Letter to Clients: 4th Quarter 2018
Dear Clients and Friends:
Autumn is probably my favorite season, although maybe that is just because it is the current season. I like the change of seasons. It is one of the reasons I love living in Iowa; we have four separate and distinct seasons which gives truth to old maxim, “if you don’t like the weather, wait five minutes and it will change“. On rare occasion, a change in the weather can quickly go from perfect to a disaster.
Floods, hurricanes, wildfires, earthquakes, extreme winds, and tornadoes all have the potential to create treacherous conditions and cause devastation. Insurance is a great first line of defense, but it is often inadequate as it does not necessarily cover all natural disasters. For example, flooding requires specific flood insurance, and a standard homeowners policy won’t cover damages caused by an earthquake. Since disaster can strike with little or no warning preparation is the key.
This quarter’s letter, in addition to our customary market review, will focus on the importance of building a financial emergency kit. The time to create an emergency kit is today, while the skies are blue and the winds are calm. We will also look back on the legacy of Lehman Brothers 10 years after its colossal collapse.
Making a Financial Emergency Kit
You should have two identical Financial Emergency kits; one physical and one virtual. The physical kit has everything you need if power and/or access to the internet is no longer a viable option. The first step to creating a financial emergency kit is to get a fireproof and waterproof safe or container. However, since you can’t guarantee that this kit won’t be lost or destroyed during a disaster, you will need to have a virtual emergency kit as well. A safety deposit box is an option but relies on your ability to get to a bank and access the box.
DV Financial’s client portal offers “the Vault” which is encrypted, safe, secure, private, and backed up virtual storage, but there are other cloud-based systems as well. Dropbox, a popular cloud-based storage system, offers an app which gives you access to your files from mobile devices and computers.
The important concepts are safety and duplicity. Whenever possible, have the same items available in both your physical and virtual emergency kits. It is also a good idea to copy your virtual emergency kit onto a flash drive which you can keep in your physical kit. Given the sensitive nature of your information, protect everything with a strong, unique password.
Cash and keys. Make a duplicate of house keys and auto keys. You may also need cash in the immediate aftermath of a disaster. ATM cards may not work and not everyone is prepared to take a credit card. Still, it wouldn’t hurt to include a duplicate credit card.
Contacts. Who are the important people in your life–family, friends, medical, and professional? Create a list with telephone numbers, emails, or other contact information.
Identification. If disaster strikes, you may be asked to confirm your identity to obtain disaster relief services, file insurance claims, to gain access to your property or financial assets. Your kit should contain essential documents, including extra originals or copies of a passport, driver’s license, birth certificate, marriage certificate, adoption records, Social Security card, green card, any military records, and pet ID tags. These will allow you to establish your identity and the identify of immediate family members, while eliminating the need to replace important ID markers.
Important records. We have copies of your financial records, but this doesn’t preclude you from safe harboring your records. A short list of financial documents that can fit into your kit includes mortgages, property deeds, and legal documents such as a power of attorney, estate planning, wills, and insurance policies. Include recent bank and credit card statements, and investment accounts records. Don’t forget to pack recent retirement account statements and your most recent tax return.
What are your valuables? Create an inventory of your personal belongings. Assemble a paper, photo, or video inventory and add it to your emergency kit. Be sure to save receipts for major items, home upgrades, and any appraisals of valuable belongings. For your household items, record what’s in each room. For major items, write down serial numbers. While you’re at it, record the cost. Take closeup pictures of valuables, including details such as serial number tags. You can also videotape your belongings with a narrative description of the relevant information.
If the project seems overwhelming, start by tackling one room at a time. If it’s ever needed, it will be valuable in helping you maximize benefits from your insurance policies and expediting the claims process.
Protecting your family
A disaster will take an enormous mental toll on you. Having your financial records in order will remove one burden. But what about your children? Your children’s wellbeing will largely be dependent on you. Kids look to Mom and Dad for their security.
Here is a disaster preparation checklist for parents obtained from UNICEF USA:
- Pack essentials such as medicine and clothes.
- Pack toys, favorite books, music, electronics, and have fresh batteries.
- Talk to your kids about what to expect at a shelter.
- Develop a system with your children that will allow them to be identified if they are separated from you.
- Learn basic first aid skills in case you or your child becomes sick or injured and medical supplies are scarce.
Chat with kids in ways they will understand. Be honest and reassure them, but don’t make promises that aren’t realistic. Just as important, let them know there are resources available that will assist your family.
While I sincerely hope you never experience the pain that comes with the loss of property or worse, we are here to assist. Taking proactive steps in advance can help eliminate one source of uncertainty in the event disaster strikes.
(Warning: abrupt topic change immediately ahead!)
The legacy of Lehman
September 15, 2018 marked the ominous ten-year anniversary of Lehman Brothers declaring bankruptcy. This sparked the financial crisis that engulfed the global economy. Lehman’s failure could be categorized as a “systemic event”, the financial term for an event that triggers severe financial instability and sends shockwaves through the economy.
Economically, we have recovered: unemployment is low, Gross Domestic Product (GDP – the primary measurement of economic activity) is above pre-crisis levels, and major U.S. market indexes have topped pre-recession highs. For some, the memories remain painful and fresh, and it is clear the crisis left an indelible mark on many investors.
Today’s bull market pushes higher, yet some investors react fearfully. You see it every time the market experiences a set back and the financial news sources talk about it frequently. Someday, the memory of the crisis will recede and the fear will eventually fade. Until then, many are still wondering if (when?) it will happen again.
Can it happen again?
Never say never, but it is important to recognize that the next financial crisis will probably be different from the last financial crisis. We tend to learn from our mistakes and the system implements preventive measures. It does not matter if you place blame on the banks or on borrowers; too many homeowners ended up in loans they couldn’t afford or didn’t understand. Gone are the days of easy mortgage credit. Today, underwriting standards for home loans are more realistic and banks are better capitalized than in 2007. The major banks now have a much bigger cushion to absorb loan losses.
During a recent press conference, Fed Chief Jerome Powell was asked about financial conditions. Powell said, “The single biggest thing I think that we learned was the importance of maintaining the stability of the financial system.” It’s something “that was missing” back then. He continued, “We’ve put in place many, many initiatives to strengthen the financial system through higher capital, and better regulation, more transparency, central clearing, margins on unclear derivatives, all kinds of things like that, which are meant to strengthen the financial system”.
These measures won’t prevent another recession, nothing will. Systemic risks haven’t completely abated, but the financial system is in a much better position to withstand a shock than it was in 2008.
The key to long term market success is time in the market, not timing the market. While it is good to know what is going on, don’t let today’s news influence your long-term goals.
Random parting thoughts
- Diversification and having a blend of the right type of investments is also important.
- Headlines create short-term volatility. Historically, patient investors who have stuck with a disciplined approach are typically rewarded.
- Given enough time, stocks have always out performed any other asset class.
- While heading to the safety of cash during volatility may bring short-term comfort, opting for the sidelines can have long-term impact on results.
- The opposite is also true. Don’t become overconfident when stocks are surging. No individual investor and no single investment is invincible. Avoid the temptation to take on too much risk.
A recent Fidelity Investments study concluded that investors who stayed in the markets (during 2008) saw their account balances grow an average of 147% between the fourth quarter of 2008 and the end of 2015. Investors who moved out of stocks and into cash during the fourth quarter of 2008 or first quarter of 2009 experienced an average return, during the same time, of just 74%. Even worse, over 25% of investors who sold out of stocks during that downturn never had the nerve to get back into the market.
Sometimes our role is to help you sort through the noise. We vow to advocate for you and your long-term plans. If (when) the markets zig when you hoped they would zag, and others are getting nervous, you may use us as a resource. I appreciate the opportunity to serve as your financial advisor. If you, or anyone you know, have any concerns or questions please feel free to reach out to me at firstname.lastname@example.org or call us at (515) 255-3354. We are happy to assist.
Art Dinkin, CFP®
This newsletter contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded “blue chip” stocks, primarily industrials, but includes financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks. The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock's weight in the index proportionate to its market value. The Russell 2000 Index is an unmanaged index that measures the performance of the small-cap segment of the U.S. equity universe. The MSCI All Country World Index ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 23 Emerging Markets (EM) countries*. With 6,062 constituents, the index covers approximately 99% of the global equity opportunity set outside the US. The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. Barclays Aggregate Bond Index includes U.S. government, corporate, and mortgage-backed securities with maturities of at least one year.