Letter to Clients: 2nd Quarter 2015

“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.

-Lewis Carroll

Dear Clients and Friends:

Developing a clear objective can be the hardest part of the financial planning process. For example, clients often ask “How much money do I need to retire?” but can’t tell me what they expect from their retirement. A good financial plan is like a road map. If we know where we are and where we want to go, we can use the plan to determine the best route to get there. But just like a road trip, there are many options along the way. You may want to take the Interstate which allows us to go faster and has fewer opportunities to stop along the way. Or perhaps you would rather take the scenic highways and country routes; taking the time to sightsee and explore along the way.

The secret is to remember that there is no “correct” answer. It doesn’t matter where you are or even where you are going. We can help you make the plan to get you there and help you avoid hazards along the way.

One such hazard which will be a big theme for us in 2015 is to review beneficiaries. Whenever there is a significant life event – a birth or death in the family, change of marital status, etc – or just as a matter of good practice about every five years, we should check every account and every insurance policy to make absolutely certain your plan will not be sidetracked. So far this year we have found life insurance policies where an ex-spouse was named beneficiary and the current spouse was overlooked; other life insurance policies where the beneficiary had passed away decades ago; and education plans where the named beneficiary had finished their education and it was time to decide how to redirect those funds. This exercise not only makes absolutely certain your wishes will be carried out if anything happens to you, but it helps us guide you along your financial journey.

By mid-April most of us have put 2014 taxes behind us and this is a great time of year to get rid of old records. Remember that you can always bring in your old documents and place them in our shredding box where you can be assured that your identity will be protected and your documents will be destroyed.

Inflation, the Fed, and low rates

Even if your financial objectives are long term, it is important to keep tabs on what is influencing shorter-term market action. One topic that has been influencing markets right now has been the unusually low rate of inflation. That’s right, low inflation.

While we are all aware of the steep drop in gasoline prices, other items seem to be rising in price. Your favorite restaurant may have just hiked prices, or the cost of a movie ticket, popcorn, and a drink may leave you gasping for breath. Has the price of your health insurance jumped? Or maybe the check you just wrote for your son or daughter’s college tuition comes to mind when you hear someone utter “unusually low inflation.”

Well, according to the broad-based Personal Consumption Price Index, which is the index the Federal Reserve favors when it’s gauging price pressures in the economy, price increases have been holding below its 2% annual target for 34 months straight, per data supplied by the St. Louis Federal Reserve. If we throw out the more volatile food and energy components and look at what economists call core inflation, we’re still below the Fed’s 2% target for the same 34 months.

The Consumer Price Index is more familiar to most folks, especially to those of us who remember the wicked inflation of the 1970s. The CPI tends to run slightly higher than the PCE Price Index, but it is also currently running below the Fed’s target of 2% (BLS).

So what’s the point? Well, whatever you think the real rate of inflation is–and of course it will vary from person to person based on the individual basket of items and services he or she consumes–how the CPI or the PCE Price Index records inflation directly affects stocks, bonds, and Federal Reserve policy. Therefore, these are the relevant measures of inflation for an investment viewpoint.

The Federal Reserve was quite explicit in its statement that followed the March meeting when it noted it won’t begin raising the fed fund rate until it sees further progress in the job market and “is reasonably confident that inflation will move back to its 2% objective over the medium term.” Clearly, low inflation is playing into the Fed’s low-rate equation. Plus, long-term bondholders want to be compensated if they expect much higher inflation. Right now, that’s not the case.

While the Fed’s take on inflation and raising rates is vague, the Fed doesn’t need to see 2% inflation; it just has to be “reasonably confident” that inflation is moving toward its target. In some respects, it is similar to the 1960s Supreme Court decision on the definition of obscenity. Fed Chief Janet Yellen seems to be implying she will know inflation is rising when she sees it.

Europe still matters

Low inflation isn’t the only thing that’s holding yields down in the U.S. If you think it’s bad at home, take a look at Europe. Want to buy Germany’s 10-year bond? You’ll get a yield of less than 0.20%. That’s right, less than 0.20% for 10 years. In Switzerland, the 10-year yield is just below zero! In fact, in a number of countries in Europe, you’d have to pay the government (a negative yield) if you were to buy shorter-term debt.

It’s another reason why we are grappling with low bond yields, as investors in Europe look for safe debt that earns a much better return than what they receive at home.

What does all of this mean?

Stick to your plan. After all it’s your plan for a reason. For starters, it takes the emotion out of buying and selling. It also reduces anxiety and risk and is the foundation of your plan to achieve your financial goals.

Today’s markets are fairly priced. There may be some bargains which can be found, but overall the market metrics are in line with long term averages. At current valuations, we need to be a bit cautious in how we select positions and how they might fit into the individual portfolios.

Finally, let’s not ignore opportunities around the globe. While U.S. markets have performed quite well in recent years, diversification outside the U.S. helps to reduce overall risk and allows us to take advantage of growth opportunities that aren’t available at home. No one can accurately forecast which markets will be winners and which will be losers, but a stake in global equities enables us to maximize your return and minimize volatility over the longer term.

DV Financial is here to serve you

I hope that you have found this month’s review to be both beneficial and educational. As your financial advisor, it is our job to partner with you as you travel the road to your financial goals. If you ever have any questions about what I’ve conveyed in this month’s message or want to discuss anything else, please feel free to reach out to me.

As always, I’m honored and humbled that you have placed your trust and confidence in my firm, and I am proud to serve as your financial advisor.


Art Dinkin, CFP®