Super Babies or New Rules?

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, CPFA.

You probably noticed the headlines: for the first time, U.S.-based scientists have genetically modified a human embryo. This follows similar news from China, which, like the U.S., has touted the ability to correct defective genes that cause inherited diseases like cystic fibrosis, or to resolve the predilection to cancer or heart disease.

This marks the new era of human gene editing—what some are calling "designer babies," what others might soon be calling "super babies." The question for all of us to wonder is: where will this lead?

A recent article by popular scientist Vivek Wadhwa lays out some of the possibilities. He says that the new CRISPR process to edit genes in humans and animals has basically made it as easy and nearly as cheap to snip and replace bits of DNA as it is to edit computer code—and scientists see some similarities between the two. Computer code and DNA are both shorthand commands for very complex processes, and as those commands are understood, their possibilities expand.

The ability to modify an embryo doesn't necessarily have to stop with genetic-related diseases. While they're checking for the gene for cystic fibrosis, would you want a medical team to make a few nips and tucks, and guarantee that the child will be born with blonde hair, blue eyes or greater intelligence? There are reports of parents who have given their young children human growth hormone and anabolic steroids in order to turn them into more successful adult athletes. What if a creative, clandestine team of researchers approached that same family and promised that they could tinker with the next embryo and produce a seven and a half foot, four hundred pound gridiron competitor?

Other parents might want to add a few IQ points to their childrens' intelligence, and scientists have recently uncovered several places in the human DNA that seems to code for intelligence. Why stop at a few IQ points when you could conceivably ensure that your child would be a transcendent genius with intelligence off the conventional charts? And what would be the impact on society of a dozen, a hundred or a few thousand super-intelligent, genetically-engineered citizens?

Meanwhile, as it becomes easier and less expensive to hack the life code, we could see terrorists creating frightening new viral or bacterial diseases for which there is no cure.

In February, an advisory body from the National Academy of Sciences announced support for using CRISPR to edit the genes of embryos exclusively to remove DNA sequences that doctors say can cause serious heritable diseases. But rather than hailing this as a first step in an ethical debate about modifying life as it has evolved on this planet, many scientists see the go-ahead as the first step down a long pathway that could lead to very serious consequences in the future.



Don't Sell on Headlines

Written by Gerald E Gasber, CFP®, CIMA®, CPFA & Bob Veres.

So far, the world markets seem to be shrugging off the sabre-rattling coming from North Korea (normal behavior) and the U.S. White House (complete departure from prior administration policy). The smart money is betting that the distant but suddenly headline-grabbing possibility of the first conflict between two countries armed with nuclear weapons will amount to a tempest in a teapot.

Meanwhile, the U.S. stock market has been testing new highs for months, and experts cannot quite explain why valuations have been rising amid such low volatility.

So the question is quite logical: isn't this a good time to pare back or get out of the market until valuations return to their historical norms, or at least until the North Korean "crisis" blows over?

The quick answer is that there's never a good time to try to time the market. The longer answer is that this may actually be a particularly bad time to try it.

What's happening between the U.S. and Korea is admittedly unprecedented. In the past, the U.S. largely ignored the bluster and empty threats coming out of the tiny, dirt-poor Communist regime, and believe it or not, that also seems to be what the military is doing now. Yes, our President did blurt out the term "fire and fury" in impromptu remarks to the press, and later doubled down on the term by suggesting that his warning wasn't worded strongly enough. But the U.S. military seems to be responding with a yawn. There are no Naval carrier groups anywhere near Korea at the moment; the U.S.S. Carl Vinson and the U.S.S. Theodore Roosevelt are both still engaged in training exercises off the U.S. West Coast, and the U.S.S. Nimitz is currently patrolling the Persian Gulf. Nor has the State Department called for the evacuation of non-essential personnel from South Korea, as it would if it believed that tensions were leading toward a military confrontation.

Meanwhile, on the home front, the U.S. economy continues to grow slowly but steadily, and in the second quarter 72.2% of companies in the S&P 500 index have reported earnings above forecast.

What does that mean? It means that you will probably see a certain amount of selling due to panic over the North Korean standoff, which will make stocks less expensive—a classic buying opportunity. History has given all of us many opportunities to panic, going back to World War I and World War II, and more recently 9/11—but those who stayed the course reaped enormous benefits from those who abandoned their stock positions.

If you're feeling panic over the North Korean situation, by all means, go in the nearest bedroom and scream—and then share some sympathy for the Americans living in the island territory of Guam, which is in the direct path of the North Korean bluster. Just don't sabotage your financial well-being in the process.


Measuring the Market

Written by Gerald E Gasber, CFP®, CIMA®, CPFA & Bob Veres.

Have you ever wondered what stock market professionals and equity analysts talk about in their spare time? Recently, the Bloomberg website featured a debate about something that is getting a lot of attention recently: the historically high, and still-rising U.S. stock market valuations. People have been willing to pay more, and more, and more for a dollar of corporate earnings. What does that mean about future returns?

Let's look over the shoulders and see how two professionals approach the question of how to look at today's markets.

Bloomberg Gadfly columnist Nir Kaissar starts by noting that the Standard & Poor's 500 Index has beaten both the MSCI EAFE Index -- a collection of developed market stocks outside the U.S. -- and the MSCI Emerging Markets Index by 6 percentage points a year since March 2009, when the market hit bottom, through May, including dividends. Whether you measure market prices by price-to-earnings ratio, price-to-book or price-to-cash flow, U.S. stocks are now more expensive than their foreign counterparts.

To Kaissar, that suggests that investors should consider moving at least some of their money out of American companies and into companies domiciled elsewhere.

Bloomberg View columnist Barry Ritholtz countered that valuation is largely driven by psychology. We are experiencing a bull market in American stocks, which can be defined (in psychological terms) as a period when investors become willing to pay more and more for a dollar of earnings. Eventually this will turn around, and the regional performance gap between the U.S. and Europe will reverse.

But for Ritholtz, the important issue is timing. You could have used Kaissar's argument four or five years ago, gotten out of U.S. equities, and you would have missed a nice runup while foreign stocks were going nowhere. Is it possible that the same will be true over the next few years? (Hint: it is definitely possible.)

Kaissar responded with a definition of risk vs. valuations—the idea that investors are generally willing to pay more for less risky stocks. So can we make an argument that the S&P 500—with a price-to-book ratio about twice as high as the EAFE basket of stocks—is half as risky as stocks trading in the rest of the world? He doesn't think so, and the conclusion is that American stocks are mispriced.

Ritholtz says that rather than trying to time which part of the world is going to do better or worse, it's better to own it all. Instead of U.S. stocks vs. world stocks, own a portfolio that includes all of them in proportion.

Aha! says Kaissar. U.S. investors commonly allocate 70 percent to 80 percent of their stocks to the U.S., even though U.S. stocks represent only 50 percent of global market capitalization. He says that if you believe in true diversification, it would make more sense to create portfolios with a U.S. stock allocation that's closer to 45 percent, tilting slightly toward the global stocks that are currently trading on sale.

Ritholtz makes a final argument, saying that sometimes cheap stocks get cheaper and continue to fall; other times expensive stocks get more expensive and keep going up. He doesn't want to abandon U.S. equities, but he finds common ground with Kaissar when he recommends that people with U.S.-heavy portfolios consider diversifying into MSCI EAFE and MSCI EM indexes—not for timing purposes, but because it's prudent diversification. You can see exactly how boring the cocktail conversations of stock analysts can be by viewing the entire discussion here:



Going Global: A Look at Public Company Listings

Written by Gerald E Gasber, CFP®, CIMA®, CPFA & Diminsonal Fund Advisors LP.

Trivia time: how many stocks make up the Wilshire 5000 Total Market Index (a widely used benchmark for the US equity market)? While the logical guess might be 5,000, as of December 31, 2016, the index actually contained around 3,600 names. In fact, the last time this index contained 5,000 or more companies was at the end of 2005. This mirrors the overall trend in the US stock market. In the past two decades there has been a decline in the number of US-listed, publicly traded companies. Should investors in public markets be worried about this change? Does this mean there is a material risk of being unable to achieve an adequate level of diversification for stock investors? We believe the answer to both is no. When viewed through a global lens, a different story begins to emerge—one with important implications for how to structure a well-diversified investment portfolio.


When looked at globally, the number of publicly listed companies has not declined. In fact, the number of firms listed on US, non-US developed, and emerging markets exchanges has increased from about 23,000 in 1995 to 33,000 at the end of 2016. It should be noted, however, that this number is substantially larger than what many investors consider to be an investable universe of stocks. For example, one well-known global benchmark, the MSCI All Country World Index Investable Market Index (MSCI ACWI IMI) contains between 8,000 and 9,000 stocks. This index applies restrictions for inclusion such as minimum market capitalization, volume, and price. For comparison, the Dimensional investable universe, at around 13,000 stocks, is broader than the MSCI ACWI IMI.

While it is true that in the US there are fewer publicly listed firms today than there were in the mid-1990s (a decrease of about 2,500), it is clear that the increase in listings both in developed markets outside the US and in emerging markets has more than offset the decline in US listings. Although there is no consensus about why US listings have decreased over this period of time, a number of academic studies have explored possible reasons for this change. One line of investigation considered if changes in the regulatory environment for listed companies in the US relative to other countries may explain why there are fewer listed firms. Another considered if, since the 2000s, private companies have had a greater propensity to sell themselves to larger companies rather than list themselves. In either case, the implication for investors based on the numbers alone is clear—the number of publicly listed companies around the world has increased, not decreased.


In the US, with thousands of stocks available for investment today, it is unlikely that this change will meaningfully impact an investor's ability to efficiently pursue equity market returns in broadly diversified portfolios. It is also important to note that a significant fraction of the publicly available global market cap remains listed on US exchanges. As noted in Exhibit 2, the weight of the US in the global market is approximately 50–55%. For comparison, it was approximately 40% in 1995.

For investors looking to build diversified portfolios, the implications of the trend in listings are also clear. The global equity market is large and represents a world of investment opportunities, nearly half of which are outside of the US. While diversifying globally implies an investor's portfolio is unlikely to be the best performing relative to any one domestic stock market, it also means it is unlikely to be the worst performing. Diversification provides the means to achieve a more consistent outcome and can help reduce the risks associated with overconcentration in any one country. By having a truly global investment approach, investors have the opportunity to capture returns wherever they occur.


While there has been a decline in the number of US-listed, publicly traded companies, this decline has been more than offset by an increase in listings in non-US markets. While the reasons behind this trend are not clear, the implications for investors today are clearer—to build a well-diversified portfolio, an investor has to look beyond any single country's stock market and take a global approach.

Source: Dimensional Fund Advisors LP.
Past performance is no guarantee of future results. There is no guarantee an investing strategy will be successful. Diversification does not eliminate the risk of market loss. Investing risks include loss of principal and fluctuating value. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks.
All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Indices, such as the MSCI All Country World Index Investable Market Index (MSCI ACWI IMI) are not available for direct investment.

Who's On Your Side?

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, CPFA.

Friday, June 9 quietly marked/will mark an historic day in the financial services world. On that date, all financial advisors will be required to forego any sales agenda and give advice that would benefit their clients or customers—or, if they decide otherwise, to explain how and why they intend to give advice that instead primarily benefits themselves and their brokerage company. This rule only pertains to rollovers from a qualified plan like a 401(k) into an IRA, and to the investment recommendations for that IRA account. But it may be a first step toward something larger.

The polls consistently show that most Americans believe they already receive objective advice—called "fiduciary" advice by the profession and regulators. But the overwhelming odds are that they don't. There are half a million brokers who earn commissions if they can convince you to buy an expensive alternative to the thriftier, better-performing investment options on the market. That's more than ten times the number of advisors who adhere to a fiduciary standard. Government research estimates that consumers lost $17 billion a year to conflicted advice in the recommendations made by brokers and sales agents posing as advisors related to retirement plans. This, to put it bluntly, helps explain why so many Wall Street brokers are insulted if their annual bonus is in the low seven figures.

The actual number of real fiduciary advisors may actually be lower than this discouraging figure. A mystery shopper study in the Boston area found that only 2.4% of the "advisors" (most were almost certainly brokers) it surveyed made what most would consider to be fiduciary recommendations. On the other side, 85% advocated switching out of a thrifty portfolio with excellent funds into something a bit more self-serving.

An article in the most broker-friendly publication imaginable—Bloomberg—recently outlined some of the ways that you can be taken in by a sales pitch and never know it. (The full article can be found here: It notes that the brokerage industry—that is, the larger Wall Street firms, independent broker-dealer organizations and life insurance organizations—repeatedly fought the fiduciary rule in court, arguing, in some cases, that their brokers and insurance agents shouldn't be held to this standard because, despite what they said or what the companies' marketing materials proclaimed, they were nothing more than salespeople trying to effect a sale. The courts refused to block the rule.

It gets worse. Even though brokers are held to a sales standard—they are required to "know their customer" and to make investment recommendations that would be "suitable" to somebody in your circumstances (a very low standard that is appropriately known as "compliance"), a new study found that 8% of all brokers have a record of serious misconduct, and nearly half of those were kept on at their firms even after getting caught.

We don't know how long this regulation will be in effect. New Labor Secretary Alexander Acosta has announced that he's studying whether the rule that requires brokers to act in the best interests of their customers is good or bad for customers, and his comments hint that he thinks you would be harmed if suddenly you were able to trust the advice you receive. But there is one simple way to determine whether you're working with somebody you can trust.

First, ask your advisor directly to provide written documentation that he or she will act in your best interests. This should be no longer than a page and might be no longer than a sentence or two. There's even a "Fiduciary Oath" that many financial advisors are giving to their clients—without any prompting. If the broker hems and haws, then hold onto your wallet or purse, because chances are any recommendations you receive are going to cost you money that will be disclosed in the fine print of whatever agreement you sign, somewhere after page 79.