Somewhere between colossal and titanic. Apple, the largest publicly traded company in the world, has a market capitalization of $2.4 trillion. If it were its own country it would be slightly less valuable than all the publicly-traded stocks in Germany and slightly more valuable than those in South Korea. Microsoft is worth $2.2 trillion, a little less than South Korea, but worth more than Australia. Google and Amazon are worth $1.8 trillion and $1.7 trillion respectively, less than Australia but more than Brazil. Facebook’s value of $1.0 trillion is greater than all the stocks in Russia and Spain. Tesla and NVIDIA are worth $700 billion and $500 billion respectively, not good enough to make the trillion-dollar club, but good enough to be worth more than the stocks of Mexico or Indonesia. The stock markets of those two countries are worth about the same as JP Morgan Chase.

Each of these countries has hundreds or thousands of publicly traded companies and some of the most recognized brands in the world. The eight of them represent over $13 trillion in GDP and just shy of 1 billion in population. The eight American companies on the other hand are slightly more valuable on a market capitalization basis, have $1.5 trillion in revenue, and employ 2.2 million people. Simply put, the largest U.S. companies are very valuable.

American brands are strong, but there’s a world of growth potential if we look overseas. That’s one of the many reasons we continue to hold international stocks.

The following table summarizes the figures mentioned above.

Trying to time the market is nearly impossible; there is no way to predict when the market is going to perform well and above what we expect it to. However, by buying and holding a low-cost, globally diversified portfolio, we know that we will not miss out on the returns of the top performing days in the market. Take the hypothetical situation below from our friends at Dimensional Fund Advisors which shows how the impact of missing just a few of the market’s best days can be profound.

A hypothetical $1,000 in the S&P 500 turns into $138,908 from 1970 through the end of August 2019. Miss the S&P 500’s five best days and that’s $90,171. Miss the 25 best days and the return dwindles to $32,763. There’s no proven way to time the market—targeting the best days or moving to the sidelines to avoid the worst—so history argues for staying put through good times and bad. Investing for the long term helps to ensure that you’re in the position to capture what the market has to offer.


Source: Dimensional Fund Advisors

Are you 70 ½ or older? Do you still need to take part, or all, of your required minimum distribution (RMD) from your IRA? Are you planning on making any charitable donations before the end of the year? If the answers to these questions are yes, consider making the charitable donation(s) directly from your IRA. According to the IRS, “[a] qualified charitable distribution (QCD) generally is a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions.”

Making a QCD excludes the distribution from income (up to $100,000 per person, per year), and counts towards your annual distribution requirement. Excluding the IRA distribution from income is more beneficial than taking a charitable deduction in most cases. However, for those taxpayers who will claim the standard deduction, making a qualified charitable distribution is even more attractive.

Jane, age 72, has a $1,000 distribution requirement from her IRA that must be taken by the end of the year. She also wants to make a $1,000 donation to her favorite qualified 501(c)(3) organization in December. Jane files a joint tax return with her spouse and has no itemized deductions besides her state income and property taxes, which are capped at $10,000.

Jane is better off making a qualified charitable distribution of $1,000 from her IRA to her favorite charity, rather than receiving the distribution and donating the cash. The reason is that Jane will take the $24,400 standard deduction under either scenario. Therefore, excluding the $1,000 from income is more advantageous than taking the income and a subsequent charitable deduction, which she will not actually end up taking on her return.

Making a qualified charitable distribution is fairly straightforward. Contact your IRA custodian, or Rockbridge advisor, and request a distribution. Make sure the check is made payable directly to the charity and not in your name. Request that no taxes be withheld from the distribution at either the federal or state level. Finally, have the check sent directly to the charity (if the custodian requires the check get sent to the IRA owner, make sure to forward the check to the charity as soon as possible).

If you are considering making a QCD, please keep in mind the following:

  • You must be at least 70 ½ year old when the distribution was made.
  • You must obtain an acknowledgement letter from the charitable organization containing certain information required by the IRS.
  • If your IRA contains both pre-tax and after-tax contributions, be sure you check with your accountant or Rockbridge advisor before making a QCD.

While making a QCD is generally more advantageous from a tax standpoint than taking the IRA distribution and taking a charitable deduction, everyone’s situation is different. Be sure to check with your accountant or Rockbridge advisor if you think this technique may be right for you.

In the last year, interest rates have fallen dramatically. At the end of the 3rd quarter in 2018, the yield on a 10-year note from the U.S. Government was 3.05% and today it stands at 1.68%. This decline in interest rates is unusual, but not unprecedented. Given the vast resources of the world’s largest money managers, banks, insurance companies, and universities, surely someone saw this coming.

By and large no one did, and, unless we see a rise in yields in the fourth quarter, no one will be very close. The data above comes from the Wall Street Journal Economic Forecasting Survey. Each month, the WSJ surveys over 50 economists on a wide variety of things, one of which is what they expect the U.S. 10-year Treasury bond will be yielding at a future date. The chart shows what each economist predicted, versus what actually happened.

The difficulty in forecasting rates is well shown by looking at yields at the end of June. Nine months prior, the world’s leading economists’ predictions ranged from 2.75% to 3.94% with an average of 3.40% and a standard deviation of 0.28%. The actual yield on June 30th was 2.00% or 5 standard deviations below expectations. A 5 standard deviation variance should happen 1 out of every 3.5 million times, or effectively never, when events are normally distributed. This reinforces what we already knew:  markets aren’t normal, and people can’t predict them.

As we’ve seen here with interest rates, it is very difficult to time markets, getting in or out at the right time to take advantage of the market’s next move. Smart and highly compensated people who work on large teams with unrivaled access to data spend all day trying to forecast the market. And still, they are wrong as often as they are right.

The best-case scenario for average investors trying to time the market is that it will insert an element of chance into their financial lives. For those willing to accept a materially less comfortable retirement for the chance at having a relatively lavish retirement, market timing may make sense. But that is not most people, and the universe of investors who try to time the market on average underperform for the following reasons:

  1. Excessive Costs: Market timing requires buying and selling positions which comes at a cost. Every time you transact a security you cross a bid/ask spread and some securities come with a fee to trade. While small individually, when done repeatedly these little costs add up. Some use options to time the market. Options are a terrible investment over the long run. Options trading is like playing in the poker room at a casino. With every bet you make, there is someone else on the other side. The only one sure to profit is the house.
  2. Holding Cash: Most who try to beat the market end up holding an unnecessarily large amount of cash for extended periods of time. As cash is a poor long-term investment, this generally reduces returns.
  3. Poor Decisions: Theoretically, every future movement in the market is random, securities are efficiently priced, and investors should not be able to pick winners or losers. Still, there is data that shows the average investor who trades frequently has an uncanny knack of buying high and selling low. The psychology of investing is difficult for anyone to master and frequently instincts work against investors.

The markets future movements are unknown, even to “experts.” Timing the market or picking stocks will usually hurt your wallet, not to mention the mental stress that comes with it. Having a long-term strategy and sticking with it is the best way to build wealth in the long run and to position yourself for an enjoyable retirement.

Stock Markets

It was generally an off quarter for stocks, except for Real Estate Investment Trusts (REITs). The year-to-date numbers look good. Recent periods show variability among individual markets as well as within various time periods – REITs continue to do well, no doubt reflecting declining interest rates. One theme running throughout the past ten years’ stock returns is the better-than-average numbers for domestic stocks versus international stocks.  While this behavior is clear by looking back, investment decisions are made by looking ahead.  Markets have no memory so we can’t bank on superior results from domestic markets continuing.

Another theme in these ten-year numbers is that the domestic large-cap market (S&P 500) returns consistently exceeded those of other benchmarks. Expected earnings and growth drive stock returns, and any surprises that alter these expectations produce volatility.  S&P 500 stocks are well-followed by analysts; there is no reason to think that they will consistently provide positive surprises.  So, what’s going on?  It may be simply that S&P 500 stocks are the default investment when investors desire more risk in the face of anemic returns in other markets.  These results are by and large unrelated to company earnings and investments opportunities – suggesting a “passive management bubble”.  If that explains some of what is happening, then the relative results in this market won’t go on forever.

We know that maintaining a globally diversified stock portfolio has the best chance for long-term success.  However, because domestic markets, especially the S&P 500, are so popular and familiar, it has been especially difficult for investors to maintain strategic commitments among several other markets this time around.

Bond Markets

A yield is what you earn by holding a bond to its maturity. Changes in yields drive returns – falling yields are positive; rising yields negative.  The longer a bond’s maturity, the greater the impact a given change will have on prices and returns. 

The Yield Curve is a picture of how these yields vary across several bond maturities.  Shown to the right are U.S. Treasury securities a year ago (September 2018), at the end of last quarter (June 2019) and today.  Not only can changes help us better understand bond returns, they can also be useful predictors of the direction of interest rates.  The sharp fall-off over the past year means positive bond returns, especially at the longer end – the long-term Treasury benchmark (7-10 yrs.) earned nearly 10% while the short-term benchmark (1-3 yrs. Treasury) earned only 3%. Bond returns were positive over the past quarter reflecting the downward shift in the Yield Curve.

Last year’s curve is typical; the more or less “flat” curve we see today is not.  However, it is consistent with expected lower rates in the future.  The story behind this prediction is that the Fed will continue to reduce rates to fight the upcoming economic decline. However, while there is some indication of a slowdown, neither the stock market, nor labor markets (where unemployment is at historical lows) seem to anticipate much of a slowdown.  The recent cut in interest rates is more in response to political pressure – at these levels the effect of any decrease will be mostly perception.

Recessions and the Tools to Respond

There is a lot of noise about a coming recession.  While the numbers still look reasonable, the tools to respond may not be as potent this time around. The hue and cry for the Fed to reduce interest rates notwithstanding, and with rates at historically low levels and massive Treasury securities on the Fed’s balance sheet, there is not much room for monetary policy to make a difference. As far as fiscal policy is concerned, the Government is already running substantial deficits due to the recent tax cut.  The positive impact may be behind us and with today’s political dysfunction, the opportunity to do more with fiscal policy may not be available.   A lot of uncertainty – little wonder the stock market is volatile.  With the large tax cuts in place and an accommodative Fed, we have enjoyed a nice ten years that may be difficult to repeat.

The word “recession” makes investors feel uneasy and with good reason; the correlation between a bear market and an economic recession is very high. For anyone with money in the stock market, especially those nearing retirement, this can be scary. The “r” word has been making headlines in recent months as investors worry about trade wars, the yield curve inverting, and drops in manufacturing activity. In this piece, we’ll unpack what a recession is, what it means for markets, and what can be done to protect a portfolio against one.

A recession is defined as a period of two consecutive quarters where economic activity declines on an inflation-adjusted basis. The main cause of this is economic activity decreasing; however high inflation and population growth can play a factor as well. For example, Japan has had three recessions in the last 10 years as their population has shrunk by 1.52%.

In the United States, economic activity is measured by the Bureau of Economic Analysis’ calculation of Gross Domestic Product (GDP). This measure takes three months to publish and is then revised each of the next two months before we are given a final reading. Because of the definition and the time it takes to report, we don’t know we’re in a recession until 9 months after it is upon us.

Regarding impact, we analyzed the six recessions we’ve seen over the last 50 years.

For example, in November 1973, a 16-month recession began in the United States which saw GDP shrink by 3.2%. The stock market peaked 11 months prior to the start of the recession (December 1972). It took 21 months to bottom out with a loss of 45.6%. During that time international stocks dropped 29% and five-year government bonds rose 4.5%. Fourteen months after the bottom, a balanced portfolio recovered all it had lost.

A recession’s impact on the market varies. Sometimes the impact is small (the drop we had in Q4 of last year was worse than the market’s reaction in three of the recessions) and other times it is very large. The thing that struck our team was how quickly a balanced portfolio recovers from a recession. A 60% stock portfolio that is diversified among international stocks, and is rebalanced quarterly, recovered on average 9 months after the market bottom. When you’re living through the drop, it can feel like a long time, but for investors whose money has a 30+ year investing horizon, it isn’t that long.

Another thing to remember is we don’t know when/if the next recession is coming. The Wall Street Journal Survey of Economists puts the odds of a recession in 2020 at less than 50%. Australia has gone 28 years since their last recession.

While there is no such thing as an average recession, let’s play one out. Say we begin a recession in January of 2020. We won’t know it’s a recession until next September. The market will have peaked this past July and will drop 31% before bottoming in October of 2020. A diversified 60/40 portfolio will decline 13.3% and recover those losses by July of 2021. Again, it’s not fun, but it’s not the end of the world.

And to reiterate, we don’t know when or if this will happen. We’d bet a lot of money a recession won’t start in January of 2020, not because we think we know what the economy will do, but because it’s a low probability event. In the 48 hours we took to research and write this piece, we’ve had a bit of good data and positive news from trade negotiations. The market is up 2.7% over that time and the headlines talking about a recession have vanished. That could easily change; the only point is that no one knows, and headlines are fickle and sensational.

If the fear of a recession is keeping you up at night, it’s a good idea to reach out to your advisor and discuss your asset allocation. A financial planning best practice is to periodically make sure you’re appropriately allocated for your long-term goals and individual risk tolerance. But alterations that are “short-term” by nature or “tactical” are usually mistakes. As Peter Lynch (one of the most successful investors of all time) once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” Our job as your fee-only fiduciary advisor is to make sure you don’t prove Peter Lynch right.

Whether it’s your first house, you are relocating to a new area, or you are upgrading to your “forever” home, buying a house is one of the most significant purchases you will make. Properly budgeting for the costs to buy, finance, and maintain the new home can help set you up for financial success and keep you from feeling “house poor.” While there are many considerations that go into finding the right house for you and your family, reviewing the points below will start you off on a solid foundation (pun intended!).

How much can you afford? – 3 primary rules of thumb include:

  • Maximum purchase price is 3x your gross household income.
  • Housing-related payments (mortgage, taxes, homeowner’s insurance) should be less than 28% of your monthly gross household income.
  • Total debt payments should be less than 36% of your monthly gross household income.

What type of mortgage to get and how much to put down:

  • The most common types of mortgages are conventional mortgages. Conventional mortgages have a fixed interest rate and vary in duration, with 15 or 30 years being the most common.
    • A 30-year mortgage will generally have the lowest monthly payment but a higher interest rate.
    • A 15-year mortgage is the opposite. Your interest rate (and therefore the overall cost of the mortgage) will be lower, but your monthly payments will be much higher.
  • Regardless of the term length, lenders typically require you to make a down payment of 10% to 20% of the purchase price. If you put less than 20% of the purchase price down, you will likely be required to pay Private Mortgage Insurance (PMI). This insurance protects the bank in case of a home mortgage default and is typically between 0.5% and 1% of the loan amount each year.

What are some of the other costs to consider?

  • Property taxes and homeowner’s insurance – Property taxes can add a significant amount of cost on a home. Taxes vary by state and by county; however, it is not unreasonable to assume that if you are targeting a $1M+ home, you should estimate paying $25K to $40K a year in property taxes. Property taxes may be included as a portion of your monthly mortgage payment, or you may need to pay them directly during the year. Don’t forget to take advantage of state programs, like New York’s STAR program, which can reduce your property tax burden. While not nearly as expensive, homeowner’s insurance goes up as the purchase value of the home increases. It may be advantageous to bundle your various insurance policies together through one carrier. Often insurance companies will provide discounts for having homeowner’s, car insurance, umbrella policy, etc. with them.
  • Closing costs – Most mortgages will have some form of closing costs associated with them. The fees cover the loan recording and processing, attorney costs, title insurance, appraisal and various other new mortgage requirements.   Expect closing costs to be approximately 2%-5% of the loan value.
  • Maintenance and upkeep expenses – Homes can be expensive to maintain. Routine repairs and improvements on an older home can be a few thousand dollars a year. Major repairs such as replacing the roof, or damage from a weather event, can cost tens of thousands of dollars and can be unexpected. Plan on budgeting about 1% of the home value for annual maintenance.

 How to title the property?

  • Tenants by the Entirety (TBE) – For married couples, this is typically the default titling option. Advantages of TBE include creditor protection in certain circumstances and probate avoidance when the first spouse passes away. Just like with owning property as joint tenants with rights of survivorship (JTWRS), the deceased tenant’s share passes to the surviving tenant via operation of law and not through the decedent’s Will or revocable trust.
  • Tenants in Common – In some instances, it will be advantageous to own the property jointly as tenants in common. The main difference between tenants in common and TBE or JTWRS is that each tenant can direct the passing of their interest through their Will or revocable trust. This is advantageous if real property is needed to fund a testamentary trust, such as a credit shelter trust.
  • In Trust – For those using a revocable trust (or trusts) as part of their estate plan, making sure to title the property in the name of the trust(s) is essential. Usually the attorney who drafts the trust will also draft a deed to transfer existing property into the trust(s). If a trust is already in place and you are purchasing new property, the new property should be purchased directly in the name of the trust(s).

So, whether you are purchasing a first home, a forever home, or perhaps a second (or third) property, there are a number of considerations (financial and otherwise) that should be reviewed beforehand. Proper planning will not only help you acquire the house of your dreams, but can also help make sure that dream does not end up in a financial nightmare down the road.

Most people think of bonds like Certificates of Deposit (CDs). You loan someone money, they give you interest each year, and then at the end of the contract you get back the full amount you initially lent. Over that time, your return should be whatever the interest rate was and if you think of it from a cash flow perspective, at any point during that period your return should also be that (positive) interest rate.

But in reality, bonds can lose value over shorter periods of time, even if they don’t default. Last fall, we published a piece discussing this phenomenon. At that time, we had many clients reaching out with well-founded concerns that their bonds were losing money. Since then, bonds have gone up in value as interest rates have fallen. We haven’t yet had any concerned clients asking why their bonds have made so much money in the last 12 months, but we figure calls will soon be coming (haha). As your favorite Syracuse based fee-only fiduciary advisor, we wanted to revisit the issue to help explain it again.

Let’s say an investor bought a $1,000 face value, five-year bond that paid 2.0% for $1,000 (par) when it was issued. A year later, the investor has received $20 in interest payments and now owns a four-year bond. But market conditions have changed, and new four-year bonds are being issued with a yield of 3%. If the investor wanted to sell the bond he or she bought last year, other investors wouldn’t pay full price for something that will give them 2% when they can get 3% out in the market. As a result, the original investor would have to sell his bond at a discount. In this case, the investor would probably only be able to get about $960 for this bond. This combined with the $20 in interest leaves the investor with $980 in proceeds on something that cost $1,000. This works out to a loss of 2%.

Over the last year the opposite has happened. Interest rates have fallen and the returns on bonds have exceeded their yield.

To complicate things further, most of our investors don’t own individual bonds, but rather bond funds. These funds own thousands of individual bonds and are constantly buying newer, longer dated bonds with the proceeds from maturing bonds. Through this process, the bond fund never matures and maintains a somewhat steady duration.

The most common fund our investors own is one which tracks the Bloomberg Barclays Aggregate Bond Market. The following table shows a first cut at how this fund has performed over the last year.

The decline in interest rates of 1.02% would lead to an estimated 6.12% increase in the mark to market value of the bonds it is holding. Over the last year it has also earned an estimated 2.58% in interest for a total return of 8.7%.

In reality, aggregate bond funds are up roughly 11%. The reason for the difference in this and the 8.7% we calculated above is two-fold.

  1. The majority of the decline in interest rates is from longer-dated bonds which appreciate more when rates fall. For example, a year ago the 1-month treasury yield was 2.11% and today it’s 2.05% – almost no change. However, the 10-year yield was 3.06% and today it’s 1.55% – essentially half of what it was a year ago! This different change in yields of different maturities has caused funds to appreciate more than you’d expect from their change in interest rates.
  2. The second and less impactful factor is that interest rates haven’t fallen in a straight line over the last 12 months. Interest rates peaked in November and still stayed relatively high until about May of this year. More time with higher interest rates means the interest earned over the last 12 months will be higher than our 2.71% estimate from the average.

The last 12 months has been great for bonds. Unfortunately, it’s nearly certain the next year, or five years, won’t be as good. Still, bonds add value to a portfolio by reducing volatility and earning a positive return over time. If you have any concerns regarding your bond holdings and how they impact your financial plan, please contact your advisor. It may be tempting to alter your investments based on future predictions of interest rates, but history has shown this to be difficult. Look for an article in our next newsletter documenting how poorly expert predictions were a year ago.

Stock Markets

Stocks rebounded nicely. Tech stocks (FANGs – Facebook, Amazon, Netflix, Google) after leading the way down in last year’s fourth quarter (off 22%) led stocks back up (up 23%). A global stock portfolio earned about 12% this quarter and domestic stocks continued in the forefront.

Looking past this quarter, non-domestic markets have fallen short of domestic market returns.  There is no reason to think this pattern will continue. Stock markets seemed to have calmed a bit, and some of the uncertainties that have plagued stocks in the recent past seem to be coming into sharper focus.  Trade negotiations with China are moving along in a more positive vein and stocks continue to respond nicely to positive news about any possible resolution.

Concerns of looming deficits due to tax cuts appear to have moved to the back burner as inflation and interest rates remain at historically low levels. Markets continue to shrug off any dysfunction in Washington.  Yet, concerns remain. How Brexit (Britain leaving the European Union) eventually plays out remains a mystery.

Bond Markets

Bonds, especially longer-term bonds, are up this month, which is consistent with declining yields, at longer maturities.  Look below to see how bond yields beyond a year are below last quarter and a year ago.  The ten-year yields are below one-month yields – the lowest is at the 5-year mark. This pattern is unusual. Perhaps the best explanation is as simple as this: in a world of low and negative interest rates, U.S. Treasuries are the “best deal in town” for safe assets.

Interest Rates

Interest rates are historically low and have confounded many observers – more than a few predictions have gone awry, and crafting a compelling story to explain why there is little difference between short-term and long-term rates remains elusive.  Additionally, by historical standards the Fed has massive levels of Treasuries and Mortgage-backed securities on its balance sheet, which it must deal with, creating even more uncertainty.

Interest rates are important to the economic landscape. They are the price of capital – interest is what must be paid to use someone else’s money. The Fed only controls short-term rates.  Longer-term rates are where supply and demand for capital intersect. Demand depends on the expected payoff for putting capital to work; supply depends on what you expect to earn for giving up the use of your money. The horizon for suppliers and users of capital is distant – slight changes in interest rate’s can have a significant effect.

Stock prices are the present value of all future cash flows, which theoretically go on forever.  Falling interest rates translates into rising values of these cash flows.  The historically low levels and generally downward trend in interest rates help to explain the long-running bull market.

Bond returns are affected by both absolute levels and changes in interest rates – rising rates produce lower bond prices and returns; falling interest rates work in the opposite direction.  The longer the maturity, the greater the impact of changing rates.  Declining yields at the long end mean better returns for longer-maturing bonds.

Where interest rates go from here is anybody’s guess.  However, right now there doesn’t seem to be much pushing rates up, especially with an expected slowdown in worldwide growth.  All indications are for rates to remain low with little difference between short and long rates for a while.

Jack Bogle

Jack Bogle, the godfather of index funds and founder of Vanguard, passed away in January at age 89.  His influence on the investment world over the past forty years is immense; his accolades are well-deserved. Jack Bogle’s unwavering commitment in his ideas alone set him apart.  While the underlying concepts behind index funds are now the mainstream, they surely weren’t when he first championed them.  Jack Bogle clearly did more than anyone for small investors.  The notion behind Index Funds (achieving market results at the lowest cost to have the best chance for long-term success) is equally applicable to all investors – both large and small.

Congratulations! You are officially married and get to enjoy all the financial benefits that come along with it. After you’ve had some time to relax after the big day, be sure to consider the following.

  • Beneficiary Designations – Update beneficiary designations on any life insurance, retirement accounts, etc., to name your spouse as primary beneficiary.
  • Income Tax Withholding – Review the amount you are withholding from your paycheck. You may want to make an adjustment if you plan on filing a joint tax return in 2019. Remember you can file a joint return if you are married by the last day of the calendar year.
  • Review the benefits you are receiving, or are eligible to receive from your employer.
    • Health Insurance – If only one spouse is working, make sure both of you are covered under your company plan. Most companies only allow their employees to change their insurance elections once a year during their “open enrollment” period. However, exceptions are permitted for certain qualifying life events, which typically include marriage. If you are both working, it may be less expensive to pay for a plan that includes a spouse at one employer rather than paying for two single plans. One of you could even have better coverage than the other. It is in your best interest to review all the options available to you.
    • Life/Disability Insurance – You may have declined life insurance or disability insurance coverage when you were single. Now that there is someone else in the picture, you will want to review your options. Even if you are covered by an employer plan, you may want to purchase additional term life insurance coverage which would help to cover any joint debt and provide income replacement for the surviving spouse.
  • IRA Contributions – Getting married can affect your ability to save in certain retirement accounts, such as Roth IRAs. Roth IRAs allow you to save up-to the lessor of $6,000/year ($7,000/year if you are 50 or older), or the amount of income you, and or, your spouse earns in 2019. Contributions are made with after-tax money, and investment earnings and gains are not taxed when distributed (unlike with traditional IRAs). Getting married can affect your ability to save in these types of accounts in the following ways:
    • Individuals can contribute to a Roth IRA for their spouse as long they file a joint tax return. This allows a spouse who may have not been able, or eligible, to contribute to a Roth before getting married, to benefit from the favorable tax treatment of saving in Roth accounts.
    • The ability to contribute to a Roth is reduced when a taxpayer’s adjusted gross income (AGI) reached certain levels for the year. In 2019, someone filing an individual tax return is forced to reduce the amount they can contribute to a Roth once their AGI reaches $122,000, and is no longer eligible to make contributions once their AGI reaches $137,000. These amounts increase to $193,000 and $203,000 respectively, for married couples filing jointly. Therefore, someone who makes over $137,000, but less than $193,000 on a joint return, can now make Roth IRA contributions for both themselves and their spouse.
    • There are similar opportunities with regards to traditional IRA contributions. However, because most people are covered by an employer retirement plan, these contribution strategies can be more complex.

While the points above illustrate many of the common planning items that are relevant to newly married couples, each piece is only one part of a comprehensive financial plan. Please contact your Rockbridge advisor with any questions! Keep checking back for more articles as part of the “Life Events” series.

Rockbridge is involved in many organizations that advocate for children with disabilities and their caretakers.  As a result, we’ve helped numerous families financially navigate through their working years and successfully transition into retirement.  Special needs families tend to have common questions, one of which is how and when to file for Social Security benefits.

In order to provide a special needs child with the highest quality of care, it’s common for one spouse to stay at home full-time.  As a result, the non-working spouse doesn’t accumulate a significant work history and their future Social Security benefit suffers. Sure, the non-working spouse could file for Spousal benefits, but today we take a look at a special filing method called “Child-in-Care”.  Here’s how it works:

To file for this benefit, the working spouse must have retired and started collecting his/her Social Security benefit.  At this point, the non-working spouse can file for and start collecting Child-in-Care Spousal benefits AT ANY AGE.  That’s right, the non-working spouse can start collecting Child-in-Care benefits at any age.  Moreover, Child-in-Care benefits have preferential calculations over traditional Spousal benefits.  The non-working spouse is entitled to 50% of the working spouse’s Full Retirement Age (FRA) benefit.  Benefits would continue as long as the special needs child remains an eligible dependent (more on this later).

On its face, the Child-in-Care strategy sounds like an excellent way for a non-working spouse to receive a significant Social Security benefit.  However, there are two potential issues to consider:

  • First, the working spouse must start collecting his/her benefit in order for the non-working spouse to file and collect. If the working spouse starts collecting at age 62 (earliest age possible), he/she is locking in a permanent benefit reduction for the rest of their life.  Depending on the family’s assets, the working spouse could delay their benefit until a later age, providing a significantly higher lifetime income.  Delaying benefits could also provide protection for the non-working spouse should the working spouse pass away early in retirement.
  • Second, depending on the amount of SSI/SSDI benefits that the special needs child receives, you may exceed the Family Maximum Benefit.  Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI) are benefits paid on the working parent’s earnings record. The same is also true for spousal benefits.  As a result, combining SSI/SSDI benefits with the higher Child-in-Care spousal benefit can often exceed the Family Maximum Benefit.

So, how do you make an optimal filing decision?  It’s important to consider the following.

  • What’s the age discrepancy between the two spouses?
  • What’s the size of current SSI/SSDI benefits?
  • What’s the life expectancy of the child with special needs?
  • Does your family have other income and/or retirement assets?
  • What’s the family health history of the two spouses?
  • What’s your comfort level with delaying Social Security benefits?

As always, please feel free to reach out to your financial advisor at Rockbridge for an analysis that’s specific to your situation.

Stocks for this quarter maintained the above-average trend in the year-to-date numbers.  The primary market drivers are the Fed activities and the status of tariff discussions with China and Mexico.  As the prospects for reduced interest rates and resolution of the tariff negotiations wax and wane, stocks move up and down.

The graph below shows returns in several equity markets for various periods ending in June.  A few things stand out:  (1) domestic markets have done better than non-domestic markets; (2) there are significant differences among the various markets and; (3) while volatile, it was a reasonably good period for stocks.  Keep in mind that ten years is a short period and that markets have no short-term memory – what we see here may not be indicative of what the next ten years hold.  Consequently, the need for diversification.

Bond Markets

The yield curves below show what’s earned over several periods from holding U.S. Treasury securities to maturity.  These curves are sometimes indicative of the future direction of interest rates – upward sloping is consistent with a reward for taking interest rate risk and increasing rates; flat and downward sloping for decreasing rates. Note the parallel shift downward over the past quarter – positive for bond returns.  The typical yield curve slopes upward – greater return for longer maturities.  Note the June and March yield curves do not follow this pattern.  Look at the uptick in short-term yields and decline in yields for longer maturities over the past year – positive for long-term bonds, negative for short-term.


Diversification can bring short-term uncertainty, but unless you can predict the future consistently, it is still the best strategy for the long run. Holding a diversified portfolio means in most periods, there will be at least one market we wished we avoided.  Recently, value stock returns are well under those in other markets. Yet, to realize the long-run benefits of diversification, we must deal with this short-term regret and uncertainty. There is evidence that over the long run, markets tend to move towards averages – periods of above-average returns are followed by periods of below-average returns.

International Trade

Markets move as the prospects for tariff negotiations wax and wane.  International trade ties world economies together – it’s fundamental to the workings of today’s global economy. Through time the world changes and comparative advantages shift.  International trade continuously affects various industries differently.  Recent volatility in stocks is consistent with ongoing trade negotiations with China and now Mexico.  As the specter of increasing tariffs becomes an issue, markets tend to fall when first introduced, then rise with anticipated resolution. These ups and downs are something we must live with today.

Capital Markets and the Fed

All eyes are on the Fed and the prospect for reduced interest rates.  While this noise is apt to be positive for stocks in the short run, it is hard to put together a compelling story for the longer term.  First, the Fed can only directly affect short-term rates.   Second, there is not much room for rates to fall from today’s historically low levels.  Third, Fed actions only impact long-term rates and borrowing costs to the extent they change market expectations. Finally, the reason for a rate cut is an economic slowdown – generally not positive for stocks.

Stock prices are the present value of expected future cash flows, and so move in sync with an increase’s or decrease’s in expected cash flows and move inversely with interest rates.  For reduced interest rates due to an economic slowdown, the positive impact of falling interest rates would offset the negative effect on expected cash flows.  It appears the market is making that tradeoff today.

The impact the Fed has on the bond market is mostly perception.  It can only affect short-term rates.  A bond’s yield (the amount it will earn if held to maturity) depends to an important extent on expected inflation.  Changes in these yields, which affect periodic returns, follow changes in expected inflation.  This is where the Fed and bond returns come full circle – the Fed watches expected inflation and signals its views by adjusting short-term rates. While it is comforting to have explanations for short-term market behaviour, often it is random noise. This time around the explanation seems to be an anticipated reduction in interest rates by the Fed.

For nearly all investors, the importance of asset allocation and security diversification cannot be overlooked. Diversification can mean different things to investors, but the concept is pretty well understood – hold several different types of investments and you will be better served than those who are concentrated in one stock or in one narrow investment strategy.

I would like to introduce the topic of “tax diversification” here – since it’s not a phrase that is generally understood or discussed among a large percentage of investors and retirees.  The type of account you are eligible to open and maintain will determine how and when the funds are taxed.

For example, whether a withdrawal from your account will affect your taxable income, and ultimately how much you pay in federal and state income taxes depends on the type of account.

Account types generally fall in one of three categories: Tax-Deferred, Tax-Free and Taxable.

  • Tax-Deferred: Funds held in Traditional IRAs, a 401k, 403b, pensions or profit-sharing plans are tax-deferred. Contributions to an employer’s sponsored plan are made on a pre-tax basis before wages are taxed (such as with a 401k or 403b or 457 plan). Most insurance annuities are tax-deferred – gains are taxable when you or a beneficiary receives a withdrawal. In the case of a Traditional IRA, contributions are normally made on a pre-tax basis. Contributions are allowed but complicate the future reporting that is required to avoid paying tax again.
  • Tax-Free: Funds held in Roth IRA’s are tax-free. Contributions to the account are after-tax, but there is no tax charged on earnings or normal distributions. Additionally, certain types of municipal bonds produce tax-free income and may not have to be reported as income on either your state or federal return – or both.
  • Taxable: A typical Brokerage account is taxable. The dividends, interest, capital gains or capital losses are reported to the taxpayer at the end of each year and you will have to pay tax on any income or realized gains. A withdrawal from this type of account are not a taxable event, because tax is paid on the income each year.

When in retirement, there may be compelling reasons to accelerate or delay tax-deferred distributions or rely on those that are deemed tax-free. Rather than simply withdrawing from only one account type, it may make sense to rely on two or even three of those category-types in later years, depending on personal circumstances.  We generally advise our clients, when appropriate and advantageous, to have and maintain a combination of accounts that are “tax-diversified” to maximize the efficiency of distributions, and the favorable tax treatment given to long-term capital gains, dividends and capital losses.  Certain account types are better suited for gifting to individuals or charities during life, while others can more effectively meet philanthropic goals upon death and avoid income tax.

As with many facets of financial planning, there is rarely an absolute right or wrong method, but rather, a better method for distributions, gifts and asset classes held in certain account types. If you believe you stand to benefit from being more “tax-diversified” with your account types, please contact your Rockbridge advisor for a more detailed discussion of this topic.

We’d like to welcome to the firm our newest investment advisor, Zach DeBottis, as well as our two summer interns, Joel Farella and Hari Nanthakumar.

Zach joined Rockbridge in a new capacity this past June, having worked for Rockbridge as an intern intermittently throughout his senior year of college at SUNY Geneseo. While working as an intern, Zach found a real appreciation for the approach that Rockbridge takes to improve the financial well-being of their clients. Upon nearing graduation, Zach received several job offers from other Syracuse-area firms within the industry, but he realized very quickly that the values instilled within the framework of Rockbridge resonated with his own values the most.

You can learn more about Zach here.

Joel joins us having just completed his first year at St. Lawrence University, where he intends to major in business and environmental studies. His connection to the firm is through his father, Anthony Farella, one of the founding partners. Joel believes this internship is an appropriate fit for him because he has had an interest in finance for a number of years. Aside from his interest in finance, he also believes that the dynamic of working in the Rockbridge office will provide him with valuable skills and experience for all of his future endeavors.

Hari, like Joel, has also just completed his first year at Columbia University as an economics and philosophy major. He heard about Rockbridge through Ed Barno, one of the advisors of our firm. Hari is hoping to take a deep dive into the world of investment management and explore the complex and sometimes difficult financial issues faced by individuals and institutions. Additionally, Hari is excited to learn about how Rockbridge in particular goes about making decisions to better the financial well-being of their clients.

Welcome Zach, Joel, and Hari!


The financial crisis of 2008 put the financial services industry under significant scrutiny. While the biggest headline grabbers were overleveraged investment banks and practices around mortgage origination, retail investment services also underwent additional regulatory oversight. Specifically, Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act directed the Securities and Exchange Commission (SEC) to rule on the obligations, actions, and standards of brokers, dealers, and investment advisers.

The legislation requiring a ruling came about because the sentiment among average Americans is that their interactions with the investment world tended to benefit those working in the investment world more so than themselves. These feelings were not unfounded. In the 80s and 90s, almost all “retail” (individuals purchasing for their own accounts, not part of a larger group) investing happened through brokers and the only fund offerings were high-cost actively managed accounts. Between advisory fees, sales loads, fund fees, trading commissions, and custodial fees, the cost of investing was often in excess of 3%. Read more

Target date funds have become some of the most common investments in America. Not coincidentally, their rise in prevalence has coincided with 401(k)s gaining in popularity. We have seen it here locally; many of the largest employers in Syracuse (Syracuse University, Carrier, Lockheed Martin, General Electric, Welch Allyn, and Niagara Mohawk/National Grid) had pensions. In almost all cases, the pension has been frozen and replaced with a 401(k)s that provides a target date fund (often the default investment when an employee enrolls).

Target date funds are good investments, they achieve two important goals to help satisfy the fiduciary obligation of the 401(k) plan’s advisor:

Diversification: They are generally diversified over thousands of stocks and bonds incorporating multiple asset classes.

Simplification: Target date funds are logistically simple. You only need one holding and it automatically adjusts your allocation from being aggressive when you are young to more conservative as you near retirement.

In most 401(k) plans which have automatic enrollment (73% of plans are now set up for automatic enrollment), target date retirement funds are the default investment. This means without any action taken, you’ll be investing in your 401(k), and it will be through a target date fund based on your age. Generally, you are placed in the target date fund closest to when you’ll turn 65, regardless of whether you plan on retiring at 55 or 75.

It is important to understand not all target date funds are the same, they can vary in allocation and cost.

In terms of allocation, the most famous instance of allocation discrepancy was in 2008. During that year, returns on 2010 target date funds (designed for those retiring in two years) varied from -3.5% to -41.3%. Since then, companies managing target date funds have more standardized their allocations, but differences still exist. The following chart shows the stock allocation for different target date funds of various companies or organizations.

The largest disparity is in funds close to retirement. Federal Employees invested in the Thrift Savings Plan (TSP) who have chosen the Lifecycle Funds will have a very heavy allocation towards bonds as they near retirement. However, those who are invested with T. Rowe Price (common for employees at Syracuse University), are close to 60% equities despite being invested in the exact same fund year. In 2008, the TSP’s 2010 fund would have lost about 6% while the allocation held by T. Rowe Price would have dropped 20%. This is not to say the T. Rowe Price allocation is too risky, but rather a reminder that it’s important to understand exactly how your funds are invested.

While not a 30% disparity, we still see decent differences in the allocation of 2040 target date funds. Fidelity comes in most aggressive with a 90% equity allocation – that’s a lot of stock market risk for someone who is 45, especially if they plan on retiring in their 50s.

For 2060 target date funds, we see Blackrock has an effective all equity allocation while JP Morgan inexplicably has a more conservative allocation than their 2040 fund, with 15% in bonds and 7% in money market funds.

Another discrepancy between target date funds is cost. The following table shows the expense ratios associated with each 2040 target date fund.

The expense ratios of target date funds are confusing if you work in the industry. If you work outside the industry, good luck. Fidelity, the largest custodian of 401(k)s in the country, is a perfect example. The average investor would assume they are in Fidelity’s 2040 Target Date Fund. But Fidelity alone has 21 different 2040 Target Date funds. The expense ratios of these funds range from 0.08% to 1.75% despite more or less doing the same thing. This price complexity comes from two things:

Multiple Series: The largest fund companies have many series for the same type of investment. Fidelity, Blackrock, and Schwab all have actively managed target date funds that charge high fees and low-cost non-active target date funds. Look for the word index as that is usually low-cost.

Different Share Classes: Clients of Rockbridge don’t have to worry about share classes because they are associated with commissions. As fee-only fiduciary advisors, we are prohibited from receiving a commission on a product we recommend, but some 401(k)s will have commission-based investment options. Even among choices that don’t receive a commission, you can have difference expense ratios. Fidelity’s Advisor Freedom series has an “Institutional” share class which costs 0.75%, a “Z” share class which costs 0.65% and a “Z6” share class which costs 0.50%.

We’ve found investors can sometimes get the same exposure as the more expensive target date fund options through the use of low-cost funds within the same 401(k) plan. Saab Sensis, a successful local employer uses a lineup which includes Principal as their target date fund family. These target date funds charge from 0.57% to 0.79% depending on the year. However, they offer lower cost mutual funds which can get the same exposure for around 0.25%, leading to substantial savings for the investor.

Lockheed Martin is similar. Most of their target date fund options cost 0.54%, but you can get the same exposure through individual index funds for 0.08%.

In conclusion, target date funds are generally good investments, but it’s important to know exactly what your getting in terms of allocation and cost. As always, if you have questions or concerns, please contact your advisor at Rockbridge and we can help look through your specific situation as it relates to target date funds or more general financial planning.

If you watched the Preakness Stakes, you and about 90% of all viewers were fixated on the horse named Bodexpress that threw his jockey right out of the gate and ran the entire race without him. It was an amazing feat. That’s right – no jockey steering him and whipping him with a crop around the entire 1.3-mile track.  At any point, Bodexpress could have stopped, turned around, or succumbed to side riders who tried to stop him during the contest. Bodexpress finished the entire race, and ran with the pack for nearly the entire contest. In fact, it almost appeared he would take over the lead horses before entering the final stretch.  While Bodexpress did not win, nor did he even finish in the top three, he made for a remarkable story. However, you may be asking yourself, what is the point of mentioning the jockey-less horse in one of the nation’s most prestigious races on our firm’s blog?  If you’re familiar with our past articles, you may have already guessed where this piece is going.

Bodexpress did not need to be over-managed – he had a job to do, one in which he was trained to do almost from birth. While I don’t want to overuse the analogy, I could not help but think that if Bodexpress was a mutual fund, he would have been an index fund. He didn’t need a jockey. Nor do most of your investments need a hyperactive “fund manager” dictating which stocks to buy and sell on a daily basis. Frankly, evidence states, most baskets of stocks or bonds generally do not need constant buying or selling from an expensive fund manager or “jockey,” as they are sometimes called in our industry.  Bodexpress, the horse with some of lowest odds at the start did not come in last, even sans jockey – some other horse named “Market King” came in last at the Preakness, which I find ironic for this analogical piece.

How do you think the owner of Market King felt, much less the jockey, after the Preakness? Humbled? All that steering, whipping and guiding and they still couldn’t beat a horse that was just following the track and taking his energy from the horses he ran alongside for a little over a mile. My bet is the owner, trainer and jockey of Market King felt a little foolish – not unlike an investor who has little value to show for their extra investment efforts (fretting over stock selection and market timing) when compared to the “jockey-less” index mutual fund.

Next time you watch a business show, read a book on the stock market, a personal finance magazine article extolling the virtues and benefits of picking stocks, timing markets or using derivatives, think of Bodexpress and know that sometimes in life, it just may better to ignore the conventional wisdom and leave some matters as they are meant to be. Even Bodexpress decided to take a victory lap all by himself after the race concluded.

Stock Markets

Stocks rebounded nicely. Tech stocks (FANGs – Facebook, Amazon, Netflix, Google) after leading the way down in last year’s fourth quarter (off 22%) led stocks back up (up 23%). A global stock portfolio earned about 12% this quarter and domestic stocks continued in the forefront.

Looking past this quarter, non-domestic markets have fallen short of domestic market returns.  There is no reason to think this pattern will continue. Stock markets seemed to have calmed a bit, and some of the uncertainties that have plagued stocks in the recent past seem to be coming into sharper focus.  Trade negotiations with China are moving along in a more positive vein and stocks continue to respond nicely to positive news about any possible resolution.

Concerns of looming deficits due to tax cuts appear to have moved to the back burner as inflation and interest rates remain at historically low levels. Markets continue to shrug off any dysfunction in Washington.  Yet, concerns remain. How Brexit (Britain leaving the European Union) eventually plays out remains a mystery.

Bond Markets

Bonds, especially longer-term bonds, are up this month, which is consistent with declining yields, at longer maturities.  Look below to see how bond yields beyond a year are below last quarter and a year ago.  The ten-year yields are below one-month yields – the lowest is at the 5-year mark. This pattern is unusual. Perhaps the best explanation is as simple as this: in a world of low and negative interest rates, U.S. Treasuries are the “best deal in town” for safe assets.

Interest Rates

Interest rates are historically low and have confounded many observers – more than a few predictions have gone awry, and crafting a compelling story to explain why there is little difference between short-term and long-term rates remains elusive.  Additionally, by historical standards the Fed has massive levels of Treasuries and Mortgage-backed securities on its balance sheet, which it must deal with, creating even more uncertainty.

Interest rates are important to the economic landscape. They are the price of capital – interest is what must be paid to use someone else’s money. The Fed only controls short-term rates.  Longer-term rates are where supply and demand for capital intersect. Demand depends on the expected payoff for putting capital to work; supply depends on what you expect to earn for giving up the use of your money. The horizon for suppliers and users of capital is distant – slight changes in interest rate’s can have a significant effect.

Stock prices are the present value of all future cash flows, which theoretically go on forever.  Falling interest rates translates into rising values of these cash flows.  The historically low levels and generally downward trend in interest rates help to explain the long-running bull market.

Bond returns are affected by both absolute levels and changes in interest rates – rising rates produce lower bond prices and returns; falling interest rates work in the opposite direction.  The longer the maturity, the greater the impact of changing rates.  Declining yields at the long end mean better returns for longer-maturing bonds.

Where interest rates go from here is anybody’s guess.  However, right now there doesn’t seem to be much pushing rates up, especially with an expected slowdown in worldwide growth.  All indications are for rates to remain low with little difference between short and long rates for a while.

Jack Bogle

Jack Bogle, the godfather of index funds and founder of Vanguard, passed away in January at age 89.  His influence on the investment world over the past forty years is immense; his accolades are well-deserved. Jack Bogle’s unwavering commitment in his ideas alone set him apart.  While the underlying concepts behind index funds are now the mainstream, they surely weren’t when he first championed them.  Jack Bogle clearly did more than anyone for small investors.  The notion behind Index Funds (achieving market results at the lowest cost to have the best chance for long-term success) is equally applicable to all investors – both large and small.

Many of us are familiar with insurance for your home, auto and life, but the reality is – we don’t often know our specific coverages until we need to make a claim.  Insurance has become so specific it’s worthwhile to contact you carrier and become more familiar with exactly what your policy is going to cover in a time of need. In our society, there is insurance for your pet’s medical bills, canceled vacations, or a defective home appliance. If you have an insurable interest in something, there’s likely a policy out there to cover you.  However, one of the most overlooked types of insurance is one that protects your income, or lack thereof, in the event of an extended long-term disability.

When you hear that a friend or family member is “on disability” many of us assume that most, if not all, of their income is being replaced, but that is not usually the case.  Generally, there are two types of disabilities;  “Permanent” or “Non-Permanent”.  Some common disabilities are “short-term” such as maternity leave or “longer-term” such as a chronic illness that prevents someone from returning to work in any meaningful way; but I will focus on long-term disabilities here.

Under limited circumstances, a person can file for Social Security Disability Income (SSDI) and be approved for benefit payments for the rest of their life or until they reach their Full Retirement Age (FRA). Upon reaching their FRA the benefits convert from SSDI to Social Security Retirement benefits. There will be a gap if your FRA is 67, and your LTD policy only pays benefits until the age of 65, another reason to pause and consider the consequences and impact on your life.

There are two primary types of insurance policies:  group LTD insurance offered by your employer or a private policy that you purchase on your own.  More importantly, there are two methods for paying for LTD insurance that determine how your benefits will be taxed.  Premiums can be paid with after-tax income (non-deductible) or pre-tax income (deductible).  Group LTD policies typically have lower premiums than individual policies, but typically offer lower benefits, or may be combined with other disability benefits (i.e. Worker’s Compensation or SSDI).

For a private LTD policy that you own and pay for, the benefits are excluded from your taxable income. On the other hand, if you are covered under a policy that your employer pays for (with pre-tax income), expect the benefit payments to be considered taxable income.  This is where it can get confusing.  Your employer may offer access to a group plan but require that you pay the premiums on an after-tax basis.  In this case, you may have the benefits “reduced”, “offset” or “integrated” by other non-salary payments you are eligible to receive, such as Worker’s Compensation (if the injury took place while on the job).  The important thing to note is that LTD benefits provided in a group plan are typically computed after Worker’s Compensation, SSDI and/or pension payments are calculated. You can see that the carrier is not going to allow you to collect as much as you may have originally believed and it’s unlikely you will receive more than 60% of your wages with a combination of Worker’s Compensation, Pension and LTD benefits.

LTD policies can be complex when it comes to understanding basic coverage, exclusions and elimination periods (which may be up to 180 days or more).  This is only meant to serve as a primer and general overview of LTD.  As with life insurance, we at Rockbridge generally recommend owning a private policy that is not affected by employer changes.  Private policies are typically more expensive and require an underwriting process that evaluates your age, health and medical history. The fact is, the loss of your future earnings is something you may wish to consider insuring against, for the financial well-being of your family, especially if you are under age 60.  If you feel the need to review your situation and perform an LTD needs analysis, please contact your advisor at Rockbridge.

It’s no secret that since the Financial Crisis value stocks have underperformed growth stocks.   Many theories exist as to why this has happened, none of which can be confirmed as truth.  This begs the question “what does this last decade of value underperformance mean?”  The answer, truthfully, is that it means nothing.

For starters, value stocks have outperformed growth stocks over long periods of time.   Because of this, we have a mix of value and growth stocks in our portfolios, with a tilt towards value stocks.  What we do know is that there have only been three significant periods where value stocks have underperformed growth stocks in the last 90 years.  One of those three periods happens to be 2008(ish) to today (see chart below):

Source: Kenneth French’s Data Library, 1926-2017

Although there is uncertainty around how long these periods of value underperformance last, history suggests the frequency of a positive value premium has increased when you look at longer-term data (see chart below).

Source: Dimensional Fund Advisors

What does all this mean?

Quite frankly, it’s unlikely to expect value stocks to underperform growth stocks.  It’s even more unlikely to endure this underperformance over long periods of time.

This value premium isn’t all that steady or predictable, but a consistent investment approach that maintains an emphasis on value stocks will allow investors to more reliably capture the premium over the long run.

If you’re like most people, you know that planning to achieve your financial goals involves more than just budgeting and saving for retirement. You’ve undoubtedly received financial advice, solicited or otherwise, from some combination of family, friends, coworkers, or even just from the myriad financial planning advertisements on TV and online. With all of this information out there, it’s no wonder that there’s more than a little confusion as to what financial planning is all about.

At Rockbridge, we view financial planning as the ongoing process of identifying goals, evaluating strategies to achieve those goals, implementing the action items necessary for those strategies to be effective, and monitoring the results.

This process sounds simple enough, but how do you know where to begin? How do you identify which goals are relevant to the planning process? Should they be specific or broad? Should you focus on short-term or long-term goals, and how do you prioritize them? What happens if your goals change?

Often it takes a major life event to draw attention on our true financial goals. While there are any number of events that may impact a person’s financial objectives, there are a handful of life events that, we as advisors, get a lot of financial planning questions about. These events include:

  • Getting married
  • Buying a house
  • Having a child/adopting
  • Changing jobs or starting a business
  • Retiring

Visit our blog at, where we will be rolling out dedicated posts discussing many of the common (and sometimes not so common) planning considerations associated with these life events.

As always, reach out to your Rockbridge advisor with any questions regarding your specific situation.

Over the summer, we had a client ask if there was a place to look for existing accounts or funds they or family members may have accumulated and forgotten about over the years. That sparked Julie’s memory of the New York State Office of Unclaimed Funds ( You may have noticed the Office puts a kiosk at the NYS Fair every year.

Run by the NY State Comptroller’s Office, the Office of Unclaimed Funds serves as custodian of more than $15 billion in assets. When an entity has money that belongs to someone else and can’t reach that person, they turn the money over to the Office of Unclaimed Funds.

This particular client did not have any funds belonging to the Office of the Comptroller, but it seems like a lot do. A few of us had unclaimed funds, as did family members and friends.

Experiences getting the money back are varied. Some submit online and get paid within three weeks. Ethan had a $175 reimbursement from a Doctor’s visit (the insurance company ended up covering it months after the visit and after I had moved); this took five months to process as the State needed separate confirmations of a previous address and a current address.

When completing the online form, you must submit your Social Security number, and some detailed contact information such as phone number/provider and e-mail. Having the check mailed to the address on your driver’s license can speed up the process.

We encourage everyone to give the search a try. In addition to searching by your first and last name, we have found it useful to search by last name and city. As always, reach out to your advisor with questions.

This recent market downturn has many investors drawing parallels to how they felt during the infamous 2008 financial crisis. The last 11 years have been a roller-coaster ride for investors. Right after seeing market highs in late 2007, investors experienced a nearly 50% market decline of the S&P 500 in 2008. In the following 9 years, the S&P 500 delivered double-digit positive returns in all but two years, and then unfortunately had that barbelled with today’s most recent threat on a bear market with the S&P 500 going down 19.77% since late August. Well, to summarize, it has been a volatile ride!

So how does this 11-year ride stack up in the history of stock returns? There have been 83 trailing 11-year periods since 1926 for the S&P 500. 2008-2018 ranks in the bottom 25% for these periods when measuring performance. To make things worse, the S&P 500 was the shining star over this time period beating out the returns of U.S Small-cap, International, and Emerging Market Stocks.

Knowing this, you would assume a diversified investor (60% stocks and 40% bonds) probably didn’t fare too well over these past 11 years. They didn’t get the 6-7% return we would expect for the long run, but still managed a return of 5.14%.

When put into perspective, a 5.14% return doesn’t sound too bad given the period we just went through. Contrary, a saver who invested in 1-year CD only averaged 1.05% during the same period, losing over 1% per year to inflation. $500,000 invested in January of 2008 grew to $867,796 with the 60/40 portfolio vs $560,395 if saved in 1-year CD.

There are many takeaways here, but most important is the reminder to stay the course. Being invested in the market certainly will come with volatility at times (see at left), but it is one of the best ways to get returns that keep up with inflation and help us meet our long-term goals. We don’t expect future equity returns to be in the bottom 25% going forward. Things will turn around like they always do. As investors, the only thing we can do is make sure we are participating when that time comes.

2018 was a woeful year for investing. All major stock market indexes were down, bonds enjoyed a year-end rally to finish flat, and commodities such as gold and oil fell. Seeing all asset classes drop in unison is unusual and unlikely to continue.


Stocks began the year on solid footing, but fortunes quickly changed as early February saw a 10% drop in equities. Markets steadied over the spring and summer, with domestic stocks reaching new highs in the early fall. And then the 4th quarter happened. All equities suffered substantial losses. In aggregate, U.S. Large Caps and REITs were the best performers of 2018, followed by U.S. Small Caps, and then International Stocks.

2018 was a poor year for International Stocks, but Emerging Markets are still the best performer over the last two years (after being up 38% in 2017). December was a reminder of why we stay diversified. While U.S Stocks were down 10%, International Developed lost 4.8% and Emerging Markets lost 2.6%. Again, we see diversification help to dampen volatility.


Yields rose in 2018 and the curve flattened substantially. The Federal Reserve hiked rates four times last year as they viewed a strong economy and a tightening labor market reason enough to aggressively unwind their accommodative monetary policy. The U.S. 5-Year Treasury, a good proxy for our Bond holdings, began the year with a yield of 2.25%, before selling off to reach a high of 3.09% in early November. At that point, the aggregate bond market was down 3% for the year and it looked certain we’d finish the year negative for the 4th time in the index’s 43-year history. But a 58 basis point rally in the final two months spared Bonds, allowing them to finish 2018 with a positive return of 0.01%.

The yield curve is now the flattest it’s been in a decade. The 1-Year Treasury Bill is yielding more than the notes maturing in 2-7 years. It appears the market is pricing in one more hike in interest rates, followed by a few cuts from the Federal Reserve. These cuts could come as a result of a recession or simply because global growth slows (but doesn’t contract) and inflation softens below the Fed’s goal of 2%.

Near Bear Market

On Christmas Eve, the S&P 500 closed down 2.7%, ending a 7-day stretch where stocks lost 11.3% of their value. That selloff put us on the cusp of a “bear market” meaning a drop-in price of 20% or greater from a previous high.

The causes of the selloff are numerous. America and China are involved in a growing trade war, the Fed is raising interest rates, analysts lowered global GDP growth estimates, manufacturing activity is below expectations and our government is in a shutdown with no end in sight.

On top of that, we’ve had a record long 10-year run of strong stock market performance and economic expansion that is the second longest in history. It seems there is plenty to be fearful of. Our cognitive biases aren’t helping. Some of us may be experiencing  recency bias. In the last 30 years, the only two times the market has dropped more than 20% were because of the dot-com bubble and the financial crisis. In those instances, we saw the market sell-off 49% and 57% respectively. Being 20% off the highs investors think, “I know what happens next.” The next logical question is– shouldn’t we sell out of stocks now, wait until the market falls 50% and buy back in? But just because that’s how the last two drops have happened doesn’t mean this one will be the same. It’s possible the bottom of the market will be a 21% selloff, or 23%, or 27%, or 32%. Or it’s possible that the bottom was the 19.78% we saw on December 24th.

Some of us also suffer from negativity bias; we remember the things that ended poorly but forget instances where things turned out well. In 2011, the market was in the middle of its recovery from the financial crisis when cracks began to appear. Greece was heading towards bankruptcy and there were concerns the Eurozone would break apart. Bank of America was experiencing extreme volatility, and some feared they may be insolvent. High-profile investors such as Ray Dalio, who predicted the 2008 crash, were warning of a “double-dip” recession, pushing markets back to levels in 2008 & 2009. In the five months from May until October, the market sold off 17%. But the crash never came. Greece and the rest of the EU didn’t implode, Bank of America got a $5 billion investment from Warren Buffet, and the economy kept chugging along.

The same fear investors feel about the market today they could have felt in 2011. But we forget 2011 and remember 2008, though there is no reason to think that 2019 will be like 2008 and not 2011 (throughout history there have been a lot more 20l1’s than 2008’s).

2019 and Beyond

We do not know what the stock market will do in 2019, and neither does anyone else. Despite the pessimism in the markets and in the media, there are plenty of reasons to feel good about stocks. America’s economy is expected to grow at 2.3% and the broader world is expected to grow at 3.0%. 2018 ended with a very strong jobs report as wages and hiring continues to be robust. Perhaps most promising of all was an increase in the labor force as those who had previously not been looking for jobs re-entered the market.

Every Wall Street Bank that puts out a price target for the S&P 500 is predicting a positive year in 2019. The average earnings for the S&P 500 are expected to be $173. With a 2018 close of $2,507, that works out to a forward P/E of 14.5, which is low by historical standards meaning stocks are currently a good value. This puts equities on par with where they were at the start of 2013 – that year the market rallied 34%.

We don’t know what next year and beyond have in store for stocks, but we do know over time it pays to be invested. Investing in the market isn’t easy which is why it pays so well in the long-run. Volatility like we saw in the last quarter causes people to sell out of stocks. This is beneficial to the disciplined investor as there are fewer people with whom he or she has to share corporate profits.

The best thing a person can do is find the right mix of stocks and bonds that fits their individual needs and then stay the course. And lastly, if the market closes next year right where it started at $2,507, your return won’t be 0, you’ll have made 2.2% because companies pay dividends!

I’ve been watching people drive all my life. I’ve been an individual investor and an investment advisor guiding clients for more than half of my adult life.  I’m a curious soul and during a recent trip from Syracuse to Atlanta, I had quite a bit of time to watch and observe the behaviors of all sorts of motorists and their driving habits.  I could not help but draw comparisons between peoples’ driving habits and their investing habits; impatient drivers expose themselves to all sorts of unnecessary risk and stress.

On a long trip, my GPS estimates the time I will arrive at my destination, usually within a few minutes.  As advisors, we tell clients what they should expect in terms of average market returns knowing that, in any one year, those returns could be considerably higher than expected (2017) or perhaps lower than expected (2018).  Over your investing lifetime, you will likely achieve what you set out to accomplish in terms of investment results if you stay the course and remain committed.  Your GPS will do the same; despite the fact that you may be driving faster or slower than expected at certain times along the way, you will generally arrive on time.

While not always the case in Syracuse, in Atlanta, traffic jams are ever-present during the rush hours.  Undeniably, some drivers feel the need to constantly change lanes expecting something better to happen.  Rather, I conclude, the best option is to stay in one lane and let the “jam” naturally work itself out – no different than what long-term investors should do in an efficiently functioning market.  We have all observed motorists who change lanes whenever they suspect that other drivers may be getting an advantage.  Just as there is added risk in changing lanes and avoiding bumpers and accidents with other moving vehicles, there is risk in jumping from one investment to another based on news reports or a gut-feeling that you are not moving forward fast enough.

The next time you are in a traffic jam, observe the experienced drivers who do in fact stay in their lane – they have been there before, they have seen it play out and they know the stress and risk is not worth the potential reward.  Although they may be frustrated, they tend to remain calm and logical at the same time – accepting the inevitability of certain occurrences.

The best drivers I have observed in my lifetime have a high degree of patience.  And you guessed it, the most proficient investors are very patient as well.  Successful investors understand that some years will be better than others.  Poor economic cycles or market corrections (although fairly common and expected) are impossible to predict in terms of veracity or duration.  This is a valuable lesson I have learned over the last twenty plus years as an investment advisor.  If you feel the need to change lanes, end your investment journey, or simply seek assurance that you’re headed in the right direction, be sure to reach out to your Rockbridge advisor!


Stock Markets

December’s market reminds us that risk is real – even after the uptick at the end of the month, a global stock portfolio is down about 15% for the quarter and 12% for the year. Technology stocks (Amazon, Apple, Microsoft, Google, Facebook, Netflix), which have been driving the market to new heights in recent years, were off nearly 20% this quarter.

Future returns depend on news, which, of course, can’t be predicted. (If it could it wouldn’t be news!) Maybe markets have exaggerated today’s concerns or maybe there is more to go.  For sure, increased volatility lies ahead.  We have been lulled into a stock market that has provided a mostly smooth ride upward over the past few years.  That pattern is not typical – risk matters.

Up until now, the market has shrugged off the myriad of issues that have been plaguing us for a while. These include:  international trade wars and tariffs, rising interest rates, privacy and social media concerns, impact of last year’s Tax Bill, resolution of Brexit, slowdown in global growth, sliding oil prices, political dysfunction and Government shutdowns.  Market prices reflect a continuing forecast of the eventual economic impact of these issues.  In December, these forecasts turned negative.

The ten-year numbers above tell us there is a reward for enduring the normal ups and downs of stock markets, including recent results.

Bond Markets

Bonds earned positive returns for the quarter, fulfilling their role of reducing the overall risk of a diversified portfolio. 

The shape of bond yields across various maturities is unusual.  Even as the Fed increased interest rates, the market-determined yields on longer-term bonds fell.  This pattern can be a harbinger of a difficult economic environment ahead. On the other hand, it is also consistent with an overall move to reduce exposure to risky assets.

We are now dealing with the risk side of investing, which we can divide into two categories:  (1) the impact of factors that affect all securities, and (2) the impact of what affects only an individual security.  By diversifying, the effect of any individual security becomes minimal.  Expected return is the reward for enduring the variability of market-wide uncertainties.

Stock markets are risky, but what about the eventual reward?  Do investors eventually earn what they expect?  We look for answers in two places:  (1) If market participants, who are constantly buying and selling, didn’t eventually earn what they expect, they wouldn’t play, and (2) There is evidence that over the long run, returns tend toward long-term averages.  But long-term means long and succumbing to short-term variability ensures failure.  It’s why risk matters.  It’s why the urge to give up makes success hard to achieve.

Depending on the news you read, you may have come across headlines talking about bear markets and stock market corrections. The following is a guide to what they mean and how to put them in the context of history.

The conventional definition of a bear market is a price drop in a stock market index of 20% or greater from its high. The most quoted stock market index in America’s investment community is the S&P 500. When people reference our being in a “bear market,” they are likely talking about the S&P 500.

With Monday’s close at 2,351.10, the S&P 500 is 19.78% off its close of 2,930.75 set on September 20th of this year. That means we are a 0.28% drop away from entering a bear market. However, other markets are already in bear territory:

A 20% drop feels pretty bad and it is. Since 1950, we’ve witnessed 9 bear markets:

Nine bear markets over 68 years works out to one every 7.5 years. And it has been nearly 10 years since our last bear market bottom. Are we due? Maybe…

Another term in the news is market “corrections.” A market correction is generally defined as a drop of 10% or more. The following table shows all the stock market corrections since 1950 that never became bear markets:

When looking at the current correction compared to all drops of 10% or greater since 1950, we see:

Our last two bear markets (2002, 2009) have been big ones, the two largest since the great depression. In the last 30 years, the only times the market has dropped more than 20% it’s kept falling, eventually being cut in half. Our recency bias tells us once we’re 20% off market highs we have much pain ahead, but that is not certain. It is imperative we remind ourselves that twice doesn’t make a trend and is woefully short of being statistically significant.

Maybe stocks will continue to drop, reaching a 40%+ bear market, or maybe 2018 will be a repeat of 1990. In 1990, we had a correction that barely eclipsed 10% very early in the year, followed by a larger drop at the end of the year that came within 0.1% of being a bear market. But if you had temporarily reduced your equity exposure it would have been to your detriment. For the rest of that decade, the S&P 500 appreciated at an annualized 20.9% over that 9-year span.

No one knows what the market will do next, but we do know it’s folly to try and time it. $10,000 invested in the S&P 500 in 1950 would have grown to $14,000,000 today for an annualized return of 11.1%.  One way to think of it is that every day you are in the market you are earning nearly 0.03%. If only it were that easy…


Stock Markets

For the last quarter, stocks are up except for Emerging Markets, which were close to flat. Domestic stocks are seemingly shrugging off the uncertainties of increasing interest rates, trade wars and tariffs.

Year to date, an Emerging Market stock portfolio would be down almost 9%. It is not surprising that today’s uncertainties are having a greater impact on developing economies as they tend to have larger debt levels denominated in dollars and exports are a bigger part of their economies.  Consequently, the value of the dollar is increasing, interest rates are rising, and tariffs will have a greater impact.

Non-U.S. markets have not kept pace with U.S. markets over the periods presented. Subsequently, stock returns from a globally diversified portfolio over these periods would be below those of the popular domestic indices (e.g. S&P 500).  This environment makes maintaining commitments across all markets especially hard.  The benefits of diversification are clear, but it often means enduring periods of below average results in various markets for extended periods of time. For example, since 1971 the annualized ten-year return for the S&P 500 has varied between 5% and 17%.  It is reasonable to think markets will eventually earn their expected returns (in the “long-term”), but this variability gets in the way of considering ten years the “long-term”, as we would expect a much tighter range in these results if it were indeed the long-term.  So, when we see non-U.S. stocks underperform in every period reported in the chart above, we do not conclude they will always underperform, but instead that more patience is required to reach the “long-term” and achieve expected returns.


Bond Markets

The Yield Curves to the right shows that bond yields ticked up for all maturities over the past year and quarter.  The Fed recently affirmed its commitment to increase interest rates and the change in yields is consistent with that objective.

How much room is left for bond yields to move?  The yield on the 10-year Treasury is currently about 3.1%.  Theoretically, a bond’s yield should include a premium for (1) the time value of money, (2) risk and (3) expected inflation. For example, let’s pick 2% as a premium for investing instead of spending money.  Note the difference in yield between one-year and ten-year bonds is 0.5%.  This leaves 0.6% as expected inflation over the next ten years. If this expected inflation number is reasonable, then today’s yields might be about right – if this number for expected inflation over the next ten years feels low, then yields might have some ways to go.  While these observations are not a prediction, they are intended to provide some context for what we see in today’s bond markets.

As we think about the recent bull market in U.S. stocks, below-average results in non-U.S. markets, and historical low interest rates, keep in mind that markets have no memory.  Remember that prices are based on expectations not the past.

Interest rates are rising, and yet you may not be earning much on your cash.  As financial markets finally begin to reflect a recovery from the crisis of 2008-09, the brokerage industry is changing the way they handle customers’ cash, and investors need to pay attention.

Over the past ten years we have become accustomed to earning nothing on our cash.  The Federal Reserve kept rates at essentially zero for so long that investors came to expect no return on uninvested funds.  It has been a difficult time for savers.  Bank CD rates are generally very close to U.S. Treasury rates, and until mid-2016 a 3-month treasury security yielded less than 0.25%.  In fact, the Fed dropped rates effectively to zero in December 2008 and finally began to raise them again in December 2015.  The 3-month treasury yield has steadily risen along with the Fed Funds rate, from 0.25% in 2016 to over 2% today.  By historical standards interest rates are still low, but the increase from zero to 2% is significant for savers and investors of short-term cash.

So why am I still not earning anything on cash?

The short answer is that the brokerage industry is keeping most of the interest earned in sweep accounts for themselves and forcing investors to deliberately invest cash to earn a competitive rate.

Borrowers who compete for funds are compelled by market forces to pay similar rates – otherwise they don’t get the funding they need.  So banks selling CDs in the open market have seen rates rise along with treasury yields.

Not all borrowers are forced to compete.  Bank deposits and cash balances in brokerage accounts represent something of a captive audience.  Years ago, when interest rates were high, and the market was competitive, banks and brokers began offering sweep accounts, where excess cash was automatically swept into an interest-bearing account each night.  This arrangement was an important source of profit for banks and brokers as they were able to invest the cash and earn a positive spread, or margin, above what they paid the customer.

When the Fed dropped short-term rates to zero in 2008, the profit margin disappeared from sweep accounts, along with the return to savers and investors.

Fast forward to 2018 and we see that short-term rates have crept back to 2%.  At the same time brokers and investment firms have continued to experience competition in other areas of their business; $19.95 was once thought to be an incredible bargain for a brokerage trade.  Many brokers now offer trading on an electronic platform with rates below $10, and certain transactions are free.  Likewise, the internal management fees or expense ratios for mutual funds and ETFs have been driven downward to the point that Fidelity recently announced some index ETFs with an expense ratio of zero.

In their search for profits, brokerage firms have seized on the sweep accounts as a way for them to make money.  Most have transitioned to where excess cash is swept to a bank deposit fund that earns something, but very little.  Profits flow back to the brokerage firm because they either own the bank or have some affiliation that returns profit to the brokerage firm.  This arrangement has at least one advantage for investors because the bank sweep funds are FDIC insured, but returns are substantially below what we would historically expect from money market funds.

So, what am I supposed to do?

Well the good news is that investors have alternatives.  The first strategy is to reduce cash balances where practical.  Schwab for example explains that their sweep account is only intended for the minimal cash balances required for near-term transactions.  Cash held for a longer period, where the investor wants a return without taking investment risk in stocks or bonds, can be invested in a purchased money market mutual fund.  Money invested in these funds is available next-day, rather than same-day in a sweep account.

For Rockbridge clients we are implementing a tighter cash management protocol to reduce balances held in sweep accounts and using money market mutual funds or ultra-short bond funds to generate some return on funds that are not allocated to long-term investment risk.

It is also important to keep this issue in perspective.  Our target is to keep cash balances at 1% (now less than 1%), so a $1 million account would have a cash balance of $10,000 or less.  If left in the sweep account rather than a fund with 2% returns, the lost income would amount to less than $200 per year.

The terminology and nuances of sweep accounts and purchased money funds can be confusing, so if you have any questions, please give us a call to discuss.

We had several clients this year reach out to ask how bonds were performing in their portfolios. These are great questions, so we created a few items to address what you see in your statements.  Some people notice they have held bonds for several years but seem to have a loss with their holding. This may come from their monthly statement from the custodian. Below is an example of how that looks:

From looking at this statement, it seems this investor has lost almost $9,000 from their bond holdings in the last 2.5 years (1/25/16 to 7/31/18). However, if you look at the returns from the bond funds over that period you see they were positive.

This is possible because the bond funds pay interest every month. That interest goes into the account as a monthly cash deposit and is used when we rebalance the portfolio. Interest paid in cash does not increase the market value column. Despite showing an unrealized loss, the investor did make money through these holdings.

All that said, bonds can lose money. When interest rates rise, the value of existing bonds goes down, and returns can be negative even when accounting for interest payments.

Real life application of interest rates:
  1. How it’s playing out this year (numbers from 1/1/2018 to 9/26/2018):An aggregate bond fund holds thousands of bonds. In their entirety, they have an average weighted life (duration) of 6 years. This number tells us how sensitive they are to interest rate changes.At the start of the year, an aggregate bond fund was yielding 2.57%. It is now yielding 3.22%. That means it had an interest rate increase of 0.65%. If you multiply that increase by the bond duration, Sabine’s blog you get the change in value of the underlying bonds. In this case, 6 x 0.65% = 3.90%, so the bonds’ market value dropped by 3.90% from January through September 2018.However, the bonds are paying interest. If you average the yield at the start of the year and currently, you get 2.90%. For roughly 9 months in the year, 2.90% x 9 / 12 = 2.13% of earned interest. This nets out to a loss of 1.77% so far this year.
  2. This isn’t a bad thing! Rising interest rates generally aren’t a problem for the following reasons:
    1. Your returns going forward will be higher! If bond yields start at 2.57% and never change, you’ll earn 2.57% for the rest of your life. If they start at 2.57%, jump to 3.22% and then never change you’ll eventually have more money because of it. Remember, the 3.90% drop in principal came because yields went up 0.65%. Every year from now on you’ll be getting 0.65% more in return. 3.90% / 0.65% = 6. In six years, you’ll have made up the lost principal in extra interest. From that point on you’ll be getting more in yield, leaving you better off in the long run!
    2. Usually, bonds and stocks have an inverse relationship. Historically, the price of stocks and bonds move inversely with each other. This means when stocks are falling, interest rates go down and the value of existing bonds goes up. The opposite is true as well; if the economy is doing well and stocks are rising, interest rates are also going up and the value of existing bonds goes down. Quantitative easing by the Federal Reserve has skewed this some, but overtime we expect this to continue. For a balanced investor who holds both stocks and bonds – when bonds are losing value for an extended period, the stock portion of the portfolio is likely going up. Remember, a few months, quarters or even years is a relatively short time when it comes to investing. And for most of our clients, our time horizon is decades not years.

In summary, we feel bonds add value to most individuals’ portfolios. Over the long run they provide a positive return and have much less volatility than stocks. Additionally, they usually move in the opposite direction of stocks which limits large fluctuations in portfolio value and amplifies the benefit of rebalancing.


“Give, but give until it hurts.”
– Mother Teresa – 


I don’t think Mother Teresa paid much attention to the tax code, but her quote is unusually prescient for 2018 taxpayers.  The changes have made it unlikely to get a tax break on money given to your favorite charities.

When the Tax Cuts and Jobs Act was signed into law late last year, the intent was to reduce taxes and simplify the tax code for all Americans.  Some of the more significant provisions were the increase of the standard deduction along with the elimination of many itemized deductions.

The standard deduction has nearly doubled to $24,000 for married couples filing jointly ($12,000 for single filers).  The non-partisan Tax Policy Center estimates that more than 90% of tax filers will no longer need to itemize their deductions.  Therefore, taxpayers who use the standard deduction would not get any tax savings from making charitable donations.

How the New Tax Law Reduces or Eliminates Charitable Deductions:

For example, let’s say that a married couple pays at least $10,000 (maximum deductible amount) in state and local property taxes, has mortgage interest of $5,000 and makes $5,000 in charitable contributions. This adds up to $20,000 in deductions, which is lower than the $24,000 standard deduction. The higher standard deduction eliminates the tax deductibility of charitable contributions.

How Bundling Restores your Charitable Deduction:

One way to get a tax break on your charitable donations is to bundle them into one year.  For example, if you are likely to give $5,000 to charity each year, then making a one-time donation that covers the next 3-5 years to a Donor-Advised fund will allow you to get the tax break back.

Bundling Works Like This:

Say you make a $15,000 contribution to a Donor-Advised fund in 2018.  Using the above example your total itemized deductions are now $30,000. ($10,000 state tax, $5,000 mortgage interest and $15,000 charity).  The additional $6,000 in itemized deductions over the $24,000 standard deduction would be worth 24%-37% of the difference depending on your own marginal tax rate.

Additionally, you can use the Donor-Advised fund to make distributions to your favorite charities anytime (ie. spread equally over 3, 4 or 5 years or in any other timeframe you choose).

There are many Donor-Advised funds to choose from including ones offered by Charles Schwab and TD Ameritrade.  You can contact your Rockbridge advisor, or check out these Step-by-Step Instructions to Set Up a Donor Advised Fund.



  1. How does/and how much does your advisor get paid?

Fees matter.  It is important to know how much you are paying and the value you receive for that payment.  If you’re paying 1% or more for only investment management with no in depth retirement planning, we should talk.

  1. Is your advisor required by law to act in your best interest? If not, why?

Most advisors are only required to do what’s “suitable” for you and are not required to act in your best interest.  If your advisor is anything but a fee-only registered investment advisor (ex. Fee-based, commission based, insurance salesman, bank advisor etc.) they have intentionally decided against being held to a fiduciary standard (acting in your best interest).

  1. Does your advisor invest his own money in the same manner he recommends to his clients?

Rockbridge advisors believe all money (theirs, as well as their clients) should be invested according to an evidence-based investment philosophy studied by academics since the 1960s. If your advisor is investing their own money differently than they are recommending you should invest yours, it should make you stop and think.

  1. Does your advisor help you save money on taxes?

We help clients focus on factors they can control.  Together, we build and create a financial plan incorporating a tax-efficient investing and withdrawal strategy so you end up with more of your own money (and the government doesn’t!).

  1. Does your advisor help you understand how much money you can spend in retirement?

Investment management is just one piece of sound financial advice.  We solve financial problems beyond just the investment management component.  The first step of our process is to help you understand how much you are able to spend throughout retirement relative to how much you are spending today.

  1. Does your advisor have industry professionals to help you in all aspects of your financial life? If not, why?

At Rockbridge, we have built a team of industry professionals (CFP’s, CFA’s, CPA’s, and Legal),  that are committed to client care.  We have the expertise to provide unrivaled advice in all aspects of your financial life.

While you should think about retirement planning as early as possible, the five years leading up to retirement are critical. If you believe you are 5 years or less away from retirement, now is the time to seriously take a look at your finances and get a plan in place.

The New York Times recently shared an article called “Countdown to Retirement: A Five Year Plan.” The article provides a list of key items you should be concentrating on in each of these five crucial years leading up to retirement. You can check out the original article here.

5 Years to Go

This is the year for a “financial check-up.” Are you on track to meet your retirement spending needs based on your saved assets and retirement income sources (Social Security, pension)? Even if your projections are not what you want them to be, it is important to know where you stand so you can make adjustments. Do you need to cut back spending now in order to save? Do you need to adjust your asset allocation to take advantage of higher expected returns? Rockbridge can help you run this analysis, develop recommendations for the next five years in a financial plan, and get you on the right track.

4 Years to Go

Now is a good time to think about where you would like to live in retirement in your later years. If you were thinking about living in a retirement community, it may not be a bad idea to start researching now. You can get an idea of the cost and plan for it if necessary, and many retirement communities have long wait lists. You should also consider how you would fund a long-term care event. Have you built up enough assets to self-insure? Is it appropriate to purchase long-term care insurance to cover the full or partial cost of care in a nursing home?

3 Years to Go

As important as it is to financially plan for retirement, it’s just as important to emotionally plan. How do you plan on filling your time? Many people say they want to travel, but what about from day to day? Whether it’s working part-time, volunteering, or devoting time to a hobby you love, you need to consider what your retirement looks like. This is also a good opportunity to evaluate your current home. Do you plan on selling and downsizing? If you plan on staying in this home, are they any updates you want to get done while you are still working? You may also want to consider if refinancing your home make sense or if you’d want to establish a HELOC for emergencies.

2 Years to Go

Talk to your tax advisor to see if there are any tax savings strategies you can benefit from. Roth conversions are popular if you have a large balance in pre-tax accounts (traditional IRAs or 401(k)s). Additionally, if you drop to a lower tax bracket in retirement, it may be a good opportunity to pay the taxes on some of that money and convert to a Roth IRA which will never be taxed again before you have to start your required minimum distributions. This is also a good opportunity to rerun your financial plan and practice” being retired. See how it feels to live off your retirement spending budget over the next couple of years!

1 Year to Go

Have you thought about health insurance once you retire? If you are retiring prior to age 65 when you would be eligible for Medicare, you will have to fund the cost of your own health insurance. Ask your employer if they offer any form of retiree healthcare benefits. You also have the option to use COBRA for your current coverage or to purchase a policy through the exchange. This is also a good time to take a look at your asset allocation again. If you’re on track, maybe you can start scaling back some of your stock exposure. It’s never a bad idea to have some extra cash available or to make use of short-term investments just in case the market takes a hit right when you retire.

We know there is a lot to think about when it comes to planning for retirement, and Rockbridge is here to help!

Stock Markets

Returns from various stock market indices over several periods ending June 30, 2018 are shown to the right.  Here are a few highlights:

  • Domestic stocks continue to lead the way. REITs were up nicely for the quarter, but non-domestic stocks were down.  Due to political turmoil and the specter of a trade war, stocks traded in developed international markets are reflecting uncertainty.
  • Emerging markets gave back much of their positive result of recent periods. This is driven by increasing interest rates and the strength of the dollar.
  • Returns from domestic small-cap stocks have done well over these periods.
  • Look at the variability among the different markets over the shorter periods and how it tends to even out over longer periods. Keep in mind:  ten years in capital markets is a short period over which there can be plenty of anomalies.

Bond Markets


The Yield Curves graph to the right shows the yield to maturity of U.S. Treasury securities, from short-term (one month) to the long-term (twenty years).  Recent changes in these curves are presented below.  Note:

  • Look how short-term yields have climbed over the past year with little change in longer-term yields. As yields move up, prices and returns go down.
  • There is not much change over the quarter. Notice the flatness of today’s yield curve – hardly any difference between 5-year and 10-year yields.  A flat yield curve is generally an indicator of a difficult economic environment ahead.
  • While there is no sign of it yet, it seems reasonable to expect increasing inflation due to the introduction of tariffs, plus today’s robust economy and low unemployment.  Expectations of increasing inflation should produce higher yields for longer-term bonds.

A recent headline in the Wall Street Journal declared, “A Generation of Americans Is Entering Old Age the Least Prepared in Decades.”  The article starts out by stating, “Americans are reaching retirement age in worse financial shape than the prior generation, for the first time since Harry Truman was president.”  It is a familiar story with some updated, and alarming, statistics.

Consider the following statements from the article:

  • In total, more than 40% of households headed by people aged 55 through 70 lack sufficient resources to maintain their living standard in retirement.
  • Median personal income of Americans 55 through 69 leveled off after the year 2000 – for the first time since data became available in 1950 (according to analysis done by the Urban Institute). Median income for people 25 through 54 is below its 2000 peak.
  • Americans aged 60 through 69 have more debt, including six times as much student-loan debt in 2017 than they did in 2004 (according to New York Federal Reserve data adjusted for inflation).
  • Households with 401(k) investments and at least one worker aged 55 through 64 had a median $135,000 in tax-advantaged retirement accounts as of 2016 (according to the latest calculations from Boston College’s retirement center)…that would produce about $600 a month in annuity income for life.
  • Health care costs – since 1999, average worker contributions have risen 281% during a period of 47% inflation.
  • The cost of higher education continues to rise much faster than inflation, causing student-loan debt to rise for students, and often for parents.
  • Life expectancy continues to increase, so people in their 50’s and 60’s are often helping aging and ill parents while figuring out their kids’ college expenses.

Individual stories of financial insecurity often start with familiar hardships.  At Rockbridge, we have clients affected by all of the common, but unfortunate, life events including job loss, personal illness, divorce, ailing parents or children, and student-loan debt for themselves or their kids.

One interesting change I noted – we now talk more often about “approaching retirement age,” rather than “approaching retirement.” Some people still choose to retire early, and others are forced to retire, but more people are choosing to continue working because they need the income or prefer the lifestyle.

At Rockbridge, we think people should make decisions that enhance their financial security whether they plan to retire or not.  The trends noted above make financial security a more difficult goal to obtain.  Planning early, and adjusting often, will allow people to be better prepared as they approach retirement age.  If you have not reviewed your plan lately, give us a call.

Last week, we introduced you to our weekly Investment Committee meetings. When we met for class on 4/27/18, we began our discussion on the subject of an “optimal portfolio.”

The centerpiece of investment management is portfolio construction. Alongside financial planning, the manner in which one’s money is invested is critical to meeting one’s financial goals.

Before attempting to construct the best portfolio possible, it is important to identify some core beliefs when it comes to investing. There are many, but a few we would like to highlight are:

  • Markets are efficient: By and large, the best estimate of the true intrinsic value of a stock or bond is whatever price the security is currently trading at. Free lunches almost never exist, though in hindsight may seem obvious. No one really knows what will happen to the market tomorrow or the next day.
  • Only take systematic risk: When you own the broad stock market, you are exposed to variability in the value of your investment (risk). When the economy is good, a diversified stock portfolio will go up, and when recessions hit, it will go down. The investor is rewarded for taking that risk. Over time markets go up, but the ride is bumpy. When one owns individual stocks, they are still exposed to that same economic risk. However, they are also exposed to company specific risk. The company specific risk associated with each individual stock averages together to get the broader market, meaning on it’s whole provides no additional return. By concentrating your investments into specific holdings, you are exposing yourself to increased risk without improving expected returns.
  • Risk and return are highly correlated: As markets are efficient, and assuming only systematic risk is being taken, the more (less) risk you are taking the higher (lower) your return should be over long periods of time. Since 1926, U.S. stocks have averaged a 10% return. If you were told going forward you’d get 10% every year, everyone would sign up, driving the price up until the expected return was lower. The fact that the market can be up or down 40% in a year is what makes it risky and along with that comes a return.

Keeping these “truths” in mind, we construct an optimal portfolio with the goal of achieving the following things:

  • Achieve the highest risk-adjusted return: Through the application of modern portfolio theory, we want every portfolio to deliver the largest return for a given level of risk. Financial advisors and investors together are responsible for determining how much risk the investor can and should take. At that point, we find the combinations of investments that deliver the highest expected return.
  • Keep costs low: Research shows that paying too much in fees and commissions eats into returns. Keeping costs low and achieving market returns in the most efficient manner is the proven way to build wealth.
  • Simple and customizable: Research has shown a few factors drive returns. Introducing a multitude of strategies and products generally complicates things, often driving costs up without improving returns. Additionally, every client is unique and an optimal portfolio must be customizable to their specific situation. Whether it’s a legacy stock position with large capital gains, or an employer sponsored retirement account with poor/limited investment choices, an optimal portfolio needs to be able to be customized. Simplicity meshes better with customization than complexity.

Having a plan and sticking with it is critical when it comes to investing. Cognitive and behavioral biases cause people to make emotional decisions which harm their financial well being. Understanding and buying into the investment management piece of one’s finances, helps the investor and the advisor stick to the plan and avoid the mistakes that harm most investors.


People from all across the world look forward to Friday.  Friday marks the end of a (usually long) work week and the start of what is supposed to be a relaxing weekend.  At Rockbridge, we look forward to Friday’s, particularly Friday mornings, for a different reason.

Friday mornings have become a tradition, some say a “tradition unlike any other” (not the masters), where great minds (some) sit around our conference room table and discuss the core principles of our investment philosophy and what, if any, changes should be made to our portfolios.  These meeting are led by Bob Ryan, Rockbridge’s Chief Investment Officer, and topics include anything and everything investment management related.

The purpose of these weekly articles is to inform clients what we are discussing each week and how it relates to their wealth at Rockbridge.  Our investment philosophy is proven in academia and the ideas we implement in our portfolios have been around for several years.  It’s important to us to not have a “whimsical” approach to managing wealth; something we see all too often in the investment management world.  Although we are seen as a financial planning/wealth management firm in the eyes of our clients, investment management and portfolio construction is the backbone of this process.

We hope to provide valuable insight on our Friday meetings; what some have coined “Bob’s Investment Class.”  This marks the beginning of a series of weekly posts sharing some of these ideas with you.

Thoughts from Friday 4/20/18

Mike, Ethan, and Claire, attended the Dimensional Fund Advisors (DFA) conference in New York City this week and came away with some interesting ideas for our Friday discussion.

Topic: Corporate Bond Credit Risk Premium

There are risks to consider when investing in the bond market, one being credit risk.  Credit risk is the risk of a bond “defaulting”, and in a normal market riskier bonds will have to entice investors by providing higher coupon payments.  We ran across data suggesting that bonds with lower credit quality have similar default rates to similar bonds with higher credit quality.  This begged the question of “why not invest in riskier bonds and pocket the higher coupon payment if said bonds have the same default rate as  similar higher quality bonds?”

One of our core rules is to be suspicious of any “free lunches” when it comes to investing; achieving a higher return without enduring additional risk, which is what we see here.    This situation is no exception to our core beliefs.

We discussed that although increasing credit risk in the bond portfolio might not result in a higher default rate, it would actually increase the correlation to the equity portfolio.  Bonds should be inversely correlated with equities, and increasing credit quality too much creates positive correlation to equities; meaning equities and fixed income would behave similarly, something we don’t want to happen.  Bonds provide a “buffer” in the portfolio, helping to “smooth out the ride.”  For example, in 2008 the Barclay’s Aggregate Bond Index finished the year earning 5.24% while the S&P 500 Index finished losing nearly 37%.

In summary, the role of bonds is much more than the eye sees.  Sure, we could increase expected bond returns by exposing portfolios to more credit risk, but we would increase the correlation between the stock and bond components of the portfolio as well.


Stock Markets

Returns from various stock market indices over several periods ending March 31, 2018 are shown to the right. Here are a few highlights:

  • While not observed in these graphs, volatility seems to have come back, which is normally how stock markets work.
  • Except for emerging markets, stocks were down over the past quarter – REITs continue to lag.
  • Even with the off quarter (with the exception of REITs), stocks were up nicely over the past twelve months.
  • Note that over the past five and ten years, returns from stocks traded in domestic markets were well above those in non-domestic markets. However, don’t let these results fool you. Diversification to non-domestic markets is still important to long-term success.


Bond Markets

The Yield Curves to the right show the yield to maturity of U.S. Treasury securities over several maturities, from the short term (one month) to the long term (twenty years).

  • Look at how the curve has moved since the beginning of the year. It is essentially showing a parallel shift upward. As yields move up, prices and returns go down.  Consequently, we realized negative bond returns this past quarter – the longer the maturity, the greater the loss.
  • Now look at the changes since a year ago. Yields for longer maturities did not change much over the past year and, in fact, fell between March and December.  Notice how yields on shorter-term Treasury securities moved up.  These shifts explain the negative annual returns on bonds of shorter maturities and positive returns on bonds of longer maturities.
  • The Yield Curve got flatter over the past year.  The Fed’s activities have increased short-term yields without much effect on longer-term bond yields.  Generally, longer yields are driven by the expectation of future short-term interest rates and inflation.  Today’s Yield Curve implies lower interest rates in the future – quite different from both the announced goal of the Fed and what is usually experienced in a robust economy.


As another tax season comes to a close, we wanted to draw attention to a number of scams and schemes to defraud unsuspecting taxpayers. We think it is important that our clients be aware of how these scams work, and what precautions you can take to protect yourself.

How the Scams Work:

One popular method for defrauding taxpayers is to steal their identity using “phishing” techniques, or malware to obtain their victim’s personal information. Phishing scams use fake emails or website links designed to appear to be legitimate. Once accessed, these fake links will either ask for information or potentially even infect your computer with software allowing the fraudsters to access personal information.

Recently, identity thieves have used this stolen information to file fake tax returns, but use the taxpayer’s actual bank account to deposit the fraudulent refund. Once the refund has been deposited, they will call the taxpayer posing as an IRS agent, debt collector, or law enforcement and demand that the refund be returned.

Taxpayers who receive the refunds should follow the steps outlined by Tax Topic Number 161 – Returning an Erroneous Refund. The tax topic contains full details, including mailing addresses should there be a need to return paper checks. By law, interest may accrue on erroneous refunds.

Telephone scams are another popular way criminals look to defraud taxpayers. These scams involve callers contacting taxpayers claiming to be IRS representatives. The victims are told that they owe the IRS money and that the amount must be paid immediately using either a gift card or wire transfer. Callers posing as the IRS will often become hostile or insulting, and threaten the victims with arrest, suspension of a business or driver’s license, or even deportation if they do not pay. If the phone is not answered, the thieves may leave an urgent callback message.

Scammers do not just operate during tax season. Thieves posing as IRS agents have targeted parents and students during the summer and back-to-school months, by calling and demanding payment of a fake “Federal Student Tax,” or some variation thereof. Just like in the telephone scams previously discussed, these callers will demand payment via gift card or wire transfer, and will threaten to report the student to the police to be arrested if payment is not made.

These are just a few of the most popular scams thieves have engaged in to attempt to defraud innocent taxpayers, and new techniques and tactics are being developed all the time. With that said you can protect yourself by taking the following precautions.

Know What the IRS Will Not Do – The IRS will never:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes.
  • Threaten to bring in local police, immigration officers or other law-enforcement to have you arrested for not paying. The IRS also cannot revoke your driver’s license, business licenses, or immigration status. Threats like these are common tactics scam artists use to trick victims into buying into their schemes.
  • Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed. You should also be advised of your rights as a taxpayer.
  • Ask for credit or debit card numbers over the phone.

Know What the IRS Will Do:

  • Contact you through regular mail delivered by the United States Postal Service. If there is an issue with your tax return, the IRS will issue you a tax “notice” informing you of the issue.
  • Call or come to your home or business. The IRS may call or send an agent to your home or business, but only in special circumstances such as when a taxpayer has an overdue tax bill, to secure a delinquent tax return or a delinquent employment tax payment, or to tour a business as part of an audit or during criminal investigations

Know Whom to Contact:

  • Contact the Treasury Inspector General for Tax Administration to report a phone scam. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
  • Report phone scams to the Federal Trade Commission. Use the “FTC Complaint Assistant” on Please add “IRS Telephone Scam” in the notes.
  • Report an unsolicited email claiming to be from the IRS, or an IRS-related component like the Electronic Federal Tax Payment System, to the IRS at

The bottom line is that if you are contacted by someone claiming to be from the IRS, DO NOT give out sensitive information over the phone or via email. If the call does not feel right, hang up and contact the IRS at 800-829-1040, or your advisor.

It’s common for investors to feel nervous when looking at investments by themselves. Are you saving enough? Are you saving in the right place? Are you holding the right mix of investments? Should you own individual stocks or funds? Are you paying too much in fees? What are you actually paying in fees? For the average investor, this is enough uncertainty to make someone feel uncomfortable, and this isn’t even the whole picture.

Dealing with a pension can seem daunting too. How does my retirement date affect my payout? When should I claim my benefit? Should I take the lump sum or the annuity? What, if any, survivorship benefit should I select? The same goes for Social Security:  When should I collect? When should my spouse collect? Will I get the full amount promised to me once I retire?

Any of these items, in a silo, is enough to make an investor nervous. Add them together and you get anxiety. When investors are nervous, they are more likely to make mistakes. That’s where Rockbridge comes in. We can help you answer these questions by framing your financial decisions in a comprehensive financial plan.

Numerous studies have shown investors harm themselves when they act impulsively. This boils down to investors holding cash because they are afraid of the market declining. This may be when the market is at an all-time high and they’re afraid of a correction, or when the market is rapidly falling and the person is worried it will go to 0.

In reality, neither is certain and no one knows what the next day will entail. However, we do know markets go up over time, and every day you hold cash is a day you’re missing out on the next incremental gain.

As advisors, we’ve found investors are less likely to make mistakes or act impulsively when they see their investments as part of a larger plan. Knowing the role each piece of the puzzle plays is helpful in reducing the stresses of personal finance, and makes one more likely to adhere to a course of action that is in the person’s best interest. It can be hard to forego income when you’re middle aged, but understanding the benefit of saving in your 401(k) makes this more doable.

Perhaps a family has a large fixed pension that, combined with Social Security, covers all their living expenses right as they retire. Their investment savings will become important over time as inflation erodes the value of the fixed pension. Knowing this helps a family stay the course when the stock market is volatile.

Alternatively, a person might need to rely heavily on their portfolio in their early 60s while they wait to take Social Security and receive a small inheritance. This investor will want a less risky allocation to protect against large declines in the stock market. They should also stick with their plan and not pursue a riskier allocation because they think the market is about to shoot up. This person’s portfolio plays a much different role than the portfolio of the family in the previous paragraph, despite being close in age.

This is all not to say plans can’t change. For example:  Someone is 68 and delaying their Social Security to claim a larger benefit; if the stock market drops 50%, the course of action giving them the highest probability of success might be to claim Social Security now and not draw down on an investment account while stocks are at depressed levels. These decisions shouldn’t be done impulsively. They should be well thought out and analyzed with mathematical probabilities to ensure that an unemotional, best course of action is being pursued.

No commentary or article you read is going to be perfectly relevant to you because every situation is unique. Investors are best served when they have a plan they buy into that addresses all facets of their financial life. This improves mental well-being and helps families avoid mistakes that can be costly. Rockbridge can help you look at the whole picture and guide you in making the important financial decisions.


The markets have seen several ups and downs over the years, but remember – Volatility is normal. At Rockbridge, we believe financial advisors play a vital role in helping you understand what you can control while providing expertise, perspective and encouragement to keep you focused on your long-term goal. We are here to help you tune out the noise.

Check out this insightful video that our friends at Dimensional Funds Advisors put together!

Estate planning has often had an air of mystery to some people. The terms used and bantered about by lawyers or planning professionals are not words we use in everyday conversations.  Do you have heirs? Answer: No you don’t – it is a trick question. If you are reading this article, it’s presumed you are alive and breathing. So, only individuals who have died have heirs … but only if they don’t have a last will.  Confused? You are not alone.

Heirs are technically those in your family lineage or by marriage who will receive assets from your estate if you don’t have a will.  Dying without a will is called “intestacy” – not a word you often hear, but it is a term you really need to understand to avoid some unintended consequences created when one dies without a will and no specifications are made in writing.  Probate is known as the court supervised process of an Executor retitling assets to your beneficiaries when you do have a valid will. Beneficiaries are those who are named in your will – or have been listed on such common arrangements as your life insurance, company retirement plan, annuities or your IRA.  Such assets as life insurance and retirement accounts list beneficiaries by contract and therefore supersede the directions of your will in nearly all instances. So, what is stated in your last will – providing you have one – does not control who receives funds from life insurance, IRAs, 401ks, annuities, etc.  Inheritance issues for families can be turned upside down if you do not understand the difference between probate assets and non-probate assets.

The concern with some beneficiary arrangements in retirement and life insurance is they are often signed and then forgotten. Why is this a problem? You may have listed your deceased spouse or still specify your ex-spouse even after a divorce. There are many pitfalls that can occur with beneficiary arrangements due to forgotten policies or bank accounts, children or grandchildren born after the initial acquisition, remarriage, death of a child, etc. At Rockbridge, we urge you to review and discuss with us your beneficiary arrangements with accounts we manage as well as those assets outside of our purview. Too many estate plans can be disrupted or legally contested – much of which could have been avoided by an annual review and discussion of your beneficiaries and general intentions. Changes in family circumstances such as death, remarriage, new family members, and divorces should spur a conversation with your investment, insurance and legal advisors to ensure those individuals or charities who you intend to receive bequests from your estate are those who actually benefit.

Nothing can take the place of an expert attorney skilled at drafting proper estate planning documents such as your last will & testament, any relevant trust documents or Health Care Proxy, Living Will/Advance Healthcare Directive or Power of Attorney. If these terms are confusing, as stated earlier, you’re not alone.  If you have a sizeable estate, complex family dynamics, are charitably inclined, have step-children, second marriages, young children who are minors, for example – you owe it to your loved ones to receive professional guidance in such matters. Please feel free to start the conversation with our team.

It’s tax time again and as you gather your W2s, 1099s, and maybe even your K-1s, we thought it would be a good time to explain our income tax planning approach.

Income tax planning is a crucial aspect of the overall financial planning process. To some degree, taxes impact every area of your financial plan. In certain cases, the tax planning opportunity will be a one-time event; affecting only one or two tax years. Other times, tax decisions will have an impact on multiple tax years well into the future.

At a high level, tax planning consists of the following elements:

  • Accelerating or delaying controllable income
  • Accelerating or delaying controllable deductions
  • Structuring your investment portfolio to maximize the tax advantaged characteristics of income
  • Converting future taxable income into tax protected income

The basis for tax planning involves reviewing and understanding your current year tax situation, and how it compares to projections of future years. Throughout the year, we review the income you’ve received and expect to receive, along with the deductions you’ve taken and expect to take. This will give us an idea of your expected Federal and State marginal tax bracket.

Your projected current year tax situation will be reviewed against what we would project next year’s tax situation to look like (at least on a high level). Based on this comparison, we can make decisions to accelerate or delay income and deductions, to the extent possible.

Tax planning impacts how we approach constructing your portfolio. We pay attention to the different tax characteristics of income, and how that is affected by being held in accounts with different tax structures.

Distributions from Traditional IRAs are taxed at ordinary income rates, which are generally much higher than long-term capital gains or qualified dividend rates. Holding investments we expect to produce income subject to these tax advantaged rates in an IRA causes this income to lose its tax advantaged characteristic when distributed. Therefore, we try and hold as much of your allocation to bonds as possible in your IRA and hold your stock allocation in your Roth and taxable accounts

Finally, we look for opportunities to convert future taxable income into tax protected income. Examples of this include funding 529 Plans and Health Savings Accounts (HSAs). The investment gains and earnings in these accounts will avoid income tax as long as they are used to pay for qualified education and medical expenses. Directly funding and/or converting pre-tax dollars into a Roth IRA shields future investment gains from income taxes.

We do not let taxes alone drive the decisions we make. However, we do consider their impact and look for ways achieve our planning goals in the most tax efficient way possible.

Yesterday evening, Rockbridge’s own Ethan Gilbert, CFA was featured on our local Spectrum news network. Check out the interview below where Ethan discusses the recent market shifts, how these swings can affect your retirement accounts, and how to protect your accounts from this volatility.


Click here to learn more about Ethan!

This past weekend, the New England Patriots did it again. Down 10 in the 4th, star quarterback Tom Brady orchestrated two scoring drives to pull off another comeback victory. In two weekends, the Pats will try to win their 3rd Super Bowl in 4 years – headlining a host of impressive statistics dating back to 2001.

But as loyal CNYers, we know this run will come to an end. Brady, already 40 years old, will age, coach Belichik will retire, and the Bills and Giants will once again meet in the Super Bowl.

We’ve seen it in other sports: The UCLA Bruins under Wooden, the Celtics with Bill Russell, and the Yankees in the 1950s. Teams have great runs, but sooner or later they have losing records. This pattern transcends most facets of life. When we perceive something to be at a peak, we say it’s only a matter of time before it’s worse than it is today.

The stock market doesn’t play by these rules. It’s normal to think because the market is at an all-time high it must go down, but it mustn’t. The stock market and the Patriots have enjoyed similar recent success, but they will have different futures.

Markets go up over time. Since 1978, we’ve had 40 “year-ends.” Money invested in the S&P 500 has hit a new end-of-year-high in 27 of those 40 years. Having the stock market trading at or near an all-time high isn’t cause for panic; it’s common!

We just hit our sixth consecutive year of a new high. This is a great stretch, but in the 80s and 90s we saw runs of eight and nine years respectively. The current run could last for 12 years, or it could end this next year.

No one knows for sure what the market will do, but cash is a poor long-term investment and the stock market has rewarded those who stuck with it through the ups and downs. $1 invested 40 years ago is worth $80 today.

While markets go up over time, they do have temporary periods of declines. As investors, we need to determine the right diversified mix of stocks and bonds that allows us to benefit from being invested while protecting us when times are bad.

And when the stock market inevitably performs poorly, Tom Brady will be jealous. For unlike Mr. Brady, the stock market’s best days are still to come, but Brady is better now than he will be at 45. Well it’s Tom Brady, let’s say 50 to be safe.

Stock Markets

Returns from various stock market indices over several periods ending December 31, 2017 are shown below. The past quarter was good for stocks – REITs lagged. Over the past year, returns from stock indices, especially emerging markets, were well above longer- term averages.  Over longer periods, domestic market indices were well above those of non-domestic markets, which tells us nothing about what we’ll see over the next ten years.


Bond Markets

Yields are up at the short end in response to the Fed increasing interest rates; yields at the longer end are down a bit.  Yields and bond prices are inversely related (when yields go up, prices come down and vice versa).  These changing yields explain negative bond returns for short-term bonds; positive returns for bonds of longer maturities.

Today’s Yield Curve is flatter.  The Fed can control only short-term rates; long-term yields generally reflect market expectations for future interest rates and inflation.  Falling yields are consistent with the expectation that the Fed will have difficulty increasing interest rates down the road or reduce inflation – a precursor for a difficult economic environment, which seems inconsistent with today’s economy.


Happy New Year! Now that 2017 is a wrap, one of the best presents you can bestow on yourself and your loved ones is the gift of proper preparation for the rest of the year. Want to get a jump-start on it? Here are 10 financial best practices to energize your wealth management efforts.


  1. Save today for a better retirement tomorrow. Are you maxing out pre-tax contributions to your company retirement plan? Taking full advantage of your and your spouse’s company retirement plans is an important, tax-advantaged way to save for retirement, especially if your employer matches some of your contributions with “extra” money. And, by the way, if you are 50 or older, you may be able to make additional “catch-up contributions” to your plan, to further accelerate your retirement-ready investing.
  2. Verify your valuables are still covered. Most households have insurance: home, auto, life … maybe disability and/or umbrella. But when is the last time you’ve checked to see if these policies remain right for you? Over time, it’s easy to end up with gaps or overlaps, like too much or not enough coverage, deductibles that warrant a fresh take, or beneficiaries who need to be added or removed. If you’ve not performed an insurance “audit” recently, there’s no time like the present to cross this one off your list.
  3. Get a grip on your debt load. Investment returns will only take you so far if excessive debt is weighing you down. Prioritize paying down high-interest credit cards and similar high-cost debt first, and at least meeting minimums on the rest. You may also want to revisit whether you still hold the best credit cards for your circumstances. Do the interest rates, incentives, protections and other perks still reflect your needs? Ditto on that for your home loan.
  4. Check up on your credit reports. Speaking of those credit cards, have you been periodically requesting your free annual credit report from each of the three primary credit reporting agencies? Be sure to use for this purpose, as it’s the only federally authorized source for doing so. By staggering your requests – submitting to one agency every fourth months – you can keep an ongoing eye on your credit, which seems especially important in the wake of last summer’s Equifax breach.
  5. Get a bead on your budget. How much did you spend in 2017? How much do you intend to spend in the year ahead? After current spending, can you still afford to fund your future plans? Do you have enough set aside in a rainy day fund to cover the inevitable emergencies? These days, there are apps available to help you answer these important questions. is one such popular app.
  6. Get ready for tax time … with a twist. While income tax reform looms large in the U.S., the changes won’t apply to 2017 taxes (due by April 17, 2018). Still, there are the usual tax-planning activities to tackle: gathering receipts and reports, making prior-year contributions, wrapping up business revenue and expenses if you’re a business owner, funding or drawing down retirement accounts, and more. Plus, there now may be tax planning opportunities or challenges to consider as the new laws take effect in 2018. You may want to fire up those tax-planning engines on the early side this time around.
  7. Give your investments a good inspection. Where do you stand with your personal wealth? Do you have an investment strategy to see you through? Does your portfolio reflect your personal goals and risk tolerances? If you experienced strong growth in 2017, is it time to lock in some of those gains by rebalancing your portfolio to its original mix? While investment management is a marathon of patient perspective rather than a short-sighted sprint of mad dashes, a new year makes this as good a time as any to review the terrain.
  8. Ensure your estate plans are current. Do you have wills and/or trusts in place for you and your loved ones? If so, when is the last time you took a look at them? Your family may have experienced births, deaths, marriages or divorces. Dependents may have matured. You may have acquired or sold business interests, and added new assets or let go of old ones. Your original intentions may have changed, or government regulations may have changed them for you. For all these reasons and more, it’s worth revisiting your estate plans annually.
  9. Have a look at your healthcare directives. As healthcare becomes increasingly complex, advance directives (living wills) play an increasingly vital role in ensuring your healthcare wishes are met should you be unable to express them when the need arises. Don’t leave your loved ones unaware of and/or unable to act on your critical-care or end-of-life preferences. If you don’t already have a strong living will in place, Aging with Dignity’s Five Wishes is one helpful place to learn more.
  10. Give your newly adult children the gift of continued care. Have any of your children turned 18 recently? You may send them off to college or a career, assuming you can still be there for them should an emergency arise. Be forewarned! If you don’t have the legal paperwork in place, healthcare providers and others may be unable to respond to your requests or even discuss your adult child’s personal information with you. To remain involved in their healthcare interests, you’ll want to have a healthcare power of attorney, durable power of attorney and HIPAA authorization in place. It may also be prudent to establish education record release authorizations while you’re at it.



We get it. Life never stops. The holiday season can be a busy time that often spills right into the New Year. Don’t despair if you can’t get to all ten of these tidbits at once. Take on one each month, and you’ll still have a couple of months to spare before we’re ringing in 2019.

Better yet, don’t go it alone. Let us know if we can help you turn your financial planning jump-start into a mighty wealth management leap. It begins with an exploratory conversation.


As you are likely aware, Congress has recently passed significant changes to the tax law. These changes are effective beginning in tax year 2018, with many of the changes for individuals set to sunset after 2025. The summary below is a high-level overview of many of the most relevant changes that will impact people’s taxes. If you have questions relating to your specific situation, please contact your Rockbridge advisor. Also, keep an eye out on our blog for upcoming articles discussing our income tax planning process, and for more in-depth reviews of these new changes to the tax law.

We’re coming in for a landing on our alphabetic run-down of behavioral biases. Today, we’ll present the final line-up: sunk cost fallacy and tracking error regret.


What is it? Sunk cost fallacy makes it harder for us to lose something when we also face losing the time, energy or money we’ve already put into it. In “Why Smart People Make Big Money Mistakes,” Gary Belsky and Thomas Gilovich describe: “[Sunk cost fallacy] is the primary reason most people would choose to risk traveling in a dangerous snowstorm if they had paid for a ticket to an important game or concert, while passing on the trip if they had been given the ticket for free.” You’re missing or attending the same event either way. But if a sunk cost is involved, it somehow makes it more difficult to let go, even if you would be better off without it.

When is it helpful? When a person, project or possession is truly worth it to you, sunk costs – the blood, sweat, tears and/or legal tender you’ve already poured into them – can help you take a deep breath and soldier on. Otherwise, let’s face it. There might be those days when you’d be tempted to help your kids pack their “run away from home” bags yourself.

When is it harmful? Falling for financial sunk cost fallacy is so common, there’s even a cliché for it: throwing good money after bad. There’s little harm done if the toss is a small one, such as attending a prepaid event you’d rather have skipped. But in investing, adopting a sunk cost mentality – “I can’t unload this until I’ve at least broken even” – can cost you untold real dollars by blinding you from selling at a loss when it is otherwise the right thing to do. The most rational investment strategy acknowledges we cannot control what already has happened to our investments; we can only position ourselves for future expected returns, according to the best evidence available to us at the time.


What is it? If you’ve ever decided the grass is greener on the other side, you’ve experienced tracking error regret – that gnawing envy you feel when you compare yourself to external standards and you wish you were more like them.

When is it helpful? If you’re comparing yourself to a meaningful benchmark, tracking error-regret can be a positive force, spurring you to try harder. Say, for example, you’re a professional athlete and you’ve been repeatedly losing to your peers. You may be prompted to embrace a new fitness regimen, rethink your equipment, or otherwise strive to improve your game.

When is it harmful? If you’ve structured your investment portfolio to reflect your goals and risk tolerances, it’s important to remember that your near-term results may frequently march out of tune with “typical” returns … by design. It can be deeply damaging to your long-range plans if you compare your own performance to irrelevant, apples-to-oranges benchmarks such as the general market, the latest popular trends, or your neighbor’s seemingly greener financial grass. Stop playing the shoulda, woulda, coulda game, chasing past returns you wish you had received based on random outperformance others (whose financial goals differ from yours) may have enjoyed. You’re better off tending to your own fertile possibilities, guided by personalized planning, evidence-based investing, and accurate benchmark comparisons.

We’ve now reached the end of our alphabetic overview of the behavioral biases that most frequently lead investors astray. In a final installment, we’ll wrap with a concluding summary. Until then, no regrets!

So many financial behavioral biases, so little time! Today, let’s take a few minutes to cover our next batch of biases: overconfidence, pattern recognition and recency.


What is it? No sooner do we recover from one debilitating bias, our brain can whipsaw us in an equal but opposite direction. For example, we’ve already seen how fear on the one hand and greed on the other can knock investors off course either way. Similarly, overconfidence is the flip side of loss aversion. Once we’ve got something, we don’t want to lose it and will overvalue it compared to its going rate. But when we are pursuing fame or fortune, or even going about our daily lives, we tend to be overconfident about our odds of success.

When is it helpful? In “Your Money & Your Brain,” Jason Zweig cites several sources that describe overconfidence in action and why it’s the norm rather than the exception in our lives. “How else could we ever get up the nerve to ask somebody out on a date, go on a job interview, or compete in a sport?” asks Zweig, and adds: “There is only one major group whose members do not consistently believe they are above average: people who are clinically depressed.”

When is it harmful? While overconfidence can be generally beneficial, it becomes dangerous when you’re investing. Interacting with a host of other biases (such as greed, confirmation bias and familiarity bias) overconfidence puffs up our belief that we can consistently beat the market by being smarter or luckier than average. In reality, when it’s you, betting against the trillions and trillions of other dollars at play in our global markets, it’s best to be brutally realistic about how to patiently participate in the market’s expected returns, instead of trying to go for broke – potentially literally.


What is it? Is that a zebra, a cheetah or a light breeze moving through the grass? Since prehistoric times when our ancestors depended on getting the right answer, right away, evolution has been conditioning our brains to find and interpret patterns – or else. That’s why, our pattern-seeking impulses tend to treat even random events (like 10 coin flips, all heads) as if they’re orderly outcomes suggesting a predictive pattern. “Just as nature abhors a vacuum, people hate randomness,” says Zweig, as a result of our brain’s dopamine-induced “prediction addiction.

When is it helpful? Had our ancestors failed at pattern recognition, we wouldn’t be here to speak of it, and we still make good use of it today. For example, we stop at red lights and go when they’re green. Is your spouse or partner giving you “that look”? You know just what it means before they’ve said a single word. And whether you enjoy a good jigsaw puzzle, Sudoku, or Rubik’s Cube, you’re giving your pattern recognition skills a healthy workout.

When is it harmful? Speaking of seeing red, Zweig recently published a fascinating piece on how simply presenting financial numbers in red instead of black can make investors more fearful and risk-averse. That’s a powerful illustration of how pattern recognition can influence us – even if the so-called pattern (red = danger) is a red herring. Is any given stream of breaking financial news a predictive pattern worth pursuing? Or is it simply a deceptive mirage? Given how hard it is to tell the difference (until hindsight reveals the truth), investors are best off ignoring the market’s many glittering distractions and focusing instead on their long-term goals.


What is it? Recency causes you to pay more attention to your most recent experiences, and to downplay the significance of long-term conditions. For example, in “Nudge,” Nobel laureate Richard Thaler and co-author Cass Sunstein observe: “If floods have not occurred in the immediate past, people who live on floodplains are far less likely to purchase insurance.” That’s recency, tricking people into ascribing more importance to the lack of recent flooding than to the bigger context of being located on a flood plain.

When is it helpful? In “Stumbling on Happiness,” Daniel Gilbert describes how we humans employ recency to accurately interpret otherwise ambiguous situations. Say, for example, someone says to you, “Don’t run into the bank!” Whether your most recent experience has been floating down a river or driving toward the commerce district helps you quickly decide whether to paddle harder or walk more carefully through the door.

When is it harmful? Of course buying high and selling low is exactly the opposite of investors’ actual aspirations. And yet, no matter how many times our capital markets have moved through their bear-and-bull cycles, recency causes droves of investors to stumble every time. By reacting to the most recent jolts instead of remaining positioned as planned for long-term expected growth, they end up piling into high-priced hot holdings and locking in losses by selling low during the downturns. They allow recency to get the better of them … and their most rational, evidence-based investment decisions.

We’re on the home stretch of our series on behavioral biases. Look for the rest of the alphabet soon.

Have you caught cryptocurrency fever, or are you at least wondering what it’s all about? Odds are, you hadn’t even heard the term until recently. Now, it seems as if everybody and their cousin are getting in on it.

Psychologists have assigned a term to the angst you might be feeling in the heat of the moment. It’s called “FoMO” or Fear of Missing Out. Education is the best first step toward facing FoMo and making informed financial choices that are right for you. So before you make any leaps, let’s take a closer look.

What is cryptocurrency?

Crytpocurrency is essentially a kind of money – or currency. Thanks to electronic security – or encryption – it exists in a presumably secure, sound and limited supply. Pair the “encryption” with the “currency,” and you’ve got a new kind of digital asset, or electronic exchange.

Well, sort of new. Cryptocurrency was introduced in 2009, supposedly by a fellow named Satoshi Nakamoto. His Wikipedia entry suggests he may not actually be who he says he is, but minor mysteries aside, he (or possibly “they”) is credited with designing and implementing bitcoin as the first and most familiar cryptocurrency. Ethereum is currently its second-closest competitor, with plenty of others vying for space as well (more than 1,300 as of early December 2017), and plenty more likely to come.

Unlike a dollar bill or your pocket change, cryptocurrency exists strictly as computer code. You can’t touch it or feel it. You can’t flip it, heads or tails. But increasingly, holders are receiving, saving and spending their cryptocurrency in ways that emulate the things you can do with “regular” money.

How does cryptocurrency differ from “regular” money?

In comparing cryptocurrency to regulated fiat currency – or most countries’ legal tender – there are a few observations of note.

First, since neither fiat nor cryptocurrency are still directly connected to the value of an underlying commodity like gold or silver, both must have another way to maintain their spending power in the face of inflation.

For legal tender, most countries’ central banks keep their currency’s spending power relatively stable. For cryptocurrency, there is no central bank, or any other centralized repository or regulator. Its stability is essentially backed by the strength of its underlying ledger, or blockchain, where balances and transactions are verified and then publicly reported.

The notion of limited supply factors in as well. Obviously, if everyone had an endless supply of money, it would cease to have any value to anyone. That’s why central banks (such as the U.S. Federal Reserve, the Bank of Canada, and the Bank of England) are in charge of stabilizing the value of their nation’s legal tender, regularly seeking to limit supply without strangling demand.

While cryptocurrency fans offer explanations for how its supply and demand will be managed, it’s not yet known how effective the processes will be in sustaining this delicate balance, especially when exuberance or panic-driven runs might outpace otherwise orderly procedures. (If you’re technically inclined and you’d like to take a deep dive into how the financial technology operates, here’s one source to start with.)

Why would anyone want to use cryptocurrency instead of legal tender?  

For anyone who may not be a big fan of government oversight, the processes are essentially driven “by and for the people” as direct peer-to-peer exchanges with no central authorities in charge. At least in theory, this is supposed to allow the currency to flow more freely, with less regulation, restriction, taxation, fee extraction, limitations and similar machinations. Moreover, cryptocurrency transactions are anonymous.

If the world were filled with only good, honest people, cryptocurrency and its related technologies could represent a better, more “boundary-less” system for more freely doing business with one another, with fewer of the hassles associated with international commerce.

Unfortunately, in real life, this sort of unchecked exchange can also be used for all sorts of mischief – like dodging taxes, laundering money or funding terrorism, to name a few.

In short, cryptocurrency, blockchain technology, and/or their next-generations could evolve into universal tools with far wider application. Indeed, such explorations already are under way. In December 2017, Vanguard announced collaborative efforts to harness blockchain technology for improved index data sharing.

That said, many equally promising prospects have ended up discarded in the dustbin of interesting ideas that might have been. Time will tell which of the many possibilities that might happen actually do.

Even if I don’t plan to use cryptocurrency, should I hold some as an investment? 

If you do jump in at this time, know you are more likely speculating than investing, with current pricing resembling a fast-forming bubble destined for collapse.

Bubble or not, there are at least two compelling reasons you may want to sit this one out for now. First, there are a lot of risks inherent to the cryptocurrency craze. Second, cryptocurrency simply doesn’t fit into our principles of evidence-based investing … at least not yet.

Let’s take a look at the risks.

Regulatory Risks – First, there’s the very real possibility that governments may decide to pile mountains of regulatory road blocks in front of this currently free-wheeling freight train. Some countries have already banned cryptocurrency. Others may require extra reporting or onerous taxes. These and other regulations could severely impact the liquidity and value of your coinage.

Security Risks – There’s also the ever-present threat of being pickpocketed by cyberthieves. It’s already happened several times, with millions of dollars of value swiped into thin air. Granted, the same thing can happen to your legal tender, but there is typically far more government protection and insurance coverage in place for your regulated accounts.

Technological Risks – As we touched on above, a system that was working pretty well in its development days has been facing some serious scaling challenges. As demand races ahead of supply, the human, technical and electric capital required to keep everything humming along is under stress. One recent post estimated that if bitcoin technology alone continues to grow apace, by February 2020, it will suck away more electricity than the entire world uses today.

That’s a lot of potential buzzkill for your happily-ever-after bitcoin holdings, and one reason you might want to think twice before you pile your life’s savings into them.

Then again, every investment carries some risk. If there were no risk, there’d be no expected return. That’s why we also need to address what evidence-based investing looks like. It begins with how investors (versus speculators) evaluate the markets.

What’s a bitcoin worth? A dollar? $100? $100,000? The answer to that has been one of the most volatile bouncing balls the market has seen since tulip mania in the 1600s.

In his column “Bitcoin & Its Risks,” financial author Larry Swedroe summarizes how market valuations occur. “With stocks,” he says, “we can look at valuation metrics, like earnings yield. With bonds, we can use the current yield-to-maturity. And with assets like reinsurance or lending … we have historical evidence to make the appropriate estimates.”

You can’t do any of these things with cryptocurrency. Swedroe explains: “There simply is no tangible relationship between any economic or financial parameters and bitcoin prices.” Instead, there are several ways buying cryptocurrency differs from investing:

  • Evidence-based investing calls for estimating an asset’s expected return, based on these kinds of informed fundamentals.
  • Evidence-based investing also calls for us to factor in how different asset classes interact with one another. This helps us fit each piece into a unified portfolio that we can manage according to individual goals and risk tolerances.
  • Evidence-based investing calls for a long-term, buy, hold and rebalance strategy.

Cryptocurrency simply doesn’t yet synch well with these parameters. It does have a price, but it can’t be effectively valued for planning purposes, especially amidst the extreme price swings we’re seeing of late.

What if I decide to buy some cryptocurrency anyway?

We get it. Even if it’s far more of a speculative than investment endeavor, you may still decide to give cryptocurrency a go, for fun or potential profit. If you do, here are some tips to consider:

  • Think of it as being on par with an entertaining trip to the casino. Nothing ventured, nothing gained – but don’t venture any more than you can readily afford to lose!
  • Use only “fun money,” outside the investments you’re managing to fund your ongoing lifestyle.
  • Educate yourself first, and try to pick a reputable platform from which to play. (CoinDesk offers a pretty good bitcoin primer.)
  • If you do strike it rich, regularly remove a good chunk of the gains off the table to invest in your managed portfolio. That way, if the bubble bursts, you won’t lose everything you’ve “won.” (Also set aside enough to pay any taxes that may be incurred.)

Last but not least, good luck. Whether you win or lose a little or a lot with cryptocurrency – or you choose to only watch it from afar for now – we remain available to assist with your total wealth, come what may.


There are so many investment-impacting behavioral biases, we could probably identify at least one for nearly every letter in the alphabet. Today, we’ll continue with the most significant ones by looking at: hindsight, loss aversion, mental accounting and outcome bias.


What is it? In “Thinking, Fast and Slow,” Nobel laureate Daniel Kahneman credits Baruch Fischhoff for demonstrating hindsight bias – the “I knew it all along” effect – when he was still a student. Kahneman describes hindsight bias as a “robust cognitive illusion” that causes us to believe our memory is correct when it is not. For example, say you expected a candidate to lose, but she ended up winning. When asked afterward how strongly you predicted the actual outcome, you’re likely to recall giving it higher odds than you originally did. This seems like something straight out of a science fiction novel, but it really does happen!

When is it helpful? Similar to blind spot bias (one of the first biases we covered) hindsight bias helps us assume a more comforting, upbeat outlook in life. As “Why Smart People Make Big Money Mistakes” authors Gary Belsky and Thomas Gilovich describe it, “We humans have developed sneaky habits to look back on ourselves in pride.” Sometimes, this causes no harm, and may even help us move past prior setbacks.

When is it harmful? Hindsight bias is hazardous to investors, since your best financial decisions come from realistic assessments of market risks and rewards. As Kahneman explains, hindsight bias “leads observers to assess the quality of a decision not by whether the process was sound but by whether its outcome was good or bad.” If a high-risk investment happens to outperform, but you conveniently forget how risky it truly was, you may load up on too much of it and not be so lucky moving forward. On the flip side, you may too quickly abandon an underperforming holding, deceiving yourself into dismissing it as a bad bet to begin with.


What is it? “Loss aversion” is a fancy way of saying we often fear losing more than we crave winning, which leads to some interesting results when balancing risks and rewards. For example, in “Stumbling on Happiness,” Daniel Gilbert describes: “[M]ost of us would refuse a bet that gives us an 85 percent chance of doubling our life savings and a 15 percent chance of losing it.” Even though the odds favor a big win, imagining that slight chance that you might go broke leads most people to decide it’s just not worth the risk.

When is it helpful? To cite one illustration of when loss aversion plays in your favor, consider the home and auto insurance you buy every year. It’s unlikely your house will burn to the ground, your car will be stolen, or an act of negligence will cost you your life’s savings in court. But loss aversion reminds us that unlikely does not mean impossible. It still makes good sense to protect against worst-case scenarios when we know the recovery would be very painful indeed.

When is it harmful? One way loss aversion plays against you is if you decide to sit in cash or bonds during bear markets – or even when all is well, but a correction feels overdue. The evidence demonstrates that you are expected to end up with higher long-term returns by at least staying put, if not bulking up on stocks when they are “cheap.” And yet, the potential for future loss can frighten us into abandoning our carefully planned course toward the likelihood of long-term returns.


What is it? If you’ve ever treated one dollar differently from another when assessing its worth, that’s mental accounting at play. For example, if you assume inherited money must be more responsibly managed than money you’ve won in a raffle, you’re engaging in mental accounting.

When is it helpful? In his early paper, “Mental Accounting Matters,” Nobel laureate Richard Thaler (who is credited for having coined the term), describes how people use mental accounting “to keep trace of where their money is going, and to keep spending under control.” For example, say you set aside $250/month for a fun family outing. This does not actually obligate you to spend the money as planned or to stick to your budget. But by effectively assigning this function to that money, you’re better positioned to enjoy your leisure time, without overdoing it.

When is it harmful? While mental accounting can foster good saving and spending habits, it plays against you if you instead let it undermine your rational investing. Say, for example, you’re emotionally attached to a stock you inherited from a beloved aunt. You may be unwilling to unload it, even if reason dictates that you should. You’ve just mentally accounted your aunt’s bequest into a place that detracts from rather than contributes to your best financial interests.


What is it? Sometimes, good or bad outcomes are the result of good or bad decisions; other times (such as when you try to forecast future market movements), it’s just random luck. Outcome bias is when you mistake that luck as skill.

When is it helpful? This may be one bias that is never really helpful in the long run. If you’ve just experienced good or bad luck rather than made a smart or dumb decision, when wouldn’t you want to know the difference, so you can live and learn?

When is it harmful? As Kahneman describes in “Thinking, Fast and Slow,” outcome bias “makes it almost impossible to evaluate a decision properly – in terms of the beliefs that were reasonable when the decision was made.” It causes us to be overly critical of sound decisions if the results happen to disappoint. Conversely, it generates a “halo effect,” assigning undeserved credit “to irresponsible risk seekers …who took a crazy gamble and won.” In short, especially when it’s paired with hindsight bias, this is dangerous stuff in largely efficient markets. The more an individual happens to come out ahead on lucky bets, the more they may mistakenly believe there’s more than just luck at play.

You’re now more than halfway through our alphabetic series of behavioral biases. Look for our next piece soon.


Let’s continue our alphabetic tour of common behavioral biases that distract otherwise rational investors from making best choices about their wealth. Today, we’ll tackle: fear, framing, greed and herd mentality.


What is it? You know what fear is, but it may be less obvious how it works. As Jason Zweig describes in “Your Money & Your Brain,” if your brain perceives a threat, it spews chemicals like corticosterone that “flood your body with fear signals before you are consciously aware of being afraid.” Some suggest this isn’t really “fear,” since you don’t have time to think before you act. Call it what you will, this bias can heavily influence your next moves – for better or worse.

When is it helpful? Of course there are times you probably should be afraid, with no time for studious reflection about a life-saving act. If you are reading this today, it strongly suggests you and your ancestors have made good use of these sorts of survival instincts many times over.

When is it harmful? Zweig and others have described how our brain reacts to a plummeting market in the same way it responds to a physical threat like a rattlesnake. While you may be well-served to leap before you look at a snake, doing the same with your investments can bite you. Also, our financial fears are often misplaced. We tend to overcompensate for more memorable risks (like a flash crash), while ignoring more subtle ones that can be just as harmful or much easier to prevent (like inflation, eroding your spending power over time). 


What is it? Thinking, Fast and Slow,” Nobel laureate Daniel Kahneman defines the effects of framing as follows: “Different ways of presenting the same information often evoke different emotions.” For example, he explains how consumers tend to prefer cold cuts labeled “90% fat-free” over those labeled “10% fat.” By narrowly framing the information (fat-free = good, fat = bad; never mind the rest), we fail to consider all the facts as a whole.

When is it helpful? Have you ever faced an enormous project or goal that left you feeling overwhelmed? Framing helps us take on seemingly insurmountable challenges by focusing on one step at a time until, over time, the job is done. In this context, it can be a helpful assistant.

When is it harmful? To achieve your personal financial goals, you’ve got to do more than score isolated victories in the market; you’ve got to “win the war.” As UCLA’s Shlomo Benartzi describes in a Wall Street Journal piece, this demands strategic planning and unified portfolio management, with individual holdings considered within the greater context. Investors who instead succumb to narrow framing often end up falling off-course and incurring unnecessary costs by chasing or fleeing isolated investments.


What is it? Like fear, greed requires no formal introduction. In investing, the term usually refers to our tendency to (greedily) chase hot stocks, sectors or markets, hoping to score larger-than-life returns. In doing so, we ignore the oversized risks typically involved as well.

When is it helpful? In Oliver Stone’s Oscar-winning “Wall Street,” Gordon Gekko (based on the notorious real-life trader Ivan Boesky) makes a valid point … to a point: “[G]reed, for lack of a better word, is good. … Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.” In other words, there are times when a little greed – call it ambition – can inspire greater achievements.

When is it harmful? In our cut-throat markets (where you’re up against the Boeskys of the world), greed and fear become a two-sided coin that you flip at your own peril. Heads or tails, both are accompanied by chemical responses to stimuli we’re unaware of and have no control over. Overindulging in either extreme leads to unnecessary trading at inopportune times.


What is it? Mooove over, cows. You’ve got nothing on us humans, who instinctively recoil or rush headlong into excitement when we see others doing the same. “[T]he idea that people conform to the behavior of others is among the most accepted principles of psychology,” say Gary Belsky and Thomas Gilovich in “Why Smart People Make Big Money Mistakes.”

When is it helpful? If you’ve ever gone to a hot new restaurant, followed a fashion trend, or binged on a hit series, you’ve been influenced by herd mentality. “Mostly such conformity is a good thing, and it’s one of the reasons that societies are able to function,” say Belsky and Gilovich. It helps us create order out of chaos in traffic, legal and governmental systems alike.

When is it harmful? Whenever a piece of the market is on a hot run or in a cold plunge, herd mentality intensifies our greedy or fearful chain reaction to the random event that generated the excitement to begin with. Once the dust settles, those who have reacted to the near-term noise are usually the ones who end up overpaying for the “privilege” of chasing or fleeing temporary trends instead of staying the course toward their long-term goals. As Warren Buffett has famously said, “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”

Well said, Mr. Buffett! We’ve got more behavioral biases to cover in upcoming installments, so stay tuned.


Welcome back to our “ABCs of Behavioral Biases.” Today, we’ll get started by introducing you to four self-inflicted biases that knock a number of investors off-course: anchoring, blind spot, confirmation and familiarity bias.


What is it?  Anchoring bias occurs when you fix on or “anchor” your decisions to a reference point, whether or not it’s a valid one.

When is it helpful?  An anchor point can be helpful when it is relevant and contributes to good decision-making. For example, if you’ve set a 10 pm curfew for your son or daughter and it’s now 9:55 pm, your offspring would be wise to panic a bit, and step up the homeward pace.

When is it harmful?  In investing, people often anchor on the price they paid when deciding whether to sell or hold a security: “I paid $11/share for this stock and now it’s only worth $9/share. I’ll hold off selling it until I’ve broken even.” This is an example of anchoring bias in disguise. Evidence-based investing informs us, the best time to sell a holding is when it’s no longer serving your ideal total portfolio, as prescribed by your investment plans. What you paid is irrelevant to that decision, so anchoring on that arbitrary point creates a dangerous distraction. 


What is it?  Blind spot bias occurs when you can objectively assess others’ behavioral biases, but you cannot recognize your own.

When is it helpful?  Blind spot bias helps you avoid over-analyzing your every imperfection, so you can get on with your one life to live. It helps you tell yourself, “I can do this,” even when others may have their doubts.

When is it harmful?  It’s hard enough to root out all your deep-seated biases once you’re aware of them, let alone the ones you remain blind to. In “Thinking, Fast and Slow,” Nobel laureate Daniel Kahneman describes (emphasis ours): “We are often confident even when we are wrong, and an objective observer is more likely to detect our errors than we are.” (Hint: This is where second opinions from an independent advisor can come in especially handy.)


What is it?  We humans love to be right and hate to be wrong. This manifests as confirmation bias, which tricks us into being extra sympathetic to information that supports our beliefs and especially suspicious of – or even entirely blind to – conflicting evidence.

When is it helpful?  When it’s working in our favor, confirmation bias helps us build on past insights to more readily resolve new, similar challenges. Imagine if you otherwise had to approach each new piece of information with no opinion, mulling over every new idea from scratch. While you’d be a most open-minded person, you’d also be a most indecisive one.

When is it harmful?  Once we believe something – such as an investment is a good/bad idea, or a market is about to tank or soar – we want to keep believing it. To remain convinced, we’ll tune out news that contradicts our beliefs and tune into that which favors them. We’ll discount facts that would change our mind, find false affirmation in random coincidences, and justify fallacies and mistaken assumptions that we would otherwise recognize as inappropriate. And we’ll do all this without even knowing it’s happening. Even stock analysts may be influenced by this bias.


What is it?  Familiarity bias is another mental shortcut we use to more quickly trust (or more slowly reject) an object that is familiar to us.

When is it helpful?  Do you cheer for your home-town team? Speak more openly with friends than strangers? Favor a job applicant who (all else being equal) has been recommended by one of your best employees? Congratulations, you’re making good use of familiarity bias.

When is it harmful?  Considerable evidence tells us that a broad, globally diversified approach best enables us to capture expected market returns while managing the risks involved. Yet studies like this one have shown investors often instead overweight their allocations to familiar vs. foreign investments. We instinctively assume familiar holdings are safer or better, even though, clearly, we can’t all be correct at once. We also tend to be more comfortable than we should be bulking up on company stock in our retirement plan.

Ready to learn more? Next, we’ll continue through the alphabet, introducing a few more of the most suspect financial behavioral biases.

By now, you’ve probably heard the news: Your own behavioral biases are often the greatest threat to your financial well-being. As investors, we leap before we look. We stay when we should go. We cringe at the very risks that are expected to generate our greatest rewards. All the while, we rush into nearly every move, only to fret and regret them long after the deed is done.

Why Do We Have Behavioral Biases?

Most of the behavioral biases that influence your investment decisions come from myriad mental shortcuts we depend on to think more efficiently and act more effectively in our busy lives.

Usually (but not always!) these short-cuts work well for us. They can be powerful allies when we encounter physical threats that demand reflexive reaction, or even when we’re simply trying to stay afloat in the rushing roar of deliberations and decisions we face every day.

What Do They Do To Us?

As we’ll cover in this series, those same survival-driven instincts that are otherwise so helpful can turn deadly in investing. They overlap with one another, gang up on us, confuse us and contribute to multiple levels of damage done.

Friend or foe, behavioral biases are a formidable force. Even once you know they’re there, you’ll probably still experience them. It’s what your brain does with the chemically induced instincts that fire off in your head long before your higher functions kick in. They trick us into wallowing in what financial author and neurologist William J. Bernstein, MD,  PhD, describes as a “Petrie dish of financially pathologic behavior,” including:

  • Counterproductive trading – incurring more trading expenses than are necessary, buying when prices are high and selling when they’re low.
  • Excessive risk-taking – rejecting the “risk insurance” that global diversification provides, instead over-concentrating in recent winners and abandoning recent losers.
  • Favoring emotions over evidence – disregarding decades of evidence-based advice on investment best practices.

What Can We Do About Them?

In this multi-part “ABCs of Behavioral Biases,” we’ll offer an alphabetic introduction to investors’ most damaging behavioral biases, so you can more readily recognize and defend against them the next time they’re happening to you.

Here are a few additional ways you can defend against the behaviorally biased enemy within:

Anchor your investing in a solid plan – By anchoring your trading activities in a carefully constructed plan (with predetermined asset allocations that reflect your personal goals and risk tolerances), you’ll stand a much better chance of overcoming the bias-driven distractions that rock your resolve along the way.

Increase your understanding – Don’t just take our word for it. Here is an entertaining and informative library on the fascinating relationship between your mind and your money:

Don’t go it alone – Just as you can’t see your face without the benefit of a mirror, your brain has a difficult time “seeing” its own biases. Having an objective advisor well-versed in behavioral finance, dedicated to serving your highest financial interests, and unafraid to show you what you cannot see for yourself is among your strongest defenses against all of the biases we’ll present throughout the rest of this series.

As you learn and explore, we hope you’ll discover: You may be unable to prevent your behavioral biases from staging attacks on your financial resolve. But, forewarned is forearmed. You stand a much better chance of thwarting them once you know they’re there!

Next week, we’ll begin our A–Z introduction to many of the most common behavioral biases.

Stock Markets

Equity market returns over several periods ending September 30, 2017 are shown on the graph to the right. Here are a few highlights:

  • Stocks provided above-average returns over the past quarter – REITs lagged.
  • Non-domestic markets led the way in recent periods; over longer periods it was domestic markets.  While it would be nice to know which will do best in the future, no one does. We have to remain committed to all markets.
  • Note how after falling short previously, emerging market stocks have snapped back in recent periods.

Bond Markets

Yield Curves show the yield of U.S. Treasury securities over several maturities, from the short term (one month) to the long term (twenty years).  How these curves have changed over the recent past is shown below.

  • Since September 2016 yields have increased across all maturities, which is not surprising given the announced goals of Fed officials. Yields and bond prices are inversely related (when yields go up, prices come down and vice versa), which explains negative bond returns over the past year.
  • Today’s Yield Curve is flatter than what we saw at the beginning of the year.  The Fed can control only short-term rates; long-term yields generally reflect market results.  A flat yield curve can indicate that the market doesn’t believe the Fed can increase rates down the road in a more difficult economic environment.  Look how yields on longer-term securities have fallen slightly even though short-term yields increased.


On August 2, 2017, the Dow Jones Industrial Average set a record, closing above 22,000 for the first time. People will debate the cause of the rally and how long it will last, but there is only one answer that matters to the prudent investor – time.

Markets go up over time. Over the last 90 years, the S&P 500 (a better gauge of the U.S. stock market than the Dow) has seen 11 “bear markets” during which the index fell by more than 20% of its value. In four of these instances, the index fell by 48% or more, with the largest fall (86%) coming during the Great Depression. Despite these large declines in value, if you had bought and held from 1927 through today, you would have realized an annualized 9.9% return. The biggest losers were not people who failed to foresee Black Tuesday, the 1973 oil embargo, the dot-com bubble, or the financial crisis. They were people who were not invested.

The stock market is notoriously difficult to predict. On August 13, 1979, Businessweek ran a famous cover story titled “The Death of Equities.” Businessweek cited inflation, changing regulation, and an increase in investment alternatives as the reason America should “regard the death of equities as a near-permanent condition.” Over the next 20 years, the Dow would grow from 839 to 11,497, and investors in the S&P 500 would receive a 17.7% annualized return.

Twenty years after the Businessweek story, Kevin Hassett and James Glassman wrote Dow 36,000, a book articulating why the Dow would triple by 2005. Hassett and Glassman argued the cost of equity should be on par with treasury yields, leading them to conclude the “single most important fact about stocks at the dawn of the twenty-first century: They are cheap… If you’re worried about missing the market’s big move upward, you will discover that it is not too late.” In January 2005, the Dow closed at 10,490. Dow 36,000 now sells used for $0.01 on Amazon.

In addition to being unprofitable, market timing is also mentally punishing. If you were to sell out of your position now and, in a year, the market was 10% higher (Dow 24,200), would you get back in or keep waiting for the fall? If, instead, it was 10% lower in a year (Dow 19,800), would you stay on the sidelines in anticipation of more declines, or would you conclude the market had bottomed out? The challenge with market timing is that you need to be right twice – when you sell and when you buy back in. And remember, these price changes don’t count the 2% annual dividend large-cap stocks are paying.

Is today’s market overvalued? Your conclusion depends on your perspective. Over the last 7.5 years the S&P 500 has seen 13.3% annualized appreciation, suggesting today’s market is overvalued. However, since 2000, it has returned 4.9%, suggesting it’s undervalued. Since 1990, the market has returned 9.6%, on par with its 90-year average.

You can play the same game with price-to-earnings (P/E) ratios. Currently, the P/E ratio of the S&P 500 is high by historical standards, suggesting the market is overvalued. However, stocks look forward, not backwards, and the forward-looking P/E ratio is slightly overvalued but much closer to “normal.” Lastly, the earnings yield of equities (P/E’s inverse) relative to yields on long-term bonds actually makes stocks look cheap. Are stocks overvalued? It’s anyone’s guess.

The Dow has reached a new high because markets go up over time. However, there are periods where they go down. If you can’t financially afford or mentally stomach a 40% or greater decline in your portfolio, you shouldn’t be 100% invested in stocks. Find a risk profile that matches your needs, diversify from the S&P 500 to other markets such as small cap stocks, international stocks, and bonds, and stick with your allocation. Trying to outsmart the market leaves most people feeling foolish.

This article by Ethan was featured in the Central New York Business Journal.

Any investor who spends even a modest amount of time reading financially-based magazine articles, or occasionally watches or listens to financially-based TV or radio programs, can’t escape all the pronouncements financial advisors make to prospective clients. So, if you are new to Rockbridge, I thought it would be fun to share a few promises with you. Here are five promises of what Rockbridge will not do with clients or prospective clients:

  1. Make Short-Term Stock Market Predictions

We don’t guess the hourly, daily, quarterly or even annual direction of the stock market or the Fed’s action on interest rates. We don’t think others should either since even the so-called experts are wildly incorrect most of the time, and when they are right, it was more likely luck, not skill.

  1. Tie Stock Market Results to Political Events or Partisan Grips on Congress or White House

While many of us have political leanings or biases of who may be better for the economy (and eventually the stock and bond markets), we don’t believe either major political party provides compelling evidence for a more healthy economy or better results for your portfolio.

  1. Make Changes to Your Portfolio Every Time the Market Swings

Volatility is inherent in the markets – so are daily fluctuations. We believe in keeping asset class target allocations within acceptable parameters, but we will not make knee-jerk reactions to events on a daily basis. Portfolio rebalancing occurs when one asset class substantially outperforms or underperforms and target weightings have a higher than acceptable variance.

  1. Select Only “Good Investments” and Avoid All Those “Bad Investments”

Far too many times I have been asked individually if I can steer someone “into just the good investments.” The fact is, we are deeply rooted in an efficient market theorem, and the best method for participation is low-cost, broad-based index components (either mutual funds or ETFs) using both long domestic and international strategies. We keep a tight handle on our portfolio models and don’t stray to the esoteric or exotic (such as short selling or options contracts) based on a hunch or gut instinct. We know that each strategy we employ will not perform identically to another – the results will rotate in and out of “desirability,” but we focus on how they perform together over long periods of time.

  1. Focus Solely Only On Your Investment Performance or Increasing Your Portfolio Size

While achieving suitable investment performance is often a vital aspect of appropriate financial planning, yearly results are not the most critical measure of a financial advisor’s value or worth to you or your family.  Meeting expected performance should be in the context of achieving your overall financial goals – there are far more important topics to be concerned with rather than losing sleep over a friend or neighbor’s investments “doing better” than your own. We enjoy robust returns as much as anyone else.  However, neglecting tax implications or appropriate insurance coverage and dismissing proper retirement planning or estate planning efforts will impact a family on a much deeper level than worrying about what everyone else is earning from their investments. Trust me, most of the time, your friends or neighbors have no idea what their actual returns are and rarely will they review an actual performance report with their advisor – much less with you.

Philanthropy does not always make the list of critical priorities when planning for the future, a process often dominated by other pressing needs like education and retirement.  Yet for those blessed with some success, and financial resources that exceed what we need to survive, philanthropy can be a way to give back, pay it forward, or just do something good for other people.

Philanthropy – Goodwill to fellow members of the human race; the effort or inclination to increase the well-being of humankind, as by charitable aid or donations.

The Central New York Community Foundation is celebrating 90 years of philanthropy in Central NY.  The slogan for the celebration is “Here For Good,” which is intended to carry a double meaning – here to make the community a better place and here for the long term.

Community foundations now serve communities across the U.S., and it has been my privilege to serve on the board of The CNY Community Foundation, where I have been able to observe first-hand the impact it has on people’s lives.  It is now responsible for a pool of charitable capital that surpasses $226 million.  Over the course of its history nearly $170 million has been invested in the Central New York community.  That history includes many stories of transformed lives and improved communities. Some of those stories are told in a recent publication and are also available online at:

Community-wide Impact

The Community Foundation plays a role in some big, community-wide initiatives, like “Say Yes to Education,” which provides a path to college for Syracuse City School District students.  Say Yes funds several support programs and after-school programs for school students and ultimately funds last-dollar college scholarships for those who go on to college.  The Community Foundation provides leadership for many aspects of the program and administers the Say Yes Scholarship Endowment Fund, which is now fully funded at $30 million.


The act of giving can be very rewarding, as we see the impact on those less fortunate, or envision the impact on future generations.  The Community Foundation can help donors work through the process of creating Legacy Plans that identify their motivations for giving, document their giving stories, and preserve their charitable legacy.  One such story is told in the 90th Anniversary publication about the Martha Fund, established to honor Martha Blumberg, a bright, talented young woman who died far too young.  The Martha Fund was established by her mother’s will to honor Martha’s zest for life, and since 2013 the fund has awarded nearly $300,000 to support children’s art programs, health services and learning activities.

Looking Ahead

It is easy to lose sight of philanthropy amidst our day-to-day struggles, so when you do hit the pause button, and make plans for your financial future, keep in mind the resources available to make philanthropy a part of your legacy.

While the Equifax security breach only recently became public knowledge on September 8, in many ways, it was a lifetime ago.

We were already on high alert for instances of identity theft. But the source, scope, and what seems like a justified feeling of betrayal associated with this particular breach have ushered in a new era of cybersecurity. There was before the Equifax breach; now there’s after.

What does “after” look like, and how can we help you navigate it? You’ve no doubt noticed a barrage of articles covering what has happened and what others suggest you should do about it. Unfortunately, there is no one-size-fits-all regimen, but here are some of the most frequently cited actions we’ve seen, along with our commentary on them:

Check your credit reports using Keeping an eye on your credit reports has long been a best practice, and should continue to be, today more than ever. Be sure to only use As the website says, it is the only provider authorized by Federal law to provide you with the free annual reports that already are rightfully yours. Also, so you can obtain a free credit report more than annually, consider staggering the three primary agencies’ reports, selecting one to review every four months.

Consider placing a fraud alert or a freeze on your credit. Deciding which (if either) of these actions makes sense for you depends on your personal circumstances. For example, if you’re frequently applying for credit, placing a freeze may be impractical. On the other hand, if you have been a victim of identity theft, an alert might not suffice. In this instance, it’s worth reading through the advantages and disadvantages before determining your next steps. We’re here for you as well, to serve as an additional sounding board.

Consider enrolling in a credit monitoring service. Equifax has offered to provide a year of free credit monitoring and identity theft protection via TrustedID Premier. We’ve seen mixed reviews on whether it makes sense to accept Equifax’s offer. First, there’s the whole trust issue raised by the recent breach. Plus, identity thieves have nearly endless patience, so one year of monitoring is only the beginning. That said, other independent services can be costly (especially if you’ve got an entire family to cover), and they may not ultimately offer much that you cannot do on your own if you so choose. It comes down to a cost/benefit analysis unique to you.

Regularly change the passwords and PINs on your financial accounts. Like regularly monitoring your credit reports, periodically changing your financial account login information has been and remains a best practice. Quarterly or at least twice a year makes good sense to us.

File your tax returns as early as you’re able. Filing early minimizes the opportunity for an identity thief to file a bogus return on your behalf.

We’ve seen other tips and pointers besides these, some of which may be advisable as well. To avoid informational overload, here are three guiding lights:

  • Pace yourself. As with any seemingly insurmountable challenge, it may be best to take things one step at a time, lest you lock up and end up doing nothing at all.
  • Patiently prevail. Approach your security as an ongoing process rather than a quick fix. After determining which actions make sense for you, set up a routine and a schedule for implementing them. Write down your plans, and then follow them.
  • Partner with us. We won’t go into sensitive specifics here but, as financial advisors, we have long been taking strong measures at our end to protect against hackers and identity thieves. That said, no system is impregnable. The more aggressively we join forces to thwart cybercriminals, the more likely we will ultimately prevail.

So, how can we help you moving forward? If you’d like to consult with us as you think through some of the points we’ve touched on above, we welcome the conversation. We also ask you to be responsive when we reach out to you with security-related questions or suggestions. For example, earlier this year, we produced a quick-reference and more detailed overview, “Avoiding Financial Scams and Identity Theft Slams,” filled with perennial information and best practices. We’d be delighted to share (or re-share) those materials with you.

As this wise educator observed in reflecting on the Equifax breach, “Security isn’t a product. It’s a process.” Just as sensible investing involves taking appropriate near-term steps in the context of an ongoing, personalized plan, so too do we find it increasingly imperative to respond to this and future cyberattacks with upfront planning, well-reasoned action and continued best practices. Let us know how else we can assist with that!

Stock Markets

The chart at right shows stocks performing well in the past quarter and six-month periods.  Year to date, domestic large-cap stocks were up about 9% while small-cap stocks were up 5%.  Stocks traded in international developed markets and emerging markets were up 14% and about 19%, respectively.

Over three, five and ten years, domestic markets (both large-cap and small-cap) were especially strong.  These results are starting to give rise to concerns of “irrational exuberance” and over-valuation in these markets.  Keep in mind, however, we could be observing a bounce off the sharp decline of 2008, one of the worst periods in stock market history.  So, what do we have now – “over-valuation” or “regression to the mean”?  Not so much exuberance in other markets.

The usual proxy for the domestic large-cap stock market is the S&P 500, a well-worn index that many consider representative of the total stock market.  Today the S&P 500 is skewed by well-known technology companies – Apple, Microsoft, Alphabet (Google) and Amazon make up the top four stocks, with Facebook coming in at number six.  Thus, the S&P 500 is more indicative of how the largest technology stocks fared versus stocks in general.

The chart shows the extent that markets fall in and out of favor through time, which provides an incentive to try and predict.  However, this is not something we recommend.  Instead, maintain commitments to each asset class and reap the benefits of diversification.  In any event, recent periods have been generally good for stocks.

Bond Markets

The Yield Curves chart at the right yields of U.S. Treasury securities across various maturities as of June 2017, June 2016 and December 2016.  Today’s curve is more pronounced and shown in green.  Notice how it has “flattened” – long rates are down and short rates are up.  Yields have increased over the past year resulting in a negative impact on bond returns over that period.

The rise in short-term rates is consistent with recent Fed activity.  Yields on bonds of longer maturities are market determined.  It has been, and continues to be, widely anticipated that the Fed will continue to increase interest rates.  Yet, longer-term bond yields have not increased.  This flattening of the Yield Curve can be a harbinger of difficult times ahead as the market may be telling us they don’t expect the Fed will be able to increase rates.  We’ll see.

Stock values have been climbing almost uninterruptedly over the recent past.  Bonds have not.  This record is consistent with the long-held maxim that if you can stand the heat, stocks will eventually outperform bonds.  The recent track record, along with this widely held belief, has some wondering why hold bonds at all.

While stocks look good, there are still reasons to hold bonds.  First, bonds reduce volatility, which can make it easier to remain committed to a given risk strategy over the long term.  Failing to do so means not realizing the positive long-term returns of stocks.  In some periods, maintaining an allocation to bonds provides a better outcome.  (A portfolio with a 30% allocation to bonds did better than an all stock portfolio in 27% of the ten-year periods since 1926.)  Prudence means not taking unnecessary risks and matching a portfolio’s profile to established long-term goals – bonds help do that.

I often say that one of our primary roles as an advisor is to provide context and perspective for clients, allowing us to collaboratively make better decisions.

Behavioral economists have identified narrow framing as the tendency for investors to make decisions without considering the big picture or long-term effect on their portfolio.  This behavior can be harmful when it leads to bad decisions, like falling in love with a stock or a market sector that has done particularly well recently.  If we observe a particular sector doing well, and conclude we should buy more, the overweight can reduce diversification, and hurt portfolio performance when an inevitable market correction occurs.  Similarly, a narrow focus on a single, very risky asset may lead us to reject it from the portfolio, when a small percentage could add valuable diversification over the long term.  The benefits of portfolio theory are enormous, but require that we consider the big picture – the whole portfolio.

A recent post on the Rockbridge website includes a link to a Wall Street Journal article discussing some of the pitfalls of narrow framing (, but this is not a new subject.  The author of this article, Shlomo Benartzi, was cited for his previous work by some other famous behavioral economists in a research paper from the late 1990’s.  The authors of that paper included Amos Tversky and Daniel Kahneman, the subjects of Michael Lewis’ recent best seller The Undoing Project.

That paper discusses myopic loss aversion, which is the combination of a greater sensitivity to losses than to gains, and a tendency to evaluate outcomes frequently.  The authors did an experiment that supported their theory that long-term investors would make better decisions if they looked at their portfolio performance less frequently, like yearly instead of monthly.  Looking at short-term results is like narrow framing; it is easy to ignore the big picture and focus on a small piece of data. (If you still think looking at your 401(k) balance every day is a good idea, I can send you a copy of the paper!)

It turns out that being short-sighted and attaching outsized negative emotions to losses (another way to say myopic loss aversion), is not good for long-term investment results.

Behavioral economists have devised several experiments to illustrate how loss aversion affects decisions.  One of my favorites is the following two questions:

  • Scenario One:  You have accumulated $9,000 and face a choice: take $9,500 for sure OR flip a coin, heads you get $10,000 and tails you keep the $9,000 you start with.
  • Scenario Two:  You have accumulated $10,000 but cannot just keep it.  Your choices are:  flip a coin, heads you keep $10,000 and tails you keep only $9,000 OR take $9,500 for sure.

Research shows that most people in Scenario One will take the sure gain.  The chance for additional gain is not worth the risk of the coin toss.  On the other hand, when faced with Scenario Two, most people choose to gamble, because the pain of loss is significant, and therefore we tend to justify taking more risk to avoid a loss.  Now step back and compare the two scenarios – they are exactly the same, but framed differently.  It is irrational, from an economic perspective, to choose a different answer based on how the options are framed, but most of us do.

Behavioral economists depart from traditional economists by acknowledging that humans do not always appear rational.  Real people often make decisions that differ from a rational person trying to maximize their economic well-being.

Our role as advisors is to recognize that humans allow emotions to affect decision making.  We can then help reframe decisions in ways that lead to better long-term outcomes.  Pitfalls we can help investors avoid include:

  • Falling in love with the short-term    performance of a particular asset or sector and taking too much risk.
  • Being frightened by negative performance and taking too little risk.
  • Buying winners and selling losers without considering overall portfolio diversification.
  • Focusing on an isolated account without considering its role in the context of your total portfolio.  Sometimes this can be minimized by consolidating accounts; for instance, all your old 401(k) accounts can be consolidated in one rollover IRA account at the same custodian that holds your taxable brokerage account.  This makes it easier to track overall performance and optimize placement of tax-efficient and inefficient asset.

If we acknowledge the impact of our emotions, and constantly force ourselves to step back far enough to see the big picture, we can expect better long-term investment results.

I recently returned from a fee-only advisor industry conference.  In addition to educational opportunities, it was a rewarding experience to spend time with other like-minded professionals. Rockbridge advisors have been attending these conferences for almost 10 years, so I thought it would be interesting to share a bit of the history behind the fee-only movement.

More than 40 years ago, consumers had very few choices when seeking out investment advice.  Large companies that paid representatives to sell individual securities and other financial products dominated the industry.  In 1982, a group of independent advisors got together in Atlanta, Georgia to brainstorm ways to deliver investment advice to their clients that didn’t require them to accept commissions from sales of financial products.  This small band of advisors sent out hundreds of invitations to other advisors around the country to see if there were others who felt the same way.  In February 1983, The National Association of Personal Financial Advisors (NAPFA) was born.  The first meeting brought together 125 advisors who were committed to expanding the use of fee-only financial planning by individual consumers.

NAPFA established a set of professional standards for fee-only financial advisors. They set their members apart from the crowd by committing to a fiduciary standard of care and rejecting commission compensation.  NAPFA advisors are different from other financial professionals in many ways.  They must adhere to a strict fee-only business model and provide comprehensive planning to their clients.  In fact, NAPFA requires members to submit a financial plan for peer review before being accepted into the Association.  Members are also required to complete 60 hours of continuing education every 24 months.

Today NAPFA membership exceeds 2,400 advisors nationwide.  The Association hosts two national conferences per year where members get together in formal study groups around the country to help each other and exchange ideas.

Rockbridge Investment Management is proud to be a member of NAPFA since 2008.  The advisors of Rockbridge have attended numerous NAPFA conferences while also taking a leadership role by volunteering on national and regional boards of the organization.  Many of our clients first learned about our firm by visiting the NAPFA website in search of a fee-only fiduciary advisor.

Today, the government and the media have been spreading the word about this band of fee-only fiduciary advisors that stands ready to provide objective, unbiased financial advice to consumers who are ready for a change.  At Rockbridge, we are ready for the growth opportunities that will come as consumers learn about the benefits of working with a fee-only advisor.

If you would like to learn more about NAPFA, please visit their website at

Oftentimes, many investors get caught up in short-term results rather than looking at the big picture. This is known to behavioral economists as “narrow framing,” or “a tendency to see investments without considering the context of the overall portfolio.” Unfortunately, this idea can lead to many missed opportunities for investors.

Narrow framing can cause investors to either take too little risk or too much risk. People often get scared by daily market swings and keep their money in a bank account. On the other hand, people may invest in something considered risky without taking their collective portfolio into account.

According to this Wall Street Journal article discussing narrow framing, you can avoid these mistakes by checking your portfolio less often. Another suggestion is to aggregate your financial accounts by consolidating at one location, or by using software to display all your accounts in one place. This allows you to view your portfolio holistically, which can help to assess your overall risk exposure.

At Rockbridge, we help our clients invest for the long-term big picture. We come up with a portfolio in line with your risk tolerance and goals, and help you maintain a steady strategy throughout the ups and downs of the market. We can even help report on all of your accounts – even the ones we do not manage directly. It is our goal to help you avoid the trap of “narrow framing,” and become a disciplined investor. We will be here with you through it all!


Young or old, wealthy or poor, online or in person … Nobody is immune from financial scams and identity theft slams. No matter who you are or how well-informed you may be, the bad guys are out there, daily devising new tricks for every fraud we fix.

Who Are They? Fraudsters and Thieves

  • Financial fraudsters are after your assets.
  • Identity thieves want to steal your personal information – usually, so they can commit financial fraud by posing as you and breaching your security.

What Do They Want? Your Money and Your Life

Some of your most treasured personal information includes:

  • Social Security Numbers, passports, driver’s licenses and similar identifying information.
  • Financial account and credit card numbers.
  • Passwords (or insights about you that help them guess at weak ones).
  • Your and family members’ contact information (name, address, phone, email).
  • Your and family members’ birth dates.
  • Details about your life (interests, travel plans, relationships, your alma maters, etc.).

How Will They Get It? However They Can!

Criminals come in all shapes and sizes, and will use anything and everything that might work:

  • Most mayhem occurs the same, old ways: the real or virtual equivalent of strong-arm theft; breaking and entering; and increasingly, scams that trick you into giving your goods away.
  • They may be strangers. They may pose as someone you know. Unfortunately, they can be someone you do (Elder abuse, for example, is often perpetrated by family members.)
  • They may commit their crimes online, by phone, in the mail (to a lesser extent) or in person.
  • Phishing emails and deceitful or compromised websites try to trick you into clicking on bad links or opening infected attachments. This exposes you to malware which infects your device with anything from harmless pranks to damaging viruses to serious security breaches.

What Should You Look For? Ten Red Flags

Criminal techniques may be new-fangled, but the tactics – the red flags to look for – are mostly unchanged. Whether online, in the mail, on the phone or in person, be on extra alert whenever:

  1. An offer sounds too good to be true.
  2. A stranger wants to be your real or virtual best friend.
  3. Someone you know is behaving oddly, especially via email or phone. (This may mean it’s an identity thief, posing as someone you know.)
  4. Someone claiming to represent a government agency, financial or legal firm, police department or other authority contacts you out of the blue, demanding money or information.
  5. You’re feeling pressured or tricked into responding RIGHT AWAY to a threat, a temptation or a curiosity.
  6. You’re prioritizing easy access over solid security (weak or absent locks and passwords).
  7. You’re sharing personal information in a public venue (including social media).
  8. Facts or figures aren’t adding up; bank statements, reports or other info is missing entirely.
  9. Your defenses are down: You’re ill, injured, grieving, experiencing dementia or feeling blue.
  10. Your gut feel is warning you: Something seems off.


An Action Plan (Hint: It’s a Lot Like Evidence-Based Investing)

The more of these sorts of alarm bells are sounding off, the more suspicious you should be. What then? The hardest part may be deciding where to begin. We recommend approaching your personal security the same way you approach investing: Instead of feeling you must immediately chase every defensive action out there, start with a plan.

  • Base your plan on how and why identity theft and financial fraud occurs, as described above.
  • Include broad strokes as well as specific action items.
  • Pay extra attention to the risks that pose the greatest threats to you and your lifestyle.
  • Whenever new tricks, techniques and technologies emerge, refer to your plan as a dependable framework in which to consider your next best steps.

What Else Can You Do? Quite a Lot!

While criminals are forever finding new ways to foil our defenses, there are still plenty of sensible steps you can take to protect yourself and your money.

Online Protection

  • Virus software: Install anti-malware and anti-spyware software on all of your devices. Keep it and your operating system current!
  • Backups: Use backup software for system and/or file recovery as needed. Allow for multiple version backups, in case you need to go back in time for a safe recovery.
  • Passwords: Create strong, unique passwords for each of your devices and accounts (long, random combinations). Periodically change them, especially on financial and other sensitive accounts, and whenever you may “smell a rat.” Consider using password management software to securely track them. An application we like to use is LastPass.
  • Extra security: Employ extra security when available, such as two-step verification or biometrics (fingerprints). Starting June 10, 2017, the Social Security Administration will require a second method of authentication in the form of a text message or email code when logging into your account. This will help better protect your account from unauthorized use and potential identity fraud.
  • Hyperlinks and attachments: In emails or on websites, be incredibly cautious about clicking on links or opening attachments, especially from unfamiliar sources. Refer to our “Ten Red Flags” to help spot the most suspicious ones.
  • Social media: Privatize your social media profiles and activities so only those you allow in can see them.
  • WiFi: Be extra careful on public WiFi connections outside of your home or business. Don’t conduct sensitive transactions on them; assume the world can see anything you’re doing.

Suspicious Phone Calls

  • Identify: Whenever a stranger calls you out of the blue demanding or enticing you into sending money or sharing information, it’s probably a scam. Even when a caller claims to be someone you know, if their requests seem urgent, unusual, or emotionally charged – watch out. It’s probably an identity thief in disguise.
  • End the call: Your best line of defense is to immediately hang up. Don’t engage in conversation; you may accidentally divulge information a con artist can then use against you.
  • Don’t cooperate: Unless you initiated the call, never share your credit card number or any other sensitive information, especially in response to an urgent threat or enticing “prize.”
  • Investigate: Do what you can to verify the caller’s legitimacy. For example, if they claim to be from the IRS, end the call and contact the agency directly to inquire further. If they claim to be a family member in distress, tell them you’ll call them back and then call a close relative to double check. Google the suspicious number to see if others have reported it.
  • Report: Report the suspicious number to federal authorities.

Credit and Records Management

  • Watch for inconsistencies: Whether you’re receiving banking, credit card and investment statements online or in the mail, scan each one for odd or unfamiliar transactions.
  • Watch for missing statements: If statements you were expecting to receive suddenly stop arriving, a financial fraudster might have pirated your account and redirected it elsewhere.
  • Monitor your credit reports: Take advantage of your right to request free annual credit reports from Review them carefully for inaccuracies.
  • Consider a credit freeze: If you rarely apply for loans, you may want to freeze your credit, unlocking it only when needed. It costs a bit, but shuts out identity thieves cold.
  • Follow up promptly: If something seems “off,” immediately change any login passwords, and promptly contact the service provider and appropriate federal authorities.

Personal Security

  • Remain on guard: Don’t assume you’re safe just because you’re not online. There is still plenty of old-fashioned theft going on.
  • Secure it: Secure any paperwork you must keep. Lock up your home, desk, file cabinets, car, mailbox and trash bins. (Identity thieves will “dumpster dive” to steal your stuff.)
  • Shred it: Use a shredder to destroy any paperwork you do not need to keep.
  • When you’re out and about: Keep a close eye on your purse or wallet (at work and social events, in the gym and stores, and so on). Avoid keeping personal identification in your car.
  • Filling in forms: When filling out medical forms, credit card applications and similar paperwork, only provide what is essential. Don’t provide your Social Security Number on initial request, and push back if pressed for it. It’s rarely actually required.
  • Banking: When using an ATM machine, be aware of others around you and avoid using one that looks like it might have been tampered with.

What If They Succeed? Act Promptly

If you believe you’ve been exposed to identity theft or financial fraud, time is of the essence.

  • Online: If it’s an online event, immediately change the passwords on any affected accounts. It may help, and it certainly can’t hurt. Your multi-version backups might come in handy too.
  • In general: Check in with any bank or other institution involved, and the government agency responsible for overseeing the breach: the IRS for tax fraud, or the FTC for anything else.
  • Financial: If you feel your financial security has been compromised, we’ll want to hear from you as well! We’ll do all we can to help you fix the breach and minimize any damage done.



The stock market crash of 2008-2009 is a very recent memory for many investors who still bear the scars from the experience. At Rockbridge, we also have prospective clients who walk into our offices saying that they haven’t recovered yet from the financial pain their portfolio endured over those several months.

Why? It’s usually a combination of some or all of the following factors:

  • Their advisor trying to time the market
  • Lack of broad diversification
  • Excessive investment and advisory fees
  • Emotional response to short-term market fluctuations

“More money has been lost trying to anticipate and protect from corrections than actually in them.”

– Peter Lynch, renowned Fidelity fund manager –

The last 10 years haven’t given investors the risk-appropriate returns they deserved (a 50% stock and 70% stock portfolio basically had the same 10-year result), but if you stayed the course, you’re certainly not “still recovering” from 2008-2009.

For example, a $100,000 investment (50% stocks and 50% bonds) at the market peak at the end of 2007 returned to $100,000 only 13 months after the market bottom, as shown by the graph below. This is not something we want to experience again, but certainly a result most investors could live with given the circumstances.

Now, how do you accomplish that result?

  • Stay the course
  • Diversify your investments
  • Keep investment costs low
  • Limit emotions by having and sticking to a plan

“The investor’s chief problem and even his worst enemy is likely to be himself.”

– Benjamin Graham, “The Father of Value Investing”

We can’t predict or control what the crowd will do in the financial markets we are seeing today, but we can increase our odds of a successful outcome by controlling the aspects of investing that can be controlled: diversification, asset allocation, costs and discipline.

We might see a period of negative stock market returns in 2017, but we don’t know. All we do know is that the best way to guarantee underperforming the market is to not be invested in the market, so our answer is to stay the course and periodically review your portfolio with us to be sure the level of risk you are taking is appropriate for your specific goals.

Screen Shot 2017-04-17 at 9.56.51 AM

Teachers Insurance and Annuity Association, better known as TIAA was founded almost 100 years ago (1918). TIAA provides retirement plan solutions for a majority of the higher education institutions in the United States. One type of investment, called the TIAA Traditional Annuity, is a unique fixed income investment option that is available in TIAA 403(b) plans and cannot be purchased on the open market.

TIAA Traditional Annuity Basics

  • Available in most university 403(b) plans and usually has guaranteed minimum return of 3.00%.
  • Guaranteed returns are subject to the creditworthiness of TIAA (currently rated as one of the best insurers in the market).
  • The actual crediting rate of TIAA Traditional Annuities is based on when the money went into the fund. Older contributions can have a crediting rate of 4-5%.

What are TIAA Traditional Restrictions?

  • Contract type matters with how TIAA Traditional Funds can be withdrawn.
  • In Retirement Annuity/Group Retirement Annuity (RA/GRA) contracts, TIAA Traditional investments have to be taken out over a period of time. The shortest allowed is 10 payments over 9 years.
  • In Supplemental Retirement Annuity/Group Supplemental Retirement Annuity (SRA/GSRA) contracts, investments in the TIAA Traditional Annuity can be withdrawn at any time.
  • Supplemental plans have a lower guaranteed crediting rate since the investment is liquid, but the minimum is usually 3%.

What is the Current Fixed Income Environment?

  • Short Term CDs yield around 1%
  • 10-Year Treasuries yield around 2.5%
  • If interest rates rise, bond prices fall causing the return on treasuries to be lower.
  • TIAA Traditional Annuities yields 3%+ with no volatility.

What are the Planning Considerations for TIAA Traditional Funds?

  • A 3%+ rate of return on fixed income assets is appealing in today’s interest rate environment.
  • The TIAA Traditional Annuity could be utilized for some or all of the fixed income portion of a portfolio.
  • Careful consideration of withdrawal needs in retirement should be considered before transferring money into RA/GRA TIAA Traditional investments where the withdrawals are restricted.
  • Making the right investment selection across multiple TIAA contracts and outside investments can be complicated.

As you can see, the TIAA Traditional Annuity option in university 403(b) accounts provides a unique planning opportunity in today’s interest rate environment. If you have this option available to you through you TIAA 403(b), it may be worth utilizing. However, please remember that it is important to weigh the pros and cons of this option to determine if it makes sense to be considered as part of an overall investment and financial planning strategy.

Stock Markets

While markets were down early in the quarter, most, but not all, have bounced back since the Election with small company stocks and value stocks leading the way.  Stocks trEquity Returns 12 31 16aded in international markets and emerging markets have not fared as well in this period, reflecting a strengthening of the dollar. This means a globally diversified stock portfolio would not have done as well as what might be implied by the media hype.

While not everyone looks back at 2016 with delight, the past year was not bad for stocks – especially domestic stocks.  These stocks, as well as emerging market stocks, were up over 12% (small cap stocks up 21%) for the year.  Stocks traded in international developed markets lagged, earning just 1.5% for the year.

The accompanying chart that displays not only recent, but also longer-term results, is a picture of the effects of diversification.  Look at how some markets are up and others are down, but they tend to even out over longer periods.

Bond Markets

The accompanying chart of Yield Curves tells us a couple of things.  First, look at how yields for maturities greater than five years jumped nearly 1% since September 30, 2016.  Increasing yields will drive bond returns down – the longer the time to maturity, the bigger the drop.  This means we have losses from bond investments this quarter, especially from bonds with longer periods to maturity.  Increased yielYield Curves 12 31 16ds at the short end are consistent with the Fed’s recent vote to increase short-term rates; the increases over longer periods have more to do with expectations for economic growth and inflation.

Second, these Yield Curves show a relatively minor year-over-year change.  While in 2016 long-term bonds did earn over 4%, reflecting the drop in yields earlier in the year, returns from both intermediate-term and short-term bonds were about flat. Bond market allocations just haven’t contributed much in recent periods – stocks have carried the day.  This will not always be the case.

There is much talk and concern about increasing interest rates, which will not be good for bond performance.  Below are responses to some of the specific questions we have received from clients.

Q:  Why have interest rates increased since the election?

A:  Many of the ideas put forth by President-elect Trump are perceived to be inflationary. Spending more on infrastructure and defense while cutting taxes would increase the federal deficit and create inflationary pressure.

Q:  The Federal Reserve recently increased the federal funds rate and says it will likely do so again in 2017. Is this the beginning of a long-term upward movement in interest rates?

A:  Not necessarily. The Fed has limited control over interest rates, particularly longer-term rates.  The Fed sets the federal funds rate, which determines the cost for banks to borrow and lend money overnight.  Other interest rates are determined by investors in the market.  When markets expect higher inflation, there is upward pressure on interest rates, and because markets anticipate the future, the increase in rates can occur well before the deficits or actual inflation appears.  The longer-term trend depends on how those expectations change in the future.

Q:  What are “normal” interest rates, and when might we see them again?

A:  Historically, short-term rates tend toward a level that offsets inflation, so an investor leaving money in a money market account does not earn much, but avoids the loss of purchasing power due to inflation. If inflation is around 2%, normal short-term rates might be 2-3%, which is consistent with Fed expectations.  Minutes from the December meeting of the Federal Open Market Committee say members expect “that the appropriate level of the federal funds rate in 2019 would be close to their estimates of its longer-run normal level” and their projections were 2-3%.  Investors need an incentive to tie up their funds for longer periods, and they tend to expect 2-3% more than money market returns, so “normal” for ten-year treasury bonds might be 4-6% when inflation is around 2%.

Q:  Why have some of my bond funds lost more value than other bond funds?

A:  The value of long-term bonds is affected more than the value of short-term bonds when interest rates change. This is a simple economic reflection of opportunity cost – if your money is in cash when rates rise, you can take advantage of higher rates right away, but if your money is tied up in a long-term bond, you have to wait for it to mature.  The fact that you will earn less while waiting for the bond to mature is reflected in the immediate change in value.  If another investor buys the bond from you at the reduced market price, their return reflects the new higher interest rate.  Bond funds reflect the change in market value so investors can get in and out of the fund without harming other shareholders.

Q:  Do the recent declines in value reflect a permanent loss in the value of my bond funds?

A:  Not really. Like in the example above, the bond fund is just a collection of individual bonds with different maturities.  If one of the underlying bonds is held to maturity, it still returns the face value and the interest earned is equal to the amount originally “bargained for.”  The lower market value reflects the fact that new investors demand a higher return over the remaining life of the bond because interest rates are now higher.  The past year provides an interesting example.  On January 1, 2016, the yield on a total bond market index fund was around 2.5%.  Rates dropped, and by the end of September, bond funds were reporting year-to-date returns of 6%, because bond prices had increased.  Post-election interest rates jumped, bond values dropped, and bond funds ended the year with returns of about 2.5% for the year.  For long-term investors the unrealized gains and losses are not permanent – they are just a reflection of the changing opportunity cost of holding bonds rather than cash that can be reinvested immediately.

Q:  Given that we don’t know where interest rates are headed, or how soon we might get back to “normal,” how should my fixed income portfolio be structured?

A:  The specific answer always depends on your specific situation, but generally we think markets are still the best prediction of the future – sometimes a poor prediction, but the best we have.  So we think investing in bonds is important to provide stability to your portfolio, and taking the interest rate risk of the total bond market is likely to provide modest, positive returns, with reasonable levels of volatility.

In 2016, Rockbridge welcomed 145 new families to our community of clients.  We ended the year helping clients manage $552 million of investment assets.  This represents an increase of 12.4% over last year.  We continue to evaluate our staffing to provide the high level of service that our clients have come to expect from our firm.

Building a Sustainable Business for Our Clients

Last year, we continued to explore ways to strengthen our partnership and build a sustainable business that our clients can rely on for many generations.  During the first half of the year we worked with The Leading Element, a local consulting firm, which provided valuable insights on leadership and strategic planning for our leadership team.

The People of Rockbridge

Kevin Sullivan joined the firm in 2016 as a lead advisor.  Kevin brings 25 years of experience in the financial services industry.  We look forward to Kevin’s success within the firm.

Claire Ariglio and Dave Carroll spent a good portion of the year studying for the Certified Financial Planner (CFP®) exam.  They both plan on sitting for the test in early 2017.

We continue to invest in professional development:  specifically, attending the NAPFA fee-only advisors conference in Washington, D.C. and contributing to our advisor study group that meets quarterly in New York City.

Ongoing Awareness Campaign

Our growth can be traced directly to two main sources:  referrals from clients and web searches for fee-only advisors.  Delighted clients often refer friends and family to our firm, and prospective clients looking for advice find our website while researching advisors.

Our marketing plan includes improvements to our website which ranks #1 in the Syracuse market for investment advisors and financial planners.

We also advertise our fiduciary advisor services on local radio and television, including a billboard ad in the Syracuse Hancock International Airport.  Many of our new clients now know our name when they decide to come in for an initial consultation.  We plan on continuing our modest allocation of resources to more of the same advertising in 2017.

Who We Are

At Rockbridge, our business is built around our commitment to client care.  We start each planning engagement with our clients by focusing on what they want:

Fiduciary– We’re legally obligated to advise strictly and exclusively in your highest interest, period.

Fee-only– Our sole compensation comes from clearly disclosed fees that are a percentage of the wealth we manage for you.  We reject all commissions or other forms of outside compensation.  You are the only person who compensates us for our advice to you, and we think that’s in your best interest.

Right-sized– We’ve grown our firm to complement our clients’ needs with a sensible balance of investment advisors, financial and retirement planners, service support, and office administration designed to fully address client needs.

We continue to remain focused on providing the best experience for our clients, and we sincerely thank you for your trust and confidence.

Markets in November

The campaign is finally over and Donald Trump won.  Markets respond to surprises and this result was one.  Tuesday night I, along with many others, anticipated a starkly negative response.  Yet, most, but not all, stocks went up and have generally stayed there.  Domestic small company stocks and value stocks responded big – up in the neighborhood of 15% for November.  On the other hand International stocks and especially stocks traded in Emerging Markets were off.  Bond yields shot up producing a drop in prices and negative bond returns for the month.  Surprising many, domestic markets seem to expect a Trump administration will be positive for stocks.

Expectations from a Trump Administration

Expectations about the future drive stock prices; surprises produce changes.  So, what’s the market expecting from the election of Donald Trump?  Here are some thoughts:

Expectations for increased government spending as well as tax cuts.  These changes could not only increase expected inflation, but also provide cover for the Fed to raise interest rates.  An increase in expected inflation explains the rise in bond yields producing a falloff in bond prices and negative returns.  Increases in domestic interest rates can drive up the value of the dollar, which helps to explain negative returns across international markets.

Expectations for an improved domestic manufacturing environment from a review of trade policy, immigration policy and globalization – “bringing back jobs”.  An expected improvement in basic industries would help to explain the sharp rise in stocks of smaller and value companies traded in U.S. Markets.  On the other hand, a more restrictive domestic trade policy is apt to hurt companies with stocks trading in Emerging Markets.

Expectations for a more benign regulatory environment, which is apt to have a positive impact on the stocks of most companies traded in domestic markets, especially those of large financial companies.  A portfolio of the largest U.S. banks was up 18% in November.

While these expectations produced positive environment for domestic stocks today, no doubt, there will be surprises along the way.  While the Republicans have both Houses of Congress and the Presidency, there are still Democrats.  Donald Trump has no clear mandate to implement given polices, except to upset the status quo.   No one knows what that means.  A more or less clean slate gives people the opportunity to make their own interpretation about how he will govern, which is apt to lead to disappointment as the future unfolds.  We’ll see.

There are many things to consider when you are looking to hire a financial advisor, and many people are not sure which questions to ask.

This article from shares a few items to keep in mind when looking for someone to manage your money. It is important to look for terms such as “certified financial planner,” “registered investment advisor,” “fiduciary,” and “fee-only” when you are conducting your research. People and firms with these designations are legally obligated in act in your best interest and only get paid by the client for unbiased advice, not through commission.

Fortunately for you, there is no need to look further. Rockbridge is a registered investment advisor, a fiduciary and a fee-only firm. In addition, almost every advisor on staff is either already a certified financial planner (CFP), or in the process of taking classes in order to become one. Please feel free to reach out to us if you have any questions or would like to schedule a discovery meeting.



Whether you find the election results exciting or shocking, we are now faced with the question, “What’s next?”

With respect to your investments, here’s a quick reminder of how we feel about that:  Ample evidence informs us that it is unwise to alter your long-term investment strategy in reaction to breaking news, no matter how exciting or grim that news may seem, or how the markets are immediately responding. Markets constantly process information, and security prices incorporate new or changing risks. Markets have proven far better than others in pricing these risks and determining fair value at any point in time. As we saw with the unexpected outcome of this summer’s Brexit referendum, the biggest surprise may be how resilient markets tend to be, as long as you give them your time and your patience.

In other words, if you feel you want to make changes to your investment portfolio in the aftermath of Tuesday’s election results, please be in touch with us first, so we can do the job you hired us to do. Specifically, you can count on us to advise and assist you based on our professional insights, your personal goals and – above all – your highest financial interests.

In the meantime, consider these words by billionaire businessman and “stay put” investor Warren Buffett, from his 2012 letter to Berkshire Hathaway shareholders:

“America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful). American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor…The risks of being out of the game are huge compared to the risks of being in it.”

Buffett published these sentiments on March 1, 2013, shortly after the last presidential election cycle. If you review the volume of his writings, you’ll find that he has expressed similar viewpoints on many occasions and through many markets, fair and foul.

Presidential terms are four years long. Your investment portfolio has been structured to last a lifetime. Remember that as you consider your personal “What’s next?” … and please call us if we can assist.

Stock Markets

It was a pretty good quarter for stocks, with the riskier small-cap and emerging market stocks leading the way.  REIT’s gave back some of their robust returns of prior periods.  The year-to-date numbers for stocks are solid as well.equity-market-returns-9-30-16

The riskier markets have done better this quarter, which is consistent with an increased appetite for risk.  One concern is that much of the recent returns can be explained by the need to reach for risk to expect any sort of return. This can lead to a general mispricing of risk.  Consequently, these excess returns are apt to be temporary.

The grey bar showing international markets in the above chart, except for the most recent quarter, hasn’t reached the heights of other market returns.  It shows that this market has not kept pace with others over these periods.  However, be careful as it says nothing about future returns from international markets.

Bond Marketsyield-curves-10-2016

The accompanying yield curves chart shows the yield to maturity of Treasury securities of various maturities.  Note the little change over the September quarter, which is consistent with a more or less flat bond market.  Yields for longer maturities have fallen since the beginning of the year, which reflects the relative attractiveness of U.S. Treasury securities in a world of negative interest rates.

Credit spreads (the difference between yields on corporate bonds versus comparable Treasury securities) have declined over the past quarter resulting in positive returns from investment grade corporate and especially high yield bonds.  These declines are consistent with our theme of an increased appetite for risk.

The Value of Capital

I am usually skeptical of suggestions that we are entering a “new normal.”  Yet, a case might be made that this time it’s different.  The axiom that capital has value can be questioned – Central Banks can’t seem to give it away!   Interest rates are the “price” of capital – it’s what’s paid to use capital.  Interest rates near zero and, in some places, negative provides an indication of the value of capital today.

Central Banks worldwide, including the Fed, are not shy at providing capital at little or no cost.  Banks are holding massive amounts of reserves; there is little appetite for rebuilding infrastructure and many corporations are finding the best use of capital is to buy back stock.  Furthermore, in developed economies, human capital – not physical capital – is more of a driver of economic growth today.  Apple, Microsoft, Facebook, Google and Amazon are relatively new names among today’s largest corporations, each of which is engaged in managing human capital primarily.  This shift away from physical capital helps to explain the decline in demand and is consistent with a lower price of capital into the future.  Perhaps a new normal.

This apparent reduced value for capital has implications for investors.  First, is this really a new normal or is it temporary?  Second, what is the impact on the price of risk going forward?  Third, can we earn the returns of the past by judiciously managing risk, or will we have to accept reduced expected returns going forward?  Fourth, are markets signaling deflation ahead?

As I said, I am generally skeptical of paradigm shifts and suggestions of a new normal.  We have to deal with a lot of random behavior, and capital markets can be out of whack for extended periods.  The current distortion could simply be the result of Central Banks acting alone without changes in fiscal policy to produce economic growth.  Consequently, we must be careful about shifting our ideas about how the world works in response to what could turn out to be temporary aberrations.


Managing clients’ financial assets is at the heart of what we do here at Rockbridge.  However, having a well thought out investment portfolio will only get you so far if every facet of your financial life is not addressed correctly or on time.  Rockbridge is here to help you answer all these tough questions and prepare you and your portfolio for all that lies ahead on this road to retirement.



Proper planning allows you to answer these questions and not miss any needed exits along the way. Rockbridge is here, as your financial PARTNER, ensuring you a smooth journey down “life’s road” well beyond your exit for retirement!

Once Upon a Time…

When we started an investment advisory firm in 1991, it seemed obvious to Bob Ryan and me that structuring portfolios by focusing on asset allocation was superior to the stock picking culture of the day.  The ability to implement the strategy with low-cost index funds was still a new innovation, and we found ourselves talking with incredulous institutional investors who could not understand why any prudent, sophisticated investor would settle for market returns when every active manager walking through their door had consistently outperformed the market – at least that’s what their presentations declared.

We occasionally mused about what would happen when investors “saw the light” and embraced low-cost passive or market tracking strategies.  If everyone bought index funds, could markets become inefficient and create opportunities for smart investors to beat the market by picking undervalued securities?  Our conclusion – it might be possible in theory, but extremely unlikely.  As the market approached a 100% devotion to index funds, capitalism would prevail and a few smart investors would start bidding up the price of undervalued securities, keeping markets reasonably efficient for everyone else.

Fast Forward…

This brings us to the latest round of arguments in the ongoing active versus passive debate.  A sell-side group at Alliance Bernstein put together a provocative research piece likening a market dominated by passive investments to Marxism.  The argument is that markets influence the judicious allocation of capital by determining which companies deserve investment and which borrowers deserve capital (from bonds).  Index funds, by buying everything in the index according to market weight, are not contributing to the process of capital allocation, thus they are not only worse than a free-market, they are even worse than communism, where there is at least some attempt at planning and prioritizing.

How Many Active Investors Does It Take…

Somewhere around 30-35% of investable assets are now held by market tracking Exchange Traded Funds (ETFs) and mutual funds.  The argument that smart money managers can outperform the market has been overwhelmed by data suggesting otherwise.  Although stock pickers will not be extinct any time soon, there is a steady flow of assets moving out of actively managed mutual funds and moving into index and market tracking funds and ETFs.

As this trend continues the discussion has begun to shift to the perils of a market dominated by indiscriminate investors blindly buying market weighted index funds, but not everyone agrees with the dangers described by the Alliance Bernstein piece.  Vanguard founder John Bogle (who launched the world’s first public index fund) has estimated that a 90% passive market should be sustainable. Burton Malkiel, author of the classic, “A Random Walk Down Wall Street,” has set the number even higher, at 95%, saying with indexing at 30-35% of the total, there are still plenty of active managers out there to make sure that information gets reflected quickly.  “And in fact I think it’ll always be the case.”

At Rockbridge we agree with Bogle and Malkiel, that indexing is unlikely to ever reach levels where it threatens the efficiency of markets and their ability to incorporate all available information in the setting of prices.  Taking advantage of market efficiency, and the availability of low-cost, evidence-based market tracking funds and ETFs, is still the best way to implement an asset allocation strategy for long-term investors.

With less than a month to go before the Presidential election, many clients and friends have asked me how the markets will respond to the voters’ choice.  While there will be no shortage of prognostications in the media, investors would be well served to avoid speculating.

Trying to outguess the market is often a losing game.  All of the current information and polling on the election is baked into current stock market prices.  Major market fluctuations usually occur when unexpected events happen.  As of today, we expect either Clinton or Trump to be our next President.  So stock prices reflect that reality to a large degree.

History tells us that markets provide substantial returns over long time periods regardless of which party holds the Presidency.  So for “buy and hold” investors, the best advice is to “do nothing” and let the markets work for you.  The underlying reasons for investing your wealth in the stock market have not changed.


Generating excess returns or limiting losses based on the election results will likely be the result of random luck.  However, those decisions can be very costly to the long-term investor who may make the wrong moves based on the short-term news cycle.

The highest probability of long-term investment success remains the same: identifying your personal goals and objectives; creating and sticking to a diversified asset allocation plan using low-cost evidence-based investments; and rebalancing regularly.

October is National Cyber Security Awareness Month.  With more and more financial transactions happening online, we wanted to share a very helpful infographic (shown below).  Please be mindful of the personal information you provide online!

How to Recognize and Avoid Phishing Attacks Infographic

Infographic by Digital Guardian

Back in August, the Social Security Administration added a new step in order to protect the privacy of those who use my Social Security, the online platform to view personal Social Security information.

When you sign in at, you will now be asked to add your text-enabled cell phone number. You will then receive a text with a one-time security code that you must enter in order to access your account. Each time you log in to your account, you will have to complete two steps going forward:

Step 1: Enter your username and password

Step 2: Enter the security code Social Security texts to your cell phone

The new requirement is the result of an executive order for federal agencies to provide more secure authentication for their online services, such as “multi-factor authentication.” Using a one-time security code in conjunction with your username and password is an example of multi-factor authentication. This extra layer a security is just another step in proving that you are the actual owner of the account so your private information is kept safe.

Unfortunately, if you do not have a cell phone or do not wish to give out your cell phone number, you will not be able to access your my Social Security account under this new method. If you need to contact Social Security for any reason, you can do so here.

To learn more, please review the Frequently Asked Questions page.

It’s no surprise that this year’s U.S. presidential race has become a subject of conversation around the globe. In “Why Our Social Feeds are Full of Politics,” Canadian digital marketing executive Tara Hunt observes, “American politics, it seems, makes for high-intensity emotions far and wide.” The intensity will probably only increase as the November 8 election date nears.

We are by no means endorsing that you ignore what is going on in the world around you. Politics and politicians regularly and directly affect many aspects of our lives and our pocketbooks. But as you think through this year’s raucous race, remember this:

The more heated the politics, the more important it is to establish and maintain
a well-planned, long-term approach to managing your investments.

So go ahead and talk politics all you please – and if you are an American, be sure to vote. But when it comes to your investments, it’s best to ignore any intense emotions and the dire or ebullient predictions that spring from them, as dangerous distractions to your financial resolve.


Have you ever heard of stage-one and stage-two thinking? They’re terms popularized by economist Thomas Sowell in his book, “Applied Economics: Thinking Beyond Stage One.” Basically, before acting on an event’s initial (stage one) anticipated results, it’s best to engage in stage-two thinking, by first asking a very simple question:

“And then what will happen?”

By asking this question again and again, you can more objectively consider what Sowell refers to as the “long-run repercussions to decisions and policies.”


In investing, we see stage-one thinking in action whenever undisciplined dollars are flooding into hot holdings or fleeing immediately risky business. Stage-two thinking reminds us how often the relationship between an event and the world’s response to that event is anybody’s guess and nobody’s certain bet. A recent Investopedia article, “Does Rainfall in Ethiopia Impact the U.S. Market?” reminds us how market pricing works:

“No one knows how any of these events will impact markets. No one. That includes financial advisors who have access to complex computer models and investment strategists in the home office with cool British accents. They don’t know, but their livelihood depends upon appearing to know. Few of them are ever held accountable for the innumerable predictions they got wrong. They simply move on to the next prediction, the next tactical move.”

Investors should avoid trying to predict future market pricing based on current market news.


Stage-two thinking is especially handy when considering the proliferation of predictions for anything from financial ruin to unprecedented prosperity, depending on who will next occupy the Oval Office.

Again, the problem with the vast majority of these predictions is that they represent stage-one thinking. As financial author Larry Swedroe describes in a US News & World Report piece, “Stage one thinking occurs when something bad happens, you catastrophize and assume things will continue to get worse. … Stage two thinking can help you move beyond catastrophizing. … [so you can] consider why everything may not be as bad as it seems. Think about previous similar circumstances to disprove your catastrophic fears.”

In the current presidential race, we’re seeing prime examples of stage-one thinking by certain pundits who are recommending that investors exit the market, and sit on huge piles of cash until the voting results are in. At least one speculator has suggested that investors should move as much as 50 percent of their portfolio to cash!

And then what will happen?

Here are some stage-two thoughts to bear in mind:

  • Regardless of the outcome of the election, there’s no telling whether the markets will move up, down or stay the same in response. By the time they do make their move, the good/bad news will already be priced in, too late to profit from or avoid.
  • In the long run, the market has moved more upward, more often than it moves downward, and it often does so dramatically and when you least expect it.
  • Moving to cash would generate trading costs and potentially enormous tax bills. Worse, it would run contrary to having a sensible plan, optimized to capture the market’s unpredictable returns when they occur, while minimizing the costs and manageable risks involved.

In this or any election, stage-two thinking should help you recognize the folly of trying to tie your investment hopes, dreams, fears and trading decisions to one or another candidate. Politics matter – a lot – but not when it comes to second-guessing your well-planned portfolio.

We all know the importance of getting your finances in order and creating a financial plan when you are on the brink of retirement. However, creating a “leisure plan” can be just as important to a successful retirement.

This recent USA Today article discusses the significance of planning how you may want to spend your leisure time in your golden years. “Retirement will be the first time since you were 5 when your days will be ‘nearly completely unstructured’… And without something to do, you’ll likely be unhappy.”

Remember:  Rockbridge is here to help you plan before retirement and throughout retirement – no matter how you decide to spend your time.

Stock Markets

Just look at the short-term variability in the various equity indices shown in the accompanying chart.  It shows how markets behave through time – some markets are up substantially while others are down.  Of course, this variability is reduced by holding a commitment to each, but it means periodically enduring down markets while appreciating the positive results of others.

Look at the ten-year period where all equity indices are positive.  Even in this relatively long period, proxies for international developedEquity Returns 6 30 16 markets and emerging markets stand out as below average.  While we have had to deal with an extended down period in these markets, it is not indicative of what the future holds.

Financial markets continue to deal with the turmoil from Britain voting to exit the European Union.  First lurching down on the news, then, except for British markets, back up to where it now seems that financial markets have generally incorporated the initial shock in a reasonable fashion.  Domestic stocks ended the quarter up about 3%; stocks traded in developed international markets down 1%; emerging markets up nearly 2%.   Year to date a globally diversified stock portfolio would not have fared too badly either – gains in emerging markets generally offset losses in international developed markets.  This time around diversification to emerging markets, REITs and bonds cushioned the immediate impact of today’s uncertainties.

Bond Markets

The bond market story is told in the yield curves chart.  Look at how short-term yields have generally increased, while yields of longer maturities have dropped.  The change in short-term yields reflects the Fed’s beginning to increase interest rates, and longer-term yields are consistent with the so-called “flight to safety” in the face of global uncertainties and negative interest rates. (U.S. Treasuries are still providing a positive return, increasing their demand.)Yield Curves 6 30 16

Once again, the Fed announced that they would delay their program to increase interest rates – too much uncertainty in global markets they say.  I wonder when global uncertainty will dissipate – there will always be something.

Credit spreads – the difference in yield between corporate bonds and Treasury securities – narrowed over the quarter explaining a premium for bearing the credit risk of corporate bonds versus Treasury securities.  While narrowing credit spreads is contrary to the reduced appetite for risk, it is consistent with market participants searching for yield in today’s low (negative) interest rate environment.


On June 23rd, 52% of British voters thumbed their nose at the European Union to say:  “We’re out of here!”  This action is going to usher in change.  Of course, anytime the status quo is upended, get ready for a lot of uncertainty as things get sorted out.  As always, the best strategy to deal with this turmoil is to periodically rebalance allocations back to an established risk profile – taking advantage of “buying low and selling high.”

The British vote surprised many.  Now we start the process of “putting as much of the toothpaste as possible back into the tube.”  This will produce more surprises – some positive, others negative – all independent of the Brexit vote.  So far, financial markets seem to have handled the uncertainty reasonably well.

While Brexit didn’t seem to have much of an impact on financial markets, the vote is important nonetheless.  Brexit is a first cousin to the Trump phenomenon here.  Both reflect a repudiation of the ideas and programs of the so-called “Establishment.”  The data is reasonably clear that not everyone has shared the benefits of globalization, technological change, immigration, etc.  A lesson of the Brexit vote as well as the success of Donald Trump and Bernie Sanders is that there is an underlying discontent with economic and cultural changes that better not be ignored

Although our name is Rockbridge Investment Management, there are many services that we provide to our clients beyond managing investments.   We wanted to share just a few of these additional skills with our clients.

General Questions

We are here for you as an ongoing resource for every financial question, big or small.  Please ask!

Retirement Income Planning

Investment management is only part of the retirement picture. We are able to plan for what your retirement will look like by combining all sources of future retirement income.

Pension Analysis

If you have a pension, the decision on how to start collecting on the pension is one of the biggest financial decisions you will make.   We can look at the context of the available pension options and your other financial assets to optimize your available retirement spending.

Insurance Evaluation

While we don’t sell any insurance products, we are knowledgeable in life, health and long-term care insurance products.  We can help provide context to how much insurance you need and where the best place is to purchase it.

Social Security Strategies

Often unrealized, Social Security will still provide the backbone of your retirement spending.  There are many different options available for claiming Social Security.  Making sure the right selection is made can have a substantial impact.

Estate Planning

We can help lead you through many complex estate planning scenarios and work with your attorney on finalizing your optimal estate plan.

Tax Planning

There are many ways to optimize your savings and retirement withdrawals by understanding the complicated tax laws.  We have the expertise to understand how your investments and taxes interact.

College Savings

Tuition bills have skyrocketed in the last decade.  We cannot help reduce the cost of tuition, but we can make sure you are saving and paying for college in the most cost effective way for your children.

401(k) Recommendations

Before retirement, employer retirement plans are often the easiest and best way to save.  Even though we cannot directly manage your personal 401(k) account, we can provide guidance on which investments should be in the account.

If you have questions relating to any of the topics listed and more, please feel free to contact us.  Rockbridge has firm-wide expertise to help you achieve your financial goals

The recent vote in Britain to exit the European Union is yet another reminder of how markets often react negatively to surprises. We cannot help but ask ourselves, “Is it different this time? Maybe this is the event that upends markets as we know them, and I would be stupid not to react!”

As it turned out, markets settled down quickly after this latest surprise, but it reminds us that long-term investors must endure these market downturns because no one has the crystal ball that would allow us to avoid them.

Sometimes surprises have profound and long-lasting effects. Those of us who have been saving for retirement for the past thirty years or so have seen plenty of surprises, and I think it is helpful to put some of the results in perspective. Looking back from 2016, it is interesting to note how disappointing our recent experience has been. Since 1940:

• The worst 3-year performance for the S&P 500 ended in March of 2003 (-16.09% annualized).
• The worst 5-year performance for the S&P 500 began a year later in March 2004 (-6.64% annualized).
• And the worst 15-year performance for the S&P 500 ended in August 2015 (+3.76% annualized).

In other words, the technology/dot-com bubble that ended in March 2000, and the financial crisis of 2008, were back-to-back disastrous surprises for the stock market. The fallout has consumed more than half the working career of anyone much under 50 years old, and had a negative impact on those who are older and trying to save for retirement in their peak earning years.

Another interesting fact: If we add the previous ten years to that worst 15-year period (25 years beginning in September 1990), the S&P 500 realized annualized returns of 9.8% – very close to longer-term averages.

Some conclusions we can draw from these observations:

• Time horizon matters – 15 years is not a long time for a long-term investor, and anyone planning for retirement should be a long-term investor.
• It’s different every time – the cause of the surprise is almost always different than the last time markets were shaken, but long-term investors must be ready to endure the inevitable downturn.
• The best reaction is almost always the same – check your risk profile to be sure it is appropriate for your situation, then rebalance to your targets, buying stocks at discounted prices.
• Staying the course makes sense – the major market run-up in the 1990’s was as unforeseeable as the subsequent downturns.

Events like the Brexit vote test our patience and tolerance for risk. Maintaining a long view to the future, and keeping history in perspective, can help us make better investment decisions.

Rockbridge is pleased to announce that Kevin R. Sullivan joined the firm in April after spending 25+ years in the trust & investment management divisions of local banks.  Kevin is a graduate of St. John Fisher College and brings to Rockbridge experience with trust and estate planning issues, portfolio management and business development for both personal, trust and retirement account situations.

While Kevin has spent years working within the ‘actively-managed’ portfolio approach, he is grateful to join a firm whose philosophy and process is built on the evidenced-based method employed by Rockbridge Investment Management.

Months prior to joining Rockbridge, Kevin enrolled in the Certified Financial Planner (CFP) and expects to be completed with his studies within the next several months.  Based on his interactions and first-hand experience in working with pre- & post-retirement clients, as well as generational issues affecting local families, Kevin is focused on bringing additional value and elevating the conversation with his clients on a number of financial topics here at Rockbridge.

You can learn more about Kevin here.

Believe me, we get it. After yesterday’s Brexit referendum and its startling outcome, it’s hard to view today’s news without feeling your stomach twist over what in the world is going on. Whenever the markets scream bloody murder, your instincts deliver a sense of unrest ranging from discontent to desperation.

Financial author Larry Swedroe has called this your GMO response: Get me out! The Wall Street Journal personal finance columnist Jason Zweig explains it this way: “Losing money can ignite the same fundamental fears you would feel if you encountered a charging tiger, got caught in a burning forest, or stood on the crumbling edge of a cliff.”

Basically, you can’t help it. These sorts of responses are being generated by the amygdala lodged deep inside your brain, over which you literally have no control.

What’s Next?

So, first, take a breath. Now another one. Next, remember that there is a fine line between remaining informed about global goings on, versus letting an onslaught of news take over your brainwaves and trick you into rash reactions.

In that context, it doesn’t take long to realize that the breaking Brexit news raises myriad questions, with few swift and comforting answers currently available.

In lieu of fixating on the bounty of in-depth analyses (when in reality the answer to exactly what is coming next is: “Who knows?”) it’s worth remembering that capital markets have been encountering and absorbing startling news for centuries. When viewed close up, the mechanics can be ear-piercingly loud, but they actually have a history of working marvelously well in the long run – at least for those who heed the evidence on how to participate in the upside rewards while managing the inevitable downside risks.

What Should You Be Doing?

In short, very little at this time … which we understand, can be one of the very hardest things to (not) do. So let’s talk about that.

In your portfolio, if we’ve accurately positioned you for withstanding high market risk when it occurs, you can congratulate yourself for having already prepared as best you’re able.

While the outcome of the Brexit referendum is certainly new and different, its impact on the market is old hat. These are the sorts of events we have in mind when we prepare and manage you and your portfolio. Using global diversification, effective asset allocation and careful cost management, the goal has been – and remains – the same. Our aim is to expose you to the market risks and expected returns you need for building or preserving your wealth, while minimizing over-concentration in any one holding. That way, you are best positioned to avoid bearing the “Ground Zero” worst of it when market crises do occur.

Even so, perhaps the unfolding events are causing you to realize that you aren’t as keen as you thought you were on bearing market risk. Real life is very different from theoretical exercise.

If this is the case, we get that too. Still, we would strongly suggest that this is no time to act on those insights. In fact, it’s likely to be the worst time to do a “GMO.” First, it is likely to incur significant avoidable financial loss. Plus, while it may temporarily feel better to have “done something,” it leaves you with no plan for the future. That can generate more chronic unhappiness than it briefly relieves. Life is too short for that!

If you’re having your doubts, consider your current feelings an important and valuable insight about yourself, but please, please sit tight for now. Do give us a call right away, though, and we’ll explore how best to ratchet down your investment risk sensibly and deliberately.

In short, as your advisor, we’re all in on safeguarding your best financial interests. We remain as here for you as ever. We hope you’ll let us know how you are holding up, and what questions we can answer about the unfolding news. Market analyses aside, we are living in “interesting” times, and would love to chat further with you about them, one on one.

Thanks in part to our evidence-based approach to investing, we don’t have to eat our words or advice very often. But recently, we discovered that we stand corrected on one point. Fortunately, it’s a point we’re happy to concede:

Evidence-based investing doesn’t have to be such a boring subject after all.

In his recent “Last Week Tonight” HBO segment on retirement plans, John Oliver showed the world that even the typically eye-rolling conversation on why fiduciary advice matters to your investments can be delivered so effectively that it goes viral … or at least as viral as financial planning is ever likely to get, with nearly 3.5 million views, and counting.

Oliver’s masterful combination of wit and wisdom is worth watching first-hand. If you’ve not yet taken the 20-minute coffee break to check it out, we highly recommend that you do so.

The best part? It’s hard to say. He covers so many of our favorite subjects: avoiding conflicted financial advice, reducing the damaging effects of excessive fees, and participating sensibly in expected market growth.

We also are hopeful that Oliver’s segment will help strengthen the impact of the Department of Labor’s recent rule, requiring all retirement advice to strictly serve the investor’s best interests. We can’t quite bring ourselves to share the analogy that Oliver used to bring that particular point home, but here are a couple of our other favorite zingers (pardon his French):

On stay-the-course investing: “There is growing evidence that over the long term, most managed funds do no better, and often do worse, than the market. It’s basically the plot of ‘Charlie and the Chocolate Factory.’ If you stick around, doing nothing while everyone around you f**ks up, you’re going to win big.”

On hidden fees: “Think of fees like termites. They’re tiny, they’re barely noticeable, and they can eat away your f**king future.”

Lacking Oliver’s comedic timing, our own frequent conversations on these same subjects are unlikely to ever reach 15 million viewers. But that doesn’t diminish our equal levels of passion and enthusiasm for how important it is to safeguard your financial interests by embracing the few relatively simple, but powerful principles that Oliver shared.

One thing we do have over Oliver: We are quite serious about actually serving as a fiduciary advisor, protecting and promoting your highest financial interests. As always, we deeply appreciate your business. If you are aware of other investors who could use a similar helping hand, why not share Oliver’s video with them? We hope you’ll also offer them our name along with it, in case they’d like to continue the conversation.

Selecting the right financial adviser is crucial. You want someone who is trustworthy and who will act in your best interest, but they are not as easy to find as you would think.

A recent article in the Wall Street Journal provides tips on finding an adviser who is the right match for you. The author of the article, Jason Zweig, explains the importance of research, interviewing, asking the right questions and other forms of due diligence. “Only after you have thoroughly questioned the advisers and reviewed their answers should you ask yourself which one feels most likeable and trustworthy.”

You can read Zweig’s article here.

Life insurance is often sold as a “one size fits all” product; it will serve as protection and as an investment account that will grow at an impressive interest rate.  When you take the time to unwind these products, you will often find that the old saying holds true:  “If it seems too good to be true, it probably is.” Like most insurance products, the wording is very confusing and the salespeople are very convincing, which makes it difficult to determine if the policy is right for you.  Hopefully these explanations of the various types of life insurance will help clarify what type of policy is truly in your best interest:

  • Term Life Insurance – Term life insurance, often called “pure insurance,” is the most affordable type of life insurance. It can be purchased for 10-, 15-, 20-, or 30-year “terms.”  For example, if a 30-year old purchases a 20-year term policy, the policy will terminate when the insured reaches 50 years of age.  This is typically the most appropriate life insurance, as it covers a point in your life when you need the most amount of life insurance:  when your children are young, debt is high(er), and retirement savings balances are relatively low.  The need for insurance after 60+ years of age does not really exist for most clients.
  • Whole Life Insurance – In my experience, whole life insurance is the most oversold type of life insurance currently on the market. There are very rare situations where whole life insurance makes sense.  I have seen salespeople sell these products as a better alternative to 401(k) accounts, college savings plans, etc., which is entirely false.  Unlike term life insurance, whole life insurance covers the insured’s “whole life.”  In fact, if the policy is still in force when the insured reaches 100 years of age, the insurance company will write the insured a check for the death benefit!  Whole life premiums are substantially higher than term life insurance, and salespeople may be inclined to sell a client whole life insurance rather than term life insurance to generate higher commissions.  These policies have a “cash value” component of the policy that is often very misleading.  For example, if you pay a $100 monthly premium for a policy, $60 may go to the insurance company for the actual cost of the insurance, and $40 may go into a separate forced savings account (cash value).  Often times, insurance companies project 7% growth on these cash value accounts, which is entirely unsustainable.  There are various components we look at with these policies (“guaranteed” and “non-guaranteed” projected values, dividends, etc.) that are crucial in determining if the product is right for you.
  • Universal Life Insurance – If you want to purchase permanent insurance, universal life insurance is typically a better investment than whole life – “guaranteed” universal life in particular. Old(er) universal life insurance policies need to be reevaluated; clients often expect these policies to last their entire lifetime, when in fact they end prematurely due to the internal cash value earning lower than anticipated interest rates. Insurance companies solved this problem by issuing guaranteed universal life insurance policies.  These policies will stay in force even if interest rates aren’t as projected (as long as certain conditions are met).  There is a subset of universal life insurance called variable universal life insurance which is simply “gambling” with your life insurance.

Most consumers will be much better off by purchasing term insurance rather than either type of permanent insurance, but certain situations may warrant the need for permanent life insurance.  If you have any of these policies and have specific questions, please don’t hesitate to contact me (by phone or email) for evaluation.

A simple Google search for “retirement plan” or “retirement calculator” will provide thousands upon thousands of results.  The number of websites that promise to provide retirement or financial guidance in a short amount of time are plentiful.  The real question is, are they accurate?   As with anything in life, the devil is in the details.  A comprehensive understanding of your personal situation cannot be done in a 5-minute Twitter level analysis.  It does not make sense to have a cursory glance at something as important as retirement.  When considering retirement planning and whether to go alone or with an advisor, please consider the following points:

Are the Plan Results Really Correct?

  • Have you ever heard the saying, Garbage In, Garbage Out (GIGO)? This is more important than anyone realizes when talking about retirement plans spanning 30+ years.   A slight miscalculation can mean the difference between a successful plan and low spending in retirement.  Simple online retirement calculators are high level estimates and should not be used to make major life decisions.

Advanced Scenario-Based Analysis

  • Modern financial plans have moved far past standard Excel models and back-of-the-napkin calculations. Not only should the retirement plan be flexible and easy to update, it should also run many simulations and stress test the results looking at downside scenarios.  This is not something that can be done easily through a quick calculator or fixed rate of return model.


  • The biggest impact on financial and retirement planning has nothing to do with analysis. Emotions and personal experience can heavily weigh decisions as retirement approaches.  Having an unbiased and objective resource can prevent costly mistakes.   Emotions are also amplified the few years around retirement because of the shifting mindset from saving to spending from your portfolio.


  • Another factor that a financial advisor can provide is the framework for good decision making. What decisions need to be made now?  Which decisions have the biggest impact?  Financial planning, like life, is not black and white.  What advisors do is to help you frame your decisions so that you are able to make the best decision for you.

Missed Opportunities

  • Your financial life is filled with several complex topics including investments, savings, debt, taxes, college savings, Social Security, pensions, etc.  Understanding the relationship between all of the topics is far more complicated, and because of this there are often missed opportunities.  Look to an expert to help you capture those opportunities.

The default investment option for the Lockheed Martin Salaried Savings Plan (SSP) and the Capital Accumulation Plan (CAP) is the managed Target Date funds.  A Target Date fund is designed to capture the entire investment market in a single fund.  In addition, as you approach retirement, the Target Date fund becomes less and less risky.  While this sounds good in theory, there are some significant downsides to using Target Date funds, especially the ones available in the LM retirement plan.


For new investors, there are some significant advantages to holding the LM Target Date Funds, the primary of which is simplification.  For an employee in their 20s and 30s, savings rate is by far the most important factor in retirement success.   Focusing on savings rate and simplifying the investment selection with a Target Date fund is a good approach during these years.  Another benefit is that the Target Date funds automatically rebalance on at least an annual basis.   Finally, the Target Date funds decrease in risk over time which could benefit an investor that is disengaged from their accounts.


It is important to consider how much risk you are truly taking with a Target Date fund.  There is no standard for how much stock market risk a particular Target Date fund holds, so two different funds that have the same retirement year (Target Date 2040) could have drastically different holdings inside of them.    By investing in individual asset classes instead of a single fund, you have the ability to better control the risk taken in the portfolio.  In addition, the risk can be controlled better for other facets of your individual retirement picture.   The ideal risk level may be different if you have a LM pension as well as the SSP.


The Target Date funds in the LM 401(k) plan are actively managed by Lockheed Martin Investment Management Company (LMIMCo).  On any given day, the LMIMCo can change the internal account managers in the fund which can change the price.

For example, the annual expense ratio on LM Target Date funds can vary between 0.15% and 0.82% at any given time.  That is quite a broad range.  It would be good to know to a more accurate detail if the annual expenses were either $150/year or $820/year (on a $100,000 account).

In contrast, selecting individual index based funds in the plan would have a lower expense ratio of around 0.04%.   Knowing that you are only paying $40/year instead of $820/year (on a $100,000 account) is a big incentive to re-evaluate your investment selection within your account.

Active vs. Evidence-Based Investment Management

At Rockbridge, we fundamentally believe in the evidence-based or index-based investing approach.  The goal of most investors should be to capture the returns of the entire market for the lowest possible cost.   Unfortunately, the Lockheed Martin Target Date funds fall under a category of active management.   The concept of active management means that a fund is making specific investment decisions in an attempt to outperform their benchmark investment.  While the word “active” sounds like a positive characteristic for an investment manager, academic evidence shows that over the long run, a large majority of active managers have lower returns after fees compared to using an evidence-based approach.  Many of the Lockheed Target Date funds also show this performance lag on their Morningstar reports.


Although the Lockheed Martin Target Date funds hold many different asset classes, there are several that Rockbridge does not believe adds long-term value for clients.  These asset classes include commodities, alternative investments, futures, and Treasury Inflation Protected Securities (TIPS).  In addition, each target date fund held approximately 9% in cash at the end of 2015.  With the goal of long-term investing, holding cash in a retirement account could decrease your expected return, and thus, your retirement account balance.


As you can see, the Target Date funds within the Lockheed Martin 401(k) have both benefits and pitfalls.   The main benefit is simple broad diversification, however this comes with increased costs and risk factors for the investor.

At Rockbridge, we prefer to control the risk in your portfolio and reduce the unneeded costs associated with investing.  As mentioned above, the Lockheed Martin plan does have well diversified, evidenced-based funds that are available.  Please reach out to us for an allocation unique to you.

Lockheed Martin MST recently announced the upcoming Voluntary Layoff Program with the goal of reducing the divisional workforce by 1,500 employees.  If you are considering retirement and are eligible for the Voluntary Layoff Program, it may make sense to deeply consider the options.

As with all retirement and transition decisions, there are two main components: the financial aspects and the non-financial aspects.   Often, the non-financial considerations far outweigh any detailed financial analysis.

Financial Considerations

  • Have you reached the savings level where you can comfortably retire the way you envisioned in the past?
  • Do you have major upcoming costs such as college tuition for children that would hurt your early retirement decision?
  • How will this program affect your taxes this year and future income streams like Social Security?
  • If you are not 65 years old, how does this impact your medical insurance coverage?

Non-Financial Considerations

  • Are you truly ready to retire from day-to-day work? What would that look like?
  • Do you have other career ambitions outside of Lockheed Martin?
  • What does your spouse think of the prospect of you no longer working?
  • Are your primary friends retired or still working?
  • If needed, how will you replace the sense of daily accomplishment that work provides?

Start with a Financial Plan

When considering a major life decision, it makes sense to first take a step back and figure out your priorities and long-term goals in life.   The best way to do this from both the analytical and emotional level is to have a comprehensive financial plan in place.  This living document can help frame the Voluntary Layoff Program decision as well as open the discussion for other missed financial opportunities going forward.  Rockbridge is here to help facilitate the discussion and frame the key decisions for you at this critical time in your career.   We are here when you are ready.

If you qualify for the Voluntary Layoff Program and are interested in applying, the following are some key dates to keep in mind:

  • May 11: Final day to submit application for the Voluntary Layoff Program
  • May 26: Employee notified if application is accepted and the applicable exit date
  • June 9: Date majority of the employees will exit the business; additional dates will continue quarterly through June 8, 2017

When evaluating a financial advisor, the most important factor is that they truly understand you as a person and your personal situation.  At Rockbridge, we have a dedicated focus in working with clients that are employees of Lockheed Martin.  Because of this, we already have an expertise in all employee benefits plans and how each one interacts with other benefits such as Social Security.  This allows us to optimize your retirement plan and gives you the reassurance and confidence that you are not leaving anything on the table.

Over the next several weeks, we will be writing our thoughts on different facets of Lockheed Martin employee benefits.  We hope that you are able to take away some new information that will help you better save and be prepared for when retirement comes.  We are always here to answer your questions as they arise.

Lockheed Martin Retirement Plans

As you well know, there are several different pension and retirement programs offered through Lockheed Martin via Voya.  Each one has their own unique benefits and quirks.   In addition, between now and 2020, the retirement program landscape will change with the pension benefits being frozen for all employees.   We will address each of these items in detail to help eliminate confusion regarding terminology and acronyms.

Salaried Savings Plan (SSP) – This is the company’s 401(k) plan.  Employees are allowed to contribute between 1%-25% of their salary with a max contribution of $18,000/year ($24,000/year for employees 50 and over) for 2016.  In addition to the employee contribution which is always yours, the company will match 50% of your contributions up to 8%.  This means that if you put in 8% of your salary, the company with contribute 4% of your salary toward the plan.

Capital Appreciation Plan (CAP) – For employees that are not part of the Lockheed Martin Pension Plan (hired 1/1/2006 or later), the company will contribute an additional 3%-4% of your salary toward retirement savings.   The CAP will transition fully in 2020 to the new Lockheed Martin Retirement Savings Account (RSA) where the employer will automatically contribute 6% of your salary toward retirement.

Retirement Savings Account (RSA) – A new retirement plan benefit that will function for all employees in place of previous pension benefits.  LM will contribute an automatic 2% of your salary to this program from 2016-2019, and in 2020, that percentage will merge with the CAP and increase to an automatic 6%.

Pension Benefits – The LM pension plan was discontinued for new employees starting 1/1/2006.  Beginning 1/1/2016, the LM pension plan has a locked annuity value for your average pay formula.  Any additional raises will not be factored into the pension formula.  Beginning 1/1/2020, the pension plan will stop accruing additional years of service.  On 1/1/2020, the final pension figure will be 100% fixed.

Lockheed Martin Executive Compensation Plans

In addition to the standard employee plans offered, Rockbridge is well versed in the various executive compensation plans available to highly compensated employees.   With each employee having unique supplemental benefits, we plan individually to optimize every available option.   We have detailed experience working with the Lockheed Non-Qualified Supplemental Savings Plan (NQSSP), the Non-Qualified Pension Plan (NQPP), Deferred Management Incentive Compensation Plan (DMICP), Long-Term Incentive Cash and Restricted Stock Bonuses as well as other legacy compensation plans.

How Plans Interact in Retirement

Understanding the complexities of each Lockheed Martin retirement plan is important, but even more critical is understanding how these plans function together with outside assets (brokerage accounts) and pensions (Social Security).   Using advanced planning software, Rockbridge can make sure your hard earned savings are maximized for your goals.

Framing Solutions

Outside of pure investment management, one of the most valuable services that Rockbridge provides is goal and decision framing.   Unlike simple math problems (1+1=2), retirement decisions are a combination of analytical and emotional decisions.   For many retirement questions, there is no right or wrong answer, but Rockbridge can help frame the decisions so that you are able to select the best solution for YOU.  Having an unbiased and objective third party look over your entire financial picture will give you the peace of mind that the transition to retirement will go smoothly.

First Step

The first step forward is always the most difficult.   When you are ready, Rockbridge would be happy to walk you through the path to retirement to make sure you are making the best decisions going forward.  We offer complimentary discovery meetings so that you can get to know us and see if we are a good fit.   We also offer second-look services to see if your current advisor is maximizing all of your available investment resources.   Your life savings and retirement happiness are always worth a second look.

Stock MarketsEquity Market Returns (2) 3 31 16

After January’s rough start, stock markets bounced back nicely in March, bringing most numbers into the black for the quarter.  Domestic Small Cap and International Developed Markets are the exception – down about 1.5% and 2%, respectively.  Notice from the accompanying chart that it was Emerging Markets that led the way, earning nearly 8% for the quarter.  While not nearly enough to bring longer-period returns into the black, it does give some sense of how diversification works.

The uptick in stock returns in March seems to reflect a more or less positive resolution to some of the recent economic uncertainty – commodity prices have rebounded, figures from China appear better than expected and the domestic economy shows signs of continued improvement with fourth quarter GDP numbers revised upwards.  Also, markets have calmed down a bit – daily volatility of the S&P 500 is below average in March.

While certainly dominating the airwaves, markets don’t seem to be paying much attention to the goings on in the Presidential election.  Don’t let expected political environment cloud investment decisions – assessing not only the probability, but also the impact of the eventual election of any of the current contenders, is tricky indeed.

Market prices are based on the future – today’s prices reflect a set of expectations, which may or may not be realized.  Prices are set expecting a positive return.  The possibility for short-run losses, while not expected, is risk.  It’s what we endure to earn the long-run positive returns.  For sure, however, there will be lots of unpredictable ups and downs along the way as the markets digest the news of the day.

Bond MarketsYield Curves 3 16

The yield on the bellwether 10-year U.S. Treasury security fell about 0.5% to 1.8% by the end of the quarter reflecting positive returns in Domestic Bond Markets.  Note the changes in the accompany Yield Curves chart – short-term rates increasing due to the Fed’s tightening, yet rates over longer periods falling.  The Fed can impact short-term rates; the market sets longer-term rates.

We are in the midst of an environment of historically low interest rates.  In fact, as a component of current monetary policy, the Central Banks of Japan and some European countries have begun to charge member banks a negative interest rate to hold reserves.  Also, the market determined rate on five-year inflation protected U.S. Treasury securities is a negative 0.3%.  Yields on the ten-year security have fallen to under 1.8%, which if inflation over the next ten years is expected to exceed 2%, also produces a negative yield.

While this interest rate environment has persisted for some time, markets can be out of whack for extended periods. However, expected deflation over longer periods could make negative yields rational.   Still, I would be hard pressed to argue that negative interest rates are the “new normal” and are here to stay.  Negative interest rates can’t go on forever, and Stein’s Law (Herbert Stein, Chairman of the Council of Economic Advisors in the Nixon and Ford Administrations) tells us that “If something can’t go on forever, it will stop.”

I will make the argument here: Most people would rather go to the dentist than get their estate documents (Living Will, Power of Attorney and Health Care Proxy) in order.  Why?  The dentist appointment usually only lasts an hour and does not require any preparation or thought in advance.  In contrast, the estate planning process takes some forethought and a few meetings to complete.  In addition, estate planning makes us consciously aware that we are indeed mortal.

Fortunately for estate documents, once you establish them, you hopefully won’t have to update them for years to come.  My advice is as simple as this:  Pull off the Band-Aid and complete your estate planning.  You will be happier with yourself after the fact.  I can speak from experience.  My wife and I finally finished our estate documents 14 months after our daughter was born.  I made sure to purchase my life insurance by the time she was born, but the estate documents found their way to the bottom of the pile of life’s paperwork.

I wanted to share our experience in hopes that it will encourage you to finalize your own estate plan.  What at first seems like a daunting task is really not all that bad or time consuming.  Hopefully after reading, you will feel confident to act.

Why do I need to create/update my estate documents?

The main reason for visiting an estate attorney would be to direct your decision making and assets in the manner you prefer if you become incapacitated or pass away.

When do I need to create/update my estate documents?

Estate documents are usually created around a life event.  The definition of life event is quite wide, but it could include marriage, divorce, new child/grandchild, retirement, financial windfall, etc.

What are the primary roles you need to name in your estate documents?

Guardian – a person appointed to take care of minor children if you were to pass away

Executor – a person who is capable and will carry out your wishes

Power of Attorney – someone who is able to act on your behalf in legal and financial matters

Health Care Agent – someone who will act on your behalf for medical decisions if you are unable to make them.

What work do I need to do in advance?

For families with children, the biggest issue will be selecting a guardian for your children.  Please don’t let this decision paralyze you and prevent you from finishing your estate documents.  Think about the important decision, but then realize that you can always change your wishes at a future time.  In this case, a good plan now is better than a perfect plan in the future.

What was the process like with the attorney?

My wife and I have a fairly simple estate, so we were able to get everything completed in the course of two meetings.  The first meeting took approximately one hour and was an introduction to the process.  We discussed many of the different topics in this article and thought about what-if scenarios.  We were able to make most of the role appointment decisions in the meeting.  About two weeks later, we received a package in the mail with all draft estate documents for us to review.  Once reviewed, we had a final meeting to review and sign the paperwork to make the documents official.

What does it cost?

The completion of most basic estate documents range from $500 to $1,000.  This price range would cover the majority of people.  If your financial or family life is more complicated, this price could be higher.

Why should I visit a real in-person attorney?

With technological advances, there is always a temptation to use a lower-cost online service such as LegalZoom.  Although these solutions could make sense, I feel that it is worth the extra cost to work with a local attorney who knows your situation and can help guide you through difficult questions.  With such important decisions, this is not the area to skimp on a few hundred dollars.  The in-person service also makes the official signing with witnesses and notaries a much easier process.

Hopefully this summary will serve as a reminder of cause to act so that your final wishes are protected in the future.  If you would like, Rockbridge would be happy to give you an attorney referral for someone we have worked with in the past.

“The three worst words of stock market advice:  Trust Your Gut.”  That was the headline of a recent article by Jason Zweig in The Wall Street Journal, reporting on a new academic study.  Dr. Robert Shiller of Yale, who won the Nobel Prize in economics in 2013, has been surveying investors about their expectations since 1989.  Dr. Shiller and two colleagues (Goetzmann and Kim) recently released a draft of their analysis of “Crash Beliefs From Investor Surveys”.

The study supports the idea that investor beliefs are heavily influenced by what recently happened, and the effect of bad news is reinforced by how it is reported in the media.  As Zweig says, “the investors’ forecasts regularly look more like aftercasts – simple projections of the recent past into the future.”

Zweig goes on to note that institutional investors are little better than individual investors at predicting the future of markets.  In the two years leading up to the financial crisis in 2008, the majority of financial professionals thought the chances of an imminent crash were nil, and then they turned maximally pessimistic in February 2009, when the market was near bottom and about to make a significant recovery.

This study seems particularly relevant in the context of what has happened so far in 2016.  As market values dropped as much as 10% early in the year, pessimism continued to build.  Optimism returned as markets recovered, and we ended the first quarter in the black.  We all feel better, even though the real world hasn’t really changed much.

The recent analysis by Dr. Shiller and his colleagues seems to suggest once again that investors are not very good at predicting the market, and their emotions tend to reflect what just happened, which is not helpful in predicting the next turn. This phenomenon may be explained by the ways our brains are hardwired to work, but allowing behavioral biases to affect investment decisions can be detrimental for professionals as well as non-professionals.

Conclusion:  Do not trust your gut when it comes to investment decisions.  Take the emotion out, and avoid decisions based on a prediction of the future.  Instead, develop a strategy that reflects an appropriate level of risk, and stick with it.  Our job as an investment advisor is to help develop that strategy and to reinforce our mutual commitment, especially when recent events and emotion try to weaken our resolve.

Many investors pay high fees for actively managed funds. Traditionally with these funds, an investor pays the “manager” of the fund to select investments that they believe will outperform the market. This, in turn, should give the investor a higher return than the market produces.

Although many expect a higher rate of return, evidence shows that actively managed funds do not outperform their benchmark often, and when they do, they usually cannot generate these higher returns consistently.  This evidence, along with the desire to keep the costs to our clients low, is why Rockbridge does not utilize actively managed funds. Instead, Rockbridge uses index funds that are constructed of the components of a market index. This allows us to track the market and mimic market returns. Since index funds skip the step of hand picking securities (by purchasing the entire market index), they are much less expensive than actively managed funds.

However, according to a recent Wall Street Journal article, several active managers are including exchange-traded funds, or ETFs, in their mutual funds. ETFs are a type of security that tracks an index as index funds do. The main difference is that ETFs trade like common stocks on an exchange. Their prices fluctuate throughout the day as shares are bought and sold, unlike a mutual fund that is traded at one price at the end of the day. Since ETFs track an index and don’t require a manager, this also makes them a less expensive option.

If ETFs essentially select the funds for the fund manager, doesn’t that defeat the purpose of an actively managed fund? Investors may feel that they aren’t getting their money’s worth if they’re paying for active management. The fund manager is simply selecting another set of securities (the ETFs) to put into their mutual fund instead of conducting research and picking individual stocks.

These active fund managers have given several reasons for altering their philosophy on picking individual stocks. One is that stock selection is too risky. They would rather control risk and generate consistent performance which the ETFs can help do. They argue that including ETFs also makes the fund easier to understand, and makes changing the underlying assets more efficient. These justifications probably sound familiar since these are all reasons Rockbridge gives to support the evidence-based approach to investing used in our client portfolios.

As an investor, it is important to be on your guard and understand the fees you are paying. Even active managers now are moving towards more of an evidence-based approach to investing – something Rockbridge has done for well over a decade.

As you may have heard, there have been some drastic changes to Social Security regarding the file-and-suspend and restricted application methods of filing. These changes were announced back in October 2015 when Congress passed their 2016 budget. (You can read more about the specifics of these changes in this article.)

As expected, there has been much confusion surrounding the changes – from Social Security recipients and Social Security Administration employees alike. The criteria regarding who is still eligible for these strategies is specific and complex, which leads people to discuss their eligibility with a professional. However, according to a recent Wall Street Journal article, there have been several instances where people have been given incorrect information regarding their eligibility from the Social Security Administration.

“People who turn 66 by April 29 can still file for Social Security and suspend their benefits to allow a spouse to file a restricted application, as long as they act by that date. Doing so can make sense if your spouse was 62 or older by January 1 of this year because people in that age group will continue to be able to file a restricted application for only a spousal benefit once they turn 66. With such a coordinated strategy, one spouse can pocket the spousal benefit while both delay claiming their own benefits to take advantage of the delayed retirement credits that increase monthly payments by 6% to 8% for each year in which claiming is deferred between ages 66 and 70.”

The article sites one case where a couple – the husband is 66 and the wife is 64 – was told by a Social Security office in California that they could not participate in the strategy because they both needed to be 66 years old. Since this is incorrect, the couple’s financial advisor told them to be persistent. The couple filed-and-suspended the husband’s benefit over the objections of the Social Security agent and were accepted. According to their advisor, the couple could have lost over $100,000 in lifetime benefits if they had not insisted.

The Social Security Administration says that it has made an effort to inform the over 30,000 employees through manuals, training and other methods of instruction since the beginning of 2016. They recommend that if you are having trouble at an office to ask for a supervisor or a technical officer. Filing online is a great option as well.

You can always contact your advisor at Rockbridge with any questions regarding Social Security. Below is a chart of the claiming deadlines, and different scenarios regarding eligibility.

claiming deadlines

Source of chart: Michael Kitces at Nerd’s Eye View. You can read Michael’s article regarding the Social Security changes here.

Tax season is in full swing, which may bring up many questions and considerations about your investments. Am I saving in the most tax-efficient locations for my financial situation? Are my individual investments tax-efficient as well?

A recent article by Vanguard discusses how broadly based index funds are more tax-efficient than actively managed funds. Rockbridge has built their models strictly using index funds because of their low costs and range of securities within the funds. Their tax efficiency is just another reason why index funds make sense.

One way a fund’s tax efficiency can be measured is with its “tax cost.” Tax cost is the difference between the before-tax return of a fund and its preliquidation after-tax return. According to the article, the median tax costs for index stock funds is 27 basis points less than actively managed stock funds.

Several actively managed funds have a higher tax cost compared to index funds because they tend to change the investments within the fund more often. Since they are attempting to achieve a higher return than the market, they frequently liquidate and make new purchases in order to hold the funds their research shows will perform well. The sale of current investments for new ones causes the owners of the fund to realize capital gains (which are taxed) more often.

Although we believe it is much more important to manage the overall allocation of assets in your portfolio based on your risk tolerance than it is to manage exclusively for taxes, your portfolio’s tax efficiency is still important to take into account.

Stock Markets

In 2015, domestic large cap stocks (S&P 500) and REITs were up while other markets were down – emerging markets were off big!  The positive results in the S&P 500 were driven by just two stocks – Amazon and Google.  Otherwise it would have looked like other market indices.  These results, I think, reflect ongoing economic uncertainty throughout 2015, much of which is still unresolved.  Examples include:  (1) Where is the bottom for commodity prices?  (2) What is the strength of the dollar as Europe eases its monetary policy and U.S. tightens it?  (3) Are interest rates withering?  The lack of resolution of much of this uncertainty will contribute to continued stock price volatility, which has certainly been the case so far in 2016.  The first week in January has the feel of panic – we’ll see.

Daily volatility of stock prices was up in 2015. This is especially apparent over the last couple of months and into the beginning of 2016.  Yet, the 2015 experience was pretty much in line with how stock markets have behaved historically.  We have become used to above-average returns with less volatility from the widely followed domestic markets in the recent past.  The 2015 story was different – below-average returns with greater volatility.

Bond Markets

After keeping us in suspense most of the year, the Fed voted to increase the rate on Fed Funds (rate at which banks lend excess reserves to one another overnight) by 0.25%.  This much anticipated change was met with a loud ho-hum – surprises are what move markets.  The accompanying Yield Curves chart, which shows yield to maturity from U.S. Treasury securities Yield Curves 12 2015of different maturities, depicts increases at the short end with slight increases at longer maturities.  Yet, not much of a change overall.

While the impact of changes in the Fed’s policies on bond markets and where we go from here continues to provide uncertainty, I think a little less distortion of capital markets from the Fed’s activities is welcomed.

One of the tenets of successful long-term investing is the practice of portfolio diversification.  Through diversification, investors can increase their expected long-term return for a given level of risk (volatility).  This is accomplished by investing in assets that are not perfectly correlated to one another, but each asset individually has a positive expected return.  This theory is the basis of Modern Portfolio Theory (MPT).  Because underlying assets in diversified portfolios are not perfectly correlated, one problem with diversification is that there will always be something investors wish they didn’t own.

Emerging markets was one of the worst performing asset classes in 2015, returning a negative 14.6% for the year (as evidenced by the MSCI Emerging Markets Index).  If foresight were 20/20 at the beginning of the year, we clearly would have avoided a commitment to this asset class.

On the other hand, at the start of 2015, the best data source we had available for predictive purposes was the past behavior of the asset class.  Over the 15 years prior, the MSCI Emerging Markets Index returned approximately 10% annually and exhibited a standard deviation (risk) of 23% (based on monthly returns).  As important as its risk/return behavior, this asset class has not been perfectly correlated with other assets in which we invest, so it was expected to offer diversification benefits.  (Note this time period was used because it was the earliest data available for this Emerging Markets Index.)

Interestingly, the most similar asset class, with respect to risk and return over the same time period, was U.S. real estate (as evidenced by the Dow Jones U.S. Select REIT Index).  This asset class returned approximately 12% and exhibited a standard deviation of 23% as of 2014 (compared emerging market returns and risk of 10% and 23%, respectively).

Given the similarities between the asset classes at the end of 2014, an argument could be made that the 2015 returns might be expected to be similar.  Interestingly, they behaved extremely different in 2015.  U.S. real estate exhibited the best returns of the underlying asset classes, with the Dow Jones REIT Index returning a positive 4.5% for the year (versus the negative14.6% for emerging markets).  This return difference is more attributable to the lack of correlation between the two assets, in addition to their exhibited risk.

Since there is no evidence of investors being able to consistently outperform the market or predict the best asset classes (prior to outperformance), diversification continues to be the best alternative for successful long-term investing.

2015 was an exciting year of growth and change at Rockbridge.  Market returns were less than ideal for the year, but we continue to see growth in our fee-only business model as prospective clients seek out unbiased advice and professional investment management.

We are the leading fee-only investment management firm in Central New York, managing $491 million in client assets, a 14% increase over last year.  We have also added staff to meet the demand of taking on more clients.

Firm Ownership Growth

Ownership of the firm expanded in 2015.  Craig Buckhout and I are the managing members of Rockbridge, providing leadership to a growing group of talented professionals.  Last year, Patrick Rohe and Ed Barno became partners in the firm.  This year, Doug Burns and Geoff Wells will also become equity partners in Rockbridge.  Expanding ownership of the firm is one of  our primary goals as we grow to serve more clients.  The addition of more owners provides for an enduring business over the long haul, ensuring continuity for our clients.

The People of Rockbridge

New faces at Rockbridge include Claire Ariglio and Lisa Cellucci.

Both Claire and Lisa will be supporting our financial planning efforts with new and existing clients.  Additionally, Dave Carroll completed his first full year at Rockbridge.  All three of these new advisors are studying for the Certified Financial Planner™ designation in 2016.

Sadly, we say goodbye to long-term Rockbridge employees Ted Scallon and Keri Morrison.  Ted is relocating to New Jersey to spend more time with his family.  Keri will be spending her time working with the Live Like Jake Foundation (, which she and her husband, Roarke, founded in memory of their son, Jake. The work of the foundation is extremely important to Keri, and we look forward to supporting her and the foundation in its mission to raise awareness for drowning prevention.

Awareness Campaign

The top two reasons new clients land at Rockbridge are referrals from existing clients and our website.  More people are searching for fee-only advisors and financial planners, and we continue to maintain our #1 rank in those searches.

Many of our new clients said they had never heard about us prior to their search.  So in an effort to raise our profile in the community, we embarked on an awareness campaign in 2015.  You may have seen or heard our ads on Time Warner Cable, FIOS, or the radio.  We have received very good feedback from existing and new clients, so we will continue to advertise in various media outlets in the future.

We continue to remain focused on providing the best experience for our clients, and we sincerely thank you for your trust and confidence.

When we go to a good action flick, we enjoy the suspense and surprises, but no one wants that experience when investing.  James Bond and Mission Impossible would not be box office hits without some interesting plot twists, and an occasional victory by the villain, and yet the end result is usually something we expect – the good guy wins.

Unfortunately, investing can be a lot like a good action movie, and it is important to remember that 2015 was just one scene, where the villains had some success, but it is not the whole story.  While we have experienced 9%-10% returns from the stock market over time, we usually get something different.  Those expected returns only emerge over long periods of time.  Like the plot of an action movie unfolding, it requires some patience, and tolerating our hero experiencing some setbacks.

The S&P 500 has produced an annualized return of 9.7% over the past 50 years, but looking at those 50 separate one-year periods, we see something very different.  In 11 of those years the return was negative; 2015 is not one of those years as total returns with dividends were 1.4%.  Still, with a long-term return of 9.7% we might expect most years to have returns close to that, say a range of 5%-15%.  Surprisingly, 40 of the 50 one-year returns were outside that range, either less than 5% or greater than 15%.  So what we expect for the average is quite different than what we experience year to year.

One of the problems we have as investors is our tendency to overemphasize near-term performance.  Behavioral economists have labeled this the recency effect.  It explains why people want to buy what just went up, and sell what just went down (usually a bad strategy), and it can also explain why it is so hard for investors to maintain a long-term perspective.  This is one reason we recommend investing based on decades of performance data, not months or even years.

The markets are starting the new year with plenty of volatility and negativity.  Perhaps if we think of it as the unfolding plot of a good action movie, we will be more comfortable enduring the inevitable ups and downs, which must be endured to achieve our long-term expectations.

Our Rockbridge team is continuing to grow, and as a new member, I would like to take a moment to introduce myself.

My name is Lisa Cellucci.  I was born, raised, and educated right here in Syracuse.  Even as a little girl, I always loved math and numbers.  But maybe even more than math and numbers, I have always loved people.  Whether a person is three, ninety-three, or anywhere in between, I can always find something to talk about with them.  This meant that I was going to have to answer the following question – “What kind of job can you find where you are working with numbers but also communicating with people?”

In high school, business classes were by far my favorite type of classes.  I could say for certain that someday, I wanted to be a businesswoman with some type of business degree, but couldn’t quite pinpoint exactly what I wanted to be doing.  I found myself at Le Moyne College after receiving the Presidential Scholarship, a merit based scholarship that the school offered.  To get the most out of my time at Le Moyne, I double majored in Finance and Business Analytics.  I ended up completing my required coursework early in 2012, and decided I could never have enough education, nor was I ready to be done with college, so I decided to stay at Le Moyne College and earned my MBA in 2014. This allowed me to couple the knowledge I had in finance with a strong business background.

I worked all throughout high school and college.  My first job was at Wegmans, where I worked for six years. I worked my way up through several positions: cashier, service desk, cashier trainer, and service team leader.  As a company, Wegmans is highly focused on customer service, and I think that provided a strong foundation for the rest of my life.  Now, each and every time I come in contact with a client, I want to be sure that they feel their needs are met quickly, efficiently, and pleasantly.  During my undergraduate studies, I interned at a local financial advisor to school districts and municipalities.  I found that I enjoyed what I was doing during the internship, and accepted a job as a financial analyst immediately upon my graduation.  Although I liked what I was doing, after three years, I felt as if there was little room for career growth and wanted to dig deeper in the world of finance by learning new things, gaining experience, and new education.

Lucky for me, I found out that Rockbridge was looking to hire additional financial planners.  After my first interview, I knew Rockbridge was the company for me – I just hoped they liked me as much as I liked them!  One of the most important values that Rockbridge follows is our fiduciary duty to our clients.  No matter what the situation is, we always act in the best interest of our clients.  Because of this, we can stay true to our investment philosophy and help people take the emotions out of their investment decisions.  I am thrilled to be working with individuals as I feel that this type of work is very rewarding. I am hopeful that we bring peace of mind to clients that their money is managed well whether they are young and just starting out or enjoying their golden years – and most of all that we are helping others.

This year, one of my biggest goals here at Rockbridge is to complete my Certified Financial Planner™ certification, which I am currently studying for. Plus, I look forward to working with each of you!

P.S. – My interests outside of work include spending time with family, friends, my dog, Lexi, and my two fur nieces, Mila and Zoey.  I also enjoy volunteering in the community (I teach church school to second graders), supporting our beloved Syracuse Basketball team, and fitness training.

It’s been nearly a decade in the making, but time has finally come: On December 16, 2015, the U.S. Federal Reserve (the Fed) raised the federal funds rate by 0.25 percent. In and of itself, it’s a small move. But it’s being reported as “a historic moment,” since it’s the first federal funds rate increase of any sort since June 2006. Seeking to bolster an ailing economy amidst the Great Recession, the Fed began lowering the rate in fall 2007, until it hit zero percent in December 2008; it’s been sitting there ever since.

So what does the news mean to you and your financial well-being? As is nearly always the case during global economic events over which we have no control, we recommend that you remain informed – but that you act only on factors you can expect to manage within your personal investing. In that context, let’s take a moment to share some insights about the Federal Reserve funds rate.

What Is the Federal Reserve?

As described on its consumer education site, the Federal Reserve is the central bank of the U.S. It was created by Congress as an independent government agency in 1913 to “provide the nation with a safer, more flexible, and more stable monetary and financial system.” Yellen is its board of governors’ chair. Ben Bernanke was chair before her, and Alan Greenspan before that.

Yellen and her board of governors are based in Washington, DC. They also oversee 12 regional reserve branches across the country and are tasked with three main roles:

  1. Monetary Policy – Promoting “maximum employment, stable prices and moderate long-term interest rates”
  2. Supervision and Regulation – Overseeing U.S. banks and gathering information to understand financial industry trends
  3. Financial Services – Serving as a bank for U.S. banks as well as for the country’s monetary operations – issuing currency, managing the government’s bank accounts, borrowing money in the form of U.S. Savings bonds and more


What Is Going On?

While you wouldn’t want to run a developed country without all three of these roles in place, monetary policy is where much of the headline-grabbing action has been, as the Fed has been grappling with when, by how much, and how frequently it should raise the federal funds rate.

The Federal Reserve sets monetary policy through its Federal Open Market Committee (FOMC), which includes the Fed’s seven board members and a rotating representation of Reserve Bank presidents.

The FOMC holds eight regularly scheduled annual meetings to consider what actions to take (if any). In the days before those meetings, the financial press often reports on expected outcomes as if they were a done deal, and markets often respond accordingly.

In reality, until those meetings have taken place, nobody knows for sure what their outcome will be. We saw this in September 2015 when a widely anticipated rate increase did not take place after all. In December 2015, a rate hike was again widely predicted; this time, the predictions happened to be correct.

Ordinarily, the FOMC has a number of ways to seek balance among the competing demands of the economy. But while the federal funds rate remained at zero, their usual arsenal had effectively been reduced to a single bullet: Will they or won’t they raise that rate?

It’s no wonder the question became the media’s central focus for recent FOMC meetings. It’s also no wonder that investors have been – and no doubt will continue to be – bombarded with the usual volume of conflicting coverage on what is and is not at stake, and what may or may not come to pass. Depending on who you heed, higher federal funds rates could be anything from a panacea, to a global scourge, to a non-event in the markets.

What Does All This Mean to You and Your Money?

First, it helps to understand that there is an intricate interplay between developed nations’ monetary policies, global interest rates and the markets in general – and that these components are nowhere near one in the same. Anyone who claims to know exactly what will happen in one arena when we pull a lever in another had best be able to present a functioning crystal ball if he or she is to be believed.

To understand the complexities involved, consider this insightful article by Bloomberg View columnist Barry Ritholtz: “You’re the Fed Chairman. What Would You Do?” In short, monetary policy-setting is neither as easy nor as obvious as you might think.

It’s also worth emphasizing that the only interest rate the Fed has direct control over is the U.S. federal funds rate, which is the rate at which depository institutions (mostly, banks), lend and borrow overnight funds with one another.

The resulting cash flow is the grease that turns the wheels of our federal banking system, so it’s an important factor. But that doesn’t mean that there is a consistent cause-and-effect relationship between federal funds rate movements and other yields-based financial instruments such as U.S. or international fixed income funds, interest-earning accounts, mortgages, credit cards and so on.

As this Wall Street Journal article describes, “Think all rates would tick a little higher as the Fed tightens? That isn’t how it works. … The impacts will be uneven. Some borrowing costs are likely to rise closely in sync with short-term rates, but others won’t.”

Why is this so? It’s the result of those multiple global factors at play, with the Fed’s actions representing only one among them. A post by “The Grumpy Economist” John Cochrane even suggests that the Fed’s actions may be one of the less-significant factors involved, as he comments: “Lots of deposits (saving) and a dearth of demand for investment (borrowing) drives (real) interest rates down, and there is not a whole lot the Fed can do about that.  Except to see the parade going by, grab a flag, jump in front and pretend to be in charge.”

What Should You Do?  

Whenever you’re wondering how best to respond to a shifting landscape such as that wrought by rising (or falling) interest rates and any related repercussions, begin by asking yourself: What can I do about it?

Unless you are Janet Yellen, there is probably nothing you can do to personally influence what the Feds are going to decide about interest rates in the months ahead, or how the global markets are going to respond to the news. But there is plenty you can do to help or harm your own wealth interests.

First, if you already have a solid financial plan in place, we do not recommend abandoning it in rash reaction to unfolding news. If, on the other hand, you do not yet have a well-built plan and portfolio to guide the way, what are you waiting for? Personalized financial planning is a good idea in all environments.

Next, recognize that rising or falling interest rates can impact many facets of your wealth: saving, investing, spending and debt. A conversation with a professional wealth manager is one way you can position yourself to make the most of the multi-factored influences of the unfolding economic news.

Together and through varied interest rate climates, we can help put these and many other worldwide events into the context they deserve, so you can make informed judgments about what they mean to your own interests. The goal is to establish practical ways to manage your debt; wise ways to save and invest; and sensible ways to spend, before and in retirement.

These are the factors that matter the most in your life, and over which you can exercise the most control – for better or for worse. Give us a call today if we can help make things better for you.

There is an endless amount of terminology that surrounds the finance and investment industries. It can certainly be confusing to the average investor, and may be responsible for some uncertainty when it comes to how to invest and which advisor to trust.

The Devil’s Financial Dictionary is a book that has recently been released by Jason Zweig, a Wall Street Journal columnist. His glossary lists several of these commonly used and complex terms alongside their satirical definitions. Zweig’s straightforward and candid guide is his attempt to enlighten the everyday investor, while making them laugh at the same time.

At Rockbridge, we understand how difficult it can be to find an advisor you can trust and who consistently makes decisions with your best interest in mind. We hope that you enjoy this humorous summary of Zweig’s new book as you enjoy the relaxing weekend with your families. Hopefully it will cause a few laughs and shed some light on exactly why we do things the way we do here at Rockbridge.

The holidays are right around the corner, and it’s time to start thinking about gift shopping, parties, and all the other spending that goes along with them. It’s nothing new that the holidays are expensive. However, it is important to set a budget and avoid overspending during this time of year.

This Reuters article discusses how 62% of parents admit to overspending during the holidays. Many will even dip into their emergency savings or retirement accounts just to pay the holiday bills. They offer a few tips on how to curb your holiday spending and avoid financial stress so you can enjoy what the holidays are really all about.

Last week, Congress passed their “Bipartisan Budget Act of 2015.” Among the typical budgetary items, there are a few alterations that will impact the Social Security benefit filing system. Anyone who turns 62 in 2016 or later will no longer be able to take advantage of the “file-and-suspend” strategy for the purpose of receiving spousal benefits. This strategy would allow a person to file and then immediately defer their benefits to a later age, while their spouse was able to claim spousal benefits. In turn, the married couple could take advantage of the deferral credits that increase benefits by 8 percent per year after full retirement age until age 70, while still receiving the spousal benefit Social Security check each month. Under the new rule, a person filing for Social Security must file for both their own benefits and their spousal benefits, but will only receive the higher of the two.

This will impact many people who were planning on including this strategy in their retirement spending plan as a main stream of income. However, Congress believed they needed to eliminate this “loophole” to prevent people from receiving larger benefits than the government originally intended.

Check out the articles below for some more detail on the changes being implemented:

Congress is Killing the File-and-Suspend and Restricted Application Social Security Strategies

New Budget Deal Is Cutting Your Social Security Benefits and It’s a Good Thing


In a recent WSJ article, they talk about the how smart phone “investment apps” are causing investors to react to short-term market swings and abandoning their long-term established financial plans.

Behavioral economists call this tendency, “myopic loss aversion”- and it can be incredibly costly.

Click on the link above to read the full article!

Stock Markets

The chart to the right shows what we have had to put up with recently:  all but REITs were down for the quarter (all were down since the beginning of the year), and emerging markets were downbig, showing variability over the trailing twelve months.  These periods remind us that markets do go down, but this is what it means to accept risk.

equity market returns 093015

Stock markets reflect the uncertainty of today’s economic environment, which includes the slowdown in China’s economy, the short-term impact as well as the longer-term sustainability of the sharp fall-off in the prices of energy and other commodities, and the effects of the Fed unwinding its easy monetary policy of the last seven years.  The impact of all of these factors on emerging market economies is especially worrisome and helps explain the sharp fall-off in those markets.

Perhaps the sharp fall-off in markets is a repricing of uncertainty.  Yet, all of these things have been pretty well known for some time.  The upheaval in just the last couple of months is somewhat a mystery, but is oftentimes how markets work.  Diversification has not been helpful in recent periods – most everything is down.  All that having commitments to bonds got us was avoiding losses, which, I suspect, is the best we can expect for a while.  Yet, I don’t know a better alternative than remaining committed across the board based on established tolerances for risk.  It is the best way to deal with market volatility and the unknowable future.

Bond Markets

Bond markets were about flat for the quarter but up a bit year-to-date.  While providing some respite from recent losses from stocks, this is about what we can expect.

Interest rate increases – feels like we’re “Waiting for Godot”!  The Fed seems to be poised to raise interest rates, which has been the case for a long time now.  This is beginning to take on some of the characteristics of the play “Waiting for Godot”, by Samuel Beckett.  I can’t help but wonder if “Godot” will ever get here, although I’m sure the Fed will eventually raise rates.  While many blame this uncertainty on what’s happening in today’s markets, it’s hard to imagine a 0.25% increase will cause much of an upheaval once it is digested.  But, it does reflect a change in policy that could result in dislocations.  We’ll see.

Emerging Markets   

Emerging markets were off more than 17% in the quarter and year-to-date.  A diversified emerging market portfolio includes allocations to over fifteen countries ranging from China (16%) to Chile (2%).  Using Exchange Traded Funds as proxies, the accompanying table shows the quarter and year-to-date returns in the countries that dominate (86%) the portfolio.  Note the evidence of contagion among emerging market economies as all experience a sharp fall-off in the September quarter.  And, in most instances, it was these results that dragged the year-to-date returns into negative territory. emerging market sept 2015

It seems clear that investors in stocks of emerging market countries have adjusted to the uncertainty of today’s global economy.  We will have to wait and see whether they have gone too far.  In the meantime, participation in the risks and returns of this asset class – which makes up about 14% of worldwide stock markets – is important to a well-diversified stock portfolio.

Predictions and Descriptions

At times such as these, everyone seems to be telling us to get ready for tough times ahead.  Maybe, but market prices anticipate the future about which uncertainty always abounds.  Price changes are driven by surprises.  You can’t predict surprises!

While the causes are constantly changing, if we accept that how market participants deal with an unknown future is consistent, then we can use past behavior to describe the future in terms of both what’s expected and, importantly, a well-defined range of possible outcomes.  The range for most stock markets is quite large – exceeding an annual rate of plus or minus 16% two-thirds of the time.

Stock market participants always expect positive outcomes.  Prices are established from arm’s length transactions by traders satisfied to buy from traders equally satisfied to sell.  Neither would trade unless they expected a positive result.  Of course, in the short run there will be winners and losers.  But, for them to continue to play, the ups and downs will even out and over the long haul markets will produce what traders, on average, expect.  How long must we wait for this to happen?  It could be a while. But, the alternative is to make moves based on someone’s prediction of a surprise!

Yale Beats Harvard – Again

So trumpeted a recent WSJ headline. Yale’s endowment, managed by David Swenson, earned 11.5% for the year ending June 30th.  His acolytes at Bowdoin and MIT earned 14.6% and 13.2%, respectively.  This compares to about 1% that benchmark proxies for a well-diversified portfolio would have earned.  How do these endowments do it?  They hold assets, generally under a category called “Alternatives,” that are not valued from arm’s length transactions – the returns can be whatever they want them to be!

College endowments don’t need to worry about needing cash – when they need money they go to the alumni.  So, the ability to readily turn investments into cash (liquidity) isn’t important.  Endowments can assume this liquidity risk, which can be large and should provide a significant premium.

Now it just may be that David Swenson has special gifts that allow him to identify assets and managers who will provide extraordinary results through time consistently.  And, these gifts can be passed on to whoever will listen.  However, the true value of the endowment’s nonmarketable assets will not be known until there is a need for cash, which is apt to be never.  In the meantime, they have latitude in reporting values and returns that are based on someone’s estimate.  Take with a grain of salt results posted from assets, the values of which are not determined from arm’s length transactions.

Most Americans are overwhelmed with the array of options when searching for health insurance coverage in addition to Medicare Part A and B.   Before answering a common question people ask regarding Medicare, it probably makes sense to explain the different components:

Medicare Part A:  If you paid Medicare taxes while employed (most people do), there is typically no premium associated with Medicare Part A.  The majority of individuals are automatically enrolled in Medicare Part A once they reach age 65.  Generally speaking, Medicare Part A covers partial costs for hospital visits.

Medicare Part B:  There is a varying premium associated with Part B of Medicare depending on your reported income.  For married couples earning $170,000 or less, the premium for 2014 was $104.90 (can be deducted from Social Security benefit if desired).  If you fail to enroll in Part B when you’re first eligible (age 65), you’ll have to pay a late enrollment penalty for as long as you have Part B.  This is typically a 10% increase for each year you COULD have had Part B, but is subject to change on an annual basis. You will not have to pay a late enrollment penalty if you are employed and elect to use your employer’s coverage instead.  If this is the case, you must still enroll in Medicare Part A and provide proof of coverage through your employer at the time you enroll in Part A.  We encourage our clients to sign up for Medicare three months prior to turning 65 years of age to avoid the late enrollment penalty.

Medicare Part C:  Part C is more commonly referred to as the “Medicare Advantage Plan.”  This part of Medicare is optional and most individuals purchase this part of Medicare to supplement Part A and B or purchase a full blown Medicare Supplement Plan.  I will explain this in further detail later on.

Medicare Part D:  This is another optional part of Medicare you may purchase to cover the costs of medications.  This is usually built into Medicare Advantage Plans (Part C) but must be purchased additionally with Medicare Supplement Plans.

Unfortunately, Medicare Part A and B only cover a portion of medical costs.  As a result, most people elect to purchase some type of additional supplemental insurance.  This is where Medicare can become complicated and people become frustrated; leading to the most frequently asked question:

Do I purchase a Medicare Supplement or Advantage Plan (Part C)?

Ok, this question is much more complex than it seems.  Since I am trying to simplify Medicare, it would make sense to first explain the difference in a couple sentences:

Simply put, if you are in good health and do not visit doctors often, you can get away with a Medicare Advantage Plan (Part C).  If your health is deteriorating, you visit the doctor(s) more than you would like, and/or you simply want the most robust coverage available, then a Medicare Supplement plan is probably a better option.  Hopefully the chart shown below can help you decide which is most appropriate:

Medicare Supplement
– Most comprehensive
– Variety of different plans/premiums
– Accepted by majority of medical providers

– Higher premiums than Advantage Plans
– Must purchase Part D in addition (drug coverage)

Medicare Advantage Plan
– Very Inexpensive
– Built-in drug coverage

– More restrictive networks
– High variability between plans
– Higher copays than Supplemental plans

As shown, Medicare Advantage Plans usually have very small or even no premiums because the insurance company is compensated by your Medicare Part B payment.  However, these are not as comprehensive as Medicare Supplement plans.  There are copays for doctors and higher copays for specialists, but even if you are the healthiest person there is no reason not to enroll in one of the zero premium plans (…it’s free, but you get what you pay for).  Most plans also have built-in prescription drug coverage (Part D).

Medicare Supplement Plans have a higher monthly premium and are more comprehensive.  There are several different plans to choose from and several different insurance companies that offer these plans.  Most people don’t realize that the insurance companies charge different premiums for identical plans!  As of 2015, there are ten Supplement plans that are distinguished by a letter, such as Plan F or A.  These plans are standardized across all insurance companies and you will get the exact same benefits purchasing a Plan F from any company.  However, the premiums the companies charge are different depending on the company you choose!  There is absolutely no reason to not purchase the lowest cost insurance provider of whatever Medicare Supplement plan that you decide makes most sense for your situation.  Of all the different Medicare Supplement Plans, Plan F is the most comprehensive (and expensive) and classified as the “Cadillac” plan.  There are typically no copays or out of pocket costs outside of the monthly premium paid.  However, you must purchase a prescription drug plan (Part D) in addition to any Medicare Supplement.

Fortunately, lists all providers AND premiums of Medicare Supplement Plans sorted by zip code.  The Medicare Advantage plans are not standardized and differ from company to company.  Please visit or contact Rockbridge if you would like assistance regarding Medicare options.  We understand that this is very confusing for consumers, and with our expertise we can point you in the right direction!

As the newest member of the Rockbridge team, I thought I would take this opportunity to introduce myself. Whether you are a client, or another financial services professional, I believe it’s worth taking the time to explain my background, how I got here, and why I decided to pursue a career in the financial services industry.

My name is Claire Ariglio. I graduated from Elmira College in 2014 where I studied Business Administration and Economics. Right out of school, I was hired as an Operations Administrator at a local broker-dealer. Fast forward about a year and a half, and here I am:  a financial planner at Rockbridge Investment Management.

Throughout middle and high school I had an idea, though broad and vague, of what I wanted to do with my life:  help people and work with money or numbers. I was good at math, I was Treasurer of my class for as long as I could remember, and I grew up in a household of accountants; something along the lines of money and numbers had to be good fit. However, I struggled with the specifics of how I was going to make that happen, especially the “helping people” part.

When I entered my freshman year at Elmira College, I was unsure what I wanted to study. I took classes in mathematics education and accounting before I finally declared myself as a business administration major. In my sophomore year, my economics professor approached me and asked if I had ever considered studying economics. She told me I had a natural inclination towards the science and convinced me to give it a shot. Although I never saw myself studying economics, I grew to love it. For my remaining years at Elmira, I learned about strategic management, corporate finance, the stock market, international trade models, development economics, and even a little bit of game theory.

After graduating from Elmira College, I was hired as an Operations Administrator at a local broker-dealer. I thought it would be an excellent introduction to the financial industry, and would serve as the perfect combination of my business and economics degrees. While I was there, I was able to gain a lot of first-hand experience working with clients and was exposed to the industry in a way that can’t be taught in a classroom. After working there for a little over a year, I had the self-realization that I wanted to be more than a member of the operations staff. Although I enjoyed working as part of a team to support our advisors, I wanted to have more of a forward-facing, upfront position that I would be able to grow into. I wanted to have more control over what I was doing on a day-to-day basis. Enter Rockbridge.

At that point, financial planning hadn’t really been on my radar. However, when I heard that Rockbridge was looking to hire more financial planners, I figured why not look into it? It could be the perfect career opportunity hiding right under my nose. I contacted them right away, we set up a few interviews, and the rest, as they say, is history.

Once I learned how Rockbridge conducted their business, I knew it was a good fit both personally and professionally. It was the perfect blend of my love of finance and numbers, and being able to help people. A person’s wealth is one of the most integral parts of their lives, and most people struggle to manage it effectively. There are so many decisions to make when it comes to retirement – “Where and how much should I be saving?” “Is my portfolio diversified?” These are primary concerns for the average person and they are difficult to consider while attempting to maintain a financially stable life; it can be overwhelming without the guidance of a professional. That’s what makes financial planning such a rewarding experience. It’s a job that allows you to ease financial worries simply by laying out a person’s finances all in one place, and getting them on track for a comfortable retirement. The fee-only investment philosophy that Rockbridge implements is also something I love; it truly allows an advisor to act in the best interest of the client without some monetary figure getting in the way. Needless to say, I can’t wait to see where this new journey at Rockbridge takes me.

(And for those of you who were looking for something of some financial substance, here’s one of the most important things I’ve learned from working in this industry:  the stock market is a long-term vehicle. It’s going to have its ups and downs. Don’t be alarmed when the market takes a dive and the value of your brokerage account or IRA decreases. It’s not a loss until you sell everything and realize the loss. Just wait it out, and over the long run, your account should grow.)


Would you stop being a fan of the Yankees, Mets, Giants, Jets, Bills or the Syracuse Orangemen and root for a team in Florida in order to save on your tax bill?  It might help!

Many New York State residents planning for retirement expect to maintain a residence in New York, but claim another state as their state of domicile.  Their purpose is to reduce their tax burden (state income taxes and/or estate taxes).  There are currently nine states with little or no state income tax.  The most popular of these for New Yorkers is Florida.  Florida has no state income tax and no estate tax.  Particularly for those with expected high taxable incomes in retirement, and/or high taxable estates, the tax savings can be considerable.

In the “old days,” if you lived out of New York State for more than 183 days per year, you were not deemed to be a “statutory resident” of New York, and this was thought to be the main litmus test for claiming not to be domiciled in New York and not subject to income and estate taxes in New York.   Your domicile is the place you intend to have as your permanent home, where your permanent home is located and the place you intend to return after being away (as on vacation, business assignments, educational leave, or military assignment).  You are a New York State resident for income tax purposes if your domicile is New York State or your domicile is not New York State but you maintain a permanent place of abode in New York State for more than 11 months of the year and spend 184 days or more in New York State during the tax year (note – there are special rules for military members and their spouses).

This still sounds fairly straightforward and not difficult to achieve.  However, in recent years, New York State, as they have been losing considerable revenue from individuals claiming domicile elsewhere, has become far more aggressive in challenging a change in domicile.  From a recent court case, “A domicile once established continues until the individual in question moves to a new location with the bona fide intention of making such individual’s fixed and permanent home there…  The burden is upon any person asserting a change in domicile to show that the necessary intention existed…  Although petitioners may have registered in Florida, obtained driver’s licenses and registered their cars there, there is little convincing evidence as to petitioners’ intent to abandon their New York State domicile and acquire a new one in Florida.”

New York State, in a residency audit, will examine all aspects it considers indicators of domicile, including your “home,” active business involvement, where you spend your time, where you keep things “near and dear” to you, family factors and so forth.  Where you are registered to vote; where your driver’s license is maintained and cars are registered; where you go to church; what clubs you belong to; what charities you support; where your accountant, lawyer, doctors, insurance agent, etc. are located, will all be looked at.

A change in domicile from New York State can be established and defended if you are indeed changing your domicile in substance.  It is advisable to consult with a tax practitioner or lawyer with expertise in this area before claiming the change, so that you can properly defend, document and support your position (without abandoning your favorite New York team!).

Measuring investment performance without a benchmark is like judging the results of a football game when you only know one team’s score.  To get the real story, there must be a “measuring stick.”  Obviously, in football you also need to know the opponent’s score.  In the case of investment performance, results should be compared to an overall market with similar risk characteristics.

Here at Rockbridge, we structure clients’ portfolios to maximize the probability of meeting long-term financial goals.  In doing so, we are committed to the idea that a portfolio’s asset allocation (mix of stocks and bonds) determines its risk profile.  Asset allocation is also what explains a portfolio’s long-term results, and the best way to implement these portfolios is through the use of market-tracking funds/ETFs.  The philosophy hasn’t changed, going back to the firm’s roots in 1991.  The use of benchmarks helps us measure if portfolios are delivering on their long-term objectives.

The following indices are generally used to construct our portfolios’ benchmarks:

S&P 500/Russell 2000 – Domestic Stocks

MSCI EAFE – International Stocks

Barclays Government/Credit Index – Bonds

In our benchmark construction, the amount allocated to each of the above markets mimics the risk profile it is designed to measure.  By design, many portfolios are diversified beyond the above benchmarks and include exposure to emerging markets and real estate.  Over the past quarter, this exposure has not helped overall portfolio performance when compared to benchmark results.  However, we continue to believe this diversification is appropriate and will bring incremental value in the future, as it has in the past.


Many investors nearing retirement are beginning to focus on life after work.  Questions arise that can be difficult to answer, such as:

  • How much savings is enough to retire?
  • What sources of income will I have after I stop working?
  • How do I construct a portfolio to fund spending goals?
  • What will I do with my time?
  • When should I apply for Social Security?
  • Lump sum vs. pension payments?

Here are my four steps to a successful retirement experience:

1)  Have a plan

The most successful retirees have a well thought-out plan before retiring.   Write down your goals.  If you have a spouse, each of you may have differing goals.  Write them all down and decide which ones take priority and come to an agreement; memorialize your goals in a document.  Decide on a sustainable withdrawal rate from your portfolio and an asset allocation that takes into account how much risk you are willing and able to take to achieve your spending goals.  You will also need to consider taxes, legacy and estate plans, long-term care needs and risk management.

2)  Create a “retirement paycheck”

Set up direct deposits of all income sources, such as a pension and Social Security.  Add a recurring transfer of funds from your investments (IRA or Brokerage account) to supplement your fixed monthly income sources.  Don’t be afraid to set up recurring payments of all your monthly expenses to eliminate the need for check writing and mailing.  Automate and free up your time for more important things to do in retirement.  It’s also a great idea to consolidate all of your various accounts with one custodian.

3)  Find a new passion

Once you have the financial part of retirement under control, you will need to address your personal goals.  You need to retire TO something, not just FROM something.  Spend some time considering what you will want to do with your free time.  Options include working part time in your current field, paid work in a new field, volunteering, traveling or just relaxing at home.  Everyone has a distinct path that is right for them, but surveys suggest the most satisfied people continue to have a passion for something in their life.

4)  Balance, outsource & simplify

Some people enjoy managing their retirement portfolio, while others prefer to work with a trusted advisor to free them up to focus on their personal goals and priorities.  Either way, there are many ways to simplify your financial life and minimize time devoted to finances.  Lack of organization often creates unnecessary stress that can be unhealthy.  Decide which tasks you can do on your own and which tasks you would gladly pay to outsource to someone you trust.

In my experience, working with many pre-retirees, these are the four critical steps to a successful retirement experience.  Add in some investing and spending discipline and you can confidently move from a life of work to a life of whatever you choose!


No one likes to see their savings decline in value. Times like these are not much fun for investors, watching markets “correct” in the face of abundant global uncertainties. As investment advisors, one of our most important jobs is to help long-term investors keep hold of their long-term perspective. Here are some things to consider.

A drop in stock prices makes us feel poorer – like we lost something – but it only really matters if we are buying or selling now, and if we are buying (or adding to our 401(k)) it’s a good thing!

Watching stock prices fall, and our nest eggs shrink, makes us feel like our financial security is out of our grasp, or at least out of our control. At times like these people say things like, “maybe I should buy real estate.” Land and buildings seem more tangible and sure to hold their value. Of course in 2008 we found out that real estate doesn’t necessarily hold its value, and when it must be sold, prices can swing wildly, just like stocks.

The stock market is very liquid so shares can always be sold at some price. When we try to sell our house in a bad market we say “there just aren’t any buyers right now,” which really means there is no one willing to pay a price I will accept. I could sell at a fire sale price, and maybe my neighbors would feel like they just lost some of their wealth, but until it becomes a blood bath like 2008, most of us would ignore it. We would say, “I’m not selling my house now anyway, so it doesn’t matter.” The difference with the stock market is that we cannot put our heads in the sand and ignore it. The 24-hour news channels are bombarding us with the news of falling stock prices and a tsunami of global uncertainties.

This will likely be a down year for our client portfolios. For clients withdrawing from their accounts, we can use income or sell bonds to provide cash and avoid selling stocks at reduced prices. For others we will be using new cash to buy stocks at reduced prices, and sell bonds to rebalance portfolios by buying stocks.

Three- and five-year trailing returns for stocks are still well above long-term averages. While we could have an extended period of weak returns, we expect markets to behave much as they have in the past, providing reasonable returns to those willing to take risk. We remain convinced that diversification and a steady exposure to stock market risk is still the best approach for long-term investors who are willing to keep a long-term perspective.

We would like to welcome Ed Barno and Ed Petronio from Salt City Financial Planning. Effective January 2015, after working collaboratively for more than a year, Salt City’s practice was merged into Rockbridge Investment Management. We are excited to have them as part of our team and offer a hearty welcome to the former Salt City clients. You can learn more about them on our Who We Are page. Ed Barno also joined the executive team and is a partner in the firm. Together we look forward to expanding our service to all of our clients.

Ensemble Practice
Over the past few years you may have noticed a change in our culture as we moved from an advisor centric business model to an ensemble practice. This transition is a work in progress, but we firmly believe that this change will improve our service to clients, while allowing for continued growth of the firm. Today, each client works with a mini-team within the firm consisting of two advisors and an operations professional. Clients continue to have access to anyone in the firm including our area-specific experts in financial planning and investment management.

Expanding Roles
We are also committing to expanding the ownership of the firm in an effort to attract and keep the best and the brightest talent in our industry. In January 2015 we welcomed Patrick Rohe as a partner in the firm and as a member of the executive team that now includes Anthony Farella, Craig Buckhout and Ed Barno.

Our focus continues to be on offering the best possible planning and investment experience for clients. We welcome your opinion on our firm’s structure, service, or growth plan. Please email us or call if you would like to offer any feedback. As always, we thank you for your continued confidence.

Ben Franklin once wrote “nothing in this world is certain except death and taxes” and as wealth managers we must help our clients manage investments in light of these certainties. Neither can be avoided, but steps can be taken to help minimize their effect on wealth levels. One way is through the use of asset location strategies.

Asset location strategies involve the use of tax-advantaged accounts (think IRA, Roth IRA, 401(k), 403(b) etc.). These types of accounts can help reduce the “tax drag” of the overall portfolio, without sacrificing proper asset allocation. This is possible because the Internal Revenue Service (IRS) taxes returns of assets differently, and investment assets exhibit dissimilar tax efficiency characteristics.

Stocks and stock funds are generally taxed as a result of capital gains when sold. These capital gain rates are usually preferential when compared to ordinary income tax rates. Dividends from stocks are also taxable, but often receive the same preferential tax treatment as capital gains. Because of lower tax rates and the ability to defer taxes (when they are not sold), most stocks are considered “efficient” from a tax perspective.

On the other hand, bonds and bond funds are primarily taxed as a result of interest payments. These payments typically cannot be deferred and are taxed at ordinary income rates. Municipal bonds can be used to avoid much of this tax burden, but expected returns (even on an after-tax basis) are often lower. As a result, most bonds (other than municipal bonds) are considered “tax-inefficient.”

Take the following hypothetical example: An investor (30% ordinary income tax rate and 15% capital gains rate) has a $1 million brokerage and a $1 million IRA account ($2 million combined). With a targeted 50/50 overall stock/bond allocation, there are two extreme scenarios of how stocks and bonds may be allocated. (Pretend there is 10% capital appreciation in stocks and 10% interest in bonds after one year).

Scenario #1Implement the 50/50 allocation with all stocks in the IRA and all bonds in the brokerage:

After one year the tax could be as follows:

  1. No taxes on the stocks inside the IRA
  2. Bonds would have $30k tax bill ($1mm x 10% interest x 30% income rate)

 Total tax = $30k

Scenario #2Implement the 50/50 allocation with all bonds in the IRA and all stocks in the brokerage:

After one year the tax could be as follows:

  1. No taxes on the bonds inside the IRA
  2. Stocks could have a $15k tax bill ($1mm x 10% gains x 15% capital gains rate)

 Total tax = $15k (but possibly $0 if the stocks are not sold and gains aren’t realized)

Another consideration is when the market goes down, there can be an opportunity for tax-loss harvesting for assets in taxable accounts. This is an opportunity not available inside of IRAs.

Since stocks are historically more volatile than bonds, it makes sense to have them in taxable accounts.

The simplistic example above should help illustrate why the asset allocations inside of different accounts may not match one another. Instead, when appropriate, we overweight tax-inefficient assets (taxable fixed income, REITs) inside of tax-advantaged accounts to increase the expected after-tax return of the overall portfolio.

The other certainty that Ben Franklin cited is death. Because the IRS also allows a step-up in basis upon death of an investor, the tax liability associated with capital gains may be avoided entirely. For example, if an investor owns a stock with a value of $100,000 (originally bought for $1,000) and dies with the stock in their taxable account, their heirs may never have to pay taxes on the stock appreciation. This is because the IRS allows for the cost basis to be stepped up to current valuation levels and capital gains taxes are never collected. This is an additional reason why it may be advantageous to have appreciable assets inside of taxable accounts and avoid having all your account allocations the same.

When people think seriously about retirement, they often wonder if their savings are going to be sufficient to support their lifestyle in retirement. Few people are able to rely on pensions, and most young people assume Social Security may help their parents, but will be of no value to them. Obviously some things need to be done to fix the Social Security System for the long term, but for those of us approaching retirement in the next ten to fifteen years, Social Security payments will be an important part of the retirement income picture. More important than many people realize.

A recent study from the Center for Retirement Research at Boston College (Brown et al., March 2015) suggests that people find it difficult to value a lifetime income stream, and yet the value of Social Security may be as important, or even more important than savings, in determining financial security in retirement.

The researchers asked people to put a value on a $100 change in their Social Security monthly benefit. Participants were asked, if they could write a check now for an increase of $100/month in their lifetime income, how much would they be willing to pay? Most respondents were only willing to do this when the price was very low. The median price they were willing to pay was $3,000, which could be recovered in the first two and half years of higher payments! By way of reference, the actuarial value reported by the researchers is $16,855. Even more dramatic, to replace $100/month with a 4% withdrawal rate, you would need an investment portfolio of $30,000, but of course your heirs would keep the remaining principal in that scenario.

Helping clients decide how much investment risk is right for them may be the most important thing we do as investment advisors. We can provide advice, but the decision must be the clients’ own if they are going to remain committed in the face of adversity.

That decision can be difficult, but may be made easier when framed properly, or put in an appropriate context. Understanding the value of Social Security may be critical to making good investment decisions, yet this recent study points to how difficult that can be.

As an example, for a typical couple who has accumulated a million dollars by the time they retire, their savings could provide $40,000 per year at a 4% withdrawal rate. If they need $80,000 per year to support themselves in retirement, the $40,000 or so they may get in annual Social Security benefits are in one way equal to the income they may take from their savings (assuming a 4% withdrawal rate).   The payment stream from Social Security is not really worth $1 million, because there is no residual value for heirs, but it is an important part of the retirement portfolio.


  1. Social Security is more valuable than many people think.
  2. The value of Social Security is important in the investment risk decision as the guaranteed stream of income provides stability, which may provide the confidence to take a higher level of investment risk in the rest of the portfolio.
  3. Better investment decisions can be made in a portfolio context, where all sources of wealth and income are taken into consideration.

When thinking about the risk of your investments, be sure to take a step back and look at the whole picture. Maybe you can take more risk than you thought!

Stock Markets
Except for shares of Real Estate Investment Trusts (REITs), Equity Market Returns over Periods Ending 6 30 15which were down more than 10%, equity markets were about flat for the quarter. Results over various periods ending June 30, 2015 are shown in the chart at right. Ten-year returns are generally consistent with what can be expected over the long run. The three- and five-year returns are well into positive territory and, except for emerging markets, are above long-term averages. These periods show a positive environment for equity investments.

Over shorter periods, however, there is significant variability among equity market returns – some positive, others negative. Also, note that different markets are up when others are down. The relative consistency among markets over the longer term, with variability in the short run, is what can be expected from participating in global stock markets.

The Greek default to the International Monetary Fund (IMF) has been in the news. While this precipitated a large one-day drop in market values, the default seemed to have been taken in stride as markets have rebounded some as of this writing. There is no real news in this drama. The difficult trade-offs facing not only Greece but also other European economies are generally well known. It is reasonable to expect volatility in worldwide market prices as these issues are resolved. Attempting to predict the impact ahead of the market is a difficult process – best to let the “wisdom of the crowds,” as reflected in market prices, sort it all out.

Bond Markets
Yields ticked up this quarter – the ten-year Treasury rising to 2.3% from 1.9%. Because bond prices move inversely to yield changes, bond returns were negative – the longer the maturity the greater the loss. While the Fed continues to put off raising interest rates, bond yields seem to anticipate upward movement nonetheless. U.S. Treasury securities are attractive in periods of global uncertainty, which will tend to drive yields down in the short run.

Does it feel like you are constantly paying bills all of the time?   It may be time to refresh and automate your current financial process.  Just simply keeping track of all of our various accounts can be mindboggling and often quite tiring.  Since time is one of the most precious aspects in life, why not regain some by automating your personal finances.

Reason To Automate
Initially, it can feel scary automating your finances – like you are losing control over when and out of which account a bill gets paid.  Looking at the bigger picture though, you are going to pay your electric and gas bills anyway, so why not simplify things.


  • Gives you peace of mind that no bill was left behind (think of times where you are away from home such as vacations and holidays).
  • Frees up time to spend on more important tasks.
  • Increases your credit score:  On-time bill payments make up 35% of your overall credit score.
  • Provides safety:  Online bill pay has come a long way over the past decade.  Websites are more secure and most credit cards and bank accounts have built-in fraud monitoring features.

First Steps
In order for financial automation to work, you must build up a checking/savings account balance to a level where all bills can be paid without worrying about the amount (emergency reserve).  Next, you will need to create an online login (if you do not have one) for each bill/payment you would like to automate.  Once your account is setup online, you will then be able to initiate your recurring payments.

What accounts can be automated?

  • Credit Cards (always pay the balance in full)
  • Gas/Electric/Water/Cell Phone/Cable/Garbage Bills
  • Debt Payments (Home Mortgage, Car Loans, Student Loans)
  • Savings (Set up automatic transfers to a different account)
  • EZPass/Car Insurance/Life Insurance

With automatic payments set up, you will not have to continually write checks for monthly bills.  However, I do recommend monitoring all of your transactions so that you can make sure all of your charges are correct.  I personally use to monitor my credit cards, bills and bank account transactions.  It is simple to setup and is very secure.  I use this as a replacement for balancing my checkbook.

Everyone manages their finances in a way that works for them.  If you haven’t considered setting up automating payments, I urge you to give it a try.  If we can help you at Rockbridge, please let us know.

In an unfortunate skiing accident, I recently tore the anterior cruciate ligament (ACL) in my left knee. I am now three weeks post-surgery and doing well, but beforehand spent a month tirelessly interviewing and researching surgeons to perform the operation. Through this process I figured out that they are all “really nice” people and because of this I was stuck in decision paralysis on who to choose. It wasn’t until I dug deeper that I found the perfect match for me, and I couldn’t be happier with where I am today.

In this case, digging deeper included the following:

  1. Who matches best with my personality and long-term goals?  
  2. Who has the most/best experience working on ACL repairs and especially the type I want to have? 
  3. I consider myself young and active. Does this affect what type of reconstruction I should have (hamstring tendon vs. patellar tendon vs. cadaver tendon)?

Choosing the right surgeon and surgery type was important for me and I wanted to make sure I didn’t regret my decision. After going through the above list, it was easy for me to narrow down the list of surgeons and confidently come to a decision I know was best for ME.

I believe the same holds true for people looking for a trusted financial advisor. At the end of the day, I believe, like surgeons, advisors are all “really nice” people, so investors must dig deeper to help find the right match for their situation. Usually a life event (marriage, children, retirement, changing jobs, etc.), just like my injury, sparks your need to look for an advisor or second opinion. Without the right list of questions, it’s easy for decision paralysis to take over!

Below are some questions that hopefully will help every investor distinguish the right financial advisor from the rest of the “really nice” people in the industry:

  1. Are they a fiduciary? In other words, do their goals align with yours and are they truly placing your best interest in front of theirs.
  2. Are they a Certified Financial Planner™ (CFP®)? CFP®’s have gone through rigorous coursework around financial planning and are better suited to help you understand how your savings will translate into available spending in retirement.
  3. Do they even offer comprehensive financial planning? Most investment firms only concentrate on how your money is invested, and often overlook the importance of how other factors will affect your retirement picture (i.e., Social Security timing, college savings, insurance needs, pension vs. lump-sum decisions, etc.).
  4. How much do they charge for their services? Costs are one of the few things you can control as an investor and have a large impact on your overall financial success. Make sure to find out what the advisor charges for their annual fee as well as what the annual charges are on the investments he recommends.

Just like my experience finding a surgeon, choosing the right financial advisor can prove to be tough and decision paralysis often takes over. Hopefully the list above will help you weed through the plethora of “really nice” people in this industry and find the perfect financial advisor for you.

Rockbridge is a fiduciary, meaning that we must always act in the best interest of our clients. We are required to act as a fiduciary because we are registered with the SEC under the Investment Advisers Act of 1940.

The Debate
The SEC was given authority to propose a uniform fiduciary rule for all brokers and advisors as part of the Dodd-Frank Financial Regulatory Law of 2010. They are still wringing their hands. More recently the White House has been pushing the Department of Labor to establish a rule that would apply only to retirement money. It would require any person giving advice on retirement accounts to act as a fiduciary.

The vast majority of people calling themselves financial advisors, or investment advisors, are not registered in the same way our firm is registered, and are not held to a fiduciary standard.

This can lead to unpleasant surprises, as reported in a New York Times article last October (Tara Siegel Bernard NYT, 10/10/14). A retired couple in their 70’s went to their bank. The teller suggested they meet with the bank’s investment expert, who probably called themselves a financial advisor. The couple was sold a variable annuity in which they invested over $650,000. They didn’t fully understand that the annuities came with a hefty annual charge of about 4% of the amount invested. The bank said the investments were appropriate for the couple, in other words, in compliance with the “suitability standard” to which non-fiduciaries are held. “Like many consumers, they say they didn’t realize that their broker wasn’t required to follow the most stringent requirement for financial professionals, known as the fiduciary standard. It amounts to this: providing advice that is always 100 percent in the consumer’s interest.”

Many people think they are getting fiduciary advice when they are not. The lingo and terminology are bewildering for consumers.

The simple fact is this – whenever an advisor’s compensation is affected by the client’s decision, a conflict of interest arises between what’s best for the advisor/broker, and what’s best for the client.

If you don’t know exactly what determines your advisor’s compensation, they are probably not a fiduciary.

Why does it Matter?
The Council of Economic Advisers published a report in February that supports a fiduciary standard for retirement accounts. The report includes the following statements in its executive summary, based on its review of academic literature:

  • Conflicted advice leads to lower investment returns. Savers receiving conflicted advice earn returns roughly one percentage point lower each year.
  • An estimated $1.7 trillion of IRA assets are invested in products that generally provide payments that generate conflicts of interest. Thus, we estimate the aggregate annual cost of conflicted advice is about $17 billion each year.

A difference of 1% never sounds like much, but it can mean a difference in lifestyle. For a retired couple with $500,000 invested, it could pay for a nice $5,000 vacation every year.

Why Does it Not Matter?
Regulations do not always have the desired effect. Regulation in the financial services industry often takes the form of “required disclosure.” Think about the reams of extra pages you must sign at a mortgage closing, or the Privacy Statement mailings that no one really reads. That paper is all intended to make you aware of the ways you could be harmed, but as consumers, we pay little attention.

While the SEC might implement a principle-based fiduciary standard, we are more likely to see something that is based on rules – which will require conflicted advisors to disclose those conflicts to consumers.

A similar process occurred recently with “Fee Disclosure” for 401(k) Plans. The intent was that plan sponsors (employers) and participants could make better choices if they simply knew how much they were paying for their retirement plan services and investments. Instead the result is another layer of burdensome paperwork for employers, and a barrage of “disclosures” that leave participants more confused than ever. Have costs been reduced, or investment choices improved? Not really.

The Council of Economic Advisers summed it up well at the end of their report:

Finally, in practice, disclosures of conflicts of interest can actually backfire (Cain et al. 2005, Loewenstein et al. 2011*). Research in behavioral economics and psychology demonstrates that when advisors disclose their conflicts, they may be more willing to pursue their own interest over those of their clients and thus give worse advice. Advisees may interpret the disclosure as a sign of honesty and become more likely to follow their advisors’ biased advice.
*Cain, Daylian M., George Loewenstein, and Don A. Moore. 2005. “The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest.” The Journal of Legal Studies 34 (1): 1-25
Loewenstein, George, Daylian M. Cain, and Sunita Sah. 2011. “The Limits of Transparency: Pitfalls and Potential of Disclosing Conflicts of Interest.” The American Economic Review 101(3): 423-428

Some lessons can be taught while others must be learned through experience. Unfortunately those experiences can sometimes be costly. I do not think regulation will teach people the value of a fiduciary relationship. At the same time, I remain hopeful that more people will learn the lesson before paying years and years of unnecessary tuition.

Equity Market Returns over Periods Ending 3 31 15Stock Markets
After a lot of bumps and bruises, as we show in the accompanying chart, stocks markets were up across the board over the March quarter.  Although lagging over longer periods, international developed markets led the way this quarter.

Look at the returns from emerging markets.  While the 10-year results are consistent with other markets, returns are well below in other periods.  I think this simply reflects the unsustainability of the early-on exuberance shown by investors for the BRICs (Brazil, Russia, India and China).  In any market or market segment, sustained periods above or below long-term averages generally don’t last.

The latest moves in market averages seem to be in response to comments from pundits observing the latest Fed activity as well as the uncertainty in the pace of the growth in the global economy.  The worry, I guess, is that after the run-up in domestic equity markets of the past few years we are heading for a cliff and anything negative will push us off.  It’s true that since December 2008 the S&P 500 has earned more than 18%, well above long-term averages.  Yet, add just the previous three years and this average drops to 9% – so maybe it’s just making up for lost time!  In any event it’s uncertainty about the future that drives market prices.  Markets respond as the future unfolds.

Bond Markets
Bond returns, which react inversely to changing yields, were Yield Curves 3 15, 12 14 and 3 14positive over the past quarter and trailing 12-month periods.  These results are consistent with the falling bond yields shown in the accompanying chart.  With the domestic economy seemingly doing better, it is well known that the Fed is poised to raise interest rates anywhere from a quarter to three-quarters of a percent.  The timing is the only uncertainty.  Yet, in the face of expected rate increases, bond yields have continued to fall.  I can think of two explanations:  (1) temporary market anomalies due to unprecedented Fed activities of recent years, and (2) significantly reduced inflation expectations.  I suspect the truth includes both – we’ll have to wait and see.


Expected Inflation
The chart below shows the trend in the annual changes in the ConsumTrend in Annual Change in CPI 3 2015er Price Index (CPI) over the past five years.  Look how it has fallen to below zero for the most recent period.  I suspect this negative number reflects sharply falling energy prices and not necessarily a sign of a general decline in prices across many items (deflation) in the future.  Deflation can be a significant drag on economic activity – why spend now if prices are going to be less in the future? – which helps to explain the Fed’s announced goal of keeping inflation at about 2% annually.

Of course, it is expected inflation that is reflected in market prices.  However, given today’s negative inflation and bond yields, two conclusions seem reasonable:  (1) the Fed is going to have to work hard to meet its inflation target, and (2) future inflation is apt to be less than what we have experienced in the past.

As we deal with the daily ups and downs of market averages, it is important to keep in mind that stock prices are determined by the actions of both a buyer and a seller – each has access to the same information.  They interpret it differently, but the price that results is where they are both happy.  Now, we may think that those who traded last got it all wrong, but there is little evidence of long-term success from betting against the “wisdom of the crowds,” which is reflected in the market price.

While uncertainty abounds, as it always does, it seems like what could impact stock and bond values is pretty well known and, therefore, is part of today’s price. Of course as we go through time, we are going to receive new information (“news”) not only about the eventual outcome of today’s uncertainty, but also about new things to worry about.  Some of this new information will be positive, some will be negative; all will be a surprise.  The impact of these surprises is the risk we endure, safe in the expectation that over time we will be paid for bearing this risk.  That’s how markets work!

I’ll tell you a few reasons why, and how, an advisor might save you more than you will ever pay in account management fees.  Income tax time exposes some of the costly mistakes of investors, especially those who decide that they can manage their own investments.

I have heard this for years:  “I can do the same thing you guys do with my money, and save money on the annual fees.”  I agree that one may be able to decide what to invest in, what amount of risk to take, invest in the same products, and rebalance his/her accounts regularly.  Then I add, “but you won’t!”, and there are other less obvious reasons to take advantage of an investment advisor.

Here are a couple simple real life examples, understood by just about everyone who has investments or IRA/pension accounts:

Vince brought his documents to have his taxes prepared, generally a simple return with some pension, dividends, interest, and Social Security.  As I entered his data from 1099 forms, I noticed a large one-time distribution of over $30,000 from his IRA, not unusual in itself, but I noticed no federal or state withholding.  Upon completion of the return I asked Vince about it and he said he took it all out for improvements to his house.

I then told him to his surprise that it was all taxable income, and that his federal tax liability is $6,400 and his state tax liability is $600.  In previous years he would get a small refund.  In Vince’s case not only was his taxable income increased by $30,000, but this additional income was enough to make about $13,000 of his Social Security taxable income.  Vince manages his own accounts, had an IRA and lots of telephone stock from years of payroll deductions with the phone company.

Now he has to come up with an extra $7,000 to pay his taxes, or file for installment payments of roughly $90 monthly for six years.  Plus, he has to deal with NY State IRS about payments.  He and I agreed to hold the return until the next week so he would have some time to think about how to handle the situation.  The next week he came back and told me he would pay the whole thing by April 15 of this year. I asked where the money was coming from, and he said he had sold all of his stock holdings, worth much more than the $7,000 he currently owes IRS.

Now he has created a few more problems for himself:  He has created a very large capital gain for himself for 2015.  This extra income will, no doubt, make his Social Security taxable again this year, and he will have a large amount of cash on hand that should be invested.

What should he have done?  He should have talked with his financial advisor/consultant about his need for cash to make his home improvements.  By taking the money out over 2 or 3 years, or getting a home equity loan, or selling some (not all) of his stocks, he would have been in a lower tax bracket, possibly paying no NY State taxes, and kept his equity investments in place.  It is the kind of financial discussion one should have with an investment advisor before making a rash decision.

At Rockbridge , we feel that this kind of support and assistance is what the investor client should expect.

Sharon, age 72, came to the tax preparation session fully expecting that she would not need to file a return this year because her income was too low.  I looked at her documents and agreed that she need not file a return.  As we talked I inquired about any pension, because she had no document from a custodian or company.  She said that she didn’t need any extra money last year, and that she remembers some letter in the fall but ignored it.  I suspect the letter was from a custodian telling her that a required minimum distribution (RMD) from her IRA was due because she was over 70 ½.  The custodian is required to notify the client, but is not required to make a distribution because the client may have already satisfied the minimum distribution from another IRA account.

Since Sharon had thrown the letter away, I suggested that she contact the custodian to see what she should have taken in 2014.  The penalty for not taking the minimum distribution is 50% of the distribution.  This penalty is applied regardless of the tax liability or lack of it on the tax return.

At Rockbridge we talk with every client who has an RMD and make sure they understand the amount, the payment method, and the withholding options.

One might ask why I didn’t do more to help these people.  In my role as a voluntary tax preparer for AARP I am precluded from acting as a consultant or advisor to those for whom I prepare taxes, and may not hold myself out as an investment advisor, nor solicit business for my firm.  In these cases I talk with the client about the situations and suggest the actions that I think they could take in their best interests.  It is their tax return that I prepare and file for them.

This is a perfect time of year to reflect on 2014 and look ahead to 2015.  Personally, the favorite part of my job is meeting with clients and prospective clients.  Lucky for me, last year I had the most client meetings ever as an advisor.  I’ve had the opportunity to build relationships with a very diverse and interesting group of people.  A common theme running through meetings is a desire by investors to work with a trusted advisor who takes time to understand their unique situation and goals.  All of us here at Rockbridge Investment Management find great satisfaction in helping others.  Our firm has achieved many milestones that I’d like to share with you.

Client Growth
As of today our firm manages $440 million dollars in client assets and we work with over 500 families to provide ongoing investment management and financial planning.   Rockbridge is now the largest independent fee-only investment advisor in Upstate New York.  Our growth has been fueled by client referrals and other individuals in our community who have done their own research and concluded that the fee-only advice model is the best option for investors seeking an advisor who is held to a fiduciary standard of care.

Our Business Model
As a fee-only Registered Investment Advisor (RIA),  our only source of revenue is from fees paid by our clients, which separates our firm from the vast majority of financial advisors in the industry.  We continue to improve our financial planning service to complement our commitment to an evidence-based investment philosophy.   We are well positioned to help the many baby-boomers seeking unbiased advice as they look to retire over the next several years.

Firm Accomplishments
Our goal is to build a collaborative and supportive culture at Rockbridge that attracts top-level talent and partners in the firm.  This year, two of our professional advisors, Doug Burns and Geoff Wells, completed the education and experience necessary to become Certified Financial PlannerTM professionals (CFP® professionals).

Although many professionals may call themselves “financial planners,” CFP® professionals have completed extensive training and experience requirements and are held to rigorous ethical standards. They understand all the complexities of the changing financial climate and will make recommendations in your best interest.  We currently have four CFP® professionals in the firm.

David Carroll joined the firm in November 2014.  David, a graduate of LeMoyne College, comes to Rockbridge after spending a year at Wells Fargo Advisors.  David will be assisting in financial plan construction in addition to working with our younger clients and 401(k) participants.

Leah Foley will be joining Rockbridge in January 2015.  Leah is currently a senior in the Financial Planning Degree program at Alfred State University.  She will be completing a full-time internship with us until her graduation in May 2015.

Looking Ahead
Our priority will be meeting with clients to review their investment plans.  While there is no way to predict future returns, we are confident that markets will reward investors for taking investment risk over the long term.  We will continue to help clients determine the right amount of risk to take in order to meet their financial goals.

We remain passionate about our investment philosophy and thoroughly enjoy building long-lasting relationships with our clients.

A subtle change is occurring in the investing world that we, at Rockbridge, have been noticing for some time.  In fact, I am happy to see the trend accelerate.  Investors are utilizing an increasing amount of market-tracking funds and ETFs, rather than using active management.  Active management is the process of trying to outperform the market by buying the best securities and timing the market’s ups and downs.  In other words, investors are realizing (and voting with their dollars) that active management is not worth the added costs.

The process of building portfolios is comprised of two distinct steps:  (1) Asset Allocation and (2) Security Selection.  Many investors have similar views on step one.  However, there are two camps when it comes to the second step.  In one camp investors believe experts exist who have the skill and superior ability to “beat the market” through active management.  In the other camp, investors believe that there are bargains in the stock market, but it is either too costly or too difficult to accurately identify these companies before all other market participants.  Instead, these investors focus their time on ensuring asset allocation is appropriate, utilizing market tracking (index) funds to mimic their desired asset class exposures.

There can be valid reasons for both approaches to security selection.  For example, if all investors believed no relative value existed in active management, index funds would attract all investor capital.  Opportunities to buy underpriced stocks should proliferate.  In the opposing view, if all investors utilized active management, a “free ride” arises where participants get market exposure, by way of index funds, with comfort that every company is competitively priced.

Before John Bogle’s launch of the first index mutual fund in 1976, active management and stock picking were the status quo.  However, now it appears that investors are taking notice that the odds are stacked against active managers.  The Investment Company Institute, an association of regulated investment companies, analyzes trends in U.S. investment companies.  According to data in their 2014 fact book, domestic index funds and domestic index-based ETFs saw net inflows of $499 Billion over the last five years, while actively managed domestic funds experienced outflows of $363 Billion.   Although actively managed funds still have more assets under management, the difference is shrinking year after year.

The latest “SPIVA® U.S. Scorecard” report by Standard and Poors published in mid-2014 found that over the past five years more than 70% of active domestic equity managers across all capitalization and style categories failed to deliver returns higher than their respective benchmarks.   The SPIVA® report measures the performance of active fund managers against relative benchmarks for different time periods.  The findings may be evidence that investors are making smart decisions by pulling money out of actively managed funds and into index-based funds.

Stock MarketsEquity Market Returns over Periods Ending 12 31 14
The accompanying chart shows domestic stocks up and international stocks down over the past quarter and one-year periods.  Real estate investment trusts (REITs) were up substantially in these same periods.  The largest U.S. companies have been especially strong recently and, because these are the stocks followed by the mainstream media, we have the illusion of robust stock markets in 2014.  But, it’s a big world and it is important to look beyond our shores to participate in the risks and returns of global markets.  Knowing that various markets act differently from one another is important in understanding the investment landscape, especially in recent periods.

Look at the ten-year numbers.  Not only are returns more consistent, except for international markets, they are reasonably close to long-term averages.  It is not reasonable to expect that international markets will trail other markets over long periods; it only shows that ten years are not necessarily the long run.

Bond MarketsYield Curves 12 13, 9 14 and 12 14
Bonds did quite well as yields declined over the year, even as the Fed began cutting back on its Quantitative Easing programs.  Look at the accompanying chart and how yields at the longer end of the curve fell over the past quarter and one-year periods.  Declining bond yields are not typically associated with the improving domestic economy that we have been experiencing.  This decline seems to reflect a prediction that the Fed will keep short-term rates near zero well into the future.  It also seems to reflect the global economic uncertainty, especially in Europe, and the relative safety of U.S. Government bonds.

Some Thoughts on 2015
The Stock Market – If there are no surprises, it is reasonable to expect overall market returns in the neighborhood of 7% after inflation, and in the case of small-cap stocks and international stocks, a little more.  Of course, there will be surprises – some positive, others negative – all of which can have a significant effect on returns.  Today’s increased volatility paints a picture of more surprises of greater magnitude in 2015.  The uncertain effect of falling oil prices on both producing and consuming economies is one unknown that could have a dramatic impact on stock markets around the world.

The Bond Market – What is in store for bond markets in 2015 depends to a great extent on when the Fed raises short-term interest rates.  The Fed’s timing is apt to be a surprise.  Delay beyond the expected time frame will be positive; sooner will be negative.  The current turmoil in the world economies and how the various Central Banks respond will also continue to impact bond yields.  Yet, it’s still hard to imagine lower bond yields in 2015.

Wall Street – Things on Wall Street are beginning to look a lot like they did prior to 2008.  Profits are up, bonuses are back, and concentration is greater – all from engaging in questionable value-adding activities (this time around it is mergers and acquisitions of large public companies).

Investing Internationally
Diversification means usually owning something you wished you didn’t.  This time around international stocks had a terrible year.  Yet, investing in this asset class improves a portfolio’s profile of risk and returns.  However, to realize the long-term benefits of this diversification, differences in short-term returns must be endured.

The lagging performance of international stocks in recent years has been dramatic and has dragged down past returns such that even twenty-year returns are significantly lower for international stocks (5.4% versus 9.9% for domestic markets).  However, market prices reflect the future and there is no reason to expect U.S. markets to continue to outperform other parts of the world.  Market forces will attract capital to where returns are expected to be the highest, bidding up prices of outperformers and discounting prices for the laggards.  In the long run, risk and return are related.  The benefits of diversification (e.g., reduced risk without reduced expected returns) are because short-term returns from different markets are not completely correlated.  The lack of correlation between domestic and international markets was certainly clear in 2014.

International markets have rebounded more slowly from the financial crisis than those in the U.S.  Some would suggest this disparity could have been predicted.  However, investment capital is very mobile and investors everywhere prefer low risk and high return, which is evidence that market participants have been surprised.  Above-average returns in domestic markets and below-average returns in international markets cannot be expected to continue.  Now, surprises happen randomly.  The only way to take advantage of this random activity is to rebalance back to long-term allocations (buy low and sell high) consistently, because risk will be rewarded in the long run.

My wife Amanda and I welcomed a baby girl (Norah Marie Wells) into the world on December 17th.  As a planner by both nature and profession, I wanted to make sure we had all of our ducks in a row prior to her arrival.  One of my top concerns was purchasing additional life insurance and I wanted to share my experience.

 Type of Life Insurance

Insurance by nature covers low probability, high cost events.  A premature death is a perfect example of the need for insurance.  Choosing the type of life insurance I needed was the easiest part of the process.  For 99% of people out there, term life insurance is the most cost effective and correct insurance to purchase.  At Rockbridge, we believe that it is best to keep insurance and investing separate.  Blending insurance and investing creates complicated products that are mainly benefiting the insurance company and the person selling the product (examples include whole life insurance and universal life insurance)

 Amount of Insurance Purchased

In order to determine the amount of life insurance coverage I needed, I looked at what expenses I wanted to cover.  This is a very personal decision and many people will come up with different results.  After some thought, I wanted to go with a higher amount of insurance that would cover almost everything I could imagine.  The main items were college expenses for potentially 2-3 kids and income for my wife while the children are still at home (and possibly forever). For me, a policy of $2.5M was conservative, but appropriate.

Most term life insurance policies are level term, meaning that the payment and insurance benefit stays constant for the duration of the contract.  The time value of money needs to be factored in when determining the amount of coverage you would like to purchase.  At a 3% inflation rate, $2.5M will be worth less than $1.4M in 20 years.

 Duration of Coverage

For term life insurance policies, there is a set duration for when the policy is effective.  The most common durations are 10-, 20-, and 30-year terms.  This was another area where I struggled a bit on my decision-making process.  I wanted to time the ending of the contract with the need for life insurance.  In this case, a majority of the need was based on living expenses and college costs for the next 20-25 years.  Looking at the pricing, a 30-year policy was significantly more costly than the 20 year policy.   In the end, I purchased a policy with a duration of 20 years to cover a majority of the risk.


Cost is one of the most important factors.  Insurance is only good if you keep paying the premiums!  I wanted to keep my annual insurance costs as low as possible, but still meet all of my needs.  The $2.5M 20-year policy was the personal sweet spot for me at $969/year.

A large factor that comes into play when purchasing insurance is the physical and health screenings.  Life insurance companies have different risk categories that an insured individual falls into.  The better health you are in when you purchase insurance, the lower the likelihood of premature death, and thus the lower the cost of insurance.  I am still waiting to hear back on the final qualifications, but I expect toend up in the highest category.

One final cost item to note is how the insurance salesperson is compensated.  Although you don’t explicitly pay their compensation, on an average term life policy, the  agent will make between 30-90% of the first year’s premium.  They also may make up to 5% of the premium for every year you renew the policy.  This is not something to be frowned upon, as agents need to be compensate; however, it needs to be noted that it is in their best interest to sell a more expensive policy.


I was not too particular with the insurance company that I purchased the policy from, as long as it has at least has a strong credit rating and is expected to be around for the long term.  The least expensive $2.5M 20-year term policy quote for me was Metropolitan Life Insurance Company (MetLife).

Buying Experience

At Rockbridge we provide unbiased financial advice and don’t personally sell any products.  Therefore, even for a personal insurance policy, I had to use an outside resource.  I was quite curious with the whole insurance buying process, so I went with an insurance agent that sold the policy I was looking for, but that I had never met.  I would assume that my experience is typical for someone looking for a new policy.

 – Initial Meeting (60 minutes)

I set up an initial meeting to purchase the policy.  I ended up going to their company’s office because it was a short walk from mine.  I had already priced out the policy I was interested in at, but I left those numbers in my pocket.  I explained exactly what I was looking for prior to the meeting and the agent already had some price quotes for policies on his computer.  The downside is, he solely priced the policy with his own insurance company and did not look at the costs of others in the marketplace.  Many agents have the ability to sell both their own products as well as products of other companies.  I then mentioned the other insurance policy and the price being significantly lower ($1300+ vs. $969).  After dodging a few planted questions as to why their proprietary product was better, he was able to look and find the exact same MetLife policy I wanted in their system.

I will note that there was also a brief conversation about Whole Life Insurance which is quite costly and not really appropriate for my situation.

 – Second Meeting (15 minutes)

This meeting was the finalization of the paperwork and payment of the first annual premium.  As soon as I wrote the check to the insurance company, I was covered for the life insurance policy while the process is going through underwriting.  The company may determine that I am in a different risk category and may have to pay more every year or lower your coverage amount, but initially, I am covered from the moment you write the check.

– Health Physical / Screening (30 minutes)

The life insurance company wants to make sure that I was insurable and a good candidate for them.  As part of the underwriting, I had to complete a physical with blood draws, a urine sample, height/weight and blood pressure checks as well as a detailed health background screening.  I also had to sign a health care release form so that the insurance company can appropriately look at my health history from previous doctors.  This is all pretty standard and the nurse was great.

 – Additional Information (15 minutes)

This may not happen to everyone, but the insurance company needed additional information for my policy.  In the past, I had a pilot’s license and participated in the general aviation community.  This and other activities are considered a higher risk for the insurance company.  I had to provide more information to the insurance company that I had indeed stopped flying years ago and do not have any plans to fly in the coming years.

 – Approval

I am currently still awaiting approval for the final health category, but I don’t expect any complications.


– Purchase life insurance ONLY if you have a need.

– Term life insurance is almost always the best solution.

– Determine an approximate cost of insurance prior to meeting (

– Being healthy saves you a lot of money in insurance costs.

– Be patient, the process takes a while.


I wanted to share my experience and thought process to help others feel a little more at ease about purchasing life insurance.  As always, helping determine the value and term of a life insurance policy is just another way that Rockbridge can help in your financial lives.  And since we don’t sell insurance, you know we will always give you our honest opinion!

Ten-year Treasury rates continue to stay at historic lows following the “Great Recession” of 2008. The prevailing sentiment is that rates will climb as the economy continues to recover. On the other hand, it is important to give this view a historical context. There have been times where long-term bond yields have remained below average for extended periods. An interesting graph appeared in the Enterprising Investor blog for the CFA Institute (“Three Charts that Will Rekindle Your Interest in Financial Market History” by William Ortell). My interest was in a graph of the historic yields of the Ten-year Treasury security.

Using data from Robert Shiller (2013 Nobel Memorial Prize winner in Economic Sciences), I constructed the graph at right of interest rates. Long-term bond rates averaged approximately 4.6% over the available history, which is magnified by the high inflationary environment of the 1970’s and 80’s. However, it is interesting to note that there was a 20-year period beginning in the 1930’s where rates stayed in the sub 3% range, which is where rates are today.

We must be wary of the chance that rates could remain low for a long time, and possibly go lower. Much will depend on the Fed’s actions and the overall economy.10-Year Bond Yields 10 14


We added TIPS (Treasury Inflation Protected Securities) to many of our client portfolios several years ago. We are now selling them out of client portfolios, as we no longer expect them to fulfill their intended purpose.

TIPS were created in the late 1990’s. Issued by the U.S. Treasury, they pay a low, fixed, nominal interest rate, plus each year the principal value is credited with an amount equal to the impact of inflation as measured by the Consumer Price Index. In essence, TIPS were designed as a way to lock in purchasing power, as the principal of the bond grew at the rate of inflation, and the interest payment provided some real, after-inflation, rate of return.

The Current Problem
The Federal Reserve implemented extraordinary measures to stimulate the economy in the wake of the financial crisis, and “real” interest rates have dropped below zero. These measures helped the U.S. economy avoid a deflationary spiral like Japan experienced over the past several years, but the current interest rate levels are not sustainable, as savers should expect a reward for foregoing immediate consumption, not the loss in purchasing power they are experiencing today.

As the Fed unwinds their measures, and the economy continues to recover, it is reasonable to expect interest rates to rise. One might expect some equilibrium state where short-term rates hover at or above the rate of inflation, and savers get a positive real rate of return.

In the current environment, the Fed has successfully pegged inflation expectations at about 2%, and the value of TIPS varies on changing expectations of Fed policy instead of inflation expectations. The markets try to guess when the Fed will allow real interest rates to rise back toward some equilibrium level. Since the change in value is not related to a change in inflation expectations, TIPS are not currently an effective hedge against inflation.

Compounding the problem is the fact that TIPS funds have a long average maturity, greater than the overall bond market. Since their change in value is now more sensitive to interest rate policy and changes in rates, they behave much like other long-term treasury bonds, and no longer provide the expected level of diversification in the bond portfolio.

TIPS no longer provide the portfolio benefit they were intended to provide. TIPS were originally expected to provide some protection from unexpected inflation. The Federal Reserve has acted aggressively since the financial crisis to stimulate the economy and avoid deflation. As a consequence of the Fed action, TIPS are now behaving like long-term treasury bonds, meaning their value is more sensitive to changes in interest rates. With inflation expectations seemingly under control, it does not make sense to endure the volatility of long-term treasury bond risk, particularly in the face of an expected rise in interest rates sometime in the future.


The indices in the chart at right, except for those of domestic large companiesEquity Market Returns over Periods Ending September 30, 2014 1, show that stocks in the third quarter gave back some of their recent gains. International stocks and those of domestic small companies were down over 5%; stocks traded in emerging markets and Real Estate Investment Trusts were down by a lesser amount. The results of domestic large company stocks (S&P 500) in recent periods stand out. It is not clear why and may be evidence of short-term irrational behavior. Whenever an investor allocates new funds to stocks for whatever reason, they seem to gravitate towards the S&P 500, which bids up the prices of those stocks and could account for the recent positive results.

Over the past ten years stocks have provided reasonable returns, with a diversified stock portfolio earning an annualized return in the neighborhood of 10%. However, as the chart shows, to achieve that return it was necessary to endure a good deal of variability not only in the total portfolio but also among the individual asset classes. No doubt, this variability is what is in store for the future.

Bond Markets
Bond returns reflect changes in yields which, as shown in the chart at right, were Yield Curves 9 13, 6 14 and 9 14fairly stable over the past quarter and year-to-date periods. Consequently, returns on Treasury securities were relatively flat. Credit spreads (the difference between yield on Treasury securities and the comparable corporate bonds) have narrowed in recent periods, which explain the better returns from corporate bonds.

The ten-year yield on inflation protected Treasury securities of 0.6%, while increasing slightly, remains low by historical standards, and has remained so even as the Fed has cut back on its Quantitative Easing program. This minimal response to the Fed’s “tapering” leads some to predict that yields at these levels are a “new normal.” I remain doubtful.

Quantitative Easing and Excess Reserves
Over the past five years the Fed, through its “Quantitative Easing,” has added to its balance sheet $4.0 trillion (that’s trillion with a “t”) in U.S. Treasury securities. This massive purchase of Treasury securities seems to have had less than the expected impact on either economic activity or inflation. Now, as the Fed is curtailing this program, it might be useful to look at why this is the case.

When the Fed buys a security, it credits banks’ reserves. Reserves provide funds for the bank to lend to consumers, businesses and governments and thereby spur economic activity. Banks have not been making loans with these excess reserves.

In general banks don’t hold excess reserves. Until 2008, the average level of excess reserves was in the neighborhood of $1.3 billion. However, these excess reserves started to climb as the Fed began to Treasury Securities on Fed's Balance Sheet and Excess Reserves 7 08 to 7 14purchase securities. Look at the accompanying chart that shows Treasury securities on the Fed balance sheet and excess bank reserves over the past five years. As the Fed’s holdings climbed from a modest amount in July 2008, excess bank reserves climbed essentially in lockstep. In the past five years the proceeds from the Fed’s purchases have been held by banks as excess reserves. While the Fed can provide funds to loan with the purchase of securities, if there is no demand for loans then the impact on economic activity or inflation may not be what is expected. Essentially, the Fed is “pushing on a string.”

Given the above, the purchase by the Fed of U.S. Treasury securities has, by and large, simply been added to banks’ excess reserves. Therefore, as it begins to sell its current holdings, it seems a good guess that banks will simply use their excess reserves to purchase these securities and the impact from the Fed’s “tapering” will not be a whole lot more significant than when it was making the massive purchases.


“Rockbridge Investment Management Named a Top 100 Wealth Management Firm by CNBC”

SYRACUSE, NY – Rockbridge Investment Management, an independent, fee-only investment management firm serving individuals and families, has recently been named as one of CNBC’s Top 100 Fee-Only Wealth Management Firms.

Rockbridge is the only Central New York firm to join the elite list of wealth management firms across the country.  The ranking methodology, developed by CNBC in collaboration with Meridan-IQ, was carefully formulated based on a variety of standards, including: assets under management, number of staff with professional designations such as a CFP or CFA, experience working with third-party professionals such as attorneys or CPAs, average account size, growth of assets, years in business, number of clients and ability to provide advice on insurance solutions.

“We are pleased to receive this recognition and believe our ranking is a true testament to our profound commitment and dedication to client care,” comments Anthony Farella, CFP® and a Principal of Rockbridge Investment Management.  “As a fee-only based firm, we are built to provide a unique client experience to help families and individuals achieve long-term financial goals in a meaningful way.”

Since its inception in 1991, Rockbridge Investment Management has been providing sound financial advice to clients.  The firm manages $450 million and serves 531 families across the Central New York region.  In February of 2014, Rockbridge relocated to an expanded office in downtown Syracuse where it continues to meet the investment needs and goals of clients.

Rockbridge Investment Management is an independent, fee-only investment management firm serving individuals and families.  The firm advises clients in investment management, retirement planning, life transition planning and 401(k) Administration.  For more information, visit

If you have children approaching or in college, the end of summer means one thing:  a fall tuition payment!  Fortunately, as New York State residents, there is a little tax break for college expenses.  By contributing to the NYS 529 College Savings Plan, you are able to deduct up to $10,000 for a couple ($5,000 for an individual) on your NYS income tax return.  At approximately a 7% state tax rate, this could save a family $700/year on their state income taxes.

For the families with students currently in college, you are not out of luck.  If you contribute the $10,000 into a NYS 529 Plan, then pay the tuition payment from the 529 Plan, you are also eligible for a tax deduction.  The clearing time will take approximately 2 weeks, so please plan accordingly.  By just adding the one step before the tuition payment, you can also take advantage of this credit.

Finally, if you happen to be a family who is subject to federal estate taxes, a Legacy 529 Plan may be the perfect way to reduce estate taxes and provide a perpetual education fund for your heirs.  We would be happy to discuss this with you individually.

College savings can be an important part of your financial picture, and Rockbridge can help clarify your options.

Stock Markets
The first chart at right shows returns from various stock market indices over several periods ending June 30, 2014.  Equity markets have rewarded those of us who stayed the course.  Why?  I offer three culprits:

  1. Equity Market Returns over Periods Ending June 30, 2014Surprises associated with an improving economic environment
  2. Lack of return opportunities in bond markets
  3. “Animal Spirits”

These things are interrelated.  The worldwide economy continues to improve, albeit at a sluggish pace, due in some part to the central banks’ efforts to keep interest rates low.  However, these policies result in few opportunities in bond markets.  The third factor, “Animal Spirits,” is a term coined by John Maynard Keynes in his 1936 book “The General Theory of Employment, Interest and Money” to explain emotional confidence and trust in the future.  It is used to explain what makes individuals and corporations undertake long-term capital investments – oftentimes “Animal Spirits” can be a good explanation of the short-term behavior of stock markets.

Bond Markets
Bond market returns are driven by changes in yields and credit spreads.  Positive (negative) returns follow from declining (increasing) yields and narrowing (widening) credit spreads; the longer the time to maturity, the greater the impact.

Bond Market Returns over Periods Ending June 30, 2014Over the last six months the yield on the ten-year US Treasury security, which is often used as a bellwether for interest rates in general, fell from 3.0% to 2.5%.  At the same time, credit spreads narrowed.  The second chart at right shows inflation (percent change in Consumer Price Index) and bond returns over several periods ending June 30, 2014.  (The Treasury Index reflects only changes in interest rates; the Barclays Government/Credit Index shows the impact of both changing rates and credit spreads.)  Note the extent to which returns from the Barclays Index exceed those of the Treasury Index in recent periods, reflecting narrowing credit spreads.  Also, note that inflation has been rather benign.

The Fed is the primary driver of interest rates.  Yields have declined even as the Fed reduces its purchasing of long-term Treasury securities.  While it is no doubt too early to tell, the impact of the Fed’s backing away from its “Operation Twist” seems to have had little impact on yields so far.  While the Fed has promised to keep short-term interest rates near zero at least over the next year, there is a lot more discussion of the impact of increasing interest rates on economic activity, which may signal the beginning of the end of the Fed’s accommodative monetary policy – we’ll see.

Timing Markets
Strategic asset allocation is critical to investing over the long term – it defines the risk profile of the portfolio and explains most of its return.  Tactical asset allocation means shifting this strategic commitment to asset classes in response to predictions of short-term market behavior.  It’s a euphemism for “market timing.”  Making a shift to avoid a correction is market timing.

Unless there is a specific point at which the funds are needed, market timing requires two decisions – when to get out and when to get back in.  Being right with both is rare.

The market timing data is mixed.  Making the wrong market timing decision can be costly.  For example, buying and holding the S&P 500 since December 31, 1970 results in $1,000 growing to $78,435 by the end of this quarter, but if the best five quarters are missed, then it grows to just $31,195.  Avoiding down markets, on the other hand, can be very rewarding.  If the worst five quarters are missed, then $1,000 becomes $245,558, which helps to explain the appeal of market timing.

Given where we are today, we are interested in whether a period of above-average returns is generally followed by below-average returns and thus signals a potential down market.  To evaluate the extent to which we can use previous five-year returns to provide a meaningful forecast, let’s look at returns from the S&P 500 Index, after inflation (change in CPI), over the 174 quarters (43½ years) since December 31, 1970.  Further, let’s define a good five-year period as one with an average return greater than 15%, and a loss of 10% is the period to be avoided.   The results of this analysis are at right.
Timing Analysis July 2014
There are not a lot of five-year periods when the average return exceeded 15%.  However, note that a five-year period that averaged above 15% is more apt to be followed by another year of above-average returns than a loss that exceeds 10%.

While the results from avoiding a “down” market are compelling, the cost of missing “up” markets can be substantial.  There is always substantial variability about the future direction of stock markets.  Timing markets successfully requires reducing this variability.  Unfortunately, there is no reason to think past returns will be helpful.  There is simply no reason to conclude that now is the time to engage in tactical asset allocation.

The question of firm strength and continuity has surfaced more and more this year.  Both new and long-time clients are concerned that their financial planning firm will be around for the rest of their lives as well as for their children and grandchildren.  The good news is that over the past few years, Rockbridge has focused on becoming an enduring firm.

Business Model
Rockbridge is set up as a professional ensemble practice to achieve long-term continuity.  We have a multigenerational approach to planning and currently have employees who are in their 20s, 30s, 40s, 50s, and 60s plus.  Using the youth, experience, energy and patience of the different generations allows Rockbridge to truly provide clients financial advice for generations to come.

We have modified our business processes to provide better service to our clients.  About two years ago, we started involving two advisors in every client meeting.  Having two minds and contacts at the company provides reinforcement to clients that there is always someone available to speak with them.  In addition, two minds are always better than one when it comes to complex financial planning.   Finally, we are beginning to include a dedicated support person for each client to back up the primary and secondary financial advisors.  This trio of personnel should provide the highest level of customer service and personal touch.  We feel this approach sets us apart from the rest of the industry.

As Rockbridge grows, we have found a good balance of individual expertise while keeping the feel of a small personal company.  As we grow, we have expanded to include two Certified Financial Planners (CFPs), two Chartered Financial Analysts (CFAs), two MBAs, one Ph.D., and one Certified Public Accountant (CPA).  Outside of individual credentials, each employee continues to build individual expertise, whether it be Investment Management, Financial Planning, Tax Planning, Education Planning, Social Security Analysis or Estate Planning. 

We are constantly looking for new ways to improve our business and provide an even better client experience.   As always, we appreciate any recommendations you have for us.  The highest compliment we can receive is a referral for a job well done.

We have seen high returns and low volatility over the past three years. It feels like the stock market is due for a correction. Over the past three years returns have been much higher than average and volatility has been much lower than average. The chart below compares returns, and the variability in returns, for the S&P 500 over various periods. Annual returns over the past three years, at nearly 17%, are well above the long-term average of about 10%, while variability was only two-thirds of that experienced historically. By way of contrast, the three-year period leading up to June 2009 was a disaster for returns, but volatility was merely average.

Performance of S&P 500 Index Over Various Periods

Different views of the future. When stocks are appropriately valued, it means that the pressure for higher valuations is roughly equal to the downward pressure on prices. Some think the future will bring faster growth in sales and earnings, while others hold an opposing view, but the equilibrium price includes an expectation that investors will earn a return on their capital over the long term.

Let’s consider some offsetting views. It is easy to tick off reasons why markets could, or should, correct. The P/E ratios have risen above historical averages, indicating overvaluation. The economy remains fragile and very dependent on the Federal Reserve. Emerging markets are struggling and growth has slowed in China. Europe and Japan are still struggling to get on their feet, and then we have all the volatile geopolitical issues of the day from Syria and Iraq to Russia and Ukraine, not to mention North Korea, and the turmoil in most of central Africa.

So why are the markets continuing to push the Dow and the S&P 500 indices to new record highs? Well, one thing to keep in mind is that the normal course of economic expansion should result in stock values growing and, therefore, constantly reaching new record highs. As investors, most of us are tainted by the experience of the past two decades, when the technology bubble of the late 1990s inflated stock values so much and so fast that it has taken 15 years to straighten out. Microsoft is a good example of how far out of whack valuations were at the height of the tech bubble. It is trading now at around 15 times earnings, which is near the long-term market average for all stocks. Back in 1999 the price reached a level that was over 80 times earnings. Paying 15 times earnings is more likely to generate an acceptable rate of return.

Other factors contributing to a positive outlook for stocks include the fact that the US economy is growing, with no signs of overheating or significant imbalances. There is a lot of promising new technology on the horizon – think 3-D printers. The energy boom is pushing the US back toward energy independence, which provides a wide variety of related economic and political benefits.

Conclusion – expect lower returns and more volatility. We should expect lower returns than the past five years and more volatility, but a major correction, while always possible, seems no more probable now than at any other time.

Of course, a significant correction is quite likely at some point, but it would represent a bump in the road for long-term investors who can expect market forces to provide adequate risk-adjusted returns over time.

Over the weekend, the Wall Street Journal writer Lindsay Gellman covered this important topic.   She did an excellent job articulating the values of both hiring an advisor and managing your own personal finances.  The sole point that I disagree with in the article is titled, “You won’t stick to a pro’s advice, anyway.”  At Rockbridge, our goal is to establish a long-term plan up front and help clients follow that advice over time.  

The full article can be found here:  WSJ Article

More to Savings Bonds Than Just Interest:
Savings bonds are perhaps the best interest-paying savings these days, with the banks paying little or no interest on savings and checking accounts and interest on CDs at an all-time low.  Savings bonds are typically long-term savings.  Several tax clients cashed in their long-term savings bonds in 2013, incurring lots of ordinary income and related tax liability. 

One advantage, besides the better interest rates, is that the interest is not subject to state taxes.  However, all of the interest is subject to federal taxes, and federal tax rates are generally much more than state tax rates.  One big disadvantage is that there is no “step-up” in basis for the one who inherits them.  The “basis” of most other financial assets (stocks, bonds, property), when inherited, is the value at the date of death when calculating gain or loss at the time of sale, and the gain is considered to be “long-term.”  Not so with savings bonds.

Given this fact, it might be advantageous to set up an annual schedule to cash in savings bonds, possibly paying less tax and avoiding the inclusion of this income in the Social Security income calculation.  Most are unaware of this tax treatment, and surprised at the tax on this inherited asset.  This is the kind of thing that should be discussed with your investment advisor when planning on cash flow from your investments or savings.

Do You Know What is in Your Account?:
One tax client had sales of securities to report from two brokers.  The number of stocks sold for 2013 was 159 individual stocks.  She had no idea why there were so many sales and what stocks were actually in her accounts.  One would wonder why an account would have that many individual securities, and we are only talking about those stocks that were sold in 2013.  I didn’t see what was bought because it was not relevant to the tax preparation!

It is not critical that investors know exactly what each investment is, but they must be able to get an explanation from the investment advisor if it is desired.  When this many stocks are bought or sold, I immediately begin to wonder if the transactions are made to benefit the client, or the salesperson.  And good luck doing the capital gains portion of a tax return with this many short- and long-term transactions!!

Take Advantage of Your Investment Advisor:
One client explained that he wanted to file “married filing separately” although he was married the entire year and is still living with his wife.  They were not separated.  I explained that there was a considerable difference in the tax rates for this status, but he told me his wife had already filed this way because she had created a trust and thought they no longer qualified as “married filing jointly”.  Their tax liability filing separately was $10,739.  The tax liability for filing jointly was $8,967.  The creation of a trust has no bearing on the decision on filing status, and a mistake like this can be costly.  The investment advisor, along with the attorney, should be part of any decision to move assets to a trust so these kinds of issues can be discussed.  Rockbridge has a “value proposition” stating “Helping clients make sound financial decisions through a comprehensive client experience.”  We hope clients will include us and use our expertise in their financial decisions.

Required Minimum Distributions (RMDs):
An annual occurrence seems to be a tale of the investment advisor or custodian who doesn’t follow up with the client who should have made a required distribution from his/her IRA account.  In this case, enough was taken from another IRA account to satisfy the minimum, but it was just accidental that it worked out.  One advisor just failed to contact the client to assure the proper distribution be made.  At Rockbridge we pay special attention to assure compliance for our clients.

At the end of a year and at “tax time” it is an ideal time to think about your investments and review your financial situation.  Take advantage of your investment advisor and their expertise in financial areas such as income taxes, retirement planning, investing, Social Security benefits, cash flow needs, and estate planning.  Call us at Rockbridge to discuss your accounts or to become a valued client.

In a recent Wall Street Journal (WSJ) article, the debate over whether to use active or passive investments was addressed. The conclusion was just use both! Let’s take a look at the five reasons they give to defend this neutral stance and see if they hold up to scrutiny. 

1. Use index funds for efficient markets, and active funds for others.

The rationale is that it is hard for active managers to beat the index in efficient markets like the S&P 500, but where they thrive is in less efficient markets like domestic small cap and international stocks.  

This sounds reasonable; however, the facts don’t back it up. According to the 2013 SPIVA study, which ranks active managers against their benchmark, the majority of active managers underperformed passive investments in 21 out of 22 categories over the 5-year period ending 12/31/13. Some conclusions from the study:

  • 79.4% of active managers underperformed large US stocks (S&P 500)
  • 74.8% of active managers underperformed small US stocks (Russell 2000)
  • 71% of active managers underperformed international stocks (EAFE)
  • 80% underperformed the “less-efficient” emerging markets asset class  

Clearly, the evidence suggests that active strategies are no more likely to outperform in less efficient markets. 

2. Keep the door open for beating the market. 

The article says, “Index mutual funds and exchange-traded funds offer a low-cost, tax-efficient way of matching broad market returns—which a large percentage of active managers can’t seem to do.”  However, they say there is an emotional element to investing you have to consider. People want to think they can beat the market and don’t want to settle for benchmark returns.

Well, sometimes I like to think I could play golf professionally, but then reality sets in as I wake up! Look at the stats from above; you are playing a loser’s game if you keep trying to beat the market.

3. Add an active manager to fine-tune the volatility of your portfolio. 

This reason doesn’t make much sense since active managers actually just layer an additional level of risk on your portfolio. An investor already has to deal with the volatility of the markets.  Why add the unknown human risk of an active manager to the equation?   

4. Use a mix of funds to hedge against market crosscurrents.  

Michael Ricca, managing director for Morgan Stanley, says, “Passive and active funds tend to perform better in different environments. It can be better to own an active manager who can scout for attractively valued securities or shift to sectors that might hold up better in a correction.”

I think the writers of this article are missing the point. Active managers have consistently underperformed their passive counterparts in 21 out of 22 asset classes over the last 5 years.  There is no credible evidence that active managers can add value through security selection. 

5. Use an active-passive blend to bring down overall expenses.  

The article says that “Many active funds charge 1% or much more in annual expenses, while index funds may charge as little as 0.05%. Even if you generally favor active funds, you might use a blend to lower your overall portfolio expense ratio to perhaps around 0.5%”.

Alternatively, you could use index or low-cost passively managed funds in all investment asset classes to reduce the cost of your investment portfolio. Remember, the saying “you get what you pay for” does not hold true when it comes to investing.

Equity Market Returns over Periods Ending March 31, 2014In the chart at right, we show returns from several equity market indices for periods ending March 31, 2014.  After falling in January and bouncing back in February, domestic equity market returns ended the March quarter slightly positive; returns in the REIT market were especially strong.  While exhibiting the same ups and downs as domestic markets, returns in the international developed markets ended the quarter in positive territory as well.  Emerging market returns were off just a bit.  Except for emerging markets, equity market returns have been strong and generally above long-term averages over the one-, three- and five-year periods.  Over the ten-year period returns from all our equity market indices, including emerging markets, are about on track with long-term averages.  

I think equity market results over the past few months reflect nervousness about monetary policy by both domestic and international central banks.  While the Fed continues to signal essentially no change in its current low interest rate policy, the impact on equity markets of a less accommodative monetary policy, as economies strengthen, is creating some uncertainty in today’s financial markets.

Bond Markets
Bond Market Returns over Periods Ending March 31, 2014In the second chart at right, we compare returns from bonds that bear just interest-rate risk (5-year Treasury Index), with bonds that bear both interest-rate risk and credit risk (Barclays Gov/Credit Index) and changes in the Consumer Price Index (CPI).  Except for the past year, bond returns have been well above the historically subdued level of inflation.  While significantly under equity market returns in recent periods, a premium above inflation is consistent with what can be expected from bond investments over the long term.

The impact on bond yields, of both changing interest rates and reducing premiums for bearing credit risk, is what explains recent bond returns.  Yields on Treasury securities of longer maturities did tick down a bit in the first quarter but have risen over the past year, which explains the positive returns of the past quarter but negative returns of the past year.  Increasing yields have a negative effect on bond returns; the effect of falling yields is positive.  Credit spreads (the difference between the yield on U.S. Treasury securities and the yield on corporate bonds) have been narrowing in recent periods more or less mirroring the positive results of equity markets, which explain the return premium from corporate bonds.

The Long Run
Investment decisions must be made with a focus on the long run.  Seeking to avoid the impact of short-term variability (“market timing”) never works – don’t try it.  However, maintaining a long-run discipline is difficult in the face of the constant noise surrounding market ups and downs.  It would be comforting if we knew just how long we have to wait for the long run. 

Let’s see if some past history provides any insight.  We can define the long run as the period of time over which the actual average return equals what we expected.  We can add some numbers.  The average return from the S&P 500 after inflation over the past 44 years is 7.6%.  By assuming market participants eventually realize what they expect, we can use this number as a proxy for what is expected for taking the risk inherent in the S&P 500.  Long-term Returns of S&P 500 less CPI Periods Ending March 2014In the chart at right I have tracked average returns from the S&P 500 less inflation over both a trailing 10-year period and a trailing 20-year period to see if over these periods the actual average return is close to 7.6%.  Note that there is considerable variability over the 10-year period which is reduced when the period is stretched to 20 years.  Yet there is significant variability in the 20-year period as well.  Neither 10 years nor 20 years have been long enough for investors to have realized the 44-year average return, which we use as a proxy for expectations.

The primary implication of the data in this chart is the idea that the long run does not lend itself to a specific time period.  It shows that just because the average result for a prior 10-year period was negative does not mean this is what can be expected over the next 10 years.  Even 20 years is not long enough for average returns to equal what might be expected.  Making investment decisions for the long run is based on expectations as well as knowing the variability around those expectations that we will encounter through time.  We must avoid the urge to extrapolate any past history into the future, even if those results are for as long as 20 years.

Does hiring an investment advisor improve your portfolio returns?  This question is often on the minds of our clients or prospective clients.  The value of an advisor is often easier to describe than define numerically.  Many clients find value in hiring an advisor to provide “peace of mind” and comfort that a professional is watching over their portfolio.  This value can be difficult to quantify because it varies by client. 

Value measurement – What is Alpha?
Investors have many tools available to evaluate the performance of portfolio managers.  One such tool is the Jensen Measure, named after its creator, Michael Jensen.  The Jensen Measure calculates the excess return that a portfolio generates over its expected return.  This measure of return is commonly known as Alpha.  Alpha is an elusive quality.  Very simply put, it is the ability to beat an index fund without adding risk to a portfolio. Investment managers are always seeking it but rarely sustain it.

The academic evidence strongly suggests that delivering above-average returns without adding additional risk is extremely difficult or nearly impossible in the long run.  However, most of what we read in the business news or watch on TV is directly aimed at uncovering the elusive manager able to “beat the market” and deliver consistent Alpha to investors.  The fixation on market beating returns has often led to dire results for the average investor. 

About 3%
So how does an investor measure the value of