Where Are We At? • Where Do We Want to Go? • How Do We Get There? • Are We on Course?

Where Are We At? • Where Do We Want to Go?  • How Do We Get There? • Are We on Course?

The above questions represent the sequential order of primary questions that I work with clients to help them solve when they become clients of Carrick Bend Advisors, LLC.

CBA LLC is a Registered Investment Advisory (RIA) firm. RIAs have more of a legal fiduciary responsibility towards clients than conventional brokers and brokerage firms where financial products are “sold” more than advised on.

I hold myself out as an Investment Advisor and a Financial Planner.  I have two of the most validated professional designations to help support that claim.  I hold both the Chartered Financial Analyst® designation and the CFP (CERTIFIED FINANCIAL PLANNER™) certificate.  Both designations require a fiduciary standard of care and acting in the client’s best interest.

Enough about me, what about you?  What I usually see is that people have some idea of all of their investment assets but they may not see how it all fits together.  I call this the “Where are we at?”  The first thing I do when a client has engaged me is to map out exactly where my client is financially at the present moment.

The next big question is “Where do we want to go?”  or, perhaps more to the point, “Where can we afford to go?” This involves an iterative process of bouncing ideas and goals back and forth and crunching lots of numbers while running sophisticated statistical forms of analysis to best estimate what is reasonable and prudent.

Only then can we collectively even start to answer the question “How do we get there?”  By now we have a firm understanding of the current and planned assets and resources in place.  I can start mapping out a bespoke investment strategy for the client to try on, which I can resize to best fit as needed.

The last question “Are we on course?” is the key one.  Yes, we have done a lot of work together.  We have dug into details.  I have come back for clarity and confirmation many times.  We have gotten to know each other quite well.  However, it is all worth it because the future is unknown.  We have prepared for that as well as we could.  In the interim we weather the storm, stay on course, make changes when necessary, and continue to monitor your overall progress in meeting your life goals.  I say life goals because our finances touch upon our lives in almost every way.

That is what I do.

Brian Berberet, CFA, CFP®
Carrick Bend Advisors LLC


Municipal Bonds or Municipal Bond Funds? Don’t Ask WWSOD? (What Would Suze Orman Do?)

Municipal Bonds or Municipal Bond Funds?

 We read an article about Suze Orman in Costco’s magazine a while back.  The Costco mag rag has a few articles and lots of Costco products. In a sidebar to the article, Orman advises investors to buy individual bonds rather than bond funds. Orman’s primary argument is that individual bonds can be held to maturity and that interest income of individual bonds is more stable. We disagree with Orman for the most part. We think she is making a quick punchy magazine bullet point that does a disservice to most readers who take her comments at face value.

A Bit of a Drag

In her article, Orman did not differentiate between taxable and tax-free bonds.  We will focus specifically on municipal bonds where we think Orman’s broad brushed advice is particularly doing readers a disservice.  The primary municipal bond mutual fund that we use in client portfolios is the Vanguard California Intermediate Municipal Bond Fund (VCADX). The internal management fee charged by Vanguard is 0.09 percent annually. One would naturally think that if one were to buy individual municipal bonds, after paying the transaction costs of the original bond purchase, one could at least save 0.09 percent a year avoiding the annual expense ratio drag embedded in the bond mutual fund. This does not turn out to be the case.

A Bit of a Spread

The municipal bond market is more fragmented and less efficient than the stock market. Individual bond investors routinely pay from 1 percent to 4 percent more than what a mutual fund manager would pay for the same bond. The mutual fund companies have a scale and a frequency of buying municipal bonds that allow brokers to lower bond prices and still make money. The difference between what one investor can sell a bond for and the price she would pay for that same bond is called the “spread.” The wider spread that smaller municipal bond investors pay is effectively a fee embedded in the price of the bond and not really fully disclosed. Studies indicating simultaneous prices paid by retail investors versus institutional investors confirm these wide spreads.

(Unlike the bond market, the equities markets are pretty much priced the same for smaller investors and large institutional investors. This is due to a combination of free market competition and regulation. As bond trading platforms improve, we do expect smaller investors to eventually have access to more competitive pricing. We expect this process to take several years.)

Assume you pay 2 percent more than what Vanguard paid for the same bond. Roughly speaking, you would have to hold onto that bond about 22 years (2%/0.09% = 22.3 years) before the 2 percent higher price you paid for the bond starts being more attractive than the additional 0.09 percent in annual fees you pay to Vanguard.

Particularly if you are in the asset building mode, individual municipal bond investing is even more expensive, because the individual investor continues to pay a premium every time she buys more bonds to reinvest municipal bond interest income. Municipal bond funds, however, allow savers automatic monthly reinvestment into the bond fund without a transaction fee. Also, depending on the size of coupon interest, the individual investor may not even be able to find a municipal bond issue small enough to buy in order to stay fully invested.

Stability, Income, and Diversification

We think a common investor opinion that the income from individual bonds is more stable than the income from bond funds is incorrect. Let’s say an investor builds a laddered bond strategy and attempts to keep a fairly stable average weighted maturity (or duration, which is a metric used by institutional investors and is a little more complex) by buying longer, such as by buying bonds of rolling maturities. If the investor keeps buying a replacement bond of the longest desired maturity every time a bond matures, she faces the risk that the reinvested coupon interest may be less than the coupon paid by the last maturing bond.

Another common investor sentiment goes something like, “Well, if I hold on to the bond until maturity, I will always get my principal back.” Bond prices fluctuate daily, just like bond mutual funds. Every investment should be evaluated on a total return basis, which incorporates both the change in price from one period to the next and the cash flow earned from the investment. Factoring changes in interest rates, the time value of money, and inflation, a known nominal fixed dollar payment ten to twenty years out really is not much of an assurance of the value of your bond today. More importantly, that fixed dollar amount that will be paid off that far out in the future is not much of an assurance of what your real economic return will be from that investment.

Digging through the actual mechanics and going over the details confirms what we really think: Any comfort that comes from knowing exactly when your individual bonds will mature relative to the constant maturity of a bond fund is really a false sense of security.

Finally two more points on why municipal bond funds may be better for you than individual municipal bonds. The first one is fairly simple. Unless the client has a large dollar amount to be dedicated to municipal bonds, the amount of diversification achievable through a bond fund such as VCADX is difficult to replicate.

The second point is a little more conceptually difficult. Broadly speaking, a portfolio of individual bonds becomes a little shorter in maturity every day. That may lead to your bond allocation moving from its original specified risk tolerance. This can be adjusted when new money is invested in bonds and when a bond matures. Developing strategies using municipal bond funds that target specific maturity ranges (i.e., short-term, intermediate, and long-term) is likely a better way to customize a municipal fixed income allocation tailored specifically for an individual’s interest rate sensitivity and risk tolerance.

What’s in My Wallet?

I thought a way for you to get to know me and a way for me possibly share some high-level personal finance ideas would be for me to crack open my wallet and share what is inside.

First of all I have my driver’s license, proof of both medical and auto insurance, a few of my business cards and those of others and some coupons for a car wash place I need to use up.

More in the financial nuts & bolts of it all, I probably have too many credit cards. However, my credit score is over 800 and there is a method to my madness. The cards on the left side of my wallet are all for my personal use and are set up to be downloaded to my personal Quicken account, which I do daily.  The cards on the right side of my wallet are all for my business’s use and are setup to download into my QuickBooks business accounting program.

Being a business owner it is important to keep my personal and business spending quite delineated.  Having cards specifically dedicated to each use helps.  Having them all setup to download into my respective personal spending and business software saves me a lot of data input time.


A few big picture thoughts

  1. NEVER run a balance on your cards EVER.  Pay off your credit card IN FULL every month.  If you do have a credit card balance, it’s time to eat peanut butter sandwiches, wear what you’ve got, and stay away from the vacay.  In this instance  “Just do it” means “No New Nikes.”  Even the best credit card rates are usurious in nearly all circumstance.  Keep in mind advertised low rates are often teaser rates to suck you in and get you to run up a balance for higher rates down the road.
  1.  ALWAYS get something out of the card. I get United Frequent Flyer miles and great foreign exchange rates out of two cards. Five percent cash back from Target from one card and 5% cash back from Amazon on another. Four percent cash back on gas from my Costco Chase card.  Dig around find which Air Miles programs work best for you.  This guy is good: http://onemileatatime.boardingarea.com/.
  1. Put it ALL on the card. What?  First of all, you have no credit card balances since you ate peanut butter sandwiches all last year. Believe me I know.  I’ve done it.  Putting more on the credit card gets you more cash back or other benefits.  Tie your cards to your spending tracking software and you will have a better sense of how much you spend.  In addition, you will have various forms of purchase protection.  Last year I took four people to Hawaii using miles I had got on my credit card and the rental car that got a bit banged up when we went beyond the paved road was all covered by my Visa’s extended rental car insurance coverage.
  1. Put automatic payments on your credit card and NOT your bank account. I like to control my checking account balance.  Having automatic payments take money out when they want bugs me.  I’d rather have those payments hit the credit card where I can review them when I want, and better yet, pay them when I want as long as it is before the credit card’s due date.  This can push out when you have make the payment sometimes beyond a month.  Plus you get cash back, miles, or whatever benefit you have researched works best for you.

That’s it.  Out of habit, I pay off my credit card balance in full right when I get the statement.   That seems to improve your credit score for some reason.  Cash?  I usually keep the cash in my wallet pretty tight.  Although I always have cash on hand.  Don’t me a lame cashless cheapskate when out with friends.

One final thought is once you get the cards that work for you, be selective about canceling cards and switching to new ones.  I am not saying don’t ever do it.  I am saying be selective and intermittent.  This is especially true when looking to borrow money for a car or home. Having a few credit cards with a long credit history boosts the score.  Recently opened cards can push it down. Just be judicious and timely.

Some more personal financial thoughts down the road.

Luck is the Residue of Design

There seems to be the American Dream of striking it rich.  While some folks are born rich and other really luck out, most financially stable folks did it over a long time. Also just because you become rich is no guarantee  that you will stay rich.  There is a bit of a crisis among retired NFL players running out of money shortly after retirement.

My focus will on how you can increase your financial well being over time.  Once you are at a financial circumstance that you are satisfied with, the conjoined issue is maintaining your financial fitness.

My best metaphor for financial fitness is that is is much like physical fitness.  No crash diets, no extreme workouts, rather ongoing consistent caloric monitoring and diligent rigorous working out wins the game.

The more disciplined you are with your money and the more you invest in yourself and your business and/or professional efforts will very likely payoff in time. Nose to the grindstone and all that stuff.

When I see a Mercedes or a Rolex, I also see just that much less which could have possibly been invested in another area with very likely higher monetary, emotional or spiritual returns. Ok, so I am a judgmental jerk 🙂

Nothing wrong with having some nice things.  Likewise nothing wrong within within one’s means even if that means even if that means wearing a Seiko and driving an older Honda.

Finally, being financially fit is a part of a greater goal.  Being a deceit caring loving human being wins the game.