Mistakes, climate change, dementia risk, reading and debt.
One costly mistake millennials are making. Cash. 1 in 3 millennial think cash is the best long-term investment (savings accounts and CDs). With the inflation target at 2%, earning less than the rate of inflation is losing buying power. Saving is important, but when saving for a decade or more, you can afford some short-term risk in exchange for compounding and higher rates of return. The millennial’s actions of not trusting the stock market and valuing cash more than securities is understandable… they did experience the 2008 financial crisis first-hand.
Climate change. Climate scientists have discovered an uneven pace of seasonal change in the atmosphere. The frequency of temperature has become very volatile. It is getting much hotter in summers and much cooler in winters. Also, the seasonal cycle is changing and this is observed by trees flowering early.
GDP. Gross Domestic Product has increased 4.1% Q2 to Trump’s acclaim despite an ensuing fiscal cliff. According to the Bureau of Economic Analysis, “the second-quarter increase in real GDP reflected increases in consumer spending, exports, business investment, and government spending”. Many economists, including NYT economics reporter Ben Casselman, are attributing the growth to the Trump tax-cuts and increases in government spending. Despite the growth, the Trump administration’s laxed economic policy is coming at a cost. According to the Office of Management and Budget, because of the Budget Act of 2018, debt will increase by $1 trillion over the next decade.
Cutting your dementia risk. About a third of dementia causes might actually be avoided by living a lifestyle that better protects your brain. Dementia impacts memory and leads to a decline in cognitive performance. One brain disorder that causes dementia is Alzheimers and it is the most expensive disease in America costing $215 billion per year. Here’s a list of nine ways to cut your dementia risk:
Reading a book makes you a better friend. The readers ability to be transported by a story actually says a lot about how we can comprehend, interpret and empathize with the stories of those around us in real life. Evidence suggests there is a positive correlation not only between reading and social cognition, but more importantly between reading and empathy.
The bottom half and debt. The bottom 60% of income-earners have accounted for most of the rise in spending even as their finances worsened. Tepid wage growth causes middle and lower-income Americans to dip into their savings and borrow more even with a hot job market and other signs of economic health (more jobs does not mean higher wages).
The Alchanati Campbell and Associates Team
Who you are is who you are, markets are being a bit crazy, gold shines not as bright, REITs, your thinking and your time.
The most important skill nobody taught you. “All humanity’s problems stem from man’s inability to sit quietly in a room alone,”(Blaise Pascal). We fear the silence of existence, we dread boredom and instead, we choose aimless distraction. We will never be able to learn the art of solitude. We now live in a world where we’re connected to everything except ourselves. Never being alone is not the same thing as never feeling alone and the less comfortable you are with solitude, the more likely it is that you won’t know yourself. We are increasingly out of touch with who we are and we are really addicted to a state of not-being-bored. But there is a solution: the only way to avoid being ruined by this fear is to face it. Let the boredom take you where it wants so you can deal with whatever is really going on with your sense of self.
REITs. Interest rates and yields on Treasury bills are what tend to drive REIT prices and that’s what’s behind their recent rally. REITs have out performed other US equities since late February.
REITs versus Private Real Estate Assets. From 1992-2017, a list of 7,300 private funds in Cambridge Associates’ database (an extensive collection of institutional-quality private funds) were tracked. The return from the 25 year period was 7.6% while the FTSE NAREIT REIT All Equity Index (a public REITs Index) had a return of 10.9% during that same time period. Investing privately gives you the privilege of investing with the greatest institutional managers, but you sacrifice the daily liquidity available with public REITs. Private real estate investments not only earned a lower return, but also took on much greater risk in the form of higher leverage.
Private Banking versus Wealth Management. Many don’t know the difference. Wealth management deals with the optimization of a client’s portfolio taking into account their plans and goals and this can be practiced on a portfolio of any size. Private banking refers to an envelope solution for high net-worth individuals offering personalized care and management of their finances.
How to improve your thinking. Understand the forces at play and understand how your subconscious might be leading you astray. Here is an effective framework for thinking that protects us when making decisions:
The most important asset… time. I would be willing to bet that none of you, if you were offered every dollar of Warren Buffett’s fortune, would trade places with him right now and I would also bet that Warren Buffett would trade to be 20 years old again for all of his wealth. Why is time your most important asset? Because you will never get a second more than what you already have. Money will come and go in your life, many times as a result of good and bad luck, but your time is only here now.
Gold. The price of the precious metal dropped to its lowest since last July. A stronger dollar and higher short-term bond rates are blamed for gold's recent decline. Since gold is traded in dollars, a stronger greenback makes it more costly to buy this precious metal. Also with the expectations of the higher interest rate hikes from the Federal Reserve, investors are buying up higher-yielding assets.
Markets are being a bit schizophrenic. US economic growth is accelerating and corporate profits are booming, but geopolitical risks, inflationary pressures and escalating trade tensions threaten the market’s outlook. A majority of investors worldwide believe a trade war is the greatest risk facing markets and the worst part is, it’s largely dependent on the actions of unpredictable politicians.
The Alchanati Campbell and Associates Team
This week’s “What’s up?” is dedicated to long-term knowledge. Who needs knowledge that expires… Enjoy.
Expiring Knowledge versus Long-Term Knowledge. How much of what you read today will you still care about a year from now? It’s amazing how much of the information we consume has a half-life measured in days or months. Much of the information we consume is expiring knowledge. Expiring knowledge catches more attention than it should because there’s a lot of it and we chase it down. Long-term knowledge is harder to notice because it’s buried in books rather than blasted in headlines. Expiring knowledge tells you what happened; long-term knowledge tells you why something happened and why it might be likely to happen again.
Investors focus on the wrong things. While most of us should be investing for the long-run, markets conspire against us drawing our gaze and enticing us to take action. Matters such as war or peace in the Korean Peninsula, NATO or NAFTA problems, or Italy leaving the EU are meaningful, but from an investment prospective, there is very little most investors can do to benefit. Before the temptation to act on news becomes too strong, try to answer these three questions:
Yield versus Total Return. Many don’t know the difference. Yield is the income return on an investment. This refers to the interest or dividends received from a security. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. The difference between the two is total return includes appreciation from the security and yield does not.
The limits of human existence. A person’s risk of death slows and even plateaus above age 105. Data tells us that there is no fixed limit to the human life span yet. People at age 110 had the same continued chances of survival as those between the ages of 105 and 109- a 50/50 chance of dying within the year and an expected further life span of 1.5 years. The odds of survival inexorably decline as a person enters middle and old age. Evolutionary selection and the influence of good genes and healthy life choices improves your odds of a longer life span.
Are you sure your investments are appropriate for you? High valuations or low valuations, overweight or underweight, bullish or bearish, growth or value, income or total returns, etc. are very important to consider when investing, but are not nearly as important as how the investments jibe with you personally. Here are some important factors to consider to help you judge the appropriateness of your investments:
Public Real Estate versus Private Real Estate. There are three types of commercial real estate investors: those who buy buildings directly, those who invest in funds that buy buildings, and those who buy their real estate through Real Estate Investment Trusts (REITs). All real estate investors should look to the public market for signals on operating fundamentals and valuations (Reliable market information on public REITs is readily available). There are pricing discrepancies across private and public markets. In the apartment sector, the average REIT is trading at a 14% discount to the current market value of its assets (12% for neighborhood shopping centers, 16% for the office sector, and 17% for the mall business). Historical data shows that signals from the public market have been helpful in forecasting private-market returns across property sectors. Property prices have almost always appreciated in the 12 months after listed REITs traded at net asset value premiums and they have declined by an average of 2% following periods when REITs traded at discounts.
WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now.