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Leveraged and Inverse ETFs — Most Investors Should Avoid Them

Leveraged and inverse ETFs are difficult to understand and are not a good fit for long-term investors.

Exchange-traded funds (ETFs) trade daily on exchanges like stocks. Leveraged versions use complex futures and derivatives to amplify the daily returns of an index, often times trying to double or triple the return. Inverse ETFs strive to return the opposite of the index.

When ETFs are held for longer than a day, the effects of compounding can produce results that vary significantly from the one-day outcome. This makes leveraged and inverse ETFs unpredictable and risky to hold for longer periods.

Citi, Morgan Stanley, UBS and Wells Fargo have paid $9.1M to settle allegations on leveraged ETFs. These banks were fined $7.3 million and they agreed to pay $1.8 million in restitution to some customers who were sold leveraged and inverse ETFs. Industry regulators allege the banks sold billions of dollars of these volatile investments without properly assessing their risks and whether they were suitable for retail customers. (“Retail” customers are individual investors versus “institutional” investors like pensions and hedge funds).

The Financial Industry Regulatory Authority (FINRA) and the Security & Exchange Commission (SEC) have previously warned the investing public about the risks of leveraged and inverse ETFs, particularly for those investing for the long term.

Temperament over Intellect

Warren Buffett once said, “The most important quality for an investor is temperament not intellect.”

Investors very often buy at high prices when the market is hot and attractive, and sell at low prices after observing periods of poor performance.

This leads average investors to severely trail both the S&P 500 index and the Barclays Aggregate Bond Index over long time periods.  This is why investors are very often their own worst enemy.

CBS MoneyWatch author Larry Swedroe recommends in this article that you ask yourself if you believe that you’re best served by being your own advisor:

  • Do I have the temperament and the emotional discipline needed to adhere to a plan in the face of the many crises I will almost certainly face?
  • Am I confident that I have the fortitude to withstand a severe drop in the value of my portfolio without panicking?
  • Will I be able to re-balance back to my target allocations (keeping my head while most others are losing theirs), buying more stocks when the light at the end of the tunnel seems to be a truck coming the other way?

 

Tune Out the Noise…your portfolio will thank you for it!

noise

One Day in Mainstream Media Market Headlines…

6:00 AM MarketWatch US Futures Down As Euro Pressures Mount

6:30 AM TheStreet.com US Stock Futures Recover on Amazon Tablet Expectation

7:15 AM MarketWatch Stocks Fall in Pre-Market Amid Global Concerns

8:00 AM Minyanville Stocks Buoyant Ahead of August Durable Goods Orders

8:10 Wall Street Journal US Marts Down Briefly, Techs Remain Higher

9:15 AM TheStreet.com US Stocks Mixed Ahead of Open After Durable Goods Orders

9:45 AM MarketWatch Stocks Decline Slightly On Economic Concerns

10:15 AM MarketWatch US Stocks Fall on European Woes

11:00 AM Minyanville Stocks Up After Morning in Which They Were Slightly Down

11:30 AM TheStreet.com Stocks Exist  at Half Past 11 AM this Morning

12:00 PM  MarketWatch Stocks Slightly Higher at Mid-Day as I Pick Up My Dry Cleaning

12:15 PM Bloomberg Markets Stabilize as Japanese PM Explains Proclivity for Vending Machine Pornography

12:30 PM Minyanville US Markets Rally Modestly as Stocks Don’t Be Down

1:00 PM TheStreet.com Stocks Off Slightly After Cloud Passes Briefly in Front of the Sun

1:30 PM Reuters We are Better than You and You Probably Realise that by Now

1:50 PM Wall Street Journal US Stocks Extend Advance after Not Extending Decline

2:15 PM Minyanville Markets in Retreat as Euro Pressures Threaten Global Recovery

3:10 PM TheStreet.com US Stocks Unchanged, We Are Seriously Running Out of Reasons for Random Things You Guys

3:11 PM TheStreet.com US Stocks Still Unchanged, We Just Checked For You

3:34 PM Bloomberg Markets Neutral Into the Close

3:37 PM MarketWatch Neutral Markets Into the Close

3:50 PM Wall Street Journal Stocks Set to Close Flat on Session as European Woes Continue to Cause Concern

3:56 PM Reuters US Stock Market Flat on Close

4:01 PM MarketWatch No Change in US Stocks Today on Excessive Nonsensical Headlines, Tune in Tomorrow

Avoid getting caught up in the hype and drama of media’s talking heads.

Thanksgiving Dinner Cost Drops Third Straight Year

This year’s turkey dinner will cost you 22 cents less or -0.4% compared to last year. The average cost of a classic Thanksgiving Dinner for 10 people is $48.90 according to the American Farm Bureau Federation’s survey. The very mild decrease in the turkey index is not too different than the the government’s Consumer Price Index for food eaten at home which increased slightly 0.1% over the past year.

The bird soaks up the lion’s share of the budget at 44% of the meal’s cost. The 16-pound turkey came in at $21.71 this year or $1.36 per pound. The price of most ingredients was quite stable compared to last year. Biggest losers: turkey down $0.67 (-3.0%) and sweet potatoes down $0.13 (-3.7%).  Biggest gainers: miscellaneous ingredients up $0.29 (10.7%), fresh cranberries up $0.22 (9.1%), and pumpkin pie mix up $0.12 (3.7%).

This is the third consecutive year that the average cost of a turkey dinner decreased and it’s the lowest cost in six years.

Happy Thanksgiving!


Source: AFBF

10 Ways Financial Advisors Fail Their Clients
  1. Acting as if they know exactly what the financial markets are doing and why.
  2. Not being quickly and easily accessible via phone or email.
  3. Not continuing to research a client’s financial situation for a better solution.
  4. Not recognizing a total solution by ignoring the client’s portfolios managed by outside firms.
  5. Not speaking to and working deeply with both members of a couple.
  6. Limiting recommendations to the products provided by the advisor’s firm.
  7. Failing to address the risks associated with an investment.
  8. Failing to give ancillary and holistic advice on a client’s financial issues once the portfolio is established.
  9. Talking over a client’s head and using jargon.
  10. Managing client assets without knowledge of the client’s comprehensive financial plan.
HSA = Tax Triple Play!

health-savings-accountTis the season to select your health insurance plan either through your employer’s offering or the private insurance market. If you’re considering a high-deductible health plan (HDHP), keep in mind that many (but not all!) come with the fantastic opportunity called a Health Savings Account (HSA).

We love HSAs because they do two things:

  1. They help you pay for your medical costs either today or in the future
  2. They are triple tax advantaged

The government makes these accounts triple tax-advantaged because they want to incentivize you to save for your future medical costs. We know as the nation greys and gets older, we need to have a pot of money set aside to cover our potential out-of-pocket costs.

Here’s the triple tax saving advantage:

  1. When you have an HSA account attached to a high-deductible plan, you get to take a tax deduction on your current your contribution.  For families, it’s $6,900 in 2018 ($7,000 in 2019). This means you get to lower your adjusted gross income by $6,900, a tax savings of potentially around $2,000 if you take into account state and federal income taxes. That’s $170 of savings each month if you do a little rounding. That’s pretty incredible.  That’s step 1 – you get a tax deduction in current year.  If you’re age 55 or older, you eligible for a $1,000 “catch-up contribution” so your can lower your AGI by $7,900 (thus lowering your tax bill by ~$2,300 or $190 a month).
  2. Layer two of the triple tax advantage is it grows completely tax deferred meaning it is growing without taxation on any appreciation, any dividends, or any income that’s going on a long as that money is sitting in the HSA account.
  3. Here’s the third layer and really the knockout that makes it an awesome savings tool for the future.  If you use the money in the future for medical expenses, your HSA distributions are completely tax free.
    (Here’s another cool thing.  Once you reach retirement, you don’t have to use your HSA for medical expenses, but if you want them to be tax free, it needs to be medical expenses.)

Be careful when you select a high-deductible health plan (HDHP) to make sure it qualifies for HSA eligibility:

  1. HDHP minimum deductibles: self-only $1,350; family: $2,700
  2. HDHP maximum out-of-pocket amounts: self only $6,650; family $13,300

HSAs can be one of your best friends for the future.

hsa

Asset Management vs. Financial Planning

At a 100,000-ft level, we do two things in our financial advisory practice: Asset Management* and Financial Planning.  Although these two functions are distinct, they are very much interrelated.  Both are essential components for our client families’ long-term success, but it’s important to understand and appreciate the differences:
(* Asset Management also falls under the monikers of  “investment management” or “portfolio management”)

Asset management is about asset allocation, expected returns, risk tolerance and time horizons.
Financial planning is about making wise choices about the use of debt, setting up college savings plans, tax efficiency, estate planning and ensuring your insurance needs are taken care of.

Asset management is about managing investments.
Financial planning is about managing investors.

Asset management is about portfolio construction and risk management.
Financial planning is about comprehensive planning and emotional management.

Asset management is about measuring portfolio performance by comparing results to predetermined index benchmarks.
Financial planning is about measuring your performance against your true benchmark — your goals.

Asset management is about allowing your money to work for you to help you reach your financial goals.
Financial planning is about helping people define their goals, dreams, desires and fears.

Asset management is about creating a process that guides your actions in a wide variety of market environments.
Financial planning is about implementing a plan and making corrections along the way as life or market and economic forces intervene.

Asset management is about creating a portfolio that can survive severe market disruptions.
Financial planning is about creating a financial plan that can survive severe life disruptions.

Asset management deals with financial capital.
Financial planning deals with human capital.

Asset management is about growing and/or preserving your wealth.
Financial planning is about understanding why money is important to you personally.

Asset management is about where to invest a lump sum.
Financial planning is about how and when to invest a lump sum.

Asset management is about asset allocation.
Financial planning is about asset location.

Asset management is about creating policies to guide your actions in the face of economic and market uncertainty.
Financial planning is about helping people make better decisions with their money in the face of uncertainty that is impossible to reduce.

Asset management helps you understand how much you need to earn on your investments to meet your future spending needs.
Financial planning helps you understand how much you need to save meet your future spending needs.

Asset management helps you figure out where to take your money from when you need to spend it.
Financial planning helps you figure out where to spend your money in a way that makes you happy.

Asset management helps you grow your savings to meet future consumption needs.
Financial planning helps you plan and budget for future consumption needs.

Asset management is about creating a long-term process to guide your actions in the markets.
Financial planning is about creating systems that allow you to spend less time worrying about your money.

Asset management is about reducing the anxiety that comes from the volatile nature of the markets.
Financial planning is about reducing the anxiety that comes from making important decisions with your money.

Asset management involves growing your wealth so some day you can become wealthy.
Financial planning involves figuring out what a wealthy life means to you.

To get the most benefit from asset management, you really need comprehensive, well thought-out financial planning.

25 Important Documents You’ll Need Before You Die

death-dossierDesign your “Death Dossier” soon or you could be setting up your heirs for frustration and financial pain:

25 Important Documents You’ll Need Before You Die
The Essentials
• Will
• Letter of instruction
• Trust documents
Proof of Ownership
• Housing, land and cemetery deeds
• Escrow mortgage accounts
• Proof of loans made and debts owed
• Vehicle titles
• Stock certificates, savings bonds and brokerage accounts
• Partnership and corporate operating agreements
• Tax returns
Bank Accounts
• List of bank accounts
• List of all user names and passwords
• List of safe-deposit boxes		 Health-Care Confidential
• Personal and family medical history
• Durable health-care power of attorney
• Authorization to release health-care information
• Living will
• Do-not-resuscitate order
Life Insurance and Retirement
• Life-insurance policies
• Individual retirement accounts
• 401(k) accounts
• Pension documents
• Annuity contracts
Marriage and Divorce
• Marriage license
• Divorce papers

Learn more in this article

Got retirement plans? Your spouse may disagree

couple

A recent survey by Fidelity shows that wives and husbands don’t share retirement-planning duties nor agree on the plan:

  • Only 41% of couples surveyed handle retirement investment decisions together.
  • Only 17% of couples say either spouse is prepared to assume sole responsibility of their retirement finances.
  • Although women are more likely to outlive their husbands, only 35% of wives say they are completely confident in their ability to take over the finances. 72% of husbands feel they can.
  • 33% of couples say they don’t agree or don’t know where they plan to retire.
  • 62% of couples nearing retirement don’t agree on the age at which to stop working
  • 47% of couples nearing retirement don’t agree on whether they will continue to work in retirement.

Here’s what you should do and know:

  • Both husbands and wives should know where critical documents are kept
  • Both need to know what to do if their spouse is no longer able to assist with financial decision-making
  • Both should have an understanding of the family’s finances, savings, and investment goals.
  • Both should become active in financial planning and meeting with the family’s financial planner and investment manager.
  • Both husbands and wives should talk about retirement and finances more often together for better agreement and mutual understanding.
Simplicity

simplicity-006

Although we live in a complex world, this doesn’t mean we have to accept nor invite complications. In fact, very often a simple solution is the best solution.  So what are some possible non-complex approaches to complicated finances?

Advisor Tony Isola, CFP, has a few ideas for you to consider:

  • Automate your retirement contributions and eliminate the default status of doing nothing;
  • Try to stay married (divorce is a great destroyer of wealth);
  • Buy experiences and not things, and de-clutter your life while increasing happiness;
  • Do not spend $250K for a four-year private college education for your children;
  • Exercise and eat right; this will save you a boatload of cash on health care in the long run;
  • Bank at a credit union;
  • Do not invest a dime on an investment “tip;”
  • Don’t be cheap when finding an accountant;
  • Check your investment portfolio annually, not every day;
  • Don’t cheat people because karma is a bi*ch; and
  • Get disability insurance.

Sir Isaac Newton chimed in on the subject as well: “Nature is pleased with simplicity and nature is no dummy.”

Source: ATM

Nothing on this website constitutes either the provision of investment advice or solicitation to provide investment advice. Investment advice can only be provided through a formal investment advisory relationship. Copyright © 2019 NorthStar Capital Advisors - Charlotte, NC. All Rights Reserved.