The S&P 500 and the MSCI Emerging Market Index have very different results over the last 5 years. During that time, the S&P 500 produced positive returns every year, while the MSCI Emerging Markets Index was only positive in one year. So with this information, why would anyone choose to place their money in an emerging market index?

The answer comes from history.  Over the last 28 years, the MSCI Emerging Markets Index actually performed better than the S&P 500, and would have actually made you a better return. When looking over that 28-year period, the MSCI Emerging Markets Index had negative annual returns in 13 years. During that same time period, the S&P 500 only had 5 years with negative annual returns. However, over that time period, the S&P 500 compounded at a rate of 10.3%, while the Emerging Markets Index compounded at a rate of 10.5%.

One of the most difficult parts about investing in emerging funds is to stick with it. It is hard to look at a fund that is producing negative returns over several years and continue to hold on. However, by keeping the fund for a long period of time, you are more likely to receive the benefits that come with riskier investments.

For more information on investing in emerging markets, give us a call!

Past performance is no guarantee of future results.

This is a scenario everyone has played out in their head hundreds of times. What would I do if I suddenly came into $1 million? Most of us already have a plan, to either get out of debt, or to buy a new car or a new house. But, assuming those things were already taken care of, what would most of America do with $1 million?

Million dollar question

According to a recent survey of Mirador Wealth, most Americans would choose to invest their newly acquired fortune in land. In fact, Americans in 17 different states choose to invest in land. The respondents were given five choices: land, investments and business, travel, a small plane, or a boat. So given these options, why are more people choosing to either buy a boat or plane rather than invest? There are a few reasons why this could be the case. First of all, when given a large sum of money, history shows us that most people tend to be spenders, and not savers. According to Forbes, 44% of lottery winners who have won a large prize have gone broke within 5 years. If people already have a lack of financial discipline, access to more money merely amplifies financial mistakes. Another reason people are choosing to spend instead of invest is because of a lack of financial knowledge. According to a recent Gallup poll, 43% of Americans are not financially literate. This means that they struggle with paying bills and building their credit. So when these people receive a large quantity of money, they already have bad habits, and their money will not last as long.

Interestingly enough, the people in states with the lowest median household income chose to buy land, while the people in states with the highest median household income chose investments and business. So that leaves you with the question, what would you do with $1 million?

If you’d like to gain more financial knowledge and discipline to handle your first $1 million or even have a little guidance to help you get there, give us a call!

Piggy Bank

Depending upon your circumstances and everyone’s is different, the order that you prioritize for investing may vary. However, in general most people should prioritize investing for the short-term and then the long-term. Short-term investing, which I prefer to call savings, is most commonly for an emergency fund. An emergency fund is basically a small accumulation of money to pay insurance deductibles and co-pays plus other small, unbudgeted expenses like a hot water heater replacement or new tires. An emergency fund should also be available as a replacement income during a time of unemployment. Most experts recommend having three to six months of expenses in an emergency fund. For many this may be the same as three to six months of income, but the distinction should be drawn here between income and expenses. To help evaluate how much you might need, look at the job market for your career. What you need to ask yourself is, “How long would it take me to find a replacement position to earn my current income?” Only you can be the judge, but that’s why three to six months is used as a rough guide. Statistically, the higher your income and the more specialized your field, the harder it is to replace your income. Some may want to plan for unemployment lasting more than six months.

Short-term savings may also include putting back extra for large purchases such as a large appliance, automobile, or vacation home. Though you may use similar instruments to help the money grow, be sure to keep this money separate from your emergency money. If you have the discipline to separate it through budgeting, you can use the same accounts, but this is difficult for most people. I recommend keeping separate accounts for your different short-term saving purposes. Obviously, it is difficult to save for your next car if you’re still paying on the old one, so debt elimination may be a factor in getting your short-term savings in place. Most would suggest getting a small emergency fund first, followed by debt elimination other than your home, followed by the rest of your short-term savings accumulation.

The objective of your savings instrument should be to outpace inflation while maintaining relatively stable principle values and high liquidity. We usually recommend a combination of a checking account, money market, and certificate of deposit for our clients. Each of these allows for good principle stability, but with varying degrees of return and liquidity. Having the least necessary in the most liquid investments is often the most advisable, but again only you can be the judge of what you will need access to.

In conclusion, the distinction between saving and investing is important. If you are merely “loaning” money with savings and not investing money, your assets will not truly “grow” in spending power. In fact, if you don’t keep up with inflation, the value of your money can go down even if the amount grows! Inflation is a real risk that should be considered for longer-term investing, so investment vehicles used for savings and investing should differ greatly for most people and businesses.

Eddleman and Eddleman LLC has chosen to be a fiduciary for more than a decade. And while we believe that a fiduciary implementation is the best for clients, we also believe that individuals should have the option to choose how they implement financial services. But, there’s been a battle raging over this same decade of who is a fiduciary, who isn’t and who should be. Some of our peers are also fiduciaries; they believe that everyone in the investment industry should come under the fiduciary rule. However, there are alternative ramifications when the government gets involved and starts forcing businesses and individuals to interact in certain ways.

So what is a fiduciary? On a basic level, a fiduciary is an entity that manages the affairs of another with the highest level of care. When it comes to investing, a fiduciary has a legal responsibility to do what is in the best interest of the client. Currently, all investment advisors are required by the Investment Advisors Act of 1940 to be a fiduciary to their clients, while stockbrokers are regulated by the Securities and Exchange Act of 1934, which does not require a fiduciary duty to their clients. Stockbrokers are required to make “suitable” investment suggestions for their clients, but they are not required to make the best suggestions for their clients. For more information on the differences between stockbrokers and investment advisors, read this article from Forbes.

Currently, the Labor Department has proposed a bill that would raise the investment advise standards for stockbrokers. The bill would require stockbrokers and potentially others in the industry to be fiduciaries. Not only would this bill change the way that stockbrokers give advice, but the wording of the bill could also cause a censorship of the media. Media personalities who give advice to individual callers or audience members might no longer be able to express their opinions on specific investment situations. This raises questions about whether or not the bill violates First Amendment rights. This article from Forbes gives a more in depth look at how this bill could cause problems for media members.

When it comes to investment risk, two facts are true for everyone! Everyone takes investment risk, but risk doesn’t necessarily mean additional return. You might be saying to yourself either, “I don’t take investment risk,” or  “I like risk, it means more return.” Well, I’m sorry to say it, but if you are either person, you’re wrong. Now, before you become defensive, please let me explain.

First let me address those of you who think you don’t take investment risk. The fact is that if you have any money (or possessions), you take investment risk. There are many types of risk associated with money and possessions that people do not consider. If you say, “I don’t invest! I purchase possessions.” You incur devaluation risk. If you say, “I don’t invest! I put my money under the mattress.” You incur inflationary risk. If you say, “I only use certificates of deposit that are FDIC insured.” You incur Interest Rate Risk. If you say, “I only use government bonds.” You incur Reinvestment Risk. The point is regardless of how safe you think your money is, you are taking risks if you have any money or possessions anywhere. The fact of the matter is that life involves risk. If you are alive, you have taken risk, you are taking risk, and you will continue to take risk in all areas of your life including money. Let’s look at a few different parts of life to draw some analogies. Relationships. If you believe you don’t incur risks in your relationships because you refuse to have any, you take on a whole new set of risks. For example, you risk growing old alone. Transportation. You refuse to fly in a plane because you believe they are dangerous. Consequently, you take on even more risk by driving long distances and increase your chances of having a car wreck.

Perhaps you’re the person who believes that risk equates to reward. You must understand that all risks are not created equal. Regulatory Risk, Business Risk, Call Risk, Currency Risk, Market Risk, Liquidity Risk, Event Risk, Opportunity Risk (Cost), Political Risk, Operational Risk, Prepayment Risk, and those previously mentioned are just a few of the types of risk that exist. There are numerous risks that you may take for which you are not compensated, and there are other risks that you may take for which you are more likely compensated. Let’s look at some more analogies. Relationships. You only date persons who have a history of lying, but taking on this risk will not reward you with better relationships. Transportation. You understand the driving with no brakes is dangerous, so you disconnect the brakes to your car in hopes of getting to your destination faster.

These analogies may seem silly, but hopefully they help you to understand that every individual takes risks with their money and that all investment risks do not have an expectation of return. Over the next several weeks we will explore some of these investment risks so that you can make more informed decisions about investing your money!

For more information on investing, visit our financial planning page.