2 Minutes With Magis Wealth Planning 5/12/17

“2 Minutes With Magis Wealth Planning” is published on the second Friday of every month.  It is comprised of five brief thoughts that we’ve come across during the course of our daily reading and research.  It summarizes data points that we find both relevant and interesting on various topics including investments, retirement, taxes, industry news, etc. 

  • Jack Bogle, the founder of Vanguard and pioneer of index investing, has been a long-time staunch advocate of passive vs. active funds. So he made headlines recently when he said that “if everybody indexed, the only word you could use is chaos, catastrophe. The markets would fail.”  However, he also said that the chance of everybody indexing is 0%.  He believes indexing could comprise 75% of the market without posing a significant risk, compared to the 20-40% that it comprises today.  https://www.bloomberg.com/news/articles/2017-05-06/bogle-says-if-everybody-indexed-markets-would-fail-under-chaos
  • Leveraged ETFs have been growing in popularity, but most people that own them probably don’t fully understand the associated risks. Leveraged ETFs are exchanged traded funds that provide 2x or 3x exposure to an underlying index or asset class using derivative contracts (called swaps).  In summary, these are extremely complicated financial products that are intended to deliver 2-3x daily returns – and since the leverage gets reset/rebalanced every day, they tend to dramatically underperform the multiple of the index they’re tracking. The bottom line is that leveraged ETFs were created as trading instruments and are not meant to be bought and held, but the vast majority of investors that own them are not aware of this.  Unless of course they read the prospectus – which almost no one does.  https://www.bloomberg.com/view/articles/2017-03-23/sec-may-regret-the-day-it-allowed-leveraged-etfs
  • From the sad but unfortunately true file: We recently received a call from an 89 year old widow after she met with “a very nice man” at a local investment management office.  She owns a small portfolio of stocks and a condo that she currently rents out.  She said this “nice man” advised her to sell all of her stock and her condo “immediately for whatever she could get” – even if she had to take a big loss on the sale.  He then recommended that she invest 100% of the proceeds (or about $300,000) into an annuity.  He did NOT ask to see her tax returns to see if doing so would incur an exorbitant (and unnecessary) tax liability, he did NOT ask about other sources of income, he did NOT ask about her living expenses, he did NOT ask about her estate planning wishes, and he did NOT compare his recommendation to any other alternatives.  He also did NOT tell her that he would likely receive a commission check for somewhere between $15,000 and $30,000 if she took his advice.
  • The Chart of the Month below comes from this article in Bloomberg View which explains that elevated stock valuations aren’t necessarily a signal of a market top in and of themselves. Past market peaks have come at both high and low market valuations, high and low inflation rates, high and low dividend yields and high and low bond yields. But one common thread in 11 of the last 15 bear markets has been a U.S. recession, which is typically only evident after the fact. https://www.bloomberg.com/view/articles/2017-03-06/calling-a-top-in-stocks-has-become-a-cottage-industry
  • Chart of the Month:

Bear Markets Since WWII Source: Ben Carlson; Bloomberg View

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