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All Posts By Michael Lecours, CFP

The Role Cash Serves in a Portfolio

Cash in a portfolio should have a specific role in a portfolio. We see cash as fitting in one of these three categories:

  • Liquidity provisions: this is to cover expenses and emergency funds.  This includes money to pay for the mortgage, the unexpected new roof, basic living expenses, etc.
  • Defensive position: Cash in this pot acts as a cushion against stock/bond volatility.
  • Offensive position:  In some cases, we recommend keeping higher levels of cash until trends in the market change.  In this case, we maintain cash reserves for future investments.

How much cash in each category depends on your expense pattern, your goals and risk tolerance.

Contact us today if you’re interested in making your cash work harder.


The Risks of Having High Levels of Cash

Investors have been keeping record high levels of cash in their investment accounts and savings accounts.  It’s a logical place to park money for a while. It’s relatively safe, readily accessible and a very common practice.  Unfortunately, many investors are moving to cash without a strategy guiding them.  So what’s the problem with having a high level of cash?

1) Your cash is earning next to nothing. The government is discouraging savings by keeping interest rates low.  They are doing this to push investors into the market and to invest in stocks and bonds.

2) Low interest rates will likely continue. Janet Yellen, the incoming Fed Chair has signaled her intentions to maintain similar policies as her predecessor.  These poor savings rates could continue for the next few years.

3)  Inflation will slowly eat away at your purchasing power.  This slow, ever-present issue catches many investors off guard.

4)  In addition to inflation risk, you also face opportunity risk.  Many investors sat in cash during the last few years, while the markets hit all time highs.  That’s a missed opportunity.

Bottom line: The government is punishing you for saving, and rewarding you for investing.

You need to develop a strategy for your cash. It’s important to treat cash as an asset class.  It needs to serve a specific role in the portfolio.

Contact us today if you’re interested in making your cash work harder.


NU Fixed Account Update

In a recent newsletter by the Association Retired Employees of Northeast Utilities (ARENU) , we wrote about the popular Fixed Account in their 401(k) plan at Fidelity that many NU retirees use. After the article went to press, a major development occurred: The interest rate on the fixed account decreased from 3.5% to 2.75%. That decline is steep – well over a 20% reduction, and it raises a lot of flags for us:

  • The rate has dropped below the long term average inflation figure of 3%. That means the cost of living could outpace the income generated in the fixed account. Retirees who are withdrawing interest on a regular basis will see their income decline.
  • The rate decreased at a time when interest rates elsewhere are holding steady or even increasing. This may be an indication of subpar rates for the foreseeable future in the fixed account.
  • This change has significantly reduced the fixed accounts relative appeal. Now, there are many strategies that are just as competitive as the fixed account and in some cases offer additional benefits.

If you’re concerned about how this change will affect you, please contact us for a meeting. We can work with you to identify a strategy to meet your needs or fill the gap that this rate change caused.

Technological Unemployment: Is It Different This Time?

In the past, technological advancements ushered in new industries and created new jobs that were better, safer, and offered better pay.  A small fraction of the population are farmers today and their producing more food than ever before.

Up until recently, technology advancements have improved tasks that were highly routine- Production-line, manufacturing, manual labor. It replaced our physical abilities. But some are saying that there is a new round of advancements that will change the equation and result in technological unemployment.

But could it be different this time?

For the first time, technology is replacing our mental abilities.  Apple’s Siri can understand our words, IBM’s Watson is beating the best and brightest in Jeopardy, Google is rolling out driverless cars, Netflix and Amazon have complicated algorithms that offer spot on recommendations for us.

We will be hearing more and more about this in the years to come.

Our take – A new technological revolution is starting and it will be a major disruption. There could be a period where certain jobs are at risk of being replaced by Siri or Watson or some other machine with a person’s name. But after a period of disruption, that innovation will eventually lead to new developments that will likely result in new jobs requiring new skills.  It’s similar to the period when the farmer moved to the city to work in a factory.

If you’re interested in reading more, take the time to read this article It’s well worth your time.

Should You Be Rotating Out of Bonds?

This past summer, we may have seen the warning we needed when it comes to the portion of your portfolio in bonds. Interest rates can’t go down any more, they can only go up. This could result in the value of your current bond holdings going down. This is discussed as “The Great Rotation”. Investors who flocked to bonds in 2008 and 2009 are now starting to rotate to stocks. On the surface, many investors think it’s time to drop bonds altogether.

And it’s not just investors thinking this way. Many of the top financial institutions agree (great chart on that here)
When the consensus is that bonds will be a weak investment, it’s easy to jump on the band wagon. But markets often do exactly the exactly opposite of what you would think.

Instead of following the heard, perhaps investors should simply review their bond holdings and look to upgrade the quality of the funds. Not all bonds or bond funds will be affected by rising interest rates the same way –something the chart and most investors don’t follow.

Top Themes in Financial Services

A recent article outlined investment themes to look for over the next decade and listed some growing trends in financial planning. It’s reassuring to see these trends. We’ve been working hard to innovate within this industry and find ways to help our clients.  These trends are very similar to what we’ve been working on for the past two years:

Retirement Planning: We’ve focused our efforts on building Retirement Income Distribution Strategies that take into account all pots of money (savings & investments) and all sources of income (pensions, Social Security and annuities).  Our planning factors in the slow, ever-present, erosion of purchasing power that occurs each and every year –inflation.  In 20 years, the cost of living may double! Many clients don’t think about that when they retire, unless we illustrate it for them.

Low Cost Asset Management:  Many firms have very high minimum fees, where the firm will only accept new clients with at least $500,000 or more in investable assets.  Due to technology and automation these minimums are decreasing.  We’ve always kept our minimums lower than average and are happy to see the trend finally start to shift in this direction.  Ultimately, it will allow more investors to get more help than if they were to do it on their own. We often waive our minimums for referrals from existing clients.

RIA Advisory Services: The old model of charging upfront commissions on investments is disappearing.  Client don’t like paying high sales charges and we don’t like being in the position of having to “sell” a fund.  The alternative is to pay a small fee for advice and management on an ongoing basis.  It opens up the investor to a much wider pool of investments without having to incur new sales charges, and it allows for greater flexibility.

In the end, these trends are great for the investor: More affordable investment advice, better planning tools, and less in the way of expenses are all going to benefit the investor.

If you’re interested in learning more about any of these themes and how they apply to you, please contact us.

Is Your Career More Like a Stock Or a Bond?

A recent article argues that investors in steady jobs (government, teachers, etc) should balance out their steady & predictable “bond-like” pay check by buying more stocks in their retirement accounts, while investors in risky jobs (entrepreneurs, sales, etc.) should load up on more stable investments like bonds to lower their overall risk.

Maybe on paper this concept seems like a good idea. If an investor could check emotion at the door, maybe a concept like this could work. But it fails to incorporate the investors goals and risk tolerance. And investors can’t check emotion at the door. Most investors keep salary and investment performance in separate buckets.

The only time we’ve used this approach is to developing income distribution strategies for retirees with part-time jobs, second careers, or owning a small business.

I’m interested in your thoughts? Do you like the concept? Send me your thoughts and I will post them.

Are We In an Investment Bubble?

Over the past few months, many experts have been trying to make sense of the performance of the US stock market. It has been on a roll for about two years now! Is it too good to be true? Are we in the midst of an investment bubble? Economists are debating the issue now, as it’s hard to identify one during the moment.

It’s hard to find information that can help you make up your mind. Either, it’s an overs implication of the facts, an exaggerated piece written by someone looking to scare the reader, or so academic that you can’t fully understand the article. Below are a two pieces that I’ve found to be helpful.

The chart below suggests that we are (and have been for quite some time) outperforming the long term average of the market. There is always a reversion to the mean. It may happen in 20 years or tomorrow. I like this chart because it puts the past few years in context.


Robert Shiller, Nobel Memorial Prize recipient in Economic Science and author of Irrational Exuberance, outlines six points that can contribute to a bubble:

  • The sharp increase in the price of an asset or share class
  • Great public excitement about these price increases
  • An accompanying media frenzy
  • Growing interest in the class among the general public
  • ‘New Era’ theories justifying the high price
  • A decline in lending standards

Some of these conditions appear to have been met, but many have not. Lending is still has high standards and much of the general public has not participated in the market. They are still cautious.

I think many people are confusing an economic bubble with a normal market correction. Will we experience a 5%-10% market correction in the near future? Most likely. Will the bubble burst bringing us back to the lows of 2009? Probably not, but you can never tell.

This serves as a reminder to keep to your investment strategy. It’s all too easy to make an emotional decision and jump on the band wagon as the headlines tout new highs. But that’s where people can get in trouble. They load up in one asset class at the wrong time.