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Cost vs. Value. And How Money Fits In.

Excerpts from a great post great post by Seth Godin:

“Five dollars to buy a snack box on an airplane is worth something very different than five dollars to buy a cup of coffee after a fancy meal, which is worth something different than five dollars in the grocery store. That’s because we get to pretend that the five dollars in each situation is worth a different amount.”

“Cost isn’t abstract, but value is.”

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.

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.

The Other Market

It seems we have forgotten about bonds with the stock market in full boil. The bond market is almost twice the size of the stock market and it is about to post one of its worst years in a long time. Over the last decade, interest rates have dropped below the long-term average of 5% to 1.4% for the 10 year Treasury. Furthermore, short-term rates on money market funds and C.D.s are almost zero due to the Zero Interest Rate Policy of our Federal Reserve. Of course, when interest rates go down, the price of bonds goes up and the long trend of lower interest rates since 1981 made bonds a good investment. However, this trend has hit bottom.

Like holding a ball under water, interest rates are popping upwards. The interest rate on the 10 year Treasury has almost doubled off of the May low to the current 3%, and this is still below what many consider normal. Therefore, the price of bonds has now been declining due to rising interest rates. Their meager interest payments have not been enough to compensate for the damage. Leading bond funds are sporting total returns of 0 to minus 10%.

The dilemma is that bonds and money market funds are an important theoretical part of any proper portfolio. This is especially true for the investor concerned about what the extreme volatility of the stock market can do to one’s life savings.

Deja Vu

THE social media stock, which everyone has been atwitter about, became a public company last month. A lucky few were able to get it at its initial public offering price. Opening price for the rest of us was about 70% higher. Since then it has risen another 64%. There is no Price/Earnings ratio because there are no earnings. Even the Price/SALES ratio is obscene. The market capitalization of this company now makes it bigger than most of the companies in the S&P 500. We have seen this sort of price action before, 15 years ago during the Internet bubble. *

“History doesn’t repeat itself, but it does rhyme.” – Mark Twain

*Since I wrote this 2 days ago, the stock is off almost 20%.