Where to stash cash 2

One conundrum with the low interest environment is trying earn interest on your cash deposits.  Yes inflation is low, but when you have cash sitting around it is nice to know where your best options lie.  So, I thought those in this situation might appreciate Jason Zweig's article and review of the current environment and vehicles, particularly a site he mentions that is a good tool too: wwwdepositaccounts.com.

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This is a WSJ article.  Often the WSJ does not allow direct links to their articles.  However, if you search the title "Squeeze More From Your Cash" you can find and access the article.

2016's Intial Market Decline Dilemma

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I don’t normally, or have not thus far, responded to market sell-offs.  And, I am not typically a big believer in lengthy market commentary. But, this year’s start and market decline looks to be the worst in sometime, at least since the 2009 decline.  So, I wanted to offer encouragement to potential and current Pacific Capital Works clients that the plan we have in place, see your Investment Policy Statement (IPS), is a winning strategy.  And, if we stick to it, and don’t get caught up in the market movements, we will achieve our goals, which is the reason we are investors in the first place.

 While it is tempting to believe that there are those who can predict bear markets and, therefore, sell before they arrive, there is no evidence of the persistent ability to do so. On the other hand, there is a large body of evidence suggesting that trying to time the markets is highly likely to lead to poor results.  For example, a study on the performance of 100 pension plans that engaged in tactical asset allocation (a fancy term for “market timing,” allowing the purveyors of such strategies to charge high fees) found that not one single plan benefited from their efforts. That is an amazing result, as even random chance would lead us to expect at least some to benefit.

One way to deal with these down turns is think about similar historical outcomes that resulted positively in the last 89 years (1926-2014):

  • There were 33 years (or 37% of them) in which the S&P 500 Index produced a loss during the first quarter. By the end of 18 of those years (or 55%), the S&P 500 had produced a gain. Of those 18 years, the highest return occurred in 1933, when the S&P 500 returned 54%. The best performance during the last three quarters in each of those years was also in 1933, when the S&P 500 returned 79.2%. The last time the first quarter ended in negative territory but full-year returns turned positive was just recently, when in 2009, the first quarter finished with a return of -11% and went on to recover for full-year gains of 26%.
  • There were 31 years (or 35% of them) in which the S&P 500 Index produced a loss during the first six months. By the end of 11 of those years (or 35%), the S&P 500 had produced a gain. Of those 11 years, the highest return occurred in 1982, when the S&P 500 returned 21.4%. The best performance over the last half in each of those years was also in 1982, when the S&P 500 returned 31.7%.
  • There were 24 years (or 27% of them) in which the S&P 500 Index produced a loss during the first nine months. By the end of four of those years (or 17%), the S&P 500 had produced a gain. Of those four years, the highest return occurred in 1982, when the S&P 500 returned 4.0%. The best performance over the last quarter in each of those years occurred just recently, when in 2011, the S&P 500 returned 11.8% over the last three months.

 As Warren Buffet stated about the simplicity and the difficulties of investing .  The simple part is that the winning strategy is to act like the lowly postage stamp, which adheres to its letter until it reaches its destination. Similarly, investors should stick to their asset allocation until they reach their financial goals.  The reason investing is hard is that it can be difficult for many individuals to control their emotions (greed and envy in bull markets, and fear and panic in bear markets). In fact, I’ve come to believe that bear markets are the mechanism by which assets are transferred from those with weak stomachs and without an investment plan to those with well-thought-out plans—meaning they anticipate bear markets—and the discipline to follow those plans.  A necessary condition for staying disciplined is to have a plan to which you can adhere. But that’s not sufficient. The sufficient condition is that you must be sure your plan avoids taking more risk than you have the ability, willingness and need to take.

Todd Brundage Airs on Business Radio Powered by Wharton School on "Your Money"

Todd Brundage, the President of Pacific Capital Works, joins Professor Kent Smetters of the Wharton School of Business as a contributor on the program “Your Money.” Your Money airs on Business Radio on Sirius XM on Tuesday, September 29th from 5pm to 7pm EST. Todd will air from 6:20 to 7pm EST.

Business Radio Powered by the Wharton School features easily accessible information on a wide range of business topics. Your money airs via satellite on Sirius XM channel 111, and through the SiriusXM Internet Radio App on smartphones, as well as online at Sirius XM Radio.  Business Radio features world-renowned and distinguished professors and alumni as regular weekly hosts, plus executives, entrepreneurs, innovators and other experts as special hosts and guests.

Learn more about "Your Money" or listen to on demand

Is Your Trusted Financial Advisor Working for You? (Part I & II)

Is Your Trusted Financial Advisor Working for You? (Part I)

It is not uncommon to hear in investment conversations about someone’s trusted advisor who takes good care of them.  However, within the investing landscape a glaring dilemma exists with these individuals understanding.   The compensation system and the exclusion of the fiduciary role of your advisor can run counter to your interests.  And, it is well documented in the literature that when the incentive system of your advisor runs counter to your interest, often their behavior follows…leaving your trusted advisor not so trusted.

Many of us assume all advisors are similar.  And, once you feel you have found someone you can trust then you believe you have the winning combination for success.  However, not all advisors are the same.  In fact, how your advisor gets paid can likely communicate to you how well they can be trusted and how likely they will work on your behalf.

The vast majority of financial advisors are sales people.  This method of client interface has been very effective for the “Wall Street” firms.  These very likeable and apparently trustworthy people concentrate on distributing the products and services of the firm they work for that designed them to generate a profit and to be easily sold.  I might also add I think these sales peoples’ relationships are genuine, but they don’t make decisions beyond the sales execution and often don’t have the financial knowledge to understand the investment structure that best benefits a client’s interest.   It is quite common for these sales people to be well liked.  It is why they took up the vocation of sales in the first place.  And, those who don’t leave potential clients with this warm and fuzzy feeling and don’t get the new business get thrown out of this, often described, ruthless industry quite quickly.  But, in no way is this particular sales structure good for you. 

So, even though you feel like you can trust your advisor, it is important to understand how your advisor is paid and how that system incentivizes their behavior.  We will discuss the incentive systems, the complexities of them and what is most likely to work best for you in our next posting, “Is Your Trusted Financial Advisor Working for You?” (Part II)

Is Your Trusted Financial Advisor Working for You? (Part II)  - August 12, 2015

There are multiple ways advisors get paid by their clients.  The public investing community isn’t usually aware because most advisors try to look like the independent fiduciary that is representing your best interest and are vague about methods of compensation.  And, frankly, unless your advisor discloses this to you, you will likely never know the full extent of the compensation picture.  So, it is important to ask your advisor how they are paid and what fees you pay.

For clarity I have divided the compensation system into two types of payment:  (1) Fee-only and (2) Fee Based.  Fee only advisors get paid directly by you in a variety of forms.  But, they will disclose that fee to you and that is the only fee they receive for their services.   Fee-only advisors are generally considered the most transparent and the most likely to best represent your interest because conflict of interest is minimized.

On the other hand, Fee Based Advisors may not disclose their compensation or only some of it; which is why many clients don’t know what they are paying or only know about the fees charged on your statements.  Additional fees could be in an ongoing insurance commission, an investment fee that the fund kicks back to the advisor (12b-1), spreads in the transaction of an investment (compensation typically gained in bond trades from differences in price your advisor firm transacts and purchases or sells to you for), or commission on the sale of an investment.  Financial services clients paying advisors through Fee Based methods will find the method of compensation very convoluted, but more importantly, likely are bringing in an incentive system to the advisor that no longer includes looking out for the client’s best interest because they are bringing other compensatory relationships into the equation.

And, even more confusing is many Fee-Based advisors, and some calling themselves Fee-Only advisors, complicate these compensation methods by collecting fees from a combination of payment types, a sort of wolf in a sheep’s clothing.  Some might call themselves a Fee-Only Registered Investment Advisor (RIA) firm and charge a fee like a fee only advisor, all seeming very trust worthy.  But, the actual employees of the firm might also work for another employer, typically a brokerage firm or insurance company, where they receive additional income from these other forms of compensation and therefore, as employees, are not a Fee-Only advisor.  The usual scenario occurs when a dually employed advisor also works for a brokerage firm and/or an insurance agent, selling you questionable insurance contracts or putting you in investments into expensive vehicles which provides these advisors additional income, or provides them a commission on the spread of a sale.

Hopefully this is not the case for you?  Unfortunately, it is likely happening more often than not, which makes one question the often overheard statement of one’s trusted advisor.

It is clear, if you are going to use an advisor, which is poignantly clear in the research of client benefits, that utilizing a “real” Fee-Only Advisor and Advisor Representative is the most beneficial choice for your financial goals and health.

Please contact us if you would like to set-up a financial evaluation and have your current strategy or financial health reviewed (http://pacificcapitalworks.com/getting-started/ ).  We are the premier investment advisor for entrepreneurs and executives in a few select industries ( see http://pacificcapitalworks.com/clients/)

Todd Brundage, President 

Truth in “Silicon Valley” about VC returns

If you watched the HBO series “Silicon Valley” last season you might recall a show, where Jared the PiedPiper CEO, asked another founder of a VC backed start-up if he had even considered taking less money in his latest round of venture capital (VC) funding instead of getting the highest valuation.  This insightful piece of advice, is not only true for the better performing VC firms, but provides us with an understanding of the instrumental components of successful VC funding.

The poor performance of private equity and VC portfolio’s is well supported in the academic research, especially when considering the risk of these investments.  A 2012 Study, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2053258,  by the Kauffman Foundation found that the heroic stories of Google and Facebook win the hearts minds of the public, but VC returns have not outperformed the public markets since the late 1990s and since 1997 have lost money.

However, some skill among the VC community might be noted in a few firms or individuals.  In fact, a 2015 Study, http://onlinelibrary.wiley.com/doi/10.1111/jofi.12249/abstract, in the Journal of Finance found that 85% of the returns were coming from 10% of the VCs.  The same VCs that take companies public or have successful sales or mergers, continue to have prosperous investments. So, if you are looking for VC funding and you are one of the few that get it, you probably want to go with the most successful and skilled VC in your industry.

However, not all of this out performance is attributed to skill.  Because exactly as Jared pointed out the successful VCs don’t have to pay as much for their investments.  In fact in a 2004 Study, http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2004.00680.x/pdf,  in the Journal of Finance it was shown that highly reputable VCs pay in the range of 217% to 4% less for investments.  So, not only is skill and reputation at play in this persistence performance, but so is, just frankly, paying less. 


Pacific Capital Works and Nike's 401(k) Match Make News

Oregonian Financial Columnist Brent Hunsberger sites Pacific Capital Work's 401(k) Reviews, on our website, and particularly calls out the risks of 401(k) plans that match contributions, such as Nike's Retirement Savings Plan.  Brent describes the risks of missing out on free matching dollars when you don't structure your contributions correctly.  An inherit problem we have seen for the busy Nike executive that has a larger salary and an insistently busy schedule.

Read the Full Article



The Stress Test - What Does It Mean and What Is So Funny About The Results?

The Fed completed its annual “stress test” of bank’s financial health.  So what does that mean to us and our clients?  And, what is so contradictory about these results?

When you custodian your assets (the location that actually holds your assets) you want the organization to be sound and viable in the worst of times.  You want your assets accessible when you need them.  So, holding assets with custodians that at least meet these Fed criteria appears wise and preferably you would like to be at the top of this list.  Not all banks on this list custodian investment assets.  But, it is nice to see the Bank of New York Mellon at the top of the custodians, where we custodian most of our assets.

What is so funny about the results is that some of the Banks on the bottom of this list had an ad campaign a few years ago describing that they are so big and strong that their clients had better access to financial products.  Based on these and prior results that does not appear to be the case.  Any time someone tells you that they have better access or proprietary investments, consider that as a signal that you need to find another adviser.

Read The Full Article   (or search the title "Fed Stress Tests Find Banks Adequately Capitalized")


Todd Brundage Airs on Business Radio Powered by Wharton School on "Your Money"

Todd Brundage, the President of Pacific Capital Works, joins Professor Kent Smetters of the Wharton School of Business and Jason Zweig, a journalist for the Wall Street Journal and best known for his weekly column “Intelligent Investor,” as a contributor on the program “Your Money.” Your Money airs on Business Radio on Sirius XM on Tuesday, January 13th from 5pm to 7pm EST. Todd will air from 6:20 to 7pm EST.

Business Radio Powered by the Wharton School features easily accessible information on a wide range of business topics. Your money airs via satellite on Sirius XM channel 111, and through the SiriusXM Internet Radio App on smartphones, as well as online at Sirius XM Radio.  Business Radio features world-renowned and distinguished professors and alumni as regular weekly hosts, plus executives, entrepreneurs, innovators and other experts as special hosts and guests.

Learn more about "Your Money" or listen to on demand

Price Risk to MLPs

A popular investment of late has been MLPs.  For income seeking investors the low interest rate environment has limited many safer more secure options, and it appears many have chosen to seek income in MLPs.  However, with the recent price cut in oil, many of these price dependent oil and gas projects and services might struggle to maintain their income and begin to realize the risk portion of the equation and mistakes made in the gaining popularity.

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Adjusting Estate Strategies with 2013 Tax Changes

2013 changes to the tax code have created a need to change many estate plan strategies.  Plans need to refocus priorities by minimize capital gains and adding greater scrutiny to state tax levies.

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This is a WSJ article.  Often the WSJ does not allow direct links to their articles.  However, if you search the tile "The New Rules of Estate Planning" you can find and access the article.

Online Wills

Here is a review of Online Wills to include other necessary legal instruments.  For some, these tools are appropriate, but we generally advise seeing an estate lawyer to create these documents if you have complexities or need to maximize federal or state estate or death taxes.

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This is a WSJ article.  Often the WSJ does not allow direct links to their articles.  However, if you search the tile "Before It's Too Late: A Test Of Online Wills" you can find and access the article.

So What is an Investment Advisor Worth?

Vanguard, the largest mutual fund company, took the difficult and pain staking work to figure out what an investment advisor doing the basic and appropriate roles might be worth to an investor.  Never mind that the majority of advisors don’t do these assumed tasks or are structured appropriately.  The result is 3% of your assets annually.  So, the more assets you have, the more money the advisor is worth.  Additionally, the article does not address the risk removal one would hope an advisor would additionally provide.

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2014 Review on Where to Stash Cash

It is always a bit of a conundrum strategizing for your short term cash needs, but especially exasperating domestically because of the “feds” recent actions and the low interest environment.  So, it is nice to see this article from Annamaria Andriotis highlighting and describing some of the basic options.

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This article links to Wall Street Journal (WSJ).  Occasionally the WSJ limits access to subscribers based on its marketing strategy.  Often, if the link requires subscriber access, you can “search” the original title of the article and gain access through your search function, where apparently the WSJ allows access.

College Savings Utilizing Insurance

Rarely does it make sense to use insurance for an investment.  Cost matters when investing and risk exposure is actually an advantage, over long periods of time, which can be rewarded with higher returns.  Early college planning clearly meets these criteria with an inflation rate around 6%, and insurance investments omit these two important factors.

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This article links to Wall Street Journal (WSJ).  Occasionally the WSJ limits access to subscribers based on its marketing strategy.  Often, if the link requires subscriber access, you can “search” the original title of the article and gain access through you search function, where apparently the WSJ allows access.

A Sign Vacation Home Values Are Returning

One of the first signs that the vacation homes are returning in value.  After years of low values and no buyers, the National Association of Realtors states that second homes acquired for personal use are up 30% with the return of market values.

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This article links to Wall Street Journal (WSJ).  Occasionally the WSJ limits access to subscribers based on its marketing strategy.  Often, if the link requires subscriber access, you can “search” the original title of the article and gain access through you search function, where apparently the WSJ allows access.