Have you ever heard the saying “fake it until you make it?” My first job in finance I worked for a man who volunteered to co-sign a car loan with you if you would buy an expensive, flashy car. He wanted everyone in town to see his stock brokers driving expensive cars. He figured if they saw that, they would think his firm must be really good at trading stocks for their clients and that would drive new business. Never mind they had lost millions in the 2008 crash.
I always thought though it was a dumb idea, but, over time, I’ve realized there was probably more truth to it than I would like. Humans are funny creatures- they assume the trappings of a successful lifestyle must mean you are inherently good at what you do. Unfortunately, this is not always the case. Big Wall St. investment houses are famous for droppings thousands of dollars on lunch, just trying to impress someone. It turns out that sometimes a big car and a big house just means you have big car payment and a big mortgage.
These days I drive a 10 year old truck. My wife drives a 14 year old car. I spend my days teaching my clients how to wisely manage their financial resources as my family does the same. This means things like trying to pay cash for a vehicle, living in a house you can afford, and saving diligently for retirement. I believe it would be hypocritical for me to live any other way. And while I’ve come to realize that sometimes my old pickup truck may turn off a potential client, I’d rather be secure in how I manage my own finances, then to try impress someone else.
My advice to people interviewing advisors is don’t be fooled by a lavish exterior. They may just be faking it, hoping to impress you with style when there is no substance. Instead, focus on things like experience, education & compensation system. Make sure they have (or are actively pursuing) credentials like the CFP (Certified Financial Planner) or ChFC (Chartered Financial Consultant) designations. Ensure they had experience in the financial markets before they became an advisor. Make sure the fee system best benefits you, the client. Help put an end (for your sake!) to “fake it until you make it.”
The Prior Month
Both equity and bond prices fell in June as worries about the end of “easy money” had investors concerned the economy may not yet be ready to survive in a normalized interest rate environment. A rally the final week of June cut the losses, however, and by the end of the month the S&P had fallen just 1.6%. Meanwhile 10 year U.S. treasury note yields rose from 2.16 to 2.48%. That sharp rise in yields had a devastating impact on prices, though, knocking out three years of interest payments in just one month. Meanwhile inaction by Chinese central bankers caused Asian markets to fall some 10%. For the year, emerging markets ETFs like Vanguard’s VWO fund Schwab’s SCHE have now fallen 10-15%.
Markets will have the opportunity to focus on something besides interest rates this month as corporate America will step to the podium and tell us, as Walter Cronkite would say, “the way it was” in the 2nd quarter of 2013. Expectations are low as the estimated overall growth rate for the S&P 500 in the Q2 2013 is a paltry 0.7%. A remarkable 87 companies in the index have issued lowered guidance for earnings compared to just 21 raising guidance. Pay particular attention to sectors that are very sensitive to interest rates such as banks, homebuilders & REITS. If they seem concerned about the impact higher interest rates may have on their businesses that fact won’t be lost on the decision-makers at the Federal Reserve.
The volatility index, or VIX for short, is a measure of the market’s expectation for volatility over the next 30 days. It is sometimes called the “fear” index, or “fear guage.” An elevated VIX means volatility (downward stock prices) are expected in the near future. Oftentimes the VIX will start rising before prices start to fall, or remain elevated even as price recovers– an indicator that prices may yet fall again, even further. Spotting these signs can often be a difficult task, as they are often quite subtle, however, it can be quite rewarding.
Warren Buffett, the 4th richest man in the world, still lives in the same modest house he bought back in 1958. He paid $31,500 for it then. Clearly, this is a man who’s not faking it until he makes it!
Have a great July,