“Uncertainty” is now a catch-all reason for why we have sell-offs in the stock market. “Uncertainty regarding a new trade deal with China”, and “Uncertainty regarding the direction the Federal Reserve will take” are two of the more prominent excuses for bad days in the market.

Millennials

Having been around for many cycles, and being the parent of Millennial children myself, I don’t think it used to be this way. Particularly since the Fed’s actions coming out of the Financial Crisis of 2007-2009, I believe investors, and especially the Millennials who cut their teeth during those years, became used to and overly reliant on the Fed broadcasting its moves before they happen. Then, any change to the Fed’s stated plan of action is met with selling due to “uncertainty”. Earlier this year, the Fed got pummeled in the financial media for stating they would be more “data dependent” for future rate hikes rather than clearly stating they would raise x-amount of times over the next year.

China and Trade

Likewise with China. We have gotten used to inexpensive Chinese and other foreign goods coming into our market, so much so that it became a basic foundation for our US economy. Now we have a President who thinks we are overall not getting the better of that relationship. This has caused caterwauls of uncertainty. I am not condoning tariffs, but I am suggesting that the caterwauls have been overdone.

Apple

Another instance of overreaction to uncertainty is when Apple announced it would no longer provide unit sales for the iPhone (and its other products) in an effort to get analysts and investors to look at revenue rather than unit sales. AAPL lost almost 10% of its market cap in the few days after this announcement on November 1, 2018, and, after recovering a bit, proceeded to lose about 38% of its market cap peak-to-trough through the end of 2018. AAPL has recovered about 21% since then, but I see the 2018 drawdown as a huge overreaction to not knowing how many iPhones they were selling. Analysts and investors had become conditioned and had gotten used to knowing unit sales with certitude, and taking that certitude away from them made them mad.

You Can Profit

You can profit if you are willing to live with what others consider to be added uncertainty. For instance, are you ok with Apple publishing revenue numbers but not unit sales? Others are not ok, but if you are, and you still believe in AAPL’s future earnings, then you may have a leg up and you might have a good buying opportunity. Are you ok with the Fed not telling you exactly how many interest rate increases they plan to do during 2019? Others are not ok with that because it is a change from the way the Fed has been doing business for the last 10 years. However, if you are ok with a more “data dependent” and flexible Fed approach, then you can profit by keeping a cooler head about you. Data fluctuates. Don’t you think it is wiser to keep data fluctuations in mind before making decisions that affect the nation’s economy? I do. Do you really believe, when all is said and done, that there will be a drastic change in the number of goods the US will import from China and other low-cost producers? Possibly, I believe, but not sufficient to have caused all of the drama that has fallen out over the day-to-day reporting of Trade Negotiations with China.

IMO

This is a variation on the Warren Buffet riff – “Be greedy when others are fearful.” I am not saying you should be greedy. I am saying that what actually happens after the reported “uncertainty” ends up being not really that bad. If you can live with a few downs to go along with the many ups, then you will probably make out ok in the long run.

It’s March, so you may soon get your annual Social Security Statement in the mail. At the top, it will say about what your payment will be at Full Retirement Age. Seems simple, right?

Read The Fine Print

Well, it’s not quite that simple. If you read the assumptions for how the SSA calculates your benefit, you will see that they assume you will continue to work and pay into Social Security until Full Retirement Age. So, if you are inclined to continue to go to work every day until your mid to late 60’s, have at it! However, for those of us who might not want to stick around at the office water cooler that long, the Social Security Statement of benefits is not fully accurate.

Calculate Your Own Benefits

Instead of relying on the Social Security Administration’s calculation, you will have to calculate your own benefits yourself. How might you do that? Go to the Social Security Administration website, ssa.gov, and go to the bottom of the home page. There is an icon there called Calculators. Click that, and then click the Online Calculator icon. Next, you have to manually input your earnings record for every year. It’s somewhat of a pain to do so, but it really doesn’t take very long. Then you have to assume you will quit working at some point during the next 2 years. For the experiment that I ran, I assumed my client would pay in during 2019 but not at all in 2020 and thereafter. The client still has several years to go until Full Retirement Age. Next, you choose whether you want your calculation done in today’s dollars or in inflated future dollars – I find it easier to understand using today’s dollars. Finally, you hit Calculate, and voila! You have calculated your own Social Security benefits! The Online Calculator function is limited in that you can’t input different levels of earnings for each year 2020 and beyond, but it is useful for what it does.

Differences

In general, the closer you are to Full Retirement Age, the less the difference will be between the SSA’s calculation and your own calculation of your benefits. If you are in your mid-50’s or older and you have been paying in all of these years but you don’t want to calculate your own benefits, as a general rule, you can take the SSA’s calculation, and your actual benefit will be about 97% of that amount if you quit work next year but don’t file to receive Social Security benefits until Full Retirement Age. If you are younger than your mid-50’s, I highly recommend you do your own Benefits calculation. Those of us who are in their late 50’s or older probably pay more attention to what their Social Security benefits will be. Nevertheless, for anyone, knowing what your Social Security benefits will be is an important element of your financial and retirement planning at any age.

Vocabulary

If you read your Statement, or, better yet, create an account at ssa.gov, be mindful of the meaning of the word “retirement”. For the SSA, “retirement” means that you quit work and immediately file to receive social security benefits. However, you probably think about “retirement” in terms of no longer going to work every day. The filing for benefits part is a separate issue. Then there is Full Retirement Age, or FRA. FRA is based on what year you were born in, and the following chart breaks it down:

In general, you can file for Social Security as early as Age 62, but your benefits will be 8% per year lower than they would be if you wait to file until your FRA. Alternatively, your benefits grow 8% for each year you wait to file after your FRA up to age 70.

IMO

Because of recent law changes, there are fewer strategies available for filing for Social Security benefits. It is much more straightforward. However, there are some different things to think about, including whether to file early, or wait until FRA, or wait even longer. A good financial planner can help you make those decisions.

Are you actively looking for a job? If you are, you may be going about your job search in the wrong way, according to this article from The Wall Street Journal. Written from the purview of the employer, the article says that recruiters and companies prefer to hire “passive” candidates, meaning candidates who aren’t actively looking for a new job. If you are actively job-hunting, this means perhaps that the best way to find the new job you covet is to convey a sense of nonchalance about the process and the job. In order to get hired, become more passive about the process. Sounds counterintuitive, but maybe not.

Damaged Goods

The desire to hire outside candidates who demonstrate little or no desire to work for you falls from the notion that if that person is actively out there searching for a job, then there must be something wrong with that person. They must be damaged goods, in some way or another. Perhaps they don’t fit well within a corporate structure, or they are not Team Players, or their skills aren’t up to par. Therefore, the logic goes, it is better to hire people who are content in their current jobs and to persuade them that your company and this new job opportunity would be superior to what they currently have. As a result, the Wall Street Journal article says, enthusiastic candidates who are actively seeking get passed by in favor of those who are less enthusiastic but fit the process better. That’s why the title of the article is “The Biggest Mistakes Companies Make With Hiring”.

Playing Hard To Get

This is like “Playing Hard To Get’ while dating. If you want to date someone, act like you don’t want to, and your target will be more intrigued. It’s no fun unless you have to fight for it, right? Now, in retrospect, is “Playing Hard To Get” really the right way to go about it? Do more lasting relationships start with “Hard To Get” or with more active partners? I don’t know the answer, but it is worth pondering. I will say that today’s online dating scene is antithetical to the “Hard To Get” playbook. If you are using a dating app, it’s all out there. Maybe this is a shift in the strategy of how partners hook up. Likewise, maybe job-hunting sites like Indeed or LinkedIn signals a shift from hiring passive candidates to hiring more active ones.

IMO

Finding a good job is probably the most fundamental part of financial planning. If you are job-seeking, maybe you should try to play “Hard To Get”, if it is in your nature to do so. Personally, I am not that way, but it does work for some people. You have to have a strong sense of yourself to be a passive player, which is perhaps why some employers prefer passive players.

By the way: You should also click the Comments section related to this “The Biggest Mistakes” article in the Wall Street Journal. I’m sure you will relate to a lot of the comments readers have made.

This is a blog post about an article about a recent Gallup poll. The poll says that 69% of Americans believe their financial situation will be better off one year from now than it is currently, and only 16% believe they will be worse off financially in a year. Furthermore, if you read the article and look at the chart that shows the poll results for the past 40+ years, you will see that Americans have remained consistently optimistic for the past 10 years.

Polls

I generally don’t read much into polling, particularly now. I’m sure you all get plenty of calls on a daily basis that tell you they are taking a survey and want you to participate. What is your normal and understandable reaction? Of course, it is to say No Thank You and hang up. Robo-calls asking you to participate in a survey are now more commonplace than ever. Because I don’t participate, I guess that others don’t either, and that to me skews the results. That said, I do sense that this particular Gallup poll gets it about right – maybe not the exact 69% number, but the sense that most people are optimistic about their own financial future.

Contrast

The fact that Americans are steadily optimistic about their future stands in contrast to the daily gyrations and increased volatility that we are seeing in the stock markets. If you watch financial media and believe that the changes in stock market prices reflect changing levels of optimism, and that a selloff day in the market means fewer investors are optimistic, then this Gallup poll refutes that sense. Instead, the Gallup results probably mean that most people don’t pay much attention to the stock market and its volatility level. They keep their heads down, go to work, go about their day, support their families, and don’t let the noise get them down. Good for them! It means people deal with what they can control and don’t worry about what they can’t control. This is a coping mechanism. If you have to get up every day and go to work, then it’s best for your mental and physical health that you have a rosy view about what you are doing.

IMO

If you are an Eeyore and walk around with a dark cloud about your financial future, I recommend that you work with a financial professional (such as me) so that you can lift that cloud. Join the majority of Americans and feel good about your future through proper financial planning. You would go to a psychologist if you had mental health issues, so go to a financial shrink when you have financial mental health issues.

If you have a 401k or 403b retirement plan through your employer, then you probably have your funds invested in Mutual Funds, likely managed by the likes of Fidelity, Vanguard, or other well-known fund portfolio managers. If you have a regular “taxable” investment account, perhaps you own Exchange Traded Funds, such as an S&P 500 Index Funds. Mutual Funds and ETFs are both own baskets of stocks that are managed by either real human beings (likely for mutual funds) or even computers (possibly in the case of ETFs). However, there are important differences between the two types of investment vehicles. What are the differences and how do the differences impact the way you invest?

Who is the Counterparty?

The main difference is the counterparty to your purchase or sale. When you buy or sell a mutual fund, from whom do you buy or sell it, and same for an ETF? For a mutual fund, you buy and sell shares in the fund directly from the fund manager. A mutual fund has a ticker symbol and you might route an order through an exchange, but the seller or buyer of your order is the fund itself, not some other investor. With an ETF, however, you buy and sell shares over an exchange such as the NYSE, just like you would any other stock.

Open-End/Closed-End

You buy mutual fund shares directly from the manager because a mutual fund is an Open-End fund, meaning there is no limit to the number of shares the fund can have outstanding. You buy shares in an ETF through a stock exchange because an ETF is a Closed-End fund, meaning the number of shares outstanding is finite and the price of the fund will fluctuate based on the demand for those shares – price goes up as demand goes up.

End of the Day vs. Any Time

Another difference that falls from the Open-End/Closed-End issue is that you can buy or sell ETF shares at any time during the trading day, but you can only buy or sell mutual fund shares at the end of each trading day, after the Net Asset Value for that day is calculated. That means you can’t “day-trade” mutual fund shares, nor can you dump them in the middle of the day if the market is crashing. You have to wait until the end of the day to buy or sell a mutual fund. This is not really a problem if you own mutual funds in your retirement account because they are long-term investments.

Costs

Mutual Funds typically are more expensive. They have higher “load” fees and/or management fees, typically because they are more hands-on in terms of management. Mutual Funds can be very specialized in terms of economic sectors or industries or even geographical regions, and so if you like any of these specialized areas to outperform, you can play that hunch more easily by using a mutual fund. ETF’s are less expensive because they typically are set to mirror an index that is out there, and they are therefore less management-intensive, even to the point of being run by an algorithm or a computer. ETF’s are more general, and so it is more difficult to play any specific industry or sector by using an ETF, although such specialized ETF’s are becoming more common.

IMO

As I alluded to at the start of this posting, holding mutual funds in your retirement account are fine, typically because that’s all you might be able to hold in that account as deemed by your retirement account trustee. ETF’s are getting a lot of ink because they have lower costs, are becoming more innovative and more specialized, and because they are more “liquid” because you don’t have to wait until the end of the trading day to transact. I am not taking sides in this debate. My only point is to inform you about the differences between mutual funds and ETF’s and help you understand what you can and cannot do with them.

Are you one of those people out there who is exhorting our current President to Act Presidential? If you are, and even if you are not, perhaps you should first look into the mirror and see if that person staring back at you also Acts Presidential. Because, you know the saying about those who live in glass houses.

State of Mind

This discussion is topical because it is President’s Week. Acting “presidential” means different things to different people. But most can agree that it is a way of dealing with issues. It means taking control of a situation and acting with benevolence toward all involved. It means keeping your wits about you while others are losing theirs. It means getting others to agree with your wishes because of the strength of your character and your ability to persuade others of the merits of your thoughts or actions.

Don’t Be a Victim

Acting “presidential” does not mean accepting your fate without trying to do something about it. Specific to my field of financial planning, let’s take the example of someone who is behind financially and is falling deeper in the hole of debt. While it may in your mind not be on a par with the actions of those whose heads are sculpted into Mount Rushmore, if you are being slowly crushed by a mountain of debt, you can act presidential by right away cutting out expenses you don’t absolutely need and spend only what you make. The next step would be to spend less than you make and use that leftover to start to eat away at your debt. Take charge of your life and your financial situation! Pretty much every financial advice book ever written is some version of that imperative.

Move

Here is another take: Are taxes crushing you because you live in a high-tax state and you no longer get the full benefit of State and Local Tax (SALT) deduction, and your state is raising taxes on you? Unless you are completely tied to your home and your state, and even then, you can Act Presidential and move to a different state, one with lower state taxes. Chances are this lower-tax state will have higher economic growth than the place you just left, as well as possibly warmer or better weather. Our ancestors back in the day uprooted from other continents and countries in order to get here, and without the benefit of nearly-supersonic air travel, and without really knowing what they would face. Nobody who arrived in the US ahead of them texted photos back to the old country to show what a great time they are having here in this great land. With that in mind, is moving say from the Northeast to Florida, Texas, or any number of other low-tax states such a really big ask? Don’t feel like you have grown roots in some place or situation that is causing you not to get ahead. Take charge, even if it means taking a chance.

IMO

There are any number of examples of turnaround stories of people who dug themselves out of a rut and set themselves straight. All of these stories started with someone deciding to Act Presidential and take charge of their own financial situation. And, once you decide to Act Presidential, re-elect yourself and continue to do so. At least you will feel better about yourself, and that is very important!

Maybe you like to dabble in real estate, or maybe real estate is the main focus of your business. A good way to look at real estate, when you look at buying a property, is whether the property will require more capital for you to achieve your objective, or whether the property is already cash flow positive and will provide you with monthly cash flow through its excess rents from the first day you buy it. This is a continuation of the theme of cash flow that I introduced in last week’s two blog posts.

Flipper

If you are a house flipper, you want to buy a house (or any other property) that is in some state of disrepair, or that just needs updating, develop a plan and complete the required repairs or updates, then put it back on the market and sell it, hopefully for a profit. Your “value added” is that you either bought the property at a better price than others could for whatever reason, or you have special design ideas or talents, or you have some ability to provide “sweat equity” and do some the work yourself, or some combination of all of these. At the macro or strategic level, however, you need to realize that to make money on this project you need to spend additional money through the process before you make your profit at the end by selling the asset. There probably will not be any cash flow through rents or tenants while you are doing the rehab or updating work. Even if you buy a multi-tenant property and decide to update each unit at it turns over, you will not receive rents on the unit being updated, even if you still earn rent for the remaining units. A “flip” property can be a good investment for someone who has the time and ability to put additional money into the project. However, it is probably not the best type of investment for someone looking to buy a property for its current cash flow.

Landlord

If you are looking to be a landlord, however, from an investment perspective, you are looking to invest money into an asset that will generate current income. Hopefully, the income from rents will exceed the amount you need to spend on your loan payment, taxes, maintenance and insurance. If so, then you truly have positive cash flow. Maybe there is a temporary situation that you believe will rectify itself and you will have positive cash flow thereafter. Maybe you might sell the property down the road, but you are more concerned with maximizing rents in the property, and/or with stabilizing your tenant base, so that you maximize your current cash flow. This is the equivalent, in the stock market, of buying a utility or other high-dividend stock: It may go up in the future, but you really want the higher income it provides than does a bond or money market fund.

IMO

My only point is, if you are already a real estate investor or if you are thinking of investing in real estate, you need first to determine what your objectives are. If you like watching HGTV and want to emulate the likes of Chip and Joanna, then you must not need the current cash flow and you must have extra cash that you are willing to invest in the property over and above your initial down payment. If maybe you have some basic handy man talents and you like interacting with tenants and you want to retire and live on the rents you generate from investing in income properties, then you are a different type of investor and you may be looking to buy a different type of property, one that can provide income to you from Day 1 or close to it. Make sure you know what you want before you start looking.

When you think about having a diverse portfolio, you think about diverse asset classes (such as a mixture of stocks and bonds). Alternatively, if you are just concerned with stocks, you might think diversity is a mixture of companies in different industries. I say there is another way to think about diversity, and that is the diversity of holdings among companies that are cash-flow-positive and cash-flow-negative.

Previous Blog

In my previous blog that I posted on February 12, I said one way to analyze companies is to look at their cash flow and determine whether they generate and throw off cash flow from their operations, or if they require additional cash flow in order to continue to operate and to achieve their goals. You should look at your stock portfolio in the same way. At an even higher level, you should look at your overall portfolio in the same way.

Examples

Let’s first take an entire portfolio that is a mixture of stocks and bonds. The bonds are current cash flow to you, although the amount of cash flow may not be that great because interest rates are currently low, albeit rising. Stocks may be cash flow positive or negative, depending on where they are in their development cycle. If you have a larger percentage of your assets in bonds, should you balance that out by having a larger percentage of your stock portfolio invested in high-tech, high-beta companies that are early in their cycle and will require additional cash to be successful? That is certainly a viable asset mix strategy. Or should you avoid the risk of cash-flow-negative stocks altogether? It depends on your goals, wants and needs with respect to returns and your own cash flow. Your age of course plays a role. The older you are, the less time you have for a young company to come to fruition. You might not be around any more when it does.

Now, let’s take just a stock portfolio. If stocks are the entire universe of what you invest in, perhaps because you are young, have a job, and are willing to take a greater level of risk in your investing, then I would recommend that you make sure you have a good mixture of ownership of companies that are cash-flow-positive and cash-flow-negative. If you do so, you are diverse because the cash-flow-positive companies will probably provide support and downside protection for the companies earlier in their development cycle. If you are high-tech investor specialist, for example, for every new, innovative cloud-computing or cyber-security company that may have recently IPO’d, make sure you balance out by owning companies like Apple, Microsoft, and Intel that spin off buckets of cash flow. In the medical sector, for every biotech you own, make sure you also own a Merck, J&J, or Bristol-Myers, all of which generate cash flow and dividends. If you are excited about the upcoming IPO’s of Uber and Lyft, both of which are a long ways from being cash flow positive, go ahead and jump in, but don’t bet the farm.

Buffet Again

You will be able to keep up with the indexes only if you own some companies that are high-risk and high-reward. Warren Buffet can make money owning only cash-flow-positive companies because he can buy the entire company and therefore control its cash flow. You cannot. You need to give yourself a shot at some upside by making sure you own companies that have more upside than companies that are already established.

IMO

Looking at differing cash flow models as a way to diversify your portfolio is not necessarily a substitute for traditional models of diversity, such as having a mixture of stocks and bonds. However, it is another layer and another way to think about how you structure your portfolio, either among the general mixture of asset classes or among stocks specifically.

A good way for you to look at companies is to determine whether their cash flow generation is positive or negative. A company that generates positive cash flow is one that is probably self-funding, meaning that it does not need outside investment to continue to operate. It can stand on its own, thank you very much. Typically a company that generates positive cash flow is one that is well-established and that has a product or line of products that it sells that generates the cash that the company reinvests back into business operations. Kind of like a perpetual motion machine. Maybe these cash flow-positive companies have so much free cash flow from operations that they also pay dividends to their shareholders, which is an added bonus.

On the other hand, a company that has negative cash flow is one that needs additional outside cash infusions in order to continue to operate. These are usually young companies that have products that are in the research and development stages that have yet to be approved by the appropriate authorities (but which show high promise), or companies in the early stages of product sales that need to grow into their overhead. Think about a new pharmaceutical or medical device company with a great new innovation that needs money to get the innovation approved and/or brought to market.

Warren Buffet

Given my description of these two types of companies, why would you invest in a company that continually needs additional capital in order to survive? Shouldn’t you just invest in companies that throw off excess cash flow? The Oracle of Omaha, Warren Buffet, would agree with you. Excess cash flow is an important part of his “margin of safety” and is also perhaps the main objective of his investments, which is to capture excess cash flow..

Potential

A cash-flow-positive company is great, but newer companies that are in the earlier stages offer potentially much greater returns. It used to be that companies didn’t IPO until they were cash-flow-positive, but that changed with the initial Dot Com boom 20-25 years ago (!!?? can it be that many years ago?) Although the trend has eased in the last 5 years, companies are IPO’ing earlier and earlier in their life cycles, as their managers see the public markets as the best way to mainline the blood that they need, namely, more and more cash. With more potential comes more risk, however, so you really need to be careful when you invest in companies that are cash-flow-negative. Either have some familiarity with their business or industry sector, or invest through an intermediary such as a mutual fund or a high-tech sector ETF so that you are inherently diversified.

IMO

My main point with this blog post is to encourage you to analyze companies in an effort to answer the question of whether the company is cash-flow-positive or cash-flow-negative. This high-level determination will give you further insight as to how the company operates its business and what you might expect in the future if you decide to buy stock in that company. In my next post, I will draw on this positive vs. negative cash flow concept to show you how you can diversify your portfolio in ways that are different than you might currently think about diversity.

Security is a major issue. Now that most of our bank and brokerage accounts are online and have online portals, it is more important than ever now to ensure that your accounts are secure and that nobody can hack in and steal your identity, or, worse yet, steal your money.

Two Factor Authentication

One method that is increasingly popular because it is effective is Two Factor Authentication. Maybe you already have it for your accounts, and if you don’t already, you should. What is it? With Two Factor Authentication, you have your traditional user ID and Password when you log into your account on a financial website. Then, after you have input your ID and Password, the site will ask you for further information. In the case of one of my accounts, it asks for information from a Key Card, which is a credit card-sized card with numbers and letters. This particular site will give me two numbers, and I must provide the characters that correspond to those two numbers in order to log into my account. This makes it much more difficult, if not impossible, for a bad guy to hack into my account.

Face ID

Now that more cell phones have the face id feature, this makes it much more convenient to implement Two Factor Authentication. Once you input your ID and Password, instead of asking for information from a Key Card that the bank has given you, the website will ask you to log into your cell phone. This means you have to have your cell phone with you when you log in on your computer, but that is probably not a stretch for most people. If you are using the app portal on your cell phone, all the better, because you have already provided the 2nd Factor by logging into your phone with your Face ID. If you don’t have Face ID, an alternative is that the website will send you a (usually) 6 digit Authentication Code in a text, and you will have to type in those 6 digits. You have probably had this experience already in some capacity. It’s pretty easy.

IMO

Though not yet mandatory, most banks and brokerages are moving toward the Two Factor Authentication model because it is that much more secure. If you are logging in to any site that doesn’t have to do with your money, such as social media sites, then you can decide if Two Factor Authentication is worth the hassle. However, when it comes to any site that links to any of your money, including your credit card accounts, then I highly recommend that you protect yourself and upgrade your security so that you have Two Factor Authentication. Once you get used to using it, it is really not any hassle to use it. Don’t continue to put yourself and your money at risk – sign up for Two Factor Authentication for your bank, credit card, and brokerage accounts today!