Author Archives: Edward Brownlee

Bond Market Volatility

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A bond is a loan made to a corporation or government in exchange for regular interest payments. The bond issuer agrees to pay back the loan by a specific date. Bonds can be traded on the secondary market. The bond market is usually where investors venture when looking for stability, security, and a lower risk profile as a part of their investment portfolio.

What happens in the bond market has real implications for equity investors and for the economy in general. A bond essentially represents an IOU—a promise to repay a loan on a certain date, along with specified interest payments along the way.

Prices and interest rates for an individual bond depend on a variety of factors, including positive or negative news about the issuer or changes in its credit rating.

But at a higher level, returns in the bond markets are much more related to interest rate changes—and perceptions about what will happen to interest rates in the future. When interest rates fall, the prices of existing bonds go up. And when interest rates rise, the opposite happens: If your loan is earning you less money than someone could make by giving a brand-new loan, they’re going to pay less to buy your loan. This creates volatility in the bond market.

However, the volatility seen in the bond market in the recent short term hasn’t been seen in decades.

Volatility has returned to the bond sector. And, some of the “rules” that have held true in the bond market for decades have been overturned. For example, early last month in March 2023, the year U.S. Treasury bond yield briefly ticked above 5%, which is the highest it had been in more than 15 years. A couple of weeks later it was back below 4%.

In early March, Fed Chair Jerome Powell stated in testimony before Congress that the peak Fed Funds Rate was likely to be higher than many initially expected, explains Collin Martin, director and fixed income strategist, Schwab Center for Financial Research. And when Powell suggested that, investors began to act, and they sent up treasury yields to where they expected the Fed Funds Rate to reach down the road. Now, like most investments, yield comes down to supply and demand. And following the comments from Powell, treasury investors demanded higher yields then, in the short term, so that they weren’t stuck holding investments with lower yields if the Fed did hike more than they initially anticipated.

The dynamics changed pretty suddenly with the collapse of Silicon Valley Bank pulling down yields sharply, because of concerns about financial stability, Collin stated.

Now, the Fed has a dual mandate of price stability, which can be considered inflation, and maximum employment. But the Fed also has an unofficial mandate of financial stability, and the collapse and failure of a few banks led to concern that stability could deteriorate.

So investors totally shifted their expectations for Fed policy, and instead of expecting a peak rate of 5-1/2% or more, expectations were that the peak rate might only be 5% or so. In fact, bpnd investors weren’t even sure if the Fed would hike at all going forward, and they began to price in rate cuts sooner than expected. Now, if the Fed was only expected to hold its rate at 5% or so, and then cut it soon, investors pulled down those expectations and were willing to accept a lower yield and lock in that lower yield for certainty rather than risk what happens if the Fed cuts rates down the road. And that’s what pulled their prices up and yields down because of those expectations.

References:

  1. Volatile Bond Market Signaling Changes to Economy podcast transcript, Charles Schwab WashingtonWise, April 6, 2023.
  2. https://investor.vanguard.com/investor-resources-education/portfolio-management/bond-markets#modal-bond

Successful Investor’s Psychological Mindset

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“Doing well with money isn’t necessarily about what you know. It’s about how you behave. And behavior is hard to teach, even to really smart people.” ~ Morgan Housel, The Psychology of Money

Individuals must understand that there is a psychological mindset that the successful investor tends to have.

The successful investor will focus on probabilities, intrinsic values and safety of margin while letting decisions be ruled by rational, as opposed to emotional, thinking.

Investors’ emotions are their worst enemy.

The psychology of money is the study of our behavior with money. Billionaire investor Warren Buffett contends that the key to overcoming emotions is being able to retain your belief in the fundamentals of the business, and not get too concerned about the stock market price.

Investors should realize that there is a certain psychological mindset that they should have if they want to be successful, and try to implement that mindset. Dave Ramsey has said that building wealth is “20% head knowledge and 80% behavior.”

Value investing mindset

Value investing derives the intrinsic value of a common stock independent of its market price. By using a company’s factors such as its free cash flow, earnings, return on invested capital, and dividend payouts, the intrinsic value of a stock can be found and compared to its market value. If the intrinsic value is more than the current price, the investor should buy and hold until a mean reversion occurs.

Mean reversion is the theory that over time, the market price and intrinsic price will converge towards each other until the stock price reflects its true value. By buying an undervalued stock, the investor is, in effect, paying less for it and should sell when the price is trading at its intrinsic worth. This effect of price convergence is only bound to happen in an efficient market.

The fundamental principle of value investments lies in the ability of the markets to eventually correct to their intrinsic values. Common stocks are not going to remain inflated or bottomed-out forever despite the emotions and irrationality of investors in the market.

References:

  1. https://www.investopedia.com/terms/b/bengraham.asp
  2. Morgan Housel, The Psychology of Money. Harriman House, Great Britain, September 8, 2020.
  3. https://www.amazon.com/gp/product/0857197681/ref=as_li_tl_nodl?

Contrarian Investing

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“The way to make money is to buy when blood is running in the streets.” ~ John D. Rockefeller

Contrarian investing believes that the worse things seem in the market, the better the investing opportunities are for profit.

Contrarians, as the name implies, try to do the opposite of the crowd. They get excited when an otherwise good company has a sharp but undeserved drop in share price. They swim against the current and assume the market is usually wrong at both its extreme lows and highs. The more prices swing, the more misguided they believe the rest of the market to be. (For more on this, read “Finding Profit In Troubled Stocks.”)

Bad Times Make for Good Buys

Contrarian investors have historically made their best investments during times of market turmoil. In the crash of 1987, the Dow dropped 22% in one day in the U.S. In the 1973-’74 bear market, the market lost 45% in about 22 months. The terrorist attacks of Sept. 11, 2001, also resulted in a major market drop. Those are times when contrarians found their best investments.

The 1973-’74 bear market gave Warren Buffett the opportunity to purchase a stake in the Washington Post Co. at a deep discount (the company could have “sold the [Post’s] assets for not less than $400 million.” Meanwhile, the Post had an $80 million market cap), an investment that has subsequently increased by more than 100 times the purchase price–that’s before dividends are included.

Sir John Templeton, founder of the Templeton Growth Fund, was also a serious contrarian investor, buying into countries and companies when, according to his principle, they hit the “point of maximum pessimism.”

As an example of this strategy, Templeton bought shares of every public European company at the outset of World War II in 1939, including many that were in bankruptcy. He did this with borrowed money. After four years, he sold the shares for a very large profit.

But there are risks to contrarian investing. While successful contrarian investors put big money on the line, swam against the current of common opinion and came out on top, they also did some serious research to ensure the investing herd was indeed wrong.

So, when a stock takes a nosedive, this doesn’t prompt a contrarian investor to put in an immediate buy order, but to find out what has driven the stock down and whether the drop in price is justified.

While successful contrarian investors have their own strategy for valuing potential investments, they all have the one strategy in common–they let the market bring the deals to them, rather than chasing after them.

References:

  1. https://www.forbes.com/2009/02/23/contrarian-markets-boeing-personal-finance_investopedia.html

Social Security Benefits for Children

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In October of 2022, more than 3.8 million children received Social Security benefits because one or both of their parents are disabled, retired, or deceased. These benefit payments to children total more than $2.6 billion every month.

Sadly, many children don’t get the benefits for which they are eligible, writes Devin Carroll.  Most people don’t know about the qualifications and rules for this special benefit, so they don’t know to apply for the children in their lives.

Who Is Eligible for Social Security Benefits for Children?

A child who is your biological child, adopted child, or dependent stepchild  is eligible for children’s benefits if:

  • you become disabled
  • you retire
  • you die
  • and, the child is:
    • unmarried, and
    • under age 18, or
    • 18 or 19 if a full-time student in secondary school through grade 12 (see note below), or
    • 18 or older and disabled with a disability that started before age 22.
      Note: A 2022 report by the Office of the Inspector General found that the Social Security Administration erroneously terminated the benefits of students who turned 18. 

How Much Is The Benefit?

If you become disabled or retire, your qualified child is eligible for up to 50% of your full retirement age benefit.

If you have kids at home, and are thinking about filing for Social Security, filing early before full retirement age (RFA) could make more sense because your children cannot collect a Social Security benefit until you file.

Consider the difference in lifetime benefit amounts for a couple with the following circumstances.

Roger is 62 and his wife is 46. They have two kids at home, ages 8 & 10.  Roger is financially well off enough to stop working and can be flexible on what age he begins to collect Social Security.

If Roger waits until his full retirement age, he’ll get $2,000 per month. If he files now, he’ll only get $1,500 per month.   He ran the numbers and figured out that if he lived to 90, he’d receive an additional $70,000 in benefits for delaying filing until 66 instead of filing at 62.

For most people, this math shows that it makes sense to delay receiving benefits. However, this does not account for the benefits paid to the children. While the children are eligible for benefits based upon Roger’s retirement, the kids cannot get benefits until he files.   Roger’s family would be able to collect thousands of dollars more in lifetime benefits if Roger files early and turns on the benefits for his children.

Here’s how…

If you run Roger’s full retirement age benefit through the family benefit calculator, you’ll arrive at a maximum benefit of approximately $3,500 . If Roger files at 62 he’ll receive $1,500 and each of his children would be eligible for $1,000 in children’s benefits. That additional $2,000 per month ($1,000 for each of the children) is only available if Roger files for Social Security.

Whenever a minor child receives a Social Security benefit, the Social Security Administration pays the benefit to a representative payee or  a parent (or legal guardian) who is responsible for managing the benefits on behalf of the child.

Before a recent law change, all representative payees were required to file an annual report. However, due to a recent change in the law, the SSA no longer requires most parents or guardians to complete an annual Representative Payee Report.

Even though the SSA doesn’t require an annual reporting, they do have the following cautioning language. “All payees are responsible for keeping records of how the payments are spent or saved, and making all records available for review if requested by SSA.”

If you haven’t spent all the money, the SSA will require you to send it back to them when your child turns 18. This is because your child is considered an adult in their eyes and they will begin to deal directly with them.

References:

  1. https://www.socialsecurityintelligence.com/social-security-benefits-for-children/#more-2900

Mindset, Believing and Behavior Matters

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Your mindset is everything. Believe you can and you will! What you believe and think you become. 

Not everyone is going to believe in you and that’s okay. At the end of the day the only thing that really matters is that you believe in yourself. So, it’s essential to believe in yourself and to have faith in your own abilities. “Believe you can and you’re halfway there,” stated Theodore Roosevelt. His words remind us of the power of self-belief.

When we believe in ourselves, we unlock a world of possibilities and potential. It’s easy to get discouraged by the challenges we face, but with a positive mindset and unwavering determination, we can overcome them.

“Champions behave like champions before their champions: they have a winning standard of performance before they are winners,” writes Bill Walls.  Effectively, champions behave and believe they are champions first, and success comes later. They adopt a champion’s mindset.

As in sports, belief and behavior matter with respect to building wealth and achieving financial freedom. Your mindset is everything. When you face challenges with a positive mindset, you open up a world of possibilities. Believe in yourself, have faith in your abilities, stay resilient, and you can accomplish anything.

“Leaders are not made in smooth seas when everything is going well. It’s easy to lead when you are winning. Leaders are made in the storm. No one is born though. Toughness is built in the struggle,” explains Julie Fournier. Neither is building wealth and achieving financial freedom.  Successfully and patiently navigating market volatility and economic turmoil requires a positive mindset, believing wealth and freedom are achievable, and possessing disciplined financial behavioral skills.

“Your mindset is everything. It shapes your thoughts, your actions, and ultimately your life. A positive mindset can help you overcome obstacles and achieve your goals. So, take a deep breath and remind yourself that you are capable of great things!” –  Unknown

What you focus on is what you will find and what you believe you will achieve. Believe in yourself and your abilities, and you’re already halfway to success. Keep pushing forward and never give up!

References:

  1. https://www.psychologytoday.com/us/blog/seeing-what-others-dont/201605/mindsets

The Best Filing Age for Social Security Benefits

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Filing for Social Security benefits at age 62 can offer a greater financial benefit in tax savings and capital accumulation than filing at 70 in the right circumstances, states Devin Carroll, author of “Social Security Basics: 9 Essentials That Everyone Should Know”l

There are several factors or variables you should consider:

  1. You want to make sure your money is going to last throughout your 30 years or more of retirement
  2. You want to make sure your Social Security filing decision is coordinated with your other financial assets and income
  3. You want to know if a Roth conversion would work for you (and how much to convert)
  4. You need a better estimate of a year-by-year retirement income plan
  5. You want to make sure that your retirement income strategy won’t cost you unnecessary local, state and federal income taxes
  6. You want to make sure you understand the right sequence to access your taxable, deferred and Roth retirement accounts

 

Faith

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“Faith is the first factor in a life devoted to service. Without it, nothing is possible. With it, nothing is impossible.” ~ Mary McLeod Bethune.

Faith is the substance or assurance of things we hope for, but have not yet received. Faith (confidence, belief, trust) is also our evidence of that which is not seen—the invisible spiritual things.

Faith comes before a prayer is answered or before an individual has received what he or she has requested from God. If we have received what we asked for, then faith is not needed.

An example of faith was demonstrated by educator Mary McLeod Bethune who was quoted as saying: “I considered cash money as the smallest part of my resources [for starting the school for Negro girls]. I had faith in a loving God, faith in myself, and a desire to serve.”

“Now faith is the substance of things hoped for, the evidence of things not seen.” ~ Hebrews 11:1,

Keys to Building Wealth

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The wise man saves for future days,
Delaying pleasure in frugal ways,
Building wealth with each coin saved,
A future secure, a life well paved.

Achieving financial freedom and building wealth require a combination of the right mindset, focus, self-discipline, patience, gratitude and knowledge. “The freedom to do what you want, when you want, with whom you want, for as long as yo want, is true freedom,” says Morgan Housel, in The Psychology Of Money.

The six keys to building wealth over the long term are mindset, focus, discipline, patience, knowledge and gratitude. A seventh key is health.

It’s effectively about your mindset. Wealth is achieved by habitually investing in yourself first and foremost. Winning at finance and at life is 80 to 90 percent habit/behavior and 10 to 20 percent knowledge/skill. Knowing what to do isn’t the problem; actually doing it is. Most of us know what to do, but we just don’t or won’t do it. If you can control the person in the mirror, you can be fit and wealthy.

Once you adopt the mindset of the individual you aspire to become, there are no limits to what you can achieve.

Once you realize that everything in this life is but a thought, mindset and resulting habits, you are guaranteed to alter your life’s trajectory. “Doing well with money has a little to do with how smart you are and a lot to do with how you behave,” explains Morgan Housel, in The Psychology of Money

Be disciplined enough to delay instant gratification while building wealth. “Rich is the current income. Wealth is income not spent. Wealth is hard because it requires self-control,” concludes Morgan Housel, in The Psychology of Money. The truth is that wealth is what you don’t see. Wealth is the nice cars not purchased. The diamonds not bought.

Careless spending and a conspicuous consumption lifestyle make you a slave to capitalism, while saving and investing in assets builds wealth. “Spending money to show people how much money you have is the fastest way to have less money,” writes Morgan Housel, in The Psychology of Money.

Building wealth requires a long-term perspective and a willingness to make sacrifices in the present for future benefits.

Final key point, getting healthier should be equally as important as building wealth. It is stated repeatedly and for a very good reason that “health is wealth”.

References:

  1. Morgan Housel, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness, September 2020.
  2. https://www.sloww.co/psychology-of-money-book/