Let’s meet with Phil & Rich

As interviewed by Michael Regan on January 3, 2014

Let’s start at the top – what was your greatest achievement as a team in 2013?

Going through another year of deepening relationships with our clients.  We are very lucky to say that our clients are very interesting and wonderful people.  So going through another year of building those relationships is very satisfying.

Let’s look at the flip side of that coin… tell us what was your greatest challenge in 2013?

Our investment exposure to inflation sensitive assets.  We have been of the mindset for a while now that all this QE in the United States as well as many other reckless monetary policies being pursued around the world are eventually going to produce some nasty unintended consequences… the most obvious of those consequences being inflation.  And that hasn’t happened yet.  As it turned out, 2013 was a great year to be invested in US equities and pretty much a terrible year to be a contrarian.

As you reflect on the year, what opportunities are you currently focused on in 2014?

Providing a safe a predictable income stream for clients while still allowing for capital growth.

Are there any real dangers that investors should be wary of in the coming months?

How much time do you have?…  In all seriousness, there are potential problems all over the place.  That’s not to say that these problems are all going to explode at once, or that a market crash is imminent, but there are risks out there and they are real. Take the analogy of an avalanche.  How does an avalanche start?  Is the cause of an avalance one single snowflake falling in the wrong place at the wrong time causing the whole mountain of snow to collapse?  Or is the real problem that the whole snow structure of the mountain was unstable to begin with?  The truth is that there were probably fault lines all over the place on that mountain and it was only a matter of time until one of them would eventually give.  What we’re getting at is that it’s more important to understand that the current environment is structurally unsound than it is to try to identify exactly what the event is going to be that starts the avalanche.  Again, not saying that everyone should duck and run for cover, just that they need to be extra careful about understanding the risks they are really taking with their investment capital.

What advice are you giving your clients who have already retired and need income from their portfolios for the next 20 years?

Stay out of bonds.  It can be tempting for income investors to go way out on the yield curve and buy bonds with very long maturities (5-10 years or more) because those are the only bonds that actually pay a respectable interest rate.  But we say don’t do it.  Don’t chase the yield because the risk is absolutely not worth it.  Interest rates are likely to rise, and when they do it could be really painful for anyone holding long-term paper.  Instead, look for income in places like dividends and partnerships where the interest rate risk is not so severe.

Is there a prospective client profile that you feel uniquely set to serve well in the coming year?

Income investors.  People who have worked their entire lives saving and being prudent and now want that savings to produce income for them.  This is the type of person who used to be able use very low-risk investments like CD’s, treasury bonds, and even corporate bonds, and still make a reasonable return on their money.  As recently as 2007, investors used to be able to put their money into 1 year CDs or 2-3 year treasuries and make around 5%… and that was good enough.  Those days are long gone, and now that same investor would be lucky to get 0.25% using those same methods.  So $1,000,000 used to provide $50,000 of income and now it only provides $2,500.  That math doesn’t work for most people.

What should concern me about Janet Yellen as our next Chairman of the Federal Reserve?

I think it goes way beyond just Janet Yellen.  We are concerned about central bank actions everywhere.  But regarding Yellen specifically, it does matter that she is the new chairperson.  I don’t think anyone can look back over the last few decades and say that it didn’t matter that Greenspan and Bernanke were the last two Fed chairs.  Greenspan reigned during the dot.com bubble, and Bernanke during the housing bust.  So using history as our guide, Janet Yellen will very likely preside over some sort of crisis during her tenure as the Fed chairperson… what we don’t yet know is how she will manage that crisis and what the long-term effects of her decisions will be.

What currencies are trending toward greater risk in 2014? Which are trending stronger?

Let’s first remember that when talking about currencies, currencies only have value in relation to something else.  So for example if someone tells you that the dollar is going to weaken, you have to ask them, “against what?”  It’s most common for currencies to be measured against one another such as dollar/euro, dollar/yen, euro/yen, etc…  Since every major government is attempting to weaken their currencies all at once (in order to boost exports and growth and therefore help their ailing economies) it’s unlikely that any one major currency will make a big move against any other in 2014.  The one exception to that might be the Japanese Yen.  The writing seems to be on the wall that the Yen will weaken against the dollar this year if for no other reason than it is the official stated goal of the Japanese leadership to do this as a means of helping Japan recover.

Any closing advice for young families who are just beginning to invest and save for their future?

Live below your means and save.  Save more than you think you need to save.  And if anyone ever presents you with an idea that seems too good to be true, it probably is.  The only investor who made money every single year was Bernie Madoff – and as it turns out he wasn’t really an investor at all. (Michael – That last bit may be a little too strong… I’ll let you decide)

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This post was written by Conscient Capital