1. When I think of the stock market, especially in down times like this, I try to picture a big rubber band. A law of physics (not sure which law, but some law!) tells us that the more the rubber band is pulled back, the faster and further it will fly when released.   

    So it is when the market pulls back, as it has in the past few weeks. Going by history, we have more reason, not less, to be optimistic about the market’s future returns. 

    Remember 2008? It was a brutal year (S&P 500 down -37 percent). But the very next year, 2009, the market snapped back (S&P 500 up 26.5 percent), and continued to climb.... For every dollar you had invested in the S&P on January 1, 2009, you would have had $2.60 by December 31, 2014. 

    In 2015, this past year, the index hardly moved at all.  

    In the past 21 days of 2016, we’ve seen a fall in the index of about 8 percent. Small caps and foreign stocks (which, together with the large U.S. stocks of the S&P, form a well-diversified portfolio) have generally moved in the same direction as the S&P, only with greater swings. 
    I urge you, as I did in late 2008, not to panic and sell. If you’ve taken my advice in the past, you have plenty of money outside of the market, so that if you need to withdraw cash, you shouldn’t have to sell stocks. Not now...not for months, or even years to come.  

    In fact, as difficult (even nauseating) as it may be, now may be a good time to buy. Don’t try to time the market -- just keep your portfolio in good balance. If we designed a portfolio for you that was 60/40 (60 percent stock/40 percent bonds), then the recent slide in stocks may mean that your portfolio is looking more like a 55/45 portfolio. To get it back to where it was, to “rebalance,” means selling bonds and (gulp) buying stock. 

    I generally recommend doing this no more frequently than once or twice a year, largely to avoid unnecessary taxes and (often hidden) costs to buy and sell. But if your portfolio is too out of whack, it might make sense to rebalance sooner. There’s no strict law about when to rebalance. This is finance, after all, not physics. If you’re unsure whether to rebalance, let’s get in touch. If I have your assets under management, I will be checking your balances in the coming weeks, and contacting you if your allocations are too far from target.  

    Oh....If you are disheartened that your foreign stocks have lately fallen harder than your U.S. stocks, and you are thinking about abandoning foreign stocks, PLEASE read the attached article from Vanguard, which argues very convincingly that now may be exactly the wrong time for “home-country bias.” Note especially the chart that shows how U.S. and foreign stocks have flip-flopped over the years, with yesterday’s losers becoming the champions of tomorrow.  
    In the publishing world, I want to remind you all that the newly updated “portable editions” of Investing in Bonds for Dummies and Investing in ETFs for Dummies are available wherever books are sold. “Portable” means that they have been condensed from the earlier Dummies editions, from roughly 350 pages to 250 pages, and the book dimensions got smaller, too....Easy reading!

    And if you are going to the bookstore anyway, I highly recommend The Devil’s Financial Dictionary, a new book by Jason Zweig of the Wall Street Journal. It’s very funny, and yet also provides a scarily accurate look at the world of investing.  

    Here is the Devil’s definition of the word correction, which seems especially pertinent to the current market: 

    Correction, n. A moderate decline in the market that the people who think they have recognized it believe will not last much longer. It could, however, turn out to be the beginning of a full-blown bear market, nothing but a dip, or the beginning of a bull market. Only after it is over will anyone know for certain what it was.  

    Exactly, Beelzebub.  

    In the next few months, we’ll see where this “correction” goes.  

    In the meantime, keep your focus on the long run, and turn off CNBC!

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  2. My Letter to the Editor, published in The Wall Street Journal, August 22-23, 2015

    Your editorial “Obama Targets Financial Advisers” (Aug 17), argues against Labor Secretary Tom Perez’s proposal to require brokers to meet a fiduciary standard – to put their clients’ interests ahead of their own – claiming it would hurt middle-income people, raising their investment costs and limiting choices. In other words, you contend that the commissioned products being sold today are the middle-income investors’ best options.
    But if that were true, if these products are the best that middle-income investors can hope for, then the brokers selling them would indeed already be holding to a high fiduciary standard, and Perez’s proposed ruling wouldn’t change a thing.
    Granted, if brokers had to work with products that didn’t earn them a commission, they would have to earn their money elsewhere, and would likely wind up charging the client directly. A typical front-load (commission) of 5.75 percent costs a client with a $25,000 portfolio a cool $1,437.50. Many – if not most – fee-only advisers I know would be happy to construct a $25,000 portfolio for that amount or less....And the client would be guided toward, in most cases, a far superior investment mix that would cost way less, and perform way better in the long-run.

    Russell Wild, M.B.A.
    Global Portfolios

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  3. The world stock markets have taken a punch in the past several days, down roughly 5 percent from a week ago.

    Reading the financial press and watching CNBC, you’d think this is the end of the world.

    It could be; but it probably is not.

    Stocks go up. And they go down. And then they go up again (about two out of every three years). This has been a pattern since stocks were first publicly and commonly traded about 200 years ago.

    The past six years have been very unusual. Since the big downturn of 2008, the markets have seen a relatively calm upward climb.... Had you invested $100 in the world stock market on March 1, 2009, and had you stayed invested until about a month ago, your investment would’ve been worth about $270.

    In the past several days, following what Bloomberg and the Wall Street Journal are calling a “global selloff” (accompanied by pictures of traders holding hands to their faces, looking aghast, as if loved ones are falling off a cliff) your 2009 $100 investment would now be worth “only” $256.

    What’s going to happen next? Here is what:  Some investors (prey to the frantic newscasters) will panic and sell their stocks, only to reinvest when prices go back up. This strategy is called selling low and buying high. It doesn’t work well, even ignoring trading costs and unnecessary tax hits.

    Others, a minority of small investors, will not sell. In fact, if prices dip more, and they rebalance their portfolios, they’ll see that it is time to buy more stock. This strategy is called buying low and selling high. It works. Historically, it has worked very, very well.

    On a similar note, the relatively calm climb upward in the value of world stocks has been due largely to the super performance of U.S. stocks....Foreign stocks have lagged. That’s especially true of European stocks, troubled by the severe financial problems of Greece. And it is true of emerging-market nations’ stocks, hurt by the recent tumble in commodity prices (gold, silver, oil...). For U.S. investors, currency flux in favor of the dollar has accentuated the lag in foreign-market performance.

    But just as you shouldn’t assume that because stocks have fallen in the past few days they are a bad investment, you shouldn’t conclude that the outperformance of U.S. stocks is going to continue forever. It won’t. At some point, foreign stocks will outperform US stocks....That flip-flop between U.S. and foreign outperformance is another ongoing pattern that will likely continue forever... If currency flux (which is as unpredictable as the stock market) works in the opposite direction as of late, and the dollar starts to drop vis-à-vis the Euro and Pound, US investors will see the foreign-stock side of their portfolios significantly outpace the domestic side.

    In conclusion, stay focused on the long term, keep your portfolio balanced (I can help if you need help there), and breathe deeply on days like this one.

    It would help, too, to turn off CNBC....

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  4. The Great East Coast Blizzard of 2015 hasn’t happened (yet), but it seems that hell itself has frozen over....

    Yes, for those of you with accounts at Vanguard, you will soon, if you have not already, see major changes on your Vanguard accounts page and regular statements.

    No longer will you need to deal with Vanguard’s cumbersome old dual-accounting system with your mutual-fund holdings on one statement, and your ETFs, individual stocks, bonds and CDs on another.

    All of your securities may now be combined in one statement, and you can see them all on the same web page. (Just as clients of Fidelity, Schwab, and most other brokerages have been able to do for years.)

    Simply log on to vanguard.com and click Start, or visit the Balances and holdings page. You'll see an Upgrade link below the eligible accounts.

    If you see no Upgrade link, then you are not part of the initial roll-out, and you’ll need to call Vanguard to get your account switched over....

    Vanguard’s phone: 877-662-7447.   Let them know that you wish to have all of your holdings in one single brokerage account. By the next day, like a miracle, it will happen!

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  5. "Who is on the other side of the trade? In forex [that's where currencies are exchanged], it's probably an institutional trader at a giant global bank. In stocks, it could be a computerized high-frequency trader, a hedge fund or a mutual fund. In options, it's often a market marker or other professional trader. You might know more than any of these people (or machines). But you probably don't."

    -- Jason Zweig, "Currency Trading: Learn From Your Losses," Wall Street Journal, November 15 - 16, 2014

    These few sentences provide more than enough justification for index investing. Few investors, when they go to trade, stop to consider who is on the other side of the trade. (Yes, for every buy there is a sell. For every sell, a buy...) Chances are very, very good that, regardless of what you're trading, there's a seasoned pro waiting to make money off you. In other words, when you feel a stock is going to fall, and you sell it, there is someone picking up those shares who feels the stock will rise...and he's more likely to be right than you are. That someone probably works full-time at analyzing that one stock. He or she has several advanced degrees in finance from a top institution. He or she has an army of interns to do research...a whole lot of computing power...and the ability to make trades faster than you can blink. Do you really think that you're going to wind up the winner?

    Few traders come out ahead. In the world of currency trading, "A new study of more than 110,000 transactions finds that individual `forex' traders lose an average of 3% a week. Yes, a week," writes Zweig. Stock traders, study after study show, fare far less well than buy-and-hold investors. 

    Give me an indexed mutual fund or ETF, and I'll trust in the long-term performance of the markets, for I have not the (over)confidence that I can beat them. That's because I know who is going to be on the other side of my trade. And now you do, too...


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  6. In my last entry, I discussed the state of the bond markets. Today, I bring you a few words about stocks, in the form of an article I recently wrote for my regular finance column in The Saturday Evening Post.

    This article is particularly timely in that everyone now seems to be atwitter over the upcoming public offering of Twitter stock. Be careful in picking individual stocks! It’s more difficult than you think...

    Good Companies, Bad Stocks

    Company A is fast-growing, high-tech, and widely regarded as one of America’s best corporations. Company B is slow-growing, low-tech, and not even the CEO’s mother would use the word “best” to describe it. Which company should you invest in?
    If you guessed Company B, you’re right....

    [for rest of article, click link below]...

    I also wanted to make a quick comment on a recent Wall Street Journal report that many financial planners are deceptively using the term “fee only.” In the report, summarized by Journal columnist Jason Zweig in the September 21 – 22 issue of the newspaper, 661 financial planners at Morgan Stanley, UBS, J.P. Morgan Chase, Wells Fargo and a handful of other large brokerage houses call themselves “fee only,” even though they are decidedly not – they charge fees to clients, but also take commissions from other parties.

    For the record, Global Portfolios, LLC, has NEVER taken a commission, a gift, or any compensation whatsoever from fund providers or from any other source. And it never will. My sole compensation is what I charge clients directly.

    This policy ensures that I am not potentially swayed into making colored judgments when choosing the best financial products for my clients. (Those products are most often low-cost index funds, which numerous academic studies have shown are the best bets for long-term investing success. That’s not to say that all financial planners at large brokerage houses give bad advice, or are dishonest. Not at all. But when working with a commissioned planner, you need to realize that your best financial interests and his may not always be the same.


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  7. I hope everyone had a very pleasant summer.

    The markets these past weeks have been especially jumpy due largely to the turmoil in Syria. Despite this, despite lingering unemployment in the U.S., a still financially unstable Europe, and a significant slow-down in the growth of China, the stock markets have performed quite well year to date. U.S. stocks are up about 17 percent since January 1, and foreign markets are up about 7 percent (held back by negative numbers from Emerging-Market nations).

    Commodities are another story, having dipped significantly with precious-metal prices plummeting. And bonds, too, have suffered, with the aggregate U.S. bond market, a market that very rarely dips over the course of a year, losing about 3 percent. The reason? Rising interest rates.

    There is a direct inverse relationship between interest rates and the price of bonds. If you are unfamiliar, or a bit hazy on this relationship (as most people are), you might want to read the following short article that fellow advisor Kevin Brosious and I wrote for the NAPFA consumer blog:  [If you are familiar with the relationship, you can skip ahead to the bottom of this post.]


    Bonds and Interest Rate Risk

    By Kevin Brosious and Russell Wild

    Investment-grade bonds aren’t the slam dunk safe investment that they once were—and for this, we can thank the current interest-rate environment. Interest rates have been falling since the early 1980s, and because bond prices and interest rates move in opposite directions, bond investors have enjoyed excellent returns.

    However, all indications are that rates have bottomed out, with nowhere to go but up. [Note: this article was written about a month ago; since then, rates have climbed somewhat, but are still very much near historical lows.] And while declining rates benefit bond holders, rising rates cause bonds to sell at a discount. Think of it this way: Why would  investors pay $1,000 for a bond that pays 3% interest per year when they can purchase a new bond paying 4% for the same price?  They will buy the 3% bond only for a discount...something less than $1,000. Depending upon the maturity (years remaining in the bond) and coupon payments (how much and often interest is paid), that discount can be severe.

    For example, assume you own a $1,000, 30-year, 4% bond paying semi-annual interest. Assume that a year from today, the interest rate for the same type of bond increases to 5%. A buyer would only purchase your bond if it yields the 5% current rate. Consequently, the market value of your bond would fall to $848. You just lost 15%. Ouch.

    Of course, you can hold the bond until maturity, take your annual interest payment, and then get back your original $1,000. But then you would be stuck with a bond paying less than the market rate for 29 more years. The choice is to take the pain now and sell at a discount, or take the pain over the remaining life of the bond. It’s ugly either way.

    The example above shows why longer-maturity bonds have greater price sensitivity to changes in interest rates. In comparison, a $1,000, five-year bond under the same scenario would be priced at $963. The investor still lost money, but a whole lot less.

    However, bond issuers are smart. Most of the time, shorter-maturity bonds (less risk) pay less coupon interest. The buyer of those bonds sacrifices interest income for more bond stability.

    Bond investors can estimate how sensitive their investment is to changing interest rates by using the bond’s “duration.” Duration measures the percentage change in the market price of a bond for a percentage change in the yield. For example, a bond fund that has a duration of 10 can be expected to lose 10% for every 1% increase in yield, and vice versa. (In other words, if you invested $1,000 in a bond fund that had a duration of 10, and interest rates increased 1 point, your investment would now be worth $900.)

    The same principle applies to investing in bond funds, too.

    So, when investing in bonds, remember that risk and reward are always linked. Bonds paying higher interest carry more risk. Using a bond’s duration to determine potential interest-rate risk can be a useful tool.


    If Kevin and I had had more space, we might have delved into the long-term effects of rising interest rates on bond performance.

    But we didn’t have to. Vanguard’s investment officer Brian Scott did a very good of explaining these long-term effects in the following article, well worth the read:


    The bottom line (literally): Everyone is concerned about rising interest rates, which have certainly been rising, but that does NOT mean that they will necessarily rise more in coming months. (In other words, you can’t time the bond market any more than you can time the stock market.) Bonds are still the best diversifiers we have -- don't give up on them. Be cautious about “chasing yield” with high-risk bonds. Know that in the long-run, rising interest rates are not necessarily bad for bond investors, at least not for long-term bond investors. What you may lose in the price of your bonds (or bond funds), you will eventually gain back in higher yield.

    Back to the concept of “duration” as discussed in the article above... If you have a bond portfolio with a duration of 5, and interest rates pop by a full percentage point, you might lose 5 percent of your portfolio, but by gaining about one percentage point a year in added yield, you should be back within five years to where you would have been had interest rates not popped...In other words, no harm done to the investor who plans to buy and hold for at least five years.

    One thing that Scott didn’t get into, but I think is important to mention: If interest rates shoot up – as some fear – that will certainly hurt bonds in the short-run, but it could have an even greater dampening effect on the stock market. So don’t be so fast to abandon bonds in favor of stocks. You want BOTH. You want more in the way of stocks if you need higher return and can stomach higher volatility. You want more in bonds if you can’t stomach high volatility, and you’re okay with modest returns. And cash? The return on cash, unlike that of stocks and bonds, is very predictable... You will lose 2 – 3 percent a year on your money, as it is eaten up slowly but surely by inflation. Don’t minimize that potential loss from “cash drag”; it can be significant.

    Yes, these are somewhat tricky times to invest. But a well-balanced and regularly maintained low-cost portfolio of index funds should serve you well through the coming years.

    Enjoy fall’s first chill. Don’t be chilled by inevitable market ups and downs. Contact me if you question whether your portfolio is properly allocated.


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  8.  I wrote the following for Retirement Income Journal...

    Greater Yield through Closed-End Funds?


    For some, it’s a necessity. For others, it’s driven by a fond remembrance of yields past. Whichever. A desperate search for yield has gripped older investors. And that in large part explains the recent surge in closed-end funds.
    Both the number of new closed-end funds (CEFs) launched and the money going into closed-end funds are at record highs. In one month (March) alone there were four launches. “The CEF industry market size has increased to $288 billion, dispersed among 583 funds that are managed by 103 different asset managers,” according to a June report from Cerulli Associates.
    Of course, we all know that finding yield, even in today’s low-interest environment, is not really very hard. If you want a 12% return right now, you can buy 10-year bonds from the government of Greece. But there’s a catch. With high return comes high risk. Do CEFs, some of which offer yields similar to Greek bonds, offer any lesser risk?
    Unlikely. Markets tend to be efficient. But that’s not to say that closed-end funds are bad. Just move in with eyes wide open. The risk of buying Greek sovereign bonds is readily apparent (huge government deficits, riots in the streets, the potential for default). There’s no free gyro lunch.
    And there’s no free lunch in closed-end funds, either, although the risks are not always so visible. As with any fund, open or closed, you assume whatever risks are inherent in the asset class. So if you buy a high-yield bond CEF, for example, you risk that the underlying high-yield bonds may default en masse or, alternately, plummet in value should interest rates rise. You are also subject to managerial risk, as CEFs tend to be quite actively managed. And your account value is subject to the management fees of CEFs, which tend to be significantly higher than those of open-end funds.
    Then there are the subtler dangers:
    The discount factor. Because CEFs issue a fixed number of shares, demand may drive the share price higher than the net asset value (NAV) of the underlying holdings. That’s called a premium. Conversely, if the fund owners throw an IPO party and no one comes, the share price may dip below street level. That’s called a discount.
    If you buy shares at a premium, or even at a modest discount, you risk seeing those share values fall, regardless of how the underlying holdings perform. According to my Morningstar Principia software, about 120 CEFs currently sell at a premium, and many others are near par. Beware.
    Leverage. Many CEFs (about two-thirds, or 400, per Morningstar) borrow money to create leveraged positions. That’s often how certain funds deliver great yields. But, of course, leverage magnifies losses as well as yield and performance. Many of the leveraged high-yield CEF bond funds now selling at a premium, largely for their juicy 10% to 12% yields, took enormous hits in 2008. In some cases, those hits exceeded the 40% or so loss that stocks suffered.
    Cannibalism. Consuming capital to raise yield is something that rarely happens in the mutual-fund world, and when it does, it is clearly brought to investors’ attention. Vanguard, for example, has three funds with the words “managed payout” in the name. In the world of CEFs, “managed payouts” are not trumpeted. Check carefully to see whether the “distribution rate” includes a return of capital. If it does, your cherished yield may be little more than smoke and mirrors.

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  9. These early days of summer have brought considerable heat here to eastern Pennsylvania, in line with the past year’s heating up of the stock market. Nearly all developed nations are in bullish territory – the U.S. market (as measured by the S&P 500) is up 15 percent year to date; foreign developed-world stocks are up 8 percent. Only the emerging markets stocks have lagged – badly – with a year-to-date return of -7 percent.

    Bonds have seen about a -1 percent return year-to-date.

    Investors with well diversified portfolios are faring well, everything considered... The only mass suffering this year has been felt by the gold bugs.

    Real estate has done exceptionally well, with housing prices in particular moving strongly higher. Finally.

    I’d like to share with you my most recent column in The Saturday Evening Post, which discusses the current outlook for real estate...

    Note that although I’m wearing my “reporter’s hat” in this piece, when I don my “financial advisor’s hat” I agree with the experts I interviewed... All things considered, this is probably not a bad time to buy a piece of property... Although we can’t be certain that prices will rise (or indeed, won’t fall) from here, mortgage rates, from a borrower’s point of view, are superb.

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  10.  I wrote this article  recently for Retirement Income Journal, an excellent newsletter for financial professionals, published by Kerry Pechter, author of Annuities for Dummies....

    The Academy-Award winning film Life of Pi featured a fantastical story of wild beasts battling amongst themselves while adrift on a lifeboat after their ship goes down in a storm. Today’s politicians, pundits and investment advisors are battling amongst themselves over whether an interest-rate storm is coming, and how to build and stock an appropriate lifeboat for such an event.

    Some argue we should try to stall the storm as long as possible. Times like these, they say, with unemployment high and businesses skittish to invest, call for as loose a monetary policy as possible to keep rates from rising. In The New Yorker last week, James Surowiecki said the broader good of low interest rates clearly trumps the dampening effect of low interest rates on savings accounts, CDs, and savings bonds. His column was entitled, “Shut Up, Savers!”

    Others (name any Republican in Congress or presidential-hopeful) argue that the Federal Reserve’s efforts to keep interest rates low are throwing our seniors to the wolves (or tigers or hyenas), forcing them to accept pitifully low interest rates on their savings, and chewing them up alive (like the meerkats in Life of Pi). Some go so far as to suggest that low rates are forcing seniors back to work, and so stealing employment from the young. We must, for the sake of everyone, they argue, allow interest rates to rise.
    In a recent article in the New York Times (“A Debate in the Open on the Fed,” April 2), it was made clear that even officials within the Federal Reserve don’t agree over how to handle this stormy question of what to do about interest rates.

    Martin Feldstein argued in an April 1 guest column in this publication that regardless of government policies, regardless of what we want to happen, economic forces will eventually force interest rates up. Others, like bond guru Jeffrey Gundlach, have argued that nothing is inevitable—and that interest rates may stay low for a very, very long time.

    This uncertainly has created yet more battles about what to do in the interim, while we’re waiting for interest rates to bolt—or not.

    Some investment advisors say that we can’t sit by and watch inflation consume our savings. We should sift through the world of fixed income offerings, seeking yield in strange and usual places, like floating-rate bonds. Burton Malkiel suggests a good look at emerging-market bonds. Some say we should lower our fixed-income allocations along with our expectations, and beef up our allocations to dividend-paying stocks, and REITS.

    Other notables of the investing world, such as William Bernstein, argue that we should play it safe. He recommends high-quality, short-duration bonds, even if it means losing out to inflation, so that we can stay on top of the water once the waves of higher interest rates start to smack us hard.

    In the Wall Street Journal last week (“Pay Off That Mortgage Now!” April 6), columnist Brett Arends argued that it may not make sense to hold bonds at all. We should trash the bonds and pay off our mortgages, he says. Others have argued strenuously that this is the best time ever to lock in on low-hanging mortgage rates.

    All told, the controversy over what we should do about interest rates, as both a matter of both public policy and as investors, is one of the hottest controversies of the era... and not one to be solved anytime soon. As for as public policy goes, I’m in the let’s-stall-as-much-and-as-long as possible group. As an advisor, I’m trying to delicately balance the advice of both Malkiel and Bernstein by squeezing out a bit of extra yield—just a bit—without taking undue risk. On the debt front, I’m all for taking on long-term mortgages and not liquidating our bonds. It’ll pay in the long-run. Maybe.

    Of course, my story is one of many. As protagonist Pi said at the end of the movie about the wild beasts, many alternative stories can be told about storms and lifeboats and survival. You get to choose the one you prefer.

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