Is Value Investing Dead?

Is Value Investing Dead?

 

LUTZ BUSINESS INSIGHTS

 

is value investing dead?

Josh Jenkins, cfa, senior portfolio manager & head of research

 

Value investing has been around for nearly a century, developing a devout group of followers over time. Some of the world’s most prominent investors employ a variation of the strategy, including Omaha’s Warren Buffett. It’s not just the practitioners filling the ranks of the believers, the approach is also supported by academic research. Value investing has a strong track record with sound economic rationale to back why it has worked in the past, and why it should work in the future.

None of this changes the fact that recently the relative performance of value investing has stunk (please excuse the technical jargon). For over a decade it has lagged behind the broad market, causing some investors and pundits to lose the faith. Here at Lutz, however, we still believe. To understand why, let’s explore what value investing is, how it has performed in the past, and why we are optimistic about its future.

What is Value?

“Long ago, Ben Graham taught me that ‘Price is what you pay, value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” – Warren Buffett, 2008 Berkshire Hathaway Shareholder Letter

The above quote illustrates an important distinction that is confusing to many investors. How can you tell if a stock, or a broad market index like the S&P 500, is cheap or expensive? The obvious answer would be to look at its price. This approach feels natural, as many of us do it on a daily basis as we walk through a store or click around Amazon, but it can be misleading. The chart below illustrates the price index for the S&P 500 going back to 1928. If you tried to evaluate its merits based solely on price, you might reasonably conclude it was extremely cheap from the late 1920’s to the 1970’s. Aside from a few painful drawdowns in the 1990’s and 2000’s, the market appears to become more expensive year after year. The question is: If prices are always going higher, can stocks ever be cheap again?

S&P 500 Price Index

Source: MorningstarDirect. The S&P 500 is represented by the S&P 500 PR Index, using monthly data from 1/1/1928 to 6/30/2019. 

This is where Buffett’s quote comes into play. It is evident we have paid more for stocks over time, but has anything changed in what we receive for our money? The answer, of course, is “yes”. Decades of companies reinvesting their profits to expand and develop new technologies has resulted in businesses that are larger, more efficient, and more profitable than ever.

There are many variations of the value approach employed by the investment community. A simple one seeks to evaluate how many dollars you must pay to purchase one dollar of some fundamental metric of a company or market index. Commonly used metrics include sales, earnings (think of earnings as profits), cash flow, or book value. The value approach is centered on making sure the price you pay is reasonable relative to what you get in return. When it comes to buying stocks, what you ultimately get is an ownership stake in a company (the book value), and the right to participate in its operations (its sales, profits, and cash flows). The intuition behind using earnings (profits) as an example, is that returns will increase as you decrease the price paid for the same level of profits.

From here on “value stocks”, or simply just “value”, will refer to the subset of companies where the price paid per unit of the above fundamentals is low, relative to other stocks. If value stocks are those with the lowest price, the flip side of the coin would be growth stocks, or just “growth”. While it may seem counterintuitive to intentionally purchase the most expensive companies available, it’s actually a very popular strategy. The high flying “FANG” stocks (Facebook, Amazon, Netflix and Google), fall into this category. As their name implies, these firms are typically growing at a much faster rate than their value counterparts, and investors are willing to pay more for that future growth. The price may appear high today, but it could ultimately become a cheap purchase if the expected growth comes to fruition. The problem is investors tend to overestimate growth.

The Performance of Value

“In Theory there is no difference between theory and practice. In practice there is.” – Yogi Berra

The idea behind value investing is simple enough, but has it actually worked? To find out, we can compare the historical returns of value versus growth. Using data going back 91 years, the results clearly favor value, which outperformed the more expensive growth stocks by an average of 3.10% per year. While value has delivered higher returns over the long term, it has struggled notably in recent years. Over the last decade, the leadership has reversed with growth outperforming value by 3.44% per year. It is impossible to say precisely what has caused this change, but the massive returns from a small subset of firms (including the FANG stocks) have certainly contributed.

Historical Performance of Value vs Growth

Source: The Kenneth French Data Library; https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. Value is represented by the Fama/French US Value Research Index, growth is represented by the Fama/French US Growth Research Index. The indices are not available for direct investment, do not include costs/fees, and are not representative of actual portfolios. Returns are annualized, based on monthly data from 1/1/1927 – 5/31/1927.  

After an extended period of underperformance investors will invariably begin to question whether things have changed to the point the strategy is obsolete. While no one can say for certain if or when value will make its comeback, it is important to recognize the current bout of poor relative performance is not unprecedented. There have been several other notable periods where value has struggled.

Looking at the chart below, value has outperformed on a ten year basis during the majority of the evaluation period, as evidenced by the green line fluctuating above the grey bar marking 0.0%. When the line is blue and below the grey bar (as it is today), it signifies growth has outperformed value. The aftermath of the Great Depression (1930’s), and the run-up of the internet boom (late 1990’s) provide two stark examples of past rough patches for value.

10 Year Rolling Performance - Valus vs Growth

Source: The Kenneth French Data Library; https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. Value is represented by the Fama/French US Value Research Index, growth is represented by the Fama/French US Growth Research Index. The indices are not available for direct investment, do not include costs/fees, and are not representative of actual portfolios. Returns are annualized, based on monthly data from 1/1/1927 – 5/31/1927.  

Alas, no strategy works all the time. Value investing, like many other phenomena in the markets, is cyclical. Investors may shun certain companies for extended periods of time. This in turn makes them cheaper, and may set them up to perform better in the future. Conversely, people can get overly excited about the prospects of certain companies. As more investors buy into the ever-rising growth expectations, the price could rise too far, setting the company up to underperform. Even a wonderfully successful company can be a subpar investment by merely delivering great results when the market was expecting perfection.

 

Value Going Forward

“There is no way that we can predict the weather six months ahead beyond giving the seasonal average.” – Stephen Hawking, Black Holes and Baby Universes

Despite its struggles, there is a good reason to expect brighter days ahead for value. Given how well growth has done recently (particularly FANG stocks discussed above), the discount paid for value stocks is currently larger than normal. The chart below illustrates the discount for value companies (large and small) relative to the broad market. The middle grey bar in each section represents the average cost historically, while the green lines represent the current cost over time. The lower the green line moves, the cheaper value stocks are relative to the rest of the market.

Large and Small Cap Values

Source: Morningstar Direct. Valuations are based on an equally weighted composite of price/book value, price/earnings, price/sales, and price/cash flow of each value index relative to the broad market. Large cap value is represented by the S&P 500 Value Index, while small cap value is represented by the S&P 600 Value Index. The broad market was represented by the Russell 3000 index. Data from 1/2001 to 6/2019.

As you can see from the chart, not only are value companies trading at a larger discount than average relative to the rest of the market, they are the cheapest they have been since the early 2000’s! Unfortunately being a better deal than usual is not a guarantee that value stocks are poised to outperform in the near, or even intermediate term. Over time, however, the price paid has been shown to be one of the best predictors of future returns. Generally speaking the cheaper you can purchase stocks, the higher the returns you can reasonably expect (all else equal).

Wrapping Up

While the critics continue to debate whether or not value investing is dead, we believe those investors who are patient will be rewarded. The strategy has weathered many market cycles over the decades and endured other periods of extended underperformance. The opportunity to buy these already cheap companies at a larger than normal discount gives us a good reason for optimism.

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over eight years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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LINCOLN 

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Socially Responsible and Environmentally Sustainable Portfolios

Socially Responsible and Environmentally Sustainable Portfolios

 

LUTZ BUSINESS INSIGHTS

 

socially responsible and environmentally sustainable portfolios

jim boulay, lutz financial investment adviser & managing member

 

An increasing number of investors are looking for ways to align investment decisions with their own values and philosophies. As a citizen, you can express your political preferences around sustainability and other social issues through the ballot box. As an investor, you can express your preferences through participation in global capital markets. Socially Responsible Investing or “SRI,” is an investment strategy that allocates your dollars consistent with your beliefs and ideals.

SRI considers investors’ tastes and preferences about social issues in the design of an investment portfolio. There are a few different types of SRI investments, those that are environmentally conscious, those that are socially responsible and those that are may be consistent with religious beliefs. While some of these philosophies can be isolated, many are now combined into a general investment category called “ESG” investing. This combines social, environment and governance investing into one.

 

Who Practices SRI/ESG?

Several trends have driven SRI/ESG over the past decade. These include rising institutional and investor demand, legislative mandates for public funds, regulatory developments, the rise in environmentally themed offerings, increased shareholder advocacy, and the growth of community investing.

SRI/ESG is an investment approach available to anyone who wants to align their principles and beliefs with their financial future. If you seek a financial gain coupled with the opportunity to leave a positive mark on the environment or valued organizations, this strategy will suit your investing needs. With many financial institutions globally beginning to offer these services, it’s becoming a widely acceptable and even preferred way for investors to manage their money.

 

How Does Lutz Financial Offer SRI/ESG Services?

At Lutz Financial, we partner with Dimensional Fund Advisors to offer two types of portfolio styles to accommodate investor preference. The first are Social Core Equity portfolios, both domestically and internationally. These portfolios offer broadly diversified equity market portfolios that exclude companies that have a certain percentage of business in the following:

  • Abortion
  • Adult Entertainment
  • Alcohol
  • Child Labor
  • Contraceptives
  • Gambling
  • Stem Cell
  • Tobacco
  • Landmines
  • Companies with Businesses in Sudan

Even with the exclusions, these funds offer a broadly diversified portfolio amongst many different types and sizes of equities. As of June 2019, the US Social Core Equity 2 Portfolio (DFUEX) offered more than 2,300 domestic equities within its holdings. The DFA International Social Core Equity Portfolio (DSCLX) contained more than 4,500 globally diversified stocks within its portfolio. These social portfolios even extend into Emerging Markets via the DFA Emerging Markets Social Core Portfolio (DFESX). This fund contains more than 4,200 holdings as of June 2019. Lutz Financial combines these offerings to build clients’ global portfolios cost-effectively and diversified with more than 11,000 different companies.

Those investors looking for environmental impact investing are served using the DFA Sustainability portfolios. Lutz Financial’s use of the DFA sustainability strategies allows for systematic evaluation across industries on key issues, such as concerns of high greenhouse gas emissions or potential emissions from reserves of fossil fuels such as coal, oil, and natural gas.  In addition, the portfolios consider other factors important to those investors seeking to invest in sustainable companies such as:

  • Land use
  • Biodiversity
  • Involvement in Toxic Spills or Releases
  • Operational Waste
  • Water Management
  • Factory Farming
  • Cluster Munitions
  • Child Labor

Lutz Financial does not regard SRI or ESG portfolios as separate asset classes, but as an alternative framework for investing in conventional asset classes.  With this framework in mind, our approach centers on structuring portfolios to capture dimensions of higher expected returns. This is done in a cost-efficient, diversified way, all while applying a meaningful screening methodology that reflects a broad set of investors’ social and/or environmental concerns.

 

In short, bringing a positive change the organizations important to you through investments is becoming an increasingly popular way for people to support their values without having to sacrifice diversification or adequate returns. If you would like to learn more about the SRI or ESG offerings through Lutz Financial, please contact us or learn more here.

ABOUT THE AUTHOR

402.827.2300

jboulay@lutzfinancial.com

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JIM BOULAY, CPA/PFS, CFP®, CAP® + INVESTMENT ADVISER, MANAGING MEMBER

Jim Boulay founded Lutz Financial in 2001 and has over 29 years of experience in financial consulting and accounting. His responsibilities include both comprehensive financial planning and investment advisory services.

AREAS OF FOCUS
  • Financial Planning
  • Investment Advisory Services
  • Business Owners & Families in Transition
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Financial Planning Association, Member
  • Certified Public Accountant
  • Personal Financial Specialist
  • Certified Financial Planner™
  • Chartered Advisor in Philanthropy
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, University of St. Thomas, St. Paul, MN
COMMUNITY SERVICE
  • Catholic Charities Endowment Committee, Treasurer
  • Christ Child Society, Past President
  • Omaha Estate Planning Council, Member

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VIEW MODIFIED SUMMER HOURS HERE

OMAHA

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Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

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Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

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Grand Island, NE 68803

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Outsmarting the Ivy League?

Outsmarting the Ivy League?

 

LUTZ BUSINESS INSIGHTS

 

Outsmarting the Ivy League?

JUSTIN VOSSEN, INVESTMENT ADVISER & PRINCIPAL

Each year, the National Association of College and University Business Officers and Common Fund Institute produce a study on the returns of college endowments.[1]  This study tracks the results of University investment portfolios by size of their endowments.  Of the schools participating in the study in 2016, more than 93 had endowment assets exceeding $1-billion.² Schools such as Harvard, Yale, Stanford, Princeton and Notre Dame all have endowments over $1-billion and their returns were contributed to the study.

 

Obviously, the Universities with endowments over $1 billion have many resources, alumni, faculty and trustees to help them guide their investment decisions.  It is probably also safe to assume they employ the most-esteemed consultants, money managers and portfolio strategists that money can buy.

 

One would then guess that those institutions should be outperforming the market on a relative basis if they have all of the best and smartest resources at their disposal.  However, it turns out that is not the case.

 

Consider these returns for all Universities with endowments over $1 billion:

Average Annual Returns for US Higher Education Endowments For Periods Ending June 30,2016
Size of Endowment 1-Year 3-Years 5-Years 10-Years
Over $1-Billion -1.9% 6.0% 6.1% 5.7%

 

 

These returns are pretty decent, all things considered.  However, for comparison purposes, here are the indices for those periods as well.

Indices
Index 1-Year 3-Years 5-Years 10-Years
S&P 500 4.0% 11.7% 12.1% 7.4%
Russell 3000 2.1% 11.1% 11.6% 7.4%
MSCI World ex U.S. (in U.S. $) -9.8% 1.9% 1.2% 1.6%
Barclays US Aggregate Bond 6.0% 4.1% 3.8% 5.1%
CPI – U 0.7% 1.0% 1.6% 2.0%

 

While at face value it is hard to compare one asset class to a diversified portfolio, if we extrapolate a weighting to each index we can show what a blended portfolio of indices would have done against a blended portfolio of endowments.

 

To come up with a relative portfolio blend, let’s assume a 75% equity and 25% bond portfolio.  Of that, let’s assume approximately 25% of the equity component is international.  So, a blended index portfolio we could assume would consist of 55% Russell 3000 (US Broad Market), 20% MSCI World ex U.S., and 25% Barclays US Aggregate Bond.  This hypothetical allocation would not be unreasonable for funds with a very long-term time horizon looking to grow.  In contrast, the group of endowment over $1 billion carried a 13% US equity, 10% bond, 19% international equity, and 58% alternative asset allocation.  Alternative assets is a very broad space, but generally consists of hedge funds, private equity funds, private real estate and other assets such as art.  If we compare these returns we get the following:

 

Comparison Returns for Periods Ending June 30,2016
1-Year 3-Years 5-Years 10-Years
Endowments Over $1-Billion -1.9% 6.0% 6.1% 5.7%
Blended Index 0.7% 7.5% 7.6% 5.7%

 

So in three of the four time periods, the blended index won and in the longer 10 year figure, it was a dead heat.  I always say that if you show me portfolio returns for anything, I can mix and match a portfolio that will beat it with the ability of hindsight.  We did not do that, in this instance.  We carried a slightly higher weight to international equities, which had a dismal 10 years and also carried more bonds in the allocation, which carry lower degrees of risk than equities (and thus lower expected returns).

 

This is not a complex portfolio, but one we all could replicate because of the advent of index funds.  You can bet, however, if someone would have walked into Yale’s investment committee with a straight forward 55% US equities, 20% International equities, and 25% blended bond allocation proposal, they would have been laughed out of the room.  Does that mean the advice would have been wrong?  Using simple, diversified, low-cost investments and taking the time to control what you can.  Controlling behavior, allocation, goals, and taxes in the context of a financial plan isn’t bad advice, it is just not complex.

 

The truth of the matter is the market does not care how smart you are, how many initials you have behind your name, or how much money you have to invest. The capital markets deal in absolutes.  Adding complexity doesn’t necessarily increase returns as we see in this comparison.  Keep in mind, the more complex something is the higher degrees of monitoring, understanding, costs, and potential tax implications there may be.  These institutions have some of the brightest minds in finance on their committees overseeing those complexities and an organizational framework to monitor.  While they search out complexity, I think it is our goal to make the complex simpler.  We all still need to plan, monitor, and understand, but it all doesn’t have to be uber-complex to generate return.  We’ll see what the next 10 years brings, but don’t make the mistake of assuming complex is always better.

¹ http://www.nacubo.org/Documents/EndowmentFiles/2016-NCSE-Public-Tables_Average-One-Three-Five-and-Ten-Year-Returns.pdf

² http://www.nacubo.org/Documents/EndowmentFiles/2016-Endowment-Market-Values.pdf

 

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP® + INVESTMENT ADVISER, PRINCIPAL

Justin Vossen is an Investment Adviser and Principal at Lutz Financial with over 20 years of relevant experience. He specializes in wealth management and financial planning.

AREAS OF FOCUS
  • Financial Planning
  • Wealth Management
AFFILIATIONS AND CREDENTIALS
  • Certified Financial Planner™
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • March of Dimes Nebraska, Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

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Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Timing is Not Everything

Timing is Not Everything

 

LUTZ BUSINESS INSIGHTS

 

Timing is Not Everything

JUSTIN VOSSEN, INVESTMENT ADVISOR & PRINCIPAL

The financial industry analyst firm Dalbar has been tracking investor returns for more than 30 years.  Their studies take into consideration general investor cash inflows and outflows into equities over time and its effect on performance.  In their annual Quantitative Analysis of Investor Behavior at the end of 2013, the average return for an ordinary investor was determined to be only 3.69% percent annually over the last 30-years in their equity fund investments. During that same 30-year period, the S&P 500 has returned 11.11% on an annualized basis.  If it is any consolation, investors did beat inflation as measured by the consumer price index of 2.83% for that same time period.

 

Why does this happen?  Dalbar’s studies show the folly in investors’ decisions.  Time after time they make emotional choices on not only when to buy and sell, but also what to buy and sell.  Investors subject themselves to decisions based on their fears, “gut”, media hype, cocktail party talk and overconfidence.

 

Because of these rash decisions, investors are horrible at timing the market.  A look at the chart below from the Investment Company Institute (ICI) shows exactly why.  Investors continued to flood the market with new money throughout 2004-07 when markets were on a bull run and immediately pulled money out of equities at the bottom in 2008-09.  They have continued to sell as the stock market has come back, until only recently in 2013, began to truly buy equities again.

 

Timing-is-not-everything-Graphic

www.icifactbook.org/fb_ch2.html (8/14/2014)

 

Could this be why many are calling this the most “hated” bull market in history?  From the end of March of 2009 to June of 2014, the S&P 500 is up a total return of 198% and fund inflows show that investors have been selling most of the time.  Those who have tried to market time potentially have missed the run, but those with diligence and persistence have persevered to reap the benefits.

 

That being said, one can understand why people’s emotions have caused them to sell along the way.  There have been a litany of reasons why one could have been driven to do so.  During a little more than five years, we’ve seen an economic crisis in Europe, multiple geopolitical issues in the Middle East and Africa, a period of unprecedented action from Central Banks, budgetary crisis in Washington, nuclear meltdown in Japan, and a sharp credit crisis. Humans are hard-wired to respond to crisis, but one’s investments may be the worst place to respond to them.

 

This brings us to our recent pullback in the markets.  Was the market due for a correction?  Maybe it was?  Was it due to correct by 19% in the third quarter of 2011(I bet you forgot about that one already)?  Perhaps?

 

During the 30-year period that Dalbar did their study on investor equity returns, the S&P 500 corrected at one point in a calendar year by more than 9% in 18 of the 30 years.  At all of those points, I am sure there were reasons we could have seen bigger drops.  However, the person that didn’t panic at those points banked their 11.11% average annual return that was had over those 30-years.

 

It’s hard to advocate never selling any equities as many of us will someday need the proceeds in retirement or for other various reasons.  However, the time to sell equities is when things have appreciated relative to other assets, and not at times of panic and pullback.  This is done through a rebalancing process that is pre-determined, disciplined, mathematical and methodical.  Rebalancing should never be done on based on hunches and knee-jerk reactions.

 

Pullbacks are going to happen, it’s part of the price of admission for taking on higher risk inherent in equities to generate earn higher rates of return.  History shows us, those are rewarded more by accepting these pullbacks rather than responding.  So, when our emotions and predispositions tell us to “do something”, sometimes the best action may be no action!

 

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP® + INVESTMENT ADVISER, PRINCIPAL

Justin Vossen is an Investment Adviser and Principal at Lutz Financial with over 20 years of relevant experience. He specializes in wealth management and financial planning.

AREAS OF FOCUS
  • Financial Planning
  • Wealth Management
AFFILIATIONS AND CREDENTIALS
  • Certified Financial Planner™
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • March of Dimes Nebraska, Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

“Yellen” At The Fed

“Yellen” At The Fed

 

LUTZ BUSINESS INSIGHTS

 

“Yellen” At The Fed

JUSTIN VOSSEN, INVESTMENT ADVISOR & PRINCIPAL

ceftin vs levaquin order ceftin

“Ultimately, cynicism is a poor substitute for critical thought and constructive action.”        – Ben Bernanke – June 2, 2013

The Federal Reserve was created in 1913, when President Woodrow Wilson signed the Federal Reserve Act into law.  While the Fed has many general responsibilities, its main one is to maintain the stability of the financial system and contain systemic risk that may arise in our financial markets.  Janet Yellen continues this tricky task today as the Chair of the US Federal Reserve.

 

The Federal Reserve has used significant latitude in recent years to deal with the risks of the financial system that were most pervasive in 2008 and 2009.  Many of the steps taken have no historical precedent.  The conspiracy theorists and cynics alike have painted the Federal Reserve as being at the best, too accommodative, or  at worst the impetus of our eventual economic demise.

 

It’s easy to be cynical of an entity that truly yields great power over the world’s economy, but sometimes difficult to understand the rationale for the actions taken and ramifications thereof.  Naysayers are quick to say the Fed has inflated the stock market because of quantitative easing, and a market crash is coming when it ends (as the Fed just announced this could be as soon as October).   These critics are much less apt to dive into the numbers and understand the organics of quantitative easing.

 

To understand quantitative easing, you have to begin with the nation’s banking system in 2008.  When Lehman Brothers collapsed, questions arose about the health of other banks.  At that time the inter-bank lending market came to a standstill.  Banks with excess liquidity, that previously lent funds overnight to other banks, hoarded cash and refused to lend to any bank that had the slightest hint of insolvency.  Instead of return on their cash, they were worried about return of their cash. Couple this with the fact that consumers were now running to pull deposits from banks based on fear, the banks were in more need of liquidity than ever.

 

Typically banks access short-term cash in two ways, via the fed funds market as previously described, or directly from the Fed’s discount window. The Fed maintains both rates, the fed funds rate through the use of open market operations, and the discount rate by directly charging the banks.  Historically if a bank borrowed from the Fed, it was viewed as a sign of trouble/weakness for the borrowing bank as the Fed was deemed lender of last resort.  Beginning in 2008, the Fed recognized this and offered banks loans of up to 90-days and reduced the discount rate to 0.50%.   They lowered the target fed funds rate to 0.25%, or virtually to zero.  They tried to take the stigma away to encourage the banks to maintain liquidity.

 

With more banks using the discount window, the Fed had to attract money from the other banks that had excess cash.  They embarked on an unprecedented action in 2008 by offering to pay interest on excess bank reserves of 0.25%.   Essentially they paid banks interest to deposit money at the Fed.  Banks had historically held their required reserves at the Fed earning no interest, but banks could now be paid interest for holding both required and excess reserves.   This seemed innocuous at the time, but for capital reasons and for the fact that it paid the same rate as Fed funds, it was an attractive alternative for the banks.   While this seems to be an ancillary event, it has had large ramifications on the Fed’s ability to quantitatively ease.

 

Cynics quickly snipe that the Fed has recklessly printed money to pay for bond purchases which have swelled their assets to over $4.3 trillion as of July of 2014.  Prior to the crisis, the Fed’s assets were just above $800 billion.  However, one must take the time to look at the other side of the balance sheet to understand the true impact.

 

Since the Fed began paying interest on excess reserves, reserve deposits by banks at the Fed have jumped to more than $2.6 trillion.  You can see this in the graph below from the Fed’s website.  The other two lines are currency in circulation and the US Treasury’s balances at Fed.

 

Yellen-at-the-Fed1

Source: http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm  7/14/2014

 

Why is this important?  It’s important because a more thorough look at what the Fed has done shows that it isn’t printing all of the money to pay for quantitative easing.  What they are doing is using bank reserves that the banks are not lending to purchase mortgage backed and Treasury notes.  The Fed is essentially saying, if the banks aren’t going to lend it, we’ll put this excess cash to work for them.

 

So what does this mean for the markets and for the economy?  This is an unprecedented step the Fed has taken.  Simple economics would assume that banks will remove some of the excess reserves and lend them to customers when they are willing to justify greater risk to generate greater return.  For a couple of reasons, capital and risk, those funds may be used by banks to purchase the same bonds the Fed may or may not be selling.

 

The balancing act the Fed has to do comes into play when there is a quick demand for reserves; at which point the Fed will have to sell off assets to compensate for lost deposits, or increase interest rates to tempt the banks to keep the funds on hand.  So far, they haven’t had the need to do either.  The Fed could also sell assets as the banks take back their reserves.  Currently, the Fed doesn’t have to do any of this and could keep this balance sheet at these levels.  Thus, they will continue to walk the fine line of maintaining stability of the economy and keeping the systemic risk at bay.

 

Taking a critical and thoughtful look uncovers that the Fed is not simply printing money, but mostly using money that is already in the system that banks are not putting to work.  Someone who looks at this exercise at face value may misunderstand and deem it reckless, but it is just another tool that the Fed has used over the past 100 years to reduce systemic risk and promote economic stability.  Based on the Fed’s track record for most of its history, we probably should give them the benefit of the doubt.

 

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP® + INVESTMENT ADVISER, PRINCIPAL

Justin Vossen is an Investment Adviser and Principal at Lutz Financial with over 20 years of relevant experience. He specializes in wealth management and financial planning.

AREAS OF FOCUS
  • Financial Planning
  • Wealth Management
AFFILIATIONS AND CREDENTIALS
  • Certified Financial Planner™
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • March of Dimes Nebraska, Past Board Member

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Mind What Matters… Focus Efforts On What You Can Control

Mind What Matters… Focus Efforts On What You Can Control

 

LUTZ BUSINESS INSIGHTS

 

Mind What Matters… Focus Efforts On What You Can Control

JUSTIN VOSSEN, INVESTMENT ADVISER & PRINCIPAL

You may have heard our brand promise at Lutz Financial: “Mind What Matters”.  While catchy and cute in the marketing sense, it is also very consistent with our approach in working with clients on a daily basis.  We spend time working on the unique issues clients have that “matter” to them.  Certain things that matter to a client cannot be controlled, thus you should focus your limited time and energy on those issues that can be impacted.

 

Things That Matter

Most of us share a handful of common issues that matter to us all.  Family, friends, faith, and country are things we all care about in varying degrees and prioritization.  Another common topic that can weigh heavily on our minds is our financial well being.  Our financial resources provide us with a sense of independence, as well as give us the ability to influence a variety of aspirations.

Global issues matter to us as well.  The digital age accompanied with the rapid movement of information keeps us more informed on world events now more than ever.  Whether it be politics or poverty, human rights or animal rights, economics or ecology, many of us have special issues that matter to us.  While we can hold many of these things close to our hearts, our influence over these things is limited, at best.

Obviously there are things specific to your own situation that matter as well.  Maybe it is a charity, future accomplishment, political goals, our local sports team, classic automobiles, traveling, education, legacies, businesses, or hobbies?  These are some of the many examples of things that may be important to you based on your individual upbringing or interests.

 

Avoiding Things That You Can’t Control

It’s clear that we cannot control such things as the weather, random strangers’ actions, and the outcome to sporting events (legally!).  It is an inherent characteristic to want control of a situation; however it is much more difficult for us to admit that we cannot completely govern things like our kids, our business associates and clients, our politicians and even our future.  If we think we control all of these, it’s probably a combination of hubris and/or overconfidence.

 

What You Should Focus On

Time is a precious resource, and focusing time on things that can be controlled is the greatest use of that resource.  Formulating a plan on tangible items and establishing a timeline on when to complete each task are critical.  This process will cut down on needless time, worry and even expense trying to fix the things beyond our control.

How does this translate to our financial lives?  Wall Street, Hollywood and the media have portrayed investing as a modern day treasure hunt.  Because of this, the investment industry spends most of its time forecasting future results, predicting economic and political events, and trying to move client assets to the “next best thing”.  It’s their hubris and overconfidence in believing they can predict the market’s performance.   They use this forecasting ability as the primary reason that one should put their trust and ultimately their money with them.

Instead, it is important that you spend energy focusing on the things that matter which we can be controlled or influenced.

  • There is no question the markets matter, but we need to focus on our reactions to the markets, instead of the markets themselves.
  • Our kids matter to us, but we can’t control how they spend their money as adults.  However, we can ensure how much inheritance they get and when they get it.
  • We can’t control who is going to be president in the next election, but we can control the tax efficiency of our assets and allocation to minimize current and future taxes.
  • Our businesses are important, but are we doing everything we can to mitigate controllable risk?
  • The economy is very relevant to our lives.  But isn’t being prepared for the inevitable temporary pullback more important than the timing of said pullback?

These are just a few examples in our lives where overlap occurs between the things that matter and the things we can control.  Focusing our time and energy to prepare for these things will help insulate us from uncontrollable noise that distracts us.  Most importantly, it will reduce our stress and help us prioritize the things that matter most and formulate a plan to protect them!

 

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP® + INVESTMENT ADVISER, PRINCIPAL

Justin Vossen is an Investment Adviser and Principal at Lutz Financial with over 20 years of relevant experience. He specializes in wealth management and financial planning.

AREAS OF FOCUS
  • Financial Planning
  • Wealth Management
AFFILIATIONS AND CREDENTIALS
  • Certified Financial Planner™
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • March of Dimes Nebraska, Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850