Summer 2014

This issue of “Financially Speaking” is sure to set off some fireworks of insightful conversation and appreciation for the freedom our country enjoys. Have a great Independence Day and a memorable summer!

Food Price Crisis?

If you’ve visited the grocery store this year, you know that food prices have been going up alarmingly in recent months—and, in many cases, the price increases actually started years ago. Bacon prices (average $5.55 a pound) have risen 53% over the last four years, joining margarine ($2.11/lb, up 30%), ground beef ($4.13/lb, up 35%), oranges ($1.21/lb, up 35%), coffee ($5.00/lb; up 31%) and peanut butter ($2.71/lb, up 30%) as food commodities that have seen their prices rise by roughly a third over the past 48 months.

Some specialty items have gone up even more. If you had invested in a warehouse of fresh pine nuts four years ago, you’d be able to retire comfortably today. (Note: not part of our recommended asset allocation!).

The question we should be asking ourselves, especially those of us who expect to rely on fixed income in retirement, is: is this trend going to continue? Are food prices headed even higher? And if so, should we be adjusting our budgets for double-digit annual inflation at the dinner table?

As it happens, we are living in a perfect storm, where supply shortages have been caused by forces over which farmers and ranchers have very little control. The biggest culprit is the multi-year drought in much of the western U.S. California is in the midst of its longest—and worst—drought on record. 2013 was California’s driest year on record, and a freak heat wave during this year’s rainy season has put 2014 on track to break that dismal mark. Farmers in the most productive agricultural land on Earth—California’s central valley—have cut back on the number of acres planted as the snow pack in the Sierra Nevada mountains remains at roughly 15% of normal. This matters to food consumers everywhere. California produces a huge percentage of the nation’s celery (95%), avocados (90%), cauliflower (89%), lemons (83%), spinach (83%), carrots (66%), broccoli (94%), strawberries (88%), bell peppers (50%) and tomatoes (30%).

The same drought pattern also extends deep into Texas, New Mexico, Oklahoma, Kansas and Nebraska, which have forced many of the nation’s most productive beef cattle and feed growers to pare back herds and acreage. At the same time, Florida’s citrus growers are facing a deadly new disease called “citrus greening” that has devastated orange groves—and for which there appears to be no cure. A relatively new hog virus called Porcine Epidemic Diarrhea Virus has significantly cut into pork production. And coffee prices have exploded ever since a fast-spreading fungus infection has begun spreading across farms from Mexico all the way to Peru. Hardest hit are the so-called “Arabica” coffee plants, which produce the beans used in espressos and gourmet specialty coffee blends.

Normally, you hear commentators talk about commodity cycles, where higher prices in one year give farmers an incentive to plant more acreage, which means they produce more in hopes of taking advantage of those high prices. The excess supply drives prices back down toward normalcy. If prices are low, farmers cut back on acreage, and the lower production causes prices to rise back toward more normal levels. Some analysts are trying hard to explain why these time-honored mechanisms seem to have failed us over the past four years.

The current situation is out of the control of farmers and there are unpredictable dynamics caused by Mother Nature; the sudden advent of new crop diseases, food prices might stay high for at least a few more years. It is important to remember, in times like these, to focus on the things we can control and not on the things we can’t. Like the gas crisis in the seventies, the California fruit flies in 1989, and the swine flu of 2009, these issues will eventually resolve themselves and become a distant memory of the past.

“Those that bring sunshine into the lives of others cannot keep it from themselves.”

–James M. Barrie, Scottish author and creator of Peter Pan

The Dangers of Instinctive Investing

You’ve probably read about behavioral finance research. The conclusion is generally the same, no matter what aspect of our decision-making is being probed: the human mind is hard-wired to process information in certain ways which were extremely helpful when the environment contained gazelles (very tasty!) and saber-toothed tigers (extremely dangerous!), but are not so helpful when we’re navigating the unfamiliar terrain of the investment markets. People shop at the mall looking for bargain prices, rather than flocking to stores where the price tags have been constantly revised upwards for the past 12 months. However, for some reason, they do the opposite when they’re shopping for investments.

The research reports make it sound like ordinary investors are subject to these stupid urges, but professional financial advisors are somehow immune to them. This is far from the truth. Financial planners and advisors are better-trained to understand the markets, but we’re all subject to the same primal urges and instincts. Some professional advisors looked back with some regret at the 30% returns the U.S. markets experienced last year and wished they’d had the foresight to go all-in on stocks on January 1. That, of course, was when Congress was flirting with the fiscal cliff and a potentially-catastrophic repudiation of Treasury debt, 597 U.S. counties in 14 states were receiving disaster relief from the worst drought on record, blizzards were burying the Northeast, people were saying that the Mayan calendar predicted the end of the world and some voters were saying that the Presidential election results confirmed it.

Today, as advisors look back with envy, so too do their clients and investors. It is deeply engrained in our nature to wonder whether we should pile into stocks now while the markets are still going up. If the Russian invasion of Crimea can’t stop the upward trend, then what else can?

These are sometimes the hardest conversations a professional advisor can have, for a couple of reasons. First, because it requires the advisor to admit that we can’t control the market (and really don’t have a clue about what they’re going to do next). Naturally, this is true of all of us, but shouldn’t professionals have better insight into the future? It feels like we’re admitting a dirty secret, when in fact the inability to see the future is a limitation we mortals all share.

The second reason this conversation is hard is because it always seems like the advisor is trying to talk people out of what they want to do. We are right at the five-year anniversary of one of the best times in history to have thrown all your money into stocks—in March 2009, right after the massive global economic meltdown, in the teeth of the Great Recession. However, most of the conversations at that time revolved around just the opposite decision: shouldn’t I take all my money out of the market and avoid any further losses?

Instead of encouraging their clients to double-down on stocks in early March 2009, most advisors were still looking back with shock and horror. All of us were feeling our own sense of regret that somehow, some way we should have seen the meltdown coming—even though Fed economists, regulators and global leaders couldn’t predict it either.

Today, as always, we have no idea where the markets are headed. All we know is that history has shown, over and over again, that when the markets have been on a long upward run, and the run seems to be accelerating, that has traditionally been a poor time to load up on stocks.

It is fair to ask: what could derail stocks this year? Interest rates are low and likely to remain that way as long as the Federal Reserve Board intends them to—which, if we believe their pronouncements, won’t be until next year at the earliest. The economy is still in recovery, but GDP gains are now in line with historical averages and trending upward. Household financial obligations (measured by the share of income needed to make payments on mortgages, leases, student loans, credit cards and auto loans) is the smallest share of income since the early 1980s. Oil and gas prices are low and trending downward. We seem, on the surface, to be facing the exact opposite conditions that we experienced at the beginning of 2013: less uncertainty, calmer economic weather.

Perhaps that’s the point: current circumstances really don’t tell us much about future markets movements. Stock prices jump up and down and around based on what analysts call “sentiment,” which basically means all those dysfunctional behavioral finance heuristics playing out day by day, week by week, as we hunt stocks the way our ancestors hunted antelope. All we know is that over the long-term, companies in aggregate (and their stocks, in aggregate) have become increasingly valuable, due to the time, energy and ingenuity of all the workers, whose daily labor creates, builds and manages this growth. Fortunately, for those who have the discipline to act on it, this information can be enough to build wealth over years of patience, while the people who try to time the markets on the upside and downside are letting this stable long-term wealth opportunity slip through their fingers.

“Health is the greatest gift, contentment the greatest wealth, faithfulness the best relationship.”

–Buddha

From The Data Bank

Back to Paper-Everyone Enjoys Doodling21 is the percentage of millionaire investors who said they will work with an independent financial planner this year, a 5 percent increase from 2013. (Spectrem Group)

23 is the percentage increase in home prices since March 2012. (Bloomberg Businessweek)

42 is the percentage of money held in cash among people in their early-to-mid-30s. (UBS)

62 is the average age at which U.S. retirees report retiring, the highest age since first asking this question in 1991. (Gallup)

67 is the percentage of the total $6.6 billion in long-term care insurance benefits that were paid out to women in 2013. (MoneyRates.com)

957 is the number of active-adult communities in the U.S. (55places.com)

$4.25 million is the average price of a U.S. golf course in 2013. (Bloomberg Businessweek)

Are Daughters A Better “Investment”?

As another Father’s Day passes, a new survey from the online account aggregation firm Yodlee.com and Harris Interactive tells us that the financial relationship between fathers (and parents) can be very different for their sons vs. their daughters. The survey found that an astonishing 75% of young adult men (age 18-34) are receiving financial aid from their parents, compared with 59% for comparable age daughters. The financial dependency extends deep into adulthood; among sons aged 35-44, fully 32% are still living at home, while only 9% of women in that age bracket sleep in their former bedroom. Even those numbers understate the disparity, because more than a third of the women who are living with their parents are doing so to support them in old age, something that sons are, according to the report, far less likely to do.

Overall, daughters are 32% less likely to need their parents’ money and twice as likely to move back home because they’re unemployed. By age 45, the survey found, most of these stark differences in financial independence have faded. Sons lag only a few percentage points behind daughters in these two areas but then a new discrepancy emerges. The survey found that older sons are only half as likely as daughters to support their parents in old age.

Office Notes

Inspired Financial will be closed August 5th to hold our annual mid-year retreat to discuss the vision for our firm and to set long term goals.

Beth and the CA Bear sizedLaurie Dubchansky, our summer intern, just finished the estate planning class in the financial planning program at UCI. She also recently joined Mark (Prendergast) on the Financial Planning Association’s (FPA) Pro Bono committee.

Beth goes to Sacramento…
Beth recently flew to Sacramento to talk to politicians about allocating funds for teachers to be educated about how to monitor and discover bullying in the schools that might not get noticed.

Kevin is part of two study groups that discuss financial planning and practice management concepts. One study group consists of local financial planners and the other was formed from the team of financial planners he met at the (FPA) Residency Program last year. This group of five members (mostly from the San Francisco area) has a monthly conference call and will have a more formal, in person, meeting at a financial planning conference at UC Santa Cruz in August.

Mark will be giving a presentation entitled “Portability – No Brainer or Brain Surgery?” to over 50 financial planners at the “Far West Roundup” at UC Santa Cruz this August.

Evelyn goes to WashingtonEvelyn goes to Washington…
Evelyn has visited our nation’s capital three times in the last month for a variety of reasons. One is to be an advocate for a fiduciary standard in financial planning. During this visit, she spoke to staff of both California senators and to three Congressmen with districts in southern California. Since that visit, she was asked by the House Ways and Means Committee to provide input and feedback about Social Security as part of Americans’ retirement planning.

With all this recent travel, we’re looking forward to staying closer to home for the summer. Whether on the road or in your own backyard, we hope that you are enjoying your summer, too. As always, we truly appreciate your trust in us!

Your Team at Inspired Financial

Note: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategy may be appropriate for you, consult with your attorney, accountant, financial advisor, or tax advisor prior to investing or taking action.