Welcome to Effective Assets

Specializing in Socially Responsible Investing (SRI) for over 25 years, Effective Assets provides goal-oriented, fee-based financial planning to individuals, families and business owners. Our services include values-based retirement and life planning, SRI portfolio management, and investment consulting to non-profits and social enterprises. At Effective Assets we assist our clients in using their investments to create a more prosperous and sustainable future for themselves, their families and the world.

2nd. Quarter 2014 Newsletter

July 28, 2014 Leave a comment


July 18th, 2014

Hello, Clients and Friends,

I’ll talk more about SRI next time. This newsletter is about the different definitions of “risk.”

Let’s pretend that it’s 1995. What are the investment signals?

Stock market valuations are historically high. We have passed the historical average duration from the last market bottom to the next market top.

Obviously, the market is about to crash. Right? Not exactly.

You will probably remember that the next five years from 1995 to 2000 were among the best five years in stock market history. The stock markets continued to rise to historic highs and it took five years for the crash (that had been so certain and imminent) to occur.

Well, are we in 1995 again? Or is it really 2000? Or worse, 2007?

As I’ve discussed before, there never has been a time when I’ve not been receiving scary predictions of impending crashes. In fact, the more numerous and scary the sensationalist newsletters, the greater seems to be the likelihood of smooth sailing ahead. Multiple scare newsletters have proven to be an excellent inverse indicator. But there are indicators I do pay serious attention to.

One of them is the general optimism in the popular investment press. Remember, the newsletters have been an inverse indicator.

Another is Robert Shiller’s ten-year average price/earnings ratio, the “Shiller PE 10 Ratio.” Historically, when the Shiller 10 yr ratio is high, expectations for the future should be low, and vice versa. The Shiller ratio is currently higher than average.

Does this mean that a crash is imminent? Well, again, 1995 is a good example of how to look at this. In 1995 the Shiller ratio was high. The next five years were great, but the next fifteen were, on average, among the most dismal in history.

What other indicators are there?

Real Estate Valuations are high. Home prices are back up to their 2004 levels, but not to their 2006 levels (valuations that helped cause the crash in 2007).

The July 8th New York Times had a front-page article on how high valuations are currently.
The middle class has not recovered from the recession, while investment assets have continued to rise. Public consumption needs to rise with corporate growth, otherwise the effect is like a stretching rubber band that needs to snap back some day. Will middle and working-class incomes rise to meet market valuations? Or will stocks fall back to prices justified by working and middle-class incomes?

We are approaching the historic average duration from a market bottom to the next market top (five and one-half years – which would be next September). Does this mean sell by September?
What should we make of this? How should this affect our thinking?

To repeat: 1995 sent similar signals and there were still five more good years (!) ahead.
The following FIFTEEN years were terrible. These signs may not signal an imminent collapse, but they suggest that average returns going forward may be substantially lower than the historical average and volatility may be punishing. Historically, higher volatility has been accompanied by higher long-term returns. That is, we have historically been paid for the pain. The last fourteen years have shown us what it’s like to experience the pain without being paid for it. For example: an allocation that historically would have provided an average annual return of eight percent (over ten years or so) now might be expected to provide an average annual 5.5%. With increased volatility. This fact is at the core of today’s newsletter.

The real problem many investors face is time. If the markets are going to be more volatile with lower returns, older investors may not have any mechanisms available to help them reach their goals by the time they need them. For younger investors this is less of a problem. In 2009 the hysterical newsletters screamed that the stock markets would never recover. They claimed that this tme it was different. Remember?

But now the markets have once again, as they have always done, recovered from their downturns and risen above their previous peaks. The threat to the long-duration investor does not seem to be the downturns themselves, but lower expectations overall, even in a growing environment (see the previous paragraph). But what about investors who need money in the short term? I would say that the risk of a downturn is greater now than it was a year ago. Should we sell some stocks and move their value to bonds? Well, bonds are either yielding less than one percent or earning more while exposing portfolios to higher risks.

It might not be worth the cost of selling. I would say, if you are going to move a large lump sum from your investments, and those investments have grown in a taxable account, you will need to balance the risk of temporary “loss” in a downturn vs. the certainty of the cost of taxes when you sell. This is a planning conversation that we should have. Some investors are asking me if now is the time to sell bonds (which are so unsatisfying and/or risky) and move to more stocks. Now is probably not the moment to get more stock-heavy. Needs which are both short-term and not customary (regular) should be kept in cash and fixed income.

However, with interest rates as low as they are, and longer, higher yielding bonds being so risky, we should probably discuss diversifying your fixed income. Perhaps the biggest “risk” we face now is not periodic and expectable downturns, but lower investment expectations than we had all planned on, and the cost of taxes when we make changes or take withdrawals.
We should talk.

Let me know what you think. Up the Rebels!!


Categories: Uncategorized

NEWSLETTER – Fourth Quarter, 2013

February 18, 2014 Leave a comment

February 17, 2014

Dear Clients and Friends,

Welcome to the new year.  There’s plenty to talk about.  I’ll get to thoughts about the economy and the markets in a minute, but first, what’s happening in SRI?

Historically a series of major issues have been focuses of SRI.  The first, arguably the earliest reason for SRI, was the war in Viet Nam.  The first socially responsible investing mutual fund was started with the Latin name for peace in 1971.

The next big issue was Apartheid.  Nelson Mandela himself sent an envoy to the SRI trade association to thank us for helping end this racist dictatorship.

Some people were afraid that with the fall of Apartheid the dollars committed to SRI would shrink as people lost focus.  But amazingly, the opposite happened.   Once exposed to the experience of using their money to effect change, people added assets to a variety of SRI struggles.

The next big issue was tobacco, and now, partly as a result of the focused efforts of SRI, many state pensions have divested from tobacco companies, most media companies will not allow cigarette advertising, and the efforts are paying off with shrinking new teen addictions (but this struggle is far from over).

And now we are entering the next big struggle, and this time it’s for our survival.  The fossil-fuel divestment movement is catching on world-wide.  I expect that many of you have already heard of Bill McKibben and his non-profit, 350.org.

For years we felt that bringing investment capital to alternative fuels was the change we needed.  Many SRI investors felt that switching power plants from coal to natural gas (as a transition until the infrastructure for renewables would be developed, and natural gas when burned releases fifty percent less greenhouse gasses than coal).

SRI has conducted numerous shareholder engagements with oil and gas companies. However, a few years ago, at our national conference, First Affirmative conducted a conversation with an executive of Exxon Mobil, who stated flatly that XOM is not going to make any substantial investments into sustainable energy.  Period.  Conversation over.  This leaves little room for engagement, since the SEC will not allow investors to ask (or demand) that a company simply go out of business.

Meanwhile, state pension funds and foundations worry that divesting from oil, gas and coal companies will hurt performance and expose their portfolios to greater risk.

And now along comes Bill McKibben and 350.org.  McKibben points out that if we burn more than one-fifth of the proven reserves of the oil, gas and coal companies still in the ground we will have exceeded the amount of greenhouse gasses we can put into the atmosphere and keep the earth in livable shape.  However,  “Those reserves may be below ground physically, but they’re already above ground economically and factored into the share price of every fossil fuel company.”

What does this mean to those investors and pensions who are frightened that divesting from fossil fuel companies will increase their risk and lower their return?  It means that the opposite is true.  The share price of all of these companies is based on their entire reserves.  If the world will overheat once one-fifth of these reserves is extracted they can’t all be developed.  Therefore, the real value of these companies is about one-fifth of the value the investment market gives them.  Once investors (pensions, foundations and, yes, us) figure this out, the stock market price of these fossil fuel corporations has to fall unless these companies speedily adopt alternative sources of revenue (dare we say “renewables”?).

The obvious problem facing us is the political power the oil, gas and coal companies wield.  “…we need to loosen the grip that coal, oil and gas companies have on our government and financial markets, so that we have a chance of living on a planet that looks something like the one we live on now. It’s time to go right at the root of the problem–the fossil fuel companies themselves–and make sure they hear us in terms they might understand, like their share price.”  “We need to make it clear that if it’s wrong to wreck the planet, then it’s also wrong to profit from that wreckage.” (All the above quotes are from “gofossilfree.org”)

What is the strategy / are the strategies?  As the organizing effort progresses, the strategies will change.  But for now the  core approach coming from 350.org is divestment.  You can join the effort to encourage the institutions you are involved in to divest.  You can write to your pension, you university’s endowment, your favorite foundation.  You can divest for your own investments.  First Affirmative Financial Network has numerous strategies which can simply remove offending corporations from your existing allocation or can build you a new allocation around a fossil-fuel-free structure.

What will be the “ask” from shareholder activists?  As I stated above, the fossil fuel companies are not leaving much wiggle room so far.  “Index” funds that must hold all of the companies in the index and can’t divest can argue in a proxy battle that the future is in renewables and encourage the companies in their portfolios to devote significant development capital to alternative energy.  For a while it looked like Enron and BP were each taking the lead in this, and we all saw where that went.  Still, if investors must own fossil fuel companies this is a strategy to adopt.

You can go to www.350.org and http://gofossilfree.org for the list of the 200 most egregious companies and for more information and ways to get involved.  If you are not already a member of “Green America” (formerly “Co-Op America”), please join them.  They are in the thick of it.  http://www.greenamerica.org/fossilfree/ .  And, of course, you can let me know that this is a direction you want to take in your investing.  Backtesting indicates that there should be no harm to performance in eliminating fossil fuel companies from your portfolios, but we really don’t yet have any real data on this.

We’ve changed the world before.  Each major wave of SRI has had some success.  We can do it again.  Only this time our quality of life and that of our children depend on it.



From newsletter to newsletter I have responded to some investors’ fears that the market was about to tank yet again, repeating the debacle of 2007-2009.  You may have noticed that this did not happen.  If/when it finally does happen again the doom-sayers will still have been wrong.  It didn’t happen when they said it would.  Instead, the domestic stock markets have recovered and risen above their peaks in 2007.  None of my investors got out of the markets and went entirely to cash (missing the recovery), and I hope nobody else reading this did.  Will there be a downturn?  Yes.  When?  We don’t know.  So always keep your allocation invested in a diversified strategy that suits your needs and risk attitudes and allows for some growth or income or both.

Investor fears have tended to fall into two categories, big-ticket and small-ticket.  There are the big-ticket fears that human misuse of our politics, our ecology and our currency will all come due and collapse our economy as we know it, taking us back to the middle-ages (or the bronze age).  There are the smaller-ticket fears that the great inequality of wealth, the weakness in Europe, high unemployment, and any number of other smaller issues would cause a lesser, but substantial downturn.  There is actually a third fear, and that is that the big-ticket issues are really imminent and will cause a crash soon.

This last one causes me the greatest angst because I think that these concerns are well-placed and legitimate, but don’t think that they will have all that much effect in the short-term. But it is true that if we don’t change our ways, the next hundred years could be pretty horrifying.  Our currency is the strongest in the world, and all the concerns that it is a “fiat” currency, built upon debt, will not hasten its collapse.  I expect that we will experience a series of “Katrinas,” droughts, currency emergencies, etc., rather than one big disaster.  Each time we will rebuild and not really fix the problem.

For now we should focus on the smaller-ticket items.

The last two major downturns were based on the popping of bubbles and the discovery of massive corruption in those bubbles.  The stock market fell in 2002 largely because the major accounting firms were cooking the books on corporate earnings.  Investors, especially larger ones like pensions, had to sell their stocks until they had comfort that the data they were seeing about corporate earnings were reliable.

The stock market fell in 2007-2009 largely because the big investment banks had been slicing up mortgages in a real-estate bubble and selling their pieces, re-formed into new investments where the risks were hidden, to pensions, city treasuries, etc., as low risk investments.  When the real-estate bubble finally burst it turned out that there was risk, after all.

There really is only one big bubble that I know of facing us right now (in the short-term), and that’s the bond bubble.  It’s risks are well known to the investing public.  I think that the bond bubble will deflate slowly and it is very likely to harm the economy temporarily, but I don’t see a crash in it.  It will almost certainly cause a drawn-out, protracted downward slide in the fixed income side (the “safe” side of your portfolio), rather than a steep and rapid drop.  There are ways around this which I will address in a future newsletter.  Call me if you are concerned.

While there are currently short-term risks in the markets and in the economy (European debt, China’s weakening), our economy is actually getting stronger.  The recent volatility in the domestic stock markets is a healthy symptom.  It’s the opposite of a bubble and should make stock investors more comfortable, not less (unless they are day-traders).  Remember, the market has to fall more than 10% to be considered a “correction” and 20% to be considered a “crash.”  Recently the S&P 500 has not dropped much more than six percent.

All that said, we are approaching five years from the bottom of the last crash (March 9th, 2009) and a recovery can’t last forever.  I believe that the stock market is going to continue upward for a while and bonds may lose some value on the way.  Unless something unexpected happens, this could be followed by a stock market bubble, then another substantial downturn (but this may be a while out).  My beliefs are not a guarantee, so if you are inclined to get more conservative as the markets rise and less conservative as they fall, then this may be a time to protect some of your gains.  As always, keep the money intended for any short-term needs out of the stock and the bond markets.  We can talk about what else there is to do.

There always is more to talk about, but it will have to wait for the next newsletter.  I hope to make them more frequent from now on.  If you would like to see a copy of my ADV federal disclosure document one will be sent to you upon request.

Good luck.  Stay in touch.  Please call if you have any questions about any of this.

Up the Rebels !!


Categories: Uncategorized Tags: , , ,

NEWSLETTER – Third Quarter 2013

September 23, 2013 Leave a comment

September 23rd, 2013

Dear Clients and Friends,

You remember the old joke, don’t you? The one that goes, “Aren’t you glad I’m not the type to say ‘I told you so’? Well, I told you so.”

Well, I did. Over the last four years I have been handed every newsletter out there predicting the worst stock market crash of all time. Some were pushing gold, some were pushing the gold standard, some were blaming the Fed, some the Democrats, some our “FIAT” currency and some the crisis in Europe. I suggested that one of the best predictors of an upside in the economy and the stock markets is a proliferation of people making a living selling negative predictions. Remember how in 1989 there were five best-sellers predicting the end of our economy as we knew it? Ravi Batra. Paul Erdman. Howard Ruff. Robert Prechter and some fellow named Figgee, predicting hyper-inflation. At the time I said that if there were a deep and terrible crash they would all claim the proof of their theories. However, what if the crash didn’t happen then? If it happened twenty years later, or thirty, would they all cry out that they had been right? How long do we have to wait until we decide they were wrong?

There will always be downturns, some shallow, some deep. If you’re selling newsletters predicting disaster, that disaster has to happen pretty soon, and for the reasons stated. But it simply didn’t happen. Gold has been off its highs by nearly 25%. Inflation is below 2%. The stock markets have passed their previous peaks, yet are still rising. Granted, the markets are rising on the backs of working people and the middle class. I’m talking about economic cycles right now. I’ll get back to “social” issues and what we can do about some of them in a minute.

I have never known a time when there were no risks of economic downturns. The sellers of economic doom and gloom have used those risks to make millions selling fear. Fear is what drives America now. We don’t let our children outside to play with other kids on the block because we are terrified of “stranger abductions.” Nobody notices that the rate of stranger abductions has not increased. Just the reporting of them. “If it bleeds, it leads.” How can we watch the news today without shivering in terror?

There are risks in the economy now, as there have been since 2009. Some of them are greater risks than existed in 2007. The banks are bigger and are taking more risks. There are more credit default swaps being traded than ever before. There are Iran, Syria and Egypt. Will we be at war again, and soon? Angela Merkel was re-elected yesterday, promising more austerity in Europe. Some economists believe that continued austerity will cause a depression there.

Of course, there are the environmental issues, long-term risks to the animal life on the planet and to the economy. Climate Change / Global Warming, overpopulation, the end of clean water, diseases released as we cut down the rain forests, the creation of super bugs by the use of antibiotics in concentrated animal feeding operations (CAFOs) and my favorite, massive species die-off. These are major disasters in the making, but they aren’t going to collapse capitalism or your portfolio this year or next – maybe not in our lifetimes (“Heck, let’s leave it for the kids to fix”).

Then, maybe the biggest short / mid-term risk to the economy: The influence of corruption on the economic cycle. Out of the last six stock market downturns, at least four of them were driven by corruption, rather than by the normal cyclical nature of our economy. Drexel Burnham Junk bonds, The S&L crisis, the rigging of corporate balance sheets by the “Big Eight” accounting firms and the astonishing tie-in between predatory lending and the creating of fictitious value in the derivatives built on those loans.

So, what’s the message here? There will always be downturns in every sector you can invest in. However, don’t believe those who are making a living selling fear of those downturns. They were wrong in 1989 and they have been wrong over the last four years.

Instead, make realistic plans for your future. Adjust for changes in your long-term results. Allocate as if there will be growth in your savings, as well as downturns, while keeping the money you intend to spend for your short-term needs out of the stock markets.

Meanwhile, here is a very strong possibility. Perhaps even a probability: As the new debate over the debt ceiling approaches, this will cause uncertainty in the markets, and almost certainly a downturn this fall. If the Republicans drive us over a cliff the downturn will be greater. So make sure that any of your short-term needs are invested in conservative instruments, such as short-term bonds, cash and community notes (keeping in mind that not all issuers of community notes are safe – you should talk with me about this).

Don’t try to time the markets here. This isn’t the “big crash of all time” coming up. I think that while the bull market is not yet over, it may take a short nap. If the Republicans and conservative Democrats cave, remembering the price they paid for shutting down the government in 1995, there might not be any downturn worth mentioning at all. I’ve been hearing of the imminent and soon-to-come collapse of capitalism since 1969. Those predictions just keep on coming. Keep on sending them to me – just don’t take them all too seriously. I expect capitalism to change or fall someday. Our economy can’t keep on growing forever.

One of the main reasons the markets have continued rising as they have is that many corporations have laid off their workers, then hired them back as contractors, working long hours at reduced wages without benefits. This practice results in historic increases in productivity and this grows the value of their stock. Such behavior is unsustainable.

With the failure and shrinking of organized labor from a third of the working population to less than seven percent there is no labor core to the Democratic party. We need to make labor policy a central issue of national and local elections. Can anyone remember anything at all accomplished by Obama’s first Secretary of Labor, Hilda Solis? I can’t.

What can we do? Labor relations are a primary concern of socially responsible investing and SRI shareholder engagement. This needs to increase. Every year the SRI professionals around the world debate what issues we will press. Please write to me, to your portfolio management firms, to First Affirmative and to your SRI mutual funds, asking them to keep labor issues in the forefront of their activism. This is crucial.

What else can we do right now? What actions will be more than symbolic?

I suggest we put some focused muscle behind a few wedge issues, struggles whose goals can be accomplished and if they succeed, will change the nature of the conversation.

I will pick three for now.

First, contribute to Elizabeth Warren’s campaign. She (and John McCain !!) is spearheading a bill that would reinstate Glass-Steagall, the law that kept the banks from gambling with your money (until Clinton, Rubin, Summers, Gramm, Leach, Bliley and CitiGroup killed it). Tell your bankers that your financial advisor recommends this and watch their faces. elizabethwarren.com

Next, contribute to Healthcare for All, the lead organization fighting for Single payer in California. healthcareforall.org/

Next, contribute to the Public Banking Institute, the lead organization fighting for public banking in America. publicbankinginstitute.org

And finally, I am going to be out of the office (and out of the country) from September 26th to October 8th, tending to a family emergency. Then, from October 24th to October 31st I will be at our annual SRI conference, this year in Colorado, learning how to better serve all of you folks.

Thanks for being supportive of socially responsible investing.

Up the Rebels !!


Categories: Uncategorized

Investing in Community – @ 4%

February 2, 2013 Leave a comment


If you are already familiar with the COIN program and have been wishing to participate but frustrated by its lack of availability, then don’t let me waste your time with the first four paragraphs in this letter.  Please skip down to paragraph five.  Otherwise:


You may remember that I feel that the most socially effective way to invest a dollar is to invest in community development financial institution notes, to invest directly in community.  Often the return on that kind of investment is “below market rate.”  In these cases, the investor needs to consider the “social” benefit of the investment as a part of their return on investment.  But occasionally it is possible to get both a market rate return and still provide a high level of social benefit.

You may have heard about a California program called COIN, the California Organized Investment Network.  The state established this program to encourage investment into community investment notes.  This approach to community investing has a different wrinkle and may serve your interests well.

Basically it goes like this:  You invest a minimum of $50K into a zero-percent-return five-year community note from a COIN registered community development financial institution (a CDFI).  You receive a one-time tax credit of 20% of the amount of your investment against California income taxes.  This is not a deduction, it is a straight reduction of 20% of the amount you invested in the note from your California income taxes in the tax year of the investment.  This is the equivalent of an after-tax return of approximately 4.33% APR per year for five years.  You can compare this with the current annual return on a five-year CD or Treasury Bond of less than two percent.


I’m recommending that, if you make this investment, you make it through the Northern California Community Loan Fund.  This is the best way I know of to make direct community investments locally and effectively, into our own community.  NCCLF is a registered provider of the COIN credit-based notes.

NCCLF provides loans and consulting and training to nonprofit agencies that serve  low-income communities across the 46 Northern California counties.  Since 1987, NCCLF has closed $91.7 million to 290 projects.  These loans have helped create or preserve 5,742 affordable housing units for low-income families and individuals, and financed over 1.5 million square feet of neighborhood-serving nonprofit and retail space. These loans have also helped create or preserve 14,450 jobs.

Let’s talk about the risks of the investment.  The biggest risk of investing in an FDIC insured CD is that at present your rate of return, after inflation, will be negative, losing purchasing power permanently.  But the nominal principal and interest are insured.  NCCLF has no FDIC insurance, and so it protects its investors by maintaining a loan loss reserves which has so far been more than sufficient to absorb any defaults by borrowers.  In fact, in their 25 years of operation they have never lost any investor a dime.  This includes, of course, no investor losses in 2008.  Past performance is no guarantee of future results (or risk avoidance), and without the insurance there is some possibility that you could lose all or part of your investment

NCCLF is one of only five CDFIs in the nation to receive a AAA1 rating, the highest rating possible from CARS™, the best know agency assessing and rating the risk of CDFIs.  CARS™ provides the only comprehensive, third-party assessment of a CDFI’s financial strength and performance and, most importantly, level of community impact.  This makes an NCCLF note one of the safest uninsured CDFI investments available.

While the safety of the principal in the investment is guaranteed only by NCCLF and not by FDIC insurance, the return on the investment is guaranteed by the state of California.  That is, the entire and only return is a reduction of taxes in the year of the investment.  The only way to lose any of the 4.33% return is if you aren’t going to pay enough California state income taxes this year (you can’t roll the credit into subsequent years if you can’t use the entire credit this year).  Unlike a CD, this investment really is a five-year commitment.   Your invested money really is locked away.  So this really is for money you must have five years from now, but not before.  It is illiquid for five years.

So, here is the best way to think about whether or not you would like to participate in COIN.  If  you are likely to pay at least $10,000 in California income taxes (or 20% of whatever you would invest) and you have $50K or more that is sitting in a bank account, CD, savings account or money market and that you do not intend to use for five years or more, and that you are frustrated because it is earning less than two percent, we should have a conversation.  This COIN strategy might be right for that piece of money.

Is there a wrinkle in this?  Of course.  There’s always a wrinkle.  The COIN program is limited and will only cover $2 Million of investment this year.  It runs out of “inventory” every year.  There are always more investors wanting to participate than can get in.  The program opens today and, so far, intends to close at the end of March or when it runs out, whichever comes first.  It was just Wednesday that I learned that the program is only likely to be available this month.

Because of these time constraints I am sending this message out as a “Blast” email.  This means that I have not had the time to look at your personal circumstances to determine whether you have $50K or more sitting around, bemoaning its low interest rate.  I have not had a chance to check to make sure you are paying more than $10K in California income taxes in 2013.  This is NOT a recommendation that you personally should buy a community note from NCCLF, and that is because I cannot know that this investment is appropriate for you personally at this time.  We should talk to determine this. Also, this post is NOT an offer to sell this investment.  That offer can only be made by its prospectus.

This may be a terrific opportunity for you.  I suggest you consider the basic qualifying questions, call your tax preparer right away to ask if this is appropriate for you, then call me and I will have a packet, including a prospectus,  sent to you post haste.  Please be swift.  This is probably going to sell out soon.

Just in case it’s not obvious, I don’t make any commission when you make this investment.  I receive no kick-back or referral fee from NCCLF or COIN.  I will not charge you a fee for this recommendation or the time we will take discussing it (within reason).  My only gain if you make this investment will be an opportunity to bring even more money into changing the world for the better, and, of course, the greater glory for having done so (our office has always been a leader in bringing investments to community investing).  And, maybe, your eternal gratitude for bringing you to an investment that will do so much good and still make you over four percent in a 1.5% world.

Please give your tax pro a call, then call here and make a phone appointment to discuss this with me.  If you are interested, please act soon.



Newsletter for 3rd Quarter, 2012 – Asset Allocation and the so-called “Fiscal Cliff”

December 12, 2012 Leave a comment

December 6, 2012

Dear Friends & Clients:  Let’s talk about your investments, what’s going on in the economy, the markets, SRI, etc.

 If you are well diversified into SRI stocks (domestic, foreign, large and small-cap) and bonds, over the last twelve months your overall portfolio has probably experienced an internal rate of return about one-third to one-half of the upside of the S&P 500, which is a pure large-cap domestic stock index. 

 This should not surprise you.  As we have discussed in the past, diversification that includes both stocks and bonds should underperform during upturns and outperform (fall less sharply) during downturns, and that is exactly what has been happening.   From the market bottom in March, 2009, until March of 2012, the stock market rose in a typical recovery pattern.  Since then the large-cap domestic stock market has been very volatile, but has only gone sideways. 

 In 2007-2009, when the stock market fell 54%, if you were diversified your account fell less than the S&P’s drop of 54%.  Diversification helped.  Now that the economy is recovering your account is rising slowly, more slowly than pure stocks.  The most commonly used foreign stock index, the EAFE index, rose only a third of the S&P 500. The Barclays Aggregate Bond Index rose one sixth as high as the S&P. 

 As we have discussed before, the asset class with the greatest risk right now is long-to-maturity bonds.  When prevailing interest rates rise, the longer bonds tend to lose value.  The only way to limit that risk is to keep your bonds “short” to maturity, and, while this keeps that portion of your portfolio stable, it lowers your bond interest compared with the aggregate index. 

We are currently in one of those periods in which SRI has underperformed conventional investing, with the SRI index coming in at about 2/3 of the S&P for the last twelve months.  Now, every strategy has its time in the sun and its time in the clouds.  SRI is no different.  Since its inception in 1990, the primary SRI stock index, the DSI 400, has outperformed the S&P 500, on average.  There will always be shorter periods, such as the one we are in, when SRI underperforms.  This is usually true during times of war and rises in the price of oil, but the biggest difference this year is that our portfolios don’t include Apple Computer while many conventional portfolios do.  Apple is so huge that it is nearly single-handedly boosting the conventional indices it is in.  Is Apple a bubble, about to fall as it has risen?  Not necessarily, but I doubt it can continue to grow as it has over the last couple of years. 

Should you have put your entire portfolio in large-cap stocks a year ago?  Hindsight says “yes,” but do you remember the risks in the economy back then? It was a scary time for stocks.   Both political parties seemed willing to drive our economy off a cliff to win the election, and dissolution of the European Community and currency seemed imminent.  Many of you were doubtful when I suggested that we were already in a recovery.  Many conventional investors took their entire portfolios to cash.  Had the markets crashed back then they would have said that a coming downturn had been obvious, and weren’t they smart.  Instead, they have missed the recovery, so far. 

And what about the so-called “Fiscal Cliff?”  Like so many of the Republican framings, this one is intended to provide cover for cutting discretionary and “entitlement” programs.  How did they make “entitlement” a bad word?  Aren’t we entitled to it because we’ve paid for it?  Now that’s successful framing.

 There is no Fiscal Cliff.  The higher tax rates will take a year to work their way into our economy.  Ditto with the cuts in programs, such as the military and federal agencies.  Maybe there will be a “Fiscal Slope.”  Obama and Congress will have a few months to fix this.  Once that happens the uncertainty should be over and I imagine that worldwide stock markets may respond enthusiastically.  If we do not have a budget deal Congress by December 31st, the stock market may fall a bit, but the slump should be short-lived.

 What should Obama and the Congress really be doing about our debt and recession?  First, the debt isn’t the problem both parties are making it out to be.  Interest payments on the debt, that’s the difficulty.  Coming out of WWII the Federal debt was something like 136% of GDP.  Keynesian stimulus (like the GI Bill) enabled us to grow out of most of the debt.  We shouldn’t eliminate public and private debt entirely, since that’s our money supply.  What Congress should do is print the money we need to solve our problems with Medicare, Medicaid and Social Security.  Not borrow it – print it. The Federal Reserve has been creating plenty of money, but the banks are holding on to it instead of lending.

 So, what are your options as an investor now?

 Well, one possibility is getting rid of some or all of your bonds (for the time being).  Our chief bond manager calculates that if/when prevailing interest rates recover to their historical average level, the longer-duration bonds could lose more than 40% in market value (which is why he is keeping most of our investors’ bonds short-to-maturity).  Keeping your bond durations short means that they protect their part of your portfolio, but short bonds yield less interest than the rate of inflation, slowly hemorrhaging value.  Do keep in mind that shifting your allocation from bonds to stocks increases risk, too.  

 So, right now you get to choose your risks.  There is the risk of underperformance (keeping your current allocation to short bonds) vs. the risk of having too much of your portfolio vulnerable to market moves (by moving money from bonds to stocks).  Please call me and let’s discuss this.

 We really dodged a bullet last November 6th, didn’t we?  While I may not be thrilled with President Obama, I certainly did not want the Republicans shifting the Supreme Court further to the corporate right, a terrifying possibility.   As for the Affordable Care Act being called “constitutional” by the Supremes, I really nailed that one, didn’t I?  If you don’t remember, I invite you to revisit my 1st Quarter newsletter of May 28th, 2012.  Chief Justice Roberts threaded the needle exactly along the lines I described.

 What can we do politically?  On the larger issues, we are powerless in the face of the fantasy world agreed upon by both parties, so I think we should focus on what is actually accomplishable and might provide a wedge that would make a difference.  Let’s see if we can get a Single Payer plan instituted in California and a State Bank.  And let’s see if we can get our President to support organized labor, as he promised he would (and has not).

 Taxes?  Those heartless Democrats are very likely to raise the tax rates on Capital Gains.  Additionally, a Medicare surtax on investment income kicks in next year.  See?  Maybe we all should have voted for Romney.  (-;     OK.  Not funny.

Seriously, please discuss this with your tax preparer as soon as possible.  Should we be selling a bunch of your stocks which have unrealized capital gains before the end of this year in order to realize those gains at the current capital gains tax rate, rather than waiting for the rates on capital gains to rise, probably next year? 

That’s enough for now.

 Remember to raise hell and have a good time.  I hope you are well and thriving.

 Up the Rebels!!

Lincoln Pain, CFP®, AIF®
Effective Assets™ is an independent registered investment advisor (RIA) registered with the State of California.


Categories: Uncategorized


September 2, 2011 Leave a comment

To celebrate our twenty-five years in socially responsible investing, we are throwing a client appreciation party, and you are invited.  That’s twenty-five years of helping investors use their money to change the world, longer than one-tenth of this nation’s history!  This event will be a presentation/talk by one of the leaders in progressive shareholder engagement, Andy Behar, CEO of As You Sow, preceded by a stand-up dinner provided by “5/Five,” the award-winning restaurant at the Hotel Shattuck Plaza. 

Andy is a fascinating and entertaining speaker and his topic is one of the more exciting and effective elements of SRI.  “Shareholder Advocacy” is the process of engaging with corporations  to encourage them to take greater responsibility for their effects on the world.  This is one of the most important ways in which your money may be used to create real change in corporate behavior and corporate influence.

As You Sow has played a lead role in the struggle to get computer companies to take responsibility for their products at end-of-life, in getting retailers to sell certified wood instead of original growth, in encouraging soda companies to recycle, in removing toxics like BPA from our food stores and the list goes on.   This talk will be fun.

This is where the excitement in SRI takes place and where real change is made.  Please come, listen to a lead advocate tell his stories, and ask questions about past victories (and failures).  I hope you will come help us celebrate our twenty-five years in SRI (since August, 1986). 

Event Info:

Where?  The Hotel Shattuck Plaza in downtown Berkeley at 2086 Allston Way at the corner of Shattuck.  This is one block from the Berkeley BART station.  There are two public garages within one block (on Allston and Kittredge).

When?  TUESDAY, November 15th from 6pm – 8pm.

What?  Food and drink will be served in the courtyard behind “5/Five” Restaurant, and Andy’s talk will be in a conference room behind the courtyard.

Cost:  Our treat – This is a client appreciation event to which everyone on this mailing list is invited.  You are encouraged to bring a guest if you like.

Sponsored by Calvert Group

Space is limited, so please make your reservation early.


Lincoln & Justin

Categories: Uncategorized


September 2, 2011 Leave a comment

These last few weeks have been a textbook lesson on the problems of market timing. 

Think about it.  If four weeks ago the American stock markets had fallen forty or fifty percent or more, nearly everybody would have said, “I knew it was going to happen.”  The people who took portfolios to cash would be coming out of the woodwork, saying, “I predicted it and sold my clients’ portfolios.”

But instead, the markets have moved essentially sideways, and with huge, historic volatility.  Why?  Because stocks are currently considered to be undervalued, a rare buying opportunity.  Each time the stock market falls three, four or five percent, buyers rush in to pick up bargains at a discount.  This makes the stock markets rise in value, then the pessimists leap in, the bargain hunters take the profits they’ve made and this causes the markets to tumble until stocks are a bargain again and the markets rise once more.  This did not happen in 2008 because then stocks were considered to be overvalued, with few bargains to be found.

Those who sold everything a few weeks ago and  took most of their investments to cash are either hiding or buying or both. 

And, so, what’s it to be now?  A recovery (which is the most common prediction right now) or a market crash and a “double-dip” recession?  Do we “know” what is to happen now?  Do we “know” that the markets are about to crash?   On the before the day of this writing the market was down substantially.  Today it is “up sharply.”

Historically, a sideways, choppy market like the one we have been in for a few months has  eventually broken out steeply either up or down.

The Republicans are willing, even eager, to drive our economy over a cliff to further enrich the most wealthy and to discredit Obama and the Democrats.  The Democrats are inclined to let the Republicans do this so as to discredit  them in 2012.  And these people work for us!!  Mitch McConnell, the Republican leader in the Senate, has stated that his primary goal is to unseat President Obama in 2012.  His oath of office is to the Constitution and to the people of the U.S., (not Grover Norquist) but serving our well being  is not his primary goal.  This may not be illegal, but it is moral and ethical treason.

We are used to planning and managing money in an environment driven by economic reality (which is uncertain and volatile enough!).  But, when the politicians decide to cause downturns for political reasons divorced from business cycles,  then planning becomes much more precarious.  Another way to put this is that it is not the downturns that worry me.  You should all be allocated to take such downturns into account.  But what if, after the downturns, there is no net growth?  That’s where our politicians and bankers have been taking us for the last eleven years.  In this environment the process of trying to use historical norms to manage your money and help you get to your goals, becomes much more difficult.  It requires that we be, at least in the short term,  much more nimble and creative. 

Fortunately, First Affirmative has been in the forefront of developing new tools for us to work with, but in order to navigate the twists and turns for you I am going to need even more of your participation than in the past.

For those of you whose money is being managed under our auspices, let’s get together soon to discuss what choices/changes would be most appropriate.  If you and I have met  a short while ago, let’s at least have a phone meeting right away. 

For all of you reading this, we should probably get together to discuss how your financial plans may need to be re-evaluated.  The assumptions of the past may very well not apply any more.  For the next few years it may be tricky to invest in the traditional ways and still get anything like historical returns.   How will this affect your financial planning?  Let’s talk about it.

Categories: Uncategorized

Get every new post delivered to your Inbox.