Mike’s Thoughts on Regulations

I recently did this really awesome educational video for you on Bonds, but unfortunately I described the characteristics of bond mutual funds in layman terms without a bunch of disclosures, and approval from a higher up regulatory agency is required (come to find out).

So that got me thinking about rules and regulations.  Should we have more or less, are they a cure-all panacea, and most importantly, what are the unintended consequences?

Click on the video below to hear my crazy thoughts on regulations.  All right, they’re not really crazy, but I think the question of more or less is a hard one, and we shouldn’t “knee jerk” one way or another “just because”.


Hi there—Mike Brady with Generosity Wealth Management, a comprehensive, full-service wealth management headquartered right here in Boulder, Colorado.

Today, I want to talk about regulations—are they good, are they bad, should we have more, should we have less, and I’m going to tell you that I’m right in between. The most important thing is that it doesn’t solve everything. First off, before you think I’m some kind of a radical, you’ve got two extremes. This is 100% regulation, this is 0% regulation and I don’t think that anybody of sane mind is saying that we should have 100% regulation, that’s government ownership of everything, or is zero regulations. I don’t know what things were like before the 1929 crash, but I definitely know that, after that fact, there has always been some kind of regulation. It’s not necessarily a panacea. It doesn’t solve all your problems and I think that it’s good for us as investors, not to necessarily advocate for more or less, but just to understand that they have a place, but it just doesn’t solve everything and if you think it’s going to then I think you’re going to have a false sense of security, because something is probably going to happen in the future as well.

Let me tell you why I’m even bringing up today’s topic. I’ve probably done 100, maybe 150 of these particular videos over the last five years and the reason why I started doing the videos is I thought it was a great way, an additional way to communicate with clients and friends, maybe perspective clients. It’s a way for me to try to be as clear and concise as possible to share with you what I’m thinking and how I view things without having to pick up the phone and call every single person. That might be a very inefficient way to do it.

I also want it to be educational for you so if you’ve been watching a lot of my videos, you know that I talk about maybe a current topic, maybe a general topic, etcetera, because the way I view things is just because I do this all day, it’s not because I’m smarter than you, but maybe I’m on page five, maybe I’m on page six and because you don’t do this every day, maybe your education level in investments and financial planning is on a page two and so if I can help bring you up to page three or page four we can have a great conversation and I think you’re better off for it and I think I am as well.

Well, out of all those videos I recently did a video last week that was called All About those Bonds, and actually I don’t know if you ever that song, All About that Bass, all that Bass, well I called it All About those Bonds and I figured a couple people would get the joke, but it turned out to be a 16 to 17 minute video about bonds, so I talked about price, I talked about yield, I talked about what a bond is, how it works, premium, discount and in my opinion, it was a beautiful video. I was very proud of myself because I thought that I could refer back to it in coming months and coming years and say wow, you have a question about bonds. Just look at this particular video. Inside there, I talked about bond funds and I talked about the characteristics of bond funds, and so I was trying to talk, in layman’s terms, about the characteristics of them, whether they could lose money, make money and various situations like that and so for 30 seconds, I actually talked and warned about some things in bond funds, but because of that, I talked about the characteristics of bonds. A compliance department examiner doing absolutely her best job and that’s what she’s supposed to do, said Mike, this is actually you can’t talk about characteristics of bonds without FINRA approval. Now FINRA is one of the regulators. It’s a self-regulatory organization. It’s just one of the big regulators out there for broker-dealers. I’m like okay, how do I get FINRA approval. She’s like well you got to pay a certain amount of money. I think it was like $125 and it’s probably going to take five or six weeks and I’m like really, you got to be kidding me, so I just decided it wasn’t worth the hassle really, to go through all that delay and some of the requirements.

It’s not the $125, it’s actually the transcript, and it’s actually more involved than what I’ve led you to believe. So I basically decided it’s just not worth it for me to do it. Now the unintended consequence of that particular regulation is that what I feel is a great educational opportunity for clients is not going to be out there. A warning of some things that you should beware of as it relates to particular bonds, and I think that bonds have a place in a portfolio. I’m not going to lie to you, I think they’re a good place for most people in their portfolio and, of course, you have to personalize it to your individual situation.

Well, because of this particular regulation, that message isn’t getting out there. Look at prospectuses. Prospectuses—once again, I wasn’t around in the 1930’s and the 1940’s but the prospectus were probably very small. I’ve been doing this for 24 years. I started working with clients in 1991 and, at that point, the prospectuses were pretty fat. Over the years, my perception has been they get fatter and fatter and fatter because more and more either regulation or disclosure gets in there and to a certain degree, unfortunately, most people don’t read the prospectus. I highly encourage you to read the prospectus, okay, and I give out prospectuses to every client prior, or concurrent with an investment. However, the unintended consequence of some regulations has been to a certain point where it has now done, possibly, it just has not achieved its ultimate goal which is to inform the client. They’ve overinformed with so much information that you get nothing okay.

Back in 2008, there was a big discussion about too big to fail, that there were some various banks and institutions that were so big, that we shouldn’t have that. We shouldn’t have—people would say wait a second, we shouldn’t have to bail these things out and you shouldn’t be allowed to be too big to fail. Well, unfortunately, many of the regulations that come out work against the decentralization because every regulation has some kind of a cost associated with it and sometimes it’s hard to say what that actual cost is, but if it’s an extra sheet of paper that’s required, it’s an extra piece of documentation. I mean I have to tell you, I’ve gone through in the last 24 years, you have periodic audits and if I don’t have a folder with a label on it, even though it’s empty, I have to have that label and that folder, but if I don’t they’ll ding me.

So there’s a lot of bureaucratic type of things that add to the cost of doing business and the unintended consequence of some regulations are that it causes smaller operations, smaller businesses to just not be able to survive and be profitable and so they have to merge with larger ones and pretty soon you have, instead of five small ones, you might have two or three or maybe have one because they have to group together for the economy of scale. Now, I’m being very broad here and very general, but the most important thing is that regulations are not a cure-all for everything. Do I think we should have some regulations—absolutely, and I certainly hope you’re not getting from me that we should have no regulations, but I like to think of it as, even the prison system, I mean I think that there are some people who are a danger to society, they just are and it’s for the good of the community that they are put away and shielded from us and from harming us, but it’s very easy to say, well, I’m tough on crime so, therefore, the easy is let’s more people in prison. After decades of saying that, pretty soon we have a lot of people in prison and we have a huge amount of money going towards prison, because the easy answer was well, let’s just put him in prison. That’s the answer for everything.

Every time some kind of a crime happens, we need to be tougher on crime. Well, it’s the same way when something bad happens in the financial world. It’s like, well let’s throw more regulations on there because that’s kind of a kneejerk answer and in my response is, just so that you know where I stand is usually, well, let’s look at what we currently have and do they need to be modified? Are there some regulations that maybe need to be cut, that actually were an unintended consequence that led to that bad action and so it’s really more piling on, piling on, piling on.

That’s my video today. Really, the most important thing I want you to take away from this is that I think regulations are good and I’m glad that we have regulators. I truly believe that, but it is not an answer to everything and one of the unintended consequences at times of some regulations are unforeseen. That’s why they’re unintended, okay, they weren’t intended to begin with, but also sometimes the end investor is actually hurt and, in my case, I think the video that I did was wonderful and beautiful and, unfortunately, you’re never going to see it, but it was a good education I think for all my clients who see this particular video. If you want to know more about bonds, give me a call, because I’ll be able to do that for you in person and I think that over this next year, I’m going to make a commitment to at every meeting, really educating you on what’s the difference between price and yield, why is a 10-year Treasury important. Why has this been in the news all this time and where, in my portfolio speaking as you, where in a client’s portfolio, do bonds have a place? Do they have a big place, a little place, what is for you, so I’m going to now do it for you individually since doing it en masse didn’t work out for me. I’m looking forward to doing another video for you in a couple of weeks. I’m doing this on a Thursday afternoon so, hopefully, you’re getting it Thursday night, maybe Friday morning, because a consideration is oh, Mike, we’ll look at your stuff right away, so you can get your newsletter so anyway, I hope you have a great day. I hope you have a great weekend and you have a wonderful day. Thanks, bye bye.

2014 Review – 2015 Preview

2014 is now over, and a new year is in front of us.

In my video (click on the image below), I briefly do a recap on 2014, and then lay out my arguments for a long term approach, diversification, and reasons why I think being fully invested is wise, particularly as I continue to be optimistic  for the foreseeable future.

Click on the video below for 10 minutes of my thoughts.


Hi there! Mike Brady with Generosity Wealth Management: a comprehensive, full-service, wealth management firm headquartered right here in Boulder, Colorado.

Today want to talk about the 2014 review and the 2015 preview- spending most of the time, I think, on the preview.

2014 was a year that was not super high or super low- it was kind of right there in between. The large company unmanaged stock market indexes were in the low double digits-positive for this year. If there was a smaller company investment it was, in general, the single digits- on the low side- kind of low single digits.

Bonds, which I believe are essential for most portfolios-in 2014 they had the low to mid single digits. I’m going to use my hands here: I think a good portfolio of stocks and bonds kind of mesh together with some cash reserves- sort of those core holdings. One thing the bonds did this year [2014] they helped to reduce some of the volatility. If you are 100% stock market index, you’re really kind of all over the place. And in 2014 there was a 7% decline in the in the S&P throughout the year. It did, in the fourth-quarter, recover from that which is wonderful- so it is positive for the year.

I’m going to put a chart up on the screen of the S&P 500 going back to 1997. What you’re going to see is there is some huge advances; some declines; advances; declines, etc. I’m going to just put a circle where we are right now. You can see here, and I put a tiny little arrow next to it, where we have that 7% decline in 2014.

I’m going to put another chart up on the screen. Now you’re going to see what it looks like going all the way back hundred and fourteen years- back in 1900. You’re going to see there are some times of great advance- and it can happen over decades. There are times of consolidation over decades as well. You’re going to see over on the right side where we are now. So the question of ask yourself are we at a consolidated period? Are we at a time of great advance? Of course there could be a decline as well over many times. So this is the environment that we have to make this decision in.

It is normal for there to be dips throughout the year. As a matter-of-fact, going back to 1900, it’s normal for there to be about three dips of at least 5%- historically, that’s what happened. It’s normal for there to be a decline of at least 10% throughout the year when we look at the numbers going all the way back for a hundred and fourteen years. OK?

Time is one of our best advantages. My advice that I give to someone who needs money in a year or two is completely different than the advice that I give when we’re planning out five years, ten years, twenty or thirty. If you’re in your 60s or 70s, hopefully you’re going to live a long life. You still have a long time horizon, hopefully, of ten or twenty years. So the more that we can keep our eyes on what the goal is; Today is point A. Point B is in the future, to keep track of what our goals are in the future the happier we will probably be.

I’m going to put a chart up on the screen. It shows, in numbers, what I just talked about. This is sixty-three years. All the way back to the 1950 of one hundred percent stocks; one hundred percent bonds, and kind of a mishmash of the two. In each one of those groupings that goes from- on the left hand side- one year and on the right-hand side- 20 year rolling time period. You’re going to see that in each one of those groupings, there are three bars and the far right hand bar is a mash of stocks and bonds. The longer out we go, the longer our time horizon has been, the range of returns- the highs have gotten lower and the lows have gotten higher. So that there is a more comfortable range I would say. Kind of gets rid of the outliers of the top outliers on the bottom. And so time is, without question, a great advantage that we have going forward. And so I constantly remind clients of- “where are we going to?” and “What’s our goal?”, “What’s our endgame?” And so, how does one quarter, one year, really fit into the bigger picture of a decade, two decades etc.?

Before we start talking about the preview, let me just tell you that I am optimistic going forward. I do believe that we’re in the beginning of one of those nice big upward swings- that could be multiple years, multiple decades. That doesn’t mean it’s going to be perfect and it doesn’t mean it will be an absolute straight line but I am optimistic about that.

I wanted to read something that Warren Buffett said (one of the best investors in history) and I really have a lot of respect for him. It is this quote right here that he said in the fall of 2008. Just to refresh your memory, the fall of 2008 was horrible! And it continued into January and February of 2009. It was hard to find people who were optimistic at that point in time. What he said is this, “Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month- or year- from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before sentiment or the economy turns up. So, if you wait for the robins, spring will be over.”

What’s really interesting is after he said that the market continued to go down another 20 or 30%. And he continued to make investments all the way down. And one of the best investments that he made was actually five months after the market completely bottomed out in March of 2009. But he was committed to his conviction that long-term investments in a portfolio, and he has a well balanced portfolio, was in his best interest and when I meeting with clients we talk about how that might be in their best interests as well.

I think that there are lagging and leading indicators. “Lagging” means that the end result. So let’s say that you think the markets go up. Well, we’re not going to know whether or not that’s true or not so we looked at historically. So that’s an indicator, whether it was up or down, after the fact and then it’s too late. I like to focus on some of the leading indicators. And two weeks ago I did a video which I highly recommend that you look at. It came out around December 19, 2014. So go to my webpage look at that blog or look at the archived news newsletters. (www.generositywealth.com) But at that time I talked about some of the leading indicators about why I optimistic as things go forward in adjusting my conversation with clients accordingly.

One of them is the S&P 500 P/E ratio. Right now it’s around 16%. As it creeps up towards 20 that’s going to be a major leading indicator for me as my optimism might go towards more pessimism. I’m also going to look at earnings per share- whether or not that’s going to drop. The 10 year yield on the treasury right now it’s at 2.18 as it gets closer to 3.5, 4.0 or 5.0, I think that is going to be something that will start to give us leading indications of some problems in the future.

Declining investments percentage as a percentage of the GDP and finally, China. You’ll notice that I talk about China primarily as it relates to their economy and the impact on the world. But if you’re looking there’s always a number of reasons not to invest, not to be optimistic. You can always find every year, and 2015 is going to be no different, a reason say, “well it’s different this time!” Well, what about North Korea? What about the Middle East? What about this, what about that? There’s always, and I can sit here and point to some event, that drive the market for a relatively short time. But long-term, the fundamentals of the market win out. And in my opinion the fundamentals are positive at this point. And I’m a believer, like Warren Buffett, that the market, in general, will be higher in the future than it is today. And so we have to create a portfolio that’s individualized for us, to make sure that our behavior allows us to stay invested in that.

Just a couple of other things before I say goodbye here today: I do believe that consumer spending growth will be good going forward- particularly with lower oil prices. I think that is going to be a very positive thing. And is core inflation going to be affected this next year or two? The 2% target from the Fed, I don’t think we’re going to get close to that. So I think that interest rates are going to continue to stay low through 2015 or maybe even in 2016. And this is ultimately, I think, a good thing for us. So these are some of my argument about why am optimistic. But, in general, I’m a very optimistic person about the long-term for this and I think that it’s my client’s best interest as well. But please, don’t make any decisions without your talking to your adviser, without talking with me. It’s real important to keep the long-term vision and in your mind. But you also have to define what those goals are. You’ve got to find something that allows you, from a behavior point of view, to stay true to what your core is. That’s my preview and my discussion today!

Always I love to hear from you!

Mike Brady, Generosity Wealth Management, 303-747-6455.

And you have a wonderful day! Give me a call at anytime.


Excited Puppy Spots its Owner

I’m not going to lie to you–I’m a total sucker for a cute dog video on the internet.

Yeah, yeah, I know, pretty sappy eh?

Every time I watch this video it makes me smile.  Wouldn’t it be nice to be so lucky to have an animal or person be excited to see us like this puppy is for its owner?

Gosh darn it, I just watched it again and it made me smile.

Bullish to Bearish Indicators

I’ve mentioned all year long that I’m bullish and optimistic for the foreseeable future, and until data tells me something else, that’s where I remain.

However, what would change my opinion?  What are the data that I look at, and how would they need to change in order for my opinion to change?

Good question, and one I address in this issue’s video:

Hi there, Mike Brady with Generosity Wealth Management, a comprehensive full-service wealth management firm headquartered right here in Boulder, Colorado.

The main topic for today’s video is that I am optimistic. I am very bullish and have been all year and will be until data changes. I think probably for at least another year as I look out. But what would cause me to go from bullish to bearish or pessimistic? I want to talk about that here today but first I want to address what happened in the market the last three or four days. It has been very volatile and more on the down side than on the up side. In my opinion this is one of those normal events that happen within the year. The last time we saw this was in September and October. I did a video for you in the middle of October and I said the fundamentals hadn’t changed. This is one of those steps back that we have to be accustomed to as investors and in an intra-year decline that does happen but the underlying stretch and the fundamentals hadn’t changed and that proved itself through the end of October, November, the first part of December. I am saying that here today even though the market has gone down in general over the last week or so. Am I panicked whatsoever? Absolutely not.

Let’s talk about bullish to bearish. One thing that I am going to look for and that I watch very closely is the PE ratio starting to go above 20. Once it hits 20 and above that is going to be one of my indicators to start to be concerned. I want to say that none of these – and I’m going to talk about those five – are standalone. I am going to address the very last one but my variables in this long equation are different than somebody else’s who also could be equally smart. It is just that this is what I am going to look for and I am going to talk with you about. In general I believe in the fundamentals. I’m a value investor more than I am a technical investor. A technical person would sit here and talk about what the graph looks like and use terms like “head and shoulders” and “double tops” and all types of patterns within the graph of the market. I am not going to do that here. That is not what I believe long term is going to be more successful for clients.

I look at the fundamentals of the economy and the impact that it is going to have on the actual stock market. The economy of a country can do poorly but if the stock market was underpriced it can actually still do well and vice versa. If the economy is doing really well and if the market was just overpriced then it either will stay stagnant or go down in order to get in sync again with that particular economy.

I’ve already said the PE ratio is one thing that I am going to look at once it gets closer to 20. It is now at 16.1.

Earnings per share drop – that is something that I am going to watch out very closely. Right now it is very strong but once it starts declining, I think that is going to be a long term signal that we are headed for some trouble.

The yields of a 10-year treasury. A 10-year treasury right now is 2.09 as of the date that I am recording this. It has frankly been all over the place. Incredible volatility in the last year or so. It has been as high as about 3% and this is actually the lowest that it has been in a very, very long time. A year and a half or something like that, maybe two years.

The fourth thing I’m going to look for is declining investment spending as a percentage of the GDP. There is a great number and a great graph that I watch and as we are watching a declining of a company’s investing and their investment spending that means that they are concerned about their own market, their own change, and their own profitability that I think is going to be a very bad sign which is going to be a leading indicator of lower earnings per share in the future.

The last thing that I am watching very close is China. China is the world’s largest market at this point. It has surpassed the U.S. economy and whereas we get a cold and the world gets sick, well China now is a huge partner in that as well that when they get sick. When their really strong, unbelievable economy starts to slow down that is going to really have a major ripple effect. There is a statistic I heard over the weekend that with all of their building in the last three years, they’ve used more concrete than the United States did in 100 years. They’re incredible. There’s so many. There are three times the number of people that we have. More than three times, three and a half times and just an incredible country and it is something that I am watching very, very closely. That being said, if there are any questions about what I’ve said here today, I will continue to look forward on these things as the years go by but these are what I think are very important. If you have a different point of view, hey, I am open to it. Give me a call and we can have a great conversation.

Mike Brady, Generosity Wealth Management, 303-747-6455. You have a great day. Thanks. Bye, bye.

Current Market Conditions

As volatility has increased in the past 3 weeks, I want to keep you well informed of my thoughts.

Are the past weeks normal, have the fundamentals changed, or is this the canary in the coal mine we’ve been waiting for?

These questions are answered in my video.

Hi, Mike Brady here with Generosity Wealth Management, a comprehensive, full service wealth management firm, headquartered right here in Boulder, Colorado.

I last spoke to you a couple of weeks ago and at that time, I talked about the third quarter. I said it’s been a tough quarter, very volatile and it was down.   We’ve taken some steps back as it relates to the unmanaged stock market indexes. So far this quarter in the last couple of weeks, that has continued on the downside. Nobody ever minds volatility on the upside. One thing that’s interesting is over the last 25 years the daily average of volatility has been 0.77%, about eight-tenths of 1% on a daily basis. So far this year for the first half of this year, it was a half of 1%. It was kind of the average volatility on a daily basis. One of the reasons why the last two to three weeks seems so alarming is because the volatility has been over 1% so it’s two to three times what we’ve been kind of lulled into feeling the first half of this year and also what is normal when we look back over a 25-year timeframe. Two weeks ago, I mentioned that the smart money looks at the data and what’s happening now and says okay, so how far out an outlier is this? Is this something that actually happens quite often or periodically and that it’s a part of the game investing, part of what we should expect or is this is a precursor to something much more deadly? Are the fundamentals telling us that this is an early canary in the coal mine of some bad that’s going to happen? My answer is the first, not the latter, in that this is actually normal even if it is painful, a part of the process. When we look at a longer time horizon which is what sort of the smart money should do is looking at it from where does this fit in one year, five year, 10 year and even longer than that.

I’m going to throw up on the graph there up on your screen there, looking back over a 17-year time horizon for the S&P 500 which is an unmanaged stock market index and this is as of September 30. I’m going to put a little red mark where we are right now just to give it some perspective. I’m doing this Tuesday night so I know exactly what our closing number was and hopefully you’re getting this on Wednesday or Thursday. You can kind of see that in the whole scheme of things we could have said at that other line that I just put in there, yeah, you can see it’s a pop. It’s not going to go any higher and then we could have done it all the way from that bottom arrow all the way to where we are today. We could have said, oh my gosh, this is a high, it can never go any higher.

I’m going to put on the screen now a second graph which is looking back 114 years. You can see that there are consolidation periods and then there are times of advance, consolidation periods of times of advance. You can see there and I’ve just circled it where I believe that we are. I actually believe that we are on a longer-term advanced than we are in consolidation or a decline. Other people can make an argument to the downside; that’s okay. We always joke that economists have predicted 17 of the last the last three recessions so that’s an easy thing to do. The hard thing is for me to try to be as straightforward with you and say this is a part of that long-term process. As a matter of fact, our emotions have a tendency want to react in the wrong way. I’m going to throw a chart up on the screen there. You can see that in the late 90s, consumer confidence was at an absolute high, but that was the worst time to buy. Okay? Now you’re going to see back in the beginning of ’09 which was the beginning of that huge upswing that I showed you in the first graph that consumer confidence was a low. Then two years ago right before last year’s really strong stock market gain, consumer confidence was once again at a low. It’s almost contrary of what you would think. Like oh, people are feeling all negative so the market must go down negative. No, it’s quite the opposite. In fact, kind of what we call a lagging indicator where people actually do the wrong thing at the wrong time.

The next graph that I want to show you is up on that screen there. I think this absolutely essential. What you are going to see is those red numbers at the bottom are the intra-year decline. What that means is if the market was up 10% and then it drops 7% and at the end of the year at 3% or maybe it even ended at a different number, the high to the low throughout that year is normally a seven, eight, nine, 10, sometimes double digits so it is normal for there to be corrections within the year. It does not mean the year will end that way. I think that’s absolutely essential for us to keep in mind because we do take five steps forward at times and four steps back. If we believe that in the future that the market will be higher than where it is today, that’s why we have investments. If we didn’t believe that, why would we have investments? Keep it in your mattress, keep it in the bank. That makes no sense if you believe that long term the market is going to be lower than it is today over long term. I think that’s not a very wise bet.

I’m going to throw another chart on the screen; it’s a table. The reason why I throw this up there is because there is a well, you know, it’s just like the 1990s or it’s ‘07. Let me just tell you, look at the price to earnings ratio of about 15%. It was double that back in the late ‘90s. I mean from a valuation point of view, we’re nowhere near where we were in previous times when we’ve had a huge decline. We have lots of cash, a huge profitability, leveraging is down so this is a very good thing and the fundamentals I feel are still strong.

This last graph I want to show you I think is very, very important and that it shows historical returns by holding period. What you’re going to see is that on a yearly basis, that’s the one on the far left-hand side, there is a huge variance. The left one is 100% stock, unmanaged stock market index. The next one is 100% bond index and then there is a mix of the two together. With the one year, there is a huge variance. That’s just the way things work. Once we look out five years, 10 years, even 20 years that variance, that kind of expected return or that highs and lows have a tendency to kind of, the highs go lower and the lows go higher. For a 50/50 split historically, of course it could be different in the future, there actually has never been a five-year timeframe when the worst you’ve done is make 1% a year. Moving out to cash, thinking that you’re going to try to outsmart everyone else, that you are reading the headlines and you have some supposition of about what’s going to happen in the future I think is not very wise.

The very last thing I want to show before I cut this video is the benefits of having a stock and a bond mixed together. You’ve seen me do this before even with my hand. Up on the screen there is the 10-year Treasury note yield. It’s declined which is a good thing. The yield goes down when the price goes up. You can see that there is actually huge volatility in the last year. Those arrows there are in the last kind of year-to-date. This has been a great year to have bonds. In hindsight, having 100% of your portfolio in bonds would’ve been a fine thing to do. We don’t know hindsight so that’s why we have a mix of stocks and bonds and of course that mixture depends on the client what’s appropriate. Of course, having a well-diversified portfolio does not guarantee against declines in a general declining market, but I do believe that it is the wise way to go going forward. You can see that in the last month or so as the stock market has rarely gone down that the bonds have actually gone up. Once again, we know that because the graph went down which is counter-intuitive, but it actually meant that bonds went up so this is a good thing for bonds when the graph looks on the downside from left to right like that.

That’s what I have for right now today. I’m going to continue with these updates to you, my clients and to my friends and prospects, prospective clients. I’m here if there are any concerns that you have, 303-747-6455. Investments are a part of the big picture of getting you to where you want to go with your goals, etc., but I’m not overly freaked out about where things are at this point. Hey, would I wish that things were higher? Of course, of course, but do I over react and scrap my plan based on some weeks and months of data? Absolutely not and you shouldn’t either.

Mike Brady, Generosity Wealth Management, 303-747-6455. You have a great day, see you, bye-bye.

The Big Picture

The 3rd Quarter was schizophrenic, with most of the unmanaged US and international stock indexes negative, bonds (in general) slightly positive, and with tons of volatility across the board.

Particularly in the past few weeks, every day there seems to be triple digit swings in the Dow, and lots of negative news (ISIS, Ebola, etc.).

Now is the time when we have to remember the big picture and what we as investors are striving towards.  It is the time when emotions can be high, but we need to keep a steady hand and focus.  Now is when we reaffirm what our goals are and whether information that we’re being given is something to be alarmed about, or the normal course of a market.

I address these “big picture” issues in my video this week.


Hi there. Mike Brady with Generosity Wealth Management, a comprehensive full-service wealth management company headquartered right here in Boulder, Colorado.

Today I want to talk about where we are so far this year, of course including the third quarter of 2014, and also the next quarter where we are presently. Let me expand a little bit into the next 18 months or so, but before I do all of that I want to kind of look at the big picture. For us to examine why it is that we’re even doing this.

I like to think of investing as taking three steps forward, two steps back; or four steps forward, three steps back. There are people who will say – no, no, no; I have this wonderful program that’s really exciting, it’s sexy and it’s very tantalizing to say, but we know that that’s bad. If we look at all the particular investments that are out there they always have some kind of a jagged edge, meaning that they go up and they get some down, and then go up, and get some down. That’s a part of it. It’s part of this stuff that I was talking about – four steps forward, three steps back. The time that there are steps backwards it’s so uncomfortable and if you are so focused on that then you’ll never have the joy of the steps forward. Those steps back might be one quarter, might be one year, might be a couple of years. Historically in just the last 15 years or so, year 2000, 2001, 2002; those were three down years right in a row; 2008 was a very painful down year and 2011 we had a really painful third quarter of that year, but in general it was pretty much just a breakeven year in general. The last four, five, even six years or so, not counting 2008, but since 2008 we’ve had a generally trending up market. That’s not always the case. This is nice that we’ve had these steps forward and relatively few steps backwards. As a matter of fact, it’s so unusual right now that when it happens we start to get concerned. We’re like – Oh my gosh, this is Armageddon. It’s good for us to sit back, relax and say – okay, is this new information?, is this new data relevant enough that it changes my perspective?, that wow, it’s such a headwind that I don’t think I’m going to be able to go forward anymore like I have been able to, or is this just static?, is this just chaos out there that’s normal for the market?

I’m going to jump right to the conclusion and tell you that I think it’s the latter. We have enjoyed a relatively calm situation the last five to six years. Any kind of a disruption of the Dow, 100, 200, 250 or so; that has been happening since the Dow was at 10,000 and 11,000 and 12,000 and 13,000 and now it’s in the 16,000 and 17,000 range and all along the way there were people who were saying – no, it can’t get any higher, well, we’re always at a high, it’s going to go down, etc.   That’s not necessarily the case. Why else would we be invested in the market if we didn’t believe that sometime in the future it’s going to be higher than it is today. If we didn’t believe that, than we should just keep our money in a safe, or the mattress, or someplace else where we can have absolutely no principal loss. What we can do as investors is really watch our emotions and be the smart money (I’m going to put my quotes up there), the smart money because emotions cause your average investor, I would even say some of your professional investors to do the wrong things at the wrong time. When we look at money flows in and out of the market you’ll notice that 1999 everyone was so ecstatic. I mean emotions were so very high on the technology and so much money was going in basically at a high. At the end of 2008, the beginning of 2009 as we look at the market that was actually the perfect time to buy, but nobody wanted to buy at those points. Everybody was rushing to the door when really they were selling at the bottom and real people unfortunately buy at the top, which is what we don’t want to do. That’s why it’s good for us to keep a long-term vision of what’s going on and not be too distracted by the day-to-day, I would even say the month and the quarterly numbers and have good managers, good goals, a good plan that takes into consideration macro events and stick to that.

Sometimes the most difficult thing to do is actually do nothing, or to not overreact. It’s sort of like if you are in a car and you’re on some icy road and you’re trying to get to a certain destination, the wind is blowing you left and right, a real experienced driver is not going to overcorrect one way or the other. Yes, there’s going to be minor corrections. Yes, you are going to be very diligent in how you get to that destination down the road, but you are also going to understand – hey, wait a second, this gust is just happening. It’s going to go away and I believe that by not overreacting I’m actually long-term going to be better for myself.

This is what my 23 years of experience has shown me is that we watch out for some of the kind of sexy things that could be out there. I’ve got to tell you I’ve sometimes been real enticed by a promise of the highest return out there with no volatility. I’ve seen these things and I just don’t believe that they’re right for my clients and particularly at this particular moment in time. A good composition of stock funds, bond funds, cash, a smattering of potentially some non-traded REITs may have a place for a client if it makes sense. Of course, don’t do anything until you either talk with me, or if you’re my client to see if it made sense. This is very, very broad that I’m talking about. I really like some Business Development Companies, BDCs that are out there that can add some extra yields as well. One statistic that I do want to throw out there is just to kind of give an example of the environment that we’re in, is back in 2007, October of 2007, the yield on a bond was such that if you needed $1000 worth of income, how much do you think you would have to invest in order to get that $1000? About $24,000. What about five years later, in 2012, October. To get that same $1000 worth of income, how much money would you have to be invested in? — $3.3 million is the answer. It’s so big because the yield went from 4% all the way down to practically zero, literally almost zero.

When we look at all the various options out there in order to make money. There are bonds out there. There’s real estate. There are stock investments, etc. If you’re looking for a perfect answer, there simply isn’t one. One of the parts of I think adult life is understanding that there are many times imperfect choices. We see this every time we go to the polls for an election. No politician, no party (in my belief, maybe you think differently) is perfect. There’s always something that you disagree with them about. Therefore, we’re picking the best of our options that are available to us. Well, it’s the same way from an investing point of view. You’ve got your bonds. You’ve got your stocks. You’ve got your cash. You’ve got your real estate. You’ve got your alternatives, etc. and each one has pros and cons and it’s determining which one is right for you. The yield that you are getting on bonds, very, very low, but I think it’s part of a portfolio of a diversified portfolio. The yields on CDs and money market are down to practically nothing. As we’re invested in the stock market for the long run, one of the things that comes with that, one of the disadvantages is a little bit more volatility. We don’t have a guarantee of principal, so we’ve got to be smart; we’ve got to be diversified. Although that doesn’t guarantee in a generally trending down market that you won’t experience some losses, but we want to be diversified in order to tamper down some of that volatility.

As I started out the video talking about taking four steps forward and three steps back. Well, if you want to run and take 10 steps forward up, that’s okay. You just take the risk of sometimes taking nine steps backwards. That’s not necessarily what everyone ought to do and I think I want to bring some realism into what our expectations should be.

Warren Buffet, one of the most successful managers out there, over time he had averaged a little over 8% per year. For us to expect in the teens or in the 20s every single year is an unrealistic expectation and you will be disappointed and might cause you to do the wrong thing, which is to try to chase something or someone who is going to promise you something that long-term isn’t going to last. While Warren Buffet was making that 8% return he had time. Just in the last 20, 25 years we had 50% declines to you and so I think that that’s a very uncomfortable situation. I personally don’t want to position myself with client portfolios where we have that kind of volatility and so I think by having a good diversified portfolio with good managers long-term, we can hopefully start to narrow that band of – and unfortunately sometime giving up some of those high-highs to getting some of the low-lows as well.   So far this year markets are plus or minus a few percent depending on what stock market index you want to look at. The bond market is positive for this year. I think going out 18 months we will continue to have a good market. When I look at the yield curve, which is still a normal yield curve, which is great, it’s not inverted. I’m going to throw up some graphs up on there as well. When I look at where we are from a quantitative easing that has been easing off and will continue to go down to zero. I’ve been actually surprised we haven’t had more reaction to it. When we look at the fundamentals, the fundamentals are so strong. Huge cash balances which are wonderful from the balance sheets of corporations point of view. I think that the fundamentals have not changed in three or four months. Yes, things are slowing down a little bit. I don’t want to sit here and say that everything is wonderful. I want to make sure that I don’t give the impression of being Pollyannaish and saying everything is perfect and wonderful out there. If you’re looking for a perfect world, if you are ever looking for the perfect storm in a positive direction, you are never going to get it. You are going to be disappointed every single time. Therefore, we have to look it and say on balance is there 51% more good than negative, and if that’s the case then we adjust accordingly, and we say, yeah we’re optimistic for the next quarter and maybe even the next 18 months.

I’m always open to feedback. I’m always open to a different point of view. Please give me a call if you would like.

One thing to watch out for is that we don’t get so negative that we have these scenarios that we’re afraid to move forward and some things that might be volatile that are not certain, but then we put ourselves in such a situation where we want a warm fuzzy blanket and it costs us an awful lot for that. Anything is possible out there. The question is what’s the probability? I really deal with probabilities more than I do even possibilities, and yes there’s always those curves and those black swans, etc. One of the reasons why they call it black swans is they’re so, so very unique and yet they can be devastating, but we can’t live our lives by only focusing on the absolute worst that can happen. We have to prepare ourselves for that, but we also have to live within what’s probably out there.

Mike Brady, Generosity Wealth Management, 303-747-6455. You have a wonderful day. Thanks.