but they need to go back to the drawing board.  We actually now have a system where people do not qualify for government benefits because they do not have enough money.

I am not completely against the ACA. I understand the individual mandate, and I understand why it is important to a functioning insurance market. And if you are going to mandate people buy a policy, you need a mechanism so that those of modest means can afford it – hence the need for premium subsidies. But as usual the devil is in the details, and Congress screwed this up big time.

One of the groups that stood to benefit big time from the ACA was early retirees. In the past if you retired before Medicare eligibility age, you often found yourself without access to affordable insurance at a time when you are very vulnerable to health issues.   With ACA, this should be less of a problem. And in truth, we work with many early retirees who are now able to obtain coverage during these early retirement years which might have been problematic in the past.

Here is the problem I have with the system. The subsidies are given out based solely on income. What is wrong with that, you may ask? Everything. Income is not a very good measure of wealth when it comes to retirees. Anyone with substantial savings outside of retirement accounts and simply defer any social security and pension income and live off savings. A fairly wealthy retiree can thus live pretty well while showing a very low income for several years. Doing so would qualify the individual to receive premium subsidies – even if they have a 7 figure investment account. There’s nothing wrong with doing that either!  It is legal, and the government rewards you with a healthy premium subsidy for doing it. In fact, we may have helped some of you who are reading this to structure your income in just this way for this specific purpose.

But just because it is the law doesn’t make it good public policy.

To understand why the system is the way it is, understand first that the subsidy people use to help pay for premiums is really a tax credit that the IRS advances to the taxpayer based on their estimate of what income will be. Never before has the government advanced people money in anticipation of a future tax liability.   The income estimate on which eligibility for subsidies is based needs to be made over a year in advance, based on taxpayers own inherently inaccurate “ballpark” estimates of what their income might be. If the taxpayer ends up ultimately making more money than they thought they may find themselves in hoc to the IRS for thousands of dollars which they already spent on health insurance.

Consider an early retiree, not yet Medicare eligible, of more modest means. Retired early on social security, collects a pension, and this past year withdrew a modest amount of money from her IRA to meet some unexpected expenses. The IRA withdrawals are of course taxable income – and when added to social security and pension it was enough to kick this person over the income threshold for the tax credit. When she files her taxes she finds that the IRS wants $6000 in subsidies which were given to her to help buy her health insurance. If the person taps her only resource (retirement accounts) to pay back the government – it will boost her income again, ensuring that she will not qualify for subsidies again this year.

So how is this system fair?   The person trying to get by on pension and social security with a modest retirement account is considered “too wealthy” to qualify for subsidies. But the reason her income is too high is that she doesn’t have a big pool of savings to draw on.  If she had a lot more money (in non-retirement accounts) she might still qualify for taxpayer subsidies. So the TRUTH IS THAT THIS PERSON DOES NOT GET A HEALTH CARE PREMIUM TAX CREDIT BECAUSE SHE IS NOT WEALTHY ENOUGH TO QUALIFY!

It is like a tax refund in reverse. Instead of filing your tax return and finding that you paid too much to the IRS and are due a refund, in this case you file a tax return to find out that THE IRS HAS PAID YOU TOO MUCH and THEY WANT THEIR MONEY BACK.

OK I am done ranting. And I’m not expecting anything to be done about it because the Dems are too busy denying that any problem exists and the Reps too busy trying to kill it to bother helping to fix it. So meanwhile my best advice when it comes to ACA subsidies is that you actually should look this gift horse in the mouth.


An Unholy Alliance?

I haven’t been this disillusioned since everyone’s favorite communists, Ben and Jerry, sold their ice cream enterprise to the man for $600 million!

Learnvest has been a company on a mission for the last several years, trying to democratize the financial advice industry. They preached a mission of bringing unbiased fee-only financial advice to the masses through the magic of the internet. As a fee only advisor, I share in the mission (if only on a local level), and so am sympathetic to their cause.

This past month, Learnvest was sold to (it pains me to say it) Northwest Mutual Insurance. It just goes to prove the old adage:
If you can’t beat ‘em, just offer them a boatload of money and they will get out of your way!

Now I have nothing against Northwest Mutual – except as with all insurance companies their idea of financial planning and advice seems to be “buy our insurance products and everything will be ok.” Not exactly consistent with the stated mission of Learnvest’s very telegenic and charismatic founder.

I suspect there was a lot of vulture, I mean, venture capital poured into Learnvest. I would guess said financiers saw an opportunity to get out for a ginormous profit while Northwest Mutual sees a way to gain access to millions of mostly younger investors – an ideal market niche for life insurance. Ultimately the founder may have had little say in the matter (I really have no idea…). And in any case, there is nothing wrong with selling your start-up for a huge profit, it is our capitalist free enterprise system at its finest. But how can Learnvest seriously go forward preaching about “independence” and “unbiased” advice now that they are sleeping with the enemy?
Anyone who thinks any insurance company decision is based on any motive other than to sell more insurance to more people probably believes that Ben and Jerry donated all the proceeds from the sale of their company to worthy charitable enterprises and that Al Gore invented the Internet.

Important Lessons from Market History


Investors ignore the lessons of history at their own peril!

As I was spending an exciting Friday night playing with market analytics software, I noticed some interesting parallels between the late 1990s and the past few years.  Starting about 1995, investors started to strongly favor one asset class above all others.  If it wasn’t a growth stock, no one would buy it.  Most of us remember this as the “internet stock bubble” – but investors poured money into large cap growth stocks as well, fueling an incredible run up in the growth heavy S&P 500 index.  The below chart compares the S&P 500 performance (orange) with a well diversified portfolio with 35% US Stock blend, 15% international, 10% Real Estate Investment Trusts, and 40% fixed income.1995-2000

A $10,000 investment in an S&P 500 index fund in 1995 would have grown to a whopping $35,000 in just 5 years!  Meanwhile, the boring diversified portfolio had “only” grown to roughly $2o,000.  Investment advisors in business at the time remember this as the time when clients would threaten to fire them if they refused to abandon their principle of diversification to chase ultra hot growth stocks.

What happened next is where we learn a lot about the value of sticking to a sound investment strategy.  Here is the same chart, extended to include the next 5 years, 2000 through 2005.


So what we see here is that sticking with the diversified portfolio – even while the neighbors and co-workers were all bragging about “making a killing” in internet stocks, would have paid off quite well.  While over the full 10 year time period, both portfolios managed roughly the same return, the S&P 500 investor suffered a whole lot more pain along the way!  But most investors in the 1990’s were late to the party.  They didn’t experience the bull benefit of the 1995-2000 increase.

Consider two investors who invested a big wad of cash in January of 2000.  One chose an S&P 500 index fund which was red hot, the other listened to his somewhat conservative financial advisor and invested in the diversified portfolio of stocks, bonds, and real estate.  How did they fare during the following 10 years (which were referred to in the financial media as “the lost decade”)?


The so-called lost decade was not lost for the guy in the diversified portfolio.  He doubled his money even while the S&P investor made NOTHING for 10 years!   This in spite of the “Great Recession” and financial crisis of 2008!

So what is the lesson for today?

For the last couple of years, markets seem to have moved back to a belief that the S&P 500 and U.S. stocks are the only place one needs to invest.  We are four years beyond any talk of “The Lost Decade” and investors have watched the S&P 500 outperforming all other investments once again.  In comparison, returns on the staid old diversified portfolio seem kind of boring in comparison.  International stocks haven’t done well for a few years.  Bonds are doomed the “experts” tell us (and have been saying for 3 or more years now, while they have continued to provide stable returns).  U.S. stocks are the only place a sane investor should want to be right?


Am I the only one who sees a similarity here to the first chart from 1990-1995?

Now, I’m not predicting a market crash, I don’t have a crystal ball.  Some very smart people say the market is going to keep going up.  Other very smart people say it is going to go down.  A few doomsayers selling books say that civilization will be coming to an end and we will be foraging for food in a zombie apocalypse.  That’s pretty much the way it is every year with the stock market.

With history as my guide, I would never bet against the long term power of diversification.  When the market does fall, it is typically the previous market darling that has the farthest to fall – and why not?  Popularity drives up prices and valuations. In contrast, small cap and value stocks did not suffer much in the bear market of 2000-2003 largely because they were already (relatively) unpopular before the crash, and so did not have far to fall today.  Perhaps the same could be said for today’s laggards (international stocks and emerging markets, perhaps?)

DISCLAIMERS:  Investing is risky, and you can lose money. Diversification does not prevent losses, and may not work to reduce risk in every situation.  Charts above are estimates with data compiled from returns measured on commercial stock indices. These are hypothetical and not representative of any specific investment product or strategy.


Financial Pathways Approved to Use Dimensional Funds

Dimensional Fund Advisors is the biggest mutual fund company you never heard of.

And they are unlike any other mutual fund company.  The firm does not sell directly to investors at all.  They do not advertise (at least not as far as I have ever seen).  They do not pay commissions to brokers or advisors.  They don’t have wholesalers sending me chocolates, buying me lunch, and telling me how they are so much smarter than all the other fund companies.  They do not engage in “revenue sharing” in which they pay brokerage platforms (like TD Ameritrade, Etrade, etc.) to be on a “No Transaction Fee” platform.  In fact, they don’t do any of the normal things mutual fund companies do to sell their product.

Yet Dimensional is one of the fastest growing fund companies in the industry.  What’s the deal?  How is a company with little visible marketing effort so phenomenally successful?

Well, maybe they just have a better way to invest.

I had heard of DFA through reputation.  I knew that they had a unique approach to low cost “passive” investing which was built on the work of several Nobel Prize winning economists.  (passive is the wrong word for what they do, but I will use it to differentiate from traditional “stock picking”)   As I have been shifting more and more toward low cost investment products, I wanted to know more, so I gave them a call.

Here again, DFA is different.  Their initial response to my call was not to tell me how great their product is, but to grill me on MY business.  They wanted to know about how I work with clients, about my investment philosophy, how I charge clients, and more.  Once they were satisfied that my business was a good match, I was informed that I would not be able to use their products until I went through a 2 day training class in California or Texas.

Well, I must say, California sounded good to me in February, and I did want to learn about the DFA secret sauce, so off I went.   During the two days I spent in class listening to various PhDs and Nobel prize winning economists speak about investing, I felt somewhat intellectually inferior – but I returned a convert.

Here in a very simplistic nutshell is what makes DFA funds unique.

  • They use an index like approach to gain low cost access to nearly the entire market. Cutting down on fees means higher returns all else being equal.  That is just common sense and doesn’t take a PhD.
  • They do not use a traditional index like the S&P 500, but build their own index re-weighted and optimized based on those factors (dimensions, hence the name) which academic research has demonstrated to drive long term equity returns.
  • They keep trading costs and trading volume to an absolute minimum which cuts expenses and reduces tax burden on investors.
  • While most fund companies focus on “how can we get the most investors to use our fund” the focus at Dimensional always seems to be on improving efficiency, reducing costs, and providing the best risk adjusted returns to end investors.

Proof is in the pudding, and this is all just academic theory until it is put to work.  My own analysis shows that the funds and indices they are modeled on do in fact outperform broad market indices consistently over most 10 year time periods.  Performance is also far better and more consistent than the vast majority of actively managed mutual funds.  Of course, past performance doesn’t predict or guarantee future results, and this is still investing in markets which entails risk of loss, but I find the research is compelling, the logic is sound, and the funds are as cheap as they come, so our investment clients can expect to start seeing Dimensional products in their portfolios in coming months.

To learn more about Dimensional, you can read this recent cover article in Barrons, or view the below videos explaining Dimensional’s history and philosopy.

video platformvideo managementvideo solutionsvideo player
video platformvideo managementvideo solutionsvideo player

Fiduciary Responsibility and Congress

Maybe its time Washington lives up to the same standards they want to impose on Wall Street

The Obama administration is now coming out in favor of proposals which would require investment advisors (including brokers) to act in their client’s best interest.  Those of us who are Registered Investment Advisors have been subject to this standard since 1940 and make a fine living trying to do the right thing, but Wall Street brokerage firms are exempt under current law.  They don’t have to act int their clients best interest – their only have to not do anything too bad.  (that’s my interpretation of the rules anyway).   So Wall Street hates the idea of a fiduciary obligation, and spends lots of money trying to convince Congress that bad things will happen to people if the financial industry can’t sell them expensive complicated products they don’t understand, don’t want, and don’t need.

Readers know I am no big fan of Wall Street. And I can’t see how a little “acting in the client’s best interest” wouldn’t kill the financial industry (but the fact that they claim it will does say a lot about Wall Street!)

But President Obama’s new push has me wondering.  Why can’t we have a law that requires CONGRESS and the ADMINISTRATION to be fiduciaries when it comes to the retirement funds THEY control?  If an investment advisor stole from a client’s account to satisfy his own spending needs, that advisor would go to jail (even without a fiduciary obligation).  But now those who are in control of a bankrupt Medicare system and an actuarially broken Social Security system are going to tell financial advisors that they should act in their client’s best interest?

Hypocrisy and Washington always have gone together like peas and carrots.  This is just another fine example.

Looking back at some absolutely awful predictions 

Why you can’t believe everything you read, see, or hear in the financial news.

So the market has been going up now since 2011 without a correction of 10% or more.  That has a lot of people worried.  “The market is near all time highs” I am told, “it must be time to get out.”

One thing you learn in this business, however, is that nothing “must be”.  And truth is, I’ve been hearing very smart people tell me why it is a terrible time to invest in stocks pretty much non-stop almost as long as I’ve been in the business.

The financial media make their living stoking fear and greed in the hearts and minds of investors.  What is interesting is that, while we advisors must take great pains to explain that our predictions are not guaranteed, and that anything could happen – the media are under no obligation whatsoever to disclose that they actually are clueless.  They can say whatever they want.  They can also rely on the fact that 99.9% of readers will forget about any specific prognostication within a few days, so they don’t even need to be right.

Well, just for fun, let’s take a look at what it might have cost you to follow certain “timely advice” from the financial media.

Publication:  Money Magazine August 1997.

Headline:  Don’t Just Sit There – Sell Stock Now! 

Synopsis: The magazine recommended selling 20% of your stock holdings to lock in gains and avoid approaching calamity.

What actually happened:  The publication was followed by 3 years of extremely strong gains by the S&P 500, with annualized gains in excess of 25%.

Publication:  Business Week, August 13, 1979

Headline:  The Death of Equities:  How Inflation is Destroying the Stock Market

Synopsis:  The magazine claimed that “the death of equities….is a near permanent condition” suggesting that investors should give up on stocks and invest in gold.

What actually happened:  $10,000 invested in the broad stock market in August of 1979 would have grown to $190,000 over the next 30 years.  A $10,000 investment in gold in 1979 (apx price = $300/oz) would have grown to only $31,350 over the same 30 year period.  The nation’s most prestigious business publication at the time couldn’t see that stocks were poised to enter the longest bull market in history.  Stocks would post negative returns in just 3 calendar years in the next 2 decades (including 1994 with a paltry loss of -1.4%)

Publication:  Money Magazine, April 2004

Headline:  Why Ipod Can’t Save Apple

Synopsis:  Hindsight is great – but not so great for the writer of this article!   Speaks for itself.  In fact, I’m surprised they haven’t pulled this article from web out of sheer embarrassment.

What actually happened:  $10,000 invested in Apple at $25/share in 2004 would be worth (hold onto your hat) over $380,000 today, only 10 years later!  Apple has probably made more people rich than any other stock in American history.  Not this reporter apparently.

Publication:  Money Magazine, December 2001

Headline:  “America’s Safest Stock” “As Close as You’ll Get to Owning an Invincible Earnings Machine.”

Synopsis:  I hate to constantly pick on Money Magazine, but who can resist this one?  The article touted none other than Fannie Mae as America’s Safest Stock in 2001.

What actually happened:  Well, you may already know the rest of the story.  Fannie Mae had to be rescued and nationalized by the U.S. government during the financial crisis of 2008.  Investors were largely wiped out.

Ok, one more?

Publication:  Forbes July 19, 1993

“Bearish on America” “Sell US stocks, buy European and Asian says Morgan Stanley’s Barton Biggs”

Synopsis:  Forbes is known to take a conservative political stance, remember Stephen Forbes was a onetime Republican presidential candidate.  The position was that Clintonian policies were bad for America.

What actually happened:  Stocks (S&P 500) generated a compound return of 18.5% over the next 7 years.  Maybe political opinions and investment advice shouldn’t mix?


We could go on and on.  As you look back over time it becomes abundantly clear is that opinions expressed in financial media, books, talk shows, etc. regarding the direction of markets or the broader economy are, if not completely useless, then pretty darn close to useless.  Don’t invest based on what you read in the media or see on the internet.  They are in business to capture readers and viewers for their advertisers, not provide sound investment advice!




Proper Use of Target Date Funds in your 401k.

Retirement Target Funds are Designed to be a Solo Player

According to the Employee Benefit Research Institute (EBRI), 74% of 401k plans offer some kind of “target date retirement” funds. These are funds which purport to diversify your investment across asset classes based on your estimated retirement date. The further away the retirement date, the heavier the allocation to equities (stocks). As the target date draws nearer (or passes, indicating the individual may already be in retirement) the asset allocation shifts more in favor of fixed income and cash investments. The funds are supposed to be simple one stop solutions to the question of how to invest your 401k funds for retirement.

The EBRI also states that 41% of investors use the target date funds in their investment mix, and 15% of 401k assets are held in target date funds. The implication (confirmed by my observations in the field) is that many people use Target Date Funds in their 401k, but it is usually not their ONLY holding.
The problem is that mixing Target Date Funds with other investments may defeat the very purpose of the fund.

Used correctly, a Target Date Fund should usually be the only holding in your 401k. Why is this? Aren’t you supposed to diversify your holdings? Well, yes and no. Of course, diversification is important. It is not good to have all of your assets in stocks (unless you are a young and aggressive investor). Likewise, being all in cash likely won’t help you achieve your goals. Balance is important. But the Target date funds are already diversified by their very design. They split their investment dollars amongst many other mutual funds covering all major asset classes, according to how the issuing company feels that the average person retiring at that date ought to be invested. Since the fund has diversified for you – there is really no need to diversify further.

What I see people do (and supported by the EBRI statistic above) is invest a portion of their portfolio in the Target Date Fund, and then add several more investments around it. Maybe the thinking is that investing can’t really be this simple – I must have to do more! But these additional funds are unnecessary for most investors, and make sense only if you are trying to accomplish one of the following objectives:
a) You are retiring near the Target Date, but are adding stock investments because you believe you are more aggressive than the average investor your age.
b) You are retiring near the Target Date, but are adding cash / bond investments because you believe you are more conservative than the average investor your age.
c) You are much smarter than the people making the asset allocation choices at the mutual fund company in question, and are adding positions to compensate for errors in the fund’s investment strategy (Just kidding on this one).

While this can work for some investors, it is difficult to really understand how the funds you have added to the Target Date funds will impact your risk exposure. This is why mixing the Target Date funds with other investments can defeat the purpose of owning a Target Date fund in the first place.
If you feel the Target Date allocation is too aggressive or too conservative for your taste, there is a much easier solution. If you are more aggressive than the average investor of your age, then choose a Target Date fund 5 years later than your actual planned retirement. If you believe you are more conservative, choose a date 5 years sooner than your planned date. This way you can be pretty sure you have a fund which is well diversified, consistent with your retirement goal, and offering a level of risk you can live with.

Questions about your 401k or other investments? Give us a call. Our fee only financial planning services and advice can help you make better financial decisions and keep you on track to achieve your most important goals.

OPEC Wages War on U.S. Once Again

But you won’t hear much complaining from Congress or the President (yet)

OPEC is waging war against the US with a new weapon. One we’ve never seen before. For the last 35 years or so, OPEC’s weapon of choice was the ability to turn off its oil spigots. The rest of the world would shudder at the thought.

Gradually though, OPEC has been losing relevance. They now only control about 40% of global output. Over the last three years, that influence has been slipping faster than ever as U.S. oil production skyrockets.

So faced with losing all its power, OPEC is trying a new strategy. Pump as much oil as possible and, in concert with the U.S. shale producers, flood the market with cheap oil. Why would they want the price of oil low? That is indeed the question.

It really makes no sense from an economic point of view. After all, if OPEC were to cut production by a few million barrels a day, they could remove the entire current surplus and the price of oil would likely go back up to $80-90 per barrel – almost double. Their revenues would be far greater for selling less oil. It seems to be in their self interest if their goal is simply to maximize revenues.

But if their goal is to once again become a force in the global economy, then their current strategy might make sense. They need to cripple the U.S. shale drillers and Canadian tar sand processors who are stealing their market share. They realize surely that if they cut production they will make more money – but so will the other world players (who will keep producing full tilt). Maybe they just think it’s not fair that they do all the work while the other 60% of oil producers reap the benefits – or perhaps they really do intend to destroy their competition.

What OPEC has that none of the other producers have is the ability to produce lots of oil cheaply. Their oil sits under desert sands in huge wide open deposits. Stick a straw in the ground and oil comes up; no deep ocean drilling, no boiling tar sand to release trapped oil, no fracking or miles of horizontal drilling under the ground. So OPEC knows it can survive regardless of the price of oil. And it knows that many of its competitors cannot.

If OPEC persists with this strategy, U.S. consumers will be seeing very cheap gas prices for quite some time. Our domestic oil producers won’t be so happy. Nor will the high yield bond markets. Drilling for oil takes a lot of money, and many oil drillers have borrowed lots of money in their quest for the Texas Tea. The problem is they need to be selling oil at $80 a barrel to make enough money to pay back their loans. Cheap oil on a sustained basis means the more indebted drillers will likely default and declare bankruptcy.

I sense a big yawn coming from most readers. Who cares? I LIKE paying $1.95 a gallon! But it may impact all of us through the financial markets. No one thought the mortgage crisis was going to hurt anyone except a few sub-prime lenders. Wrong! If default rates on high yield bonds escalate, I would be surprised if it does not send shock waves through other markets.

The risks aren’t limited to junk bonds. Emerging market debt is another area that could be at risk (and which also may have broader implications). Venezuela is almost certain to default on debt (even without the oil price collapse, they were at risk. Russia is increasingly a threat as well. On the flip side, emerging markets that import a lot of oil (India, Indonesia, Thailand, Philippines) stand to benefit greatly. Still, we learned from the financial crisis that the financial system is highly interconnected, and pain in one place, whether it be US junk bonds or emerging markets debt, can quickly spread throughout the financial system and economy. It will pay to be watchful.

So what is an investor to do? Well, as you know you cannot go running to cash every time there is the threat of a crisis. There is ALWAYS the threat of a crisis. And it is just too soon to know how this might play out. Consumers will benefit from low prices. So will many businesses. And low prices will eventually cause cutbacks in supply as producers choose not to drill new wells at these prices, thus reducing the glut which is driving prices down. But this takes time. And the driller who is struggling to pay his debts is unlikely to stop drilling – even $40 a barrel is better than selling nothing at all! But some experts are predicting that the farther the price falls today, the more dramatic the future supply cutbacks may become – and if reduced supply runs headlong into increased demand from businesses and consumers gorging on cheap energy – lookout. In that environment prices may bounce back with a vengeance and the survivors (including the OPEC gang but also our energy majors and less indebted shale drillers) will be duly enriched. Just don’t expect this to play out in months; it will more likely take years. These are interesting times to be an investor.