Becoming a Better Financial Steward(in an age of investment complexity,

financial illiteracy and fake news)

Russ Wiles

The Arizona Republic, azcentral.com, USA Today

Nov. 4, 2017

My top articles this year• Arizona’s mandatory paid sick-leave law (May/June/July)

• Dismissal of Wells Fargo’s Arizona president (February)

• Arizona billionaire arrested in opioid crackdown (October)

• Incorrect state 1099-G forms could affect 580,000

Arizonans (January)

• IRS warns of tax-refund delays (January)

Americans are getting wealthier • Household net worth, $97,800, at an all-time high (JPMorgan Chase)

• Net worth has been climbing steadily since the recession low in 2009

• Exceeds the pre-recession peak of $68,200 in 2007

• You now need $2 billion to make the Forbes 400

And feeling better, too• Personal-financial satisfaction at a 24-year high (AICPA survey)

• Consumer confidence at 17-year high (Conference Board)

• Driven by higher stock prices and home values, more jobs

• Fewer loan delinquencies and bankruptcies

• Mild inflation and interest rates

How the wealthy invest

• Stocks, 31 percent

• Cash, 27 percent

• Bonds, 18 percent

• Real estate, 14 percent

• Other, 10 percent

Capgemini/RBC World Wealth Report 2017

(Survey of people with $1 million-plus net worth)

But a wide rich-poor gap persists

• The richest one-fifth of households have $630,800 in net worth

• The poorest one-fifth of households have -$6,000 net worth

• Four in 10 Americans would struggle to come up with $2,000

• Many lack emergency savings of 3 - 6 months of expenses

Federal Reserve, Census Bureau, Finra

Not everyone has shared in the rebound

• The U.S. homeowner rate has dropped to 63.7 percent from 69.2 percent in 2004

• Perhaps half the country doesn’t have exposure to the stock market

• Consequently, many Americans missed the recovery in home values, stock prices

Things are a bit worse in Arizona• Financial assets/income: C

• Businesses/jobs: D

• Homeownership/housing: B

• Health care: F

• Education: D

• Overall rank: 40

Prosperity Now scorecard of states

Financial literacy remains low

On a 5-question investment quiz by Finra, Americans on average got only 3.2 answers correct. The questions are basic. Some examples:

• If interest rates rise, what typically happens to bond prices?

• A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less. True or false?

• Buying one stock usually provides a safer overall return than a stock mutual fund. True or false?

On tougher tests, Americans do worse

The American College’s retirement literacy quiz deals with investments, annuities, Social Security, Medicare and related topics

• 38-question test was given to affluent people in/nearing retirement

• Participants were ages 60-75 with $100,000+ in household assets

• 74 percent failed the 38-question test

• Average score was 18 answers correct (47 percent)

(Take the quiz yourself at: TheAmericanCollege.edu)

Areas of weakness

• Only 38 percent knew $4,000 is the most that can be withdrawn, reasonably safely, each year from a $100,000 retirement account

• Only 34 percent knew that a large negative return at the start of retirement has a bigger impact on a portfolio than a similar loss several years before or after

• Only 33 percent understood it’s more effective to work 2 years longer and/or defer Social Security for 2 more years rather than to increase investment contributions by 3 percent for the 5 years prior to retiring

Financial concerns/complaints

• 72,000 banking/credit-focused complaints from people 62 and older

• 31 percent: mortgages

• 17 percent: credit reports/scores

• 17 percent: debt collection

Consumer Financial Protection Bureau, U.S. PIRG

Buffett’s bet

• Could an S&P 500 index mutual fund beat 5 hedge funds of funds?

• A 10-year bet, with one year to go

• After 9 years through Dec. 2016, Buffett is winning

• S&P 500 +85 percent; best hedge FOF +63 percent

Berkshire Hathaway annual report

How could a mutual fund beat a hedge fund?• Lower ongoing shareholder-borne expenses

• No sharing of profits with the managers

• Difficulty in picking individual stocks

• Difficulty in timing the market

In Buffett’s words

“My friends who possess only modest means have usually followed my suggestion. . . None of the megarich individuals, institutions or pension funds has followed that same advice when I’ve given it to them.”

”The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket — you name it.”

“The financial elites . . . have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars.”

Are we near a stock-market peak?

• DJIA, S&P 500, other indicators at historic highs

• Wilshire 5000 index up 291 percent since March 2009

• 49 record highs in 2017 through Oct. 31

• P/E ratios, other valuation measures rising

• No recent pullbacks, corrections

Signs of an overheated market

• Blow-off market top?

• Heavy inflows into equity mutual funds?

• Spike in mergers/acquisitions activity?

• Significant increase in IPOs?

PagnatoKarp

Signs of an overheated market (continued)

• Weakening upward earnings revisions?

• Rising real interest rates?

• Fewer stocks making new highs?

• Widening credit spreads?

• Shift toward defensive stocks?

What about valuations?

Indicator Latest Historic

• Forward price/earnings 17.7 16

• Schiller price/earnings 30.7 26.3

• Price/book value 2.9 2.9

• Price/cash flow 12.4 10.7

• Dividend yields 2.1% 2%

J.P. Morgan Asset Management (Sept. 30)

Tax reform on the horizon

• Fewer people will itemize

• Impact on capital gains/losses

• Retirement-account changes

• Fewer deductions possible

• Simplification for many people

• Impact on financial markets

• Year-end 2017 planning opportunities

Fake news and misleading content

We have always had propaganda, but it moves faster in the digital age

“Fake news will ruin the Internet.”

– Benjamin Franklin

Some fake-news stories• Hillary Clinton sold weapons to ISIS

• Pope Francis endorsed Donald Trump

• RuPaul claimed he was groped by Trump

• Ireland agreed to accept American refugees

Pew Research

Fake news in finance• Risk of trading on breaking news that might not be accurate

• Dangers of making decisions based on misleading material

• Potential to be swayed by biased or uninformed sources

It might not get better, so we must stay vigilantWill the fake-news situation improve (fewer lies, more accurate information)?

• Will improve: 49 percent

• Won’t improve: 51 percent

Pew Research survey of 1,000+ scholars, strategic thinkers, others

Financial-literacy checklist

• You are self-sufficient, minimize debt and add to your net worth

• You invest wisely, at low cost and don’t trade too much

• You have a good working knowledge of the tax rules

• You are adequately protected by insurance and other safeguards

• You minimize your exposure to financial fraud

• You have taken steps to ensure your assets pass as intended at death

Signs of low investing literacy

• You don’t earn as high of a return as your funds do

• You try to time the market rather than rebalance

• You incur unneeded trading costs and taxable gains

• You pay over 1 percent in fees on stock funds, 0.5 percent on bond funds

• You have an undiversified portfolio

• You deal in penny stocks, trade on rumors or speculate

Arizona’s public companies

209 corporations with shares trading in the stock market

• Only 41 worth $100 million+

• Only 31 worth $1 billion+

• Only 3 worth $10 billion+

• Most are penny stocks, many trade infrequently

Morningstar (May 2017)

Arizona’s biggest companies

Ranked by stock-market capitalization/value:

• Microchip Technology (MCHP), $22.1 billion

• Republic Services (RSG), $21.9 billion

• Freeport-McMoran (FCX), $20.2 billion

• Pinnacle West Capital (PNW), $9.8 billion

• On Semiconductor (ON), $8.9 billion

Arizona’s dividend leaders

REITS rule!

• Vereit (VER), 7.6 percent

• Store Capital (STOR), 4.8 percent

• Health Care Trust of America (HTA), 4 percent

• Pinnacle West Capital (PNW), 3 percent

• Mobile Mini (MINI), 2.7 percent

Other Arizona companies to watch

• Knight-Swift Transportation (KNX): Giant trucking company

• Amerco (UHAL): Innovative rental leader

• GoDaddy (GDDY): Global small-business support

• Versum Materials (VSM): Arizona’s newest big company

• Sprouts Farmers Market (SFM): Struggling amid consolidation

• Carvana (CVNA): Fast-growing online vehicle retailer

• Insys Therapeutics (INSY): Opioid crisis backlash

Aging tips: Social Security• The program is facing financial pressures but will survive in some form

• Even without reform, payroll/other income will pay most promised benefits (about 75 percent) after 2034

• Social Security can be fixed. But the longer we wait, the more drastic the changes

Kathleen Romig, Center on Budget and Policy Priorities

Aging tips: Retirement-savings shortfalls• Millions of Americans are entering retirement with inadequate personal savings

• There are various ways to remedy this. But perhaps the best single action you can take is:

• “By itself, working until age 70 would do the trick for most people.” –

Andrew Eschtruth, Center for Retirement Research, Boston College

Aging tips: Assisted living/nursing homes

• Most care is informal and unpaid, provided by friends/relatives

• Caregivers, especially women, drop out of the workforce or curtail employment

• LTC insurance not a solution for most people

• Most appropriate for those with $500,000-$600,000+ in non-housing assets

Robert Burke, nursing-home scholar, George Washington University

Aging tips: Concerns for retirees• Debt rising among seniors, including for college loans

• Reverse mortgage loan features, fees not well understood

• Claiming Social Security too early can hurt, results in 75-percent lower benefits at age 62 vs. 70

• Stacy Canan, Consumer Financial Protection Bureau

Aging tips: How to age well• Manage cholesterol, smoke less, exercise more

• Get enough sleep but not too much

• We are what we eat: 80 tons of food to age 70

• The importance of mental stimulation/stress reduction/attitude

• “The way you approach life will affect the way you age.”

• Dr. Luigi Ferrucci, National Institute on Aging

Aging tips: Slowing cognitive decline• All cognitive functions decline with age: It’s an outdated view (vocabulary, world

knowledge)

• Many actions help: Brain-based cognitive games, social engagement, diet, bilingualism, new learning (a hobby, another language), meditation, attitude

• But above all: Aerobic exercise (including walking), 3 days/week, 45 minutes/day

Darlene Howard, cognitive psychologist, Georgetown University

Some helpful resources• Annualcreditreport.com (order 3 free credit reports/year)

• Brokercheck.finra.org (check financial-adviser disciplinary records)

• Consumerfinance.gov (file a complaint, research issues with Consumer Financial Protection Bureau)

• Bankrate.com (find rates on mortgages, other loans, savings accounts)

• Morningstar.com (research stocks, mutual funds, more)

• Azleg.gov/ARS title (draft a beneficiary deeds Title 33-405)