Nicole Hanson

By Nicole Hanson

A quick keyword search of the value of the dollar brings up many negative headlines: “The shrinking dollar, how far will it fall?” or “The Weak-Dollar Threat to Prosperity” or “The U.S. Dollar is Done.”  There is much discussion about how far the dollar has fallen and speculation about how much further it could fall-many of these seem to presume that the following idea is a given: strong dollar = good, weak dollar = bad.  But very few actually further the discussion to what a weakening dollar actually means and why it is “bad.”  In actuality, it’s not so simple: there is a range of advantages and disadvantages which come along with a weak dollar, which will then reverse when the dollar strengthens. 

Our perception that the dollar losing value is a negative event may be just that: how we Americans and those in other countries perceive the US as stable and desirable destination for investment.  We don’t like the idea of our reputation being tarnished and certainly this is a valid point in that investor sentiment certainly can affect the value of any investment.  We human beings don’t like the sound of being termed “weak” when being compared to others so it’s easy to think of it in negative terms when the way we measure the value of the dollar is in relation to the currencies in other countries.  Yet, this relative value is not actually meaningful in terms or our country’s health and wealth; what really matters is growth in Gross Domestic Product (GDP) which is the total goods and services we produce as a country.

Consider the following examples of the impact of change in the value of the dollar: when the dollar loses strength, US goods become cheaper in the countries importing our products; this in turn leads to an increase in the sale of US goods to other countries (and thus narrows our trade deficit.)   Additionally, US consumers are more incentivized to buy domestic goods so sales within our country increase. 

Certainly if one travels to a country where the local currency is strong relative to the dollar, it will make for a more expensive trip but this is hardly a broad measure of how most Americans are affected.

Another argument to why the weak dollar is a negative is that when the dollar is weak, the products in countries whose currencies are stronger relative to it become more expensive to us.  While this is true in the case of American as consumers of foreign products, the impact is different for those same Americans who have investments in countries and companies outside of the US.  Resource-rich economies like Brazil and Argentina will benefit in the higher prices they’ll receive for their agricultural, mining and other heavily exported products, therefore buoying the values of those overseas holdings.

Because oil is priced in US Dollars, when the dollar weakens, the price of oil strengthens.  No one likes to pay more at the pump, but again, as investors, we’re benefitted, because investments in oil companies and oil exporting countries are buoyed by higher oil prices.

So, rather than thinking of the dollar in an absolute state, realize it’s all relative, and with a strong dollar or a weak one, there are simply different sets of advantages and disadvantages.  Next time you see one of those negative headlines, remember there’s always a flip-side to the doom and gloom portrayed in them.

Loren Kayfetz

By Loren Kayfetz

Personal Financial continues to adjust to our clients needs and to changes in our staff’s lives. We are excited about the arrival of Ashlyn Elizabeth Hadley on September 27. At last report, Erin, her husband Chris and the baby were all doing fine. We miss Erin as she takes a maternity leave and hope to have her back sooner rather than later.

At the same time, Nicole is rapidly approaching the birth of her first child. That “project” is scheduled for February, and both she and her husband Jeff are preparing for the changes in their lives. Again, Nicole will be out of the office for some period of time, though she seems to stress that, as the Terminator said, “I’ll be back!”

Before you panic and wonder how this will all shake out as far as services, let me fill you in on our additions. Starting with us as a Client Service Specialist in April, Stefanie Corrales now has rapidly advanced to become our Business Manager. Her background is in community banking, and she has strong organizational and financial service experience. She had already taken over much of the day to day transactions, paperwork and service duties from Erin, Nicole and me, so there is no disruption in vital work flow for you.

Finally, we have two new staff members: Adam Stolarsky joined us October 1 as our Client Service Specialist. His undergraduate and graduate studies included Electrical Engineering and Computer Sciences, and his work background includes almost a decade in data systems work with UBS Financial Services, Inc. He will become a familiar voice to you as well, as he assumes more day to day duties making sure that your information and reports are seamlessly available. Brad Klontz, PhD, also joined us on October 1, as an associate planner. He will continue his work as a psychologist while he transitions to the delivery of financial planning services, first on a part time basis. Brad brings a wealth of experience to this field, having been featured on Oprah, 20/20, interviewed for the Wall Street Journal, the New York Times, and being the author of numerous books on money psychology. Brad lives in Kauai, along with his wife, who is also a licensed clinical psychologist. He will spend approximately a week a month in California, and will begin participating in some of our meetings with you.

Along with Will Davis and Pat Pannell, we continue to provide a full house of financial service professionals to meet all of your needs. Please check in with us at Personal Financial at any time by e-mail or phone.

Loren Kayfetz

By Loren Kayfetz

Recently, my wife Pat and I were talking about the obesity crisis that is enveloping the developed world and all of the associated ills as a result of it. She remarked that this was likely the result of the fact that we are the only species that can choose to continue to eat and eat. I thought about this for a while and decided that we are also the only species that can live both in the past, present and future all at once. While this is a wonderful and special trait, it often causes us to misinterpret what is going on around us.

Politicians, employers, family members and friends all make promises. Personal Financial Consultants has made them too. Those promises are to do the best job they know how to do and be the most caring and helpful that they can.

We all know about politicians… if anything, they have a worse confidence score than used vacuum cleaner salespeople! Employers, well, they are doing for themselves and you. More complex of course is family and friends. My friend and new associate, Brad Klontz, PhD, knows all about that and will be chiming in with his own thoughts in future newsletters.

What we have promised to do is to help you organize your finances, allocate your portfolios with the most reasonable approach to risk and reward for your situation, and continue to help you meet and succeed in all of your future financial goals and objectives.

Confidence in us financial types is at a low point, too. You have misgivings about your needs being met. You are concerned that banks, investment firms, hedge funds, governments, and employers are all out to destroy your hard earned nest egg and make it impossible for you to ever be reach your goals. And you think that changing or making changes in the face of immediate adversity will somehow make things better.

You have expectations. Some of them are right and some may not be well thought out. For instance, not all actions by politicians and bankers are for the worst. Markets are not rigged. You cannot expect a free market economy to be predictable. All kinds of movements up and down are being driven both by fear and greed, and yet have little to do with the ultimate value of most market assets.

The reality is difficult to deal with. We know. We understand and we sympathize. Almost all tragic investment mistakes are made in a moment of either great excitement or utter despair. We want to help you to defy those momentary urges in order to make it possible to live the lives you and your family want to live.

The ultimate outcome of your financial lives will not be made in today’s headlines. It will be made year by year and over a longer period of time. Personal Financial wants to be your rock and your guide. Please keep that in mind and always stay in touch with us. Thank you for your continued journey with us.

Loren Kayfetz

By Loren Kayfetz

As a financial advisors, we can almost always tell you ways to make a lot of money. Sometimes, double, triple and even quadruple it. To us, that part is easy.

Let’s take China for example: Loren knew 20 years ago that a lot of money could and would be made in China. At the time, people far away from the reality of what was going on there succumbed to their own fears, emotions and risk tolerances about investing there. People base their perceptions of the risk of an investment often times on their past experiences. China was militaristic, backwards, mysterious, and, most of all, frightening. In large part “the fear of China” was usually left unsaid or only mentioned as an afterthought. Only with much soul searching and prodding could this most telling of primitive emotions be acknowledged. Now, China has proved to be one of the best investments over the past two decades. During that time you would have seen your money more than quadruple.

The same people who would never consider investing in China, might instead take a perceived “safer” route and instead insist on investing in real estate. It did not matter that prices had climbed rapidly or that lenders were loaning money to anyone who could fog a mirror. It did not matter that projected cash flow from rents would not carry a property for years to come. The tendency to frame a historical context (a comfort level with the perceived lower risk) is part of the mind trap most individual investors have within them. Point is, there has been plenty of risk here too, but, unlike investing in China, people felt they can handle the risk. Afterall, real estate isn’t that risky is it?

Now, let’s talk about Gold. Gold is a current example of such psychology. It is increasing in price because of fear (and in many cases greed to make a quick buck.) There is no rational use for gold as a replacement for any other items. Given the choice between a gold coin and an apple, we honestly would take the apple. But, at this moment, it’s obvious that other people don’t see it our way. Truth be told, the business aspect of gold makes no sense—it is not a necessary part of any required products or services. Ultimately, investing in gold is gambling. The same is true for any type of investing that does not take into account the very nature of economic building blocks: a viable business and business plan. What Loren saw in China was development, growth, expansion, modernization, and opportunity—a business plan. What we saw with real estate is nearly the same as what I think about gold right now—numbers did not matter; only that everyone else was doing it to make money. Remember the day traders from the late 1990’s that quit their jobs to trade markets for profit. They forgot about the risk and their lack of a business model and plan. We don’t think we need to explain to you their inevitable outcome.

Stepping back from our own emotional and intellectual tendencies is the only way to make money. And so, where and how do you make a lot of money. Well, if you are client, you either already know where we think that is, and, if you do not or are not a client, it is probably time to ask. Bottomline (pun intended), sometimes the perceived safest place to get a return on our investments are the places that our emotions fear taking us. And, sometimes, where our emotions want to take us, you should fear. Emotional investing is never a good thing, but sound, strategic, non-emotionally driven investing often does return, and sometimes it returns big. Our major and primary job as a financial advisor is taking the emotions out of your investing.

Loren Kayfetz

By Loren Kayfetz

It would be easy to ask: what is not a problem right now? Strife around the globe continues with conflicts and protests erupting in many places this past quarter, most notably in Libya, Egypt, Tunisia and Yemen. The entire world watches and worries, about oil, about freedom and about the future. The European Union continues to work with their members whose finances are still dangerously over extended. In the United States, we have the specter of possible government shutdowns, gridlocked legislative forums, still falling housing markets, excessive debt (especially in the public sector), and sputtering growth.

Yet, despite these overhangs, our domestic stock markets have performed extraordinarily well. Overall the Dow Jones Industrial Average and US large cap based Standard and Poor’s 500 index have been very profitable. While they look good for the last three months and one year, their three, five and ten year numbers are still between 1 and 4% a year. Since we look at our client’s risk tolerance, allocating among different types of investments, and the long term, we are not focusing on just one economic indicator.

Indeed, our asset allocation methodology has consistently placed funds in forward looking places, which at the time of the initial investment, may seem unrelated to current events. Our emphasis on international and emerging markets investing has helped our clients obtain better results with their overall portfolio for 3, 5, 10 and longer periods of time. My travels to developing Asia and emerging Europe starting in the early 1990’s set the stage for those allocations. We are now finding value and opportunity in what are being called Frontier Markets.

We do not expect to always “beat” a pure stock index… no one usually has an all stock portfolio. It is true that when the markets are moving ahead, often an all stock index will do better. When we have retreats (or if you felt at the time like it was a rout in 2008), stock indexes are pushed much lower. So measuring every heart beat of performance activity does not make any sense. The future is more than just framing the present and projecting it forward.

At Personal Financial Consultants, we continue to look to the future as a company as well. I am pleased to announce that Nicole Hanson, CFP® has been promoted to Sr. Managing Advisor of our Emeryville office. To learn more about Nicole’s qualifications, you can visit our website at www.personalfinancial.com/team/nicolehanson.html.

We just released our Spring 2011 Quarterly Newsletter—you can go to our website to check it out.

By Erin Hadley

What is it?

Inflation, by definition, is the increase in the cost of goods or services that we consumers all need to live our lives. Examples include commodities such as food, clothing, household items, and gas. as well as other services like a check up at the doctor, having your taxes prepared, or getting your house painted. When inflation rises, your purchasing power falls—meaning, one dollar buys you less.

How is it measured?

The Bureau of Labor Statistics (BLS) is the U.S. body charged with measuring inflation. It is measured using what is known as the “Consumer Price Index” or “CPI.” The costs of a collection of different goods and services are averaged, the change in the prices of each are examined for a given period of time and then again averaged and further adjusted by region. The result is the CPI for that period.

Why do I hear news about the CPI excluding food and energy prices?

All human beings need to eat and use energy in some form (even those of us who don’t have a car to gas up each week) so why wouldn’t we want to include these two very significant components? Food and energy prices are volatile and therefore can skew the measurement; removing these can help us identify trends we might not otherwise be able to see. Having a sense of general price movement give us a better indication of what’s going on and what to do about it.

Why is it important?

Slow and steady inflation is generally thought to be positive: it means our economy is growing: the risk arises when prices rise sharply and don’t accurately reflect underlying values and this can lead to a bubble and the resulting aftermath when that bubble bursts. Our central bank, the Federal Reserve (the “Fed” for short) tries to ensure inflation stays within certain limits (typically 2-3% annually.) If they feel it is moving too rapidly in one direction or another, they will take measures to try to ameliorate what they believe to be an unsustainable trend.

When inflation is the concern, they attempt to tighten the money supply by raising interest rates, selling government securities (Treasury bonds) or increasing banks’ reserve requirements. Each of these measures serve to reduce the free flow of money and thus, as former Federal Reserve chairman Alan Greenspan might say, reduce a situation that has become too “frothy.”

The economy and markets are currently recovering from the burst of the real estate bubble and the subsequent ripple effects. Thus the problem of late has been not inflation but the opposite, deflation. When it comes to falling prices, the Fed takes measures to try to loosen the money supply to help our faltering economy. And the Fed has taken many steps to try to get people spending and lending money again: interest rates are at historical lows and they’ve pumped money into the system in various ways, most recently through “quantitative easing,” an effort to encourage banks to lend more by buying government securities and increasing the amount of money flowing through the system.

What’s the worry?

If deflation is the problem, why is everyone talking about inflation? The Fed’s job is a precarious one: CPI is just one of the tools they use to try to evaluate what is going on in the economy (i.e. what is going on in the minds of individuals and institutions) to determine what strategies to utilize to keep things in balance.

Even if they do all the “right” things, they have to carefully gauge how much is enough and when to stop. While Alan Greenspan was revered for much of his 18 year tenure, he was blamed afterwards for contributing to the real estate bubble. Many believed he kept interest rates too low for too long and that the easy availability of money led consumers and companies alike to over- leverage themselves.

Right now, Ben Bernanke, our current Fed chairman, is in the difficult position of having to decide what to do next: keep rates where they are and risk another bubble in the long term, or begin to raise them and risk causing already fear-stricken consumers to put their wallets back in their pockets just as they were taking them out again for the first time in a long time.

Rates will have to be raised at some point, and with all the money the Fed has infused into the economy, it’s hard to see how the cycle won’t start again as consumers and businesses begin to feel more confident. It’s a delicate balance to be sure and Bernanke won’t know if these measures work until well after he employs them.

How does this affect me?

The most obvious way inflation affects consumers is the hit you feel to your pocketbook when you go to the grocery store or the gas pump, but inflation also affects your investments. When the Fed tries to stem inflation by raising interest rates, this can affect bonds in your portfolio. The risk of bond prices being hurt by these changes is known as interest rate risk.

Interest rates and bond prices have an inverse relationship: when bonds are first issued, their coupon rate is usually close to interest rates at that time. Because the coupon rate is fixed, if interest rates rise later, the bond price will fall. This is because the market is not willing to pay face value for a bond when newly issued bonds at the same price are paying higher coupon rates. While rising interest rates are generally bad for bonds, they affect different types of bonds differently: longer term bonds can be more significantly impacted than shorter term bonds.

What can I do to protect myself from the effects of inflation?

Lowering a bond portfolio’s duration (a measure of bonds’ sensitivity to interest rate changes) is one way to protect portfolios form rising interest rates. When we talk about interest rate changes, we are talking about changes in the US only; another way to protect a portfolio is by investing in bonds outside the US in addition to US bonds. Investing in commodities is another way to protect against inflation because it provides a hedge: as commodity prices rise, so does the value of a commodities fund. Investing in the market: while cash is fine for money you will be using in the short-term, it is not a fail-safe investment for the long-term because, as discussed above, inflation reduces purchasing power: $1 in the bank becomes worth less with every passing day that inflation is on the rise.

Nicole Hanson

By Nicole Hanson

What Are Investment Benchmarks? 

The dictionary defines a benchmark as “a point of reference for measurement.” This is the measuring stick we use to assess our portfolio performance over the long term.

Commonly Used Benchmarks

The most commonly quoted benchmarks are indices such as the Dow Jones Industrial Average, the S&P 500 and the MSCI EAFE. The Dow is composed of 30 large U.S. stocks, the S&P 500 of the large U.S. stocks and the EAFE is comprised of stocks from Europe, Asia, and the Far East.

Identifying the Appropriate Index

The appropriate index for your needs is not always easily identified by its name or popularity. For example, most people have heard of the Dow Jones Industrial Average because it is quoted in the news throughout the day. However, many people may not be aware that the Dow tracks only 30 stocks of America’s largest companies — not a very reliable source for comparison if your portfolio is a diversified mix of domestic and foreign stocks and bonds. Since all of our clients have diversified portfolios, none of the often-quoted indices would make a good benchmark. For one thing they are all stock and do not hold any bonds.

As investment managers we not only want high returns for our clients but we want high, risk-adjusted returns. That is, we want our clients’ portfolios to grow but in the least volatile way possible. To achieve this, we diversify our clients’ holdings into both stocks and bonds. The result is a portfolio that doesn’t fall as far or as fast as an all-equity index in a falling market. In a rapidly rising market our clients’ portfolios will lag the all-equity index, however, due to our investment strategy, which includes a focus on international holdings including emerging markets, our clients have out-performed the S&P 500, Dow, and EAFE over the long-term. The bottom line is that your portfolio moves differently from common indices on a day-to-day basis so if you see that the Dow plummeted one day, your portfolio most likely did not fall as far.

How do we at PFC benchmark?

We use a hybrid benchmark which is a combination of both equity and bond indices and is based on your risk tolerance and time horizon. In addition, we benchmark individual funds against their own investment category to make sure they are competitive. From time to time you will see us switch out a fund in favor of a fund we feel will perform better over the long term.