Weekly Commentary

As of Friday, March 3rd, 2017

The Critical Importance of Discovering Your "Money Mind" (Part 1 of 2) by Jacob Timm

SUMMARY

Equity markets – were positive across the globe this week with U.S. stocks (S&P 500) up +0.71% and international stocks (EAFE) up +0.89%
Fixed income markets – were negative this week with investment grade bonds (AGG) down -0.99% and high yield bonds (JNK) down slightly at -0.16%

Corporate Earnings – with almost 95% of S&P 500 companies having reported, earning are up 5.9% year-over-year (YoY)—and are likely to be even stronger comparatively next quarter given the weakness they experienced in early 2016.
Fed Hike Probability – post-Trump’s Tuesday night speech, along with that days Fed member chatter, the odds of a March rate hike jumped to 80% from 50% the day before. Despite this the market was up strong Wednesday, which is a strong positive to the market/economy withstanding getting back to more normal interest rate levels.
Historically Calm – the S&P 500 has now gone 97 straight days without a pullback of at least 1%; that is the second longest streak since 1995 when the market went 105 days without a loss of at least 1%.
Commentary: Today I want to spend some time focusing on why we as humans rarely have a good understanding of what our money truly means to us. In doing so we will dive deeper into the world of behavioral finance and some of the psychology around different ways we view money, and how those views affect the way we make decisions.
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MARKET RECAP

THE FACTS

Positive data this week included:

Durable Goods – minus the volatile sectors of aircraft and defense, durable goods growth was up for the 4th straight month to 2.1% YoY.
ISM Services Index – the ISM non-manufacturing index jumped sharply by 1.1 pts to a much higher than expected reading of 57.6. This marks the strongest rate of monthly growth since October of 2015.
ISM Manufacturing Index – jumped 1.7 pts in February for a reading of 57.7, a full 1.3 pts above consensus forecasts. The biggest boon in the report is the staggering 4.7 point jump in new orders to 65.1, matching the largest monthly growth December of 2013.
Chicago PMI – looked to as a solid economic activity indicator for the country, this data point also ramped to 57.4 in February from only 50.3 in January.
Consumer Confidence – jumped to 114.8 vs. 111.6, the highest level this century, seriously
Personal Income/Consumption – increased to 0.4% in January, slightly above expectations of 0.3%, and is now up 4.0% YoY. Consumption grew 0.2%, slightly below expectation of 0.3%, but up a solid 4.3% YoY.

Disappointing data this week included:

Pending Home Sales – declined -2.8% sequentially in January, and are only up 0.38% year-over-year; much of this softness appears to be from supply constraints and a slow-down from the sales push due to rising interest rates in the last few months.
Construction Spending – fell a sharp 1.0% in January but entirely weighed down by a weakness in public spending, whereas residential spending was up strongly.

Our Take

The overwhelming trend in the economic data continues to not only be positive, but accelerate to the upside—remember rate of change matters. And while the market over the long-run will follow overall economic growth, there are points in time when it dislocates from underlying economic realities due to its tendency of being forward looking.

The issue to consider at this point is has the market gotten ahead of itself? And perhaps the even more relevant question, have investors become too complacent about the inherent risks within the market?

As was mentioned above, the lack of volatility in the markets has reached historically low levels. Both realized and anticipated volatility within the futures markets are at all-time lows, and the S&P 500 is on its second longest streak in over 20 years without a daily pullback of 1% (see chart below).

While not so disconnected as to be a cause for concern, or necessitate reallocations, the extent to which investors so-called “animal spirits” seem to be growing by the day is worth noting. Both antidotal evidence, and countless surveys show, investors are once again feeling their own disconnect between the risk they know they should take and their desire to chase markets.

Side note: I’ve had an incredible week on the road visiting some of our great partners in Dallas and Boston, and can’t wait to share some of the new services and investment opportunities that are on their way for our clients. Our next two Quarterly Events on April 28th and July 20th will include guest presenters from these partners, and will truly be can’t miss. – Tim

Commentary: The Critical Importance of Discovering Your "Money Mind" (Part 1 of 2) by Jacob Timm

“Money by itself, is good for very little.” – Joe Duran

Intro

I spend a good portion of my time at Ten Capital creating and analyzing financial plans for our clients and their loved ones. During the past several years I’ve noticed some consistencies in the conversations and questions that inevitably arise when I sit down with an individual or a couple to discuss their unique financial life situations. The following are just a few that have stood out:

ITEM #1 - Talking about one’s financial future is not something most enjoy.

ITEM #2 - Many will avoid doing so for as long as possible.

ITEM #3 - It is sometimes difficult to take action once financial “blind spots” have been uncovered.

ITEM #4 - We as humans rarely have a good understanding of what our money truly means to us.

I’ve written on occasion about thinking “Beyond the Portfolio” when it comes to planning for our financial future and creating a sustainable retirement income. Knowing what your investment accounts mean in equating rates of return to dollars in your pocket is key to long term financial stability and peace of mind (see commentary from September 23rd, 2016). Unfortunately, this is only part of the overall financial health equation.

Today I want to spend time focusing on Item #4 on the list above. In doing so we will dive deeper into the world of behavioral finance and some of the psychology around different ways we view money, and how those views affect the way we make decisions.

One of the Many Inherent Problems with Money

I quoted Joe Duran in my introduction above “money by itself is good for very little”. Joe wrote a book entitled, The Money Code, which very insightfully dives into the problems that money can create in our lives when we don’t understand how we truly value it. The book sets forth the notion that money can only help do three things in your life.

Avoid pain
Feel good
Take care of the ones you love

To sum it up, every financial decision that we make over our lifetime will consciously or unconsciously be directly linked to addressing one of those three items: Did this financial decision help me avoid pain? Did this financial decision help me feel good? Or, did this financial decision take care of the ones I love? Those three questions will frame the remainder of what we discuss today, and I want you to keep these items in mind as we address issues around money and financial well-being over the next two weeks.

In our role as Financial Advisors we spend a good majority of our time talking about investments and money in mathematical terms. Although this can be helpful in understanding an investment portfolio, for many, they still feel inadequately trained to make solid, timely financial decision. This can be especially compounded when a couple is attempting to make a financial decision jointly, without first understanding how they each view money individually.

As we all know, money is a very personal topic. This is why it is so vital to understand the way you view money, and how your internal biases will affect your ability to make decisions in your financial life. We will talk more about internal biases next week.

What Can You Really Control

All too often, we devote our time and attention to things in our life that we have no control over. This is no different when it comes to our finances and the way we view money. In the book I mentioned above they sum up the four items that you have complete control over in your financial life, you may have heard this before.

Spending – how much will you live on now, and how much will you spend to enjoy life in the future
Saving – how much will you put away for the above-mentioned future
Timing – when will you make financial changes
Taking risk – how much risk you will assume with your assets

These four items are inherently linked and will guide your choices in almost every financial decision you will ever make. It’s important to ask yourself, especially when it comes to planning for the future and retirement, do you know what matters most to you in your financial life – and – do you have a clearly defined process to make financial tradeoffs? Without a clear understanding of these two questions, it can become very easy to become distracted in your financial life and end up making decisions that can, and most likely will, be detrimental to your current and future financial well-being.

Understanding Your Money Mind

As discussed earlier, each of us has a very unique and individual way we perceive our own financial situation. We all want our money to help us take care of the three items that drive our financial decision-making:

Avoid pain
Feel good
Take care of the ones we love

Each of us has the intrinsic desire to have our money take care of these things for us, but because of individual circumstances and the life we have lived, one of these items is usually more important to us than the other two. This can become especially apparent during stressful financial decisions when we tend to have a primary focus.

The Money Code describes this primary focus as your Money Mind, which should be thought of like a lens that you would find in eyeglasses. To expound upon this analogy, we have all heard the expression about wearing rose-colored glasses. Just as those glasses would change your perception of what you see, so will your dominant Money Mind. This happens in your financial life by influencing your viewpoint regarding every significant financial decision you will ever make.

Next week we will discuss each of the three Money Minds in detail and how discovering our individual Money Mind can help us become more thoughtful and focused when making key financial decisions in our lives.

Summary

Over and over we find that in order to create long-term financial piece of mind, one must have a complete understanding of their individual financial picture. As we discussed today, that understanding comes from focusing on more than the dollar value or your investment portfolio or even your personalized financial plan. We must dig deeper.

True, long lasting financial peace comes from understanding ourselves, the decisions we make with our money and why we make those decisions. We took the first step and uncovered what money truly means to us, next week we will dive into the three Money Minds and how they propel every significant financial decision we will ever make.

Have a wonderful weekend,

Jake and the team at TEN Capital

Forward

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