We are happy to welcome three new clients to the ZRC family this quarter. Thank you to those who continue to share what we do with friends and family. It has been an exciting year for clients of ZRC Wealth Management. Several had businesses or companies that were acquired, retired, are preparing to retire, have kids headed off to college, grand kids on the way, and experiencing change in their lives (some welcome, some not). Whatever life brings, we are here to help. It is our professional mission at ZRC to help people make sense of complex, and sometimes difficult, financial and personal decisions.
What a difference a quarter makes. The 4th quarter of 2018 was filled with fear, pessimism, and negative sentiment with the S&P 500 Index falling 13.52%. Then on January 4th, out of nowhere, buoyed by increasing optimism, the market started its miraculous accent with the S&P 500 Index rising 13.65% higher during the 1st quarter of 2019 – its best quarter since 1998. Likewise, International Developed Stocks fared almost as well, returning 10.45%; Emerging Market Stocks +9.92%, and U.S. and Foreign Bonds +2.95%.
During this period of heightened volatility, we are inclined to rebalance your accounts more frequently. Rebalancing is the process of realigning the weightings of specific stocks and bonds investments in your portfolio. This involves periodically buying or selling assets in a portfolio to maintain the original desired asset allocation and risk level. For example, since we expect stocks to outperform bonds over any reasonable time period, after a few years, a portfolio where stocks have appreciated significantly and not been trimmed (i.e. rebalanced) is unintentionally taking more risk than a regularly rebalanced portfolio. Almost every client had their portfolio rebalanced in the 4th quarter, in most cases increasing their allocation to stocks and subsequently benefiting from the 1st quarter’s joyous rally. For more on why we rebalance, go to Page 20 of our Design, Build, Protect guide HERE.
The Federal Reserve and Interest Rates. At the January and March Fed Open Market Committee meetings, The Fed voted to keep the Fed funds rate (the rate at which banks and credit unions can lend their reserves to other banks and credit unions overnight on an uncollaterized basis) at a range or 2.25% – 2.50%. This, in turn, essentially sets the base rate for which banks and credit unions will then lend to consumers, companies, and other entities. By keeping rates low, the Fed is keeping monetary policy accommodative and supportive of economic growth. This is good for borrowers, good for companies (by providing inexpensive capital), and therefore often good for stock prices as companies continue to profit and grow.
However, perpetually low interest rates are not good for savers (just look at the paltry yield your bank is giving you on your savings account and see our solution to that below). Ditto for anyone that has a large percentage of their investments in bonds (often retirees) because the current yield on U.S. investment grade bonds is just 2.9% (Bloomberg Barclays U.S. Aggregate Bond Index). Thankfully, inflation is also low at 2.1% and at least one Fed President, Chicago’s Charles Evans, said this week that while inflation remains low, he’s in favor of keeping interest rates where they are. Even still, after taxes, bonds are barely outpacing inflation and aren’t going to get investors the long-term growth they’ll need. Historically, bonds have outpaced inflation by about 2.5% a year (inflation has averaged 2.9% and bonds 5.5%). Though we believe U.S. stocks are fully valued, the fact that many have dividend yields equal to bonds, makes stocks even more compelling to bonds in this possibly new and perpetually low interest rate world.
For as much attention interest rates and the Fed’s every move receive, Larry Swedroe wrote this excellent article on why investors shouldn’t be concerned about a flat or inverted yield curve (and why Warren Buffet ignores economic forecasts and you should too). One of the reasons for December’s sell-off in stocks was that many read the yield curve briefly inverting on December 3rd with the yield on 2 Year Treasuries being higher than the yield on 5 Year Treasuries. Historically, an inverted yield curve has often (but not always) been a leading indicator of a slowing economy and eventual recession. However, there is no unanimous agreement on what defines an inverted yield curve. Most agree, ZRC included, that it is the difference between 2 Year Treasury yields and 10 Year Treasury yields (which were not inverted in December). For more on our take on markets and our Quarterly Market Review click here.
2019 could be biggest year for IPOs ever. Should you invest in them? A host of high profile companies are slated to sell their shares to public this year (such as Zoom and Pinterest this week). The reasons companies go public comes down to two reasons;
⦁ An early investor wants to cash out (i.e. – get their money back and then some). And/or
⦁ The company needs to raise capital to fund ongoing operations.
Levi Strauss & Co. (the iconic jean maker, ticker LEVI) went public on March 31st. Headquartered in San Francisco, this is the second time the company has gone public, this time largely driven by members of the Haas family – descendants of founder Levi Strauss – wanting to monetize a portion of their stakes in the company. The stock has market cap (value of its outstanding shares) of $6.5 billion and in the most recent 12 months earned $283 million on $5.5 billion in revenues. Performance since IPO as of April 15: +32%.
Lyft (one of the largest peer-to-peer ride sharing services, ticker LYFT) went public on March 29th. Headquartered in San Francisco, Lyft and its much larger competitor Uber (also HQ’d in S.F.) are transforming personal transportation and delivery services (such as food). Since being founded in 2012, Lyft alone has facilitated more than one billion rides. The stock has a market cap of $20.5 billion and in the most recent 12 months lost $911 million on revenues of $2.1 billion. The reasons for it going public are primarily so that early investors (such as venture capitalists) can cash-out all of some of their stakes for a profit, early employees can monetize their stakes, and the company raises capital to fund on-going operations. Performance since IPO as of April 15: -16%.
Should you invest in IPOs? The lure of being an early investor in the next hugely successful stock such as Apple, Google (now Alphabet), Netflix, or Amazon is very tempting. However, investing in a single stock is a very risky proposition. Though your investment may not go to zero, are you prepared to wait years to earn a profit? For example, in public statements, executives at Lyft say the company might not be profitable until 2022. While users (such as all of us at ZRC) love the service, a lot can happen in three years. Ditto for Uber who is slated to go public later this year by selling approximately $10 billion in shares that could value the company at $100 billion. It lost $3 billion from operation in its most recent filing.
You don’t have to buy shares in an IPO to an investment in the last trend or technology. At ZRC, we don’t seek to purchase IPOs for our clients. In time, most newly publicly traded stocks end-up in the funds we invest with . . . when the manager believes they have the fundamentals to merit it (such as actually turning a profit). We are happy to give you our professional opinion of any stock or upcoming offering. We frequently evaluate individual stocks for clients – especially for those with concentrated stock positions. For the scoop on companies going public or have recently gone public, see www.iposcoop.com.
Higher yields on your cash balances at ZRC. As an alternative to the paltry yield banks currently offer on checking and savings account balances (many less than 1%), ZRC has a solution for clients with high cash balances they don’t need ready access to. As a client of ZRC Wealth Management, we’ll help you invest cash balances of $50,000 or more into one of Schwab’s Purchased Money Funds and waive our customary management fee so you earn 100% of yield. The current 7-day yields of the Schwab Value Advantage Money Fund – Investor Shares is 2.29% and the Schwab California Municipal Money Fund – Investor Shares is 1.22% (with a tax-equivalent yield of 2.67% for those in the highest State and Federal tax brackets). See the partial disclosures below and the full disclosures on Schwab’s website here. Contact anyone of us at ZRC to learn more.
What we are watching. The Masters Tournament at Augusta National. One of the four major golf tournaments, almost anyone that has ever picked up a golf club can immediately recognize a hole from this iconic course in Augusta, Georgia. Barry, Ryan, and Rick have each attended a round and every inch of the course is so perfectly manicured, it is often described as Disneyland for golfers. A visit should be on the bucket list of any golfer… and getting to play one of the most exclusive courses in the world would be something else altogether.
Game of Thrones. Based on George R.R. Martin’s best-selling book series “A Song of Ice and Fire,” GOT is beautifully and graphically brought to the screen as an epic medieval fantasy. If you can get over the “shock and awe,” the acting and storyline is second to none. With the final Season 8 just underway, you still have more than a month to binge-watch the previous seven seasons and catchup.
Meru. While Free Solo won husband and wife cinematography team Jimmy Chin and Elizabeth Chai Vasarhelyi the 2019 Academy Award for Best Documentary Feature for beautifully filming Alex Honnold’s insane attempt to free climb El Capitan, their first documentary Meru is a much better story. It follows Conrad Anker, Jimmy Chin, and Renan Ozturk’s failed 2008 and then successful 2011 attempt to be the first to ascend the “Shark’s Fin” route on Meru Peak in the Indian Himalayas. Can’t get enough of the beauty and suffering that is elite rock climbing and mountaineering, then consider Touching the Void (movie and book) and The Dawn Wall.
We are now accepting applications for ZRC’s Summer internship program. Did you know that every Summer we offer a part-time paid internship based in Walnut Creek or Santa Rosa office? We seek students in college (or high school seniors that will be entering college) that are our eager to learn about investing, personal finance, operating a specialized, boutique business, and work on a variety of projects. Applicants need to be tech savvy and of the highest integrity. First consideration is given to the children (or grandchildren) of clients of ZRC Wealth Management. For the full job description (including how to apply) visit our website or click here.
One of the qualities the distinguishes ZRC Wealth Management from many firms that provide investment advice is that we are Fiduciaries. That means, the investments we make on your behalf and the advice we provide are always done so in your best interest. At ZRC, with so many friends and family members entrusting us, being objective and up-front is the best way to serve clients.
|Sources: Morningstar, Inc., Dimensional Fund Advisors, J.P. Morgan, Inc., Charles Schwab & Co., and Blackrock, Inc.
All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future returns. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Money fund investors should carefully consider information contained in the money fund prospectus, or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can request a mutual fund prospectus by calling Schwab at 1-800-515-2157. Please read the prospectus carefully before investing.