Author: Ryan Hughes

10/16/2017 - Because it probably won't happen. Is it at least possible for you (or your fund) to beat the index? Of course it is, but it depends on which market you are playing in, your access to key information, your skill, and your luck. But in the end, the odds are simply stacked against you.

US SPIVA
US SPIVA

One of my favorite reports to read is the SPIVA U.S. Scorecard. SPIVA (S&P Indices Versus Active) publishes statistics about the performance of active funds versus the performance of their benchmarks. For those that do not know, the active versus passive debate has been going on for decades. The debate boils down to one factor: does the fund manager (active manager) believe he/she can outperform the fund's underlying index?

The answer is that passive management easily beats active management in just about every U.S. category.

The most important line item is the Large Cap category, which is the most popular and the most influential. 56.56% of funds were out performed by the S&P 500. Or a better way to phrase it, only 43.44% of funds outperformed the benchmark.

It gets worse as you increase the time horizon. Only 18.15% beat over the previous 3 years. And only 6.82% beat over the previous 15 years. In other words, if you were to invest in a random active mutual fund 15 years ago, you would only have a 6.82% chance of that fund outperforming the index.

FYI - S&P does a great job to ensure that this data is as realistic and correct as possible. They correct for survivorship bias, style consistency, asset-weighted returns, etc.

International Markets A Little Better

Other countries are not nearly as efficient as the U.S., giving managers a better chance of outperforming. Still, the odds are not in their favor.

Europe SPIVA
Europe SPIVA
India SPIVA
India SPIVA
Japan SPIVA
Japan SPIVA

What About Past Performance?

Most investors look at a manager's past performance when determining whether or not invest. One of the most important measurements is whether or not the manager can deliver above-average returns over multiple periods. However, outperforming over time has also proven to be difficult.

"An inverse relationship generally exists between the measurement time horizon and the ability of top-performing funds to maintain their status. It is worth noting that less than 1% of large-cap funds and no mid-cap or small-cap funds managed to remain in the top quartile at the end of the five-year measurement period. This figure paints a negative picture regarding the lack of long-term persistence in mutual fund returns." (S&P Persistence)

Bottom Line

As many of you know, Bull Oak Capital only invests in passive index ETFs because of this data. The odds of outperformance at the sub-asset class level is low. So why play the game? Many managers will argue that they are able to exploit inefficiencies in the market and capture that value (alpha). Perhaps they can, but most cannot. For those that have, I have a few questions:

  • Can you recreate your methodology and be able to capture that value year-over-year in a consistent manner? FYI - Managers that have proven to do this are household names and billionaires.
  • How much of that outperformance (if any) is due to skill versus luck? Are you simply riding momentum or are you style drifting?
  • How much of your outperformance is due to luck?

The truth is that most individuals can't tell whether or not a fund manager is skillful or lucky. Persistence is one important measure to test this, but not the only one. Better to not play the game at all in an effort to keep your pocketbook and sanity levels high.

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
10/16/2017


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While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.

7/11/2017 – Global inflation has been stubbornly low for quite some time, creating a difficult situation for central bankers. Of course, central bank action is highly dependent upon inflation levels. And their actions have direct and immediate influence on global stock and bond prices. The problem? U.S. inflation measured by the core PCE has undershot the Fed’s target rate of 2.0% for the previous 59 months.

As a recap, core PCE (personal consumption expenditure) excludes energy and food prices as they are extremely volatile (a breakdown of PCE is here). According to traditional economics, as the economy continues its recovery and as the unemployment level falls, the price for goods and services should rise. The logic behind this idea is that the U.S. economy is driven by its consumers (71% of U.S. GDP is consumption). So, as the economy recovers, it is safe to assume that consumption increases. Therefore, businesses selling goods and services to consumers should be able to increase price, which increases their profits.

However, we have not been seeing this, even with the unemployment rate falling to pre-2008 levels and as the economy has continued to hire workers.

U.S. Unemployment Rate. Source: Bureau of Labor Statistics

A few factors that might help explain why inflation remains stubbornly low include money not in circulation, the fall in the price of oil, and price discovery.

QE: $ not in circulation

When the topic of inflation comes up during a meeting with my clients, many mention the Federal Reserve’s “printing press.” The argument goes something like this, “If the Fed has printed all of money via quantitative easing, wouldn’t that lead to a devaluation of the U.S. Dollar, and subsequent higher levels of inflation?” Well, the simple answer should be yes, but there is a critical piece missing in all of this. The trillions of dollars (yes, trillions) that the Fed “printed” from 2008 to 2014 has not entered the economy.

Federa Reserve Balance Sheet. Source: federalreserve.gov

Quantitative Easing is not akin to printing money. QE is the process by which a central bank will purchase financial securities (usually government bonds) with a money supply that is created from the Fed. In this case, the Fed purchased the majority of those securities (bonds) directly from the U.S. Treasury. Those securities has been sitting on the Fed’s balance sheet. However, the Fed has recently hinted that they might begin to unwind these positions.

The vast majority of the cash that the Fed used to pay for these securities has found its way back to the Federal Reserve as “excess reserves” (red more on this topic here). This means that of all the dollars “printed,” the vast majority of it is not in circulation. Rather, it is on deposit at the Federal Reserve. The actual amount of currency in circulation has been increasing, but at a very gradual rate.

Currency in circulation vs. institution deposits. Source: federalreserve.org

Oil Has Collapsed

One critical reason why inflation has underperformed can be attributed to the dramatic fall in oil.

Oil is a major input in the global economy. It fuels transportation, warms homes, and is used in the making most products. If the price of oil were to rise, so would the end price to the consumer. As such, the price of oil fell over the past several years. Companies did not pass this cost savings back to the consumer. Rather, it kept those savings while keeping prices relatively stable, hampering inflationary efforts.

Amazon’s Price Discovery: Impact of Technology on Inflation

Price discovery is the process of which a marketplace (buyers and sellers) determines the price of an asset. The more information that is readily available, the more accurate the price will be to its intrinsic value. While price discovery is typically used a term when talking about stocks, futures, options, etc., it can also be used in day-to-day transactions (e.g. grocery shopping, car buying, etc.).

As technological advances continue, more and more people are connected to the online world. And with this connection, we have access to an endless amount of information. While access to the internet (whether it be from your home or work computer or your cell phone) has definitely had an impact, I think the bigger impact is Amazon.

Amazon has an incredible 43% marketshare of all online retail sales and 53% of all online sales growth in the U.S. (Slice)

It’s giant scale and automation has allowed it to compete, and win, against some of the world’s largest retailers. Simply put, these traditional retailers are having a very difficult time competing against a business that is willing to operate at a 1% margin. This has allowed Amazon to grow at an blistering pace, stealing marketshare from long-standing traditional retailers. And Amazon’s presence has allowed anyone with a cell phone or a computer to have fast and easy price discovery, often times between multiple sellers on Amazon’s platform. Amazon has brilliantly positioned itself as a market provider, not as a product provider.

Because consumers now have the ability to shop for different products and the ability to compare them against each other, this makes for a more competitive marketplace. And as the level of competition increases, the applied pressure on price increases.

Bottom Line

While these three examples may explain part of the reason why inflation levels have been so low, it likely does not explain the entire reason. Some would argue that a stagnant economy can be to blame. However, the global economy has been growing at a faster rate during the previous year, yet inflation still remains low. The question is now whether central bank intervention will finally overcome these previous inflationary headwinds in the near future. Remember, the central bank balance sheets can’t stay this inflated forever.

 

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
7/11/2017


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While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.

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1/27/2017 – President Trump intends to reshape the relationship between the United States and Mexico. From building a border wall to renegotiating NAFTA, there is a lot of change about. I decided to write about the potential impact of a 20% import tax. This is not only intended to help educate others as to what is going on, but to also help me understand the scope of this potential changes. I understand that the “suggested” import tax is only a negotiating tool to help persuade Mexico to pay for the wall. However, an import tax like this would likely have some serious ramifications. This is a complex topic that is currently in flux so keep in mind that what is published today can easily change in the days or weeks ahead.

Trade: It’s important

This really shouldn’t be said, but trade between countries is extremely important. If done correctly, it promotes progress and prosperity for all involved. 74.7% of the United States’ total trade is from 15 countries alone, and Mexico is 3rd on that list (14.2%). In terms of exports, Mexico is our 2nd largest partner at 16.0% and they are our 3rd largest importing partner at 13.3%. In total, our total trade was $531B in 2015 with a trade deficit of -$58B.

US Export Partners

US Import Partners

From Mexico’s point of view, we are much bigger piece of their trading pie. The United States represents 81% of their exports and 48% of their imports.

Mexico’s Export Partners

Mexico’s Import Partners

A 20% import tax for Mexican goods entering the US would clearly hurt Mexico as this would affect 81% of Mexico’s exports. From a trade perspective, Mexico has much more to lose than the US would if President Trump were to make good on this threat. However, imports and exports represent only a piece of a country’s economy. Think back to your ECON 101 class. If you remember, the components of GDP are as follows:

GDP = Consumption + Investment + Government + Net Exports

Net Exports is imports minus exports. So, if a country were to have a trade deficit (like the U.S. has), then Net Exports would be a drag to the overall economy (-$58B deficit in 2015). When President Trump tweets about this deficit, this is what he is referring to.

The GDP Impact

Forecasting the overall impact of a 20% import tax is a near impossible thing.  One would assume that US consumers would be able to absorb come of the 20% price increase, but it is not that easy. Take, for example, the price of avocados. If Mexican avocados were to increase by 20%, I would assume that US consumers would buy Californian avocados instead. But, if the price of Toyotas being imported into the country were to increase by 20%, wouldn’t US consumers buy a Hyundai built in the US instead? Or perhaps another alternative? I don’t know. Nonetheless, I am still interested to see which country is more vulnerable and by how much. It is a relatively easy task to calculate the nominal impact for both the US and Mexico. So lets assume that a 20% tax increase on imports from Mexico to the US were only to affect those goods and not consumption, future investments, etc. just so we are able to see a hypothetical impact.

The $74B difference (total tax enacted per year) would definitely have an adverse affect for both the US and Mexico. Under this scenario, Mexico would enter into a recession with a -5.87% drop is production (again, assuming that all else is equal) and the US would feel a -0.39% reduction in economic expansion, but not a recession. Also notice that I did not include a $74B positive amount to the US Government line item (additional tax receipts) as these funds would theoretically go towards the cost of building a 2,000 foot wall.

There are a lot of other questions that I don’t have an answer for, but should be considered:

  • Are some of these exporting/importing companies able to absorb the 20% tax rate and not pass the cost along to the consumer? Additionally, would US consumers be able to absorb a higher cost? Would they look elsewhere for similar goods (likely)?
  • Would the number of goods and services drop if a 20% tax rate were enacted? (likely) Would Mexico be able to export these “lost” goods to other countries? Likewise, would the US be able to import these “lost” goods from other sources? Or, perhaps, would we be able to create these goods and services ourselves over time?
  • Would Mexico retaliate and enact an export tax on US goods, even though they rely on our country more than we rely on them?
  • What type of social impact would this have on US consumers?

The US is clearly in a position of strength and President Trump is likely using the threat of a 20% import tax as a bargaining chip. But if he were to make good on this threat, it would likely impact us more than he would realize.

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
1/27/2017


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While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.





11/25/2016 – President-elect Trump has promised to create over 25 million jobs over the next decade and to boost the U.S. GDP to an average rate of 3.5%. He plans to do so by reducing both corporate and personal income tax rates, cutting regulation and government spending, renegotiating trade deals, promoting American-sourced energy, and rebuilding the American infrastructure (well, at least $1 Trillion worth). In this blog post, I focus only on Trump’s tax plan. Market risks have shifted and there now exists a real chance that there will be a positive fiscal change (finally), which will ultimately help drive economic growth. I believe this is a game changer to both the stock and bond markets.

Trump’s Corporate Tax Change

Let’s begin with Trump’s proposed business tax policy. Simply put, Donald Trump hopes to lower the tax rate from 35% (at the upper end) to 15% across the board. There will be no more tax brackets nor a corporate alternative minimum tax.

current-corporate-tax-rates

trumps-proposed-corporate-tax-rate

Furthermore, Trump is also attempting to bring ashore the massive amount of U.S. company cash hoard, estimated to be $2.5T (CNBC). That is nearly 14% of the U.S. GDP! He is hoping to repatriate this cash at a one-time tax rate of 10%, which I suspect a lot of corporations will act upon.

Why is this tax policy such a big deal? The market is finally going to receive a more friendly fiscal policy. Since the end of the Great Recession, we have only had monetary policy to count on to help drive demand/growth. But now, it looks like we can finally count on fiscal help in the form of tax cuts.

Trump’s Corporate Tax Change – Impact To The Markets
It is no secret that the stock market is extremely expensive with a P/E ratio of 25.36. (I have written about this topic here if you are interested in learning more.) We are currently near record valuations as the S&P 500 has reached all-time new highs since Trump was elected president.

sp500-price-trump-president

But what does a Trump presidency mean for stock valuations? A lower corporate tax rate obviously means that corporations will be able to keep more of their profits. But how much more? What does this do to the market’s valuations? This is a more complicated question that it seems as there are a lot of factors driving the market. However, I attempted to quantify the change.

To better estimate the potential change, I figured it would be best to see how a lower tax rate would’ve affected the S&P 500 in the recent past (previous 12 months). Here are the facts:

  • The S&P 500’s Net Margin (Earnings/Sales) is 7.68% (TTM – June ’15-’16)

sp500-net-margin

  • While the corporate tax rate is 35% (highest bracket), the effective tax rate is 28% (Deutsche Bank)
  • The earnings yield is a low 3.94% and the TTM as reported current P/E ratio is an astronomical 25.36!

sp-500-pe-ratio-and-earnings-yield

  • The S&P 500 receives 33% of it’s profits from abroad, which means those profits are taxed at a different rate (blended 22.60%)

I highly suspect that Donald Trump will be able to pass a business tax rate of 15%, even with a Republican House and Senate eager to pass this law. Chances are, a rate closer to 20% will be pushed through. Nonetheless, the implications of a rate cut of this size are significant.

trump-tax-plan-difference

This 2.01% to 5.36% increase in S&P net margin brings the current net margin from 7.68% to 9.69% and 13.04%. In short, I believe this is what is currently driving the stock market higher. It is an immediate boon to the S&P’s bottom line.

The next question I asked is how this change would’ve affected the S&P 500? Let’s assume that Trump is able to pass a tax rate of 20% and the corporate earning’s margin is now 13.04% (up from 7.68%). That means that the S&P 500 earnings will increase from $86.92 to $147.55 per share.

The Stock Market Return With A Tax Cut

To better comprehend the implications of a business tax cut like this, I put together a sensitivity analysis showing the effect of a tax cut and the different P/E ratios. These numbers are as of 11/25/16.

trump-tax-rate-pe-ratio-return

Trump’s Proposed Individual Tax Policy

With a Republican-led House and Senate, Trump has a real shot at reforming the US tax code, which hasn’t been overhauled since 1986. As it currently stands, the highest federal tax bracket stands at 39.6%.Here is how the federal individual income tax code looks: 

individual-tax-rates-2016

If you live in California, the highest state income tax rate stands at 13.3%, making the grand total 52.9% (39.6% + 13.3%). At this rate, the U.S. has one of the highest income tax rates in the developed world, behind only Belgium, Finland, Sweden, Aruba, and Canada. We are taxed to death here in California, especially those at the higher end of the spectrum. As such, corporate and individual earnings has been finding ways around these high income tax rates (legally and some not-so-legally).

The goal for the U.S. is to stay competitive in the global economy. Though, this is an economy that has been slowing for a number of years. The Federal Reserve and it’s monetary tools has been doing everything within it’s power to spur demand. But this tactic can only work for so long. A revamp of the current tax code can really change things. And if anybody knows the U.S. tax code and it’s failings, it’s the man that has used and abused it for the past 30+ years.

Here is Trump’s proposed individual tax rates:

trumps-individual-federal-tax-rates

Under this plan, most individuals will pay less in taxes. Though, not everybody will save the same percentage amount. In fact, according to the Tax Policy Center, higher earners will save more than those at the lower brackets.

tax-break-by-percentage-trump-tax

Other changes in Trump’s Plan include:

  • Carried interest would be taxed as ordinary income
  • The 3.8% Obamacare tax would be repealed
  • The alternative minimum tax would be repealed
  • The standard deduction would be increased from $12,600 to $30,000 for joint filers, $15,000 for single filers
  • Personal exemptions will be eliminated
  • The head-of-household filing status will be eliminated
  • Itemized deductions will be capped for joint filers at $200K ($100K for single filers)
  • The death tax will be repealed, but capital gains held until death and valued over $10 million will be subject to tax. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.
  • Childcare expenses for those under the age of 13 will be allowed as a deduction. This includes stay-at-home parents, grandparents, and paid caregivers. The Trump Plan also will allow Dependent Care Savings Accounts (DCSA), which will allow contributions to be free from taxation.

Bottom Line

Trump has yet to take the office and these tax cuts have yet to be realized. At this point, of course, this is all conjecture. However, keep in mind that the stock market (and all other markets) are forward looking. The market has begun to price in the possibility that a tax reform will occur soon. As the probability of a tax cut increases, the market will bake it into it’s price (positive or negative). I believe it is more likely than not that these tax cuts (in some shape or form) will get pushed through.

We are here to help you if you feel that you are not positioned correctly in this marketplace. Feel free to reach out.

 

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
11/25/2016


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While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.





11/3/2016 – A lot of my clients are buying real estate properties and renting them out as a strategy to help them with cash flow during retirement. So, I thought I would share what this strategy could look like.

The rental property question comes up more often than not. A lot of my clients envision themselves managing a small portfolio of rental properties while going into retirement. I suppose this goal crops up simply because we live in Southern California. Whatever the reason, investing in real estate is not for the faint of heart nor is it for those that are impatient. It usually takes years before cash flow turns positive on these investments. Nonetheless, I believe investing in real estate has its benefits, especially for those planning for strong cash flow during retirement. Keep in mind that I am not a real estate guru. I am not a local market expert, nor do I know if a specific home is going to increase in value or not. Nonetheless, I am a financial professional and I can quickly tell if a property (or a set of properties) is a good investment, given a few simple assumptions.

Before I begin, I wish to make it clear that I do not make any money if any of my clients invest in real estate. Bull Oak Capital is an Registered Investment Advisory firm. We do not participate in private/public REITS, partnerships, dealmaking, referral kickbacks, etc. I simply provide advice to my clients from a financial planning perspective. If renting out a property makes sense for a client, then I will recommend it. If it doesn’t, then I won’t.

Furthermore, I do not condone house flipping, speculative purchases, or any other type of short-term R.E. investing. I am also not condoning over-leveraging yourself. As with any other type of investment, leverage increases your risk and the potential to cause financial distress. The type of real estate planning I provide for my clients is a more conservative approach. I always plan for 20% down payments on all properties and the plan always includes a plan to pay off that debt in a reasonable amount of time. The goal is to become cashflow positive sooner rather than later, not to sell the home for a profit (though this is certainly a possibility).

Building out a real estate portfolio not only takes a time, but it also takes quite a bit of money. This is usually an option for those that have a large cash surplus at the end of the month after expenses are paid.

The Lure of Rental Income

Aside from the prospect of housing values increasing, the lure of real estate investing is the steady stream of income. In San Diego, the average apartment rental rate within the city is $2,123 per month. That number in itself is enough for those interested to begin planning. A side topic is whether or not the housing market is in a bubble. I do not know, but I suspect it is, along with most other asset classes. Nonetheless, I am intentionally ignoring current market conditions as I only hope to outline the economics behind rental properties. I am also intentionally ignoring what would happen if you were to sell a property for a gain. There are a number of tax consequences that should be considered, but that is a topic for another day.

One of the biggest headwinds to a successful retirement is inflation. If you were to retire at the age of 60 and to pass at the age of 90, that is 30 years of retirement. Let’s say that you had $1MM at retirement and you decided to keep your money in the bank, earning 0% interest. And let’s also assume that you did not touch it during those years (perhaps you were living off of another asset/income stream). What would happen to that $1MM during those years if inflation was 3% on average?

Purchase Power and Inflation

The same can also be true if one were to accept a fixed annuity during retirement. A fixed annuity does not change it’s monthly/quarterly/annual benefit. That means that the true value of that benefit diminishes over time if inflation is anything above zero.

This concept is simple, but it’s important to truly understand it. This is one of the primary reasons why we invest our funds at all; to beat inflation. Whether you are investing in stocks, or bonds, or anything else, the idea is to at least keep above the inflation rate (real return).

The Economics of Renting Out Properties

Let’s build out a model to see how this can play out. Assume that we have a 35 year-old client that is looking to buy properties and hopes to rent them out. The goal is for the client to become cash flow positive before retirement. The client would like to purchase a new property every 3 years before retiring (age 55). Here are the assumptions behind these projections:

re-assumptions

These assumptions are a bit conservative, making the positive FCF that much higher. That’s okay. It’s always better to build in conservatism in a model rather than to make overly optimistic assumptions.

Property Purchase Schedule

property purchase schedule1

As you can see, under this scenario, the client would be able to purchase 6 properties before retiring. The next step is to see what this cash flow would look like.

real-estate-cash-flow

I know this sheet is a bit daunting to look at, but focus on the last column, Net Income. This is the big takeaway from all of this. Of course, during those years when the client is putting down 20% on each property the cash flow is negative. But, over time as rental rates are increasing and as mortgages are being paid off, the free cash flow begins to grow.

The large numbers can be a bit deceiving as we are looking at cash flows that are far into the future. To help with this, here are the same numbers, but it todays 2016$ dollars (present value). These numbers help give you a better idea of what a real estate portfolio can generate in income.

pv-of-cash-flow

Managing Properties Is Not For Everybody

While owning a real estate portfolio can be advantageous, it also comes with its own risks and drawbacks. The most obvious ones are the ancillary costs:

  • Property taxes
  • Property Insurance
  • Property management company (if you choose to work with one)
  • Maintenance expenses
  • Etc.

Investing in real property also means that you are purchasing an illiquid asset. If you need to sell a property for whatever reason, it will likely take some time. Furthermore, the transaction costs are going to be astronomical. On average, you should expect ~6% for each buy/sell (3% for each selling agent).

The other obvious drawback is the headache of managing a property. Most of my clients work with property management companies to help separate themselves from this issue, but that costs money (usually 8-10% of gross rental receipts) and most management companies tend to slack off over time. I cannot overstate the importance of using a good property manager and leasing your home to good renters.

There is also concentration risk to consider. Most of the time, investors will accumulate a R.E. portfolio within a concentrated area (e.g. San Diego County). For example, if the local San Diego market were to tank (e.g. there is a recession, Qualcomm decides to leave the area, there is an earthquake, etc.), your entire portfolio will likely go down with the market.

That being said, I believe the pros outweigh the cons, if done correctly. Try to build a good team of professionals (financial advisor, real estate agent, mortgage broker, CPA, etc.) to work with you if you’ve never ventured into this field before. And of course, please take the long-term view if you do decide to pull the trigger!

 

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
11/3/2016


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While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.





9/6/2016 – Most investors have only a mix of stocks and bonds in their portfolios. This is because stocks and bonds have historically had a negative correlation. Since 2008, the SPDR S&P 500 ETF (SPY) and the iShares 20+ Year Treasury Bond ETF (TLT) has had a negative correlation of -43%. (Bull Oak Capital)

On days when the S&P 500 was down, Treasury bonds were more likely than not to help dampen those negative days. This is the whole point behind diversification. By not having all of your eggs in one basket, you reduce your risk by splitting your money between these two different asset classes. Remember, owning a stock is to own an equity stake in a corporation. To own a bond is to own a debt instrument. They are two completely asset classes that are supposed to behave differently. This behavior provides safety.

Stocks And Bonds Are Pricey

Since 2008, both stocks and bonds have provided impressive returns. In fact, TLT (the long-term Treasury ETF) has posted a more impressive return than SPY (the S&P 500 ETF).

SPY vs TLT Returns

All of this has been accomplished while still maintaining a negative correlation. The problem with the current scenario, though, is that both asset classes are now very expensive. The TTM S&P 500 P/E ratio is 25.29 (www.multpl.com). The 10-yr Treasury currently yields 1.55% and the 30-yr yields 2.24%. Remember, as bond prices go up, bond yields go down. The outlook for both bonds and stocks look bleak at best, at least under the current environment.

The Risk

In my opinion, the 2013 Taper Tantrum is an event that should be on top of every portfolio manager’s mind. During this phenomenon, bond yields spiked as the Federal Reserve reduced the amount of money it was feeding into the economy.  There was also a sharp reversal in the stock and bond correlation.

Correlation

Of course, the Federal Reserve stepped in quickly to quell any pricing concerns. The markets were cheaper back then and forward looking earnings expansions were reasonable.

However, in our current market environment, both stocks and bonds are expensive. The stock market is at its all-time high and the expectation that corporate earnings growth will continue is muted. Treasury yields are at historic lows and they are very sensitive to any type of interest rate movement. Furthermore, the Fed is expected to do very little to help accommodate asset price growth. in fact, they are expected to do the opposite by normalizing interest rates.

If your investment strategy is hinged on the idea that stocks and bonds will remain negatively correlated, despite the circumstances, you should probably rethink your reasoning. A market with rising rates would not help either asset class. A worse-case scenario is one where inflation were to pick-up. Under this situation, both stock and bond prices would be under pressure. The volatility of a standard 60/40 stock/bond portfolio would increase as the correlation of stocks and bonds increase.

That being said, this central bank-induced party may continue for quite some time. The Fed, the ECB, the BOJ, and other global central banks are very powerful entities. They may continue this NIRP/ZIRP policy for another month, another year, or even another 5 years. Who knows. But with both stock and bond prices at all-time highs, the risk/reward ratio is highly unfavorable. If interest rates do rise (Fed induced or not) or if faith in the central banks begin to wane, there is a lot of pain to be had.

The threat of an asymmetrical stock and bond selloff is too great to ignore. I believe it is wise to consider these risks more closely.

 

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
9/6/2016


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While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.





8/9/2016 – Today’s marketplace is a peculiar one. When I look at the current market, I like to think that it is similar to the children’s game of musical chairs. As long as the Fed and the other major central banks are playing their tune, everybody is happy to play along. In fact, I don’t think investors have much of a choice. However, once the music stops, it is important to make sure that your aren’t the only one left standing.

Perhaps I’m being a bit dramatic, but I think the major central banks are playing a dangerous game. Low interest rates and Quantitative Easing do not come without a cost. What that cost is, nobody knows for sure. But I suspect this debt, despite its form or who is issuing it, is just like any other type of debt. It is borrowing from the future. In the Fed’s case, by creating record low interest rates, returns (stock returns, bond returns, etc.) are brought from the future and consumed today.

“Debt is future consumption brought forward. Once debt is incurred, consumption that might have happened in the future won’t happen…We forget that debt used for consumption doesn’t create new supply. It simply pulls supply forward in time. The problem is that debt can’t do this forever. Pulling your consumption forward to the present means you will consume less later.”  – John Mauldin

Yes, returns since 2009 have been impressive. Chances are, if you’ve purchased an asset (of any type) within the past 5-7 years, you’ve done quite well. Stocks are at an all-time high. Bond yields have sank as their prices have rallied with stocks. Real property prices have rebounded.

When asset prices increase, investors assume they will continue to increase into perpetuity. It is natural to expect this. It is within our human nature to find trends where they might not exist. Though, I doubt if returns will continue to be this rich, especially if precautions are not taken.

The Problem With Complacency & Linear Forecasts

The current investment landscape reminds me of the housing market in 2006. In 2006 investors assumed that money couldn’t be lost if you invested in real estate. Of course, this was not case as it sparked the Great Financial Crisis. The investment landscape is obviously different now than it was a decade ago, but it seems that the “cruise-control” investor mindset has reemerged.

  • The mindset in 2006: “Don’t worry if your monthly mortgage payments are a little bigger than what you’re used to. You qualify for the loan. And besides, you don’t plan to keep the house for very long anyways. Housing prices only go up. Just hold on long enough until prices rally to where you can sell the property.” This example might be a little campy, but it shows the speculative nature of the real estate “investors” in the mid-2000s. And with rates so low and accessible cheap capital (thanks to Mr. Greenspan and the others at the Federal Reserve), the incentive to invest in real estate was too great to ignore.
  • The mindset in 2016: “The stock market is the place to be. With rates so low, there really isn’t anywhere else you can go to for a decent return. It’s a TINA market – There Is No Alternative. With bonds so expensive and the rest of the world slowing down, the U.S. stock market is clearly the safest place to put your money. Besides, the Fed has propped up the market in the past and they will continue to do so. It’s ludicrous to bet otherwise.” (Sidenote: These are not real quotes. They are made up by yours truly to help portray the current mindset of the common investor.)

Again, people tend to forecast returns in a linear fashion. For example, let’s assume that an asset is generating on average a 6% return for the past 3 years. It seems logical to assume that this investment will continue to give you 6% annually for the next 3 years, even though we may not have a solid basis to make this assumption.

Of course, returns are volatile. An asset may give you 10% one year and -13% the next, especially when considering stocks. When forecasting returns, volatility, for some reason, is usually not accounted for. This practice not only happens within the Investment Management community, but also within the Equity Research community. I spent a summer at Wedbush Securities within the equity research department as an intern while studying for my MBA at UCLA Anderson. My primary job at Wedbush was to create Revenue, Cash Flow, and Balance Sheet projection models for various publicly-traded securities. How did we forecast revenue/expense/cash flow streams for these companies? You guessed it. Straight-line/linear projections. And if the output of those models didn’t give us the desired price, we “tweaked” the numbers until it produced the desired effect. Of course, the inherent danger in forecasting returns in a linear fashion is that it never pans out the way you hoped it would.

Central Banks are Creating Another Bubble

According to Investopedia, “A bubble is an economic cycle characterized by rapid escalation of asset prices followed by a contraction.”  When one thinks of economic bubbles, plenty of examples come to mind. Think of the Dutch Tulipomania, the dot-com bubble, and the housing bubble. There always have been and there always will be booms and busts.

However, central bank intervention, especially recently, is exasperating this cycle. The Federal Reserve, the European Central Bank, the Bank of Japan, and others have adopted a monetary policy that has pushed asset prices beyond reasonable levels. All of this is in an attempt to spur demand/growth and to create sustainable inflation. The central banks have created an asset bubble not linked to just a single sector, asset class, or commodity, but one that is linked to all major asset classes. Some have dubbed it the Everything Bubble.

How are the major central banks creating a bubble? In short, they have a highly accommodative monetary policy in an attempt to boost spending and to spur inflation (usually a 2% target). Most major central banks already have an aggressive asset purchase program (QE – Quantitative Easing) and record low interest rates. In fact, over 1/3 of all major central banks have adopted a policy zero or negative interest rates.

Central bank rates 2016

 

A zero interest rate policy (ZIRP) and a negative interest rate policy (NIRP) is a new and untested method. Because QE is already running its course and its effect is beginning to wane, central banks are looking for alternative methods to spur demand. The ECB and the BOJ are currently buying approximately $180B in assets every month. It is important to note that this figure does not include the newly announced Bank of England QE program which is expected to start soon.

QE 180B per month

All of this, of course, has consequences. The most immediate and obvious consequence is that bond yields are at records lows.

10 yr yields

Things have gotten so out of control that Japanese, German, and Swiss bonds now have negative yields, which means that investors have to pay the bond issuer for the right of owning the bond! In fact, 1/3 of all government bonds are currently yielding a negative return.

government_bond_yields_rate

 

What about the stock market? Are stocks cheap relative to bonds? Yes. The S&P 500 currently yields more than the 10-year Treasury (2.04% vs. 1.59%). But that does not make the stock market cheap. By its own right, the stock market is very expensive, especially when margins will normalize. I’ve written about this in great detail recently and you can read more about it here.

What’s Next?

One of the great mantras on Wall Street is, “Don’t Fight the Fed.” This means that it is better to invest in a way that aligns with the Feds policy rather than against it. And for the most part I think this statement is true. However, a favorite saying of mine is, “everything is fine… until it’s not.” In October 1929, Yale economist Irving Fisher declared that “stock prices have reached what looks like a permanently high plateau” days before the market crash. In 2006, everything was fine with the housing market until housing prices began to fall in 2007. In March 2010, everything was fine with Greece until it “suddenly” needed a bailout from the EU in April 2010.  It is fine to look to the past in terms of economic expansion and government intervention, but it is also foolish to not at least consider the future. Today’s actions have consequences.

Chances are, the major central banks will continue to play its music by keeping rates low and by buying assets. For the time being, investors have no choice but to dance to its tune. However, I think it is important to note that the Fed or any other central bank cannot change major economic and demographic trends. It alone cannot reverse the trend in government outlays (specifically Entitlement Spending), an aging baby-boomer population, nor the perpetual increase in asset prices. At some point, the music will stop. This is a fact. And when the music stops, it is important that you are not the last one without chair.

 

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
8/9/2016


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While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.





6/26/2016 – Brexit “Black Friday” cost investors over $2 trillion in market wealth (CNBC) as global stocks fell -5.4%. Here in the U.S., the S&P 500 was down -3.60% and in Europe, the STOXX 50 was down -8.62%.

markets 6-24-16
Brexit was largely considered an unforeseen event, a black swan event perhaps. I personally believe it is the largest financial shock since the 2008-09 financial crisis. Will this lead the markets down further? Nobody knows for sure, but the odds of a market selloff have certainly increased. Though, Brexit is not the only stressor on the global markets (e.g. tepid global growth, high stock valuations, declining corporate earnings, etc.). I have been talking about these stressors for quite some time now. See previous posts here, here, and here
Cl5Mi9xUoAAXQJL.jpg-large

Brexit: Why It’s A Big Deal

The United Kingdom is the 5th largest economy in the world, behind only the U.S., China, Japan, and Germany. (World Bank) No doubt about it, the UK leaving the European Union is a major geopolitical event. This is the first time since WWII that Europe has suffered a major decrease in it’s economic alliance with each other. And this is happening in a region that is already plagued by slow growth. The Bank of England said on Friday morning, “We are well prepared for this.” It will likely cut its main interest rate (currently 0.5%) and even revive its quantitative easing efforts. Nonetheless, a recession in England certainly seems likely. 

Because an event like this has never happened before, the fallout is extremely difficult to forecast. Though, here is my attempt to see how it will affect the UK: 

  • UK corporate investment will slow due to the uncertainty of the future between the UK and EU. The UK has participated on trade deals which have been negotiated by the EU. The future of those deals is now in question. 
  • Consumer spending will slow as recession fears mount and as the British pound collapses. The collapsing pound might also drive up inflation, which would also hurt real income rates. 
  • The UK unemployment rate will also grow as companies seek to limit spending and to shore up balance sheets. 
  • The European economy will also likely slow, possibly contracting into negative rates as the EU copes with a departing UK. Though, the reduction in GDP growth will likely not be as severe as the UK. 

How the rest of the world will be impacted by a Brexit is much more complicated. The world economy is already fragile, so the risks are real. Here is my guess as to how things might play out: 

  • Southern European countries will see bond spreads rise as the risk for further EU exits mount. 
  • A weaker Europe will hurt Chinese exports as European currencies weaken and as consumer demand softens. 
  • The Chinese Yuan will likely fall in anticipation of this new possibility. 
  • The U.S. Dollar will strengthen on weakening European and Chinese currencies and on the falling probability of a Federal Reserve interest rate hike. 
  • Oil prices will likely feel downward pressure on lower demand and a stronger dollar. 

Because there is so much uncertainty regarding the future of the UK and the EU, market volatility will certainly remain high. How quickly the UK and the EU negotiates a trade deal will help alleviate market concern and volatility. If a deal is passed relatively quickly, the damage can be (theoretically) minimized. However, the markets on Friday have indicated that this might not be the case. Furthermore, if Britain is able to execute a favorable trade agreement in a short amount of time, might not other countries in the EU likely attempt to do the same?  And isn’t this what the EU hopes doesn’t happen?

Elected Officials: Wake-Up Call

More than anything, Brexit should be seen as a wake-up call to all western elected officials. Rising inequality and low growth promotes frustration among its citizens. Brexit represents the division between the politician’s hopes for what the majority of people should do and what the majority of people are willing to do. So far, central bank intervention (e.g. U.S. Federal Reserve, European Central Bank, etc.) has been the primary driver of economic growth. There has been little, if any, positive contribution from elected officials. This, or course, is not sustainable. Politicians need to take the necessary steps to promote higher growth. And these steps should include the majority of its people, not just a selected segment. Otherwise, similar (and seemingly improbable) events like Brexit are sure to occur again. 

How My Clients Fared

As a litmus test to see how well my clients performed on Friday, I compared the three Bull Oak strategies returns versus the major benchmarks:

6-26-16 daily return
While I cannot control the markets nor their returns, I can control how my clients participate. Bull Oak clients can rest assured that their portfolios are well positioned in this environment and that I will continue to make the necessary changes as economic changes occur. 

 

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
6/26/2016


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While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.





6/2/2016 – The S&P 500 is yet again trying to reach its all-time high (reached a year ago, May 2015). As I write this, the index is within 2% of this high. 

Screen Shot 2016-05-30 at 12.45.36 PM

Almost a year ago today, I reallocated all of my client’s portfolios into a defensive position due to the increased risk of equity prices. You can read more about that call here. The move paid off. Since then, we have seen a number of sharp selloffs, only to see the stock market bounce back again. 

There are a number of factors that influence the stock market on a day-to-day/ month-to-month/ year-to-year basis. And these factors certainly change as market conditions change. Recently, the markets have ground higher, despite elevated valuations and a looming Federal Rate rate increase. The increased probability of rising interest rates has sent U.S. Treasury yields higher earlier this month. Solid job gains, inflation, and rising wages have given the Fed a reason to be more optimistic to act sooner rather than later.

Global stocks remain extremely vulnerable as stock valuations have soared. Investors have shrugged off global recession fears, a Chinese currency devaluation, and an oil-price collapse. Short-term risks include a Brexit, a Fed that is likely to raise rates, a worsening European immigration crisis, and a slowdown in global growth. Stocks will look more attractive ONLY if the earnings outlook increases or if stock prices correct downward. I believe the latter to be more probable.

In an academic setting, we are taught that stock returns can be explained by using the Fama-French 3-factor model (or the Carhart 4-factor model, which includes momentum). The 3 factors are: 1. company size, 2. company Price-to-Book ratio, 3. market risk. The 3-factor model is helpful when analyzing a specific stock or a portfolio of stocks, but not when analyzing the market as a whole. As such, I thought I would create my own list of what is the most important factors currently driving the market. 

Factors Driving the Market

Market Sentiment: We are human beings and we tend to be moody. If we perceive the economic landscape as generally positive (solid economic growth, decent consumer demand, etc.), then this is considered a boon for share prices, dividend boosts, etc. While difficult to quantify, I am increasingly convinced that the investor psychology plays a bigger role in equity returns than most give credit to.  

Monetary Policy: The Federal Reserve is the most powerful central bank in the world. The Fed has a dual mandate:  inflation and unemployment. Though its official objective is to maintain “maximum employment, stable prices, and moderate long-term interest rates.” While the Fed cannot control these figures directly, it can use indirect tools, such as Open Market Operations (purchasing government securities), reserve requirements, and the discount rate.  

Fiscal Policy: A country’s fiscal policy is to be used in conjunction with it’s monetary policy to bring forth a more effective economic strategy. A country’s fiscal policy is used to command a government’s spending policy and the country’s tax code. 

Valuation: The overall valuation of the stock market is an important factor that drives stock prices. One of the most common metrics in valuing the current stock market is the Shiller P/E Ratio.  

Momentum: Despite coming across as somewhat ridiculous, momentum is a fantastically powerful force. Investors can drive stock prices much higher, far above fair value as well as driving the stock market well below fair value. Why and how does this happen? Well, momentum is closely related to investor psychology, as earlier mentioned. Investor motivation can boil down to two main fears: the fear of missing out (greed) and the fear of losing money (panic). 

Economic Growth Expectations: GDP growth is a lagging indicator, though economists project what future GDP might be. This expectation certainly influences current stock prices. 

Equity Growth Expectations: If a company is expected to make more money in the future, its stock price should reflect this expectation immediately. Likewise, if the company is expected to make less money, its stock price should fall accordingly. This important concept is the basis for the remainder of this newsletter. 

The Corporate Earnings Problem

Ignoring the tepid economic growth expectations, slowing equity momentum, lousy fiscal policies, and a hawkish Federal Reserve, the biggest concern for equity prices is the lack of corporate earnings. A rising stock market after a 7-year bull market rally is not a concern, as long as its earnings continue to grow along side it. However, earnings have been stalling, slowing for the past 3 consecutive quarters.

SP500 EPS disconnect

Companies are on track to slow for a fourth consecutive quarter. The last time that this happened was during the 2008 financial crisis. 

Just how expensive is the current stock market? The current forward P/E multiple for the S&P 500 is 16.62, which ranks in the 86th percentile of all recorded instances. Goldman Sachs put together a fantastic table of different valuation metrics to help show how expensive this market is.  

GS Expensive Market

Of course, all of this could change if sales/earnings begin to expand again. However, I am hesitant to forecast that sales/earnings expectations will grow due to the marginal global economic growth. Here is how corporate earnings have fared so far:

margins 2

The best way to look at corporate earnings is by evaluating its profit margin as it is a measurable metric over time. With the oil crash, the energy sector has been experiencing an extreme earnings contraction. One would think that this sector is the lone culprit bringing down the rest of the index. However, the energy sector only makes up 7.1% of this index. And the S&P 500 ex-Energy profit margin has still experienced an earnings decline. Furthermore, it is unwise to carve out certain sectors from the overall market, despite how unique the circumstances may seem at the moment. Remember, the Tech Bubble was caused by a single sector and it crash brought the rest of the index with it. All markets are related and tied together in one way or another.

Advice From A Pro

Stan Druckenmiller is one of the greatest investors you have probably never heard of. He ran a hedge fund, Duquesne Capital, from 1981 to 2010 before stepping down and deciding to only manage his personal family fund ($1 billion in assets). Amazingly, he never had a money-losing year during that time and he averaged an annual return of about 30%. (Wikipedia) Druckenmiller still shares his thoughts regarding the global markets and he often makes financial media appearances. 

stanley-druckenmiller.png

In November 2015, he cut his U.S. stock allocation by 41% and issued this warning to investors, “I’m working under the assumption that we may have started a primary bear market in July.” In May 2016 during a New York City investor’s conference, he said, “the bull market is exhausting itself” and provided several reasons why he is bearish.

– The CAPE ratio (a long-term view of the stock market’s valuation) shows that the S&P 500 is 55% more expensive that it’s historical average.

– Stocks are near record highs, even though earnings have fallen for three straight quarters.  

– U.S. corporations have issued too much debt and they are using this debt not to invest in itself, but to pay for acquisitions and/or share buybacks. Druckenmiller calls this “unproductive corporate behavior.” 

– The Fed’s monetary policy has no end game. “They stumble from one short-term fiscal or monetary stimulus to the next despite overwhelming evidence that they only produce a sugar high and grow unproductive debt that impedes long-term growth.”

If the Fed doesn’t have an end game, Druckenmiller says that the stock market does. “(T)he continued decline of global growth despite unprecedented stimulus the past decade suggest we have borrowed so much from our future and for so long that the chickens are now coming home to roost.”

In conclusion, all three of my portfolios, Conservative, Moderate, and Aggressive, remain defensive. The stock price/earnings gap has to close at some point. Either earnings have to expand to realign with stock prices or the stock market has to decline. With the headwinds as strong as they are and with equity upside limited, the prudent decision is to remain cautious and patient. 

 

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
6/2/2016


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While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.





5/3/2016 – Prince died unexpectedly in Minnesota on April 21st and the cause of his death is still a mystery. There are reports that Prince died from AIDS, from an overdose on cocaine or from Percocet, from influenza, or from other causes. None have yet been confirmed.

Prince 1

His death leaves behind an immediate estate worth $300MM. He also leaves behind his publishing rights and master recordings. His manager, Owen Husney, estimates these assets alone to be worth $500MM. One would assume that with an estate this large that Prince would’ve put together an estate plan, especially if the estate is worth ~$800MM. However, his sister Tyka Nelson has recently stated that he did not leave behind a Will or any other testamentary documents. As such, Tyka has filed papers petitioning for a special administrator to oversee her brother’s estate and said that immediate action is needed to run Prince’s business affairs. She asked that Bremer Trust be named administrator during the interim. Prince is known to have taken direct control over his own image, name, likeness, and his recordings, so the revelation that a will was not drafted is shocking.

Tyka Nelson

Without an estate plan, a complicated case like this will surely last years in court. Prince was twice divorced with no children and his parents preceded him in death. Prince has one sister, Tyka, and had 7 half siblings. However, two of his half-siblings have passed, leaving the other 5 as possible heirs. Under Minnesota law, half siblings are considered as full siblings. This means that his estate could be split 6 ways (the 5 half siblings plus Tyka). If it were as easy as this, each sibling would receive ~$133MM in assets ($800MM/6). However, we don’t know if there are any debts unpaid, if these assets can be evenly split, if there are other possible heirs,  what the legal costs will be, or if the publishing rights and master recordings really are worth $500MM. Further, since Prince’s death on April 21st, more than 2.3 million songs and over half a million albums have been sold, increasing the estate’s value. 

All of this could have been avoided if Prince would’ve drafted an estate plan. Not having a will means that the state will determine how Prince’s assets will be divvied up. Not having a trust means that the this will not be a private manner. All of these court documents and proceedings will be open to the public. While there is no perfect time to draft a plan, it is always better to have one created sooner rather than later. As Prince’s passing has pointed out, both life and death can be unexpected.

When To Draft An Estate Plan

Usually the best time to put together an estate plan is when there is a big life event (e.g. marriage, buying a home, having children, etc.). If you are young and if you a small asset base, then you might not be compelled to draft a will or to create a trust. Though, if you are married with children and if you are starting to accumulate wealth, you should seriously consider it.

As a financial professional, I have come across many individuals with a sizable estate that have yet to put together an estate plan. Unfortunately, I have also worked with clients that have inherited assets that have gone through probate. It is a terrible, lengthy, and costly experience that often leaves the heirs unhappy. My primary job is to not only manage my clients wealth, but to also help them protect it. When I meet with my clients during a financial plan fact-finding session, I always ask if they have a will and/or a trust. I also ask when it was last updated. Having an estate plan is great, only if it is relevant. If you have been divorced or if you have had any children since the plan was established, it is time to update. A best practice is to update the plan every 3-5 years.

You should always consult an estate attorney when creating an estate plan. It may cost you a few thousand dollars, but it is a lot better than having nothing at all. LegalZoom and other online services are great at creating a “boiler-plate” wills and trusts, but they often fail to account for specific situations and they do not fully encapsulate your financial and family situation. Good estate attorneys are well worth the cost.   
 

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
5/3/2016


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While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.