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Market Prediction Season in Full Swing

January 3, 2017

Marcus Winbush, CFP® — CEO, True North Capital Alliance

new-years-eve-1886397_960_720-1

The close of each calendar year brings with it the holidays as well as a chance to look forward to the year ahead.

In the coming weeks, investors are likely to be bombarded with predictions about what the future, and specifically the new year, may hold for their portfolios. These outlooks are typically accompanied by recommended investment strategies and actions intended to help investors avoid suffering the next crisis or missing out on the next “great” opportunity. When faced with recommendations of this sort, it would be wise to remember that investors are better served by sticking with a long-term plan rather than changing course based on predictions and short-term calls.

Predictions and Portfolios

One doesn’t typically see a forecast that says: “Capital markets are expected to continue to function normally,” or “It’s unclear how unknown future events will impact prices.” Predictions about future price movements come in many shapes and sizes, but most of them tempt the investor into playing a game of outguessing the market. Examples of predictions like this might include: “We don’t like energy stocks in 2017,” or “We expect the interest rate environment to remain challenging in 2017.” Bold predictions may pique interest, but their usefulness in application to an investment plan is less clear.

Steve Forbes, the publisher of Forbes Magazine, once remarked, “You make more money selling advice than following it. It’s one of the things we count on in the magazine business—along with the short memory of our readers.”1)Excerpt from presentation at the Anderson School of Management, University of California, Los Angeles, April 15,2003. Definitive recommendations often attempt to identify value not currently reflected in market prices. Though they may give investors a sense of confidence about the future, how accurate do these predictions have to be in order to be useful?

Consider a simple example where an investor hears a prediction that equities are currently priced “too high and now is a better time to hold cash.” If we say that the prediction has a 50% chance of being accurate (equities underperform cash over some period of time), does that mean the investor has a 50% chance of being better off? It is crucial to remember is that any market-timing decision is actually two decisions.

In this example, if you decided to change your allocation and sell equities, you would be making a decision to get out of the market, but you would also have to determine when to get back in. If we assign a 50% probability of the investor getting each decision right, that would give the investor a one-in-four chance of being better off overall. Even if we increase the chances of the investor being right to 70% for each decision, the odds of the investor being better off would still be shy of 50%. Still no better than a coin flip. You can apply this same logic to decisions within asset classes, such as whether to be invested in stocks only in your home market vs. those abroad. The lesson here is that the only guarantee for investors making market-timing decisions is that they will incur additional transaction costs due to frequent buying and selling.

The track record of professional money managers attempting to profit from mispricing also suggests that making frequent investment changes based on market calls may be more harmful than helpful. Exhibit 1, which shows S&P’s SPIVA Scorecard from midyear 2016, highlights how managers have fared against a comparative S&P benchmark. The results show that the majority of managers underperformed over both short and longer horizons.

Exhibit 1. Percentage of U.S. Equity Funds That Underperformed a Benchmark

exhibit-1-percentage-of-us-equity-funds

Source: SPIVA® U.S. Scorecard, “Percentage of US Equity Funds Outperformed by Benchmarks.” Data as of June 30, 2016. (SPIVA®, S&P Indices Versus Active, measures the performance of actively managed funds against their relevant S&P index benchmarks.)

Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.

Rather than relying on forecasts that attempt to outguess market prices, investors can rely on the power of the market as an effective information processing machine to help structure their investment portfolios. Financial markets involve the interaction of millions of willing buyers and sellers. The prices they set provide positive expected returns every day. While realized returns may be different than expected returns, any such difference is unknown and unpredictable in advance.

Over a long-term horizon, the case for trusting in markets and using discipline to stay invested is clear. Exhibit 2 shows the growth of a U.S. dollar invested in the equity markets from 1970 through 2015, and it highlights a sample of several bearish headlines over the same period. An investor who reacted negatively to these headlines would have potentially missed out on substantial growth over the coming decades.

Exhibit 2. Markets Have Rewarded Discipline. Growth of a dollar–MSCI World Index (net dividends), 1970-2015

exhibit-2-predictions

In U.S. dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. MSCI data © MSCI 2016, all rights reserved.

Conclusion

As the new year begins, it is natural to reflect on what went well last year and what you may want to improve upon this year. Within the context of an investment plan, it is important to remember that investors are likely better served by trusting the plan they have put in place and focusing on what they can control, such as diversifying broadly, minimizing taxes, and reducing costs and turnover. Those who make changes to a long-term investment strategy based on short-term noise and predictions may be disappointed by the outcome.

In the end, the only certain prediction about markets is that the future will remain full of uncertainty. History has shown us, however, that through uncertainty, markets have rewarded long-term investors who are able to stay the course.


Source: Dimensional Fund Advisors LP.

True North Capital Alliance has no affiliation with DFA; however, the firm uses DFA funds and strategies in developing its investment models.

True North Capital Alliance is registered as an investment advisor with the states of Minnesota and Texas. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability.

Diversification does not eliminate the risk of market loss. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

References   [ + ]

1. Excerpt from presentation at the Anderson School of Management, University of California, Los Angeles, April 15,2003.
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Market Prediction Season in Full Swing

January 3, 2017

By Marcus Winbush, CFP® — CEO, True North Capital Alliance

The close of each calendar year brings with it the holidays as well as a chance to look forward to the year ahead.

In the coming weeks, investors are likely to be bombarded with predictions about what the future, and specifically the new year, may hold for their portfolios. These outlooks are typically accompanied by recommended investment strategies and actions intended to help investors avoid suffering the next crisis or missing out on the next “great” opportunity. When faced with recommendations of this sort, it would be wise to remember that investors are better served by sticking with a long-term plan rather than changing course based on predictions and short-term calls.

Predictions and Portfolios

One doesn’t typically see a forecast that says: “Capital markets are expected to continue to function normally,” or “It’s unclear how unknown future events will impact prices.” Predictions about future price movements come in many shapes and sizes, but most of them tempt the investor into playing a game of outguessing the market. Examples of predictions like this might include: “We don’t like energy stocks in 2017,” or “We expect the interest rate environment to remain challenging in 2017.” Bold predictions may pique interest, but their usefulness in application to an investment plan is less clear.

Steve Forbes, the publisher of Forbes Magazine, once remarked, “You make more money selling advice than following it. It’s one of the things we count on in the magazine business—along with the short memory of our readers.”1)Excerpt from presentation at the Anderson School of Management, University of California, Los Angeles, April 15,2003. Definitive recommendations often attempt to identify value not currently reflected in market prices. Though they may give investors a sense of confidence about the future, how accurate do these predictions have to be in order to be useful?

Consider a simple example where an investor hears a prediction that equities are currently priced “too high and now is a better time to hold cash.” If we say that the prediction has a 50% chance of being accurate (equities underperform cash over some period of time), does that mean the investor has a 50% chance of being better off? It is crucial to remember is that any market-timing decision is actually two decisions.

In this example, if you decided to change your allocation and sell equities, you would be making a decision to get out of the market, but you would also have to determine when to get back in. If we assign a 50% probability of the investor getting each decision right, that would give the investor a one-in-four chance of being better off overall. Even if we increase the chances of the investor being right to 70% for each decision, the odds of the investor being better off would still be shy of 50%. Still no better than a coin flip. You can apply this same logic to decisions within asset classes, such as whether to be invested in stocks only in your home market vs. those abroad. The lesson here is that the only guarantee for investors making market-timing decisions is that they will incur additional transaction costs due to frequent buying and selling.

The track record of professional money managers attempting to profit from mispricing also suggests that making frequent investment changes based on market calls may be more harmful than helpful. Exhibit 1, which shows S&P’s SPIVA Scorecard from midyear 2016, highlights how managers have fared against a comparative S&P benchmark. The results show that the majority of managers underperformed over both short and longer horizons.

Exhibit 1. Percentage of U.S. Equity Funds That Underperformed a Benchmark

exhibit-1-percentage-of-us-equity-funds

Source: SPIVA® U.S. Scorecard, “Percentage of US Equity Funds Outperformed by Benchmarks.” Data as of June 30, 2016. (SPIVA®, S&P Indices Versus Active, measures the performance of actively managed funds against their relevant S&P index benchmarks.)

Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.

Rather than relying on forecasts that attempt to outguess market prices, investors can rely on the power of the market as an effective information processing machine to help structure their investment portfolios. Financial markets involve the interaction of millions of willing buyers and sellers. The prices they set provide positive expected returns every day. While realized returns may be different than expected returns, any such difference is unknown and unpredictable in advance.

Over a long-term horizon, the case for trusting in markets and using discipline to stay invested is clear. Exhibit 2 shows the growth of a U.S. dollar invested in the equity markets from 1970 through 2015, and it highlights a sample of several bearish headlines over the same period. An investor who reacted negatively to these headlines would have potentially missed out on substantial growth over the coming decades.

Exhibit 2. Markets Have Rewarded Discipline. Growth of a dollar–MSCI World Index (net dividends), 1970-2015

exhibit-2-predictions

In U.S. dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. MSCI data © MSCI 2016, all rights reserved.

Conclusion

As the new year begins, it is natural to reflect on what went well last year and what you may want to improve upon this year. Within the context of an investment plan, it is important to remember that investors are likely better served by trusting the plan they have put in place and focusing on what they can control, such as diversifying broadly, minimizing taxes, and reducing costs and turnover. Those who make changes to a long-term investment strategy based on short-term noise and predictions may be disappointed by the outcome.

In the end, the only certain prediction about markets is that the future will remain full of uncertainty. History has shown us, however, that through uncertainty, markets have rewarded long-term investors who are able to stay the course.


Source: Dimensional Fund Advisors LP.

True North Capital Alliance has no affiliation with DFA; however, the firm uses DFA funds and strategies in developing its investment models.

True North Capital Alliance is registered as an investment advisor with the states of Minnesota and Texas. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability.

Diversification does not eliminate the risk of market loss. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

References   [ + ]

1. Excerpt from presentation at the Anderson School of Management, University of California, Los Angeles, April 15,2003.
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Fed Raised Rates and Signaled More Increases to Come

December 20, 2016

By Marcus Winbush, CFP® — CEO, True North Capital Alliance

At its December meeting, the Federal Reserve’s policy committee voted unanimously to raise the federal funds rate by a quarter of a percent, setting the new range at 0.50 to 0.75 percent. Rates have hovered near zero since the onslaught of the 2008 Financial Crisis and, even with this increase, rates will remain low by historic norms.

As I noted in my post earlier this month, all signals from the Fed and others pointed toward a decision to raise rates in December. As a result, this move was well tolerated by the market and likely priced in prior to the December 14th announcement.

The case for a rate increase

The economic case for a rate increase has been strengthening—especially in the second half of the year. With this decision, the Federal Open Market Committee (FOMC) delivered a “vote of confidence in the economy.” Further, the Committee expects the economy to continue its progress.

In her December 14th press conference, Fed Chair Janet Yellen highlighted the strength of the economy in four key areas:

  • Job gains averaged 180,000 per month over the past three months, and unemployment dropped to 4.6 percent in November. Yellen pointed out that “more than 15 million jobs have been added to the U.S. economy” over the past seven years.
  • Economic growth trended up in the second half of the year as “household spending continues to rise at a moderate pace, supported by income gains and by relatively high levels of consumer sentiment and wealth.”
  • Inflation, a key indicator the Fed monitors, continues to move toward the Fed’s target of 2 percent. The Fed believes 2 percent inflation is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment.

Overall, the Fed believes the labor market is strong and moving toward full employment; the U.S. economy has proved to be resilient.

How does a rate increase affect your bottom line?

The federal funds rate is the rate banks charge other banks for overnight loans from their reserves. So how does that affect you?

In practice, the federal funds rate is the benchmark for all interest rates associated with lending and investing. Thus, interest rates for everything including government financing, mortgages, credit cards, and savings accounts will be affected:

  • Expect that borrowing will cost more because banks and other lending institutions base their prime lending rate on the federal funds rate. Shortly after the Fed announced its increase on Wednesday, several large banks increased their prime lending rate from 3.5 percent to 3.75 percent effective immediately.

    The prime rate is used as a benchmark for setting home equity lines of credit and credit card rates. Thus, we can expect to see at least modest increases in these rates.

  • Expect to receive slightly higher interest returns on savings and deposit accounts. This is welcomed news for savers—especially Americans on fixed incomes—who have had to settle for very low returns on their deposits for years now. Alan MacEachin, corporate economist with Navy Federal Credit Union, explains “Rising interest rates would benefit elderly Americans on fixed incomes and others who rely on interest income to help cover their living expenses.”

However, unlike the prompt increase in the prime rate, higher returns on savings will likely take a bit longer to materialize. In her article, When Will Interest Rates Go Up?, Kimberley Amadeo points out that “rates for savings accounts, CDs, credit cards, and mortgages rise at different speeds” because different “forces drive them.”

What’s next?

The Fed expects the economy to continue its current upward trend. They project a slight increase in gross domestic product (1.9 percent this year to 2.1 percent next year), continued low unemployment (4.7 percent at yearend to 4.5 percent next year), and inflation rising closer to the 2 percent target rate by next year.

With this positive assessment of the economy, the Fed projects a federal funds rate of 1.4 percent by the end of next year, which calls for three rate increases next year. Of course, rate increases will be tied to the Fed’s ongoing economic assessments. Chair Yellen believes that only “gradual increases in the federal funds rate will be needed over time to achieve and maintain [the Fed’s] objectives.”


True North Capital Alliance is registered as an investment advisor with the states of Minnesota and Texas. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability.

Past performance is not a guarantee of future results.

All expressions of opinion are subject to change. This content is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

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Which Financial Records Should You Keep and for How Long?

December 13, 2016

By Marcus Winbush, CFP® — CEO, True North Capital Alliance

Most of us agree that it’s important to have a systematic way of organizing and storing our important financial records. But it’s one of those to-dos that’s easy to postpone until we get around to it.

Recently, one of my business associates applied for a loan to refinance her home. She was surprised by the stack of documents her mortgage broker needed to keep the process moving and lock in the best interest rate. She had to furnish proof of income (2 years), bank statements (3 months), proof of home insurance and property tax payments, and other pertinent records. Fortunately, my associate had organized her personal financial records so that both paper and electronic records were safe and readily accessible. Thus, she completed the refinance smoothly and quickly.

Now it’s your turn. How complete and accessible are your financial records? How quickly can you access essential financial records when you need them? The time you spend organizing now means you will be better prepared for next tax season; for financial/estate planning; and for recovering in case of urgent situations such as flood, fire, or theft.

The end of the year is a great time to review your files, purge those that are outdated, and get organized. Let’s explore a few suggestions about which records you should keep and how long to keep them.

Tax Records

The IRS recommends that taxpayers keep electronic or paper copies of tax returns and supporting documents a minimum of three years. Considering the possibilities below, we recommend you keep tax returns and related documents up to seven years:

  • If you discover a mistake on your return, you have three years to file an amended return.
  • The IRS has three years from the date of your filing to audit your return. If an audit reveals a substantial error, it may be expanded to include additional years, but usually not more than six.
  • The IRS has six years to challenge your return if they think you failed to report 25 percent or more of your gross income.

The IRS also recommends that you keep records that show proof of health insurance along with other tax-related records for at least three years.

Bank Records

If you have hardcopy bank records, save cancelled checks and deposit receipts until your monthly bank statement is reconciled. Keep monthly bank statements at least one year—longer if they provide supporting documentation for your tax records such as verification of income, business expenses, home improvements, and mortgage payments as described above.

Retirement Plan and Investment Records

Review monthly and quarterly 401(k), IRA, or pension statements for accuracy. Keep quarterly statements until you receive a year-end statement; then you can discard the quarterly reports. Keep your annual reports until the accounts are closed.

For stock purchases and sales, keep the certificates and proof of purchase until you sell the investments so you can properly establish your cost basis. At the time of sale, the transaction will be reported as part of your tax filing records.

Vital Personal Records

Documents in this category should be kept at least six years or permanently.

Vital RecordsKeep ...
Mortgage, property title, deedUp to seven years after the sale of the property per IRS rule.

  • Keep records of real estate commissions and legal fees associated with the purchase.
  • Keep records of capital improvements such as remodeling and upgrades. These costs can be added to the original purchase price to establish cost basis when you sell.

Health care directive/living willPermanently.

Provide your health care directive to your primary health care provider, and keep a copy in a safe place where your agent can locate it.

Life insurance policyAs long as you own the policy.
Long-term care insurance policyPermanently.
Social security cards, birth certificates, marriage certificates, divorce decree, military discharge, passportsPermanently.
Vehicle titlesAs long as you own the vehicle.
Will, power of attorneyPermanently.

Keep your will should be kept in a safe place where it is readily accessible. Make sure your executor knows where your will is stored and can access it when needed.

Review your will and power of attorney periodically to be sure they continue to reflect your preferences.

Where to store your records

If you store financial statements on your computer, be sure to back up your computer files regularly and keepe your backup copy in a secure location. Let a family member or trusted person know how to access vital information on your behalf if necessary.

Organize your paper files in a way that seems convenient and logical for you, and review them periodically to keep the files up-to-date. To protect your identity, shred documents that contain personal identification information.

With a few exceptions, store critical documents in an electronic vault, a safe deposit box, or a fireproof safe in your home with a few exceptions. In the event of death, safe deposit boxes may be sealed; therefore, originals of your will, power of attorney, and life insurance should be stored in an alternate secure location. You may, of course, choose to keep copies in your safe deposit box.

Finally, create a letter of instruction outlining where your financial records are located and listing the key contacts in case of an emergency; you may choose to create a more detailed letter of instruction as part of your estate plan.


True North Capital Alliance is registered as an investment advisor with the states of Minnesota and Texas. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability.

All expressions of opinion are subject to change. This content is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

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Stronger Economy Makes Fed Rate Increase Almost Certain

December 6, 2016

By Marcus Winbush, CFP® — CEO, True North Capital Alliance

With the 2016 presidential election behind us and a steady flow of good economic news, the long-awaited increase in the Federal Funds rate seems imminent. Although the Federal Open Market Committee (FOMC) decided against raising rates at their November policy meeting, Chair Yellen signaled that the time for an increase is fast approaching. The policy committee expressed confidence in the economy and stressed that “the case for an increase in the target rate had continued to strengthen and that an increase might be appropriate relatively soon.”

The FOMC declined to make the move in November preferring “to wait for some further evidence of continued progress toward its objectives” of maximum employment and price stability. Along with most economists and analysts, we believe that the Fed has good reason to make the move in the very near future—likely at its next policy meeting on December 13-14.

Strengthening Employment

The employment picture continues to improve this year with the labor market gaining an average of 180,000 jobs per month through October. The good news is that job gains continued to keep pace in November with 178,000 nonfarm payroll jobs added. Gains in November came primarily in professional and business services and health care; employment in construction also continued its recent upward trend.

The unemployment picture continues to improve as well. The November jobs report released by the Bureau of Labor Statistics confirms unemployment at 4.6 percent, which is the lowest level since August 2007.

Beneath the headline numbers, several indicators continue to bear watching. Unemployment showed broad improvement across various workers; however, unemployment for African Americans (8.1 percent) and Hispanics (5.7 percent) continues higher than the national headline number. At 62.7 percent, labor-force participation rate has shown little change this year, and involuntary part-time employment remains elevated when compared with historic norms. On the positive side, the number of involuntary part-time employees is down 416,000 over the year.

Continued Economic Growth

Gross domestic product (GDP) rose at an annual rate around 1 percent through the first half of this year. According to the U.S. Commerce department, real GDP increased at an annual rate of 3.2 percent in the third quarter. In her November 17th testimony before the U.S. Joint Economic Committee, Fed Chair Yellen noted that this upward trend was driven by several factors including moderate gains in consumer spending, solid growth in real disposable income, and more upbeat consumer confidence. This trend clearly signals strengthening economic growth.

Rising Inflation

Inflation continues to run slightly below the Fed’s target rate of 2 percent. The most recent report shows the U.S. inflation rate running at 1.6% through October 2016. In her Congressional testimony, Chair Yellen expressed optimism that economic growth would continue at a moderate pace, resulting in further strengthening labor market and a return to inflation in the 2 percent range.

All Signals Point to an Increase at the December FOMC Meeting

The Fed seems to have gotten its wish as stated in its November 1-2 meeting minutes calling for “further evidence” that the U.S. economy is continuing to make solid progress. The latest jobs report and other economic indicators such as inflation, strength of the U.S. Dollar, and bond yields continue to confirm a strengthening economy.

In her testimony before the Joint Economic Committee, Chair Yellen acknowledged the importance of timely rate increases: “Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting… policy goals.” Thus, most economists and analysts are fully convinced that the long wait is over and that the Fed will raise rates at its December meeting.

We concur and expect a rate increase of at least 0.25 percent over the current federal funds rate, which hasn’t changed since December 2015.


True North Capital Alliance is registered as an investment advisor with the states of Minnesota and Texas. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability.

Past performance is not a guarantee of future results.

All expressions of opinion are subject to change. This content is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

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