Thursday, December 28, 2017

Bitcoin Mania in 2017

Pathways Advisory Group, Inc.
      Evon Mendrin

“People get excited from big price movements, and Wall Street accommodates” – Warren Buffett 

Boy have we seen big price movements! 2017 showcased our President’s dramatic first year in office, Congress passing Tax Reform by Christmas (sure to be 2018’s new hit holiday jingle), and media coverage of one “all-time stock market high” after another. But the trendiest story just might be the sudden rise of bitcoin.

Hovering around $900 in January, the price of one bitcoin suddenly skyrocketed to roughly $2500 mid-year and off to $15,883 in late December! That’s a near one-year climb of over 1400%!1

Likely to be locked in as the hottest water-cooler topic of 2017, some investors are rushing to buy this cryptocurrency. Some have even taken out mortgages, run up credit cards, and turned to equity lines. With all of the press and attention, do bitcoins have a place in a well-diversified portfolio? We don’t believe so.

First – what is it?

Simply put, bitcoin is a created digital currency. Launched in 2009, it works on a peer-to-peer system without using an intermediary. Meaning, you can create transactions without using a financial institution – such as a bank – as the middle-man. The transactions are recorded on a public ledger called blockchainIts supporters claim it is a more secure, private, and cost-effective way to transact business.2

Why not jump in?

Any reasonable investment worth considering for your portfolio should carry a positive expected return. That is, there is an inherent value in the investment that will provide some future cash flow or higher value in the future.

Stocks, for example, are partial ownership in companies. These businesses produce products and services that people are willing to pay for. They have leaders, employees, and the power of their brands. These valuable aspects work to bring in cash flow (revenue). Profits can then be paid out to shareholders as dividends or reinvested into the business. Owning the stock of a company gives you a right to that future cash flow and business growth.

Bonds give you a promised future cash flow. When you buy a bond, you lend a company or government money, and they promise to pay you back with interest.

Both of these investments give you an expected return and the means for investors everywhere to reasonably value them. A globally diversified portfolio of stocks and bonds allow you to benefit from the cash flow and growth of businesses all over the world.

Bitcoin, however, does not provide a positive expected return. It doesn’t produce anything of value. Like a nugget of gold, or the dollar bill in your wallet, if you leave a single bitcoin in your digital wallet, a year later you will still have a single bitcoin. It won’t multiply into more bitcoins, and it won’t pay any additional cash.

The price is driven entirely by supply and demand. Meaning, a positive return only occurs when someone else comes along later and buys it for more than you paid. You have to hope the frenzy continues. But what happens when there’s no one left willing to pay $15,000 for a single bitcoin?

What about its actual use as a currency?

Holding a currency such as cash in a portfolio is not for maximizing return but for handling short-term expenses. Bitcoin is not currently very useful as a currency. It isn’t widely used or accepted, goods and services aren’t widely priced in bitcoin, and it’s extremely volatile.

So, what’s the reason for all this mania? Likely pure speculation. It’s the hottest thing, and no one wants to be left out. We are hooked by the glamour of digital currencies and stories of overnight millionaires.

The blockchain technology behind it may be of great use, and its use as a currency in the future is a different debate entirely. But bitcoin today is far from a usable asset or currency.

Remain disciplined with your investments as the year comes to a close. Always start with your goals and have an understanding of how your investments work. Remember the basic foundation of what drives returns over time – expected future cash flow. When it comes to cryptocurrencies, it’s the wild west out there. We urge you to stay indoors, hide the children, and wait for the mess to be over.

We wish you Happy Holidays and great success in meeting your financial goals in 2018 (and beyond)!

1Daily prices through 12/26/2017 from CoinDesk.
2See for detailed information on how it works. 

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Friday, December 8, 2017

Tax Reform a MONUMENTAL Task

Pathways Advisory Group, Inc.
      Dustin J. Smith, CFP®

As you may have heard, Congress is working towards a Tax Reform bill to take effect in 2018.  I’m not ready to use terms like tax relief or tax cuts but both proposals favor simplifying the tax code - a monumental task.  There’s work to be done, but there appears to be enough momentum (House and Senate bills must merge through conference committee, pass the House and Senate and the President must sign) to take a look at some key provisions and a few differences:

Lower Tax Rates and end of The Alternative Minimum Tax – Both tax bills (House and Senate) favor lower tax rates and an end to the Alternative Minimum Tax, but there are a few differences:

Difference:  The House tax bill repeals the Alternative Minimum Tax entirely but a last minute change to the Senate tax bill only lessened the bite (impacting fewer taxpayers).  

Difference:  The Senate tax bill lowers tax rates but doesn’t reduce the number of tax brackets (seven).  The House tax bill lowers tax rates and simplifies tax brackets extensively (down to just four).

Fewer Itemized Deductions offset by an increased Standard Deduction – Both tax bills support an increased Standard Deduction (roughly doubling it) offset by fewer potential itemized deductions (only beneficial to the extent greater than the Standard Deduction).  However, there are (again) some differences:

Difference:  The House tax bill reduces the eligible mortgage interest (itemized) deduction to interest paid on balances up to $500,000 (for new mortgages), while the existing mortgage interest (itemized) deduction limit remains unchanged in the Senate tax bill.   

Difference:  The (itemized) deduction for medical expenses is retained in the Senate tax bill but eliminated entirely in the House tax bill.

Replacing Exemptions with an increased Child Tax Credit – Both tax bills suggest replacing personal exemptions with lower tax brackets (to simplify) and an increased Child Tax Credit. 

Difference:  The Senate tax bill phases the child tax credit out at $230,000 of income while the House tax bill does so at $500,000 of income.

Difference:  The child tax credit itself differs too ($1,600 tax credit per child in the House tax bill and $2,000 tax credit per child in the Senate tax bill).

Estate Tax Exemption and Gift Tax Exclusion – We appear to be headed for an increase to the Estate Tax Exemption (amount you can transfer free of Estate Tax) and no change to the Gift Tax Exclusion (amount you can gift per individual, per year, without any Gift Tax filing implications).

Difference:  Both tax bills roughly double the Estate Tax Exemption (to $11,000,000), but the House tax bill goes one step further by eliminating the Estate Tax entirely in 2024.

The impact of 2018 Tax Reform will vary by taxpayer.  Taxpayers who don’t typically take the itemized deduction (or barely do), stand to benefit quite a bit.  The fate of taxpayers who typically take advantage of numerous itemized deductions (especially California taxpayers, with elimination of the deduction for state income taxes paid in both tax bills), will have to wait for the final merged tax bill.  Either way, if/when the rules change, we will look to interpret, adjust and clarify opportunities the same way we always do. 

Dustin J. Smith, CFP®

The above explanation is summarized and generic.  Please consult your tax professional with any specific questions and take a look at this summary from for a more comprehensive look at Tax Reform.  Feel free to play around with this calculator too.  

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Thursday, November 30, 2017

Catchphrase Investing

Let's face it - we love catchphrases. They're easy to remember, easy to talk about, and easy to follow along with. The investment world is full of them - FAANG, the Nifty Fifty, the dot-coms, BRICs - capturing the hot takes and hottest investments of the time. They get us excited, ready to jump on board and to hunt for the next group. Who doesn't want a piece of today's hottest stocks?

Should we be shifting our investments to each day's hottest acronyms? In this guest post, Dimensional Fund Advisors' Jim Parker touches on how to respond to today's (and tomorrow's) investment catchphrases. 

Jim Parker
Outside the Flags
Vice President

The financial media is drawn to catchphrases, acronyms, and buzzwords that can be sold as the new thing. FAANG (Facebook, Apple, Amazon, Netflix, and Google) is the latest of these. But does this constitute an investment strategy?
For journalists, commentators, and marketers, acronyms like FAANG are useful. They fit easily into headlines and they appeal to a feeling among some investors that their portfolios should match the “zeitgeist” or spirit of the age.

But as we’ll see, investment trends tend to come and go. This is not to downplay the transformative nature of new technologies and the possibilities they present. But as an investor, it is wise to recall that all those hopes and expectations are already built into prices.

The FAANG acronym has become particularly popular in 2017 as returns from the five members of the unofficial club have far outpaced the wider market. Exhibit 1 shows the total year-to-date returns of the FAANG members compared to the S&P 500.
Such is the public interest in the tech giants that the parent company of the New York Stock Exchange recently launched the NYSE FANG+TM Index that includes the quarterly futures contracts of the FAANG members apart from Apple (hence only one “A”), plus another five actively traded technology growth stocks.

So, does this mean, as some media gurus suggest, that you should reweight your portfolio around these tech names? After all, these companies have fundamentally reshaped traditional sectors like newspapers, television, advertising, music, and retailing.

For investors, there are a few ways of answering that question, none of which involve denying the significant influence Facebook, Amazon, Apple, Netflix, Google, and other technology names are having on our lives.

Firstly, market leadership is constantly changing based on a myriad of influences, including shifts in the structure of the global economy, commodities, technology, demographics, consumer tastes, and supply factors. Trying to build an investment strategy by anticipating these forces is like trying to catch lightning in a bottle.

In the 1960s, the then often-quoted Nifty Fifty of solid, buy-and-hold blue-chips included such names as Xerox, Eastman Kodak, IBM, and Polaroid, all of which were disrupted in one way or another by newer, more nimble competitors in the following decades.

By the late 1990s, the media was full of stories about the dot‑coms, companies that were building new businesses using the transformative power of the internet. A handful of those companies (Amazon, for instance) fulfilled their promise. Many others (retailer, prototype social network, and pet supplies firm were just three examples) crashed and burned.

In the mid-2000s, the focus turned to companies with a large exposure to the so-called BRIC economies, an acronym based on the fast-growing emerging economies of Brazil, Russia, India, and China.

Several financial services companies even set up BRIC products, with mixed degrees of success. One investment bank, having argued that the superior growth for emerging economies justified a bias to stocks exposed to these markets, ending up closing its BRIC fund in late 2015 after years of poor returns.1

So, while individual sectors each can have their time in the sun, it is not clear that weighting your portfolio toward an industry currently in favor is a sustainable long-term strategy.

A second way of looking at this issue is that accepting it is difficult to pick winning sectors does not mean you should exclude these zeitgeist stocks in a diversified marketwide portfolio. You can still own them, but you do so by casting a much wider net.

The more concentrated the portfolio, the more you are exposed to idiosyncratic forces related to individual stocks or sectors. Being highly diversified means you can still benefit from the broad trends driving technology or whatever is leading the market at any one time, but you are doing so in a more prudent manner.

Put another way, by diversifying you are not only reducing the risk of placing too much of a bet on one sector, you are improving the odds of holding the best performers. Look at Exhibit 2, which shows what would have happened if you had excluded the top 10% and top 25% of market performers in a global portfolio from 1994–2016.

We’ve seen that even professional investors can find it tough to pick which sector will lead the market from year to year.

It’s true that technology companies like Amazon and Facebook have performed well recently. But it is worth recalling that current prices already contain future expectations about those companies. We don’t know what future prices will be because these will reflect information we haven’t received yet. Because no one has a reliable crystal ball, a better approach is to diversify. That way we increase the odds of being positioned in the next big winning sector without chasing hot trends or latching on to cute‑sounding acronyms.

1."Goldman Closes BRIC Fund," The Wall Street Journal, November 9, 2015.
2.The “All stocks” portfolio consists of all eligible stocks in all eligible developed and emerging markets. The portfolio for January to December of year t includes stocks whose free float market capitalization as of December t-1 is greater than $10MM in developed markets and $50MM in emerging markets and with non-missing price returns for December of year t-1. Annual portfolio returns are value-weighted averages of the annual returns on the included securities. The portfolios “Excluding the top 10%” and “Excluding the top 25%” are constructed similarly. Individual security data are obtained from Bloomberg, London Share Price Database, and Centre for Research in Finance. The eligible countries are: Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Republic of Korea, Malaysia, Mexico, Netherlands, New Zealand, Norway, Peru, Philippines, Poland, Portugal, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Kingdom, and the United States. Diversification does not eliminate the risk of market loss. Past performance is no guarantee of future results.

Dimensional Fund Advisors LP ("Dimensional") is an investment advisor registered with the Securities and Exchange Commission.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This content is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

Monday, November 20, 2017

Holiday Office Hours

Pathways Advisory Group, Inc.
The Pathways Advisory Group, Inc. office will be closed for 
the following holidays:

Closed at Noon - Wednesday, November 22nd, 2017
Thursday, November 23rd, 2017
Friday, November 24th, 2017
Monday, December 25th, 2017 
Monday, January 1st, 2018 
Monday, January 15th, 2018
Monday, February 19th, 2018
Friday, March 30th, 2018
Monday, May 28th, 2018
Wednesday, July 4th, 2018
Monday, September 3rd, 2018

In case of an emergency, 
please contact Schwab directly at 1(800) 435-4000.

Happy Holidays!

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Thursday, September 14, 2017

Equifax Data Breach

Pathways Advisory Group, Inc.

By now, you’ve likely heard about the data breach at Equifax. From May through July, Equifax - one of the three major credit bureaus - experienced a breach in data affecting at least 143 million people.  For information on this breach, please visit the Federal Trade Commission’s website here.  You can also check for updates directly from Equifax here, including whether you were potentially impacted.

Equifax is offering a free 1-Year subscription to TrustedID.  You can see the details of the program here.

We’ve written about credit and identity protection in the past.  Jeff’s blog post, Credit Protection, highlights freezing your credit among a other key ways to protect your information.  Leslie’s post, 10 Steps to Protect Your Identity, outlines other valuable options available to you. 

While many credit card companies and banks notify their customers of suspicious activity, proactively taking a few of the steps above can make a huge difference in keeping your identity secure. 

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Friday, September 1, 2017

Marshmallows and Retirement

Back in the 1960’s, Walter Mischel, a psychologist, studied preschool children to assess the level of self-control they possessed. Using marshmallows, he placed one on a plate in front of each child. He then left, but before doing so, gave each child the same two choices: either eat the marshmallow, or wait 15 minutes until he returned. If the child was able to wait, he would receive two marshmallows (Delaying Gratification, n.d.). 

Only about a third of the children could wait the full 15 minutes. Why? Willpower and impulsiveness are the two competing cognitive processes that come into play. Willpower is based on a person’s strategic planning, while impulsiveness comes more from a person’s emotions (Delayed Gratification, n.d.). If a person employs willpower in a situation, it decreases the chances of submitting to impulsiveness in the next situation. In other words, a person must practice willpower to have willpower.

We see our clients practice willpower every day in order to save for a comfortable retirement. Younger clients are typically in the midst of buying a house, having children, and achieving career goals. It’s sometimes harder for this generation to save towards their retirement goals. But, if possible, it does have a significant effect on portfolio size at retirement. How much? See the following spreadsheet from our website's Young Investors page

Ben’s willpower to save those first ten years made a huge difference! In addition, isn’t it a little crazy how compounding interest can substantially increase our savings over time? The point: Today’s choices completely affect our future.

So, what happened to those preschoolers? Mischel tracked down nearly 60 of those original subjects more than thirty years later. The children who had exhibited high self-control remained that way throughout life, and vice versa. The higher self-control group led healthier lifestyles, received higher SAT scores, and had higher income (Konnikova, 2014).

Later in life, Mischel addressed some worried parents. He explained that children who fail The Marshmallow Test need to practice. Start out small, a few minutes maybe, and increase the time slowly (Konnikova, 2014). After all, 15 minutes is a long time for a little kid.

Remember: Practicing willpower builds willpower. Whether it is marshmallows or regular savings, willpower pays off.

Also, if you would like to see children take The Marshmallow Test, check it out here on YouTube. It’s quite entertaining.

-Written by Katie Nelson from our March 2016 Client Newsletter Article.


Delaying gratification (n.d.). American Psychological Association. Retrieved from

Konnikova, M. (2014). The struggles of a psychologist studying self-control. The New Yorker.

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Friday, August 18, 2017

What’s your Money Mind®?

Pathways Advisory Group, Inc.
      Dustin J. Smith, CFP®

Is there a particular money paradigm that drives your financial decision making? If so, what is it and where does it come from? When your thoughts are consumed by this dominant Money Mind®, how does it ultimately shape the decisions that you make?

Take this brief quiz for a little insight.

According to the source of the Money Mind® quiz, while each of us has traits of all three money minds (The Protector, The Giver and The Pleasure Seeker) one of the traits routinely dominates. This makes a lot of sense. We seem to shift back-n-forth (between money minds) depending on the circumstances, but most of us default to a particularly dominant money paradigm. However, as you read at the end of your quiz, it’s not beyond your control. With awareness and lots of clarity (e.g. life goals projections), you can cultivate your less dominant money mind(s) and live a more balanced financial life.

Dustin J. Smith, CFP®

As described in this previous post, understanding the role of money in your life can be very helpful in achieving financial clarity. For another take on the Money Mind® quiz, view this post from Forbes online.

Source: United Capital Financial Advisors, LLC.

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Thursday, August 3, 2017

Brokers and Fiduciaries, Butchers and Dietitians

Pathways Advisory Group, Inc.
Evon Mendrin

America’s brokers and financial representatives giving advice on retirement savings accounts are finally required to act as fiduciaries.

The U.S. Department of Labor’s Fiduciary Rule partially came into effect on June 9th after much delay and not without a fight.  The rule requires financial professionals working with retirement accounts – such as IRAs – to work in their clients’ best interests rather than simply finding “suitable” investments. Now, there’s a higher level of accountability and conflicts of interest are to be disclosed. (See here for more detail on the law).

While this may seem like an obvious thing for someone in that position to do – and I’ve personally known many brokers and reps to work under that principal – they were not required by law to do so!

If you’re not entirely sure what that means or how it affects you, you’re not alone. A recent survey by Financial Engines shows 93% of Americans think financial advisors should be legally required to put their clients’ interest ahead of their own. However, 53% mistakenly believe that all financial advisors are already required to do so.

It’s not entirely the clients’ fault. A great issue in the financial services industry and the planning profession is that confusion abounds. Everyone uses the same terminology – broker, representative, advisor, planner, fee-based, fee-only – it’s easy to think everyone’s the same. However, there are many differences.

Some may say the law is not quite enough, as it only includes retirement accounts (what about every other part of your financial life?). It's not perfect, but it could be a step in the right direction.

As a fee-only financial planning firm, we’re proud to have served as fiduciaries all along. The best thing you can do for yourself is to know the professionals you work with (or want to work with).  See our Searching for an Advisor page for more information on different types of financial professionals and business models – from commission-only to fee-only and everything in between.

Lastly, the video below, courtesy of Hightower Advisors, gives a great overview of the simple differences between a broker and a fiduciary. Do you want to work with the butcher or the dietician? Ultimately it’s up to you and your situation, but an informed decision is the best decision.

(Credit: Hightower Advisors, YouTube)

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Thursday, July 20, 2017

Costs Matter!

Pathways Advisory Group, Inc.
Dustin J. Smith, CFP®

People rely on a lot of different information about costs when making any major financial decision. Whether you’re buying a car or selecting an investment strategy, it’s important to be informed about the costs. When you buy a car, as my wife knows all too well, you have to be patient and flexible to maintain purchase price leverage. However, the initial sticker price is only part of the overall cost of ownership. The sales tax, vehicle insurance, fuel efficiency, routine maintenance, and potential for unexpected repairs on the vehicle also need to be considered. Some of these additional costs are easily observed, while others are more difficult to assess. Similarly, when investing in mutual funds, many different variables need to be considered to evaluate how cost‑effective an investment strategy will be over time.

Many types of costs lower the net return of an investment strategy. One important cost to consider is the internal expense ratio of a mutual fund (returns to the investor are net of this internal cost). Similar to the purchase price of a car, this expense ratio tells you a lot about what you can expect to pay for an investment strategy. Exhibit 1 helps illustrate why expense ratios are important and shows how hefty expense ratios can impact performance.

This data shows that funds with higher average expense ratios had lower rates of outperformance. For the 15-year period through 2016, only 9% of the highest-cost equity funds outperformed their benchmarks. This data indicates that a high expense ratio is often a challenging hurdle for funds to overcome, especially over longer horizons. From the investor’s point of view, an expense ratio of 0.25% vs. 0.75% means savings of $5,000 per year on a $1 million account. As Exhibit 2 helps to illustrate, those dollars add up over longer periods.

Exhibit 1

Exhibit 2 

While the expense ratio is important to evaluate, what matters most when gauging the true cost‑effectiveness of an investment strategy is the “total cost of ownership.” Similar to the car example, total cost of ownership is more holistic than any one figure. It looks at things that are readily observable, like expense ratios, but also at things that are more difficult to assess, like trading costs and tax impact.

For example, while an expense ratio includes the fund’s investment management fee and expenses for fund accounting and shareholder reporting (among other items), it doesn’t include the potentially substantial cost of trading securities within the fund. Overall trading costs are a function of turnover (the amount of trading) and the cost of each trade. If a mutual fund trades excessively, costs like commissions and the price impact from trading can eat away at investor returns. Viewed through the lens of the car analogy, these costs are similar to excessively jamming your brakes or accelerating quickly. By regularly demanding immediacy when it may not be necessary, your vehicle experiences reduced fuel efficiency and additional wear and tear. These actions increase the total cost of ownership. Additionally, excessive trading within a strategy can lead to negative tax consequences for investors holding funds in a taxable account, which further increases the cost of ownership. The best way to decrease the impact of these trading costs is to avoid trading excessively and to effectively minimize the cost per trade. Employing a flexible investment approach, as described in this previous post, helps accomplish these goals by enabling more opportunistic execution.

The total cost of an investment strategy can be difficult to assess and requires a thorough understanding of costs beyond what an expense ratio can tell you. As you can see from this discussion, however, it’s worth the effort. These costs absolutely matter. A strategy that minimizes expense ratios, limits turnover and applies a flexible trading approach (only when the potential benefits of a trade outweighs the costs) has a clear advantage with time.

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The cost of advice, relative to the value realized, is an additional factor. There are many variations (both in services and costs). Each compensation model, investment philosophy and service model differs. There is a lot to consider. At the end of the day, it’s relatively simple - the benefits realized must outweigh the costs associated with the service. 

Source: Dimensional Fund Advisors LP

There is no guarantee investment strategies will be successful. Diversification does not eliminate the risk of market loss. Mutual fund investment values will fluctuate and shares, when redeemed, may be worth more or less than original cost. The types of fees and expenses will vary based on investment vehicle. Investments are subject to risk including possible loss of principal.

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

Thursday, May 18, 2017

Tax Form 5498

Have you received a tax form in the mail recently? If not, then disregard this post. If, however, you did receive a 2016 IRS Tax Form 5498 recently, do not panic. Form 5498 is generated by investment custodians every May for Traditional IRAs, Roth IRAs or Educational Savings Accounts with activity during the previous tax year and usually does not lead to an amended tax filing.

Tax Form 5498 is informational. The IRS reconciles this activity with your Tax Return. If you received this form, ask yourself: Did I contribute to a Roth or Traditional IRA last year? Did I roll money into an IRA last year? Did I contribute or initiate activity out of an Educational Savings Account last year? Did I convert IRA money to a Roth IRA last year? If any of this activity applies to you, you received Form 5498.

Contribution information is typically requested on an accountant's questionnaire. IRA rollovers and conversions generate a 1099-R. Either way, your accountant should already be aware of the activity. Then what should I do with my copy? In most cases, simply add it to your freshly started tax folder for 2017. As your accountant reviews next year's tax file, he or she can confirm that the activity was addressed.

The above explanation is summarized and generic. Please consult your tax professional with any specific questions.

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Friday, April 21, 2017


Pathways Advisory Group, Inc.
Dustin J. Smith, CFP®

Parenting is much harder than it looks.  I cannot recall an exact moment, but somewhere along the way, the questions got harder – and we’ve got a LONG way to go.

Kids-n-money, however, should be one topic we can handle.  I am, after all, a CERTIFIED FINANCIAL PLANNER™ professional.  Surely that counts for something.  I’ve got this one Teri….

The kids ask for stuff every time we shop.  Toys, treats, you name it, and the store layouts aren’t coincidental.  “No” doesn’t seem to deter them.

I know, let’s get piggy banks and give them a little money so they can decide for themselves.  That’ll stop them from asking for more stuff.  They will learn about money choices and experience why the answer is “no” when it’s all gone.  This piggy bank will be the perfect tool – they can pick their favorite style/color...

Two weeks later, when the piggy banks arrived, it was time to get started.

“Emilie, you still have fifty dollars from your birthday. I will trade you for five ten dollar bills so you can put some of it in the spend slot, some in the save slot, some in the invest slot and some in donate. The spend slot can be used whenever you want.  The save slot is for a spending goal in the future. The invest slot actually grows for you when you’re older and donate can be used to help other kids.”

Great speech Dad - really nailed it!

“Dad, I am going to put it all in the spend slot.”

Ok - not what I was expecting.

“Ok honey.  It’s your money.  You can put it in whatever slot you like, but, if you spend it all you won’t have any money left.”

That should do it.  It was a teaching moment.

“That’s ok Dad, I will have more birthdays.”

Dammit.  Good point kid.  It is birthday money after all; maybe I don’t have this one.


Humbled but never one to quit trying, we’ve been plugging away with the kids-n-money topic ever since.  We read an interesting book The Opposite of Spoiled and started a weekly allowance.  There have been some generous moments and lots of Legos (money smolders quickly in Bryce’s pocket).  Emilie turned out to be more of a saver (half way to a Penny skateboard purchase).  They have learned to make change and pay for things themselves.  However, they do still ask for stuff at the store.

I have no idea what parental challenge is coming next, but I do know that a kid-less beach vacation will help.  Time to call the Grandparents!!!!

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Friday, April 7, 2017

Warren Buffett’s Bet Shows the Market Wins, Again

Pathways Advisory Group, Inc.
Evon Mendrin, Paraplanner

If there’s one thing that’s been confirmed over and over in my few months at Pathways, it’s the undying belief that markets work. I’ve been baptized in the eternal optimism in businesses and the investment in those businesses as broadly and efficiently as possible.

Warren Buffett agrees – and 9 years ago a great bet was brought forth.

It was 2005 when the first challenge was announced by Buffett – he reminisced in his recent 2016 Letter to Shareholders that he boldly declared the following:

 “I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees.” 

Fast forward to 2008 – a contender emerged, and the heavyweight bout began.

Protégé Partners, LLC came forward – a New York City money management firm that runs funds of hedge funds. In other words, they create funds that invest in other (hedge) funds. Their skill is selecting the best hedge funds available for their investors, rather than running their own. In theory, they select the cream of the crop – able to produce positive returns through any market environment.

In Buffett’s corner is the simple Vanguard S&P 500 index fund. In the opposite corner is Protégé’s selection of 5 funds of hedge funds – the names of the funds not publicized but known by both parties.

The bet was simple – as told on, the host of the bet. “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.” The stakes, totaling $1 million at the end of the bet, goes to the winner’s choice of charity.

The challenge is, indeed, the challenge of passive investing vs. active investment management as a whole.  Buffett, often called the Oracle of Omaha, has long been critical of the active investment management industry and the fees charged in their services. Passive investors, he argues, will instead enjoy the growth of the market as a whole with minimal costs involved. As he states in his argument on Long Bets,

“A lot of very smart people set out to do better than average in securities markets. Call them active investors.

Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.”

He is especially critical of hedge funds – the supposed cream of the crop. The managers of these funds are supposed to operate at a level above traditional active management – enticing institutional and wealthy sophisticated investors to take the bait.

Nine years into the bet – who is pulling ahead?

As of February 25, 2017, the compound annual increase for the index fund was 7.1%. The collection of hedge funds? Only 2.2% compounded annually. To put that in terms of dollars - $1 million invested in the five hedge fund-of-funds would have grown to $1,220,000. The index fund would have grown to $1,854,000.

While there are 7 months left to the bet, we can assume Mr. Buffett’s charity of choice will be eagerly anticipating the mail come January 1st, 2018. As the Oracle concludes in his recent Letter,

“The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”

This bet highlights what we wholeheartedly believe – have faith in the markets. Have faith in businesses. Invest broadly and efficiently, without trying to select or time, and let the markets work for you over time. Focus your energy, instead, on other financial decisions important to your success. Your future self will thank you for it.


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