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© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ Info@bourbonfm.com ~ (+1) 312 909 6539 1
Founder’s Words
Best of BFM Newsletters II
I would like to wish everyone lots of happiness and good health for the New Year! Since many of you liked the first edition of the Best of BFM Newsletters in January 2012 (www.tinyurl.com/BFM-BestOf-I), we decided to create another one. Many people are optimistic about 2015 (U.S. Markets up more than 200% since March 2009; up 11 of the last 12 calendar years…). While optimism is certainly in the air, it’s also more important than ever to diversify your investments. That’s where our Best of BFM Newsletters II comes in. Over the past three years we’ve carefully assembled practical tips you can use to help you make better, more informed financial decisions. At BFM, we want to sincerely thank all of our clients in the U.S., Europe, and Asia. Thank you for your loyal support and business throughout the past five years. We truly enjoy working with every single one of you. Thank you for letting us be a small part of your life.
Patrick Bourbon, CFA
- Manages $2 Billion
- 20 Years Investment Experience
- 10 Years at UBS
- Masters in Finance
- Masters in Engineering
January 2015
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 2
January 2012
Table of Contents Market Update .................................................................................................................................... 2
6 Fun Videos ........................................................................................................................................ 2
Your Personal Guide to Peace of Mind .................................................................................... 2
Let’s be Positive! ................................................................................................................................ 2
Charts of the Markets ....................................................................................................................... 2
Is Inflation Stealing your Future? ............................................................................................... 2
Emerging Markets ............................................................................................................................ 2
U.S. Tax System ................................................................................................................................. 2
We are Still Positive on Real Estate ........................................................................................... 2
Real Estate Prices .............................................................................................................................. 2
Let’s Go Global! .................................................................................................................................. 2
Let’s Diversify our Investments ................................................................................................... 2
“Our greatest glory is not in never failing, but in rising every time we fall. ” Confucius
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 3
Introduction
I agree with Claude Rosenberg that investing money has never been a more demanding or sophisticated challenge. Wildly fluctuating markets, damaging conflicts of interest, compensation linked to commissions and account activity, lack of fiduciary duty, and a huge number of new investment products have dramatically changed the character of the investing game, and made the aid of a financial planner a necessity. At the same time, governments have failed to make sure advisers behave responsibly. Many possess little or no investment sophistication or credentials. The sad fact is that many times you can’t even believe the information you’ve received. You are left in the uncomfortable position of taking a salesperson's word to evaluate his or her firm's past record. Blind use of performance numbers can lead to erroneous conclusions and poor decisions. With higher taxes, higher costs of healthcare and education, higher market volatility, and higher employment risks, the demand for capital growth has led to greater need for reliable, independent and unbiased investment advice. BFM, as a fiduciary which always acts in your best interest, offers you peace of mind and investment strategies. We are your personal CFO and help you properly analyze some of the promotional tactics used-and abused-by investment managers so that you are less likely of being misled. We have no claims that we will enable you to make money easily, but we will give you numerous practical, profit-oriented tips, and a wealth of helpful guidelines to help you reach your personalized goals as well as a comfortable retirement.
Managing the accounts for a total of more than $2 billion qualifies me to guide you through this investment jungle. Our goal is to show you how to avoid some common pitfalls that threaten you, and to provide you with the practical steps you can take to improve your own investment results. A mutual fund that is superior for someone else may not be the fund that is superior for you!
The knowledge we give you about investing cycles and styles, about fighting herd instincts, about the emotional side of investing, about developing sensitivities and certain protections against people who sell investment "products" should prove valuable in all types of decisions. One important way to mitigate surprise is to understand before investing how you are likely to react to the very human but inhibiting reactions of fear, envy, greed, anger, worry, and remorse. After all, one obstacle to clients' success is often the client himself!
To celebrate the New Year, we offer you a summary of some of our past newsletters over the past three years. You will find markets update, fun videos, how to reduce taxes, and our research on real estate, inflation, and international/emerging markets stocks.
As always, we thank you for your support and welcome your comments. Patrick Bourbon, CFA
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 4
S&P 500 Historical Bull Markets 1928 to Present
Source: Strategas (Oct. 2014)
U.S. vs ACWI (World Index)
Source: Bourbon Financial Management; www.msci.com;
Note: MSCI ACWI captures large and middle capitalization representation across 23 Developed Markets and 23 Emerging Markets countries; MSCI USA Index is designed to measure the performance of the large and middle capitalization segments of the U.S. market
0
100
200
300
400
500
600
700
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
MSCI USA Standard (Large+Mid Cap)
MSCI ACWI Standard (Large+MidCap)
Market Update
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 5
See examples of "cognitive illusions," and learn why humans make predictably irrational decisions.
Did you know that your vision can literally “trick” you whenever it can? That human attention is limited and that we can’t analyze all the information we receive?
The keys to better performance are
autonomy, mastery, and purpose
Discover the difference between
brokers and fiduciaries
BFM is a fiduciary (like a dietitian)
If you want to learn more about behavioral finance and the role of Psychology, here is a popular video (viewed more than 100,000 times!) of a class of Robert Shiller (Nobel Prize in Economics 2013).
6 Fun Videos
We’ve carefully assembled practical tips and videos you can use to help you make better and more informed life decisions.
Video: Selective Attention Test
Video: The surprising truth about what motivates us
Refer to “We are all Predictability Irrational - Dan Ariely” on YouTube
link: We are All Predictably Irrational
See more at: Newsletter, January 2014
YouTube link: Behavioral Finance: The Role of
Psychology
Video: Brokers vs. Fiduciaries
Video: Why is a Fiduciary Standard Important?
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 6
Choosing the right financial planner is an important decision. The most important factors in selecting a good financial planner should be expertise, experience, and integrity.
We are thrilled about the opportunity to assist you with your financial planning needs and to become your personal CFO.
BFM helps you diversify your wealth into selected mutual funds and ETFs after developing an effective asset allocation based on your risk profile. BFM also monitors your portfolio, your needs, the financial markets and mutual funds activity throughout the year. BFM makes recommendations to rebalance portfolios to maximize opportunities and reduce risk.
The BFM Process
BFM holistically analyzes your entire financial life to create peace of mind. We help you identify your financial goals by understanding and analyzing your lifestyle.
Learn more about why you need a financial advisor, what are our responsibilities to you, and how BFM helps you.
Your Personal Guide to Peace of Mind
See the entire Newsletter at: Newsletter, January 2014
Find out more details on:
Why is BFM UNIQUE?
Our fee-only, transparent RETAINER
pricing model, our fiduciary duties, the BFM process,
and the founder’s credentials.
We encourage you to read an article about Distinction between brokers
and advisors. You may also be interested in our
Compensation Model and Our Frequently Asked Questions.
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 7
Thanks for your wisdom and for creating the first index mutual fund available to the general public! Jack Bogle is the founder and retired CEO of The Vanguard Group and one of the
greatest investors. I agree with Jack's approach to investing defined by simplicity and common sense.
« Thinking Fast and Slow » from Dr. Daniel Kahneman is one of the best books I have ever read on cognitive psychology, decision-making, and behavioral economics. Dr. Kahneman
has never taken a single economics course but he received the Nobel Memorial Prize in Economics in 2002!
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 8
Let’s be Positive!
We started to be bullish on stocks in January 2009. The stock market had a great rally between March 2009 and April 2010 (up 80 + %). Like Buffet, Ballmer and Immelt, we
are positive!
"There soon will be more technological advancement and invention than there was during the Internet era, and that will help drive business growth." “I am very enthusiastic what the future holds for our industry and what our industry will mean for growth in other industries.” “We will see new technologies that move beyond the Internet to tie together computers, phones, televisions, and data centers to create amazing new products. And the pace of innovation will increase as technology makes workers more productive.”
-Steve Ballmer, Microsoft
"I’m a huge bull on this country... we won't have a double-dip recession. I see our businesses coming back almost across the board… It's night and day from a year ago." “I’ve seen sentiment turn sour in the last three months or so, generally in the media. I don't see that in our businesses. I see we're employing more people than a month ago, two months ago.” “The things that worked for the country through a century of two world wars, a depression and more--all while increasing the standard of living--will work again.”
-Warren Buffett
"Angry political rhetoric is not helpful, and headlines are too focused on finding negative indicators." “Business at GE is improving. Signs across the world show growth improving, as evidenced by a rise in GE's orders.” “GE is now finding it profitable to build manufacturing and service centers in the United States rather than overseas, because it is more competitive to do so.”
-Jeff Immelt, GE
See more at Newsletter, Oct 2012 Let's be positive!
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 9
Charts of the Markets
Stocks went up for 10 years between 1990 and 2000 (+400%).
We believe in diversification. Even though 2013 was not a good year for bonds (-2%), we
recommend to own some bonds during a period in which interest rates are going up.
Bonds may be expensive but you should be able to gain 2% to 4% per year on average.
See more Charts at:
Newsletter, June 2014
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 10
Is Inflation Stealing your Future?
As you get closer to retirement, you face an increasing risk of negative real returns, also called inflation-adjusted returns. This erodes your purchasing power and has a negative impact on your wealth.
Inflation is higher for college tuition, medical care, food, and energy.
The true inflation may be higher than the official reported inflation.
While we have no inflation concerns in the short term, we believe that inflation will come back in the mid to long term.
Inflation is currently below target in most OECD countries.
Incorporating inflation protection has a small cost, but in the event of an inflationary shock, it should provide valuable protection by reducing the large loss in purchasing power that a traditional stock/bond mix is likely to suffer.
Certain types of investments could protect you against inflation.
However, their effectiveness, reliability, and costs vary.
One way to prepare yourself against inflation is to diversify your portfolio beyond traditional stocks and bonds and include real assets (commodities, real estate, global REITS), inflation-linked bonds (TIPS), and stocks including Natural Resources.
Learn more about:
the Consumer Price Index, Impact of inflation,
how to protect against inflation by asset allocation, with
the Oct. 2014 newsletter:
Is Inflation Stealing your Future?
A good complementary reading is an article by Gary Halbert:
Is the Government lying to us about inflation? Yes!
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 11
As a global investor, BFM acknowledges that emerging markets are already too important to ignore and they are a good source of diversification for portfolios. Global diversification has been touted as a superior strategy for equity investors because investing in stocks in many markets around the world reduces the concentrated risks of investing in one market alone.
We believe the fundamental long-term investment case for EM is good.
There are many reasons to be optimistic about EM. Also, Emerging markets are actually creditors to the rest of the world.
Emerging Markets (EM) have: A growing middle class and domestic consumer: EM are growing faster and contribute the most to the world growth; EM have become a bigger portion of the world economy and stock market capitalization
A young and growing population:
EM population is growing fast, and the working-age population is larger.
Increasing purchasing power:
EM consumer market is growing fast; EM’s new consumers with low debt are entering the global market.
Higher returns and not expensive:
EM stocks' returns outperformed advanced economies; EM stocks do not seem expensive relative to other countries' stocks; Low debt: The debt burden of EM is lower.
Emerging Markets -
Will investing in Emerging Markets (EM) provide a comfortable retirement and more financial security?
Let’s see the Sept 2014 Newsletter:
Emerging Markets For more information about
Why portfolios with a portion invested in EM may be good strategy to reach
long-term goals
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 12
Our goal is to help our clients
understand how additional tax increases could impact their lifelong investments and portfolios. We would like to highlight one of the many tax reduction strategies available. Additionally the newsletter provides insights into various tax related topics by studying historical data and trends.
To combat the negative fiscal balance and reduce the debt burden, the U.S. government may continue to increase its revenue stream by raising taxes. Other states may follow the example set by California; it has just raised taxes by 30%, retroactively.
With the continuous down-trend in income tax rates from a high of 94% in 1944, taxes collected by the U.S. government as a percent of personal income are currently at its lowest in over 50 years.
Returns for stocks have been positive for 9 out of the last 10 years. In the last 10 years, U.S. Large Cap stocks were up 7% per year on average, U.S. Mid Cap stocks up 10%, World stocks up 8%, and Emerging Markets stocks up 17%.
2012 was another great year for markets around the world with U.S. and World stocks up 13%, Japan +23%, India +26%, Greece, Germany, Philippines and Thailand all around 30%, and returns in Turkey crossing 50%!
Furthermore, in 2012, the S&P 500 had a gain of 16.0% (total return). If you missed the 3 best percentage gain days last year, the 16.0% gain falls to an 8.4% gain. Finally, the Russell 2000 closed at an all-time high in January.
Are you curious to know how the recent tax changes will affect you?
U.S. Has Too Much Debt and a Negative Fiscal
Balance
Marginal Income Tax Rate from 1913 to 2012
The Dividend Tax Rate Has Converged Down to
the Capital Gains Tax Rate over Time
You will find some information about: Tax Loss Harvesting Long-Term Capital Gains Tax Rates
Have Been Going Down Since 1978 Taxes Collected as a % of Personal
Income are the Lowest Since 1950
U.S. Tax System – How to reduce taxes?
If you want to learn more about U.S. Tax System,
See more at the Newsletter Feb 2013:
How to Reduce Taxes?
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 13
We are still optimistic on the U.S. housing market:
Median home prices are up more than 10% after going down 27% between 2007 and 2012.
The annual increase of the median home price is the highest on record.
Buying continues to be cheaper than renting.
Source: Census Bureau, NAR, JP Morgan
Home inventories continue to decline. Good demographics (household
formation) should drive new demand. Housing affordability is still high.
Prices are still low compared to
household income.
Source: Lincoln Institute of Land Policy, BEA
Time on the market dropped.
Source: Bloomberg
You will find more information: Home Builders are Optimistic Prices are Up in Most States Home Prices Continue to Increase and
yet, they are Still Well Below Market Peaks
S&P Case-Shiller Home Price Indices Positive Population Growth Expected From 1890 to 2000, Home Prices
Adjusted for Inflation were Almost Flat
We are Still Positive on Real Estate
Learn more about why we are still positive on real estate, See at Newsletter Oct 2013
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 14
Median home price is down 27% and is
low compared to household income or new home price.
Housing affordability is high with median mortgage payment low compared to household income.
Renting seems expensive compared to
buying.
Home building to home buying ratio is low even with a positive population growth.
Home inventories are lower.
U.S. Housing Follows a More or Less Regular Cycle
Real Estate Prices Are we at the Bottom of Real Estate Prices?
Discover a Bullish View!
The real estate crisis has been one of the trigger elements of the 2008 financial crisis. Prices have already fallen by 50% in some U.S. Cities.
A bullish view of the housing market:
Housing prices went down and housing demand has been very limited due to the combination of:
See entire Newsletter at Newsletter, March 2012
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 15
U.S. GDP is only 19% of the Global GDP
MSCI EAFE P/E Ratio is Low Implying Low Valuation
Let’s Go Global!
• 2012 - 2013 should provide investors with good opportunities to buy cheap non - U.S. stocks.
• Diversification is important. It is not the time to sell international /emerging markets stocks.
• The MSCI EAFE index (index representing international stocks) P/E ratio decreased 50% from 2000 to 2012 (after doubling from 1991 to 1999).
• Less than 20% of the World GDP (Gross Domestic Product) is in the U.S.
• In the next 10 years, international /emerging markets’ stocks should continue to outperform.
The European crisis created lots of volatility, uncertainty, fear... but also opportunities. Great companies were founded during or shortly after a recession or a market decline.
Government Debt to GDP is much lower in emerging / developing economies. U.S. Stocks have more than doubled since March 2009. In the meantime, middle-class spending continues to grow and is expected to increase six-fold in the Asia-Pacific Region by 2030. Adding international stocks to a U.S. stock portfolio will decrease the portfolio volatility.
See entire Newsletter at Newsletter, July 2012
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 16
Economic History of Major Powers
Is the United States in Decline?
Let’s Diversify our Investments
The purpose of this newsletter is to try to remove some of the home country bias that many of us living in the United States may have. Our goal is to help our clients understand why a portion of their portfolios is invested in international financial markets (20% to 50% of the equities may be allocated in Europe, Asia, and Emerging Markets). Not only do Emerging Markets have much lower debt levels and a younger population, international stocks also seem to be currently cheaper than U.S. stocks.
We would like to share some data which may create some long-term concerns for the U.S. if the situation does not improve in the future.
The U.S. may be on a declining performance trajectory in the areas of Health, Education, and Safety.
Let’s achieve new greatness for America, but until then, let’s diversify our investments globally!
GDP, 1950-2050
U.S. Has Too Much Debt and a Negative Fiscal Balance
U.S. Has a Lower Life Expectancy
U.S. Has a Lower Return on Investment on Education
More Information about:
International and Emerging Markets Stocks, U.S. Median Income and Net Worth, Health, Education, and Safety.
Please see the entire Newsletter Newsletter, Oct 2012
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 17
About Bourbon Financial Management, LLC Bourbon Financial Management was formed to provide you with effective and comprehensive
solutions for managing your global wealth. Our disciplined and rigorous approach comes from
our collective knowledge in serving large institutional clients over many years.
Our core investment belief is that asset allocation (equities, fixed income, cash, real estate…) is
the single most important determinant of success in any investment plan. The dominant amount
of risk and return comes not from your choice of individual investments but from your asset
class mix. Bourbon Financial Management focuses our resources on risk management and asset
allocation.
PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to our
clients. Please tell those you feel may be interested that they can subscribe to their own free copy
of the newsletter at info@bourbonfm.com. Thank you.
BOURBON FINANCIAL MANAGEMENT
Excellence ~ Expertise ~ Ethics
616 W. Fulton St., Suite 411, Chicago, IL 60661
(+1) 312 - 909 - 6539 ~ www.bourbonfm.com
Member of the Financial Planning Association and Academic Affiliate of the National Association of
Personal Financial Advisors
© 2015 Bourbon Financial Management, LLC ~ All Rights Reserved ~ info@bourbonfm.com ~ (+1) 312 909 6539 18
Disclosures
• This material was prepared by BFM, Copyright by Bourbon Financial Management, LLC. All rights reserved. BFM is a trademark of Bourbon Financial Management, LLC. No part of this publication may be copied or distributed, transmitted, transcribed, stored in a retrieval system, transferred in any form or any means-electronic, mechanical, magnetic, manual, or otherwise-or disclose to third parties without the express written permission of Bourbon Financial Management, LLC, 616 W. Fulton #411, Chicago IL 60661. The information contained in this presentation is not written or intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from your own tax or legal counsel. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. BFM assumes no responsibility for statements made in this publication including, but not limited to, typographical errors or omissions, or statements regarding legal, tax, securities, and financial matters. Qualified legal, tax, securities, and financial advisors should always be consulted before acting on any information concerning these fields.
• Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The views expressed in this presentation are not intended to be a forecast of future events, a guarantee of future results or investment advice. Forecasts and predictions are inherently limited and should not be construed as a solicitation or recommendation or be used as the sole basis for any investment decision. All investments are subject to risk including the loss of principal. • The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. We believe the information obtained from third-party sources to be reliable, but neither Bourbon Financial Management, LLC nor its affiliates guarantee its accuracy, timeliness, or completeness. The views, opinions and estimates herein are as of the date of the material and are subject to change without notice at any time in reaction to shifting market conditions. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Examples provided are for illustrative purposes only and not intended to be reflective of results you should expect to attain.
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