Author: Tim Porter

As we look at the last quarter of the year it’s a good time to talk performance. While it’s been a great year for the stock market – up double digits in 2017 – the more conservative portfolios are not keeping pace. Even though risk has been rewarded this year, our less aggressive Income Portfolio is still outperforming the S&P 500 over ten years. The reason? Ten years back includes the Great Recession and that’s the reason, for some, to be conservative.

I want to evaluate why the Income Portfolio is lagging so far behind this year, discuss some redeeming qualities of this less aggressive portfolio, and then offer a suggestion if anyone is underwhelmed with their portfolio’s return.

Why is the Income Portfolio not keeping up with the stock market?

We use fine people at Morningstar to help us invest and they had mixed results this year. The Morningstar Hare Portfolio – what we base our Growth Account on – is doing quite well, up about 20%. However, the Morningstar’s Dividend Portfolio – what we base the Income Portfolio on – hasn’t kept up with the stock market, up approximately 4%.

Returns in the stock market this year have primarily been in growth companies, not big dividend paying companies. A lot of the companies Morningstar selects for their Dividend Investor Portfolio are utilities, real estate, oil & gas, and telecom. These are typically not known for their great growth potential and are bought more frequently for their consistent dividends, which is exactly why we own them.

With interest rates heading up now, the dividend-paying companies will be paying more interest on their debt and that negatively affects profits. We knew interest rates were going to be a headwind, but we’re comfortable with the risk. We thought the consistency of the growing dividends and relative safety of the essential service industries are a great place to invest for those with a moderate risk tolerance or who use the accounts to generate income.

Should I continue to invest more conservatively than the market?

The time to evaluate a more conservative portfolio is not in the 8^th year of an up market, which is where we are today. The best time to be conservative is during a downturn. Think 2001, 2008, and 2011. How close are we to the next downturn? We’re not sure.

This more conservative approach was a fantastic strategy in these ugly years, not so much in 2017. However, we can still make the case for staying in a moderate risk portfolio using the long-term graph. Let’s look at the track records of our target/model portfolios looking backwards ten years. These returns will differ from actual results and do not imply future performance:

Current Income Portfolio

(moderate risk):

1 yr return 3.6%,

3 yr return 5.15%,

10 yr return 7.75%

 

Current S&P 500 Returns

(aggressive risk):

1 yr return 18.6%,

3 yr return 10.8%,

10 yr return 7.44%

 

Current Growth Portfolio

(aggressive risk):

1 yr return 17.7%,

3 yr return 14.3%,

10 yr return 19.33%

 

Income Portfolio

As you can see, the 10 yr return of the Income Portfolio has kept up with the stock market while having less than 60% of the volatility of the stock market. This is because of the ugly 2008-9 markets, which hammered the stock market and left the Income Portfolio much better off. Without that time frame the Income Portfolio wouldn’t keep up.

There will be another downturn and the Income Portfolio will be the new favorite portfolio again. In order to participate more in growth years we are adding more funds. Just today we added a large position in an ETF called First Trust’s Dividend Leaders FDL because it’s had better growth. This should help increase returns in the growth years ahead. 

Growth Portfolio

On the other hand, the current Growth Portfolio is doing well by beating the stock market over 10 years with same volatility as the stock market. Matthew Coffina, CFA at Morningstar, has performed really well the last four years he’s been at the helm.

Another change we made on his recent recommendation is selling Time Warner TWX. This had a nice gain for those who’ve held it for more than a year. We are replacing TWX today with toy company Hasboro Inc HAS, which is down 9% today on ToysRus bankruptcy news and is highly touted by Motley Fool, another subscription we follow.

Can I take more risk?

A suggestion we’ve been making for those that feel like they can take more risk, is to invest at least a portion of their portfolio in the more aggressive Growth Portfolio we offer. We can, of course, move the whole portfolio, but this might not be appropriate. To accomplish this, we may need to create a separate account to keep the two portfolios separate.

Doing this can help some clients smile when the market races ahead, because they’ve participated in the runup. By moving only a portion of a portfolio, clients can also smile when we inevitably get “the” pullback, because they’re still invested in the more stable Income Portfolio.

I’m sure there are more questions out there. Please don’t hesitate to contact us to talk about your specific situation.

Thanks for reading,

Bruce Porter & Tim Porter, CFP^®

GE’s being sued for committing the cardinal sin of investment advisors… self-dealing, aka double-dipping. This filthy act resulted in a $700 Million lawsuit by a number of employees that used the GE 401k between 2011 – 2016. Just to put it into perspective, this lawsuit is seeking greater than 10x the largest 401k lawsuit ever paid. Lockheed Martin paid $62 Million to settle a similar lawsuit in 2016.

Is double-dipping really that bad? When George double-dips in the classic Seinfeld episode, the outraged Timmy makes clear double-dipping a chip, “is like putting your whole mouth in the bowl!” The same chip was never meant to collect two piles of dip and 401k providers are not meant to collect two piles of fees. As Timmy would say, “Just take one fee and end it!”

Another egregious example of double-dipping can be found in Washington DC. Politicians get paid to make decisions that are in the best interest of their constituents. However, all too often their pockets are lined with kick-backs in the form of campaign donations or promises of jobs after their terms are up. These gifts are made to mold legislation that benefit the corporations the lobbyists represent. When politicians double-dip, they have abdicated their responsibility to their constituents.

As an employer, when General Electric offers a 401k to employees there are strict rules to follow. Any employer in this situation must make decisions in the absolute best interest of the employee. It’s called being a fiduciary, and GE is being sued for failing their fiduciary duty in a couple ways:

• Put themselves first, not the employees. The lawsuit alleges the only reason the GE funds were in the 401k was because GE was making money on the funds. There’s probably some truth to this.

• Creatively compensating themselves in two ways: by charging fees to offer the 401k AND collecting fees to manage the investments as well. Here lies the double-dip. The fiduciaries that set up the plan and choose the investments should not get kick-backs on the underlying investments. That creates a question in the investor’s mind as to why the investments were chosen – Was it for performance or the kick-back?

• Mediocre results is allegedly what the employees were subjected to in the 401k. There were better mutual funds available that could have been chosen other than the GE funds. This may be true, but to be fair, my research showed two of the GE funds were actually pretty good. They were inexpensive and performed better than their respective indexes. That’s a win.

Here’s the thing, General Electric is not the only one double-dipping. This kind of behavior is rampant not just in 401ks – advisors do this to individual investors all the time. It drives us crazy.

At Retirement Income Advisors we are double-dip free. In fact, as a way to prove our value and earn people’s trust, we’re offering to do an evaluation of the GE 401k for any GE employee free of charge. We’ll provide our take on each mutual fund in the 401k line-up and offer what we would invest in if we were invested in it. If you’re interested please contact us at:

888-765-4015  or  [email protected]

To see what else we’re offering please visit Our Offer and click on Bernie below to learn more about us. 

Thanks for reading,

Tim Porter, CFP^®

When we’re looking to keep people’s attention, we don’t typically talk about a salt mine. That’s not the case today. We learned today that Compass Minerals CMP, a salt mine and fertilizer company Morningstar recommends, had a partial ceiling collapse due to geological movements in its mine in Goderich, Ontario. The good news is no one was hurt. The bad news is it will put a dent in their earnings for the next six weeks while they fix their main conveyer system (pictured).

This stock was 15% undervalued prior to this news and after today’s drop is now 28% undervalued. We saw this as a great opportunity and bought more for clients in our Growth, as well as the Moderate Income portfolios, since the stock pays a hefty 4.7% dividend now.

Morningstar states that 60% of CMP’s salt sales are used for highway deicing (not in Portland, of course). Demand for deicing salt has been down the last few years because of warmer than average winters and less snow days. But the warming weather is only partly to blame.

The warming trend will only produce 4% less snow days in our country over the next decade, but it will likely bring more volatile winters. This has been proven recently with record snowfall like they saw back East in 2014 and some of the warmest winters most the country experienced the last two years.

In short, here are the reasons we like the stock and bought more today at the depressed price:

• When winter is cold again, the stock will likely be at fair value again
• Overreaction today to a ceiling collapse that’s a short-term issue
• 4.7% dividend while we wait for stock to rise to fair value

Let us know if you have any questions,

Bruce Porter & Tim Porter, CFP^®

143 million US consumers had their information compromised recently through the Equifax cybersecurity event. Below is information on what we’re doing to protect ourselves in light of this event (information provided from an article here).

1. Visit this website to see if you were involved. I found that I (Tim) was involved, but my wife was not.

2. Consider signing up for the free credit monitoring Equifax is offering through TrustID at this website. Equifax clarified by signing up for this, you are not required to waive your right to any class-action lawsuit related to this incident.

3. The last and most effective way to protect yourselves is to freeze your credit. Usually there are fees to do this in the $10-$15 range per credit bureau, however, Equifax is waiving their fees. Contact info is below to do this:

Equifax
PO Box 740241
Atlanta, GA 30374
www.equifax.com
888-766-0008

Experian
PO Box 9554
Allen, TX 75013
www.experian.com
888-397-3742

TransUnion
PO Box 2000
Chester, PA 19016
www.transunion.com
800-680-7289

SMB Security

This latest incident has made us grateful for our efforts to secure information we have here at SMB. Within the last two years we’ve upgraded our firewall, a SonicWALL TZ300 recommended by a local security firm, and our cloud storage provider to Box.com.

We chose Box.com because online security firms are using them for their superior security. They also work with the national regulators (FINRA) of investment firms like ours to ensure they have policies and procedures in place to protect our firm and our clients.

TD Ameritrade Security

We’ve also checked in with TD Ameritrade and reviewed their policies and procedures. As expected, they have a high level of security including firewalls to keep public servers separate from private servers, 128-bit encryption to keep eyes off sensitive information and anomaly detection to alert them of unusual behavior in accounts.

TD also has an Asset Protection Guarantee that says as long as clients are taking reasonable precautions to keep information safe…

“If you lose cash or securities from your account due to unauthorized activity, we’ll reimburse you for the cash or shares of securities you lost.”

We couldn’t be more pleased with this and gives us even more confidence in TD. I also have additional information on this topic I can send. Please let me know if you’d like more.

Thank you for reading,

Bruce Porter & Tim Porter, CFP^®

This month we attended a conference for our friends at the Oregon Trial Lawyers Association in Sunriver, OR. We manage investments for the association and provide 401ks to many of the firms. To keep things interesting at our booth, we made a cardboard cutout of Bernie Madoff and contrasted our values with his lack of values.

Here’s what we thought was most helpful to understand:

Secret Strategy – Bernie had a strategy that he wouldn’t allow anyone to know about. His famous phrase when asked was, “Trust me, I know what I’m doing.” Secret strategies don’t exist. Before you put your hard-earned money with someone to invest, you need to be able to understand how they’re investing it.

Knowable Strategy – Our strategy is no mystery. We either look for companies with growing dividends in our income portfolios, or search for undervalued up-and-comers in our growth account. It’s a strategy we follow from Morningstar and both have done well.

Creative Compensation – You could say Bernie had a real creative way of charging fees. He didn’t let those fee agreements keep him from helping himself to 100% of the accounts.

Clear Fees – We believe fees should be simple enough to be understood. Our fees are just above 1% per year of the account value on average.

Advisor First – I think it’s clear Bernie didn’t have his clients’ best interest in mind. He had his OWN interests in mind.

Client First – We are fiduciaries and are legally (and morally) obligated to act in our clients’ best interest instead of our own. This means we can’t sell a lower quality investment to a client because it pays us more.

Mythical Results – Bernie’s results were too good to be true, but no one could see that because he controlled the statements and there was no third party to verify his claims.

Realistic Results – We work with a third-party custodian, TD Ameritrade, so clients have the peace of mind of knowing their statement values are not made up and have been verified.

We recognize Bernie Madoff and his $65 Billion ponzi scheme is old news. However, we still see many advisors who use some of Bernie’s old tricks: hidden fees, overly complicated strategies, advisors focused on themselves, and the promise of returns that are unreasonable.

These people are a disappointment to our industry and we work hard to educate our clients and the public so they aren’t taken advantage of. If you think your friends or your family are in this situation and need a second opinion on an investment, please don’t hesitate to contact us. We’re happy to share our thoughts.

Thank you for reading,

Tim Porter, CFP^®

This last week I taught my son, Henry, a lesson on getting back to basics. We packed up everything we needed to survive for a few days and headed out to the Jefferson Wilderness. This was Henry’s first-ever backpacking trip. We hiked into Pamelia Lake, which is something Bruce and I did when I was a kid.

The best part of the trip was the scenery. Not the trees, lakes and peaks, but watching Henry’s face light up at every small stream, funny rock, or pesky chipmunk we came across. All in all, I think he liked the experience because I caught him bragging to his cousins, “…no other five year old could’ve hiked ten miles in one day like me.” Something I may, or may not, have mentioned to him.

My experience with Henry can also teach us about investing. Value can be found in areas that are sometimes forgotten. An example of this can be seen from the Growth portfolio this month. Matthew Coffina, CFA from Morningstar ditched the online payment processor Paypal PYPL for a nice gain. He instead bought the more traditional, not online, retailer O’Reilly Automotive ORLY. This is an interesting move away from the hot technology stocks and into the more basic industry of brick and mortar retail.

Coffina’s decision was not based on large macroeconomic trends but company specific information. He believed even though PYPL had risen sharply (about 80% from when we first bought it) the price of the stock was now too high and due for a pullback.

In contrast, he considers ORLY to be undervalued after a recent earnings report showed a slowdown in earnings and sent the stock down sharply, now down 30% from its highs. The fear is that online sales, largely from Amazon.com, took a bite out of the auto parts business last quarter. Coffina thinks this to be an exaggerated concern and cites mild winters, delayed tax refunds and newer cars on the road as the reason. Not Amazon.

As someone that works on his own cars, I still prefer to buy car parts in the store rather than online. There are so many things that can go wrong on a repair; I find it’s still nice to talk through the job with someone behind the counter. Another advantage these traditional stores offer, like O’Reilly and Napa – owned by Genuine Parts GPC in the Income portfolio – is the ability to rent specialty tools that customers may only need to use once.

Amazon may still be a threat to these retailers, but the auto parts stores do have a service component that’s difficult to replicate. For these reasons we agree with Coffina’s assessment, “…while investors will need to be vigilant about Amazon, I think there’s a good chance that O’Reilly’s financial results will bounce back later this year and into 2018.”

Jeremiah Forrister

In other news, I’m extremely excited to announce a new addition to the SMB Financial Services team. Jeremiah Forrister joined us July 1 as an Investment Advisor Representative. He’ll also be answering the phones here and helping us with other administrative tasks as he learns the business and starts to build his own book of clients to serve.

Jeremiah has a lovely wife, Alicia, and two nine-month twins, Elias and Ember. He finished college in 2013 and worked his way up to a supervisor role at Costco before transitioning into the financial services business. We’re happy to have Jeremiah’s help around the office and look forward to introducing him to you in the future.

Thank you for reading. Please don’t hesitate to contact us if you have any questions.

Tim Porter, CFP^®

Who doesn’t like new underwear… in their portfolio? Especially when it pays 8% in the first month! Just after statements went out last month we picked up a position in the income accounts that we’re very excited about.

Hanesbrands, Inc HBI is an apparel company that most of us are familiar with. They own the recognizable brands such as Hanes, Champion, Maidenform, Playtex, and L’eggs. Hanes is the number one selling apparel brand in the U.S. and is found in eight out of ten households, according to The Clever Contrarian.

The stock was down 25% in less than a year and is valued by the smart people of Morningstar 40% higher than it currently sells for, meaning it has a 40% upside. Based on that, we took the opportunity to invest for all income clients in hopes the price will head back towards fair value soon.

For the growth accounts we purchased a different stock. Mercadolibre MELI is South America’s version of Amazon here locally. Over one third of all people in South America have used the service and it appears to be on track for a similar growth track as Amazon – a stock we wished we bought in the growth account years ago. The start has not been as good for MELI, but we’re optimistic this will be a great performer in the long run.

Masters Degree

In other news, I’m extremely excited to announce an accomplishment I (Tim) have been working on for five years now. As of the end of last month I’ve officially finished my Masters of Science in Personal Financial Planning! I began working on the degree in 2012 and it resulted in obtaining the Certified Financial Planning (CFP^®) designation in 2014 and now a Masters.

The best part of the schooling was the topics covered – investing, insurance, retirement planning, estate planning and taxes – are 100% applicable to the everyday situations we deal with here in the office with our clients. I’ve already had the chance to use the education in these areas on multiple occasions and I look forward to continuing to use it in the future.

If you have any questions about your current situation or portfolio, please don’t hesitate to contact us.

-Tim Porter, CFP^®

A May 7^th French Presidential run-off is a result of this last weekend and the ripple effects are being felt in the stock market. Like the US presidential election where sixteen traditional Republicans lost to a non-traditional candidate, France had a crowded field of eleven vowing to lead the country as its next president. The result was similar, as the centrist Macron won the most votes at 23%, and the Trump-like runner-up Le Pen came away with 22%.

The Wall Street Journal summed up the election this way, “On Sunday the EU and its demands of free trade and open borders became the defining fault line of a new political order. Macron, a former investment banker who seeks deeper EU integration vs. Le Pen an opponent of the EU, its Euro common currency and runaway globalization.”

The contrast between the two candidates is important because the result has, and will, affect our portfolios. Lessons learned in the last 12 months have taught us anti-establishment change around the world is here and a force to be reckoned with. Here’s how we believe the outcomes could move the markets and our accounts:

Le Pen wins – This outcome represents the wildest change and the market should sell off dramatically. We believe this will result in FREXIT (France exiting the EU) and would spell the beginning of the end for the Eurozone. The EU is the largest economy in the world with 24% of the world’s GDP vs 22% for the US in 2014. If the EU breaks up, it would be a great blow to the global economy — a little like our states seceding from the Union to become their own countries. This would end in terrible inefficiencies as traveling and doing business across state lines would become much more difficult. The same is true for the EU.

Le Pen, however, is currently a 20-point underdog in the polls, so she’s unlikely to win…just like BREXIT was unlikely to pass and Trump was unlikely to get elected.

Macron wins – Macron is more or less like a Hillary without any elected political experience. The fact that he had the most votes on Sunday indicated to the market that things are likely to continue in France as they have. This was a sigh of relief for the market, which has been up two days in a row now.

Anti-establishment has won – Regardless of who receives the most votes on May 7^th, it’s clear that France, like the UK and US, is ready for change. There will be legislative elections in June and the growing dissatisfaction with the existing Socialist and Conservative parties should continue to play out. The result will likely be more volatility as uncertainty increases in the future.

In case you’re feeling anxious about this news, we want you to know this is not a unique event. There’s always news that’s concerning and eventually it will show itself in a down market and down accounts. We stand ready to take advantage of the next downturn regardless of the particular headline. The most important part of our job, and the part we enjoy the most, is helping our clients make good decisions during these tumultuous time periods.

Please call us if you have any questions or if you’d like to discuss this election, or anything else, in more detail.

-Tim Porter, CFP^®

It’s a wonderful time of year, I’ve seen the sun more than once this week. Flowers are beginning to bloom and taxes are due…. well, maybe that’s not that great for some. As tax day approaches we’ve been getting calls regarding how the investments we use are taxed. During those calls, we’ve heard some interesting stories of how other advisors are taxing their clients financially and emotionally.

Well intentioned, but inexperienced advisors can wreak havoc on their clients this time of year. In an effort to help clients, some advisors create massive messes that have to be cleaned up by accountants and paid for by clients. A little like a young child who tries to help a parent in the kitchen. Good in theory, but not without keeping a close eye on them.

Recently, a client told us of an advisor who had invested her funds in eleven mutual funds. The client wanted a distribution every month, so the advisor would sell multiple mutual funds to generate the cash, again every month. Every sale created excessive paperwork for her accountant that resulted in an unnecessary five-hour tax prep bill!!! She will not be awarded advisor of the month. But that’s not the worst story we’ve heard.

Another client came to us after an advisor recommended she sell all her US Bank stock to buy an annuity (that’s one strike, we hate annuities). Seemed like a good idea to the client, after all diversification is great, right? Unfortunately, the sale of the US Bank stock generated a $50,000 surprise tax bill!!! That’s strike two and three!

I shouldn’t just tell on others, we occasionally do things that create stress for our clients too. Many clients will recognize the K-1 as something accountants don’t care for, but we believe the generous distributions generated are in the best interest of our clients.

Speaking for all investment people, we advisors occasionally get tunnel vision and focus on making as much money as we can for our clients while not paying as much attention to the tax side. The two cannot be separated though. After all, what good is a 10% return if you have to give it all back in taxes? We must continue to communicate with our clients’ accountants and try to minimize tax bills or at least prepare our clients for larger tax, or accountant’s bill, if we think one’s coming. After fourteen years we’re getting better at this, but we’re not perfect yet.

Not tax related, but investment focused, we are purchasing a conservative Barclays Bank bond-like note paying 2.4% per year while we wait for the inevitable pullback in the stock market. As soon as that happens, we’d like to buy the stock National Grid NGG, a British utility company paying (and growing) a 5% dividend in the income portfolio. For the growth portfolio, we’re looking to buy QuintilesIMS Q, a pharmaceutical related company that outsources clinical trials and manages pharmaceutical sales data. Morningstar says fair value on this company is $88/ share and it’s currently 10% below that.

Thanks for taking the time to read. Please call us with tax or any other questions you’d like to discuss.

-Tim Porter, CFP^®