Wealthonomics

With all the recent craziness in the markets I wrote two new papers to share some of our thoughts. One entitled “The Groupthink Dilemma” is in response to a client question about what steps we take to avoid Groupthink and then following the crowd.

The second, “Volatility: Friend or Foe”was put together to share our thoughts on the volatility and some ideas to mitigate the damage it can do to a portfolio. As always we are interested in any thoughts or comments you may have.

Nothing seems to get people riled up quicker than a discussion of taxes. The two camps seem to be divided along “the rich don’t pay their fair share” and “47% of the population doesn’t pay income tax and more than that should be paying something” ideologies. Both have data on their side but few are willing to carefully examine the others position and find an answer that finds a fair compromise.

This link will lead you to a Knowledge@Wharton post that has put forth a reasonable effort the examine each point of view.

Some interesting questions are coming out of this debate:

• Are you prepared to lose all of your itemized deductions in exchange for a lower tax rate?
• Do you think dividends should be taxed at the same rate as ordinary income?
• Do you think dividends should be subject to payroll taxes like salary?
• Should Capital Gains be taxed as ordinary income?
• Should Capital Gains be subject to payroll taxes?
• What percentage of the population should pay income taxes?
• What are your views on a flat tax?

Today was not a fun day in the markets as I’m sure the media has made you painfully aware of. Volatility is part of the markets and in the 30+ years in this business I’ve never met anyone who dislikes upside volatility. Never! That being said downside volatility is certainly not as satisfying and can cause reasonable people to question what’s going on and what to expect. This great post by Calculated Risk shows the market performance after previous large downdrafts in the market. Pretty enlightening!

No one knows what the next few days will bring. We can just as easily see huge recoveries as more declines. Successful investing is a long-term proposition and as such a long term perspective is vital to good outcomes.

I found this Opinion Piece in the Wall Street Journal interesting and instructive.

The roller coaster ride of the investment markets the past few months at times can seem scary and unpredictable. Surprises naturally can thrill, disappoint or just be downright scary. When one takes on the roller coaster at the amusement park one knows they will most likely experience the thrill, a calm and a scary part but at the end they believe all those things will happen and have a high probability of coming to the end alive and gained a memorable experience.

Being a successful investor does require a vision for the future and the expectations that there will be some thrills, disappointments and scary parts along the way as well. Having the responsibility of helping clients with their achieving their goals and helping them maintain their lifestyle in retirement is one we all take very seriously here at White Oaks.

We have gotten a few questions about our view of what’s going on. A tool we use to communicate is our quarterly webinar, the most recent being conducted on July 21st. Over the past two years we have communicated a number of things to expect so I am not surprised by……………..

• I’m not surprised that the unemployment rate has not gone down quicker. We have a structural problem of the people who are unemployed that do not have the skills and training for the types of jobs that are available today. We have indicated on many occasions that unemployment will not drop significantly until more construction activity comes back. It would be unrealistic to assume that will change anytime soon based on supply and inventory of unsold homes.
• I’m not surprised by the fact that the market has pulled back by 10% recently. Pullbacks of this magnitude are VERY normal and are to be expected. So are big drops and rises in one day. Driven by fear and greed sharp directional changes happen. Both up and down.
• I’m not surprised by the slowing of the economy. Starting in late 2008 the notion we put forth on the economy is that it would look like a square root sign. Big drop, followed by a sharp rise and that a leveling out in slow growth mode. Based on the high debt and unemployment the economic recovery would NOT have the tools for an above average recovery long-term. This is likely to continue, muddling along, until unemployment drops below 8%.
• I’m not surprised that some pundits are talking about a double dip recession. It is a lot easier to slip into negative territory on GDP falling from 1.5% than from 5-6%. Higher growth allows for some decline “to be noticed” first. That being said we continue to be in the slow growth camp. The sharp rise in employment numbers for July provide more evidence to the “slow growth” belief.
• I’m not surprised that people are frustrated by our elected Representatives in Government. The phrase that “nobody should ever see sausage being made” comes to mind. Clearly it has been ugly and will continue to be so. Personally I will be ignoring the media sound bites and review voting records for the next election.
• I’m not surprised people are concerned about the stock market. Markets climb a wall of worry and clearly we have things to be concerned about. That being said we also have a lot of positive things that get little to zero press recognition. Corporate balance sheets are strong with tons of cash. Earnings are ABOVE expectations and valuations are relatively cheap. For more data check out our webinar and this article in today’s Wall Street Journal.

It has often been said “the more things change, the more they stay the same”. Markets go up, markets go down. Always have and always will. The vast majority of investors who react emotionally to market movements lose money and the vast majority who take a long term view are achieving their goals and dreams. Our job is the later and we are not surprised when people like that. Be patient and be well!

Exciting news today for the Deficit/Debt Ceiling issue that has been hanging over our heads for, it seems forever. The Senate put forth a plan based on the Bowles/Simpson Report and President Obama has thrown his support behind it. There is a long way to go but this may have the energy to push forward.

Personally, I’ve believed the Bowles Simpson plan was the plan to consider since it was released last fall. More information on the concepts can be accessed by clicking here.

A summary of Bowles/Simpson can be accessed here.

I’ve been thinking a lot about “design” lately. When people think of design they tend to think of clothing, cars or buildings but design impacts virtually everything we do. When a Professor at Carneigie Mellon University, and famous for his early work on artificial intelligence, Herbert Simon remarked, “A Designer is anyone who devises ways to change existing situations into preferred ones.” Good design defines and assures performance no matter what the product or service. Bad design makes it hard to accomplish results.

There are many examples of “good design” in organizations. A common example is the design element that Apple Computer puts into all their products. Zappos made it easy to return shoes bought over the internet and Amazon’s design was, buy everything with a click “and you’re done”. Cirque Du Soleil redesigned what a circus was and has captured millions of hearts and imaginations.

25 years ago we started a new design with this firm. It began with a notion that people wanted financial advice, and an open architecture of being able to find and use the best in financial products while building and protecting their financial security. The key element of our design was our decision to be a fee-only firm with no compensation from a third party. There are a lot of advisors who use the term fee-based. They sound the same but fee-only is the only term that assures you that no other form of compensation is being earned to give that advice.

Being fee-only has allowed us MUCH more than just being able to say that “we are only being paid by you”; being fee-only also allows us to be open to the entire universe of ideas, not just the ones the firm has approved (possibly based on compensation) for their associates to use. Being fee-only also means that we can design structures to lower the cost of investments in a portfolio, as we have done with our pooled funds. It also allows us to have White Oaks Trust Services, our trust relationship office. This is a clearly unique model in the world of financial advisors.

More importantly, our design as a fee-only firm clearly defines the client as the “boss” in our relationships. We are here to serve you as our client and not the needs of a large, impersonal organization.

I’ve come to believe that there are more than a few “nice people” and “smart enough” advisors out there, but many of them struggle to be their best because the design elements of their firm, in many ways, restricts them. Over the past 25 years, I feel very blessed to have stumbled (oaky maybe with some thought!) into the design that is perfect for the times. We will continue to work on improving our design for the next 25 years.