Choosing the Right Financial Advisor

By: Oxana Saunders

choose the right financial advisor

As I spend more time talking to my friends, family and community members about the importance of financial planning, I realize that the thought of paying a financial advisor may seem unnecessary to some people. Sometimes they simply choose not to have their money professionally managed rather than going through what they fear might be a complicated process of finding the right person. One of the main concerns I hear is that they find it difficult to trust an advisor they don’t know.

Choosing the right financial advisor doesn’t have to be hard. This article from Forbes.com, does a great job spelling out the five key aspects to consider when selecting a financial advisor: 5 Things To Look For When Picking A Financial Advisor.

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Oxana Saunders Vice President Path FinancialOxana Saunders is the Vice President of Path Financial, LLC. She may be reached at 941.894.2571 or oxana@pathfinancial.net.

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Raul Elizalde Selected as Contributor for Forbes.com Investment Blog

Raul cropped for facebookRaul Elizalde, President and Chief Investment Officer at Sarasota-based Path Financial LLC, has been selected as a guest columnist for Forbes.com, where he will regularly contribute to financial writer Lawrence Light’s investment advice blog. Elizalde’s first Forbes’ contribution was published May 23, 2017, on the topic of “Private Debt Mounts: Why We Should Be Worried,” and may be viewed at https://www.forbes.com/sites/lawrencelight/2017/05/23/private-debt-mounts-why-we-should-be-worried/#11f50b453c56.

Elizalde is also a contributing blogger under his own byline for Investopedia.com, and his economic and investment analyses have been published online by some of the most respected financial media in the country, including Morningstar, Motley Fool, the Street and Yahoo! Finance. He shares his insights monthly through Path Financial’s subscriber-based, electronic newsletter, Straight Talk (http://www.pathfinancial.net/contact.html).

Light is an award-winning journalist with a distinguished career that includes editorial and contributing writer positions with The Wall Street Journal, Forbes, Business Week, Money Magazine, and AdviceIQ.com website. His work has also appeared in Barrons, Fortune, Investopedia, Huffington Post, Yahoo Finance and more. In addition to his Forbes.com blog he covers the financial aspects of the Trump White House for CBS MoneyWatch.

Path Financial is a Florida-registered investment firm, partnered with preferred account custodians Charles Schwab & Company and TD Ameritrade. Path is rated “A+” by the Better Business Bureau, and is located at 1990 Main St., in Sarasota, Florida. For more information, call 941.350.7904 or connect at http://www.Facebook.com/PathFinancial.

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Top 7 Benefits of 529 College Savings

By: Oxana Saunders

saint stephens exterior

Last week my son’s school, Saint Stephen’s Episcopal School in the Sarasota-Bradenton area, held its own graduating ceremony at Harvest United Methodist Church in Lakewood Ranch. Young graduates walked across the stage, turning their tassels to the right and posing for photos. Dr. Janet Pullen, Head of Saint Stephen’s, gave a wonderful speech along with featured graduation speaker and Saint Stephen’s alumnus Michael Schick.

Click here to read the Bradenton Herald's coverage and watch video.  Photography courtesy of Bradenton.com reporter Sara Nealeigh.

Click here to read the Bradenton Herald’s coverage and watch video. Photography courtesy of Bradenton.com reporter Sara Nealeigh.

saintstephens gradThe church was filled with joy, pride and a sense of accomplishment. Feeling tremendously happy for all the 78 young men and women graduating that day, I could not help but think that in about eight years my son will be one of those young people and I will be one of those parents. While this was a happy and exciting thought, it brought me back to the realities of what happens next.

The aspiration of many parents, including myself, is to send their children to college after they graduate from high school. With that comes a strenuous college selection and touring process, and even more difficult financial decisions on how to pay for it. College funding can be quite complicated and involves multiple areas of personal finance such as investments, assets, taxes, loans and financial aid. It can all be quite overwhelming.

One of the easiest and simple steps we can take today to make a big difference in our child’s college funding is to open a 529 college savings account. The article below, from SavingforCollege.com describes the top seven benefits of 529 accounts.

Click here to learn about the top 7 benefits of 529 plans.

Click here to learn about the top 7 benefits of 529 plans.

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Oxana Saunders Vice President Path FinancialOxana Saunders is the Vice President of Path Financial, LLC. She may be reached at 941.894.2571 or oxana@pathfinancial.net.

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Free monthly newsletter covering economic and investing trends

Raul newsletterWhat are you reading to stay on point for your financial future?

Cut through the noise and subscribe to Straight Talk, a free, monthly e-newsletter written by Path Financial founder, president, and chief investment officer Raul Elizalde. Straight Talk provides sharp analysis on economic and investing trends that affect investors’ bottom line. Click here to learn more and sign up.

Raul Elizalde’s commentary is frequently published on major financial and investment news sites such as Investopedia, and his insights have appeared on The Motley Fool, the opinion pages of the Sarasota Herald Tribune, Morningstar, and Yahoo! Finance.

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IMF Financial Stability Report Says Debt Binge Leaves US Corporate Assets Exposed

IMF says debt binge leaves US corporate assets exposed (ft.com)

IMF says debt binge leaves US corporate assets exposed (ft.com)

A debt binge has left a quarter of US corporate assets vulnerable to a sudden increase in interest rates. This is an issue Path Financial has been watching and writing about since 2015 (read our most recent analyses on this topic here (“Beware the Mountain of Debt” and here (“This is Where the Next Debt Crisis Will Come From“).

In its twice-a-year Global Financial Stability Report released earlier this week (April 19, 2017), the International Monetary Fund warns that the ability of companies to cover interest payments, by one measure, is at its weakest since the 2008 financial crisis. Historically, the scenario of large debt accumulations, combined with rising interest rates, rarely ends up well. Investors should be paying close attention to these red flags.

At Path Financial, our portfolio management process is focused on measuring and managing risk — a strategic and effective approach in creating a sensible balance between risk and return. Contact us to learn how we can help safeguard your investments: 941.350.7904.

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Limit Stock Market Losses to Improve Long-term Returns

men putting out fireInvesting in stocks can be brutal. According to research, the S&P 500 lost at least 10% from a previous high every two-and-a-half years on average, and at least 20% every six. A 30% loss happened every 13. It has fallen 50% from a peak three times since 1954. None of these declines were, or could have been, anticipated with any kind of precision, and they certainly do not come at regular intervals. And, remarkably, losses of this magnitude contradict the models we use to describe market behavior.

For example, the largest S&P 500 one-day loss was 20.5% in October 19 1987. According to a widely used model of stock market returns (which assumes that they form a bell curve around an average) the likelihood of the 1987 loss is similar to picking the right card in a deck containing as many cards as there are atoms in the known universe. In other words, the chance that such drop could happen is essentially zero.

Clearly the problem is not that impossible events happen but that our models are inadequate. A lot of analysts have tried to come up with better ones, but so far this quest has proven fruitless. We still can’t predict markets with any meaningful accuracy. This is why markets are not so much like the weather, as they are often compared, but rather like earthquakes, which scientists now admit are unpredictable.

But here is the good news: we cannot predict earthquakes, but we know how to build earthquake-resistant structures. Likewise, we cannot predict markets but we have techniques that can help us limit losses when markets tank.

There are some very basic reasons why limiting losses is more important than producing strong returns.

A well-known example goes like this: If you lose 50% of $100 you need a 100% return on the remaining $50 to break even. This means that a large percentage loss requires a very large percentage gain for full recovery.

But a far more important example is this: If you only lose 20% of $100, you will need just 25% to bring the remaining $80 back to $100. So a small loss requires much less effort to come out from it.

This is even more important for retirees who use savings to pay for living expenses.
For example, taking $10 after a portfolio falls from $100 to $50 leaves the saver with only $40. A subsequent 100% return only takes the portfolio back to $80. That means that the $10 withdrawal turned into $20 because of its bad timing.

But when $100 only falls to $80 and $10 are taken, a subsequent 25% recovery on the remaining $70 brings the value up to $87.50. This means that the $10 withdrawal turned into $12.50—a much smaller penalty for taking money out at the worst possible time.

The moral is clear: limiting losses is an essential element in portfolio management.
Limiting losses requires some basic processes in place. The best known is diversification, or investing in a mix of assets that tend to move in different directions. But a mix that looks diversified today may not be diversified tomorrow, especially when markets take a turn for the worse. This is because in down markets investors sell everything and correlations go up sharply. Therefore, a mix that does not take into account how the market cycle changes is prone to go through periods where diversification goes away just when investors need it most.

Adapting portfolios to market conditions requires dedication, patience, and a well-designed set of rules. This is, or should be, the professional portfolio manager’s job. Some investors insist that the portfolio manager’s job is simply to beat the market by picking a high proportion of winning assets. Accordingly, they are willing to pay a premium for those managers who seem to have the hot hands. This is a bad approach, commonly known as “chasing past returns.”

Many studies show that virtually no active fund can consistently beat its benchmark, and not because of fees. According to Standard & Poor, which publishes a regular analysis of fund performance, most funds underperform their benchmarks both before and after fees.

The simple explanation is that poorly diversified funds can only outperform their benchmarks through superior forecasting. But, just like for earthquakes, forecasting the market accurately is impossible. As one academic put it:

Going back to basics, the idea “to invest successfully in the stock market, you need to know whether the market is going to go up or go down” is just wrong. (Professor David Aldous, UC Berkeley – The Kelly criterion for favorable games)

While limiting downside exposure is crucial in portfolio management, having this protection in place at all times can be frustrating. If the market keeps on rallying, the “insurance” against declines appears to be an unnecessary drag on returns, just as going through the expense of building a house that is earthquake-resistant may seem like a waste as long as there are no earthquakes.

We all have complained about paying for insurance that we don’t seem to need. This is understandable as long as disaster does not strike. But the temptation to cancel insurance can be dangerous. If you are not yet convinced this is so, please reread the first paragraph to see why having a systematic process to protect investments from losses is a good idea.

What now?

We are a Registered Investment Advisor held to a fiduciary standard of care. We believe that our portfolio management process, focused on measuring and managing risk, can be very effective at creating a sensible balance between risk and return, partly by measuring financial and investment conditions often and adjusting portfolios through a well-defined process. We implement this process for our clients and we tailor it for their specific circumstances, and we always put their interests first. That means we do not profit from transactions or by selling any products. Our only compensation is based on the assets we manage, which goes a long way of aligning our interests with yours.

We can also help you evaluate your current goals and establish an investment plan aiming at steady, long-term returns while managing downside risk. You can download our report describing our investment methods and goals, or contact us if you would like to know more about how Path Financial’s investment process can work for you. We’ll be happy to set up a confidential meeting to discuss your path to financial success.

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Path Financial Expands Investment Advisor Team

Oxana Saunders Vice President Path FinancialSarasota-based investment advisory firm Path Financial, founded by president and chief investment officer Raul Elizalde, has named Oxana Saunders as vice president. Ms. Saunders will focus on business development, client relations, and portfolio management; she holds a NASAA Series 66 Investment Advisor Representative license and joined Path in early January 2017. Together, the two senior executives provide clients with 47 years of investment expertise honed during their respective careers on Wall Street.

Ms. Saunders will work with new clients to provide investment advice based on their life goals and personal circumstances. She is available to speak to individuals and organizations on a variety of investment-related topics, including helping clients better understand family investments, and how individuals can protect assets in times of life transition. Initial consultations are complimentary; Oxana Saunders may be reached at 941.894.2571, and oxana@pathfinancial.net.

A graduate of Baruch College with a degree in Finance and Investments, Ms. Saunders enjoyed a successful career on Wall Street prior to relocating to Sarasota in 2016. She began her investment banking career at Lehman Brothers (later Barclays Capital), where she rose to the position of Senior Vice President and was responsible for distributing a full line of products to U.S. institutional investors. She was instrumental in propelling the bank to the top of industry surveys, and was later was hired by Deutsche Bank to expand its client base. Her clients included first-tier financial institutions such as Alliance Bernstein, Oppenheimer Funds, and T Rowe Price.

“Ms. Saunders is a consummate professional with tremendous experience and intimate knowledge of financial markets,” stated Mr. Elizalde. “Throughout her career, she has made it a priority to help her clients and put their interests first. I am delighted she has joined Path Financial.”

Path Financial is a Florida-registered investment firm, partnered with preferred account custodians such as Charles Schwab & Company and TD Ameritrade. Path is rated “A+” by the Better Business Bureau, and is located at 1990 Main St., in Sarasota, Florida.

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Beware the Mountain of Debt

mountain of debtBoth interest rates and stocks soared after the US election. This is because everyone seems to agree that the new US administration will spend a lot, collect less in taxes, and cut back regulations.

This is a mix that could fuel the economy and be good for stocks. Not so with bonds: It will likely lead to higher interest rates as inflation rises, the Fed fights it with higher policy rates, and firmer economic activity pushes market rates higher.

It could also backfire on stocks if high inflation and higher wages actually drag economic activity down. Furthermore, higher US rates relative to rates abroad are sure to push up the US dollar, hurting exporters and manufacturers. This could also weaken the economy, bring down corporate revenue, and dim prospects for stocks.

This would be a worst case scenario of higher nominal rates and a decelerating economy. It is known as stagflation, and it has a reserved spot next to deflation as a nightmare scenario for policymakers.

Also, the economic policies that the new administration has so far hinted at are radically different from what has been the norm in the past few decades. This guarantees that they will face strong headwinds before they can be implemented, including congressional opposition. There is a chance that the consensus scenario may never materialize, may be watered down, or may take far longer than the market is willing to wait. So the optimism about stocks can prove to be short-lived.

Regardless of whether stocks go up or down, it is quite likely that Interest rates will remain above the historically low levels of last year, or climb even higher. This could exacerbate vulnerabilities in the economy that have so far gone relatively unnoticed.

One such issue, and a well-known trigger of past crises, is a large accumulation of private debt.

Debt is a key factor in lubricating economic activity: Households use it to buy homes or cars that could not otherwise afford, businesses use it to finance investments or fulfill orders in advance of payment, municipalities use it to pave roads and lay out utilities, and so on. Without debt, growth would be slow, halting, and ultimately impossible.

Households, businesses and governments always carry debt on their balance sheets, and constantly take new debt to replace the one that comes due. When rates go up, the cost of rolling over debt goes up as well. That is why higher rates tend to dampen economic activity, which is a normal swing in the business cycle.

But when indebtedness becomes too large, the balancing act of renewing old debt with new one becomes more difficult to pull off for reasons other than cost. Lenders start questioning the sustainability of the process, especially if rates go up sharply, and sources of funding dry up. Large debt accumulation then leads to a liquidity crisis, just when access to financing is needed the most.

The last few years of ultra-low interest rates sparked a massive increase in US business debt. The opportunity to borrow at some of the lowest rates in recorded history was too good to pass up.

But the new debt has not been used primarily to invest in the economy: much went to build cash reserves, and some more to buy back stocks or increase dividends. In the last couple of years private domestic investment has gone down while the stock of private debt continued to grow.

The earnings-to-net-debt ratio for S&P 500 corporations – a key measure of borrowers’ ability to reduce their debt levels – is at its lowest level in at least a decade, according to the research firm Factset. And while some analysts find comfort in the fact that corporate cash is also very high at $1.75tn, the reality is that much of it is concentrated in just a few technology companies: Google, Apple, Microsoft, Cisco and Yahoo account for a third of all US corporate cash.

We showed the chart below in various newsletters in the past and we updated it with the latest numbers. The chart shows that there has never been a larger or faster 4-year accumulation of non-financial business debt. Not surprisingly, prior surges of indebtedness ended in tears.
graph

This is not solely a US problem. China, most pointedly, has seen an explosive ballooning of private, non-financial corporate debt that just reached an eye-popping 170% of GDP.
Some early signs of a brewing debt crisis would include an increase in corporate credit rating downgrades, Chapter 11 restructurings, liquidity problems in the bond market, and so on. So far, these symptoms are not evident, but conditions could turn optimal for a debt crisis if interest rates rise quickly, budget deficits get out of control, and economic activity does not pick up.

Even without a sudden crisis, it remains to be seen how the mountain of global corporate debt can be gracefully wound down without anyone getting hurt. History shows that large debt accumulations rarely end up well. Close attention to any early warnings will be crucial to navigate through the rest of 2017 and beyond.

What now?

We believe that our portfolio management process, focused on measuring and managing risk, can be very effective at creating a sensible balance between risk and return, partly by measuring financial and investment conditions often and adjusting portfolios through a well-defined process. We implement this process for our clients and we tailor it for their specific circumstances. We can also help you evaluate your current goals and establish an investment plan aiming at steady, long-term returns while managing downside risk. Please send us a request for a copy of our most recent whitepaper describing our investment methods and goals, or contact us if you would like to know more about how Path Financial’s investment process can work for you. We’ll be happy to set up a confidential meeting to discuss your path to financial success. Read more.

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Why bonds collapsed and what you can do about it

pathThe result of last week’s election made some Americans happy and others miserable. Given how high emotions are running, it is remarkable that voter participation was so low: Almost 47% of voters did not show up to choose the next president. Many people, it seems, were indifferent. Not so the bond market.

Take the US 10-year note, for example: in the week from 11/4 through 11/11 it climbed 44 basis points, from 1.78% to 2.22%. This is the largest move, both in absolute and relative terms, since the New York Fed started publishing data in 1962. Because prices and interest rates moved in opposite direction, bonds crashed.

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The size of this change is hard to overstate. It dragged bonds around the world: the German 10-year bond rate surged 45 basis points from -0.13% to 0.32%, for example. The UK’s 10-year bond rose by an astonishing 78 basis points, from 0.64% to 1.42%.

These moves wiped out trillions of dollars of savings allocated to fixed income. Wealth destruction is probably more brutal in Europe and Japan, where individual savers and institutional investors rely far more heavily than Americans on fixed-income products.

Why did bonds suffered this much?

President-in-waiting Trump has said during the campaign that, under certain circumstances, he would be willing to renegotiate the US debt, which would be a repudiation of the “full faith and credit of the United States.” This is exceedingly unlikely to happen, both because he would be unleashing a catastrophe and because the legal hurdles are too steep. But he said it, and it affects perception.
Many economists expect that the combination of large tax cuts and public infrastructure spending promised by Donald Trump would increase the size of the US debt by trillions of dollars, even after accounting for the potential growth generated by the stimulus. We don’t know yet whether this is in fact the plan of the new administration. If it is, and economists are right, it will also weaken the credit quality of US Treasuries.

Inflation expectations have gone up, partly because of the possible stimulus mentioned above. Ten-year expected inflation (calculated from TIPs) climbed 20 basis points, from 1.68% on 11/4 to 1.88% on 11/11. In part, this is a consequence of the possible stimulus discussed above.

Whatever the reasons, the market appears convinced that rates are heading higher, and Investors who are still exposed to long-duration Treasuries need to look at ways of transitioning out of them.
Unfortunately, the precipitous and historical magnitude of the recent move raises the question of whether to cut losses now or to wait for some kind of “relief rally” providing a better exit point.
The problem is that rates are universally expected to climb. Therefore, the majority of investors are likely to be waiting for the same exit point, which gets in the way of it happening at all.

Another problem is that when the Fed started raising or lowering rates in the past, it almost never stopped at one or two hikes. The higher-rate path that started last December is likely to be a multi-hike trail. This will push bond rates higher still.

Investors are exposed to bonds in two ways. One is by holding individual bonds, which is not the worse option because the scheduled payments take place independent of market conditions. Another is through mutual bond funds, which unlike individual bonds are at the mercy of rising rates and have no guaranteed schedule of payments. Unfortunately, individual investors are far more likely to hold bond funds than individual bonds.

The larger issue is that fixed income, up to now an integral part of investment portfolios, may no longer be the best asset class to diversify equity exposure.

The well-known “60/40” strategy that calls for a mix of 60% in stocks and 40% in bonds worked very well for the last 35 years of declining interest rates. But, if rates have bottomed out and start to climb in earnest, bond funds could be a significant drag on portfolio performance. This is especially so in the early stages of rate increases, when higher interest payments are not enough to offset losses of principal. To make matters worse, interest rate trends are measured in decades, not years. Once they start, it’s anybody’s guess when they will end.

Investors needing diversification may have to change their approach. One is through cash, which simply muffles equity returns. Another, which we advocate, is by abandoning the idea that a static diversification such as the “60/40” is appropriate for all market conditions. A better way, in our view, is to become considerably more active in asset allocation. We have developed specific processes to implement such active strategies.

In the last few years, investors were told many times that interest rates were heading higher only to see they go lower. It’s still early to say whether we have finally reached the turning point. But the new era that the United States is entering could finally get us there. If so, investors will need to change the way they diversify their portfolios going forward.

What now?
We believe that our portfolio management process, focused on measuring and managing risk, can be very effective at creating a sensible balance between risk and return. We implement this process for our clients and we tailor it for their specific circumstances. We can also help you evaluate your current goals and establish an investment plan aiming at steady, long-term returns while managing downside risk. Please send us a request for a copy of our most recent whitepaper describing our investment methods and goals, or contact us if you would like to know more about how Path Financial’s investment process can work for you. We’ll be happy to set up a confidential meeting to discuss your path to financial success. Read more.

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