Recently, a Park + Elm client asked for some advice on handling his finances now that he is a new business owner. Small business owners are in a unique financial position, so we created a 5 step process to follow during your ownership years. Many self-employed investors won’t have the same range of assets that a life-long employee would have at retirement, so planning for your eventual exit from the business is also crucial.

Don’t try to outguess the market

The market’s pricing power works against mutual fund managers who try to outsmart other participants through stock picking or market timing. As evidence, only 17% of US equity mutual funds have survived and outperformed their benchmarks over the past 15 years. Even so, traditional investment approaches strive to beat the market by taking advantage of pricing “mistakes” and attempting to predict the future. Too often, these approaches prove costly and futile. Predictions go awry and managers may hold the wrong securities at the wrong time, missing the strong returns that markets can provide. Meanwhile, capital-based economies thrive—not because markets fail but because they succeed.

What if the typical investor decided not to bet their life savings on tips and hunches? We know from our first piece in this series, that trying to guess the most underpriced stocks is betting against 98.6 Million other investors each day; and that equity prices are fair and efficient. We also know that markets throughout the world have a history of rewarding investors for supplied capital. Instead of guessing, we should lean on academics and science to guide the way to designing a portfolio that delivers what the markets offer. A financial plan based on the science of investing frees you to focus on what matters – diversification, lowering costs, and discipline.

Many of the greatest advancements in Finance have come from academia and research. Academic research has identified the sources of investment returns historically, and applying academic insights to practical strategies can help investors benefit from what the capital markets have to offer.

There is a different way to invest. We should think about why we invest, what we know from research, and apply proven scientific methods of expected returns to our portfolio design. We focus on gaining insights about markets and returns from academic research, reducing expenses, rebalancing, and taking on an acceptable amount of risk based on scientific dimensions of expected returns. Let markets work for you by taking advantage of sensible, well-diversified, low-cost portfolios backed by decades of research and practical experience.

Park + Elm Investment Advisers, LLC is a Registered Investment Advisor offering Investment Advisory Services. The custodian for our client’s funds is The Charles Schwab Corporation. Park + Elm Investment Advisers, LLC is not affiliated with The Charles Schwab Corporation. We are registered with the Indiana Secretary of State Securities Division and additional information about us can be found on our ADV at http://www.adviserinfo.sec.gov/. The information in the brochure has not been approved, verified, or otherwise endorsed by the SEC or by any state securities authority. The brochure is for informational purposes only. It is not to be construed as tax, legal, or investment advice.

Which is it and what does it mean to you? People say it…”and the dollar is weak, too”, without knowing the consequences for their own portfolio. People are still saying it without knowing that the dollar recently reached a 7 year high.

The U.S. dollar is used to measure so many things around the world. It’s difficult to measure the value of the one thing that measures everything else. The terms “strong” or “weak” in reference to currency is simply a comparison to another currency. In the case of the dollar, the comparison is to countries with which the United States trades the most.

The dollar is rising, mainly because people from other countries seek to invest in American investments. However, there are challenges with this type of environment. A strong dollar makes our exports & American travel more expensive. Businesses or people that rely on export sales or tourism may find this difficult. If investing in gold is your thing, a strong dollar is not what you want. The price of gold is inversely related to the value of the dollar.

There are positives, though. We can import things cheaper – (good for Christmas shopping!), gas prices are cheaper, travel is cheaper. American investments get a boost from the attractiveness to foriegn investors.

The value of the dollar can affect you financially both positively and negatively. Your portfolio may get a boost, but your company may see difficulty. As with everything, the dollar won’t remain strong forever. But, when it does begin to weaken, other benefits will emerge.

The price of college is skyrocketing! Loan availability is high, demand is high, and competition is extremely high to retain these high paying, high maintenance student lifestyles. There are so many amenities at universities today, and you and your loans are paying for them. Unlike every other industry, colleges have not passed on savings captured by technology advances to their students. If you have a future student, YOU MUST START PLANNING NOW!

The most popular and most efficient way to save for college is with a 529 College savings plan. This allows you to save money in an education fund – tax deferred. While there are stipulations as to how the money is spent, many states will give you a tax credit for investing in a 529. Indiana, for instance, offers a 20% tax credit on your deposits up to $5,000. That is potential for a $1000 credit on your state taxes…an immediate 20% return.

Regardless of how you save, it’s crucial to start it early. College inflation costs need to be combatted with investing over long periods of time. The deadline for a 529 tax credit is December 31st. If you need help with this goal, contact our firm and we can guide you to the right plan.

EXPECT VOLATILITY
It is important to remember how well-functioning capital markets work and what prices reflect; prices reflect the aggregate expectations of market participants. Risk aversion, investors’ tastes and preferences, and expectations about future profits are among the many inputs that affect expectations. We should expect these inputs to vary day-to-day. Markets adapt to changing expectations and new information. As a result, we expect prices, as well as the level of volatility, to fluctuate. It is interesting to think of the alternative: If prices did not adjust and remained constant, we would be concerned that markets were not functioning properly.

JANUARY 2016
Do returns during January provide information about returns during the remainder of the year? During the month, the S&P 500 Index had a return of −4.96%, the ninth lowest return for the index since 1926. Based on this information, some investors may wonder whether the returns in January have some predictive power for the returns during the remainder of the year. Historically, a negative January was followed by a subsequent 11-month return that was positive 59% of the time, with an average return of 7%, indicating a negative January does not predict poor market returns for the rest of the year. Looking at the five lowest January returns, excluding January 2016, the average return for the remainder of the year was 13.8% and none of these years finished in the lowest 20 years of annual returns for the S&P 500 Index.

IMPORTANCE OF DISCIPLINE
While in the midst of a market downturn, we may be inclined to look for some type of signal as to what the recent period means for future returns, or to assume the current period is somehow different from what we have observed historically. Before jumping to conclusions or attempting to make predictions about what the future may hold, analyzing the available data can provide perspective. It is also important to remember that there is ample evidence that suggests prices adjust in such a way that every day there is a positive expected return on our invested capital. While the realized return over any period may be positive or negative, in expectation we believe markets will go up. As investors, we should remain disciplined through all periods in order to capture the expected returns the market offers.