General Electric Goes Off The Grid

A 122-year run comes to an end.

General Electric (GE), an original member of the Dow Jones Industrial Average dating back to 1896, was removed from the index and replaced with Walgreens Boots Alliance (a holding company that owns Walgreens). This is a pretty big deal considering GE's tenure as a member of the Dow and the fact that only 51 changes have ever been made to the Dow index. GE business has struggled in recent years, cutting its dividend back in November as it also considers dividing up its various business segments.

What is "The Dow"? The Dow Jones Industrial Average is an index comprised of 30 large, U.S. based companies. It is a price-based index, so those companies with higher share prices have greater influence on changes to the overall index value. For instance, Boeing at $340/share (biggest company) has nearly 10 times more influence than Pfizer (smallest company) at $36/share.

The Industrial part of the index's name is misleading though. The Dow does not attempt to specifically track the Industrials sector. In fact, there are only 5 Industrial stocks among the 30 companies in the index.

How does the Dow differ from the S&P 500? In contrast, the S&P 500 is market-capitalization weighted, which is calculated by taking each member company's share price and multiplying it by their number of shares outstanding. This more accurately reflects a company's size than the price-per-share does and it ensures that the truly larger companies among the 500 members have greater influence on the overall index value. The S&P is more diluted than the Dow, given it has 16 times the number of companies, but its market cap approach still makes it a better reflection of the U.S. market, in my opinion.

"Do not catch a falling knife." As the price of GE shares has fallen nearly -60% from where it was just two years ago, this teaches a valuable lesson. In a perfect world we would always buy low and sell high, but attempting to nail the bottom is most often a foolish approach. In order to buy low, especially when looking at GE, how do we know when that is? Take a look at its precipitous fall over the past couple years:

(chart created in

This is where the phrase "trying to catch a falling knife" comes into play. Much like trying to catch a knife and avoid injury, attempting to buy a falling stock or fund is a very risky proposition. A number of you have asked about whether we would buy GE over the past year and my answer has been "no". At least not yet.

My reluctance is due in part to the risk of trying to catch this falling knife, but it also has to do with opportunity cost. Even if GE does not fall too much further before it eventually bottoms, the time it takes for that to run its course and then begin moving higher (assuming it does) could take months or even years. Is that the best decision relative to other available investments? I don't believe so.

If the share price has a falling trend, it will likely continue to fall. Even if we suppose that the price has already bottomed, it could move sideways for a long time before actually rising.

In The Market..

The S&P 500 fell -0.9% this past week. Let's look under the hood:

(price data via

This week's loss for the S&P index broke what was a quiet four-week winning streak. I say quiet because the S&P only gained a combined +1.6% over those four weeks.

At the sector level it was mostly about defense, as Utilities, Real Estate and Consumer Staples finished positive. It was a rough week for growth with Technology, Financials, Materials and Industrials all losing more than -1%.

To that end, our Materials position (XLB) has yet to materialize as we anticipated (no pun intended). Materials did rebound somewhat on Friday, but we need to see more of that into this coming week. Something we are monitoring. We added a Health Care sector fund (XLV) to our larger or more aggressive accounts. Health Care looks like a sector that is primed to rally. 

In Our Portfolios...

What's New With Us?

The long-awaited Dept of Labor Fiduciary Rule is dead, officially struck down by the U.S. Fifth Circuit Court of Appeals. This law was aimed to force traditional stock brokerage firms to adhere to a fiduciary standard of looking out for their clients' best interests, rather than the current, watered-down suitability standard. The current suitability standard meant that these financial advisers (not us) only had to meet the bare minimum requirement when making investment recommendations or managing money for their clients.

The analogy I like to use when differentiating between the suitability standard and the fiduciary standard is this...

"That shirt fits you." (suitability standard)
"That shirt fits you and looks good on you." (fiduciary standard)

Our firm has always been held to the fiduciary standard by virtue of being a Registered Investment Adviser (RIA) firm. So while the reversal of the Fiduciary Rule is a big deal for our industry, it is not exactly for our firm. It was never going to affect us much. We made some refinements based on elements of the law, but nothing drastic.

For traditional brokers the regulatory landscape is back to square one. I have written at-length about why I thought the fiduciary rule was a net-positive for brokers and am happy to detail that again if you want me to. The reversal of this law is a massive regulatory change for the investment management industry, even if it means little to us. It will now take years before such regulations are implemented, if ever.

Have a great week,

Brian E. Betz, CFP®

An Iconic Toy Company Closes Up Shop

"I don't want to grow up, I'm a Toys 'R' Us kid."

One of the first commercials I remember as a kid will soon fade into an even more distant memory. That is because Toys 'R' Us is going out of business here in the U.S.

The toy giant is reportedly closing all of its U.S. stores despite attempts to restructure its massive debt. The company decided that it can pay off more of the billions it owes by liquidating the business entirely rather than continuing its struggling operations. At least one bankruptcy hearing remains, but it looks like operations will wind down in the very near future.

Toys 'R' Us is just one of the many retail companies that will succumb to Amazon in the years ahead, which has rendered such traditional brick-and-mortar distribution obsolete. It also continues to chip away at commercial real estate, as these Toys 'R' Us warehouse-like locations will remain empty for some time.

If you have gift cards to either Toys 'R' Us or Babies 'R' Us, use them as soon as possible. In a CNN Money article I was reading, a company spokesman said gift cards would only be honored for the next 30 days. To that end, if you plan on returning something purchased at either store, do not wait. On the bright side you should expect massive discounts in the weeks ahead as Toys 'R' Us winds down its operations in the next couple months.

In The Market...

The S&P 500 fell -1.3% this past week. Let's look under the hood:

(price data via

Stocks continue to see-saw, having alternated between weekly gains and losses since early February. Investors migrated to safety last week, namely Utilities and Real Estate, which were the only stock sectors that finished in the green. The surge in these defensive sectors would suggest that more losses are coming for the broader market, but overall conditions still look pretty good despite last week's decline and general choppiness. The S&P 500 has been inching its way back toward its record high of 2,873 set in January. The index enters this week at 2,752, roughly -4.5% below that peak.

The bond market had its best week of the year, rising for just the fourth time in the past 11 weeks. Treasury Bonds, Corporate Bonds and Preferred Stock all finished positive. Our more conservative client accounts continue to hold a cash position. This cash would normally be invested in bonds but the bond market has looked weak for the past few months. If that changes and the bond market continues to strengthen then those funds will be reinvested sooner than later.

In Our Portfolios...

In Financial Planning...

The long-awaited Dept of Labor Fiduciary Rule was rejected by the Fifth Circuit Court of Appeals. I am not sure exactly what that means, but it does imply that it will be a while longer before the law goes into effect. The Fiduciary Rule requires stock brokers to begin serving as true fiduciaries to their clients, rather than meeting the current, minimum standard of recommending investments that are solely considered suitable.

This distinction of "suitability" vs. "fiduciary" can be summed up by the following analogies:

"That shirt fits you." (Suitability requirement met)
"That shirt fits you AND looks good on you." (Fiduciary requirement met)

The second analogy is the standard we are already held to by virtue of being a Registered Investment Adviser (RIA) firm. As such, this DOL Fiduciary Rule does not impact our firm like it will other brokerage firms. Nonetheless, it is important to be aware of what checks/balances are being implemented across the broader financial services industry.

What's New With Us?

The good news is I mowed our lawn for the first time this year. The bad news is the engine was steaming when I finished, so I need to figure out what is wrong and fix it. Hopefully this great weather we have had continues throughout this week.

Finally, if you need help prepping the investment-related details for your tax return, just ask. By now you should have all the materials you need or have the instructions that I sent to obtain your Scottrade tax information from TD Ameritrade.

Have a great week,

Brian E Betz, CFP®

Social Security Recipients Get A Boost, Financial Reform Gets The Boot

In The News...

Two interesting things happened last week, neither involving the words Trump or Comey.

Financial Regulation Hits A Roadblock: The House of Representatives passed a bill to stop the pending Department of Labor (DOL) Fiduciary Rule, a reform that would impose more stringent regulations on financial advisers to ensure that they act in the best interests of clients. The proposed law targets financial advisers and firms that overcharge clients, often through hefty commissions. Advisers within certain firms are incentivized to recommend specific securities or investment products because it nets them higher commissions than comparable funds or products, which are less expensive and often better at fulfilling the client's needs.

The DOL Fiduciary Rule has minimal impact on our firm because we are a Registered Investment Adviser (RIA), which requires serving as a fiduciary to clients by acting in your best interests. We are fee-based (not commission) and receive no benefits whatsoever beyond the asset-based fee we earn and disclose to you each month.

So why don't all financial advisers already put client interests first? The answer is a bit muddled, which is why there is so much debate on this issue. The fiduciary standard that RIA firms like ours adhere to is clear-cut. Non-RIA firms adhere to a suitability standard when making investment recommendations. One requires giving reasonably good advice (suitability), while the other requires giving the best advice based on the client's specific situation (fiduciary).

Here is the analogy I like to use when comparing more traditional firms to RIA firms:

Non-RIA firm adviser would say: "That shirt fits you."
RIA firm adviser would say: "That shirt fits you and looks good on you."

Defining what qualifies as "reasonably good advice" and "best advice" is subjective, which is why these new, more stringent regulations are met with push-back. It is not easy to implement a uniform industry standard. The current construct of the DOL Fiduciary Rule will require minimal change to our existing business practices because of the rigorous, fiduciary measures we already take. Some version of the rule will likely go into effect soon, whether it ends up being this proposed reform or a modified version.

Personally, I am torn on this rule. You can read why in the Opinion section below.

In The Market...

The S&P 500 dipped -0.3% this past week. Let's look under the hood:

(price data via Yahoo Finance)

Stocks: Friday was a wild day for the tech sector, which fell -2.5% in the single session. The Nasdaq-100 fund (QQQ) had more shares bought or sold than any day since Aug. 2015. Financials rallied hard late and led all sectors on the week.

For now, I believe some of these dips represent buying opportunities more so than major, negative turning points. There is one particular sector, Health Care, which I think has a chance of rallying in the coming weeks. Stay tuned.

Bonds: Not much to observe here. Bonds did not sell off as much as I would have expected amid the rally in Financials. The charts still look good, in my view, and the fact that high-yield bonds did not budge much is positive for the bond market.

In Our Opinion...

I am in favor of the DOL Fiduciary Rule, but there are two reasons I am not wild about reform.

  1. I am not sure it will make a meaningful difference.
  2. Without it, our business model is relatively attractive when compared to commission-based advisers (or advisers who simply overcharge their clients).

I know, I know... One is a cynical view and the other is selfish, so I'll explain.

Bad people will still do bad things. That is reality. Even if the DOL adds a few more hurdles for unscrupulous advisers to jump over, the bad ones will find a way to press on. Also, it seems consumers are already starting to rebel against commission-laden investment products, such as variable annuities and variable life insurance. Finally, like any major reform, I question the ability to enforce the new rules.

On the plus side, the new rules may weed out the advisers who make their hay off selling expensive commission-based investments. It should curb the sale of ridiculously overpriced mutual funds as well, which many investors own without realizing it. 

Selfishly, the current landscape helps our firm because it highlights what makes our fee structure and service superior to others. If other firms are forced to be fiduciaries, it levels the playing field in a way that hurts our ability to differentiate. This is not to say we are the best, because one client's interpretation differs from the next. This is not to say we are the most cost-effective either, because value is relative (I will be the first to say if an alternative option is cheaper than ours). We have a very strong business model relative to our peers, one that involves continually searching for ways to give back to you. (The most recent example being that we now pay for all account trading costs for clients who invest $100,000 or more with our firm.)

It is rare for me to pump-up our approach or what we do. But if you spend as many years in this industry as I have, you see too many instances of investors who were misled by advisers, whether in terms of costs they paid or financial expertise they were promised but didn't receive. I try to let our work speak for itself and refrain from comparing our firm's model to other firms that I know are inferior, however this is an important issue and one that is front-and-center in both the financial and political spheres.

In Our Portfolios...

Here are the stocks and exchange-traded funds (ETFs) we bought or sold last week:

(Note: These portfolio changes do not apply to every account. Specific allocations are based on account size and risk appetite.)

Q&A/Financial Planning...

Is good news coming for retirees?

A consumer advocacy group called The Senior Citizens League predicts that retirees currently receiving Social Security will see their benefits increase by +2.1% in 2018. This is what they predict the increase will be to the cost-of-living adjustment (COLA) that typically occurs each year to help Social Security benefits keep pace with inflation.

I say typically because there was no increase in 2016 and there was only a +0.3% increase this year. Inflation is most closely linked to the Consumer Price Index (CPI), which measures the change in the cost of goods and services over time. As of April, CPI was up +2.2% from one year ago. This means a +2.1% increase would almost match current inflation, but not quite.

How this affects you: If you are nearing retirement or have not yet triggered your Social Security benefits, strongly consider delaying payments if you can afford it. Each year you delay benefits beyond your normal retirement age (either 66 or 67 depending on birth year) your payments grow by +8% per-year, until you turn 70 and are required to start taking them.

For those in their early-to-mid 60's, your normal retirement age is 67. If you wait until age 70 your monthly payment will increase by a whopping +24% (three years of delay x 8% per-year). You would be forgoing three years of benefits by delaying them, which is a negative to consider. But if longevity runs in your family you will eventually recoup that -- and much more -- by delaying payments. This is especially helpful if chronic illness is a concern (e.g. Alzheimer's), because you will need to ensure you have enough income or savings to pay for rising health care costs as you age, particularly these types of expenses Medicare won't cover.

Another option is to coordinate benefits with your spouse, by having one spouse take benefits early while delaying the other's. Contact us for more on Social Security strategies.

What's New With Us?

Despite the recent move to TD Ameritrade, you will continue to receive monthly statements from Scottrade. You can disregard those. If your month-end statement for May shows there are still funds in your Scottrade account(s), do not worry. Either we did not get your account(s) transferred prior to month-end, or, it likely shows a small, residual amount representing dividend payments. Those dividends will be automatically transferred over to TD Ameritrade, such that your Scottrade account will be transferred in-full and left with a zero balance.

Have a great weekend,


Brian E Betz, CFP®