Puerto Rico..economy, statehood

Statehood or Bust?

You’ve probably read about the troubled finances of Puerto Rico, the U.S. territory in the Caribbean that has issued more than $70 billion in municipal bonds, with no visible way to pay out the interest, much less the principal.  Now Puerto Rican have overwhelmingly voted that they want their island territory to become the 51st U.S. state.

Puerto Rico has been an autonomous territory since 1898, when the U.S. forcibly acquired it from Spain.  The territory was granted self-rule in 1952.  Last year, in response to the mounting fiscal crisis, Congress revoked some of the local government’s autonomy, creating a control board that has the power to veto any item in Puerto Rico’s budget.  In light of this forced change in autonomy, on June 11th the territory asked voters to weigh in on the territory’s status.  In 2012, the last time islanders voted on the issue, 61% of voters who made a selection picked statehood as their preferred alternative. In this vote, nearly half a million voters chose statehood on the ballot, compared with just 7,800 votes for independence from the U.S. and 6,800 votes for the status quo territorial status.

However, some are questioning the validity of the vote, since just 23% of eligible voters chose to go to the polls—the lowest participation in any election since 1967.  Part of the low turnout was attributed to the fact that three of Puerto Rico’s political parties urged their supporters to boycott the vote—which, of course, means that the parties claimed that “boycott” soundly defeated the statehood results.

The vote does nothing toward solving Puerto Rico’s fiscal crisis, which has been compared unfavorably to the Greek debt problems.  And even a resounding victory for statehood would have been mostly symbolic. For Puerto Rico to enter the union, Congress would have to pass a law admitting it. Even though the Republican platform of 2016 officially supported Puerto Rican statehood, the Republican leadership would not rush to add two senators and five representatives who would probably, based on Puerto Rican political history, lean Democratic.




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Portfolio movement, understanding the ups and downs

What does it mean when your portfolio is up 10%?


You receive portfolio performance reports every three months—a form of transparency that financial planning professionals introduced at a time when the typical brokerage statement was impossible to decipher.  But it might surprise you to know that most professionals think there is actually little value to any quarterly performance information, other than to reassure you that you actually do own a diversified portfolio of investments.  It’s very difficult to know if you’re staying abreast of the market, and for most of us, that’s not really relevant anyway.




The only way to know if your investments are “beating the market” is to compare their performance to “the market,” which is not easy. You can compare your return to the Dow Jones Industrial Average, but that index represents only 30 stocks, all of them large companies.  Most peoples’ investment portfolios include a much larger variety of assets: U.S. stocks and bonds, foreign stocks and bonds, both including stocks of large companies (large cap), companies that are medium-sized (midcap) and smaller firms (small cap).  There may be stocks from companies in emerging market countries like Sri Lanka and Mexico.  There may be real estate investments in the form of REITs and investment exposure to shifting commodities prices, like wheat, gold, oil and pork bellies.


In order to know for sure that your particular batch of investments outperformed or underperformed “the market,” you would need to assemble a “benchmark” portfolio made up of index funds in each of these asset categories, in the exact mix that is in your own portfolio.  Even if you could do that precisely, daily, weekly and monthly market movements would distort the original portfolio mix by causing some of your investments to gain value (and become larger pieces of the overall mix) and others to lose value (and become smaller pieces), and those movements could be different from the movements inside the benchmark.  After a month, your portfolio would be less comparable to the benchmark you so painstakingly created.


Many professionals believe that there are several keys to evaluating portfolio performance in a meaningful way—and the result is very different from comparing your returns with the Dow’s.


1) Take a long view.  What your investments did last month or last quarter is purely the result of random movements in the market, what professionals call “white noise.”  But you might be surprised to know that even one-year returns fall into the “white noise” category.  It’s better to look at your performance over five years or more; better still to evaluate through a full market cycle, from, say, the start of a bull market to the start of a new bull market.  However, you should remember that there are no clear markers on the roadside that say: “This line marks the start of a new bull market.”


2) Compare your performance to your goals.  Your financial plan indicated that your investments needed to generate (let’s suppose) 5% returns above inflation in order for you to have a great chance of affording a long, comfortable retirement.  If that’s your goal, then chances are, your portfolio is not designed to beat the market; it represents a best guess as to what investments have the best chance of achieving that target return, through all the inevitable market ups and downs between now and your retirement date.  If your returns are negative over three to five years, that means you’re probably falling behind on your goals—and you might be taking too much risk in your portfolio.


3) Recognize that some of your investments will go down even in strong bull markets.  The concept of diversification means that some of your holdings will inevitably move in opposite directions, return-wise, from others.  Ideally, the overall trend will be upward—the investments are participating in the growth of the global economy, but not at the same rate and with a variety of setbacks along the way.  If you see some negative returns, understand that those are the investments you’re counting on to give you positive returns if/when other parts of your investment mix are suddenly, probably unexpectedly, turning downward.


That doesn’t mean you shouldn’t look at your portfolio statement when it comes out.  Make sure the investments listed are what you expected them to be, and let your eye drift toward the longer time periods.  Notice which investments rose the most and which were down and you’ll have an indication of the overall economic climate.  And if your overall portfolio beat the Dow this quarter, or over longer periods of time, well, that probably only represents white noise.

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$2.67 million lunch with Buffet

Bidding for Buffett

Chances are you’ve never paid anybody to have lunch with you, but chances are you aren’t Warren Buffett either.  Every year, the Sage from Omaha hosts an auction, with the highest bidder getting to join Buffett for lunch and bring seven guests—with the proceeds going to charity.  The winner in this, the 18th year of the auction, came in at $2.67 million, which is actually below last year’s winning bid, of $3.46 million.

The auction takes place on eBay, with an opening bid for this expensive lunch set at $25,000.  This year’s winning bidder is anonymous, but past winners include the owner of a Chinese online gaming company and Ted Weschler, a former hedge fund manager who was later hired to help run the investments of Buffett’s Berkshire Hathaway operation.  In all, the auction has raised more than $25 million for a San Francisco charity called Glide, which offers free meals, health care and other services to homeless and low-income people in San Francisco.

As in the past, the lunch with Mr. Buffett will be at a steakhouse called Smith & Wollensky in New York.




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Realized Capital Loss 101

Investors are always learning.

One area that can be particularly challenging is gaining a better understanding of how our investments fold into the tax equation.

One such scenario is when a portfolio realizes a capital loss, also called tax loss harvesting.  Tax loss harvesting is a strategy with benefits that even some tax professionals may not understand. Here is a definition from Betterment:

“Tax loss harvesting is the practice of selling a security that has experienced a loss. By realizing, or “harvesting” a loss, investors are able to offset taxes on both gains and income. The sold security is replaced by a similar one, maintaining the optimal asset allocation and expected returns.”

At first glance, one may conclude that a capital loss is a sign of an unsuccessful year.  However, this couldn’t be further from the truth.

Why would an investor want to realize a capital loss?

First, there is a deduction of your capital loss against ordinary income.  For federal tax purposes, you apply $3,000 against ordinary income.  If you have social security, IRA distributions or other earned income that would otherwise be taxable, you can have at least $3,000 in capital losses in excess of capital gains.  In addition, there is a $5,000 deduction that can be taken on the state of Wisconsin tax return as well. These are a couple of benefits, but they may not be the most significant advantage.

The biggest advantage for individuals is when they have a capital loss and, if it’s on your books, it carries forward for at least 5 years and “may carry forward for future years”.  Visit www.irs.gov for more information of both capital gains and losses that match your unique scenario.   There is a limit for corporations.

In the future, if you have a situation where you need to take capital gains, you have this capital loss to write off against those gains or you can use the $3,000 deduction the following year.

We also strongly advocate tax planning throughout the year.  Travis Brock will elaborate on this in our next newsletter.

There are specific strategies that we use to actually harvest the loss which we will do throughout the year.  If you’re incurring a loss in the books for tax purposes, this cannot hurt you. There’s no harm in this and it’s actually a benefit.  We urge our clients to engage in a healthy conversation with their tax-preparer about this topic reinforcing the fact that a loss in an account, when evaluating the total financial and tax scenarios, is actually a positive thing because you are realizing the loss (reducing your tax liability) but maintaining the asset allocation.

There are, of course, scenarios where there is a significant investment gain, but for tax purposes individuals had a realized capital loss.   In the investment world, we consider that beautiful work!  It’s also important to note:  We can’t judge how your investments are doing based solely upon how much you’re paying in taxes, your income tax return or a portfolio gain or loss.  You have to put everything into context.

Part of our job as advisors is to assist new clients who come to us with their unique financial situations.  One scenario that we see is when an investor owns a significant number of mutual funds in their taxable account and the mutual funds have large redemptions during the year (investors get spooked and sell their shares). This forces the mutual funds to pay out a substantial amount in capital gains at the end of the year.   These distributions were unwanted and unexpected by the client since they lost money on their investments and to add insult to injury, had a large tax liability! That’s the converse of what we’re talking about here.  Because they had a significant tax liability does that mean they did well?  No, they actually lost money.  That’s the ugly opposing side of it when you lose money and have to pay taxes on top of it.

Folks who work with Financial Fiduciaries, LLC have the benefit of our staff monitoring this process closely for them.  We also provide clients with online tools where they too can track their portfolio’s progress and the tax implications.

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Ask advisor for “fiduciary oath”


Who’s On Your Side?

Friday, June 9 quietly marked an historic day in the financial services world.  As of that date, all financial advisors are required to forego any sales agenda and give advice that would benefit their clients or customers—or, if they decide otherwise, to explain how and why they intend to give advice that instead primarily benefits themselves and their brokerage company.  This rule only pertains to rollovers from a qualified plan like a 401(k) into an IRA, and to the investment recommendations for that IRA account.  But it may be a first step toward something larger.

The polls consistently show that most Americans believe they already receive objective advice—called “fiduciary” advice by the profession and regulators.  But the overwhelming odds are that they do not.  There are half a million brokers who earn commissions if they can convince you to buy an expensive alternative to the thriftier, better-performing investment options on the market.  That’s more than ten times the number of advisors who adhere to a fiduciary standard.  Government research estimates that consumers lost $17 billion a year to conflicted advice in the recommendations made by brokers and sales agents posing as advisors related to retirement plans.  This, to put it bluntly, helps explain why so many Wall Street brokers are insulted if their annual bonus is in the low seven figures.

The actual number of real fiduciary advisors may actually be lower than this discouraging figure.  A mystery shopper study in the Boston area found that only 2.4% of the “advisors” (most were almost certainly brokers) it surveyed made what most would consider to be fiduciary recommendations.  On the other side, 85% advocated switching out of a thrifty portfolio with excellent funds into something a bit more self-serving.

An article in the most broker-friendly publication imaginable—Bloomberg—recently outlined some of the ways that you can be taken in by a sales pitch and never know it.  (The full article can be found here: https://www.bloomberg.com/news/features/2017-06-07/fiduciary-rule-fight-brews-while-bad-financial-advisers-multiply. ) It notes that the brokerage industry—that is, the larger Wall Street firms, independent broker-dealer organizations and life insurance organizations—repeatedly fought the fiduciary rule in court, arguing, in some cases, that their brokers and insurance agents shouldn’t be held to this standard because, despite what they said or what the companies’ marketing materials proclaimed, they were nothing more than salespeople trying to effect a sale.  The courts refused to block the rule.

It gets worse.  Even though brokers are held to a sales standard—they are required to “know their customer” and to make investment recommendations that would be “suitable” to somebody in your circumstances (a very low standard that is appropriately known as “compliance”), a new study found that 8% of all brokers have a record of serious misconduct, and nearly half of those were kept on at their firms even after getting caught.

We don’t know how long this regulation will be in effect.  New Labor Secretary Alexander Acosta has announced that he’s studying whether the rule that requires brokers to act in the best interests of their customers is good or bad for customers, and his comments hint that he thinks you would be harmed if suddenly you were able to trust the advice you receive.  But there is one simple way to determine whether you’re working with somebody you can trust.

First, ask your advisor directly to provide written documentation that he or she will act in your best interests.  This should be no longer than a page and might be no longer than a sentence or two.  There’s even a “Fiduciary Oath” that many financial advisors are giving to their clients—without any prompting.  If the broker hems and haws, then hold onto your wallet or purse, because chances are any recommendations you receive are going to cost you money that will be disclosed in the fine print of whatever agreement you sign.





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Beam me up – instant diagnosis


Starship Medicine

If you’ve ever watched the Star Trek TV show, or any of the franchise’s movies, you’ve probably noticed that spaceship medicine is different from what we’re accustomed to.  Instead of a physical exam, on the Starship Enterprise, the doctor points a blinking device at the patient and arrives at an instant diagnosis of any health issue.

Could that ever happen in real life?  It could—and actually has.

Chip maker and tech company Qualcomm has been, since 2012, sponsoring a Tricorder XPrize Competition, offering $2.5 million to the company that can diagnose, with remote sensors, 13 health conditions: anemia, urinary tract infection, diabetes, atrial fibrillation, stroke, sleep apnea, tuberculosis, chronic obstructive pulmonary disease, pneumonia, otitis, leukocytosis and hepatitis.  The winning device would also be able to assess a patient’s vital signs, like blood pressure, respiratory rate and temperature through wireless sensors, imaging technologies and non-invasive replacements of laboratory equipment.  (A second prize of $1 million was also part of the competition.)

The social benefits of such a device are obvious: a huge percentage of the country’s health care spending goes toward expensive testing procedures, and fast, accurate diagnoses are also the key to fast, successful treatments.  Imagine a world where medical costs—including the costs of Medicare and health insurance premiums—are reduced by 30%, and people can buy a device that allows them to diagnose their own ailments.

In all, 312 teams entered the competition, including government-sponsored groups and medical corporations.  The recently-announced winner: Final Frontier Medical Devices, founded by an emergency medicine doctor named Basil Harris.

Instead of a hand-held device, the winning tricorder—called DxtER, is roughly the size of a shoe box, containing several individual diagnostic devices and sensors that patients can apply to themselves.  The devices, linked to an Apple iPad, will actually go beyond the specifications and diagnose 34 different medical conditions, in addition to the aforementioned vital signs.  The next round of the competition will look for a way to create a commercial version.




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Let’s talk about happiness – workplace, cities


Workplace Happiness—and Not So Much


What are the happiest and unhappiest jobs in the U.S. economy?   Put another way, what careers would you want to steer your children and grandchildren toward and away from if you want them to be happy during their work hours?

Recently, CareerBliss, a fulfillment-focused job search website that collects more than six million independent company reviews and three million job listings, has reported on the jobs that provide the most and least personal satisfaction.

Number one on the “happiest” list: recruiters, who basically sell the merits of their company to prospective employees.  After that, there was a strong tech theme to happiness at work.  The number two happiest job: full-stack developer—basically a programmer who creates customized web and mobile applications.  Research assistants, senior Java developers, Android developers, chief technology officers, lead engineers, lead developers, software engineers and chief operating officers round out the top ten.

The bottom job on the list was sales account manager, whose workers were considered a bit less happy than security officers.  Merchandisers, cashiers, drivers, maintenance managers, guards, sales professionals, machine operators and service technicians rounded out the bottom ten.

CareerBliss also listed the happiest cities to work in, and six of the top 20 happen to be located in California: Santa Clara (1), San Jose (2), San Francisco (5), San Diego (10), Los Angeles (11) and Irvine (19).  Portland, Oregon (3), Cincinnati, Ohio (4), Austin, Texas (6), Nashville, Tennessee (7), Boston, Massachusetts (8) and Washington, D.C. (9) were also reported to be high on the happiness scale.





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