Nine Experts, Four Surprises, and One Million Dollar Bet

Now that it's in the books, we all know 2017 was a fabulous year for investors. Though, looking back, who predicted that outcome?

Let's reflect and put ourselves one year back in time to the beginning of 2017. What could we have derived from the experts? Or from what we were hearing in the news, or from the prognosticators?

Click here to see the predictions, the surprises, and the outcome of one million dollar bet!

Cryptocurrency: What's It All About?

Have you caught cryptocurrency fever, or are you at least wondering what it's all about? Odds are, you hadn't even heard the term until recently. Now, it seems as if everybody and their cousin are getting in on it.

Psychologists have assigned a term to the angst you might be feeling in the heat of the moment. It's called "FoMO" or Fear of Missing Out. Education is the best first step toward facing FoMo and making informed financial choices that are right for you. So before you make any leaps, let's take a closer look.   

What is cryptocurrency?

Cryptocurrency is essentially a kind of money - or currency. Thanks to electronic security - or encryption - it exists in a presumably secure, sound and limited supply. Pair the "encryption" with the "currency," and you've got a new kind of digital asset, or electronic exchange.

Well, sort of new. Cryptocurrency was introduced in 2009, supposedly by a fellow named Satoshi Nakamoto. His Wikipedia entry suggests he may not actually be who he says he is, but minor mysteries aside, he (or possibly "they") is credited with designing and implementing bitcoin as the first and most familiar cryptocurrency. Ethereum is currently its second-closest competitor, with plenty of others vying for space as well (more than 1,300 as of early December 2017), and plenty more likely to come.

Unlike a dollar bill or your pocket change, cryptocurrency exists strictly as computer code. You can't touch it or feel it. You can't flip it, heads or tails. But increasingly, holders are receiving, saving and spending their cryptocurrency in ways that emulate the things you can do with "regular" money.

How does cryptocurrency differ from "regular" money?

In comparing cryptocurrency to regulated fiat currency - or most countries' legal tender - there are a few observations of note.

First, since neither fiat nor cryptocurrency are still directly connected to the value of an underlying commodity like gold or silver, both must have another way to maintain their spending power in the face of inflation.

For legal tender, most countries' central banks keep their currency's spending power relatively stable.  For cryptocurrency, there is no central bank, or any other centralized repository or regulator. Its stability is essentially backed by the strength of its underlying ledger, or blockchain, where balances and transactions are verified and then publicly reported.

The notion of limited supply factors in as well. Obviously, if everyone had an endless supply of money, it would cease to have any value to anyone. That's why central banks (such as the U.S. Federal Reserve, the Bank of Canada, and the Bank of England) are in charge of stabilizing the value of their nation's legal tender, regularly seeking to limit supply without strangling demand.

While cryptocurrency fans offer explanations for how its supply and demand will be managed, it's not yet known how effective the processes will be in sustaining this delicate balance, especially when exuberance- or panic-driven runs might outpace otherwise orderly procedures. (If you're technically inclined and you'd like to take a deep dive into how the financial technology operates, here's one source to start with.)

Why would anyone want to use cryptocurrency instead of legal tender?

For anyone who may not be a big fan of government oversight, the processes are essentially driven "by and for the people" as direct peer-to-peer exchanges with no central authorities in charge. At least in theory, this is supposed to allow the currency to flow more freely, with less regulation, restriction, taxation, fee extraction, limitations and similar machinations. Moreover, cryptocurrency transactions are anonymous.

If the world were filled with only good, honest people, cryptocurrency and its related technologies could represent a better, more "boundary-less" system for more freely doing business with one another, with fewer of the hassles associated with international commerce.

Unfortunately, in real life, this sort of unchecked exchange can also be used for all sorts of mischief - like dodging taxes, laundering money or funding terrorism, to name a few.

In short, cryptocurrency, blockchain technology, and/or their next-generations could evolve into universal tools with far wider application. Indeed, such explorations already are under way. In December 2017, Vanguard announced collaborative efforts to harness blockchain technology for improved index data sharing.

That said, many equally promising prospects have ended up discarded in the dustbin of interesting ideas that might have been. Time will tell which of the many possibilities that might happen actually do.  

Even if I don't plan to use cryptocurrency, should I hold some as an investment?

If you do jump in at this time, know you are more likely speculating than investing, with current pricing resembling a fast-forming bubble destined for collapse.

Bubble or not, there are at least two compelling reasons you may want to sit this one out for now. First, there are a lot of risks inherent to the cryptocurrency craze. Second, cryptocurrency simply doesn't fit into our principles of evidence-based investing ... at least not yet.

Let's take a look at the risks.

Regulatory Risks - First, there's the very real possibility that governments may decide to pile mountains of regulatory road blocks in front of this currently free-wheeling freight train. Some countries have already banned cryptocurrency. Others may require extra reporting or onerous taxes. These and other regulations could severely impact the liquidity and value of your coinage.

Security Risks - There's also the ever-present threat of being pickpocketed by cyber thieves. It's already happened several times, with millions of dollars of value swiped into thin air. Granted, the same thing can happen to your legal tender, but there is typically far more government protection and insurance coverage in place for your regulated accounts.

Technological Risks - As we touched on above, a system that was working pretty well in its development days has been facing some serious scaling challenges. As demand races ahead of supply, the human, technical and electric capital required to keep everything humming along is under stress. One recent post estimated that if bitcoin technology alone continues to grow apace, by February 2020, it will suck away more electricity than the entire world uses today.

That's a lot of potential buzzkill for your happily-ever-after bitcoin holdings, and one reason you might want to think twice before you pile your life's savings into them.

Then again, every investment carries some risk. If there were no risk, there'd be no expected return. That's why we also need to address what evidence-based investing looks like. It begins with how investors (versus speculators) evaluate the markets.

What's a bitcoin worth? A dollar? $100? $100,000? The answer to that has been one of the most volatile bouncing balls the market has seen since tulip mania in the 1600s.

In his column "Bitcoin & Its Risks," financial author Larry Swedroe summarizes how market valuations occur. "With stocks," he says, "we can look at valuation metrics, like earnings yield. With bonds, we can use the current yield-to-maturity. And with assets like reinsurance or lending ... we have historical evidence to make the appropriate estimates."

You can't do any of these things with cryptocurrency. Swedroe explains: "There simply is no tangible relationship between any economic or financial parameters and bitcoin prices." Instead, there are several ways buying cryptocurrency differs from investing:

  • Evidence-based investing calls for estimating an asset's expected return, based on these kinds of informed fundamentals.
  • Evidence-based investing also calls for us to factor in how different asset classes interact with one another. This helps us fit each piece into a unified portfolio that we can manage according to individual goals and risk tolerances.
  • Evidence-based investing calls for a long-term, buy, hold and rebalance strategy. 

Cryptocurrency simply doesn't yet synch well with these parameters. It does have a price, but it can't be effectively valued for planning purposes, especially amidst the extreme price swings we're seeing of late.

What if I decide to buy some cryptocurrency anyway?

We get it. Even if it's far more of a speculative than investment endeavor, you may still decide to give cryptocurrency a go, for fun or potential profit. If you do, here are some tips to consider:

  1. Think of it as being on par with an entertaining trip to the casino. Nothing ventured, nothing gained - but don't venture any more than you can readily afford to lose!
  2. Use only "fun money," outside the investments you're managing to fund your ongoing lifestyle.
  3. Educate yourself first, and try to pick a reputable platform from which to play. (CoinDesk offers a pretty good bitcoin primer.)
  4. If you do strike it rich, regularly remove a good chunk of the gains off the table to invest in your managed portfolio. That way, if the bubble bursts, you won't lose everything you've "won." (Also set aside enough to pay any taxes that may be incurred.)

Last but not least, good luck. Whether you win or lose a little or a lot with cryptocurrency - or you choose to only watch it from afar for now - we remain available to assist with your total wealth, come what may.

The Value of Behavioral Economics

A spotlight was shone on behavioral economics in October when one of its leading advocates, Richard Thaler, was awarded the Nobel prize for economics for his pioneering work in the field. The Economist succinctly summarized the importance of Thaler's work by writing, "The world, and the field of economics, is better for his contributions."

What is behavioral economics? Psychology Today says it "blends insights of psychology and economics, and provides some valuable insights that individuals are not behaving in their own best interests. Behavioral economics provides a framework to understand when and how people make errors. Lessons from behavioral economics can be used to create environments that nudge people toward wiser decisions and healthier lives." 

This month's InFocus shares a collection of resources and insights about how we behave when it comes to our money.


Tim Maurer says one of his heroes is Thaler because of how he has so profoundly boosted the prominence of behavioral economics. Maurer, the director of personal finance for the BAM ALLIANCE, writes, "I believe that the realm of behavioral economics -- and behavioral science more broadly -- can and should reframe the way we look at our interaction with money, personally and institutionally, as well as the business of financial advice."

Maurer takes a deep dive into behavioral economics in this article, looking at how it is put into play, how it can be misused and what financial planning looks like when it's done right. He also shares this revelation when it comes behavioral economics: Emotions aren't the problem and may be the solution.   


Noted educator, author and speaker Dan Ariely has also devoted his career to behavioral economics. His website features a wealth of resources that are designed to help you make better decisions and gain a better sense of a life that often is pulling you in myriad directions. Among these resources: the Pocket Ariely app, which offers recommendations for interesting reads, videos and podcasts and allows you to play brain-challenging games.

> RELATED: Ariely recommends five books on behavioral economics to help us maximize ourselves. 


Behavioral economics is one of the top categories of the popular TED Talks series, as some of the leaders in the field -- psychologists, mathematicians, economists and authors alike -- share their thoughts on everything from how the brain works to how decisions are made. The TED Talks behavioral economics playlist is divided into three categories. Find a talk that speaks to you:

Confirmation Bias

Confirmation bias, put plainly, is seeking out evidence that confirms your opinion or belief is correct while ignoring or undervaluing evidence to the contrary. No one is immune to this tendency for a very obvious reason, we all prefer to be right!

Without making a proactive effort to avoid this potential pitfall, it can sneak into our areas of interest, especially those we're most passionate about. Think politics, an argument with a loved one, or a friendly debate over who's the best baseball player of all time.

While these can all lead to hurt feelings, or even the unthinkable, sounding foolish... When it comes to investing, it's just downright costly.

Here's a quick read with some tips to give your ideas and convictions the fair shake they need before diving in. 

 Read full article

Cultivating Gratitude in Your Life

This is the time of year marked by giving thanks for what is most meaningful to us. Expressing gratitude not only can make someone feel good in the season but researchers say it can have longer-term positive effects such as improving relationships, your overall happiness and your well-being. 

In this article, Harvard Medical School cites different ways you can cultivate gratitude in your life -- keeping a gratitude journal, meditating and writing thank-you notes, to name a few.

This Thanksgiving, we want to say thank you to you. We appreciate how our professional lives are deeply enriched by the work we do with you -- listening to you, getting to know you, navigating life's path together and helping you move closer to your highest aspirations.

We are grateful for the relationship we've built with you. We are appreciative of your loyalty, emboldened by your confidence and humbled by your trust.

May your days ahead be festive, and be filled with family and friends.

Planning For The Unexpected

We help you plan for so much in your life -- from your savings and spending, to how you'll pay for higher education, to your retirement lifestyle, to the legacy you'll leave.       

We understand, however, that there's no such thing as planning for every eventuality that comes your way. We've seen this firsthand over the past few weeks as the ravages of hurricanes and wildfires significantly and suddenly altered people's lives in places such as Houston, up and down Florida, and the Northwest.

And though it didn't come close to carrying the same significance of a natural disaster, millions of U.S. consumers were caught off-guard with the news that their personal information may have been compromised as a result of the Equifax data breach. Even people who had taken careful measures to protect their identity were affected.

While it's obviously difficult to plan for things you can't predict, this month's InFocus looks at steps and processes you can put in place to better safeguard against unexpected risks.

PUT TOGETHER A 4-STEP DISASTER PLAN, the official website of the Department of Homeland Security, says the first step to getting prepared for a potential disaster is to know the most significant threats to your region. In this article, the DHS shares questions to ask and considerations to take into account when putting together your 4-step disaster plan:

  • Step 1: Discuss key questions with your household 
  • Step 2: Consider specific needs in your household
  • Step 3: Fill out an emergency plan
  • Step 4: Practice the plan also offers a toolbox of shareable resources to help the planning process for those with children and pets and how-to guides for protecting important documents and putting together clear communication plans.


The Financial Industry Regulatory Authority says that part of any overall disaster plan should be a financial kit, one that should be readily accessible and always kept stocked. FINRA shares the essential items that should be included in your financial kit -- from cash to key contacts to important financial records.

Read the essentials for your kit and tips for each


In early September, Equifax, a major credit reporting bureau, announced that it had discovered a data breach in July that affected more than 140 million U.S. consumers. Tim Maurer, director of personal finance for the BAM ALLIANCE, went on PBS' Nightly Business Report to discuss steps you can take in the event that your private information is compromised. Some of Maurer's top tips: change your passwords and PINs and monitor your credit report and statements.

Related: The Best Identity Protection Programs:

 Top Ten Reviews | | A Secure Life


As your advisor, we're most familiar with providing guidance when it comes to something else that can behave unexpectedly: the markets. We have worked to put an investment plan in place for you that is built for the long haul and can help protect you from unexpected volatility. That could come in the form of rebalancing back to your target allocations when markets are high, seeking tax-loss-harvesting opportunities when they are low, or analyzing your risk tolerance if you find yourself worrying too much about their next move.

We're here to have conversations with you about any aspect of planning, be it expected or not.

Is Your American Dream Slipping?

The article in the WSJ on September 6, 2017 caught my attention, Where the American Dream Is Slipping.

The concept of retirement has so many facets to it, but clearly economics is a driving force in the decision of timing and on the expected quality of life in retirement. Not surprisingly, the answer to the question, "The economy is working well for me and my family" was split along political party lines - with nearly 64% of Republicans saying yes, while just 45% of Democrats answering the same. In 2014 the answers were reversed, with 42% of Democrats saying yes, while only 35% of Republicans answering in the affirmative.

So who is correct? Was the economy that much better for Democrats in 2014 than Republicans? Or vice versa today? Or is perception the bigger issue? We have discussed in the past how party affiliation does impact investment return - not because of the investment performance, but entirely due to investor behavior. People are more optimistic when their candidate is in office so they invest more.

What is most surprising to me was that the percentage of Americans who say they will retire after 70 or older is now 28% - up from 18% just 18 years ago. I have many clients working past 70, but only because they are still having fun - or derive satisfaction from maintaining their relevance. Or maybe it is their spouse wants them out of the house!

Another shocking statistic - the number of people who report living paycheck to paycheck is now 78%, up from 75% just a year ago. Seventy one percent of all workers say they are in debt - up from 68% a year ago. And 18% of all workers have reduced their 401(k) contributions and nearly 40% don't participate in their company retirement plan or a personal IRA. Financial Wellness: Majority of U.S. Workers are Living Paycheck to Paycheck

With all of this data as foundation - let's turn our attention to those impacted in Texas, Louisiana, and soon to be Florida. When people are living beyond their means, have little saved for a very rainy day, and are deep in debt - what do they do now? Their lives have been shattered and their personal economic situation is now totally hopeless. Add to that, many of those were relying on the equity in their homes to bail them out. Now even that is gone. 

Focusing on all of this can be quite depressing. We should open our hearts and our pocketbooks to assist the neediest of those in despair. 

But now back to you - and your family. Here are some questions and advice to consider:

What if the unthinkable earthquake event in California became reality?

How much are you relying on your home and other California real estate holdings for your retirement? Is there a backup plan? Should you diversify? We shake our heads in amazement that so few in Texas had flood insurance. Do you have earthquake insurance? Do you know anyone who does?

What is your savings rate?

Have you lowered it to fund your todays instead of your tomorrows? Lowering your spending to increase your savings is often the only way to secure a comfortable retirement. Consistency is your pathway to financial freedom. 

What are you teaching your children?

I have seen way too many parents reluctant to inquire about how their adult children are saving for retirement. The millennials are notoriously poor savers. Do they have a budget? Are they increasing their 401(k) deferrals? Do you know? Most adult children I know appreciate their parents getting involved. Who else can they trust more than you? I am often asked to guide young adults as they start saving and investing. I am always happy to do that. 

You can't start too young - to save or to teach.

Teaching children when they are young to save is one of the greatest habits you can instill. The worst gift to pass along is to enable them and pay for everything. What you may think is a head start in life might in fact be a handicap.

The American Dream is very much within your grasp. It doesn't depend on your political affiliation, and it shouldn't depend on where you live. And it certainly shouldn't depend on your needing to work past age 70! It is totally up to you and how you behave. Sticking to a well thought out plan will be your anchor in the storms that we know will come. 


Risk is omnipresent in our lives. There are different types of risk in investing, and it exists to varying degrees when making significant financial decisions. Risk is there when we pick up an adventurous hobby, participate in a thrill-seeking activity or push our bodies. It's even there when we decide whether to play it safe or stretch our bounds (hmm, stick with honey BBQ or try the mango habanero wings?).

This month's InFocus takes a look at risk from several angles, to raise your awareness of where it exists and help you take stock of the role it plays in your life.


"I just really wish I'd taken more risk with my investment portfolio." -- No one, ever, on their deathbed.

Tim Maurer, director of personal finance for the BAM ALLIANCE, recently wrote about how people reacted when asked how they would "do over" their lives if given the chance. "Participants almost universally wished they'd have taken more risks in life -- personally, educationally, relationally, experientially, professionally and vocationally."

Maurer, however, says that this quest for risk-seeking shouldn't extend to the investment decisions you make. The field of behavioral finance and economics explains why.   

> RELATED: "Ten Ways to Expand Your Comfort Zone," from Forbes


"Never take more risk than you have the ability, willingness or need to take." --Larry Swedroe, director of research for the BAM ALLIANCE

Swedroe is a prolific writer, the author or co-author of 15 books about investing and financial planning. Swedroe commonly weaves the topic of risk into his writing and examines the important role it plays in a well-constructed wealth management plan. He recently wrote two articles that shine a light on various risks -- from mortality risk to longevity risk to human capital risk -- that reside inside and outside of investments:

> READ: An integrated investment plan is key

> READ: Understand the different types of risk


"Do my existing insurance plans accurately reflect my current needs?"

That's a question you should be regularly asking yourself, as protecting what you've accumulated and safeguarding your family's financial future is a foundational tenet of a well-developed wealth management plan. When it comes to insurance, some questions are a matter of numbers, but others are more difficult to answer as they cause us to explore how we'd manage a health crisis, re-evaluate our planning strategies or proactively think about the unthinkable. The below insurance-related questions apply to many of us when it comes to protecting ourselves and should be asked by your advisor as you analyze your risk management needs:

  • If I were to lose my income, could my family maintain our current lifestyle?
  • What would the need for long-term care do to my portfolio?
  • How can I make sure my life insurance policies are set up in the most tax-efficient manner?
  • Do I have the proper insurance for my home(s), automobiles, collectibles, etc.?

> RELATED: The Most Complex Insurance Explained

Part 1: How to Protect Your Biggest Asset -- Your Income

Part 2: Long-Term Healthcare in Retirement



"Control what you can control." --David Butler, co-CEO, Dimensional Fund Advisors

By following the above five words from Butler, investors can help simplify their complex financial lives. Out of thousands of pages of scientific research, a cornerstone of evidence-based investing emerges: Control what you can control. Control the fees you pay and your trading costs. Control your tax efficiency and your asset allocation. Control how closely your emotions are tied to an up-and-down market. Bigger picture, you can take better control of your entire financial experience. 

Below, we look at foundational tenets of evidence-based investing to give you confidence when you think of where you are and where you want to go.


"Diversifying your wealth across a variety of market risks helps you remain on course and in the driver's seat, even when the road ahead is uncertain." --Manisha Thakor, director of wealth strategies for women, the BAM ALLIANCE

For an example of why we stress the importance of having an internationally diversified portfolio, just go back a few weeks. The first quarter of 2017 closed strongly for developed international and emerging markets (up 7.4 percent and 11.5 percent, respectively). This came when many investors had cooled on international stocks after they significantly underperformed U.S. markets from 2008-2016. But not so long ago (2002-2007), the MSCI World ex USA Index returned 128.7 percent compared with 42.5 percent for the S&P 500 Index. Diversifying your portfolio so it has exposure to both U.S. and global equity markets allows you to capture market upswings and withstand its downswings over the long haul.

Click here to see the up-and-down nature of various asset classes on a year-by-year basis from 1992-2016 as well as their 20-year annualized averages and the single best and worst years of these classes from 1997-2016. 

All of this underscores the importance of being diversified and -- the topic we'll address next -- being disciplined.



"Inactivity strikes us as intelligent behavior." --Warren Buffett

Buffett is really smart and really good at making money. But he makes an important point when it comes to someone having the ability to outsmart the market. "Success in investing doesn't correlate with IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people in trouble investing."

Too many investors buy stocks during upswings when all feels good and sell during downward spirals when uneasiness seeps in. This lack of discipline can cause investors to be on the sidelines when markets rebound, causing missed opportunities. Click here to see the cost to investors when they miss the best one, five, 15 and 25 days of market performance during a 45-year period.

Patience and prudence are central to an evidence-based strategy. Stay true to your well-devised plan while rebalancing periodically. Doing so will keep your portfolio in line with your target allocations and will enable you to capitalize on buy-low/sell-high opportunities. 


"The makeup of your portfolio depends entirely on your unique ability and willingness and need to take risk." --Larry Swedroe

Swedroe, a prolific author and the director of research for the BAM ALLIANCE, says the ability to take risk is largely defined by the investment horizon, the stability of an investor's income and the need for liquidity. Swedroe says the willingness to take risk can be succinctly summed up through the "stomach acid" test. Can you stick to your plan even when the market goes down for an extended period? This includes rebalancing -- selling what has done relatively well or held its value and buying what has done worse. The need to take risk is determined by the rate of return that is needed for you to reach your financial goals.

Of course, the word unique is critical as well. The ability, willingness and need to take risk are highly personal decisions. They vary for each investor's specific circumstances. However, you can view general guidelines for prudent asset allocation decisions by clicking here.


"It's just fun to do research, learn new stuff, and potentially have an impact on the way other people are thinking about the world." --Kenneth French, professor, Dartmouth College

No room for speculation, prognostication or hunches, the evidence-based world is rooted in decades of objective research on the long-term behavior of financial markets. We use that evidence to tilt portfolios toward the asset classes that have delivered the highest returns over the long haul and should continue to do so. Click here to see the return profiles of distinct asset classes during the period of 1931-2016.

This research leads to plans that keep costs low, minimize risk and implement tax-efficient strategies. The evidence results in portfolios that are diversified domestically and internationally. Those same portfolios use fixed income to dampen volatility and address the risk tolerance of each investor. 

If you made it this far in the article - good for you! If you understand it, even better. If you would like a deeper dive into how all of this impacts your portfolio and your plan, let's get together again. 

The Big Collective Yawn

If the first few months of 2017 had a theme song, it might be, "There's a Kind of Hush All Over the World."

There was the usual stream of global news. To name a few highlights:

  • U.K. Prime Minister Theresa May signed Article 50, officially starting the two-year clock ticking on a U.K. Brexit by March 29, 2019.
  • The U.S. inaugurated President Trump in January, and the Federal Reserveraised its overnight lending rate by a quarter-point in mid-March. Chairman Janet Yellen commented, "The simple message is the economy is doing well."
  • Canada's big banks were called to task by a CBC News exposé of an industry rife with high-pressure sales techniques. The Financial Consumer Agency of Canada will be investigating the accusations in April, and there have been additional calls for a parliamentary inquiry.
  • The bombing of Syria in response to the use of chemical weapons.
  • The military standoff over nuclear testing in North Korea.

In the meantime, markets marched onward:

  • The Dow Jones Industrial Average broke 20,000 to considerable fanfare on January 25. It broke 21,000 on March 1.  Now it is back down to around 20,500.
  • In seeming disconnect, The Wall Street Journal (WSJ) also reported the Dow's "quietest quarter" in 51 years. As BPS and Pieces blogger Phil Huberpoints out: "Milestones and large, round numbers are two things that human beings are predisposed to get really excited about." But the Dow's average daily movement during the first quarter was actually a scant 0.3185% - its lowest quarterly swing since 1965. Basically, the bigger the numbers become, the less the raw point swings really matter.
  • While U.S. stocks have been popular in recent years, emerging markets are fast becoming the newest market-timing darlings. At quarter-end, WSJ columnist Jason Zweig noted, "Emerging markets are up 12% this year, double the return of the S&P 500 index of U.S. stocks, counting dividends." He also noted, "one-twelfth of all the money of these [emerging market ETF] funds has come in over the past 90 days." That's a whole lot of past-performance chasing going on!

In this context, as he's been doing for more than 50 years, Warren Buffett published his annual Berkshire Hathaway shareholder letter. To put this quarter's moves in proper perspective, here are two of our favorite bits of Buffett's usual wit from this year's letter: 

Chasing trends:

"This year the magic potion may be hedge funds, next year something else. The likely result from this parade of promises is predicted in an adage: 'When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.'"

Following forecasts:

"If 1,000 managers make a market prediction at the beginning of a year, it's very likely that the calls of at least one will be correct for nine consecutive years. Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet. But there would remain a difference: The lucky monkey would not find people standing in line to invest with him."

We've said it before. One of the few predictions we'll make is that we're almost certain to say it again: Unless your own life's personal circumstances have changed, stay the course as planned. Whenever we can help with that, please let us know.

Reflections of Warren Buffett's 2016 Letter

I will miss Warren Buffett's annual shareholder letter. At age 86 it can't be too many more years before his ever looming words of wisdom will be silenced. Until then, I will bask in the wisdom gleaned from his decades of success. Here are my biggest take aways from 2016:

1.  For those worried about an impending market meltdown:

Meg McConnell of the New York Fed aptly described the reality of panics: "We spend a lot of time looking for systemic risk; in truth, however, it tends to find us." During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.

2.  Investing when things look bleak:

Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it's imperative that we rush outdoors carrying washtubs, not teaspoons.

3. Commenting on American Economic Dynamisn:

One word sums up our country's achievements: miraculous. From a standing start 240 years ago - a span of time less than triple my days on earth - Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers. Above all, it's our market system - an economic traffic cop ably directing capital, brains and labor - that has created America's abundance. This system has also been the primary factor in allocating rewards.

4. On the future for our children:

This economic creation will deliver increasing wealth to our progeny far into the future. Yes, the build-up of wealth will be interrupted for short periods from time to time. It will nothowever, be stopped. I'll repeat what I've both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.

5. On gloomy market forecasts:

American business - and consequently a basket of stocks - is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.

I know many of you are nervous about market highs, a president who is unconventional (the kindest term I could come up with), and all of the global turmoil that exists. The fear that "this time is different" causes us anxiety like never before (not really, but we don't want to remember how we worried before). Your plan should include being able to weather the storms. If it drives you crazy, we should discuss that. Until then, worry less and live more.

Dimensional - A Look Back at 2016

If you were with us this time last year, you may recall that the markets were in a much gloomier state amidst a panic-driven sell-off. The demoralizing numbers were reflected in the early days of 2016, as well as in Dimensional Fund Advisors' 2015 Market Review, released about a year ago. At the time ...

  • USA Today reported on "the worst four-day start to the year ever for the broad U.S. stock market."
  • The Financial Times reported a global "climate of fear," following the temporary trade halt in China's stock market.
  • Plenty of other headlines were crying out that we'd best prepare for the worst. "This year is a wake-up call to think about lower returns for the next several years," one such prognosticator fretted at year-end 2015. 

Not so fast. That may be the biggest take-away from Dimensional's newly released  A Look Back at 2016, which we share with you today. While annual 2015 and early-2016 performance had been marred by nearly universal negative-to-low returns (especially from small-cap and value stocks), 2016 annual returns were nearly as polar opposite to that experience as returns can get.

"Many investors may not have expected global stocks and bonds to deliver positive returns in such a tumultuous year," Dimensional's 2016 review concludes. To say the least!  

We invite you to take a closer look at this latest review and let us know if we can discuss any of the questions or ideas it may generate for you.  Another important takeaway from Dimensional:

"This [market] turnaround story highlights the importance of diversifying across asset groups and regional markets, as well as staying disciplined despite uncertainty. Although not all asset classes had positive returns, a globally diversified, cap-weighted portfolio logged attractive returns in 2016."

What message were we delivering this time last year? We were urging anyone who would listen to avoid turning scary market risks into permanent personal damage by selling in fearful reaction to the near-term news.

On the flip side today - but for the same, evidence-based reasons - we now caution you against reading too much into, or piling too many of your investments into the recent outperformers. For managing market highs and lows alike, we are guided by the following sensible advice expressed in Dimensional's 2016 review by Nobel Laureate Eugene Fama, a founding board member for the firm:

"There's no information in past returns of three to five years. That's just noise. It really takes very long periods of time, and it takes a lot of stick-to-it-iveness. You have to really decide what your strategy is based on - long periods of returns - and then stick to it."

Well said. That said, please let us know if we can say more, or we can otherwise assist you with your planning for 2017 and beyond.

A Vote for Small Cap Stocks

Evidence-based investing is not always easy.  Over the last few years we've seen large companies outperform small and growth outperform value.  Even though we know this shouldn't persist over the long-run based on the evidence, it's difficult not to let ourselves wonder if the investment landscape hasn't somehow changed.  This is a very short period of time when put in perspective and as we know the tide can turn when we least expect it, especially when it comes to investments.

Enjoy this quick read!

A Vote for Small Cap Stocks

How the Presidential Election Has Affected Fixed Income Rates

The election of Donald Trump as president on Nov. 8 has investors assessing the full impact of his economic platform. Going into the election, the overwhelming majority of market participants were expecting a win for Hillary Clinton and had priced assets accordingly. Below is a chart of yields as of market close on 11/8 versus where rates stand as of 11/14.


As you can see, since the election we have had a fairly dramatic move in rates. Both the five-year and 10-year U.S. Treasury bonds rose more than 30 basis points in less than a week, which is an astonishing move in such a short period of time. We have also seen a sharp rise in inflation expectations. The five-year break-even inflation rate moved up to 1.74 percent from 1.64 percent, while the 10-year break-even inflation rate has risen a more pronounced 15 basis points from 1.74 percent to 1.89 percent.

Why have we seen such a dramatic rise in interest rates?

The Trump economic plan calls for increased fiscal spending, reduced regulation, a significant change to rules governing financial-services institutions, a potential change of leadership at the Fed and increased trade protectionism. If President-elect Trump is able to push these policies through, it could be very bullish for the economy while also inviting unexpected inflation and triggering faster interest rate hikes from the Federal Reserve. 

Higher inflation obviously eats into the value of future cash flows of nominal bonds, so in response investors demand a higher yield to compensate them for this risk. The risk of higher inflation has been one of the main drivers behind the selloff in U.S. Treasury bonds, as evidenced by the jump in break-even inflation rates. The potential specter of faster Federal Reserve tightening is another big driver of the selloff because investors again are demanding a higher yield now that they anticipate interest rates rising more quickly in the future.

Should we make any changes to our fixed income strategy?

The emphatic answer is no. Interest rate risk, reinvestment risk and credit risk are the three biggest risk factors when investing in fixed income. By buying high-credit quality bonds, we greatly reduce credit risk, leaving only interest rate and reinvestment risk. What we are currently seeing in the markets is interest rate risk, which is the possibility that, as rates increase, bonds of longer maturities will go down in value. Reinvestment risk, on the other hand, is the risk we had been seeing over the past several years. This occurs when a security matures and the prevailing interest rate is lower than when the security was originally purchased. Unfortunately, interest rate and reinvestment risk are at loggerheads. If you try to eliminate interest rate risk by buying only very short maturities, you are introducing more reinvestment risk and vice versa.

Our approach of building short- to intermediate-term ladders balances these two risks. For example, over the past several years as rates have fallen steadily, the longer rungs of the ladder have appreciated greatly. This has offset the fact that maturing bonds were being reinvested at lower yields. Now, the opposite is happening. As rates have risen, the longer rungs of the ladder have dropped in value, but they can now be offset by reinvesting maturing bond proceeds at higher yields. By staying in short- to intermediate-term maturities, we have also significantly reduced our interest rate risk compared to longer term portfolios and with only small sacrifices in yield.

Also note that, despite the recent selloff, yields are still below where we started the year, and many fixed income funds still holding on to positive returns. For example, the DFA Five-Year Global Fixed Income Portfolio is up 2.42 percent year to date, while the DFA Municipal Bond Portfolio is up 1.44 percent year to date. Despite the momentum we have seen in the fixed income markets, investors must remember that this is no guarantee that rates will continue to move higher. We have seen several instances, most notably the taper tantrum in 2013, of rates moving up considerably only to stabilize or fall later on down the road. Even if we continue to see rates move higher and fixed income returns turn negative, investors should not fret over this short-term pain; in general, higher fixed income rates are better in the long run for investors. This is especially true for clients in or near retirement because higher interest rates mean more interest income, which can allow them to potentially take less equity market risk in their portfolios.  


I Hate (Most) Variable Annuities

As much as I love to partner with families to dramatically simplify their complex financial lives, that's how much I hate most variable annuities. That's a lot of loathing. And I am not alone: 

  • In "The Only Guide to Alternative Investments You'll Ever Need," BAM ALLIANCE co-authors Larry Swedroe and Jared Kizer panned most variable annuities, noting that, "Sales are often in the best interest of the person making the recommendation to buy them - although they may not be in the best interests of the buyer."
  • The Financial Industry Regulatory Authority (FINRA) also has warned investors away from them in this alert: Variable Annuities: Beyond the Hard Sell.
  • Even the Aloha state of Hawaii placed them on their list of top-five Common Threats to Hawaii Investors, right up there with Ponzi schemes and affinity fraud. The clip art is a little cheesy - a thief sneaking off with the goods - but it may not be entirely off-base.

As described in the Hawaiian regulatory report, variable annuities are "complicated products that agents sell without thoroughly explaining." These sentiments echo Larry's and Jared's similar comments in their book, where they explain the flaws described here in more detail. (To be fair, they also suggest a handful of circumstances in which a sensibly structured variable annuity may make sense, although these have been more the exception than the rule, by far.)

Let's count a few of the ways that I hate most variable annuities.

Incredibly Complicated

Annuity structures in general can be mind-numbingly complex. The contracts are lengthy, confusing and obtuse - unreadable and unread. Granted, even well-written financial agreements for legitimate products can get hairy. But as a trading professional turned wealth manager, I've scrutinized a lot of detailed investment contracts over the years, and even I sometimes have a hard time determining the all-in costs and net performance expectations on these things.


Inherently Conflicted

From my conversations with your average variable annuity sales folk, they rarely seem to understand the intricacies either - or if they do, they're not admitting to it.

Given the nosebleed-high commissions they've traditionally stood to reap, it's no wonder these product purveyors don't want to take a close whiff of their own wares. As described in this February 2016 Wall Street Journal piece, the commission on a variable annuity sale averaged around 8% in 2014. So on $100,000, that's $8,000 gone, before you've even driven the annuity off the proverbial lot. I'll bet that a car dealer would live in envy of these sorts of payoffs.

Insufferably Deceptive

If that were all of it, I suppose one could argue that it's a caveat emptor world, where it remains the buyer's duty to beware. But with variable annuities, some of the deceptions I've seen used to promote the product create an unfair playing field.

The biggest one that sticks in my craw is when annuities are touted as dependable safeguards against losing your retirement nest egg to market volatility. Who wouldn't want to hear that they could earn 6% (or similar) every year, guaranteed for life? I've even had family members come to me after hearing these sorts of pitches, asking about these allegedly risk-free alternatives to traditional investing.

That's dirty pool. Of course we all want investment returns without risk. We'd also all love it if deep dish, Chicago-style pizza were low-fat, and those "I want to give you $1 million" e-mails from Nigerian royalty were for real. On the last two counts, we immediately know better. I suggest you treat any claims that you can earn "risk-free" market returns with equal suspicion.

Would you like to know the sleight of hand that's likely taking place? With variable annuities, you're not necessarily earning a 6 percent (or whatever) return ON your capital. If the underlying investments don't deliver as hoped for, what you may get instead is up to a 6 percent return OF your capital ... at least until you die, the contract ends, or your money runs out. In other words, you may be basically borrowing against your own nest egg to achieve so-called security.

Once you know how it may really work, those "guaranteed" returns lose their appeal fast, don't they? Even if you're okay with establishing a reliable plan for spending down your assets - a common and often commendable goal for retirees - you or your adviser can set up a similar arrangement on your own. It can usually be done far more transparently, with better underlying investments, at a fraction of the cost, and with a lot more liquidity, so you can make adjustments over time if your goals or circumstances change. 

Variable Annuities: A Thing of the Past?

Fortunately, I and others long committed to representing investors' best financial interests may not need to warn people away from these sorts of flimflam products for much longer.

Compliments of the Department of Labor (DOL), new fiduciary rules governing retirement plan advice are scheduled to go into effect beginning in April 2017. The DOL's rules don't specifically prohibit the sale of variable annuities, but they do require anyone offering investment advice for retirement accounts to do so in a fiduciary manner. That means any investment recommendations must be in the investor's highest financial interests. 

That's going to make inherently complex, conflicted and costly variable annuities a tough sell

Even though the DOL's rules are still months or more away, they seem to already be having a positive impact on the industry:   

  • A May 2016 InvestmentNews article reported data from a LIMRA Secure Retirement Institute survey that found 19 of the top 20 variable annuity providers reported decreased sales in the first quarter of 2016. The LIMRA survey also found that "the market share of variable annuities compared to overall annuity sales dropped to its lowest level in more than 20 years."
  • An August 2016 InvestmentNews article indicated the decline was continuing: "Sales [of variable annuities] are expected to continue their downward trajectory as the [DOL] regulation comes into effect starting next year."
  • Another financial trade publication, RIABiz, quoted a Cerulli Associates research team managing director, who described the impact of the DOL rule as "almost an existential crisis for variable annuities ... You can make the argument for the role of guaranteed income in retirement accounts but is it worth paying the high fees?"

We would say, no, high fees are rarely, if ever "worth it," at least not for the investors who are paying them. If the DOL's rules spell the demise of poorly structured variable annuities and similarly conflicted products, I say, bring it on. Way to dramatically simplify investors' complex financial lives

Men Are From Mars ... and So Is Retirement Planning

Have you watched "The Martian"? In it, Matt Damon plays astronaut Mark Watney, who is accidentally left on Mars with nothing but his wits and whatever resources he has on hand to survive. Given the distances, there will be no special deliveries to save him if disaster strikes. 
Luckily Watney is also a botanist. He figures out how to plant his supply of potatoes instead of eating them, giving himself an ongoing source of nutrition. You can watch the movie to find out more, but suffice it to say, his crop requires fertilizer! 
Anyway, as a wealth manager, I couldn't help but compare Watney's plight to the typical retiree here on earth. Like stranded space travelers, retirees face harsh consequences if poor planning, and/or dumb luck deplete their financial lifeline. 
This is probably why a recent Journal of Financial Planning study found that most retirees create a self-imposed "consumption gap," spending less than they likely could, given their available resources. The study found that the average mid-level retiree exhibited a consumption gap of around 8 percent. For wealthier retirees' the gap was as high as 53 percent. The study notes: "Even after setting aside 40 percent of beginning financial assets to cover spending risks and bequests, a consumption gap as high as 47 percent still exists for the wealthiest retirees."
Prudent Retirement Planning in Action
In other words, it's possible that retirees - especially wealthier ones - are routinely erring on the side of over-caution. Or are they? When it comes to prudent retirement planning and balanced spending, there is usually more than meets the eye. 
Life expectancy and lifestyle - Clearly, the longer one or both of you survive, the longer you'll need to sustain your supply of wealth. And yet (thankfully!) this is an unknown factor in the equation. In addition, everyone's goals and risk tolerances are unique. Some retirees may wish to leave a large legacy or are otherwise happy having a very soft cushion throughout. Others may be more comfortable living large and literally going for broke. 
Timing - In sustaining your desired lifestyle, both the timing and amount of spending influence your outcomes. Excessive upfront spending exposes you to more risk than spending later on. Think of it like Watney eating his seed potatoes. If he had consumed five potatoes upfront, it would have impacted the stability of his ongoing supply more than the same meal, post-harvest. 
Inflation and expected returns - If inflation is higher than lower during your retirement years, your investments will need to earn more just to keep up. Similarly, if the markets underperform their historical averages, you could be left with fewer "potatoes" to harvest, consume and grow. 
Spending buckets - Should you spend principal, earnings, or both? Should you draw on taxable or tax-sheltered assets? When should you start taking Social Security? How do you resolve the multiple, often conflicting possibilities, and make best use of your spending sources? The spend-down phase of retirement planning requires careful planning to manage risk and tax brackets.  
The Point of Investing: Living 
Each of these and similar considerations are complicated enough in isolation. Combine them, and add an inherently unknowable future, and we can understand why many families err on the side of extreme caution, especially when they lack robust planning to guide the way. 
As a fiduciary advisor, we would not be serving our clients' best interests if we told them to throw all caution to the wind. But as "Retirementality" author Mitch Anthony has observed, it's also important for us to help families consider both their quantitative ROI (Return on Investment) and their qualitative ROL (Return on Life™). Thus we would be equally remiss if we discouraged clients from enjoying their wealth when our evidence-based planning indicated they could comfortably do so. 
So let's look at the flip side of the spending coin: employing your wealth when warranted. In his Nerd's Eye View post, "Why Most Retirees Will Never Draw Down Their Retirement Portfolio," Michael Kitces summarizes the aforementioned Journal of Financial Planning study and also shared this chart (reprinted with permission). It offers evidence that many retirees may not be best served by spending strictly according to worst-case-scenario possibilities.

Kitces shows us that it's rare for retirees spending 4% of their wealth each year to parley the rest of an initial $1 million nest egg into $7-$10 million over 30 years. But it's equally as rare for the markets to offer such poor returns that the same strategy leaves them with less than the $1 million they started with. Most outcomes land in the relatively comfortable range of $2-$3 million by the end.
In other words, we don't live on Mars, so you may not need to spend as frugally as if your space station might blow a hole at any moment. The odds are not trifling, but neither are they as steep as the ones Watney faced on a barren planet many millions of miles from home. 
In addition, Watney was on his own. Since he was a rocket scientist with plenty of time to kill, he stood a better chance than most to come out okay. But here on earth, in your busy life, it helps to have an adviser to guide you through the many empirical and emotional considerations involved in successful retirement planning. 
What is an ideal goal for retirees? To quote Wall Street Journal columnist and author Jason Zweig: "The great investor Benjamin Graham once defined happiness as 'living well within one's means.' Did he mean 'living well within one's means' or 'living well within one's means'? I think his ambiguity was intentional: He meant both."1 

That seems like good advice for us earthlings.


Investing for Retirement Income: Straw, Sticks or Bricks? Part III: Total-Return Investing for Solid Construction

As we've discussed in the first two parts of this three-part series, we do not recommend turning to dividend-yielding stocks or high-yield ("junk") bonds to buttress your retirement income, even in low-yield environments. So what do we recommend? Today we'll answer that question by describing total-return investing.
Part III: Total-Return Investing for Solid Construction
If you think it through, there are three essential variables that determine the total return on nearly any given investment:

1. Interest or dividends paid out or reinvested along the way

2. The increase or decrease in underlying share value: how much you paid per share versus how much those shares are now worth

3. The damage done by taxes and other expenses

Total-Return Investing, Defined
Instead of seeking to isolate and maximize interest or dividend income - i.e., only one of three possible sources for strengthening your retirement income - total-return investing looks for the best balance among all three, as they apply to your unique financial circumstances. Which strategy is expected to give you the highest total return for the amount of market risk you're willing to bear? Which is expected to deliver the most bang for your buck, in whatever form it may come?
If you're thinking this seems like nothing but common sense, you're on the right track. Last we checked, money is money. In the end, who wouldn't want to choose the outcome that is expected to yield the biggest pot given the necessary risks involved? Why would it matter whether that pot gets filled by dividends, interest, increased share value, or cost savings from tax-wise tactics?
In Total-return investing: An enduring solution for low yields," Vanguard describes the strategy as follows: "Many investors focus on the yield or income generated from their investments as the foundation for what they have available to spend. ... The challenge today, and going forward, is that yields for most investments are historically low. ... We conclude that moving from an income or 'yield' focus to a total-return approach may be the better solution."
And yet, many investors continue to favor generating retirement cash-flow in ways that put them at higher risk for overspending on taxes, chipping away at their net worth and weakening the longevity of their portfolio.
We're not saying you should entirely avoid dividend-yielding stocks or modestly higher-yielding bonds. With total-return investing, these securities often still play an important role. But they do so in the appropriate context of your wider portfolio management. Let's take a look at that next.
The Related Role of Portfolio Management The tool for implementing total-return investing is portfolio-wide investment management. Decades of evidence-based inquiry informs us that there are three ways to manage your portfolio (the sum of your investment parts) to pursue higher expected returns; more stable preservation of existing assets; or, usually, a bit of both. The most powerful strategies in this pursuit include:

1. Asset allocation - Tilting your investments toward or away from asset classes that are expected to deliver higher returns ... but with higher risk to your wealth as the tradeoff.

2. Diversification - Managing for market risks by spreading your holdings across multiple asset classes in domestic and international markets alike.

3. Asset location - Minimizing taxes by placing tax-inefficient holdings in tax-favored accounts, and tax-efficient holdings in taxable accounts.

By focusing on these key strategies as the horses that drive the proverbial cart, we can best manage a portfolio's expected returns. This, in turn, helps us best position the portfolio to generate an efficient cash flow when the time comes.
Your Essential Take-Home
Bottom line, there is no such thing as a crystal ball that will guarantee financial success or a happily-ever-after retirement. But we believe that total-return investing offers the best odds for achieving your retirement-spending goals - more so than pursuing isolated tactics such as chasing dividends or high-yielding bonds without considering their portfolio-wide role.
With that in mind, the next time the market is huffing and puffing and threatening to blow your retirement down, we suggest you throw another log on the fire that fuels your total return investment strategy, shore up your solidly built portfolio, and depend on the structured strength to keep that wolf at bay. Better yet, be in touch with us to lend you a hand.

Investing for Retirement Income: Straw, Sticks or Bricks? Part II: High-Yield Bonds - Sticks and Stones Can Break You

In Part I of our three-part series on investing for retirement income in low-rate environments, we explained why we don't advise bulking up on dividend-yielding stocks as a reliable way to generate retirement cash flow. Like the Three Little Pigs' straw house, dividend-yielding stocks can disappoint you by exhibiting inherent risks just when you most need dependability instead.
Another popular tactic is to move your retirement reserves into high-yield, low-quality bonds. Let's explain why we don't typically recommend this approach either.
  Part II: High-Yield Bonds - Sticks and Stones Can Break You
We can see why it would be appealing to try to have your bonds pull double-duty when interest rates are low: protecting what you've invested and delivering higher yields. The problem is, the more you try to position your fixed income to fulfill two essentially incompatible roles at once, the more likely you will underperform at both.
Risk and Return: The Same, Old Story (Sort of) In investing and many other walks of life, there's nothing to be gained when nothing has been ventured. This relationship between risk and expected return is one of the strongest forces driving capital markets. But decades of academic inquiry helps us understand that the risks involved when investing in a bond - any bond - are inherently different from those associated with investing in stocks. These subtle differences make a big difference when it comes to combining stocks and bonds into an effective total portfolio.
Because a company's stock represents an ownership stake, your greatest rewards come when a company's expected worth continues to improve, so you can eventually sell your stake for more than you paid for it, and/or receive "profit-sharing" dividends along the way. Your biggest risk is that the opposite may occur instead.
A bond is not an ownership stake; it's a loan with interest, which defines its two biggest risks:

1.    Bond defaults - If all goes well, you get your principal back when the loan comes due. But if the borrower defaults on the loan, you can lose your nest egg entirely.

2.  Market movement - You would like your bond's interest rate to remain better than, or at least comparable to those available from other, similarly structured bonds. Otherwise, if rates increase, you're left locked into relatively lower payments until your bond comes due. 

As such, two factors contribute to your bond portfolio's risks and expected returns:

1.    Credit premium - Bonds with low credit ratings ("junk" or "high-yield" bonds) are more likely to go into default. To attract your investment dollars despite the higher risk, they typically offer higher yields.

2.  Term premium - The longer your money is out on loan, the more time there is for the market to shift out from under you, leaving you locked into a lower rate. That's why bonds with longer terms typically offer higher yields than bonds that come due quickly.

Bond Market Risks and Returns
If you're connecting the dots we've drawn, you may be one step ahead of us in realizing that, just like any other investment, bonds don't offer higher expected returns without also exposing you to higher risks. So, just as we do with your stock holdings, we must identify the best balance between seeking higher bond yields while keeping a lid on the credit and term risks involved.
With stocks - Taking on added stock market risk has rewarded stalwart investors over time. The evidence is compelling that it will continue to do so moving forward (assuming you adopt a well-planned, "buy, hold and rebalance" approach as a patient, long-term investor).
With bonds - Taking on extra bond market risk is not expected to add more value than could be had by building an appropriately allocated stock portfolio. Moreover, it is expected to detract from your bond holding's primary role as a stabilizing force in your total portfolio ... and it often does so just when you most want to depend on that cushioning stability.
For example, in "Five Myths of Bond Investing," Wall Street Journal columnist Jason Zweig dispels the myth that "investors who need income must own 'bond alternatives'" (such as high-yield bonds). He cites BAM ALLIANCE Director of Research Larry Swedroe, who observes that "popular bond alternatives ... provide extra income in good times - but won't act like bonds during bad times."
The Monevator piece we referenced in Part I offers a similar perspective: "[B]onds are meant to be the counter-weight to shares in a portfolio. They are the stabilising influence that tempers the turbulence. Equities are from Mars and bonds are from Venus, if you will. ... [Use] Equities to deliver growth, and domestic government bonds to reduce risk."
Your Essential Take-Home
Given these insights, logic dictates:
If you must accept higher risks in search of higher returns, take those risks on the equity (stock) side of your portfolio; use high-quality fixed income (bonds) to offset the risks.
As we've been hinting at throughout this series, there is one more critical component to investing for retirement income. Beyond optimizing your bond portfolio with the right kind of bonds (high-quality, short- to mid-term), and avoiding chasing dividend stocks for their pay-offs, among the most important steps you can take with your retirement income is to adopt a portfolio-wide approach to money management, instead of viewing your income and principal as two isolated islands of assets. We'll explore this subject next.

Investing for Retirement Income: Straw, Sticks or Bricks? Part I: Dividend-Yielding Stocks - A Straw Strategy

If ever there were an appropriate analogy for how to invest for retirement, it would be the classic fable of The Three Little Pigs. As you may recall, those three little pigs tried three different structures to protect against the Big Bad Wolf. Similarly, there are at least three kinds of "building materials" that investors typically employ as they try to prevent today's low interest rates from consuming their sources for retirement income:

1.    Dividend-yielding stocks

2.    High-yield bonds

3.    Total-return investing

In this three-part series, we'll explore each of these common strategies and explain why the evidence supports building and preserving your retirement reserve through total-return investing. The approach may require a bit more prep work and a little extra explanation, but like solid brick, we believe it offers the most durable and dependable protection when those hungry wolves are huffing and puffing at your retirement-planning door. 

Part I: Dividend - Yielding Stocks - A Straw Strategy

We understand why bulking up on dividend-yielding stocks can seem like a tempting way to enhance your retirement income, especially when interest rates are low. You buy into select stocks that have been spinning off dependable dividends at prescribed times. The dividend payments appear to leave your principal intact, while promising better income than a low-yielding short-term government bond has to offer.

Safe, easy money ... or so the fable goes. Unfortunately, the reasoning doesn't hold up as well upon evidence-based inspection. Let's dive in and take a closer look at that income stream you're hoping to generate from dividend-yielding stocks.

Dividends Don't Grow on Trees.

It's common for investors to mentally account for a dividend payout as if it's found money that leaves their principal untouched. In reality, a company's dividends have to come from somewhere. That "somewhere" is either the company's profits or its capital reserves.

This push-pull relationship between stockholder dividends and company capital has been rigorously studied and empirically assessed. In the 1960s, Nobel laureates Merton Miller and Franco Modigliani published a landmark study on the subject, "Dividend Policy, Growth, and the Valuation of Shares." In "Capital Ideas" (a recommended read on capital market history), Peter Bernstein explains one of the study's key findings: "Stockholders like to receive cash dividends. But dividends paid today shrink the assets of the company and reduce its future earning power."

Here's how this MoneySense article, "The income illusion," explained it: "[I]f a company pays you a $1,000 cash dividend, it must be worth $1,000 less than it was before. That's why you'll often see a company's share price decline a few days before an announced dividend is paid."

 Dividend Income Incurs a Capital Price.

So, yes, you can find stocks or stock funds whose dividend payments are expected to provide a higher income stream than you can earn from an essentially risk-free government bond. But it's important to be aware of the trade-offs involved.

As described above, rather than thinking about a stock's dividends and its share value as mutually exclusive sources of return - income versus principal - it's better to think of them as an interconnected seesaw of income and principal. The combined balance represents the holding's total worth to you. (If you're reading closely, you may notice that we've just foreshadowed our future discussion about adopting a total-return outlook in your investment strategy!)

 "Safe" Stocks? Not so Fast.

In addition, dividend-yielding stocks may not be as sturdy or as appropriate as you might think for generating a reliable retirement cash flow. Even if those stocks have dependably delivered their dividends in the past, assuming they are as secure as a government bond is like assuming that a Big Bad Wolf is harmless because he hasn't bitten you yet.

The evidence is clear, and it has been for decades: Stocks are a riskier investment than bonds. This in turn has contributed to their higher expected long-term returns, to compensate investors who agree to take on that extra risk.

Dividend stocks may offer a slightly more consistent cash flow than their non-dividend counterparts, but at the end of the day, they are still stocks, with the usual stock risks and expected returns. As this Monevator (not so) "brief guide to the point of bonds" describes, "The key to (most) bonds is they aim to pay you a fixed income until a certain date, at which point you get your initial money back. That is very different to equities, which offer no such certainty of income or capital returns."

In "The Dividend-Fund Dilemma," Wall Street Journal's financial columnist Jason Zweig explains it similarly: "When you buy a Treasury, you collect interest and get your money back (not counting inflation) when the bond matures. When you buy a dividend-paying stock, you collect a quarterly payment - but that certainly doesn't mean the stock price will be stable."

Nor is there any guarantee that the dividends will flow forever. Zweig described a lesson that many investors learned the hard way during the Great Recession: "In 2007, 29% of the S&P 500's dividend income came from banks and other financial stocks, according to Howard Silverblatt, senior index analyst at Standard & Poor's. That didn't end well. Many banks that had been paying steady income to shareholders suspended their dividends - or even went bust. Their investors suffered."

 Your Essential Take-Home

Our capital markets rarely offer a free ride. If you're taking stock dividend income today, you're likely paying for it in the form of lower share value moving forward. And if you're invested in the stock market, you are exposing your nest egg to all the usual risks (and expected returns) that comes with that exposure. That's how markets work.

The fixed income bond markets offer their share of risks as well, but in a different form, which tends to make them a better choice for helping you dampen your total risk exposure as you pursue expected market returns. Stretching for high-yield, higher-risk bond income begins to shift your bond holdings away from their most appropriate role in your total portfolio ... which will be the subject of our next piece in this three-part series.

Brexit - Our Perspective

Britain's decision to exit the European Union has brought with it all the expected trappings of a significant news event - projections of crazy market volatility, wild headlines and a fair dose of uncertainty about the long-term impact on the global economy and our individual financial lives here at home. Many questions immediately arise as we pay close attention to how the event will play out in the weeks and months to come. But our perspective is the same as it has always been in times like these. Your financial plan is built with diversification and your personal risk tolerance in mind - it's designed to weather the ups and downs that inevitably follow significant world happenings. Jared Kizer, Chief Investment Officer for the BAM ALLIANCE, reminds us of this and offers an overview of the developments below:

1. What did British voters decide?

To the surprise of many - including stock and bond markets - Britain voted to leave the European Union (EU) by a margin of 52 percent in favor of leaving (i.e., "Brexit") and 48 percent in favor of remaining. The general belief from the economic community is that this decision will weaken the British and European economies since Britain both imported and exported a significant amount of its economic consumption and production, respectively, to continental Europe.

2. How have markets reacted?

At the time of this writing, stock markets have fallen precipitously and bond interest rates have dropped as well. With the exception of precious metals, commodity markets are also generally down, and the British pound has dropped by about 8 percent against the U.S. dollar.

3. Why have markets reacted so violently?

Without question, the primary reason is that markets had incorporated a belief that Britain would remain in the EU. Stock markets had been up significantly over the last couple of weeks, and interest rates had started to move back up after being lower earlier in the month. These movements were generally believed to be an indication that the market expected Britain would remain in the EU.

Because the vote did not go as most expected, stock markets are giving back those gains and more, and interest rates are now falling instead of increasing. We emphasize, though, that while these market moves have been swift, this is normal market behavior when a significant event (like Britain leaving the EU) turns out differently than what the market had anticipated.

4. Why has the U.S. market reacted so strongly to Britain's decision?

We truly live in an interconnected, global economy at this point. Any decision by an economy that is the size of Britain's (fifth largest in the world) will impact markets elsewhere, including the U.S. market. The European market is a significant trading partner for many U.S. firms, so it's not surprising to see U.S. stocks decline since Britain's decision is thought to be a net negative for Europe from an economic perspective.

5. Will Britain's decision precipitate a global recession?

It's impossible to say whether we are headed toward a recession, but Britain's decision likely increased the likelihood of a recession. However, the strong caveat here is that markets are forward looking and have already started to incorporate this likelihood, meaning you can't use this information to your advantage. This increased likelihood of recession is no doubt one of the reasons that stock markets have moved down sharply while bond prices have moved up sharply.

6. How did markets get this wrong?

While outguessing markets is difficult, in hindsight markets will always appear to have been overly optimistic or pessimistic, which means it's easy to critique them while looking in the rearview mirror. This particular vote was expected to be close, so markets weren't certain but were tending toward a "remain" vote.

7. What will markets do from here?

While it's very difficult to predict markets, it is highly likely markets will be volatile for some time to come. Stock market volatility has been relatively low over the last few years, but it can change quickly. The VIX, which is a measure of annualized stock market volatility, has gone from about 17 percent to 25 percent in reaction to the news, which is higher than the long-term average of about 20 percent per year. It is important to remember, however, that higher volatility can work in both directions. While we could certainly see more days when stocks fall significantly, it's also possible we will have days when they rise significantly.

8. What should I do with my own portfolio?

Our guidance is the same that it has always been. If you have built a well-thought-out investment plan that incorporates your ability, willingness and need to take risk, you should not change your plan in reaction to market events. Doing so rarely leads to productive results.

Your plan incorporates the certainty that we will go through periods of negative market returns, and market reactions like this are also the primary reason we emphasize high quality bond funds and bond portfolios, which help buffer the risk of stocks. The early read on this bond approach is that it's doing exactly what we expect it to since high quality bonds have appreciated significantly in reaction to the Brexit vote.

9. How will this impact Federal Reserve interest rate policy?

As we have previously noted, interest rates have dropped dramatically in reaction to the vote. In early trading, the 10-year yield is at about 1.5 percent after having been at about 1.75 percent one day earlier. These early movements in interest rates indicate the market does not expect the Fed to increase interest rates at any point during the rest of the year. The primary ways this would likely change are either an unexpected increase in the rate of inflation or unexpectedly positive developments in the U.S. and global economy.

10. Do international and emerging markets stocks still deserve a place in a well-diversified portfolio? International and emerging markets stocks comprise about half of the world's equity market value, so we continue to believe that a well-diversified stock portfolio should include a significant allocation to international and emerging markets stocks. While both have underperformed U.S. equities over the last five and 10 years, that does not mean they will continue to do so. We have seen periods in the past when international stocks have outperformed U.S. stocks for a long period of time only for that to reverse in the future. Further, international stocks are trading at significantly lower prices than U.S. stocks, indicating expected returns are higher for international stocks compared to U.S. stocks.

11. What role do currencies play in this situation and in my portfolio?

Initially, we are seeing the U.S. dollar and Japanese yen appreciate against most other currencies, while the British pound is falling precipitously. The international funds we use do not hedge foreign currency, so when the U.S. dollar appreciates relative to other currencies, this negatively impacts their returns. The long-run academic evidence, however, shows that hedging currency risk has minimal impact on an overall portfolio and that it can be beneficial to have exposure to currencies other than the U.S. dollar for a portion of an overall portfolio.