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In this often dismal time in the world, it is important to remember these  five foundations that have brought success to so many for so long. I received an up close reminder of those foundations last week on May 11 as I sat in the beautiful St. Mark's Episcopal Church as the father of a new inductee into the National Junior Honor Society, an organization dedicated to these very ideals. Abby Golub, along with 48 of her schoolmates, lit candles and received medals around their necks for sufficiently demonstrating these five ideals to their school chapter of the NJHS. They then all recited in unison the NJHS Pledge:

 I pledge myself
To uphold the high purposes
Of this Society
To which I have been selected,
Striving in every way,
By word and deed,
To make its ideals
The ideals of my life.

These ideals – to seek and honor truth, to serve as an example for others, to place the needs of others before self, to demonstrate humility and uprightness, and to work for the greater good – are a comprehensive list of how to live, how to succeed, how to invest, and most importantly, how to treat others.

It is tempting to believe that all of the ugly, violent, and unkind news of the day means that these ideals are on the wane and in permanent retreat. But as I sat in the church with other parents and students, it became clear to me that the future is bright.  It is for that future which New Capital invests your vital and precious capital, alongside my own.


How Different Age Groups View the Trade-Off Between Time and Money

Courtesy of: Visual Capitalist

Conference Call - Second Quarter Market Update




Our family celebrated a wonderful and extraordinary event at homemade soapsthe end of March, Abby’s Bat Mitzvah, the lovely Jewish rite of passage for a young lady as she passes from childhood and begins the process of becoming a mature and independent woman. She worked very hard to learn Hebrew and how to read from the Torah, she presented a couple of speeches, and sold her homemade soaps (photo at right) to raise $3000 for WildAid, a non-profit working to reduce poaching of endangered animals. We are very proud of her, and took some family photos at our ranch in honor of the occasion. The entire event cost quite a bit (Hannah actually tells me that our planner thinks we were “very economical and efficient”), but it was also a reminder that the most important things in life are worth paying for.

I believe that an innovative independent financial advisor is also one of those things, especially in the current period that is testing advisor mettle. We are always working to prove ourselves up to this task, and I would like to describe this work.

  1. Data monitoring – Each week we meet to examine the data metrics of major markets, currencies, interest rates, and much more, and highlight interesting items and changes for us to discuss. For example, we may take a look at the difference between the yields on high yield bonds and Treasury bonds: what are they telling us? Are they indicating a nervous or confident market? Or the change in the shape of the yield curve: what is it telling us? Is it possible there is a recession ahead or is there no sign of one? Rarely if ever do any of these metrics act as a “magic bullet” where the future can be told, but taken together they help us form investment decisions to benefit clients. Over the past months the tenor of our transactions has been to reduce overweight positions to US equities, and increase fixed income and international holdings. Time will tell, but our model portfolio performance against their benchmarks has been meaningfully positive year to date.
  2. Professional views – New Capital is called on by a remarkable array of companies and market professionals who wish to visit with us to present their investment products and theses. While we are a relatively small firm with about $250 million under management, we are called on by the likes of Pimco, Vanguard, DFA, Blackrock, Fidelity, Templeton, and many more. You might think we give Fidelity preference because they are our custodian. We don’t. Fidelity’s custodian division and its mutual fund division are separate, and just because client assets are in custody at Fidelity doesn’t mean that we are going to automatically buy Fidelity mutual funds – their mutual funds must stand on their own against their competition. Moreover, when these fund companies visit us, they bring with them briefing books, economic perspectives and slides, data handouts, fund sheets – valuable information developed by some of their most important internal thinkers: economists, portfolio managers, executives, and so forth. We are therefore able to assemble a general view of how the largest and best positioned asset managers in the world see things, and then assimilate and factor those viewpoints into our own. We believe this makes it less likely, though not impossible, that we would be “blindsided” by large fund capital flows.
  3. Historical research – We study general, economic, political and market history and try to use that in our views. For example, the current tariff conflict differs from the catastrophic Smoot-Hawley tariff law that contributed to the Great Depression in important ways: back then Congress was in charge of tariff policies, now the President is. Back then, individual Congressmen “vote traded”: I’ll give you your tariff if you give me mine, and the U.S. therefore wound up with an indiscriminate “shotgun” approach to tariffs. The current actions are more “rifle shot” by the President and Chinese premier, targeting specific industries in bi-lateral trade. That doesn’t make them any less concerning, but they are different, and that has permitted us to not call you and frantically say “There’s a trade war on just like in the 1920’s, you have to sell everything now!” At the same time, we are carefully watching for downstream effects and retaliatory measures, the two main negative effects from tariff wars. History may rhyme rather than repeat, and an advisor needs to be able to distinguish between the two.
  4. Technology – The financial advisory industry is in a “golden age” for technology innovation, just as most industries are. Every day we are marketed new products that could prove useful to us and to you, companies marketing new financial planning systems, data aggregation systems, and reporting systems. For example, we are currently conducting a paid trial of a system called Hidden Levers that tests and models portfolios under different conditions. For example, we could ask the system to tell us: “what would likely happen to the portfolio if inflation increases by 3%, and what might an appropriate defensive response be?” We like the software, believe it is well designed and useful, and think it might be helpful to us as we help you. Even though this system costs money, it may be worth it, just like a Bat Mitzvah.
  5. Risk testing – We continue to invest time, energy and effort in exploring and practicing evolving ways to test your personal risk measures: your risk capacity (your financial ability to take risk); your risk tolerance (your natural psychological attraction or aversion to risk); and your risk composure (your ability to retain your composure in the face of market drawdowns). We are using tools available to advisors, as well as creating our own where we cannot find anything that meets our needs. We believe that portfolio management begins with you and your feelings about risk.
  6. Perspective – In this time of intense political drama and conflict, it is vital that your advisor be able to separate political events from economic realities, and to maintain the perspective that we are investing in business ownership through stock ownership and loans through bond ownership. Calvin Coolidge, a Republican President from the Roaring ‘20’s (and who also coincidentally attended the same small college I did), famously said that “the business of America is business”, and that is how I see it too during this period. The business mentality of America will continue long after this chaotic and extraordinary Presidency ends, and as an advisor I must keep my eye on the long term.
  7. Mindfulness – A couple of years ago I was contacted by Jason Voss of CFA Institute (of which I am a member) seeking to introduce meditation to its membership as a way of enhancing its performance and ability to deal with the stress of financial markets. They asked me to assist with offering feedback on the interactive tool they were developing and I was happy to do so. I felt Jason’s team’s eventual results were impressive, and were a clear signal that mindfulness is fast becoming an important and recognized part of an advisor’s toolbox. At New Capital, I practice with that tool each day, for my own benefit, for yours, and for your finances.
  8. You – New Capital will always retain its substantial focus on you and your goals. I attended a conference this week at the St. Regis Hotel sponsored by Barron’s for the top advisors in Houston. On one panel, one of a larger practice’s principals discussed their work with ultra high net worth “masters of the universe.” He described how one client felt poor with his $100 million, another with $50 million, and I went up and asked this advisor after the session what they were doing to help these clients transform their poverty mentalities into gratitude mentalities. He, unfortunately, could not give me a satisfactory answer. At New Capital, I am interested in helping you with all manner of financial matters, including those that exist in your imagination, because that is the very heart of financial advisory.

New Capital is a truly independent financial advisory, that not only talks about diversification, but practices it in all areas of our business. We are diversified in our technology, business partners, and clientele. All of this, by design, is to provide you with the stability and trusted partnership that you, and I believe every investor, deserve. Abby’s Bat Mitzvah was her own rite of passage. Part of its beauty was that it inspired me to think of my own, and New Capital’s. The past year has been a time of transformation, and I am excited about the road ahead. We will be there with you, helping you focus on what's important and helping you tune out the noise.



Trade Tactics: New Metals Tariffs Reflect U.S. Policy Shift

On March 8, 2018, President Trump imposed a global tariff of 25% on steel imports and 10% on aluminum imports.1 A tariff is a tax on a particular class of imported goods or services that is designed to help protect domestic industries from foreign competition.

The metals tariffs have not been well received by U.S. allies or U.S.- based companies that operate internationally. Many economists outside the administration think there could be unintended economic consequences, primarily because steel and aluminum are used in many other products that are made in the United States.2

For several decades, much of the world — including the United States — has supported the expansion of free trade and globalization, a position that the president has openly rejected. The metals tariffs are an important component of the president's trademark "America First" policy, which could continue to take center stage in the coming months.3

Stated goals

To justify the tariffs, the White House has invoked Section 232 of the 1962 Trade Expansion Act, a U.S. law that allows restrictions on imports for national security reasons. The president's proclamation contends that excess steel capacity is flooding into the country at below-market prices, harming U.S. metal suppliers and putting facilities out of business. The president and his Secretary of Commerce, Wilbur Ross, have suggested the tariffs are necessary to ensure the availability of domestic metal supplies that could be needed for defense or in the event of a national emergency.4

Bargaining chip

The metals tariffs were scheduled to take effect on March 23, 2018. Argentina, Australia, Brazil, Canada, Mexico, South Korea, and European Union nations were granted temporary exclusions until May 1, pending continuing trade talks.5 Still, the possibility of permanent exclusions could be used to extract specific concessions from some trading partners.6

For example, Canada is the largest source of U.S. steel imports, and Mexico is the fourth largest. Together they account for 25% of foreign steel and 43% of aluminum.7 When negotiations end, Canada, Mexico, and South Korea may face quotas to cap export levels and prevent them from using exemptions to import and re-export cheap steel to the United States.8

The tariffs were specifically set to levels that should slow imports enough to allow U.S. industries to boost production to 80% of capacity. Granting exemptions, even to close allies, could defeat that goal and/or result in a heavier tariff burden on other nations. It's likely that the tariffs will largely apply to the remaining three major steel exporters: China, Russia, and Japan.9

Through a separate process, companies can apply for exemptions on metal imports used to manufacture specific products in the United States, although the details are murky for which types of businesses may qualify.10

Potential problems

The metals tariffs should offer relief to the struggling steel and aluminum industries and benefit some workers in the regions where they operate. But if the price of imported metals increases by 10% to 25%, the price of domestic metal is also likely to rise, and so could the cost of U.S. goods that must compete in international markets. By one estimate, the metals tariffs could add $300 to the price of a new car sold in a U.S. showroom.11

Significant inflation could hurt consumers, reduce sales, impact corporate profits, and result in job losses, especially for industries that depend heavily on steel or aluminum.

Ongoing issues

This is not the first time the Trump administration has used tariffs to restrict imported goods, and it probably will not be the last. In January 2018, tariffs were placed on imported washing machines and solar panels in response to complaints by U.S. manufacturers.12

When Trump first took office in 2017, he pulled the United States out of the Trans-Pacific Partnership (TPP), a trade agreement that was initiated in part to counter China's growing influence in Asia. With the U.S. out of the pact, a new agreement was signed in March 2018 by 11 key U.S. trading partners including Japan, Australia, Canada, and Mexico, creating a united front that could put the United States at a disadvantage in the future.13

The president has also threatened to withdraw from the North American Free Trade Agreement (NAFTA) if it is not reconfigured in favor of the United States.14 Failing to reach a new agreement with Canada and Mexico could be quite costly: One economic analysis concluded that terminating NAFTA would result in the net loss of 1.8 million U.S. jobs within the first year and reduce the annual purchasing power of U.S. households by about $654 each.15

The administration is also planning punitive measures that could make it more difficult for Chinese firms to acquire U.S. technology and invest in U.S. businesses. The package includes about $50 billion in tariffs directly targeting more than 100 types of Chinese products. Experts warn that China is likely to strike back, possibly by restricting imports of automobiles, aircraft, computer chips, and/or soybeans and other agricultural products, if ongoing negotiations do not produce an acceptable outcome.16

Another serious concern is that these and other protectionist policies may strain relationships with our allies, some of which have threatened to respond proportionally if tariffs are applied to them. The economic impact in the United States and globally will likely depend on whether a hard U.S. stance and/or the breakdown of trade negotiations escalates into a larger trade war. For now, you might see some market volatility in response to trade concerns.

All investing involves risk, including the possible loss of principal.

1, 4-5, 10) The White House, 2018
2-3, 6-9) The Wall Street Journal, March 8, 2018
11) The Wall Street Journal, March 12, 2018
12) United States Trade Representative, 2018
13) The New York Times, March 8, 2018
14) The Wall Street Journal, January 23, 2018
15) Business Roundtable, January 23, 2018
16), March 22, 2018

How Different Generations Would Spend $10,000

Courtesy of: Visual Capitalist

The Relationship Between Money and Happiness

Courtesy of: Visual Capitalist

Tuning Out the Noise


Doing Well and Doing Good?

Growing interest in the impact of fossil fuels on the global climate may spark questions about whether individuals can integrate their values around sustainability with their investment goals and, if so, how.

As citizens, individuals can express their political preferences around sustainability through the ballot box. As investors, they also can express their preferences through participation in global capital markets. One key question these investors face is how to do this without compromising their desired investment outcomes. For instance, how can they reduce their portfolio’s environmental footprint while maintaining sound investment principles and achieving their investment objectives?

Sustainability preferences are not generally restricted to greenhouse gas emissions. Many investors may also have concerns about land use and biodiversity, toxic spills and releases, operational waste, and water management, among other issues. Thus, it is a challenge to achieve the dual goal of efficiently considering sustainability preferences while building investment solutions that help meet investors’ financial goals. One way to approach this challenge is to focus first on developing an investment methodology that emphasizes what research indicates are reliable sources of higher expected returns while also aiming to minimize unnecessary turnover and trading costs. For instance, this may mean starting with a broad universe of stocks ranging from very large companies to very small companies, and then systematically pursuing higher expected returns by increasing the weights of those securities with smaller market capitalizations, lower relative prices, and higher profitability.[1]

Next, investors can evaluate those companies being considered for investment using a focused set of environmental issues that reflect their primary concerns. By using a holistic scoring system, rather than a completely binary “in” or “out” screening process, investors may be able to preserve diversification while recognizing those companies with positive environmental profiles. This involves looking at companies across the entirety of a portfolio and within individual sectors with the goal of incorporating sustainability preferences while also maintaining the characteristics of the original strategy. For example, if one is trying to reduce a portfolio’s greenhouse gas emissions and potential emissions from fossil fuel reserves, the worst offenders across all industries may first be deemphasized or excluded from the portfolio altogether. An across-industry comparison of this nature provides an efficient way to significantly reduce the aggregate greenhouse gas emissions per unit of revenue produced by companies within a portfolio with a minimal reduction in diversification. Next, companies may also be rated on sustainability considerations within each industry. This added level of scrutiny is recognition that, in the real economy, capital markets and the supply chain are highly interconnected. For example, a retail company may consume electricity from a utility company and transportation services from a trucking company, both of which are consumers of fuel from an energy company. Comparing companies within sectors recognizes this interconnectedness and can be used to overweight the most sustainable companies within a given industry. This could include retail companies that improve the energy efficiency of their facilities, utilities that produce electricity using solar or wind power, trucking companies that improve the fuel efficiency of their fleets or use alternative-fuel vehicles, or energy companies that increase efficiency, reduce waste, and improve their overall environmental footprint. On the other hand, companies with poor environmental sustainability ratings relative to industry peers may receive a lesser weight or may be excluded.

A Suggested Approach to Sustainability Investing

Using such a combination of company selection and weighting may allow for substantial reduction in exposure to greenhouse gas emissions and potential emissions from fossil fuel reserves—important goals for many investors—while providing a robust investment strategy that is broadly diversified and focused on the drivers of expected returns.


The key takeaway for investors is that investing well and incorporating values around sustainability need not be mutually exclusive. By starting with a robust investment framework, then overlaying the considerations that represent the views of sustainability-minded investors, this allows for a cost-effective approach that provides investors the ability to pursue their sustainability goals without compromising on sound investment principles or accepting lower expected returns.


Source: Dimensional Fund Advisors LP.

Diversification does not eliminate the risk of market loss. There is no guarantee an investing strategy will be successful. Investment risks include loss of principal and fluctuating value. Sector-specific investments can also increase these risks. Environmental and social screens may limit investment opportunities.

Small and micro cap securities are subject to greater volatility than those in other asset categories.

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.


[1]. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book equity.


There's Still Time to Contribute to an IRA for 2017

There's still time to make a regular IRA contribution for 2017! You have until your tax return due date (not including extensions) to contribute up to $5,500 for 2017 ($6,500 if you were age 50 by December 31, 2017). For most taxpayers, the contribution deadline for 2017 is April 17, 2018.

You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don't exceed the annual limit (or, if less, 100% of your earned income). You may also be able to contribute to an IRA for your spouse for 2017, even if your spouse didn't have any 2017 income.

Traditional IRA

You can contribute to a traditional IRA for 2017 if you had taxable compensation and you were not age 70½ by December 31, 2017. However, if you or your spouse was covered by an employer-sponsored retirement plan in 2017, then your ability to deduct your contributions may be limited or eliminated depending on your filing status and your modified adjusted gross income (MAGI) (see table below). Even if you can't deduct your traditional IRA contribution, you can always make nondeductible (after-tax) contributions to a traditional IRA, regardless of your income level. However, in most cases, if you're eligible, you'll be better off contributing to a Roth IRA instead of making nondeductible contributions to a traditional IRA.

2017 income phaseout ranges for determining deductibility of traditional IRA contributions:
1. Covered by an employer-sponsored plan and filing as: Your IRA deduction is reduced if your MAGI is: Your IRA deduction is eliminated if your MAGI is:
Single/Head of household $62,000 to $72,000 $72,000 or more
Married filing jointly $99,000 to $119,000 $119,000 or more
Married filing separately $0 to $10,000 $10,000 or more
2. Not covered by an employer-sponsored retirement plan, but filing joint return with a spouse who is covered by a plan $186,000 to $196,000 $196,000 or more

Roth IRA

You can contribute to a Roth IRA if your MAGI is within certain dollar limits (even if you're 70½ or older). For 2017, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $118,000 or less. Your maximum contribution is phased out if your income is between $118,000 and $133,000, and you can't contribute at all if your income is $133,000 or more. Similarly, if you're married and file a joint federal tax return, you can make a full Roth contribution if your income is $186,000 or less. Your contribution is phased out if your income is between $186,000 and $196,000, and you can't contribute at all if your income is $196,000 or more. And if you're married filing separately, your contribution phases out with any income over $0, and you can't contribute at all if your income is $10,000 or more.

2017 income phaseout ranges for determining ability to contribute to a Roth IRA:

Your ability to contribute to a Roth IRA is reduced if your MAGI is: Your ability to contribute to a Roth IRA is eliminated if your MAGI is:
Single/Head of household $118,000 to $133,000 $133,000 or more
Married filing jointly $186,000 to $196,000 $196,000 or more
Married filing separately $0 to $10,000 $10,000 or more

Even if you can't make an annual contribution to a Roth IRA because of the income limits, there's an easy workaround. If you haven't yet reached age 70½, you can simply make a nondeductible contribution to a traditional IRA, and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you'll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you've inherited — when you calculate the taxable portion of your conversion. (This is sometimes called a "back-door" Roth IRA.)

Finally, keep in mind that if you make a contribution to a Roth IRA for 2017 — no matter how small — by your tax return due date, and this is your first Roth IRA contribution, your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2017.


The 5 Biggest Market Risks That Billionaires are Hedging Against

Courtesy of: Visual Capitalist

Tax Reform: Changes for Individuals


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.