Brexit and Your Portfolio

Written by Gerry Gasber.

Investors worldwide are concerned about the possibility of a "Brexit": the potential exit of "Britain" (to be precise, the United Kingdom) from the European Union.

A Brexit would represent a significant crack in the foundation of the EU. Economists believe it might produce a recession in the U.K., and when one economy slumps, there are always regional and international consequences.1

Right now, Wall Street has its eyes on a date: June 23. On that day, U.K. voters will head to the polls for a referendum on whether or not to leave the EU. A June 15 poll in The Times showed 46% of respondents intending to vote "leave," 39% intending to vote "remain," and 15% either undecided or not voting. In a new Guardian/ICM poll, 53% of respondents indicated they would vote for a Brexit.2,3

If approved, a Brexit would not happen for at least two years – but if the U.K. electorate does approve it, global markets will undoubtedly see some turbulence. Reassuringly, the European Central Bank and the Bank of England have pledged to provide additional liquidity to European financial markets if a "leave" vote rattles investor confidence.4,5

The effect on Wall Street may be short-lived. For the past several months, American investors have focused their attention on earnings, oil prices, the Federal Reserve's possible policy decisions, and fundamental economic indicators like consumer spending and hiring. While a Brexit would be major news, it may prove to be only a temporary distraction for U.S. investors. 5

So be prepared for volatility, but avoid making rash decisions. If U.K. voters call for a Brexit, Wall Street might suffer a short-term hiccup – but you are investing for the long term, and short-term phenomena should not lead you to make hasty or ill-advised investment decisions. At moments like these, staying the course is often the best course.

1 - [5/23/16]

2 - [6/15/16]

3 - [6/13/16]

4 - [6/14/16]

5 - [6/14/16]

Big Vote in Europe

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

The big question in Europe this year is how the British people will vote on June 23. Will they vote to leave the European Union (what's being called the "Brexit") or decide to continue to be part of the 28-nation economic alliance?

What's at stake? It's hard to know, exactly. Great Britain already maintains its own currency, separate from the euro, so the vote will be about whether the country continues to pay into the EU budget and adhere to the Eurozone's regulations. Norway is also living outside the EU, yet it contributes to the budget, adheres to the regulations and seems to get most of the benefits of membership—and thereby offers a way for Britain to exit and still maintain all the trappings of membership. The uncertainty over the seven years that would be required to transition out of membership would be over how, exactly, a new relationship would be structured.

The Eurozone is suffering from high unemployment, low economic growth and a disparity between the richer (UK, Germany, Scandinavia) and poorer (Greece, Spain) nations. All European Union members are governed by policies created by the European Commission and the European parliament, and subject to the dispute resolution powers of the European Court of Justice. British voters might decide they don't like the shared sovereignty and ties to the economic problems.

Naturally, there is a lot of lobbying on both sides in the run-up to the vote. Economists seem to be uniformly against a Brexit, pointing out the obvious: that it would be hard for London to continue its role as the financial capital of Europe if its nation is not actually a part of the European Union. They point out that, unlike Greece, Britain already controls its own currency, and it is not a part of the passport-free zone, which is shorthand for having control over its own policies in regard to the Middle Eastern refugee crisis.

Those in favor of Brexit say that Britain would be freer to enter into trade deals with other countries (think: China) than it is today, and of course there is a lot of nationalist sentiment about reducing foreign influence over British affairs.

Who will win? The most recent polls show 46% of British voters will cast a ballot to leave the EU, vs. 44% who will vote to remain—and 10% who say they don't know how they'll vote. With a little less than a month from the actual Brexit election, there appears to be plenty of time for either side to continue pressing their case.



The Best Ways to Buy Happiness

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

We all know that money can't buy you happiness, right? As it turns out, this is not exactly true.

A recent study by University of Michigan economists Betsey Stevenson and Justin Wolfers, examining data from more than 150 countries using World Bank data, has shed new light on the interaction between happiness and the size of your bank account. Their first conclusion: the more money you have, the happier you tend to be, regardless of where you are on the income spectrum. They concluded that multi-millionaires don't think of themselves as "rich."

However, there do seem to be income levels where a person's happiness can be increased faster than others. Princeton University economist Angus Deaton has found that peoples' day-to-day happiness level rises until they reach about $75,000 in income—a point where a person can comfortably afford the basic necessities of life without worrying where his or her next meal is going to come from. After that, this type of happiness levels off.

In fact, a report in Psychological Science magazine found that the wealthier people were, the less likely they were to savor positive experiences in their lives. Another study found that lottery winners tended to be less impressed by life's simple pleasures than people who experienced no windfall. Once you've had a chance to drink the finest French wines, fly in a private jet and watch the Super Bowl from a box seat, a sunny day after a week of rain doesn't produce quite the same jolt of happiness it used to. The additional money tended to have a cancelling effect on day-to-day happiness.

It's another kind of happiness, which focuses on something the researchers call "life assessment," that continues to rise at all levels of wealth. The more money people have, the more they feel like they have a better life, possibly (Deaton hypothesizes) because they feel like they're outcompeting their peers.

Is there any way to more efficiently buy happiness with money? A study by the Chicago Booth School of Business found that people experienced more happiness if they spent money on others than when the money was spent on themselves. Treating someone else—or, more broadly, charitable activities—are among the most powerful financial enhancements to personal happiness.

Other research has shown that you get more happiness for your buck if you buy experiences rather than things. An epic trip to Paris, or a weekend at a bed and breakfast near the cost, can be more enduringly pleasure-inducing than buying a new watch or necklace. The watch or necklace quickly become a routine part of your environment, contributing nothing to happiness. But your travel experience can be shared with others and reminisced about.

Finally, you can buy time with money—decreasing your daily commute by moving closer to work, hiring somebody to help around the house, hiring an assistant to clear your desk—all giving you more leisure time to pursue your interests. With the free time, take music lessons or learn to dance—and you'll be happier than somebody with millions more than you have.



Under Water in the Caribbean

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

By all accounts, Puerto Rico is a beautiful, sunny place to visit, especially in the Winter. But it's hard to fathom how this U.S. island territory of 3.5 million people could have racked up $70 billion in public debt—roughly $20,000 per citizen, which happens to be almost exactly the population's average yearly income. Now that Puerto Rican bonds are trading at 20-50 cents on the dollar, a lot of people are starting to wonder what happened.

On Monday, for the third time, Puerto Rico defaulted on its debt, paying the interest due on bonds issued by the Government Development Bank, but nothing on the principal—effectively defaulting on $370 million. Previous defaults include $143 million worth of appropriation bonds from Puerto Rico's Public Finance Corp. and rum-tax securities issued by the territory's Infrastructure Financing Authority. An additional $1.9 billion payment is due July 1, and nobody seems to be very optimistic that Puerto Rico will come through with that money either.

The story is a familiar one. There was a lot of investor demand for Puerto Rican bonds, because they're exempt from federal and state income tax in all 50 states—meaning residents in Wyoming can buy Wyoming bonds, or Puerto Rican bonds, and have the interest exempt from state taxation. The territory met the demand by issuing debt by 18 different public debt issuers. In recent years, interest rates on these bonds crept higher as it became clearer that the territory would not be able to meet its obligations, making the bonds attractive to mutual funds that wanted to offer high yields to investors who didn't understand the default risks.

Would a broader Puerto Rican default affect your portfolio or the municipal bond market generally? Probably not. Most of the bonds have been repurchased for pennies on the dollar by opportunistic speculators, mostly hedge funds, some of whom recently traded $900 million of face amount Puerto Rican bonds for 47 cents on the dollar. A similar agreement retired $33 million in debt held by a group of credit unions. The territorial government has proposed that holders of its general obligation bonds accept 74 cents on the dollar, and Congress is discussing the possibility of allowing the territory to file for bankruptcy under Chapter 9—currently an option for U.S. states, but not for Puerto Rico.

But investors in some of those aforementioned mutual funds could be greatly impacted. Most municipal bond funds were reluctant to touch Puerto Rican paper with the proverbial ten-foot pole, knowing that the risk of default made positive returns problematic. But load fund company Oppenheimer loaded up on Puerto Rican debt through its Rochester line of funds, and the Franklin Double Tax-Free Income Fund holds the endangered paper as well. Both companies are now lobbying hard against any deal, but the most likely outcome is that they will become poster children for the dangers of recklessly chasing yields, particularly as the handwriting has been on the wall for years.



The anxious bull

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

We're in one of the longest-running, biggest wealth-producing bull markets in history, but you wouldn't know it from the headlines or the gloomy mood of investors. On March 9, the bull market in U.S. stocks, represented by the S&P 500, celebrated its seventh year. The index has risen 194% since closing at 676.53 on March 9, 2009. The Russell 2000 is up 213% over the same seven years. The Nasdaq 100 has gained 311%. Corporate earnings are up 148% from the first quarter of 2009.

So why hasn't this bull market gotten more respect? For one thing, the S&P 500 is down 7% from its record highs in May 2015. There have been two separate drops of more than 10% between then and now. And the profit levels of American corporations are down 32% from a record high set in the third quarter of 2014.

Perhaps more importantly, the rise has been gradual, and the recovery from the Great Recession has been incremental and below the recovery rate from previous recessions. Wages have barely kept pace with inflation, which means that many people don't feel any wealthier today than they did seven years ago. And investors who didn't trust stocks, who bailed every time the markets dipped or who sat on the sidelines waiting for a clearer sign of recovery, are NOT wealthier than they were back then.

The truth is, only a few staunch investors have really benefited from one of the steadiest, longest bull markets in our history. Instead of celebrating, most of us are keeping a wary eye on the future horizon, doing what we humans do best: looking for the next thing to worry about.