2018Q3 Quarterly Commentary

October 17, 2018

2018Q3 Newsletter

Quarterly Commentary

Market Recap

The third quarter saw the continuation of a market trend we have been seeing since nearly the beginning of the year. That is the continued upward trajectory of the S&P500 (US large cap), which ultimately hit a record high on September 17. In contrast were emerging markets, which were down –1.1% for the quarter and -7.7% YTD.

Other indices remained relatively flat for the quarter and YTD, with the notable exception of the Russell 2000 (US small cap), up 3.6% for the quarter and 11.5% YTD.

Weighing on emerging markets has been tariff battles with the US (e.g., China) and economic and political disruptions (e.g., Venezuela). Venezuela in particular has suffered from internal unrest. Its oil production has fallen by nearly 1 million barrels per day since 2015. Half the decline has come this year as its economic collapse has intensified.

Table 1

Key Index Returns

S&P500 (Large) 7.7% 10.6%
Russell 2000 (Small) 3.6% 11.5%
EAFE (International) 1.4% -1.4%
MSCI Emerging Markets -1.1% -7.7%
Barclays Agg (Taxable) 0.0% -1.6%
Barclays Muni (Tax-Free) -0.2% -0.4%
DJ-Real Estate 0.7% 2.1%
Bloomberg Commodity -2.0% -2.0%

Source: Morningstar, 2018

The performance of US equities continued to be well supported by the US economy. In September, the Bureau of Economic Analysis announced that GDP grew at a healthy annual rate of 4.2% in the second quarter. Further, the unemployment rate declined in September to 3.7% — its lowest level since 1969.

Inflation continued to creep slowly up, as it has over the last four years. In September, the CPI-U increase 0.1% in in September, rising 2.3% over the last 12 months.

With the robust state of GDP and labor markets, it’s not surprising that consumer confidence and investor sentiment are surging as well. In September, the University of Michigan’s consumer sentiment index surpassed 100.0 for only the third time since 2004. Likewise the Ned Davis Research Crowd Sentiment Poll put Investor sentiment in the “overly optimistic” zone.

Given all these factors, and in response to what it referred to as “realized and expected labor market conditions and inflation”, the Fed raised the target range for the federal funds rate in September to 2 to 2-1/4 percent. This represents the sixth tightening action in a row.


Outside Perspectives

“The Tao of Wealth Management”

July, 2018

Jim Parker

Dimensional Fund Advisors

The path to success in many areas of life is paved with continual hard work, intense activity, and a day-to-day focus on results. However, for many investors who adopt this approach to managing their wealth, that can be turned upside down. The Chinese philosophy of Taoism has a phrase for this: “wei wu-wei.” In English, this translates as “do without doing.” It means that in some areas of life, such as investing, greater activity does not necessarily translate into better results.

In Taoism, students are taught to let go of things they cannot control. To use an analogy, when you plant a tree, you choose a sunny spot with good soil and water. Apart from regular pruning, you let the tree grow.

This doesn’t mean that we should always do nothing. In fact, insights from financial science suggest you should direct your investment efforts to the things you can control. These include taking account of your own preferences and sensitivities when choosing investment strategies, diversifying your allocation to moderate the ups and downs, being mindful of the impact of fees, and exercising discipline when emotions threaten to blow you off course.

Successful investing requires taking actions that can have a positive impact on the outcome. For instance, to maintain their desired asset allocation, investors should regularly rebalance their portfolio by reallocating money away from strongly performing assets.

But rebalancing is a disciplined, premeditated activity based on each person’s circumstances. It contrasts with the “busyness” of reflexively following investment trends and chasing past returns promoted through financial media. Look at the person who fitfully watches business TV or who sits up at night researching stock tips. That sort of activity is likely counter-productive and can add cost without any associated benefit. With investing, constantly tinkering with an allocation does not perfectly correlate with success.

Now, while that makes sense, many people struggle to apply those principles because the media tends to look at investing through a different lens, focusing on today’s news, which is already priced in, or on speculating about tomorrow. Guesswork can surely be interesting. But is it relevant to your long-term plan? Probably not.

People caught up in the day-to-day may constantly switch money managers based on past performance, or attempt tactical changes in their allocation, or respond in a knee-jerk way to news events that turn out to be noise.

Again, the assumption underlying these approaches is that if you put more effort into the external factors and adjust your position constantly, you will get better results. Unfortunately, people may end up earning poorer long-term returns from trading too much, chasing past performers, or attempting to time the market. Ultimately, that’s just another reminder of the potential benefits available to disciplined investors who stay focused on what they can control.

As the ancient Chinese proverb says: “By letting it go, it all gets done. The world is won by those who let it go.

But when you try and try, the world is beyond the winning.”

Questions from Clients

Q: I feel like I need a budget to help keep me on track. What tips do you have for me?

 We often hear from clients who would like help creating a budget. Before addressing how to budget, it might be helpful to discuss why. The purpose of budgeting is not to track or control every dime you spend. Sometimes life intrudes on the best laid plans and you have to spend some money regardless of what your budget says. Budgeting is really a way for you to examine your spending patterns and to make sure that your spending is in alignment with you long-term goals.

That’s the key question, isn’t it?

In this sense, a backwards-looking budget review can be almost as useful as a set of forward-looking budgetary controls.

If you download your transactions from last year into an online program like Mint and sort them by category, you might be surprised at what you find. For example, you might be shocked at how much you spend at Starbucks. Think how interesting it would be have us run the numbers on how much sooner you could retire if you were to — picking on Starbucks again — give up your latte habit.

Most banks and credit card companies allow you to import your transactions into programs like Mint. These programs largely automate the process of categorizing your transactions. This approach gives you more time to review the data rather than endless hours inputting it.

Once you have your transactions categorized, take a good look. Maybe you’ll want to make some changes in how you spend; maybe not. If you have any hypothetical situations you would like us to examine, let us know that as well.

Peace of Mind does not necessarily mean that your financial future is completely, 100% secure, although that is certainly nice. It can also come from knowing that you’ve looked at the tradeoffs and are comfortable doing what your doing. In budgeting, peace of mind means freedom from guilt in spending. Maybe you really do value those weekly lattes over an additional six months before retirement. But you can’t make that decision if you don’t have the data.

This is why Dave Ramsey says that budgeting gives you freedom. Once you’ve allocated your budget in accordance with your goals, you actually have more freedom and less guilt in spending.

 Tips for Preventing Fraud

“A Checklist for Action”

Cybercrime and fraud are serious threats and constant vigilance is key. While Barnett Financial plays an important role in helping protect your assets, you can also take action to protect yourself and help secure your information. This checklist summarizes common cyber fraud tactics, along with tips and best practices. Many suggestions may be things you’re doing now, while others may be new. We also cover actions to take if you suspect that your personal information has been compromised.

Cyber criminals exploit our increasing reliance on technology. Methods used to compromise a victim’s identity or

login credentials – such as malware, phishing, and social engineering – are increasingly sophisticated and difficult to spot. A fraudster’s goal is to obtain information to access to your account and assets or sell your information for this purpose. Fortunately, criminals often take the path of least resistance. Following best practices and applying caution when sharing information or executing transactions makes a big difference.

How we can work together to protect your information and assets

Communicating with Barnett Financial

  • Keep us informed regarding changes to your personal information.
  • Expect us to call you to confirm email requests to move money, trade, or change account information.
  • Establish a verbal password with us to confirm your identity. We’d be happy to accommodate this request.

Communicating with Schwab

Schwab takes your security seriously and leverages protocols and policies to help protect your financial assets.

Below are actions you can take to reinforce their efforts and resources to assist you in keeping your account safe:

  • Confirm your identity using Schwab’s voice ID service when calling the Schwab Alliance team for support.
  • Use two-factor authentication, which requires you to enter a unique code each time you access your Schwab accounts.
  • Review the Schwab Security Guarantee, which covers 100% of any losses in any of your Schwab accounts due to unauthorized activity.

To learn more, visit Schwab’s Client Learning Center.

What You Can Do

  • Be aware of suspicious phone calls, emails, and texts asking you to send money or disclose personal information. If a service rep calls you, hang up and call back using a known phone number.
  • Never share sensitive information or conduct business via email, as accounts are often compromised.
  • Beware of phishing and malicious links. Urgent-sounding, legitimate-looking emails are intended to tempt you to accidentally disclose personal information or install malware.
  • Don’t open links or attachments from unknown sources. Enter the web address in your browser.
  • Check your email and account statements regularly for suspicious activity.
  • Never enter confidential information in public areas. Assume someone is always watching.

Exercise an extra level of caution when moving money

  • Leverage our electronic authorization tool to verify requests. Featuring built-in safeguards, this is the fastest and most secure way to move money.
  • Review and verbally confirm all disbursement request details thoroughly before providing your approval, especially when sending funds to another country. Never trust wire instructions received via email.

Adhere to strong password principles

  • Don’t use personal information as part of your login ID or password and don’t share login credentials
  • Create a unique, complex password for each website, Change it every six months. Consider using a password manager to simplify this process.

Maintain updated technology

 Keep your web browser, operating system, antivirus, and anti-spyware updated, and activate the firewall.

  • Do not use free/found USB devices. They may be infected with malware.
  • Check security settings on your applications and web browser. Make sure they’re strong.
  • Turn off Bluetooth when it’s not needed.
  • Dispose of old hardware safely by performing a factory reset or removing and destroying all storage data devices.

Use caution on websites and social media

  • Do not visit websites you don’t know, (e.g., advertised on pop-up ads and banners).
  • Log out completely to terminate access when exiting all websites.
  • Don’t use public computers or free Wi-Fi. Use a personal Wi-Fi hotspot or a Virtual Private Network (VPN).
  • Hover over questionable links to reveal the URL before clicking. Secure websites start with “https,” not “http.”
  • Be cautious when accepting “friend” requests on social media, liking posts, or following links.
  • Limit sharing information on social media sites. Assume fraudsters can see everything, even if you have safeguards.
  • Consider what you’re disclosing before sharing or posting your résumé.

What to do if you suspect a breach

  • Call Barnett Financial or your Schwab Alliance team immediately at 800-515-2157 so that they can watch for suspicious activity and collaborate with you on other steps to take.

Learn more

 Visit these sites for more information and best practices:

  • StaySafeOnline.org: Review the STOP. THINK. CONNECT™ cybersecurity educational campaign.
  • OnGuardOnline.gov: Focused on online security for kids, it includes a blog on current cyber trends.
  • FDIC Consumer Assistance & Information, https://www.fdic.gov/consumers/assistance/index.html.
  • FBI Scams and Safety provides additional tips, https://www.fbi.gov/scams-and-safety.

At Barnett Financial

Net Promoter Score

We’re excited to announce that we have launched a Net Promoter Score initiative. Net Promoter Score is a client satisfaction measurement and process improvement methodology based on a single question. The question is: “Considering your complete experience with [our company], how likely would you be to recommend our services to a friend or colleague?”

For most of you, we will be posing this question at the conclusion of your annual Financial Plan Update.  At that time, we will transmit this question to you by emailing you a URL/web link to special page on our website.

Thanks in advance for responding and for providing your valuable input! We hope you take this initiative as further evidence of our constant desire to improve the level of service you receive at Barnett Financial and to truly “Take the worry out of wealth.”

Meeting Types

Apart from occasional one-off meetings (e.g., with you and your estate planning attorney or CPA), Barnett Financial has delineated two distinct, recurring meeting types, as follows:

  • Financial Plan Update (FPUP) – Typically offered annually. This meeting present results of an update to the retirement projections we prepared for you when you first began working with Barnett Financial. FPUPs are particularly helpful if you have just had or are contemplating a significant life change (e.g., new home, marriage, new job, etc.).
  • Planning Issues Update (PI) – Frequency varies by client; may be requested at any time. Rather than being focused on financial or retirement projections, this meeting is an open-ended discussion around the financial issues that you may be facing. We sometimes include a high-level discussion on general market returns and on your investment portfolio.

If we have requested a meeting with you and you are not clear what it is or what will be covered, please ask! It should be one of these two meeting types.

Diminished Capacity via DocuSign

We’re happy to report that our effort to obtain signatures on the Credit Reporting form via DocuSign was highly successful. This quarter, we’d like to apply the DocuSign tool to the Diminished Capacity Directive.

As a reminder, the Diminished Capacity asks you for guidance on how we should respond if we begin to suspect that you may be suffering from diminished capacity.

Rest assured that we ask all clients — regardless of age — to sign the form. Please look for the Diminished Capacity form to be sent to you in the coming weeks via Docusign.

Internal Audit

We’ve received 9 responses of the 17 confirmation letters we mailed as part of the audit. If you’ve received such a letter but have not yet responded, please do so. Thanks!

Closing Thoughts

As temperatures (finally!) start to drop and the kids reintegrate into school, it’s a good time to reflect on whether you are fully acting in a way that is consistent with your long-term financial goals.

It is easy to get caught up in a keeping-up-with-the-Joneses routine, to respond emotionally to a volatile stock market, or otherwise get sidetracked. Let us know how we can help support you in this process of reflection.