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10 Money Myths Parents Pass On To Their Kids

Taken from Steve Siebold’s book, Secrets Self-Made Millionaires Teach Their Kids as compiled from interviews with over 1,000 affluent parents with rags-to-riches narratives.

Myth 1: Making money is hard.

You can make money if you know where to look. Teach your children that making money is about solving problems. The world is full of problems, which means there is a lot of money-making potential for them. The bigger the problem you solve, the more money you can make.

Myth 2: Money is evil.

Unfortunately, the masses see money as a negative, nasty, necessary evil and they constantly fear and worry about it. Teach your kids to see money as their friend. This is a friend that offers opportunity, peace of mind and fun. Teach your kids to develop a healthy relationship with money and to see it as a medium of exchange instead of an indicator of self-worth.

Myth 3: Kids need an Ivy League education to become rich.

Most parents believe formal education is the only education that helps their kids become successful. Wealthy parents respect formal education, but they encourage their kids to tap any form of education available to make their dreams a reality. Whether it’s interviewing very successful people, reading, listening, or attending seminars, self-education is a powerful tool.

Myth 4: Hard work will make you rich.

If hard work was the secret to money, every construction worker and cocktail waitress would be rich. Teach your kids to think big, because thinking is the highest paid work. Teach your kids to use their natural talents, abilities and passions to think of solutions to problems people will pay for. Innovative thought goes much farther than a hard day’s work.

Myth 5: Your kids should associate with anyone.

Teach your kids having money doesn’t make you better than anyone else. However, if your kids want to be successful, teach them to hang out with winners. The world consists of two groups: winners and wannabees. The winners get what they want out of life. The wannabees sit around wondering how the winners did it. Your kids shouldn’t hang out with the “cool kids.” They should start associating with winners. Being cool is overrated.  Being successful is better.

Myth 6: If you fail, move on to the next thing.

Parents often want to diversify their child’s interests and that’s great. However, make sure your kids understand that if they fail at something they shouldn’t automatically move on to the next thing. Rather, opt to teach your children about persistence and how failure is not fatal. The process of failure can even be encouraged to learn from one’s mistakes. Teach your kids that success is reached by failing over and over again.

Myth 7: All people are equal.

We should all be treated with equal respect and equal justice, but that does not make us equal in other ways. Your kids will be better than other kids in some areas, but will be lacking in others. Teach your kids to focus on their own unique talents and leverage them to construct the life they desire. Don’t cushion your children to believe they are owed a fair life with equal opportunities. Teach them they have to overcome adversity and make it happen for themselves.

Myth 8: Your children’s generation is lazy, entitled and spoiled.

This is not true, but every generation says this to the following generation. The truth is every generation has individuals that are lazy, entitled and spoiled, but they also have creators, producers and innovators. These people get things done and find new ways to do things. Unfortunately, these creative individuals are often demonized before they are celebrated. Encourage your kids to look beyond the stigma and follow their passions.  

Myth 9: Money will make you happy.

While having a livable amount of money seems to make life easier, it does not directly bring happiness. Too many people, parents included, think that a certain marker of money in the bank will help them feel more secure. There is no amount of money that can erase life’s chaos and struggles. Happiness is sought from family, friends, and most importantly, love. Don’t teach your children to equate money to happiness, teach them to find happiness before they get money.

Myth 10: Middle class means you reached the American Dream.

Aspiring to be middle class is outdated by decades. In the U.S., the middle class is a large demographic and it takes minimal ambition to make it there. Some people are perfectly fine with keeping a roof over their heads and food in the fridge. Encourage your children to raise their expectations and strive for more ambitious heights. Inspire them to be world class where they can be their own boss and make their own dreams happen.


2017 IRA Contribution Deadline

By: Jaycee SmalleyThe deadline for making a 2017 IRA Contribution is April 17, 2018. (Note: Emancipation Day, a legal holiday, will be recognized on April 16, 2018, so the tax filing deadline for most U.S. citizens is April 17, 2018.) This deadline is applicable even if you extend your tax filing date.

To determine the correct contribution and deduction eligibility, please start by completing this IRA Eligibility Calculator. If you want us to assist with your contribution, or if you need help interpreting the results, please email Jaycee at

Read "There's Still Time to Contribute to an IRA for 2017" for more information.


Dimensional On: Recent Market Volatility


Fidelity 2-Step Authentication with VIP Access

By: Jaycee Smalley

Fidelity offers 2-Step Authentication as a quick and simple way to add an extra layer of security to your accounts. VIP Access by Symantec is an app that can be downloaded to your phone, tablet, or PC to increase your accounts security and prevent access from unauthorized users.

Once downloaded and activated, logging in to your accounts is simple: After entering your username and password, you will be prompted to enter an additional 6-digit code that is generated randomly every 30 seconds by the VIP Access app on your phone or device.

With this extra step, no one can access your accounts without your phone or device that the application is installed on. We strongly recommend this for all clients.

View the Quick User Guide to get started.

Please contact me at 713-388-6322 or if you have any questions or need assistance.


February Market Review

By: Todd Centurino, CFA Market volatility returned in the month of February as fears of rising inflation and interest rates pushed global equity markers lower. Mid-month, global equites were down close to 10% from their highs but managed a meaningful rebound to finish the month down 4.2%. February saw the third-highest daily volatility of U.S. equity returns in a single month since the global financial crisis. A key concern for investors moving forward is that of an economy at full employment and factories at the limit of their resources which can lead to inflation and possibly require the world’s central banks to reassess their interest rate and monetary policies.

In the U.S., the S&P 500 finished the month down 3.7% as investors adjusted prices to accommodate the new data. Bonds were also hit hard, as U.S. Treasuries sold off amid the new inflation concerns. During the month, the U.S. ten-year treasury yield reached as high as 2.95% before finishing up 0.16% at 2.86%. Investing outside the U.S. offered little protection and/or diversification. Global equities moved in tandem as the developed and emerging market indices were down between 3.4% and 4.6% on the month. Global bonds also did not fare well as they were down 0.7%.

Looking Ahead
On the positive side, the global macroeconomic environment still looks strong. Sentiment within both consumers and businesses remain high, labor markets remain tight, and financial conditions remain accommodative. GDP growth, both domestic and abroad, is increasing or has remained steady. Despite the market’s reaction, inflation numbers continue to undershoot expectations. Oil prices fell 4.7% during February and core inflation remains below the Fed’s target of 2%. Outside the U.S. the inflation picture looks similar. The European Central Bank (ECB) continues to express its commitment to remain patient about monetary policy in order to create more favorable inflationary conditions.

In light of the recent market volatility and economic data, we remain committed to our current portfolio positioning. Markets and information are fluid and we maintain a keen eye on all events that may affect your portfolios. As always, we are happy to discuss these events and your portfolios with you as needed.

Monthly Economic News

    Employment: Total employment rose by 200,000 in January following December's upwardly revised total of 160,000. Employment gains occurred in health care, construction, food services and drinking places, and manufacturing. The unemployment rate remained at 4.1%. The number of unemployed persons marginally increased from 6.576 million to 6.684 million. The labor participation rate remained unchanged at 62.7%. The employment-population ratio was unchanged at 60.1% in January. The average workweek for all employees declined by 0.2 hour to 34.3 hours in January. Average hourly earnings increased by $0.09 to $26.74, following an $0.11 gain in December. Over the year, average hourly earnings have risen $0.75, or 2.9%.
    FOMC/interest rates: The Federal Open Market Committee did not meet in February. The next meeting, the first under new chair Jerome Powell, is scheduled for March 20-21.
    GDP/budget: The second estimate of the fourth-quarter gross domestic product showed expansion at an annual rate of 2.5%, according to the Bureau of Economic Analysis. The third-quarter GDP grew at an annualized rate of 3.2%. Consumer spending rose 3.8%, with notable increases in durable goods spending (13.8%). As to the government's budget, January's deficit surged to $49.2 billion, compared to December's deficit of $23.2 billion. The fiscal 2018 deficit (which began in October 2017) is $175.718 billion — an increase of $17.14 billion, or 9.6%, above the deficit over the same period last year.
    Inflation/consumer spending: Inflationary pressures continued to show upward momentum in January. The personal consumption expenditures (PCE) price index (a measure of what consumers pay for goods and services) ticked up 0.4% for January following a December gain of 0.1%. The core PCE price index (excluding energy and food) jumped ahead 0.3% in January. Personal (pre-tax) income increased 0.4% and disposable personal (after-tax) income climbed 0.9% over the prior month. Personal consumption expenditures (the value of the goods and services purchased by consumers) climbed 0.2% in January after jumping 0.4% the prior month.
    The Consumer Price Index, which rose 0.2% in December, climbed 0.5% in January. Over the last 12 months ended in January, consumer prices are up 2.1%, a mark that hits the Fed's 2.0% target for inflation. Core prices, which exclude food and energy, increased 0.3% in January, and are up 1.8% for the year.
    The Producer Price Index showed the prices companies receive for goods and services also jumped 0.4% in January following no gain in December. Year-over-year, producer prices have increased 2.7%. Prices less food and energy increased 0.4% for the month and are up 2.5% over the last 12 months.
    Housing: Home sales continued to recede during the winter. Total existing-home sales dropped 3.2% in January after falling 3.6% the prior month. Year-over-year, existing home sales are down 4.8%. The January median price for existing homes was $240,500, which is 2.6% lower than the December 2017 price of $246,800. What may help spur sales is continuing inventory expansion for existing homes, which rose 4.1% in January, representing a 3.4-month supply. The Census Bureau's latest report reveals sales of new single-family homes also fell in January, declining 7.8% following a 9.3% drop in December. The median sales price of new houses sold in January was $323,000 ($335,400 in December). The average sales price was $382,700 ($398,900 in December). There were 301,000 houses for sale at the end of January, which represents a supply of 6.1 months at the current sales rate.
    Manufacturing: Industrial production edged down a bit in January, decreasing 0.1% compared to a downward-revised 0.4% increase in December. Manufacturing output was unchanged in January for a second consecutive month; the index has increased 1.8% over the past 12 months. Capacity utilization for manufacturing was also unchanged in January, coming in at 76.2%, a rate that is 2.1 percentage points below its long-run average. New orders for manufactured durable goods fell 3.7% in January following a 2.6% revised December gain. For the year, new durable goods orders are up 8.9%.
    Imports and exports: The advance report on international trade in goods revealed that the trade gap increased in January from December, rising from $72.3 billion to $74.4 billion. Exports of goods for January fell 2.2% following December's 2.5% gain. Imports of goods dropped 0.5% after rising 2.9% in December. Still, total imports ($208.3 billion) far exceeded exports ($133.9 billion). Prices for both imported and exported goods and services advanced in January. Import prices rose only 1.0% for the month, while export prices increased 0.8%. For the year, import prices climbed 3.6%, while export prices jumped 3.4%.
    International markets: The potential for rising inflation isn't just affecting U.S. stocks, but is being felt in other major world markets as well. The Stoxx Europe 600 Index dropped about 3.0% for February, as did the Nikkei 225 Index. While the European Central Bank has maintained its programs of quantitative easing, some hawkish officials are pushing for an end to the easing bias. China's manufacturing output slowed in February, dragging stocks down in the aftermath. Strengthening of the yuan has curtailed China's export growth, which also likely contributed to the manufacturing slowdown.
    Consumer Sentiment: Consumer confidence, as measured by The Conference Board Consumer Confidence Index®, increased significantly in February after a modest increase in January. The index increased to 130.8, up from 124.3 in January. According to the report, consumer expectations in the economy reached a height not seen since November 2000.

Evils That Never Happen

Never put off till tomorrow what you can do to-day.
Never trouble another for what you can do yourself.
Never spend your money before you have it.
Never buy what you do not want, because it is cheap; it will be dear to you.
Pride costs us more than hunger, thirst and cold.
We never repent of having eaten too little.
Nothing is troublesome that we do willingly.
How much pain have cost us the evils which have never happened.
Take things always by their smooth handle.
When angry, count to ten, before you speak; if very angry, a hundred.


 By: Leonard Golub
Dear clients,

I recently received a small framed version of Thomas Jefferson’s 10 Rules to Live By.  When I saw it I was immediately struck by how very pertinent they are to much of the advice I offer as both a financial and life advisor, and by how far I have to go myself to fulfill several of them.  Jefferson’s Rules is a useful tool by which each of us may take a personal inventory. 

  I divide my own behavior into three categories:  

  • Those that I do not generally violate (3)
  • Those that I tended to violate in the past, but have made substantial intentional improvement (4)
  • Those on which I have more work to do (3)

These days I am particularly interested in this one: “How much pain have cost us the evils which have never happened.”  In a time of greater market volatility, national political and geopolitical concerns, and technological change, it is natural to worry, and worry is often painful.  As a financial advisor, this maxim goes to the very heart of the notion of risk: that which may well have never happened, but about which wenevertheless worry. Our human minds, both extraordinarily powerful and extraordinarily vulnerable to errors, are capable of imagining and manifesting both microscopic integrated circuits made of silicon and war on entire cities of civilians (as is currently occurring in Ghouta Syria, sadly without meaningful protest from the world). Risk is that which may well be present, but cannot be seen. We do our best as advisors to detect those risks, diversify them as much as possible, and get paid on your behalf to assume the quantities of risk that remain.

But we cannot get rid of all risks, so-called systemic risks, or we would get rid of all returns, and those that remain we cannot afford to take the time and energy to worry about, or we would never get anything else done. “How much pain have cost us the evils which have never happened.” And so here are some things that have never happened that I wish to remind you of.

  • The stock market has never delivered a negative return over any ten year or greater period.
  • The stock market has never failed to surpass its previous all time highs.
  • The stock market has far outpaced cash over history.
  • The stock market has far outpaced bonds over history.

I cannot guarantee you that these “nevers” will never occur, only that I cannot afford, either on my own behalf or on yours, to mentally generate the pain and anguish that they might. You are paying me to guide you in a world of market history and realities, not a world of my own imagination or yours.

I close this month by recalling a dinner I had about a year ago with Robert Novy-Marx, one of the finest finance academics in the country, an important consultant to Dimensional Fund Advisors (he developed the theoretical foundations behind DFA’s latest “Profitability Premium”), and my brother-in-law’s great friend and best man at his wedding.

At our dinner I speculated that the persistent return premiums that have existed in markets – stocks outperforming bonds, small companies outperforming large ones, and value priced companies outperforming growth companies – could one day reverse. I was indeed speculating about evils that have never happened with one of the great minds in finance.

Robert smiled, and without a trace of pain or worry, looked at me and said with confidence: “I don’t think so.” I put down my worry, smiled myself, and proceeded to enjoy dessert, knowing that I would soon be repenting for having eaten too much.


Mind Over Model

Checking the weather? Guess what—you’re using a model. While models can be useful for gaining insights that can help us make good decisions, they are inherently incomplete simplifications of reality.

In investing, factor models have been a frequent topic of discussion. Often marketed as smart beta strategies, these products are based on underlying models with limitations that many investors may not be aware of.

To help shed light on this concept, let’s start by examining an everyday example of a model: a weather forecast. Using data on current and past weather conditions, a meteorologist makes a number of assumptions and attempts to approximate what the weather will be in the future. This model may help you decide if you should bring an umbrella when you leave the house in the morning. However, as anyone who has been caught without an umbrella in an unexpected rain shower knows, reality often behaves differently than a model predicts it will.

In investment management, models are used to gain insights that can help inform investment decisions. Financial researchers frequently look for new models to help answer questions like, “What drives returns?” These models are often touted as being complex and sophisticated and incite debates about who has a better model. Investors who are evaluating investment strategies can benefit from understanding that the reality of markets, just like the weather, cannot be fully explained by any model. Hence, investors should be wary of any approach that requires a high degree of trust in a model alone.


Mind the judgment gap

 Just like with the weather forecasts, investment models rely on different inputs. Instead of things like barometric pressure or wind conditions, investment models may look at variables like the expected return or volatility of different securities. For example, using these sorts of inputs, one type of investment model may recommend an “optimal” mix of securities based on how these characteristics are expected to interact with one another over time. Users should be cautious though. The saying “garbage in, garbage out” applies to models and their inputs. In other words, a model’s output can only be as good as its input. Poor assumptions can lead to poor recommendations. However, even with sound underlying assumptions, a user who places too much faith in inherently imprecise inputs can still be exposed to extreme outcomes.

Given these constraints, we believe bringing financial research to life requires presence of mind on behalf of the user and an acute awareness of the limitations involved in order to identify when and how it is appropriate to apply that model. No model is a perfect representation of reality. Instead of asking, “Is this model true or false?” (to which the answer is always false), it is better to ask, “How does this model help me better understand the world?” and, “In what ways can the model be wrong?”

So what is an investor to do with this knowledge? When evaluating different investment approaches, understanding a manager’s ability to effectively test and implement ideas garnered from models into real-world applications is an important first step. This step requires judgment on behalf of the manager, and an investor who hires a manager to bridge this judgment gap is placing a great deal of trust in that manager. The transparency offered by some approaches, such as traditional index funds, requires a low level of trust on behalf of investors because the model is often quite simple, and it is easy to evaluate whether they have matched the return of an index. The tradeoff with this level of mechanical transparency is that it may sacrifice the potential for higher returns, as it prioritizes matching the index over anything else. For more opaque and complex approaches, like many active or complex quantitative strategies, the requisite level of trust needed is much higher. Investors should look to understand how these managers use models and question how to evaluate the effectiveness of their implementation. When doing so, rigorous attention must be paid to how any such strategy is implemented. To quote Nobel laureate Robert Merton, successful use of a model is “10% inspiration and 90% perspiration.” In other words, having a good idea is just the beginning. Most of the effort required to make an idea successful is in effectively implementing that idea and making it work.

In the end, there is a difference between blindly following a model and using it judiciously to guide your decisions. As investors, cutting through the noise around the “latest and greatest” investment products and identifying an approach that employs sound judgment and thoughtful implementation may increase the probability of having a positive investment experience.




Source: Dimensional Fund Advisors LP.

Past performance is no guarantee of future results. There is no guarantee an investing strategy will be successful.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

Robert Merton provides consulting services to Dimensional Fund Advisors LP.



March 4-10 is National Consumer Protection Week

Next week is National Consumer Protection Week -- the perfect time to learn more about a variety of consumer protection issues.  Visit for more information.

You may also find the following concept pieces useful to learn more about your consumer rights and make well-informed decisions about money.


How Money is Spent by Different Income Groups

Courtesy of: Visual Capitalist

How Money is Spent by Different Income Groups

If you started making twice the amount of money that you do today, how would your spending habits change?

Consider if the tables were turned, and you instead were reduced to half of your current income. Where would you likely make cuts to spending?

The reality is that the money you have coming in has big implications on how expenses get prioritized – and so it’s interesting to see how people in different income brackets allocate what they have.

Visualizing Spending

Today’s series of graphics come to us from data visualization expert Nathan Yau at FlowingData, and they show how money is being spent by different income groups.

It uses data from the 2016 Consumer Expenditure Survey, an annual survey by the Bureau of Labor Statistics. Meanwhile, embedded words in the graphics come from Yau, as he makes observations on the data.

To Buy or Rent a House?

How do income groups differ in spending for housing?

Housing Expenses

How is money spent on utilities, furniture, and other household expenses?

Household expenditures

Food Expenses

Do income groups spend more eating at home, or eating out?

Food expenditures

Travel and Transportation

The cost of vehicles, gas, and other travel expenses.

Transportation expenditures

Health Expenditures

What about money spent on health insurance, services, or drugs?

Health expenditures

Pensions and Social Security

Lastly, the money going to retirement, pension, social security, and insurance plans.

Pensions expenditures

For more data analysis, as well as many other great visualizations on income, we highly recommend checking out FlowingData.


Infrastructure Boom: 5 Ways Investors Can Play It

Courtesy of: Visual Capitalist

Recent Market Volatility

After a period of relative calm in the markets, in recent days the increase in volatility in the stock market has resulted in renewed anxiety for many investors.

From February 1–5, the US market (as measured by the Russell 3000 Index) fell almost 6%, resulting in many investors wondering what the future holds and if they should make changes to their portfolios. While it may be difficult to remain calm during a substantial market decline, it is important to remember that volatility is a normal part of investing. Additionally, for long-term investors, reacting emotionally to volatile markets may be more detrimental to portfolio performance than the drawdown itself.


Exhibit 1 shows calendar year returns for the US stock market since 1979, as well as the largest intra-year declines that occurred during a given year. During this period, the average intra-year decline was about 14%. About half of the years observed had declines of more than 10%, and around a third had declines of more than 15%. Despite substantial intra-year drops, calendar year returns were positive in 32 years out of the 37 examined. This goes to show just how common market declines are and how difficult it is to say whether a large intra-year decline will result in negative returns over the entire year.

Exhibit 1.  US Market Intra-Year Gains and Declines vs. Calendar Year Returns, 1979–2017

In US dollars. US Market is measured by the Russell 3000 Index. Largest Intra-Year Gain refers to the largest market increase from trough to peak during the year. Largest Intra-Year Decline refers to the largest market decrease from peak to trough during the year. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.


If one was to try and time the market in order to avoid the potential losses associated with periods of increased volatility, would this help or hinder long-term performance? If current market prices aggregate the information and expectations of market participants, stock mispricing cannot be systematically exploited through market timing. In other words, it is unlikely that investors can successfully time the market, and if they do manage it, it may be a result of luck rather than skill. Further complicating the prospect of market timing being additive to portfolio performance is the fact that a substantial proportion of the total return of stocks over long periods comes from just a handful of days. Since investors are unlikely to be able to identify in advance which days will have strong returns and which will not, the prudent course is likely to remain invested during periods of volatility rather than jump in and out of stocks. Otherwise, an investor runs the risk of being on the sidelines on days when returns happen to be strongly positive.

Exhibit 2 helps illustrate this point. It shows the annualized compound return of the S&P 500 Index going back to 1990 and illustrates the impact of missing out on just a few days of strong returns. The bars represent the hypothetical growth of $1,000 over the period and show what happened if you missed the best single day during the period and what happened if you missed a handful of the best single days. The data shows that being on the sidelines for only a few of the best single days in the market would have resulted in substantially lower returns than the total period had to offer.

Exhibit 2.    Performance of the S&P 500 Index, 1990–2017

In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data © 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. One-Month US T- Bills is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values. 


While market volatility can be nerve-racking for investors, reacting emotionally and changing long-term investment strategies in response to short-term declines could prove more harmful than helpful. By adhering to a well-thought-out investment plan, ideally agreed upon in advance of periods of volatility, investors may be better able to remain calm during periods of short-term uncertainty.

[1] Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.

Source: Dimensional Fund Advisors LP.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss.
There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.
All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.


The Power of Dividend Investing

Courtesy of: Visual Capitalist

Recent Market Volatility


Fiduciary Obligations and Down Markets 

I was speaking with a client the other day and they inadvertently referred to me as their “broker.” It cannot be emphasized enough: there is a world of difference between a broker and an advisor, even though much of the American investing public is aware of neither the distinction nor the difference.

  • Imagine if I was being paid by the mutual fund companies into which I invest your money.
  • Imagine that you were not aware of this arrangement, and certainly not of its details.
  • Imagine that I had no obligation to tell you of the arrangement.
  • Imagine that I had better or less expensive ideas of where to invest your money but had no obligation to act on those ideas, and I could pick inferior ideas that paid me more.
  • Imagine that I created a portfolio for you that was not sufficiently diversified because some elements of a diversified portfolio compensated me less than others.
  • Imagine that I had lost confidence in an investment, or felt that it no longer met your needs, but was reluctant or even unwilling to sell that investment because I was being paid to keep that investment.
  • Or imagine that you wanted to sell an investment but I argued and persuaded against it because I was secretly being paid by another party for you to keep it.

Then I would be a broker, a middleman neither fully on your side or on the brokerage’s side for whom I work. On some matters I might be more in your camp, and on others I might be more in my brokerage’s camp. And you might often not know when I was where.

As an advisor, legally registered as such with the Securities & Exchange Commission, I must:

  1. Put your interests before New Capital’s at all times
  2. Disclose to you any conflicts of interest that I may have (most especially if I am being paid to recommend an investment to you)
  3. Prudently diversify your accounts

As the market encounters turbulence and people wonder if the long bull market in both stocks and bonds is passing, I cannot guarantee you that I have any ability to predict the market’s next movements. But I can guarantee you that I am an advisor, and offer you the obligations listed above. Hopefully, and especially in a volatile market, you would agree that those obligations are in themselves enormously valuable.


Markets Turn Down

Dear Clients:

Markets have hit a rough patch to start February after a very strong recent period of performance. We are very lucky to have a wonderful client base that has been through many market downturns. As is my custom in downturns, I'd like offer the following points:

  1. Our outlook is that the national and global economies are in good shape. Stock markets had a strong 2017 and continued to be very strong in January. At one point in January, the US stock market was up 8%. In our view and the view of many professionals it had come too far too fast. A pullback was not only imminent, but necessary and even healthy.
  2. The current downturn in markets began in the US in reaction to stronger employment figures, rising interest rates, and valuation concerns, and has now, not unexpectedly, spread to global markets. For many years, fears have been prevalent that the loose money policies of global central banks would induce rising inflation. It hasn't happened. However, with economies now running strong across the board, the market consensus is that inflation may now rise.
  3. The US stock market historically retreats, on average, 14% at some point during each year. In the past couple of years we have seen much lower volatility than this average, and people may have become accustomed to this environment. Market drops, every year, are normal and healthy, and have the benefit of reminding us that investing is not without risks.
  4. If you think you can predict when market selloffs are going to start and stop, you overestimate your powers – no one rings a bell. Academic study after academic study has shown that no one has the ability to consistently time the market, and your best approach is to adopt an investment strategy and asset allocation and stick with it unless your fundamental picture has changed. I am always available to discuss changes in your heart, mind, or financial picture that might lead to some portfolio changes.
  5. After almost ten years of gains, it is expensive to sell stocks in taxable accounts. It is not a simple decision to incur a 20%+ tax on a large gain. However, our new rebalancing software can help calculate a potential tax bill before we make trades. We are more than happy to model "what if" scenarios ("what if I sell half my stocks in my joint account?") and provide a report to show you what taxes will result.
  6. We held a recent conference call with presentation slides discussing the investment outlook - if you want to hear our current detailed views on the markets that is the best place to visit right now.
  7. I invest my own money in the securities in which I invest your money. I have sold nothing in my account in many months and nothing in the current market selloff.
  8. My cell phone is 713-724-3682. Use it whenever you feel you need to, including text. We're very busy right now managing through the markets, so please give me a reasonable amount of time to respond.
As always, thank you for your trust and confidence. Please remember that markets have always rewarded patience and discipline, and punished impulsiveness. So too, I expect, will it be now.


Storms and Boats

Dear Clients:

After a very busy 2017, I enjoyed a much needed break at my ranch, leaving aside worldly matters for a tractor, chainsaw, and pruners.  Late last year, we acquired our ranch neighbor’s parcel and doubled the size of our “nature preserve.”  My son August has been enjoying riding the all-terrain vehicle (ATV) that came with the purchase.  His mother, not so much.  The purchase also came with a barn, and I enjoy fixing and building things – the other day I hung up our canoe on some new wall hooks, and that got me thinking back to the many, many small boats that appeared as unexpected saviors during Hurricane Harvey.  Boats from garages, from trailers, from Texas, from Louisiana, hauling people in and keeping them out of the floodwaters.

2017 was tumultuous not just in Houston but in the entire United States of America, building on the very dramatic and nation altering election-related events of 2016.  Much of the tumult, of course, continues to be related to American politics generally and specifically the highly volatile Trump presidency.  At the beginning of 2017, many if not most believed that a volatile President would bring volatile roller coaster financial markets.  Instead, the markets – all markets – were up.  As usual, you can find both year-end performance reports of your accounts and complete Quarterly and Annual market reviews in your Morningstar report vault.  Here’s a snapshot of 2017:

New Capital’s ongoing commitment to international investments paid off handsomely in 2017, as international and emerging market stocks substantially outperformed US stocks (though US stock performance was nothing to sniff at) helped further along by a weakening dollar (down 10% in 2017).  

Probably the biggest market surprise of the year was not the upward direction of the stock market but the relative quiet of the stock market, with very low volatility like a placid lake – every single month of the year experienced positive gains - something that has never happened before.

Instead, volatility shifted into an entirely new and unexpected area: cryptocurrencies, led by Bitcoin, new monetary markets which exhibited astounding volatility and tech bubble like enthusiasm.  At New Capital we will not invest your money in things we cannot value, and we cannot put a value on Bitcoin, although we certainly recognize the technological benefits that cryptocurrencies represent: de-centralized, supply-limited, secure store of value and means of exchange.  I refer you to our quarterly piece entitled "To Bit or Not to Bit for our additional commentary on this topic.

Many investors, advisors, and clients express some trepidation with the elevated levels of asset values.  I count myself in that group.  After almost a decade of mostly rising stock and bond prices, yields on most financial assets (and frankly on any assets) are relatively low, and their prices relatively high.  Global growth across the world is very strong right now, which provides tremendous support for both stock and bond prices.  However, any bump in the road could cause some problems for securities given that many assets are “priced for perfection.”  In the United States, labor markets are operating at close to full employment.  Walmart, in the wake of the rapid passage of the year-end tax law has just announced an increase in its minimum wage.  While inflation has been low and benign over the past decade, there is the possibility that we will see upward pressure on prices.

The merits of the tax law itself are extraordinarily debatable.  While it is clearly a boon to companies and their shareholders, and to wealthy families, its potential effects on the general population are far more ambiguous, as many may find their net tax bills only marginally impacted after being forced to completely re-calibrate and modify their financial behavior around their housing (restrictions on property tax deductions), charitable giving (higher threshold to itemize deductions), tax filing entity (lower tax rates on some pass through businesses), education (use of 529 plans permitted for private school), and more.  We are all learning about the details in the new law, and there will be much more to say about it, but for now it is clear that the very wealthy and the accountants are the big winners.

As your advisor I have no control over natural disasters, politics, or tax laws.  Instead we at New Capital are focused on what we can control, and at our October client conference we highlighted the many things we are working on.

  1. We maintain a constant daily focus on our research, portfolio management, client services, client meetings, and our business partner relationships.
  2. In 2017 we began our implementation of eight model portfolios.  Our model portfolios are portfolio risk targets designed to give us more control over client portfolios and therefore the ability to respond more rapidly to changing market circumstances.  Please note that assigning you to a model portfolio does not mean your portfolio cannot have custom elements, as our system allows for both model compliance and custom elements. 
  3. We are spending a lot of time thinking about and discussing each client, considering your specific case, considering your risk capacity derived from our financial planning work together, reviewing your risk tolerance, and matching you with the model portfolio and benchmark that we think fits you best.  Each year when we review your profile with you we will also want to review your model assignment to make sure it’s still the right one for you.
  4. We are concluding our implementation of a sophisticated trade and rebalancing system owned by Morningstar and which integrates into our trade and reporting systems.  This software, TRX, gives us a daily alert of any client portfolios that deviate substantially from their target model, allowing us to focus our attention on those clients.  Our addition of TRX therefore means that we are watching your portfolio on a day to day basis, an enormous enhancement to our portfolio and account management capabilities.  We can also rebalance your portfolio very quickly and with tax awareness.  For us, therefore, TRX is a trade system, rebalancing system, and alert system all in one. 
  5. In 2018 we will debut a new website that will have new areas for clients, and we will expand our initial forays into client conference calls and webinars.
  6. We are evaluating and implementing a lot of technology.  In 2018, we will, among other things, roll out the Glip communications platform so that we can communicate and work with you in a more organized and secure way, and the Box file sharing system, so that we can share information with you more easily and securely.
  7. In 2017, we fielded a full team.  The full-time additions of Jaycee Smalley and Todd Centurino were very important steps for New Capital.  In Jaycee, we have a terrific young account administrator who is organized, task-oriented, and happily and efficiently gets account details done for you.  In Todd, we landed an experienced investment officer who keeps a close eye on markets, understands fund performance better than almost anyone, and comes with a strong work ethic.  Catherine Bahr, who did a superb job in client service for four years, now works to enhance our client and market communications so that you hear from us in the right ways at the right times.  New Capital began thirteen years ago with a very strong team – of one.  Your needs, my needs, New Capital’s needs, and the financial service industry’s needs have since grown and it has been my obligation to you to respond accordingly with investments in people and technology, and I am doing that.
These efforts cost money.  Over the last decade, fees for investment funds have fallen significantly, and New Capital has passed this benefit on to you by often purchasing among the lowest cost funds in the industry from managers like Dimensional (DFA), Vanguard, Blackrock iShares, and others.  While those fees may continue to fall, I believe that most of the juice has been squeezed from that lemon, and I expect that fund fees have likely hit bottom and will remain there.  We have also seen some modest moves downward in advisory fees.  For example, ten years ago New Capital’s top AUM tier rate was 100 bps (1%), and is now 75 bps (.75%).  The advent of robo-advisors has been a major driver in this area.  However, as with the fund business, I believe that advisory fees have hit bottom, and may actually see some modest increases.  This has already occurred with some robo-advisors, who were entirely too aggressive in their initial projections of advisory costs and set fees too low, requiring them to raise fees.

There is probably no more important way for an advisory to keep fees on the low side than to experience regular, sustainable growth, which we have always done.  Growth means that the fixed cost investments in people and technology – our “raw materials” - can be spread across a larger client base.  If you know anyone else who needs a good advisor in these uncertain times, we would be pleased to meet them.

A handful of clients have asked whether a growing New Capital means a less focused or less personal New Capital and my answer is emphatically NO.  The investments I am making in people and technology are designed to give us plenty of capacity to serve existing clients even better, or I wouldn’t do them.  Our clients like you are our reason to exist as a business, and only when you are happy and taken care of am I happy to explore additional client relationships.

It’s true that New Capital is in the financial planning and investment management business.  It’s also true we are in the boat building business.  May 2018 be a calm and dry year for you, with the winds at your back.  And if it’s not - if it’s turbulent, wet, and windy, like 2017 was here in Houston - may you have a good and strong boat.  We always want to be that strong boat for you, confidently holding your trust and your confidence.

Enough for now.  Back to the saw horse. 


To Bit or Not To Bit: What Should Investors Make of Bitcoin Mania?

Bitcoin and other cryptocurrencies are receiving intense media coverage, prompting many investors to wonder whether these new types of electronic money deserve a place in their portfolios.

Cryptocurrencies such as bitcoin emerged only in the past decade. Unlike traditional money, no paper notes or metal coins are involved. No central bank issues the currency, and no regulator or nation state stands behind it.  Instead, cryptocurrencies are a form of code made by computers and stored in a digital wallet. In the case of bitcoin, there is a finite supply of 21 million, 1 of which more than 16 million are in circulation. 2 Transactions are recorded on a public ledger called blockchain. 

People can earn bitcoins in several ways, including buying them using traditional fiat currencies 3 or by “mining” them—receiving newly created bitcoins for the service of using powerful computers to compile recent transactions into new blocks of the transaction chain through solving a highly complex mathematical puzzle.

For much of the past decade, cryptocurrencies were the preserve of digital enthusiasts and people who believe the age of fiat currencies is coming to an end. This niche appeal is reflected in their market value. For example, at a market value of $16,000 per bitcoin, 4 the total value of bitcoin in circulation is less than one tenth of 1% of the aggregate value of global stocks and bonds. Despite this, the sharp rise in the market value of bitcoins over the past weeks and months have contributed to intense media attention.

What are investors to make of all this media attention? What place, if any, should bitcoin play in a diversified portfolio? Recently, the value of bitcoin has risen sharply, but that is the past. What about its future value? You can approach these questions in several ways. A good place to begin is by examining the roles that stocks, bonds, and cash play in your portfolio.


Companies often seek external sources of capital to finance projects they believe will generate profits in the future. When a company issues stock, it offers investors a residual claim on its future profits. When a company issues a bond, it offers investors a promised stream of future cash flows, including the repayment of principal when the bond matures. The price of a stock or bond reflects the return investors demand to exchange their cash today for an uncertain but greater amount of expected cash in the future. One important role these securities play in a portfolio is to provide positive expected returns by allowing investors to share in the future profits earned by corporations globally. By investing in stocks and bonds today, you expect to grow your wealth and enable greater consumption tomorrow.

Government bonds often provide a more certain repayment of promised cash flows than corporate bonds. Thus, besides the potential for providing positive expected returns, another reason to hold government bonds is to reduce the uncertainty of future wealth. And inflation-linked government bonds reduce the uncertainty of future inflation-adjusted wealth.

Holding cash does not provide an expected stream of future cash flow. One US dollar in your wallet today does not entitle you to more dollars in the future. The same logic applies to holding other fiat currencies — and holding bitcoins in a digital wallet. So we should not expect a positive return from holding cash in one or more currencies unless we can predict when one currency will appreciate or depreciate relative to others.

The academic literature overwhelmingly suggests that short-term currency movements are unpredictable, implying there is no reliable and systematic way to earn a positive return just by holding cash, regardless of its currency. So why should investors hold cash in one or more currencies? One reason is because it provides a store of value that can be used to manage near-term known expenditures in those currencies.

With this framework in mind, it might be argued that holding bitcoins is like holding cash; it can be used to pay for some goods and services. However, most goods and services are not priced in bitcoins.

A lot of volatility has occurred in the exchange rates between bitcoins and traditional currencies. That volatility implies uncertainty,even in the near term, in the amount of future goods and services your bitcoins can purchase. This uncertainty, combined with possibly high transaction costs to convert bitcoins into usable currency, suggests that the cryptocurrency currently falls short as a store of value to manage near-term known expenses. Of course, that may change in the future if it becomes common practice to pay for all goods and services using bitcoins.

If bitcoin is not currently practical as a substitute for cash, should we expect its value to appreciate?


The price of a bitcoin is tied to supply and demand. Although the supply of bitcoins is slowly rising, it may reach an upper limit, which might imply limited future supply. The future supply of cryptocurrencies, however, may be very flexible as new types are developed and innovation in technology makes many cryptocurrencies close substitutes for one another, implying the quantity of future supply might be unlimited.

Regarding future demand for bitcoins, there is a non‑zero probability 5 that nothing will come of it (no future demand) and a nonzero probability that it will be widely adopted (high future demand).

Future regulation adds to this uncertainty. While recent media attention has ensured bitcoin is more widely discussed today than in years past, it is still largely unused by most financial institutions. It has also been the subject of scrutiny by regulators. For example, in a note to investors in 2014, the US Securities and Exchange Commission warned that any new investment appearing to be exciting and cutting-edge has the potential to give rise to fraud and false “guarantees” of high investment returns. 6 Other entities around the world have issued similar warnings. It is unclear what impact future laws and regulations may have on bitcoin’s future supply and demand (or even its existence). This uncertainty is common with young investments.

All of these factors suggest that future supply and demand are highly uncertain. But the probabilities of high or low future supply or demand are an input in the price of bitcoins today. That price is fair, in that investors willingly transact at that price. One investor does not have an unfair advantage over another in determining if the true probability of future demand will be different from what is reflected in bitcoin’s price today.


So, should we expect the value of bitcoins to appreciate? Maybe. But just as with traditional currencies, there is no reliable way to predict by how much and when that appreciation will occur. We know, however, that we should not expect to receive more bitcoins in the future just by holding one bitcoin today. They don’t entitle holders to an expected stream of future bitcoins, and they don’t entitle the holder to a residual claim on the future profits of global corporations.

None of this is to deny the exciting potential of the underlying blockchain technology that enables the trading of bitcoins. It is an open, distributed ledger that can record transactions efficiently and in a verifiable and permanent way, which has significant implications for banking and other industries, although these effects may take some years to emerge.

When it comes to designing a portfolio, a good place to begin is with one’s goals. This approach, combined with an understanding of the characteristics of each eligible security type, provides a good framework to decide which securities deserve a place in a portfolio. For the securities that make the cut, their weight in the total market of all investable securities provides a baseline for deciding how much of a portfolio should be allocated to that security.

Unlike stocks or corporate bonds, it is not clear that bitcoins offer investors positive expected returns. Unlike government bonds, they don’t provide clarity about future wealth. And, unlike holding cash in fiat currencies, they don’t provide the means to plan for a wide range of near-term known expenditures. Because bitcoin does not help achieve these investment goals, we believe that it does not warrant a place in a portfolio designed to meet one or more of such goals.

If, however, one has a goal not contemplated herein, and you believe bitcoin is well suited to meet that goal, keep in mind the final piece of our asset allocation framework: What percentage of all eligible investments do the value of all bitcoins represent? When compared to global stocks, bonds, and traditional currency, their market value is tiny. So, if for some reason an investor decides bitcoins are a good investment, we believe their weight in a well-diversified portfolio should generally be tiny. 7

Because bitcoin is being sold in some quarters as a paradigm shift in financial markets, this does not mean investors should rush to include it in their portfolios. When digesting the latest article on bitcoin, keep in mind that a goals-based approach based on stocks, bonds, and traditional currencies, as well as sensible and robust dimensions of expected returns, has been helping investors effectively pursue their goals for decades.

1. Source:
2. [As of December 14, 2017. Source:
3. A currency declared by a government to be legal tender.
4. Per Bloomberg, the end-of-day market value of a bitcoin exceeded $16,000 USD for the first time on December 7, 2017.
5. Describes an outcome that is possible (or not impossible) to occur.
6. "Investor Alert: Bitcoin and Other Virtual Currency-Related Investments," SEC, 7 May 2014.
7. Investors should discuss the risks and other attributes of any security or currency with their advisor prior to making any investment.

NCM Market Review: October 2017

By: Todd Centurino, CFA

The global growth story remained intact during October as developed market equities gained 2.6% and emerging market equities gained 3.9% bringing year-to-date returns up to 15.9% and 28.7% respectively for each region.

In the U.S., stocks increased 2.3% on the back of strong data during the month. Unemployment fell further, with a September reading of 4.2%, a level last seen in February 2001. While other metrics understandably dipped in September, due to hurricanes Harvey and Irma, the labor market picture remains healthy and is showing signs of rising wages. U.S. consumers were alive and well in September as the Consumer Spending and the University of Michigan Consumer Sentiment Indices reached their highest readings in 12 months.

European economic momentum continued to march higher and helped the region gain roughly 2% in October. Much like in the U.S., the Eurozone unemployment rate fell to an 8-year low and consumer confidence increased from the September reading. The biggest news for the region was the uptick in political uncertainty driven by the results of Catalonia’s referendum for independence from Spain on October 1st. The reaction from this event was largely contained in Spain which saw equities weaken and bond yields rise. Despite the increased volatility, Spanish government bond yields gained 0.9% on the month.

Emerging markets, up 3.9%, continued to benefit from the highly synchronized global growth recovery. Equity prices were lifted higher by continued expansion in the manufacturing sector and stronger commodity prices.

Looking Ahead
President Trump announced two important initiatives that markets will watch very closely over the next several months. First, is his nomination of Jerome Powell as Janet Yellen’s replacement at the Fed. This announcement is expected to be largely welcomed by investors as he is seen by many as the best candidate for continuity at the world’s most important central bank. Powell has been a Fed governor since 2012 and has supported Yellen’s policy of gradual interest rate increases. He is taking over the Fed at a time when growth is accelerating, inflation is tame and unemployment is at a 16-year low. A significant amount of pressure will be placed on him to sustain the current expansion.

Second, markets have initially responded positively to the Trump Tax Plan proposal aimed at slashing individual and corporate tax rates and adding a $1.5 trillion stimulus to the economy over the next 10 years. It is still early in the process, and many issues, most notably the mortgage interest and state and local tax deductions, still need to be ironed out. President Trump is asking this bill to be passed by Christmas. This may be an ambitious goal given the number of issues that are likely to create a divide among Republicans, especially the potential increase in the Federal debt that could result should this proposal become law.


Monthly Economic News

    Employment: September saw a loss of 33,000 jobs after averaging 172,000 new jobs over the prior 12 months. The unemployment rate fell slightly to 4.2%. The number of unemployed persons declined by 331,000 to 6.8 million. The labor participation rate increased from 62.9% in August to 63.1%. The average workweek for all employees remained at 34.4 hours in September. Average hourly earnings rose by $0.12 to $26.55. Over the 12 months ended in September, average hourly earnings have risen $0.74, or 2.9%. According to the Bureau of Labor Statistics, hurricanes Harvey and Irma impacted the number of jobs available, but not the national unemployment rate. This report appears to indicate that the labor market is tightening with fewer jobs available and increasing wages needed to attract workers.
    FOMC/interest rates: The Federal Open Market Committee met in September following its last meeting in July and left the target federal funds rate range at 1.00%-1.25%. However, some economic indicators are showing mild inflationary pressures, which, when coupled with a labor market that could be nearing full employment, may lead to another interest rate hike when the Committee next meets in early November.
    GDP/budget: The first estimate of the third-quarter gross domestic product showed expansion at an annual rate of 3.0%, according to the Bureau of Economic Analysis. The second-quarter GDP grew at an annualized rate of 3.1%. Gross domestic income, which estimates all income earned while producing goods and services, increased 1.8% in the third quarter compared to an increase of 0.9% in the second quarter. As to the government's budget, September marked the end of the fiscal year. The federal deficit for FY 2017 was $665.7 billion, more than $80 billion, or 13.7%, higher than the 2016 deficit. For the 2017 fiscal year, government expenses increased by about 3.0%, while receipts rose 1.5%.
    Inflation/consumer spending: Inflationary pressures may be mounting. The personal consumption expenditures (PCE) price index (a measure of what consumers pay for goods and services) ticked up 0.4% in September after climbing only 0.2% in August. The core PCE price index (excluding energy and food) inched ahead 0.1% for the month. Personal (pre-tax) income increased 0.4% and disposable personal (after-tax) income also gained 0.4% from the prior month. Personal consumption expenditures (the value of the goods and services purchased by consumers) jumped a robust 1.0%.
    According to the Consumer Price Index, consumer prices rose 0.5% in September, after recording a 0.4% gain in August. For the 12 months ended in September, consumer prices are up 2.2%, a mark that approaches the Fed's 2.0% target for inflation. Core prices, which exclude food and energy, edged up 0.1% in September, and are up 1.7% since September 2016.
    The Producer Price Index showed the prices companies receive for goods and services advanced 0.4% in September from August. Year-over-year, producer prices have increased 2.6%. Prices less food and energy increased 0.4% for the month and are up 2.2% over the past 12 months.
    Housing: The housing sector started to gain momentum heading into the fall season. Total existing-home sales climbed 0.7% for September following a 1.7% drop in August. Over the last 12 months, sales of existing homes are down 1.5%. The September median price for existing homes was $245,100, 3.4% lower than August's median price of $253,500 but up 4.2% from the median price last September. Inventory for existing homes rose 1.6% for the month following an August decline of 2.1%. The Census Bureau's latest report reveals sales of new single-family homes climbed a whopping 18.9% in September to an annual rate of 667,000 — far outpacing August's rate of 561,000. The median sales price of new houses sold in September was $319,700 compared to $300,200 in August. The average sales price was $385,200 ($368,100 in August). The number of houses for sale at the end of September was 279,000 (284,000 in August), which represents a supply of 5.0 months at the current sales rate.
    Manufacturing: Industrial production increased 0.3% in September following a 0.9% decline in August. The continued effects of Hurricane Harvey and, to a lesser degree, the effects of Hurricane Irma combined to hold down the growth in total production in September by 0.25 percentage point. Capacity utilization increased slightly from 75.8% in August to 76.0% in September. Manufacturing output edged up 0.1%. Mining output rose 0.4% in September after declining 0.8% in August. The index for utilities jumped 1.5% after falling 5.5% in August. New orders for manufactured durable goods increased 2.2% in September after climbing 1.7% in August. Shipments of manufactured goods increased 1.0%, while unfilled orders, which fell the prior two months, increased 0.2% in September.
    Imports and exports: The advance report on international trade in goods revealed that the trade gap for September was $64.138 billion, $0.8 billion (or about 1.3%) greater than the deficit in August. Exports of goods for September were $129.6 billion, $0.9 billion more than August exports. Imports of goods for September were $193.7 billion, $1.7 billion more than August imports.
    International markets: In a sign that the European economy is heading in the right direction, the European Central Bank is scaling back its bond-buying program, while extending its duration well into 2018. The ECB will continue to buy bonds into September of 2018, but at a slower pace. The province of Catalonia, Spain, held a controversial independence referendum on October 1, where voters were heavily in favor of splitting from Spain. The Spanish high court declared the referendum vote illegal. Nevertheless, Catalonia's regional president signed a declaration of independence about a week later, which has since prompted the Spanish prime minister to consider imposition of direct rule. Experts have estimated that a Catalonian break from Spain, a Catalexit, could have a significant impact on the Spanish economy.
    Consumer Sentiment: Consumer confidence in the economy rose in October, reaching its highest level in almost 17 years. The Conference Board Consumer Confidence Index® for October climbed to 125.9 from September's revised 120.6. Consumers expressed growing optimism about present economic conditions as well as future growth. A strong job market and improving business conditions were the primary reasons for the upbeat consumer sentiment.

The 2017 New Capital Annual Conference


Our 2017 Annual Conference was held October 26 and was well attended by approximately 50 clients.  Thank you to all of those who attended, and we look forward to seeing as many of you as possible at next year’s conference.  Our focus this year was on the value that our advisory work brings to our clients, so-called “advisor alpha”, a concept pioneered by Vanguard, with whom we have been working to adopt and even expand these concepts.  The basic idea is to quantify, in percentage terms, the value that New Capital brings to you on an annual basis.

Speaking of value, the Houston Astros were purchased at a “value stock” price of $680 million on November 17, 2011, and as is now well known, the new ownership and management set about to re-make the team with a radical housecleaning and rebuilding period.    On April 11, 2017 Forbes pegged the value of the Astros at $1.45 billion, implying a return to investors of 213% overall, and 13.45% annualized.    

I imagine that right now, the Astros may be valued well above Forbes’ April valuation.  And that, of course, is because, six years after being sold, the Houston Astros defeated, in order, the Boston Red Sox, New York Yankees, and Los Angeles Dodgers to become baseball world champions.  As I write this, approximately half a million (estimated) people are gathering in downtown Houston to celebrate this astonishing victory, earned in one of the most exciting and dramatic World Series ever played.  I grew up watching the Astros, and never thought they would ever win the World Series, even though they have had very good teams over the years, and made one trip there (they were swept in four games by the Chicago White Sox in 2005). 

The Astros were indeed a value investment for their owners, selling at a depressed price and low market value to book value.  But while New Capital can’t really obtain ownership for you in a major league baseball team (the Cleveland Indians were actually publicly traded until 1999), you should not feel too bad at missing buying into the Astros.  Over the same period from the sale of the Astros to the Forbes valuation, US small-cap value stocks (which the Astros would have qualified as when they were sold) returned 209%, or 13.1% annualized, very close to the return on Astros ownership.  New Capital includes a substantial overweighting in its equity portfolios to small-cap value US companies, and so your portfolio will have experienced gains similar to the increase in the value of the Astros from this segment of your investments.  They don’t, however, come with front row seats or a World Series championship, sorry.

The good news, however, is that the Astros victory, especially in the wake of Harvey’s terrible destruction, can be claimed by all of Houston.  As the crowds gather in downtown Houston for a parade about to kick off, you might feel satisfied at both your baseball team, and your small-cap value stocks. 


The Economic Impact of the 2017 Hurricanes