Portfolio Drift

Portfolio Drift

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While Donald Trump has certainly caused concern to some over his style and actions as President, few have been anything but jubilant over the impressive rise in the stock market since January.   Actually, if one looks back to late 2008 when the market dropped 37%, we have all since enjoyed a spectacular ride up between then and now of around 300%. 

There was a very interesting, recent article in the Business Section of the New York Times on one very important aspect of the huge rise since 2008 – portfolio drift - and the related implications for everyone in the market at this time. Obviously, one of the implications is that those of us in the market during some or all of that time have enjoyed handsome appreciation of stock assets and, by implication, feel ever more comfortable financially.  But the Times’ article points to a related and worrisome impact of the steep rise in the markets to which most of us probably have not paid as much heed as we should have.  And that is the relationship or portfolio mix between safe assets, like cash and CDs, and far more volatile stocks.   (Actually, the Times articles speaks of bonds as a safe investment which is a serious error – bonds are especially likely to decline in value as much if not more than stocks as interest rates rise.)  Most of us who own stocks balance our risk by also owning CDs and cash and, by so doing, ensuring that our investments are at least somewhat protected by the lower volatility of these reserves in the event of another large drop in the stock market.

But by now, given the huge increase in the stock market over the last eight years, the balance between stocks and cash and CDs in our portfolios, if we have not been paying attention, has shifted considerably.  As the Times points out, an allocation of 60% stocks in 2008 would be far more likely – if no cash reserves were added – to be around 75% stocks.  And this kind of allocation is risky for all but the most daring among us.  Yet, this is also likely where most of us are at this moment.

And, that is not a good place to be under the best of circumstances.  And, we are not anywhere near the best of circumstances at this moment in the nation’s history.  In fact, it is hard to imagine a more vulnerable time for the market than right now – given all that is happening in the U.S. polity.  The Times’ article is a clarion call to action, but one, I bet, few will act on.  The market has just been too good for too long, and most of us, present company included, can’t wrap our minds around how volatile things are now and how likely it is that we will have a serious decline in the market in the weeks if not days ahead. 

It is time to get our heads around the dangers ahead.  Those who do, and who at least rebalance assets in favor of cash and CDs in light of portfolio drift, will be in a far better position to weather the storm we are absolutely going to have in the very near future.

See the best 1-year CD rates here.

Goldman Sachs Comes to Market with a 6% Structured Note

Goldman Sachs Comes to Market with a 6% Structured Note

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I have written about structured notes before on BestCashCow.   I believe that they may represent a good way to generate income in a fairly low-risk way over time at rates well above the rates offered by savings and CDs.   Or maybe not.  Under any circumstance, they only work for a certain type of investor.  It is easy to get drawn to high yielding instruments after yields of extraordinarily low savings and CD yields.  Yet, these will be inappropriate for most people seeking more yield as they go out for 15-years and may be very illiquid for most of that time. 

What I particularly like about these instruments is that they are generally geared to deliver large interest payments as the long end of interest rate curve rises, unlike bonds and municipal bonds, which will see a strong and pronounced losses of value in 2018 and 2019 and beyond if the Fed continues with its stated plan to raise interest rates.

A common structure in structured notes involves a 15-year period during which the notes pay interest tied to the spread between the 30-year and the 2-year Constant maturity swap rates (“CMS”).   CMS is a rate at which bank’s trade with each other, and basically involves the difference between the stated maturity’s equivalent US Treasury rate and the 6-month US Treasury rate.  The 2-year CMS rate is currently around 1.60% while the 30-year CMW rate is currently around 2.60%.  The spread is currently at around 1%.  (If you don’t have access to a Bloomberg, these rates can usually be found here).

If rates on the long end go up faster than the short end, the spread will widen.  If they go down, it will contract or go negative.   If they spread goes negative, the holder if these instruments foregoes interest.  If the S&P falls by more than 70% from where it is on the pricing date, the holder also forego interest.  With this note, you win if the stock market doesn’t completely crash from the date of issue and the long end of the yield curve goes up.  

Over the last several years, this structure has outperformed savings and CDs, but hasn’t been a big winner since long rates haven’t meaningfully gone up.   Since holders sometimes require liquidity, it has been possible to buy notes on the secondary markets at a significant discount to par.

This offering by GS Finance Corp. is guaranteed by The Goldman Sachs Group and follows this same structure generally.  It pays a fixed rate of 6% in the first year, but unlike most other offerings it pays 6x the spread (most other offerings pay only 4x or 5x).  It is also attractive as the maximum interest rate is capped at 12%  (whereas most Morgan Stanley, JP Morgan and Citibank offerings in the past have been capped at 9% or 10%).   If you buy these notes today, you are hoping that the higher multiple and higher cap will prevent them from trading at a significant discount to par should you require liquidity over the next 15 years.

There is no doubt, the Goldman product is interesting and Goldman is a great credit.  But, anyone investing in these products needs to understand that a product of this length is going to involve real liquidity risk and the real risk of no interest payments for a lengthy period of time.  There are other risk too, detailed in this article.

These notes way be worth a look, but I would continue to have a strong bias towards savings accounts and CDs.  You’ll find the best savings rates here and the best CD rates here.

Editor’s Note: The product discussed above trades under CUSIP 40054LLP7 and ISIN US40054LLP75.   It is offered principally through investment advisors.   BestCashCow does not believe that the product is appropriate for most investors, and does not endorse it.

How To Save For a College Education

How To Save For a College Education

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You are probably expecting your children to go to college one day, and they probably should because college offers many benefits to those who attend and graduate.  College graduates earn more and spend less time unemployed than their counterparts without a college degree.  There are other lifelong benefits too, such as a network of friends and an appreciation of learning.

How much does college cost?  I think most people would say it is a lot, despite all of the benefits mentioned above.  Four years at a public college with in-state tuition could be as low as $60,000 in total, but private colleges could easily exceed $250,000.  And costs have been rising significantly faster than inflation.

Since college is going to be so expensive, you should start saving early.  But what is the best way to save?

529 Plans

The most well-known and widely used savings vehicle for college expenses is the 529 plan.  These are state-sponsored plans that allow investment gains to be tax-free if withdrawals are used for qualified college expenses.  The contribution limits are high and some states offer a tax deduction for contributions, up to an annual limit.  No state imposes a contribution limit based on income, and the owner retains control of the account, including investments and distributions.  In addition, because the account belongs to the owner and not the student beneficiary, the existence of the account has a limited effect on financial aid.

However, you are limited to investing in the available funds offered by the state and in order to get a state income tax deduction for contributions, most states require that the money be invested in their plan.  So if you are a NY state taxpayer and would like the deduction (for state purposes, none is available for federal purposes) you must contribute to one of two NY state plans.

Custodial Accounts

Custodial accounts, or UGMA and UTMA accounts are another way to accumulate money in a tax-advantaged way.  The first $1,100 of earnings realized in any year is not taxed, and the next $1,100 is taxed at 10% federal.  And you can invest in virtually anything, so if you want to buy only Amazon stock, you can do it with a custodial account.

However, the money belongs to the child and must be used for their benefit.  Once they reach age 18, or 21 in some states, they can spend the money on whatever they want, not what the parent wants.  Also, because the money is the child’s, a custodial account will more significantly reduce financial aid than a 529 plan.

Coverdell Accounts

The Coverdell account is very similar to a 529, except that no state tax deduction is offered, the maximum contribution is $2,000 per year, and income must be below certain thresholds in order to be eligible to contribute.  The only advantage of a Coverdell relative to a 529 plan is the ability to use funds for any level of education.


You can withdraw money from your IRA and generally avoid the 10% early distributions penalty regardless of age.  However, you will pay tax on the withdrawals from a traditional IRA and tax on the withdrawals from a Roth IRA if they are made before you are 59.5 or the account was opened less than five years.

IRAs were created as a vehicle for retirement savings, so using funds for college may leave the owner with a deficiency in retirement income.  But if you find yourself in a situation where you cannot save in both an IRA and a 529, choose the IRA because of the added flexibility in the use of assets.

If the child has earned income, he/she can open an IRA regardless of age, but a Roth IRA will probably make more sense because a child’s income tax rate is likely to be low, minimizing the value of the tax-deduction of a Traditional IRA.

Taxable Accounts

If you are not using one of the vehicles above, you are using a taxable account.  Tax-advantages are limited and not geared towards education (i.e., municipal bond interest and lower capital gains rates), but the accounts are the most flexible in terms of possible investments and liquidity.

Borrowing for College and Other Financial Aid

The Free Application for Federal Student Aid, or FAFSA, is used to determine Expected Family Contribution, or EFC.  Colleges determine how much federal aid you’re eligible to receive using the EFC.  The calculation is fairly complex, but 50% of a student’s income above $6,400 is expected to be used towards his/her education, as is 20% of his/her assets.  For parents, the figure ranges from 22-47% of income and 5.64% of assets.

Since savings count far less than income for parents, parents should not forgo savings with the idea that it will be made up by the federal government.  If grandparents have saved money in a 529 for the grandchildren, they should not withdraw the funds to pay for college expenses until the Junior or Senior year of the student.  The reason for this is twofold:

  1. Withdrawals from a grandparent’s 529 is considered income of the student, reducing the eligibility for financial aid, but
  1. There is two year lag between income and asset reporting on the FAFSA form and the year in which aid is given.  If withdrawals don’t occur until the junior year, then the student’s high income for FAFSA purposes isn’t relevant since they have already graduated (hopefully).


Being able to save significant amounts towards your child’s college education is truly a luxury, because you should be saving towards your own retirement and other family expenses, such as a home, first, and those other savings goals could easily take up 15% or more of your income.   If you are not likely to receive any financial aid, then you will either have to decide how much you will spend from your assets and how much your children can afford to borrow or spend of their own money.

Securities offered through Kestra Investment Services, LLC.,(Kestra IS) member FINRA/SIPC.  Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.  J Matrik Wealth Management is not affiliated with Kestra IS, Kestra AS, or Five Star Professional.

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