Monthly Archives: August 2016

The Pull of Negative Interest Rates

August 18, 2016

Did you know that in many countries the yields on government bonds are negative? According to CNBC, around $11.7 trillion of government bonds in circulation had a negative yield at the end of June. The Bank of Japan embraced the negative interest rates earlier this year, and its share of negative-yielding government debt increased to $7.9 trillion. The end result is that interest yields in a broad range of fixed income sectors pulled down down as investors searched for income outside of Japanese and European government debt.

So what does this mean and how does it affect you?

Interest rates in the United States have remained stubbornly low for a number of years. When foreign investors are faced with the choice of earning negative interest rates on their own government debt, or positive rates in the U.S., the choice is clear. Over the last two years, negative interest rates helped drive fund flows into U.S. government debt, which caused interest rates to go down in the U.S. At this stage in the business cycle with lower unemployment, interest rates should be higher on the 10-year U.S. Treasury, however, yields are currently half of what they were in December 2013.

As investors, it is important to notice the effect of foreign central banks on interest rates in the U.S., and to adjust your portfolio accordingly.

In general, the bond market is volatile as prices rise when interest rates fall and vice versa. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Bonds are also subject to other types of risks such as call, credit, liquidity, interest rate, and general market risks.

What Nick’s Reading | Are You Going Through a Period of Financial Insecurity?

Financial stress may lead to actual physical pain.

Financial insecurity has been linked to feeling a higher level of physical pain and there is a simple way to avoid this health concern.

By Nick Johnson, August 2016

According to a recent study published in Psychological Science, the flagship journal of the Association for Psychological Science, financial stress may lead to actual physical pain. “Overall, our findings reveal that it physically hurts to be economically insecure,” explains Eileen Chou, the researcher and lead study author of the University of Virginia. “Results from six studies establish that economic insecurity produces physical pain, reduces pain tolerance, and predicts over-the-counter painkiller consumption.” Based on my observations helping clients during stressful times, I can agree that Chou’s research is valid; financial stress can manifest itself physically. However, there is a simple way to avoid this health concern caused by financial stress; making sure clients are educated on their finances. When you take the initiative to plan and learn more about your finances, you instill confidence in yourself and have peace of mind by taking control of your financial future.

Chou’s findings indicate that the link between financial stress and physical pain is caused by feeling a lack of control over one’s life. As the financial insecurity problem continues to grow, people have a number of concerns. For many of our clients, feeling out of control is exactly how they would describe their current situation. About 80% of our clients are oil and gas professionals and executives. These clients have respectable jobs and generous benefits, but despite that, a number of them are going through a period of financial insecurity given the current volatility in the oil markets. They are concerned about layoffs, where their next paycheck will come from, or whether they can retire now instead of their initial plan to work longer. Often times, it’s likely they did not perform in-depth cash flow modeling. If they did perform cash flow modeling, then they might be concerned with forgetting an important piece of their financial plan. Laying out a plan can often be the remedy to relieving financial insecurity.

Looking back, the thought of financial insecurity leading to physical pain reminds me of a particular moment when a client called me to discuss his severance package. He described himself as feeling physically ill. Notably, he appeared unwell when he came into the office to discuss his concerns. He expressed he lacked confidence because he doubted his control over his financial picture. He was concerned about minimizing taxes, making sure he did not leave any money on the table in regards to his benefits, and knowing where money would come from in order to cover his expenses during retirement. I sat down with both him and his wife, to lay out a plan. At their first follow-up review meeting, I saw the relief on their faces; they laid out a plan, retired, and took control over their financial picture.

Financial insecurity has been linked to feeling a higher level of physical pain and laying out a solid plan is often the remedy.

Click here to read the full study published in Psychological Science.

Nick Johnson, CFA®, CFP®

Nick Johnson believes that financial planning is more than numbers on a balance sheet and a standardized process. People are unique and should be treated as such.

As Vice President and a Wealth Manager at Willis Johnson & Associates, his goal is to really get to know his clients, all the while providing a proactive approach to comprehensive wealth management.

The Markets (as of market close July 29, 2016)

August 2, 2016

Following an initial downturn largely in response to June’s Brexit vote, equities rebounded during the month of July. The first full week of the month saw each of the indexes listed here improve over the prior week, led by the Nasdaq, which gained almost 2.0%. The Dow recouped just about all of the value lost right after the vote. Long-term bond yields, highlighted by 10-year Treasuries, continued to slide–falling 90 basis points from their year-end value. By the week ended July 15, money flowed from long-term bonds (10-year Treasuries yield increased by 18 basis points) into equities as the Dow posted a 2.0% weekly gain, while the Russell 2000 jumped almost 2.4%. Also helping boost stocks was a much-improved labor report, which saw the addition of almost 290,000 new jobs in June. As the month wore on, light trading slowed the growth of the indexes listed here with the exception of the Nasdaq, which ended the week of the 22nd about 1.5% ahead of its value from the prior week. As the month of July came to a close, each of the indexes listed here posted robust gains, led by the Nasdaq and the Russell 2000, each gaining about 6.0% over their June closing values.

Long-term bond yields fluctuated during the month, ultimately closing at essentially the same yield as June’s closing return. The price of gold (COMEX) increased by month’s end, selling at $1,357.90–about $33 over June’s end-of-month price of $1,324.90.

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