October 9, 2015
by Jed Sires
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Market Commentary 9/30/2015

The stock market had a difficult 3rd quarter with the S&P 500 down over 6%, and down about 10% from the May 2015 all-time high.

A stock market decline is something I have been anticipating for quite a while now. Unfortunately, pinpointing exactly how it plays out is much more difficult than anticipating it: As Yogi Berra once said, “It’s tough to make predictions, especially about the future.”

In economic news, the Federal Reserve did not raise the Fed Funds Rate at their September meeting citing market volatility and a China slowdown. Some investors were anticipating a 0.25% increase. Now the market seems to believe an interest rate hike will be a 2016 event instead.

I find it interesting that an interest rate hike ‘later this year’ has been the mantra of investors and the Fed for several years now. It reminds me of the individual who wants to begin saving for retirement, but the right time to begin saving is always a year or two away. Similarly, I plan to start a diet right after this piece of cake…Sure!

At the margin, I believe that lower interest rates increase demand for risk investments. If this is true, then the opposite should also be true if interest rates rise.

Decreased demand for risk investments is the reason why investors are concerned with interest rates.

No one knows where the stock market will go next, but I believe it is prudent to make sure you are positioned to benefit from market volatility in the long run.

Disclaimer: The commentary above is the opinion of Sound Investment Strategies. To the extent that information we provide is historical, it should not be considered predictive of future circumstances/returns. There is always a potential for profit or loss in the future. Nothing in this blog post is to be construed as an advertisement, inducement or representative of performance results.

September 8, 2015
by Jed Sires
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Where is the stock market going next?

With the recent increase in stock market volatility, the future direction of the stock market has been a popular discussion topic.

I like talking about the stock market and stocks, so I have enjoyed the increased awareness that the recent volatility has brought. It seems like everyone wants to talk about the stock market with me.

The first question I typically receive goes something like this. Have you been having fun lately? My answer: Absolutely!

At some point during the conversation I get the following question: Where do you think the market is going from here? I never answer this question directly and I always start my answer by saying that no one can accurately predict what the market will do.

Lately I have added the following to my response: The market looks expensive to me, but that doesn’t mean it is going to continue to go down. Historically speaking, the stock market appears fully valued and stocks do not look cheap. What happens from here? I don’t know!

Just because I won’t make a directional market call doesn’t mean that others won’t. For a little humor, try listening to stock market pundits make directional market calls on financial TV.

What I have noticed is that most pundits seem wildly bullish (they think the market will go up) when the market is going up and bearish (they think the market will go down) when the market is going down. Continuation of the current trend is very typical when it comes to predicting the future. It appears that even the professionals let their emotions control their thoughts about where the market is going.

I also find it fascinating that the smarter investors I see on TV typically do not make predictions on market direction. Why? It’s simple; because they know they can’t predict the market. I believe there is a lot of knowledge to be gained by knowing what you don’t know.

With that being said, it is not necessary to invest thoughtlessly in the face of stock market valuations.

The best way to explain my thoughts is with an example: Let’s say you place a bet where the odds are not in your favor, but you win. Was it a good decision to place the bet? No! Now let’s say you place a bet where the odds are in your favor, but you lose. Was it a bad decision to play? No! Overtime, if you only place bets when the odds are in your favor, you will come out ahead.

Successful investing involves placing bets where the odds are in your favor and sizing the bets properly.

August 10, 2015
by Jed Sires
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Roth IRA: My Favorite Account Type

Of all the places to save money, the Roth IRA is my favorite.

If your income is under the phase-out level and you are young, you need to contribute to a Roth IRA!

Here is why: Money in a Roth IRA grows tax free, and qualified withdrawals are also tax free. A Roth IRA gives you this tax free benefit because you have already paid tax on your contributions. This is unlike a Traditional IRA which is a tax deferred account, meaning you get to pay taxes on withdrawals.

Now imagine that you have 20 to 30 years to save and invest: If you make the annual contribution to your Roth IRA and earn a nice return, your Roth could be an excellent source of tax-free retirement income.

If you want to retire early, your Roth IRA could also be an excellent source of pre-retirement income. Here is why: Since you have already paid taxes on your normal contributions, you can withdraw the amount you contributed without penalty or taxes.

It can also be used as a college savings account. In fact, if you are a parent, I would maximize your Roth IRA contributions prior to contributing to an education savings account. I have blogged about this before. College Savings vs. Retirement Savings

The only downside to a Roth IRA is that not everyone can contribute. See below for contribution and phase-out limits.

If you would like to start saving with a Roth IRA today, use the contact box to the right to contact Jed Sires.

2015 Contribution Limit
The contribution limit is the lesser of $5,500, or your earned income. A $1,000 catch up contribution is also available if you are 50 or older. This makes the total contribution limit of the lesser of $6,500, or earned income if you are 50 or older.

2015 Phase-out
If you are married filing jointly and your modified AGI is under $183,000 then you can contribute up to the limit. If you are married filing jointly and your modified AGI is $193,000 then you cannot contribute to a Roth. Between $183,000 and $193,000 you can contribute at a reduced amount. See the IRS website for the actual details.
http://www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2015

July 17, 2015
by Jed Sires
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Market Commentary 6/30/2015

• The stock market has treaded water in 2015 and most indexes sit close to all-time highs.
• Interest rates have been on the rise this year ahead of a possible Federal Reserve rate hike in September.

Stock Market Valuation

The solid blue line on the chart below represents the 10 year Cyclically Adjusted Price Earnings (CAPE) Ratio for the S&P 500 through June 8, 2015 (click the picture below to enlarge the chart). The CAPE Ratio was invented by Professor Robert Shiller from Yale and is calculated using average inflation adjusted earnings from the previous 10 years. (The chart was found on the following website http://www.econ.yale.edu/~shiller/data.htm)

Looking at the CAPE ratio chart (the solid blue line), it appears that the S&P 500 is fully valued, if not over valued relative to history, but valuations have been generally rising since 1980. It can also be seen that the CAPE Ratio has not yet reached 1929 or 2000 levels.

The CAPE Ratio is not the only data point that indicates that stocks are currently not a bargain. With that being said, the stock market could continue to go up for quite some time, or the long awaited correction could start tomorrow. Either way, with stock indexes at these valuation levels, historical average forward returns have been quite low. Because of this, we have been positioned conservatively for almost a year now…Yes, a little early.

Speaking of being conservative, we have larger than normal cash positions and equity investments that should conserve capital if the stock market corrects. The plan is to conserve capital so we will be in the position to become more aggressive when stocks are less expensive.

Interest Rates

The current low level of interest rates has played a key part in pushing the CAPE Ratio to its current level. The dashed red line on the chart represents the yield on the US 10 Year Treasury Note. As can be seen, interest rates have generally trended lower since 1981. It seems difficult to believe that interest rates could go lower, but in Germany the 1, 2, 3 & 4 year bonds currently carry negative interest rates (as of 7/3/15). That means the German government is being paid to borrow money – Not a bad deal!

Future interest rates are impossible to predict just like future stock returns. With that being said, I believe that over the next several years, interest rates will go higher rather than lower. Of course, we could be following the same route as Japan with low interest rates for an extended period of time. As a reminder, when interest rates go up, the prices of bonds go down.

Due to the unfavorable longer term risk-reward profile of bonds, we are invested conservatively there as well.

Disclaimer: The commentary above is the opinion of Sound Investment Strategies. To the extent that information we provide is historical, it should not be considered predictive of future circumstances. The commentary above is not a recommendation to buy or sell securities. There is always a potential for profit or loss in the future. Nothing on this page is to be construed as an advertisement, inducement or representative of performance results.

CAPERatioChart

June 22, 2015
by Jed Sires
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Budgeting

One of the questions I ask during a meeting with a financial planning client is “Do you have a good handle on your budget”? I find that about half of the people that I meet with track their budget and know approximately where their money goes on a monthly basis. These people typically track their spending with an excel spreadsheet or a free online budgeting service.

Of course there are a few people that don’t track their budget at all.

You would think that the budget trackers would be better at allocating their money than the non-trackers, but I have found that isn’t necessarily the case. Some budget trackers still make poor decisions when it comes to allocating money. Surprisingly, some of the non-budget trackers make very good decisions.

To summarize, just because you have a budget does not mean you are making the right decisions on how to allocate your money.

While it is important to track your budget, the key to budgeting is proper saving and spending decisions. Said in a simpler way, you must use the information learned from budgeting to make good financial decisions.

Here are three ideas to help people make better decisions with their money.

Do not carry credit card debt

Credit card debt is costly. Most people use loans (debt) to buy cars & homes. Having credit card debt is just like taking out a loan. For the most part, it does not make sense to take out a loan for the type of expenses found on a monthly credit card bill. If you already have credit card debt, pay it off. If you don’t have credit card debt, that’s great, keep it that way!

Save first, and then spend

Make it a priority to save money on a monthly basis. If your monthly savings consists of what is left over after your monthly spending, you may not have much left. I suggest setting up a separate account to segregate the money you save from the money you will spend.

Cut back on discretionary spending

Discretionary spending is the number one budget buster. From what I have seen, restaurants are the biggest area of wasteful spending. After restaurants, the budget buster list varies significantly from person to person. As a generalization, I’d say that most people have the ability to cut their discretionary by at least 25% without much pain.

(If you want to see how much $100 in monthly savings amounts to, check out this article.)

May 21, 2015
by Jed Sires
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Buy Stocks During a Crisis

I just finished reading David Dreman’s excellent book, Contrarian Investment Strategies: The Next Generation. I thoroughly enjoyed the book and highly recommend it for both professional and individual investors. As I was reviewing Dreman’s Contrarian Investment Rules, Rule 29 struck me as particularly important in the current market environment.

Rule 29: Political and financial crises lead investors to sell stocks. This is precisely the wrong reaction. Buy during a panic, don’t sell.

The reason to buy during a crisis is obvious: Historically it has proven to be very profitable for the individuals who can do it.

There are two reasons why I believe this rule is very relevant in today’s stock market.

First, with stocks hovering near all-time highs, a crisis seems to be the last thing on investors’ minds. My take away is this: If you are supposed to buy during a crisis, it would make sense to take some profits (sell) when the market has priced in very little chance of a crisis.

Second, you need cash in your investment portfolio to be able to buy during a crisis. It is very difficult to buy stocks during a crisis even if you have cash, but if you don’t have cash, good luck!

There are risks with holding cash:

First, cash currently yields close to nothing.

Second, there may never be another crisis. It appears that central banks around the world want rising asset prices and are willing to do whatever it takes to make it happen. Can central banks permanently alter the business cycle and forego another crisis? It would be nice, but to say it politely, I’m very skeptical.

Third, even if you have cash, it is extremely difficult to buy stocks during a crisis. In the midst of a crisis, it always looks like things are going to get much worse before getting better. The way to fight this risk is to have a pre-crisis plan and stick to it no matter how bleak the future looks.

Remember: Buy during a panic, don’t sell! Buying stocks during a crisis is an excellent opportunity for the investors that are prepared.

April 24, 2015
by Jed Sires
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Financial Planning for Young Professionals & Families

I believe financial planning is very important for young professionals & families. I don’t want to say that financial planning is more important when you are young (versus old), but it can certainly be more impactful.

When you are young, you have the ability to make small changes that will have big impacts on your future.

As a former track coach and athlete, a race analogy seems like a perfect way to explain my thoughts: Let’s think of preparation for retirement as a 1600 meter race (4 laps around the track). Young professionals and families have just finished, or are still running the first lap. With about 1200 meters to go (three quarters of the race), there is a lot of time to improve if the race hasn’t gone well so far.

Often when I meet someone that wants a financial plan, they are at the 1500 meter mark, or only 100 meters from retirement. Obviously, by the 1500 meter mark, most of the race has been run and neither large financial changes nor a sprint to the finish line have a tremendous impact on how retirement turns out. I don’t mean to belittle the importance of having a financial plan just prior to retirement, but a financial plan can be even more powerful when you are young.

Saving is more important when you are young: In previous blogs I have written about how a little monthly savings compounded over several years can become numbers so large that it is almost hard to believe.

Avoiding debt is very important when you are young: Credit card debt can be very difficult to escape from due to the high interest rates charged. Also, once you are burdened by debt, any additional debt tends to carry even higher interest rates. Having credit card debt when you are young is a bit like running a 1600 meter race with a backpack on.

Having a financial plan is more important when you are young: Good financial decisions early on in your career can give you a head start toward your retirement goals.

March 25, 2015
by Jed Sires
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Conservative Investing: What it means to me

I often talk and blog about being a conservative investor. The more I think about the word conservative though, the more I believe I should clarify what I mean.

The key to being a conservative investor can be summed up very well with a quote from famous value investor Joel Greenblatt: “Figure out what something is worth and pay a lot less”.

After a quiet 2014, the stock market has been extremely volatile in 2015. Volatility is often thought of as risk (the opposite of conservative) and is measured by beta. Said in another way; the greater the volatility, the greater the risk.

If your eyes are glazed over, please give me another 10 seconds because I have a better definition of risk from Seth Klarman of the Baupost Group: Risk is the potential for permanent loss of capital.

I don’t know about you, but losing money permanently sounds a lot riskier than price volatility!

If you were to buy a stock priced at $150 when the intrinsic value is only $100 there is a real risk of permanent loss of capital and the stock should be considered risky. On the other hand, if you bought the same stock at $60 I’d call that a conservative investment. Your potential loss when paying $150 for a $100 stock is much greater than if you paid $60 for the same $100 stock.

This sounds great, but how do you calculate intrinsic value? Multitudes of books are written on this subject, but to make it simple, a stock is worth its’ future cash flows discounted back to today. It must also be noted that calculating the intrinsic value of a stock is imprecise.

If you think about a stock in terms of intrinsic value, it makes it a lot easier to buy more of that stock, (or at least hold it) when it is ‘on sale’ due to volatility.

You cannot control volatility, but you can take advantage of volatility if you know the intrinsic value of what you would like to buy or sell. Knowing the intrinsic value of what you own will not stop you from losing money on a daily, weekly or annual basis. Over time, if you buy stocks at a significant discount to their intrinsic value, the odds of success are in your favor.

March 16, 2015
by Jed Sires
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Cut the Cable Cord

As I was paying my cable bill a few weeks ago, I thought about a recent conversation with my brother about how he had cut his cable cord. To replace cable, he installed an antenna that received HD quality local TV stations and switched to a different internet provider. His monthly savings was about $100.

I then started thinking about what $100 per month in cable savings compounded monthly for 5 years could become. If you invested $100 per month and received 8% on your investment compounded monthly for 5 years, your total after 5 years would be $7,347.69…not bad!

Even if you didn’t invest the money, $100 per month for 5 years totals $6,000. That is a nice sum of money for most people and it is a great reminder of how little expenses can add up to significant sums of money over time.

Thanks to that conversation with my brother, I decided to cut my cable cord. For far too many years, I have been paying well over $100 per month for internet, cable TV and phone service. Since I use a cell phone, I never used the landline and it always bothered me that I had to pay for bundled phone service.

I realize that everyone may not be interested in turning off their cable TV, but new technology and services have made it a lot easier.

Even if you are not ready to cut the cable cord, there are a lot of other ways to save $100 per month. Hopefully this article will give you a little inspiration.

February 9, 2015
by Jed Sires
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Financial Plan for Younger Individuals

During the last few months, I have created financial plans for several younger individuals. Most of these people were looking for ideas on how to maximize their money by saving and investing wisely.

I enjoy helping younger individuals because they have many years to reach their goals and due to their long time horizon, small financial changes can make big positive differences. I am also young, so I understand what’s going on in their lives.

When creating a financial plan for a younger client, I use the following process:

Establish the relationship – We first meet to discuss exactly what the client is looking for and how I can help.

Gather the information necessary for the plan – This includes assets, liabilities, savings, college savings and insurance. General and/or specific financial goals are also very helpful.

Analyze the information – Entering all the financial data into one cohesive financial plan gives me an in depth view of what’s going on.

Develop a plan – This is when I develop a step by step prioritized list of my recommendations. In addition to the action items, is a chart that shows where to allocate savings on a month by month basis.

Implement the plan – Due to the list of prioritized action items, the financial plan is very easy to implement.

Monitor the plan –The financial plan may need to be updated if circumstances change. Due to this, it is important to monitor the plan and update it over time. At the very least, it is important to check the financial plan on an annual basis.

If you would like to learn more about a financial plan visit the Young Professionals & Families Financial Plan page, or contact me using the contact form on the right side of this webpage.