February 05, 2019 in Five, Five, Five | by Scott Wood

February 555: Return Expectations, College Insurance Plans, and Fiduciary Advice

In this edition of the 555, we take a look into the fears of an extended bull market, how the generation you fall in affects your market expectations, and why you need to consider an insurance plan when your kids leave for college. Enjoy! 

1. The Continued Fear and Loathing of this Bull Market 

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 Source: Bank of America Merrill Lynch

It might seem surprising that the S&P 500 continued to climb from its bottom in March 2009, during the Great Financial Crisis, given the global turmoil of the past 10 years. Based on the chart above, there were at least 22 reasons over the past 10 years, that investors could have chosen to stay out of the market. For 2019, we can add additional reasons: a global growth slowdown, Brexit, US-China trade negotiations, global debt levels, and Fed policy uncertainty. We could probably find more.

In a connected world, the headlines that appear to be risks often turn out to be opportunities, as they have for the past 10 years. This is a phenomenon prevalent through the history of the financial markets. “Headline risk” will likely only exacerbate one’s desire to seek safety with their investments. After December’s drawdown, the question became, “Is the bull market over?” While the answer is uncertain, the “wall of worry” market psychology will most certainly continue.

 

2. Return Expectations and Expectations Uncertainty

The Schroders Global Investor Study (GIS) 2017 February_2019_555_-_Draft_-_PD_Edits_-_Google_Docs
Source: Schroders and True North Advisors
 

What are your expectations for returns going forward? Depending on your generation, they might fall anywhere in the range of expectations presented above. But after a 10 year-long bull market, the important question is whether those expectations are realistic.

The chart below brings together the expected forward returns of various asset classes, calculated by six different asset managers:

February_2019_555_-_Draft_-_PD_Edits_-_Google_Docs 2

Source: Morningstar and True North Advisors

The expected returns of professionals and the expected returns of investors are not aligned, and not for the better. This is not an overly optimistic outlook. Even though these asset managers are forecasting lower returns, paradoxically, there remains a reason to be optimistic. The past 20 years have been the “worst years for compounded returns since the Great Depression” according to Nicholas Colas of DataTrek Research. As he points out, “Mean reversion should start to kick in,” which would mean that returns should increase towards their historical trailing 20-year average of 10.7% (CAGR). Investors are in an interesting situation because of conflicting forecasts: asset management firms are expecting lower returns for the next decade, given that valuations have been high and past returns have been low, but others like Colas, predict that the historically poor returns of the past 20 years will lead to higher returns in the coming two decades.

Setting appropriate expectations is one of the many difficulties of long-term investing because investors can find data to fit their narrative, but narratives do not equal certainty. The only solution to such uncertainty is diversification of asset classes within a portfolio, because it provides exposure and protection to any type of environment that the future may bring.

 

 

3. Considering Insurance Plans When Your Kids Go to College

February_2019_555_-_Draft_-_PD_Edits_-_Google_Docs 4Much goes into getting your high schooler ready for college. It is a big decision and life change for parents and students, an exciting one at that! One of the farthest things from your mind at this time is likely insurance for your college student. When a member of your household moves away, but is still your dependent, property and casualty insurance coverage can get complicated. Does the student need a renter’s insurance policy, or are they covered under your homeowner’s insurance? What happens if they drive a friend's car while away at school and get in an accident? Do parents share in the personal liability costs? The circumstances and recommendations vary, but we are here to help you understand and navigate what you currently have vs. what you need, so you can focus on what matters most. If you would like guidance on this topic, please do not hesitate to reach out to your Wealth Manager.

 

4. Fiduciary Financial Advice

One thing that has plagued the financial services industry is Main Street's lack of trust of the industry. There are many reasons, some justifiable, why some people have developed a distrust of financial companies and the individuals who work for them.

It may be due to the media, Hollywood, or a personal situation that has happened in the past. Two popular movies - The Big Short and The Wolf of Wall Street, were salacious examples in which the best interests of clients were blatantly ignored. Unfortunately, these films are based upon actual schemes in which real people found themselves in financial ruin as a result. This can happen when a firm and its employees are not held to a fiduciary standard.

At True North Advisors, we wFebruary_2019_555_-_Draft_-_PD_Edits_-_Google_Docs 5ork to develop trust with our clients by taking on the role of a fiduciary, which involves acting in the best interest of our clients. A fiduciary is a person or company who hods a legal or ethical relationship of trust with one or more parties. This type of relationship involves a legal responsibility to take care of money or other assets for another individual. We take this very seriously.

Part of being a fiduciary and working with our clients involves using our ‘Three Sixty Process’, which is considered to be a best practices fiduciary standard for financial advice. When meeting with potential clients, we start by finding out about their lives, their ‘whys’, and their dreams. Through a few meetings, we use the Three Sixty Process to provide you with a wealth of information before asking you to commit to working with us. Only after that commitment will we ask you for fees for our ongoing advice. Yet, because True North Advisors is compensated for the financial advice we give, and not the products we recommend, fiduciary financial advice is the standard we adhere to in order to help our clients reach their financial goals.

At True North Advisors, our processes are client-centric and based on a conflict-free financial advice model. As always, we welcome your questions and comments as we aim to promote trust in our industry.

 

5. Fulfilling Lives: True North Loves Boomerangs!

February_2019_555_-_Draft_-_PD_Edits_-_Google_Docs 6True North Advisors is pleased to announce that Daryl Braley rejoined the firm in November 2018 as a Client Service Specialist. In that role, he supports the wealth management team with daily client interaction, including account openings and administration, money movement requests, and client 401K rollovers. Prior to joining True North, Daryl worked at Credit Suisse, Jefferies LLC, and Alex Brown where he handled the 10b5-1 trading plans, restricted stock sales, stock option exercises, client requests, compliance and operations for each firm respectively. He has extensive experience working with key executives and ultra-high net worth clients. “I came back to True North because of the people and culture. I believe the core values that are prevalent at True North are more in line with my personal core values than any place I’ve worked previously. The client-first approach to service, open door policy, and open platform office are what I’m accustomed to, and it fosters a better working environment for everyone,” says Daryl.

Daryl is an alumnus of Austin College in Sherman, Texas. His studies included a concentration of Business Administration and Economics. In his free time, Daryl enjoys playing basketball and tennis, reading, and vacationing in Colorado.

Welcome back, Daryl!

Filed Under: Five, Five, Five

   
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