Happy Thanksgiving

If the past couple of years have taught us anything, it’s that we have a lot to be thankful for. Personally, I’m thankful to live with my family in such a beautiful place while doing work that I love. This week, from my family to yours, I wish you a wonderful Thanksgiving. I hope that you get to spend it with family and others whom you love dearly.

Early one morning last week I was reading an article about continuing care retirement communities for a future blog post. Then I checked my email and… boom, rumors that Schwab was buying TD Ameritrade for $26 billion! This was a shock even though the brokerage industry has been going through changes lately and “consolidation” was likely. Frankly, I had assumed a smaller firm like E-Trade would be taken over, perhaps even by TD itself.

Yesterday morning those rumors were confirmed. There will be regulators to contend with and a host of other issues I’m sure, but most seem to think the deal with close sometime during the latter half of next year.

What does this announcement mean for you? (By “you” I’m referring to those wonderful clients whom I work with on an ongoing basis and use TD as custodian.)

The bottom line, I think, is that the sale (takeover, merger, or whatever else you’d like to call it) of TD to Schwab will have little direct impact on you and your investments. Why? Fundamentally, both firms are custodians, or holders and protectors of your investments, and operate largely in the background. That’s the core role both play in the market today and they do it well.

TD, for example, holds your investments, processes transactions, generates statements, and sends data to other systems I use when working for you. Schwab does the same thing for its institutional clients and I don’t see any of those fundamentals changing through this deal. Size and strength are important in the custody realm and the combined company will hold something like $5 trillion in client assets and 24 million accounts. That’s huge for a financial institution that isn’t a bank.

Both firms are very similar in terms of the nuts and bolts of their service offerings, so it’s hard to complain about this deal from an investor choice perspective. Importantly, both went to $0 trade commissions on most investments back in October, so there isn’t much of a cost difference either. The other differences between the firms are deep in the weeds.

What will likely happen at some point well into 2020 is that your accounts will be “moved” to the Schwab system as the firm absorbs accounts held at TD. Schwab and TD say that total integration could take from 18 months to three years, so it’s no small undertaking, that’s for sure. This could lead to minor headaches, but nothing bad would happen to your investments, or anything like that.

I’ll be keeping you informed along the way, but please feel free to ask questions as they come up.

Have questions? Ask me. I can help.

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The Inversion that Wasn't

The world of investing is a strange place. Some months ago, the yield curve, or the difference in yields paid by bonds of different maturities, inverted. Since yield curve inversions are a near-perfect recession indicator, much ink was spilled discussing it. Understandably, investors were focused on when a recession would hit. Many analysts thought that maybe a year or two out was a good expectation.

Fast forward to today and it seems like investors couldn’t be bothered to consider such a thing. Barring day-to-day volatility driven largely by trade tension headlines, stocks have continued to rise. The Dow Jones Industrial Average and the S&P 500 have both recently hit record highs. But aren’t we supposed to be edging toward recession? How can stocks keep going up?

This summer the Federal Reserve started lowering interest rates in response to fears about the economy slowing and trade-related uncertainty. Since then they’ve dropped short-term rates 0.75% and this, probably more than anything else, has helped investors ignore the yield curve inversion. But then the yield curve began to steepen recently and is no longer inverted! What’s an investor to think?

Does all this mean our recession fears were unfounded? Does it mean stocks can rise indefinitely? The answer to both questions is no, but stocks can continue to rise for a while because the stock market loves low interest rates, even in the face of growing problems such as low inflation, declining business sentiment and the continued slowing of the manufacturing sector. And the love affair strengthens when investors have been assured rates will stay low for the foreseeable future.

My research partners at Bespoke Investment Group explained this through an interesting metaphor following the Fed’s rate setting meeting in October.

“It was almost the equivalent of your parents telling you on a Friday that they were going away for the weekend and wouldn't be back until Monday at the earliest. In other words, party this weekend!”

The partiers in this case are investors and the keys to the house (and the liquor cabinet) are low rates supplied by the Fed (the parents). Historically, yield curves tend to re-invert after being inverted as long as they just were, so that will be something to watch out for in the coming weeks and months. Another inversion would certainly stoke the recession fires again. By the way, analysts are still predicting a coming recession, just maybe a little farther away than originally thought.

If you’re interested, here’s a list of yields from the Wall Street Journal as the bond market closed on Friday. You’ll see the yield percentage being higher with the 30yr bond and then declining at each separate maturity step down to one month. This is what a normally sloped yield curve looks like, albeit with historically low rates across the board. Flip this around and make the shorter maturities yield more than longer-term and you’ll get a sense of how backwards yield curve inversions can look.

Have questions? Ask me. I can help.

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Ridgeview Update

During this challenging time I wanted to update you on our status. As with much of Sonoma county, my family was evacuated over the weekend but we're now set up at a family member's house out of the area. Brayden, my assistant, is staying out of the area as well. Our office building is also in the mandatory evacuation zone. Fortunately, most of our business is in "the cloud" and being in a different location is only an inconvenience. So, it's business mostly as usual until we get the all clear.

My family and I wish you and yours a safe next several days, or however long this latest fire event lasts. In the meantime, please know that you can reach out with any questions.

Please take care and stay safe.

The Staff at Ridgeview Financial Planning

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All Hail the Global Consumer

We hear about slowing economic growth at home and around the world, but it’s interesting to see what consumers are actually doing with their money. It turns out that consumers here and in China are doing okay and are quite willing to spend, at least for now.

While not an official state holiday, Singles’ Day has become an important consumption day in China. If you haven’t heard about this before, you can think of the day as being a much larger version of our Black Friday.

Recognition of 11/11 each year is said to have begun in the 1990’s as a celebration of being single in China, with the 1’s in the date representing being single and then being paired as a couple. People go on blind dates, some choose it as their wedding date, others pamper themselves or… buy stuff online. In the last ten years or so Singles’ Day has turned into a massive sales event with Alibaba (the Chinese e-commerce giant similar to Amazon) displaying total sales in real time and kicking things off this year with a live performance by Taylor Swift!

Last year Singles’ Day sales were almost $31 billion. This year Chinese consumers spent $38 billion and, according to JPMorgan, surpassed in less than 12 hours the $24 billion US consumers spent last year during our five-day Black Friday weekend. The chart below, again from JPMorgan, shows how sales increased as the day went on. Granted, China has about a billion more people than we do, but they still spent more than us proportionally.

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Powerful FAANGs

I hope you’re getting back to some sense of “normal” after a crazy week or so due to the Kincade Fire. For me, it’s good to be back home and back in the office. I hope you and yours did okay, all things considered.

This week I wanted to address a question posed to me by a client about skipping the “broad market” and simply investing in the so-called FAANG stocks (the acronym is explained later). While it might sound like an interesting idea because the big tech names have been performing well lately, casting aside a diversified portfolio for a handful of stocks is probably a bad idea.

However, if you had a functional crystal ball ten years ago you could have earned higher returns by going all in on FAANG. But since we can’t see the future, investing isn’t that easy. While it’s common for a relative few stocks to drive up overall market performance, we don’t know in advance which stocks those will be. So, instead of trying to guess or chase what’s popular, we buy the broad market to capture what’s hot now but also what could be hot later.

The following short article from Dimensional Funds answers this question quite clearly (emphasis mine). You’ll note that returns didn’t suffer that badly without FAANG stocks in the last ten years but missing a wider chunk of good performers (common with unlucky stock picking) would have sunk your returns. Here’s the article…

The stocks commonly referred to by the FAANG moniker— Facebook, Amazon, Apple, Netflix, and Google (now trading as Alphabet)—have posted impressive gains through the years, with all now worth many times their initial-public-offering prices. The notion of FAANG stocks as a powerful group holding sway over the markets has sunk its teeth into some investors. But how much of the market’s recent returns are attributable to FAANG stocks? And does their performance point to a change in the markets?

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Getting to Know Future You

One of the things I love about financial planning as a profession is that there’s no shortage of good stuff to read and ponder over, and call it work. One day it’s investing topics, the next its emerging insights from behavioral finance and neuroscience. That’s probably what I’d do with that 25th hour of the day – read more. It would certainly be better than watching the news!

Along these lines I recently read a book that, in part, invited the reader to create a relationship with their “future self”. Not some stylized version of who you hope to be, but an older version of yourself five, ten, twenty years in the future. You’d then develop a regular dialogue with Future You. Even daily.

The idea is that Future You would help you understand what to do (or not do) today to stay on track for accomplishing things that were ultimately (according to Future You) the most important. Maybe its eating better and exercising, spending more time with family, or even getting in to see your dentist more often. And Future You isn’t going to blow smoke, right? They would be honest, and even plead with you to do what you probably think is right anyway.

It turns out this concept is a growing field of research that has direct implications for financial planning. This makes good sense because having a healthy picture of one’s future self informs decisions involving delayed gratification, such as saving for retirement, for example.

The following are excerpts (emphasis and additions mine) from an article on the topic. I’m including a link to the full article below. The content is meant for financial advisors, so you’ll see some references to the target audience.

Future self-continuity (FSC) is the connection and perceived association between who you are today and who you will be in the future. The idea and theory of future self-continuity were developed out of research focused on understanding and curing the problem of future discounting, which is the human tendency to place less importance on future rewards when compared to current rewards. And because of this tendency, it can become very easy to put off (or even ignore) behaviors associated with future rewards, from simple ‘bird in the hand’ scenarios (e.g., taking $50 today instead of $60 next week), or (not) saving and investing for retirement.

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