Factor Investing

The stock market is often referred to as a single entity but is made up of many moving parts.  Looking beneath the surface at single and multi-factor indexes can help investors better understand trends that may not be as visible when looking at the major indexes.

Factor investing has been around for many years but has only become more mainstream recently as investors have been given easier access to more specialized investments.  This area has been evolving with the growing popularity of “multi-factor” investments.  First, let’s begin with defining single factor investments and then progress onto more complex multi factor methods.

Single Factor

People tend to gravitate toward organization and categorizing information in order to better understand attributes and possible outcomes.  As an example, consider this analogy between factor investing and cars. Cars with big V-8 engines tend to be fast and powerful while those with small four cylinders tend to be more fuel efficient and less performance oriented.  Such a conclusion may not always be the case but is a tendency.  Engine size is simply one “factor” when assessing an automobile.  Investors do this with stocks too.  The most widely recognized indexes are one factor, or “single factor”.  A single factor may also be characterized by a sector such as a semiconductor index or a gold stock index.

The S&P 500 Index may be diversified but it is simply the 500 largest companies.  This makes size or market capitalization the single factor.  Along the same lines, the Russell 2000 Index is a small-cap index.  In the chart below, there was a clear distinction between the performance of large caps versus small-caps during mid-2018 as small-caps led the way higher.  In 2019, large-cap stocks have been displaying overall leadership.  This illustrates how factors can help explain what has been driving returns, giving a deeper perspective than over generalizing movements in the stock market.  Investment choices have become more easily available to investors that attempt to give exposure to those factors.


Multi-factor investments are the natural progression after single factor ones.  Common multi-factors include value and growth.  At first glance, these individually may sound like single factors but to determine value or growth, many factors are combined.  For example, an index provider putting together a value or a growth index may use price-to-earnings ratios, price-to-book, or dividend yield among other criteria.  These are most often well-defined, quantifiable filters to find stocks to be included in the index.

If some of the factors already covered are combined, the stock market can be broken down to an even more granular level often called “style investing”.  Each size, small, mid, and large cap is then further separated into growth or value.  In the chart below large-cap value is being compared to small-cap growth.  During the first three quarters of 2018, value stocks were rather subdued while small-cap growth was rewarded.

Factor investing has adopted very specific characteristics beyond the historically common size or styles.  Categorizing stocks down to attributes can yield an interesting perspective.  Some examples are high and low volatility, value, momentum, and quality.  These tend to be multi-factor as it can take a combination of numerous filters to find stocks with the targeted characteristic.

A momentum factor index or investment may use the performance return of multiple time frames and may be absolute returns, or the stocks return, relative to a benchmark. Some index companies define momentum as positive earnings momentum (growth factor). Quality factor investments may include formulas that filter for companies with low debt, stable earnings growth, and measures of profitability.  The recipe for making a multi-factor index it generally transparent and can be found in documentation released by the indexing company.

Having factor-based investment choices allows investors to be positioned to possibly take advantage of various economic or technical conditions.

  • Quality and lower volatility factors may take on defensive characteristics during times of stress in the markets.
  • Momentum and higher beta factors may take advantage of bull market rallies when higher risk is being rewarded.

Active portfolio managers may use rotation methods, moving between various factor investments as conditions change.  In the chart below, the black lined Relative Strength, displays the performance of the high beta factor to the low volatility factor.  A rising black line conveys leadership by the high beta index and a falling line shows leadership period by the lower volatility index.  Technical analysis methods can be applied to the Relative Strength line in order to better define the trend of leadership and its transitions.

Uncovering the idiosyncrasies of the stock and bond market in order to invest strategically has always been an obsessive compassion of the portfolio management team at Spectrum Financial. The team uses several disciplines and factors when constructing portfolios and making investment decisions for its clients.

Navigating the Wild Wi-Fi West

Ahh……. traveling through the countryside again.     I’m thrifty, and don’t have unlimited cell service.  I don’t want to use up all my cell phone data out here downloading movies for my kin.    That’s fine, free public wireless Wi-Fi networks are everywhere.    Everyone likes to get online for free.  But what does “free” often mean. There are a lot of security issues with public Wi-Fi.  I like to think of them as the wild-wild west.  This blog will go over the big dangerous amidst many public Wi-Fi spots and how to navigate them.

Malicious Hotspots

Howdy partner, welcome to free Wi-Fi.   So, you’re having dinner at the Texas Steakhouse.  Is the free public Wi-Fi really offered by the diner, or supplied by the guy renting an apartment next door?  Perhaps someone nearby setup a rogue network to entice people to connect and snoop on your web browsing.  It’s a good practice to ask an employee, or the front desk what the name of their Wi-Fi is before just jumping on the first network you find.  A legitimate Wi-Fi network will be less dangerous then a malicious hotspot that is anonymously owned.  You don’t want to shoot yourself in the foot, so to speak…

Wi-Fi sniffing

Just because you found the restaurant’s Wi-Fi network doesn’t make it safe either.  One of the tools that hackers are using on public networks is the Pineapple Wi-Fi device.  Originally developed for penetration and security testing, they can be repurposed for Man-in-the-middle attacks.  After determining what websites you access, the device can thoroughly mimic preferred networks.  All your information is then routed through the device. You may think you’re sending information to a HTTPS website, but it’s actually a spoofed website that the device created.  What’s worse is the Pineapple can save user session and cookie information and continue masquerading as your device, long after your gone.  You may need to call the local Sheriff on this network. 

How do you protect yourself?

When you connect be sure you select the Public network option when connecting to public Wi-Fi, keep your computer up to date, and leave your firewall enabled.  These options will protect your computer or device from being breached. 

When you leave a public Wi-Fi, be sure to delete, or “forget” the network in your phone or laptop.  This will keep your device from automatically reconnecting to a similar rogue network at another location.

Cautious browsing

So, we have learned how to protect your device, but what about protecting your online browsing transactions.  Limiting your internet searches to informational websites that don’t pass sensitive credentials is the best practice.  Logging into your online bank, even though an installed App should be avoided.  What about credit card purchases?  Just say no!  Ok, I just want to send an email.  Unless your email is encrypted (most isn’t) even email shouldn’t be checked on public Wi-Fi.  Do your email servers authenticate exclusively with secure HTTPS?  If you’re not 100% sure, don’t chance it.  So, what about Netflix, you like watching movies don’t you?  It depends….   If you can set your online accounts up with different passwords, in the event you are hacked they will only get onto that one site.  Not too much at risk with a compromised Netflix account if your passwords are all unique.  Plus, I get an email when another device logs on my account, so you know you can cut them off at the pass!

VPN – Circle the Wagons

What if you really need to get some work done, cellular service is not available and public Wi-Fi is your only option?  Well that’s when you need to invest in a VPN service.  A virtual private network (VPN) is a technology that allows you to create a secure connection over a less-secure network between your computer and the internet. This is beneficial because it guarantees an appropriate level of security and privacy to the connected systems. This is extremely useful when your Wi-Fi infrastructure may not support it.  It’s like sitting inside a protective circled wagon.

If your company can setup a VPN for you that would be the best option.  The next best would be a paid VPN service that’s based in the United States.  Most of these run under $10 per month.  Though there are many good ones outside of the States.    The following VPN Services have been highly rated by CNET for 2019. 

Norton Secure VPN
Private Internet Access VPN

So, chock up and stay away from those free VPN services.  Because as we just learned from this blog, nothing in life is “free”.  Now head ’em up, and move ’em out

Tax Season and your Investments

It’s that time of year again.  Time to get an early start on tax season, from taking required IRA distributions to maximizing your IRA contributions if you are working.  Now is the time to declutter, organize paperwork and speak with your advisor to make sure you are on track with your investment portfolio goals.  Wouldn’t it be nice to head into the new year free of all this stress?  There are many things you can start doing right now.

Soon, investors over the age of 70 ½ will receive their Required Minimum Distribution Letter stating how much of a distribution needs to be taken by December 31st.  This is a specific amount calculated based on your age and the balance of your retirement accounts on December 31 of the previous year.  Roth IRA accounts are excluded from these required distributions.

If you must take annual distributions, you can set up a Periodic Distribution Plan that can be customized to distribute monthly quarterly or annually.  Many investors don’t realize that if you don’t need the money for expenses, you can distribute the funds into an individual brokerage account and continue to invest the proceeds.  The funds are always available to withdraw when income needs arise.

A qualified charitable distribution (QCD) is another option for your required distribution.  The distribution can go directly to your favorite charity/charities.  You can use a QCD to donate up to $100,000/year without being taxed.

For everyone that is working, be sure to max out your IRA each year.  For 2019 you can contribute up to $6,000 if you’re under 50 and $19,000 into a 401(k).  If you’re 50 or over the maximum contribution increases to $7,000 and $25,000, respectively.  It is amazing what the power of compound interest can do when you contribute to an IRA annually at a young age.  For a great article about compound interest you can visit our website at www.investspectrum.com, go to Resources-Our Newsletter and select the April 2019 newsletter.  The article is on the last page.

These are just a few of the steps you can take to get a start on tax season.  By starting now, it will give you time to make any adjustments to your investment portfolio well before any deadlines approach.  At Spectrum Financial we help implement these tax season steps into a year-round process for our clients.  Call us today at 888-463-7600 to learn more about our company and how we can help you by creating investment portfolios to meet your unique goals.

***When maximizing retirement contributions, first consult a qualified tax professional for details based on your personal situation.

A Beginner’s Guide to Buy Low, Sell High

A Beginners Guide to Buy Low, Sell High

 “Buy low, and sell high”, is foundational advice often given to beginning investors in order to avoid losses and lock in gains.  In an attempt to reach that goal, a portfolio manager often draws from the discipline of technical analysis which at its core, focuses on the effects of buying and selling pressures on assets such as stocks, bonds and commodities.  Technical analysis is often contrasted against fundamental analysis which focuses on gauging the financial health of a specific company or industry.  The two can also be blended, introducing an additional discipline, economic analysis.  This post will explore the technical analysis discipline which is diverse.  However, most technical analysis tools can be separated into either trend following or mean reversion categories. 

Understanding how markets move

Markets have two states of movement, either trending up/down or rangebound. A portfolio manager must first use indicators specific to identifying the two states of movement. Think of these technical analysis indicators as tools. Having the right tools for the job plays a significant role in the success of the overall investment process.  Like using a hammer to drive a nail or a shovel to dig a hole versus using the shovel to drive a nail and the hammer to dig a hole.  Once an environment is identified, more specific indicators and methods can be used which may reveal further information about the environment.

Indicators of market movements

Indicators are available to detect various traits of price movement.  If “Point Z” is higher than “Point A”, then an uptrend may be present (though what happened in between could play a role in the investment decision).  Trends may be steady or could be choppy.  Even within a choppy uptrend, it may have various degrees of width in the swings.  Indicators exist that simply define a trend as being positive or negative and tools exist that define the level of volatility within the trend.  Rate of change indicators can identify the percentage movement over a specified time period in order to identify trend.  These indicators also display momentum or if the trend is speeding up or slowing down. Why does all this information matter? The more informed you are as to what is going on with a market environment the better equipped you may be to make risk-adjusted decisions for your portfolio.

Moving Averages

Moving averages (displayed below) are popular ways to identify trends because chart readers can easily see if the asset is above the moving average or below. If the asset is above the moving average the trend can be defined as an “uptrend”.  If the asset is below, it can be labeled as a downtrend.  The number of days used to calculate the moving average can vary in order to detect trends of various time frames such as shorter-term, intermediate or longer-term.

200 day
Created with TradeStation. © TradeStation Technologies, Inc. All rights reserved

Mean Reversion

The “buy low and sell high” concept can also be conveyed through mean reversion methods.  In case that term is new to you, mean reversion simply means the movement is stretched, gone further than it typically does, and may soon snap back.  “Overbought” and “oversold” are common terms associated with mean reversion methods.  If a stock is in a trading range, by definition, it reaches an upper point, or extreme and then goes down toward a mean or average.  It may then overshoot and go to a lower extreme, becoming oversold and then revert back higher.  This process may be repeated numerous times.  Trading ranges may be after an uptrend or downtrend has slowed.  These may lead to a full reversal in overall direction or the trend may eventually resume but at a different slope.  Once a trading range is identified, a portfolio manager must then be able to identify what constitutes the extremes or overbought and oversold zones.  Tools of the trade may include Stochastics, Money Flow Index, and RSI, among others (pictured below).

RSI Money Flow
Created with TradeStation. © TradeStation Technologies, Inc. All rights reserved

Volatility Analysis

Tying the states of trending and trading ranges together may also involve volatility analysis.  If volatility is high enough a trend may be observed and at the same time, upper and lower extremes can too.  These are often referred to as trend channels (see below).  Modest adjustments to exposure are often the goal when trend channels are identified such as the adding of positions around the lower channel line or “profit-taking” near the upper channel line. 

Trend Channel
Created with TradeStation. © TradeStation Technologies, Inc. All rights reserved

Why does this matter?

Many investors take a hands-off approach to investing but that puts hard-earned money at the whims of the changing trends, and some bear market trends can be devastating.  Active portfolio management, by way of technical analysis, often includes implementation of the tools discussed above. These tools detect periods of trending or trading ranges.  Refinements with more specific trading tools and methods within those periods can further increase odds of potential success in navigating the unknown waters yet to be seen. This comprehensive approach to investing is used in Spectrum’s management for its clients.

Annualized Returns & Realistic Expectations

Most investors at or in retirement need to know how long their portfolios will last when they start withdrawing for income.  They know what their monthly living expenses are and how much social security comes in every month.  By using an annualized rate of return, retirees can calculate how much money they can withdraw each month from investments to help cover the expenses lacking from social security and any other supplemental source of income they may have.

Younger investors can use annualized returns to help plan their future retirement nest-egg.  With an annualized return plugged into the equation, you can easily calculate how much you need to contribute monthly to “have one million dollars when I’m 65.”

“On the first day of every week, each of you is to put something aside and store it up, as he may prosper, so that there will be no collecting when I come.”  1 Corinthians 16:2   English Standard Version

Generally, most sectors of the stock market were down last year.  If you owned Advanced Micro Devices, Chipotle, Under Armour or Etsy last year, good for you.  Goldman Sachs, IBM, General Electric or Bitcoin? Oops!  Many investors saw their portfolios fall 1-15% last year, some even more.  That wasn’t in line with the return they were “expecting” based on 5-6% annualized returns the stock market has seen over the last 20 years.

Let’s take a closer look at expectations for earning a 5-6% annualized return on a year-by-year basis. Below are two hypothetical data tables showing the yearly data for calculating the annualized returns shown at the bottom of each table.  Table A shows annualized returns for 11 years (2008-2018), table B shows 10 years (2009-2018) of data.

                   TABLE A                                                                               TABLE B
Year Return   Year Return
2008 -17.23%      
2009 31.25%   2009 31.25%
2010 11.21%   2010 11.21%
2011 2.41%   2011 2.41%
2012 14.78%   2012 14.78%
2013 11.10%   2013 11.10%
2014 7.98%   2014 7.98%
2015 -2.15%   2015 -2.15%
2016 12.11%   2016 12.11%
2017 4.19%   2017 4.19%
2018 -2.45%   2018 -2.45%
11 Year Annualized return: 6.00%   10 Year Annualized return: 8.66%

The annual returns above are arbitrary, shown to give you an idea how returns have, can and will continue to fluctuate in the future.  In Table A, you may notice that there was not one year with a return of 6%.  In fact, there were three years of negative returns.  Annualized returns are averages that include compounding annual returns over a given period (in this case 10 and 11 years).  Investors should expect to see years of returns greater than 6% and years that make less than 6% – and in some years, losses.

Table B shows the same returns, minus 2008 (the last major bear market).  By not including the 2008 bear market, the annualized return jumps an additional 2.66%.  The lesson here is to make sure you have as much data as possible when looking at historical returns.  It is ideal to see returns for a full market cycle (bull and bear market).  Looking at returns through a full cycle will do three things: one, prepare you for bear markets, two, give you a better idea of what to expect about long term annualized rates of return when planning for retirement and three, be very realistic on your time horizon.

Back to retirement.  Retiree A wants to preserve capital and withdraw the gains over time on a systematic monthly plan.  She looks at the annualized returns of 6% over a full market cycle and decides to withdraw 5% every year, knowing there will be annual fluctuations but that over time her principal should be intact.

Retiree B wants to do the same as Retiree A above, but he reviews data from Table B and decides to withdraw 8.5% each year.  Because Retiree B is not looking at data covering a full market cycle, he more than likely will dip into principal over time.

Annualized returns can and should be reevaluated periodically to keep client expectations intact.  If future returns are consistently less than past performance, adjustments may be needed. 

The S&P 500 has annualized 11.29% over the last 70 years (12/31/1948-12/31/2018).  But the annualized return over the last 20 years (12/31/1998-12/31/2018) is 5.61%. 1   

An investor with 10+ years to go before retirement may need to contribute more money annually and/or rebalance his/her portfolio more aggressively.  For investors in retirement, they may have no choice but to start withdrawing less money until markets show signs of improvement.

At Spectrum Financial we evaluate client portfolios at least annually to ensure goals are being met, however, our Investment Team monitors the portfolios on a daily basis.  We let clients know the various options available to them so they can stay on track.  Annualized returns are an important part of helping clients reach their goals but are only a part of the equation.  Please call our office to discuss this topic in more detail for your specific retirement goals.

1 Bloomberg data

IoT (Internet of Things)

“Augmenting the human experience with a connected world”[i]

“Oh! Sorry I didn’t see you sitting there. It’s my morning break here at work, so I was checking a few things at home. Making sure that I locked the front door and checking to see if we had eggs in the fridge. Looks good. And the dog’s behaving.

So, do you remember back in 2019 when IoT was new and security was sketchy? I figured I didn’t have a lot to lose by installing that smart front door lock. After all, it was nice for the door to unlock when I pulled into the driveway, and then have it auto-lock when I left for work. I could even unlock it for my daughter who dropped by unannounced from out of town. Nice.

At that time, some people weren’t comfortable with the level of cybersecurity in IoT, so they stayed away. Others…they did their homework and only went with devices that were designed from the ground up for security. Smart.”

What’s Involved?

IoT (Internet of Things): “the interconnection via the Internet of computing devices embedded in everyday objects, enabling them to send and receive data.” So, many “smart” things are in this category: locks, thermostats, lights, alarms, toys, automobiles, garage doors, sprinklers, IP cameras, refrigerators, or your home DVR. Convenience and utility.

IoT can make your home more secure from burglars by automatically locking your front door when you leave, alert you to someone at your front or back door, make your coffee, turn your lights on and off, etc., etc. What’s not to like, right?

This transformational technology is growing geometrically and is poised for an explosion. IHS Market (a London-based global information provider) predicts that by 2025 there will be 73 billion IoT devices installed[ii]. That’s more than 9 per person on earth! With all these devices connected to the Internet, the bad guys are constantly attempting to gain access in order to steal information and steal your stuff.

Are they secure?

With all these advantages, the question becomes what is the risk of installing a smart device? It turns out that there is a lot NOT to like, IF you are not careful. Alas, most IoT manufacturers have no program for disclosing and reporting security issues. A December 2018 report explains that “90% Of Consumer IoT Vendors Don’t Let Researchers Report Vulnerabilities”[iii]. That could mean that if you are not technically inclined or are not willing to do the homework, you may want to wait until IoT technology is more mature and secure.

Here are some of the issues and possible consequences:

Issue Possible Consequence
No security updates Device could be vulnerable
Weak credentials that can’t be changed Device is vulnerable
A hacked IoT device Allows access to your other accounts on your network, identify theft
Remote (unattended!) enablement of stoves, cookers, microwaves Safety hazard
Self-driving car vulnerabilities Theft, safety concern

“As an example, an IoT thermostat very likely communicates to a cloud server to provide updates and to control the device remotely,” Jett [Justin Jett, director of audit and compliance for Plixer] says. “If the IoT security is robust, but the cloud security is significantly lacking, the entire system is vulnerable.”[iv]

What can you do?

For those who want to enjoy the benefits of current IoT tech, this may be a good time to do a little online research and get a smart lock for your front door or smart LED lights that turn on at sundown and can be controlled from anywhere in the world.

If you decide to take a step into the Internet of Things, remember that your smart device will be part of your local network. So, here’s what you should do.

  • Choose your IoT devices not just based on convenience, but also on security.
    • Smart locks are very convenient, and they are as secure as traditional locks IF well designed and supported.
    • Make sure the manufacturer is actively supporting the device.
    • Keep a “good ol’ fashion” key handy when the keyless remote entry fails.
  • Insist on strong security and check your devices’ configurations.
  • Keep your computer and smart phones updated; they usually share the same network at your home.
  • Install computer virus and malware protection
  • Use multifactor authentication when possible.
  • Don’t use public Wi-Fi without VPN.
  • Only use known devices. E.g., if you don’t know where a USB thumb drive has been, leave it alone.

Here’s an excellent consumer guide for smart home devices, developed by the UK government.

The Future

California has enacted the first law covering IoT and this may drive future federal regulations. “The short IoT bill requires IoT manufactures to equip devices with “reasonable” security measures, appropriate to the function of the devices and to the information they collect or transmit.”[v] The move is toward more security and accountability, which is good for the industry and for consumers…like you.

Spectrum IT

The IT Team at Spectrum works behind the scenes to ensure that your investment and personal information is kept safe and secure. We also strive to make sure that Spectrum’s other teams have access to the information they need, enabling them to make the best timely decisions possible for you.

[i] “The next chapter of IoT is just beginning as we see a shift from digitally enabling the physical to automating and augmenting the human experience with a connected world,” says Carrie MacGillivray, IDC. https://www.idc.com/getdoc.jsp?containerId=US44390618

[ii] IHS Markit, The top transformative technologies to watch this year, 2018 (PDF, 16 pp., no opt-in)


[iii] https://www.forbes.com/sites/daveywinder/2018/12/13/the-silence-of-the-brands-90-of-consumer-iot-vendors-dont-let-researchers-report-vulnerabilities/#4f60977d9c88

[iv] https://www.scmagazine.com/home/security-news/lightly-secured-cloud-with-a-chance-of-iot-attacks/

[v] https://www.scmagazine.com/home/opinions/californias-new-iot-security-law-is-not-nearly-enough-we-need-a-gdpr-for-iotnow/

Know Yourself: The Four Investment Temperaments

I recently read “The Four Temperaments” by Rev. Conrad Hock, AngelusPress.org.  In it the author describes in detail the good and bad traits of each of the four temperaments: choleric, sanguine, melancholic and phlegmatic.  Everyone has a dominant temperament, and, in the book, you can take a simple test to find your own temperament.  There are also many online sites that allow you to take a test to determine your temperament.  Unlike personality, your temperament never changes with time!

The fact of the matter is we are all emotional.  But we all react in different ways when presented with unintended consequences, surprises, conflict, decision-making etc. (both good and bad).  I started working with clients and their investments back in the early 90’s.  It amazed me how clients reacted differently to the same 20% move higher or the same 20% move lower in the market, even when they had the same risk tolerance.  Most of these reactions were based on perceived expectations correlated directly with their investment temperament.

The chart below shows the emotional rollercoaster ride millions of investors go through from time to time, which may influence investment decision-making.  In many cases the decisions investors make can be quite irrational and detrimental to their long-term portfolio goals.  Many investors don’t have the expertise and certainly not the time or focus needed to make proper investment decisions.

September 2015 edition of ICICIdirect Money Manager Magazine.  Source: Credit Suisse

Behavioral Finance is an amazing topic.  There have been numerous books written and any Economics/Finance major has taken at least one course on this subject.  I won’t turn this into a 50-page thesis, but I would like to explain four investment temperaments I have coined over the last 25 years.  These observations include clients, prospects, family, friends and strangers.

  • Risk Seeker This type of investor wants to make as much money as possible, regardless of risk. This type wants to make make at least as much as the general stock market going up.  On the way down they aren’t happy, but they won’t sell, knowing they will make back their portfolio losses and then some in the future.  They are extremely confident individuals.  A spin-off of the risk seeker is one that has the same objective, however their reaction during large drawdowns is different.  They start to panic, even though they came in with a long-term game plan. They know the risks involved with investing aggressively, but eventually they will sell everything at the worst possible time.
  • Controlled Risk-Taker This type of investor wants to make all the money when the general market goes up but wants to lose very little during drawdowns. Much of their investment portfolio is in equity positions.  These investors are typically well informed on what the general market is doing.  Buy and hold won’t work during periods of large drawdowns, so they employ active management in bad times.  They will quickly reduce portfolio equity exposure at early signs of emotional pain.
  • Preservationist This type of investor wants to make money with much less risk than the stock market. They feel safer with bonds because they aren’t as volatile.  Many investors with this mentality either fear they will run out of money in their retirement years or they want to give it all to their children/grandchildren.  They simply want to be reassured that their principal is still there.  Any growth is a positive.
  • Balancer This type of investor wants to make money in line with stock market returns, but they want downside protection. They know stocks are riskier than bonds and the next bear market will eventually come. They like being in a diversified stock/bond/alternative portfolio.

In late October the S&P 500 gave up all its gains for the year in just a few weeks (see chart below). From the close on October 3rd to the close on October 29th, the S&P 500 fell 9.71%. The Nasdaq 100 Index fell 12.09%, led by one of its largest components, Amazon (AMZN), which fell 21.19%.

Created with StockCharts.com.  © StockCharts.com, Inc.  All Rights Reserved.

The most common reactions I heard at the end of October were:

“Everything is fine, it’s time to buy more at a discount.”

“Ouch, that hurt. I don’t know if I should sell or hold here.”

“This doesn’t feel good, but at least my exposure was reduced, and I had a diversified portfolio, including bonds.”

“Is this the start of the next Bear market?!?! Is my money safe???”

“We’re still in a Bull market. I’m diversified and this bump in the road is OK.”

“I’ve enjoyed this Bull market, but this is the second time this year I’ve seen a 10% drop.  I think it’s time to be a little more defensive, unless the market has a good rally.”

As stated before, you can see many different reactions to the same 10%+- move in the market.  All these reactions are normal, depending on your temperament.  At Spectrum Financial one of the first things we talk to prospects about is their risk/reward profile.  Investors must be honest with themselves when asked questions like:

  • What is the biggest drawdown you could handle?
  • What are your long-term goals? How long are you willing to invest with us to meet them?
  • What Index(s) will you compare your portfolio to?
  • Is your outlook generally optimistic or pessimistic concerning investing?
  • Do you feel you are an aggressive, moderate or conservative investor?

I tell prospects and clients all the time that there are no wrong answers to the above questions.  If these questions are answered honestly, it’s much easier to customize a client portfolio based on his/her temperament so that expectations are met.  Once allocated, we know we are doing a good job when we see a drawdown in the market like we saw this October and our clients are happy with their return based on their risk/reward expectations.  If a client calls disgruntled, in many cases they aren’t as aggressive/conservative as they thought they were.  We can easily adjust portfolios accordingly.

What type of investment temperament do you have?  Call our office and let us explain our unique investment products and how they can be a great fit for your investment portfolio.

When you’re away, do your apps play?

Would it make you uncomfortable if your children or your neighbor grabbed your smart phone and started looking around?  Probably not, but what about a complete stranger?  This is often what happens when you download an app from app stores without doing some due diligence.  Many apps ask for you to open doors they have no business accessing.  This can open up your phone to more then just an app you thought you could trust.

Official app Stores vs. third party app stores

Apple® AppStore and Google Play™ are the two biggest official app stores. You can go there to download mobile applications for your iPhone or Android device.

Are they safe?  Apps in the official app stores usually follow strict development criteria. The official stores also test the applications for malware.  This is the safest place to get apps.

Third-party app stores may not use the same level of scrutiny toward the apps they allow to be listed in their app stores. Third-party app stores might offer plenty of safe applications. But there’s also a higher chance they might offer dangerous ones.  Third-party app stores should be avoided as much as possible.

Certain categories of applications were also more likely to contain malware.  Arranged by likelihood:

  1. Lifestyle apps
  2. Music and Audio
  3. Books and Reference
  4. Entertainment
  5. Tools

Grayware apps

Many apps contain grayware.  This is a term used to classify apps that behave in an undesirable manner, but not classified as malicious malware.  A common type of grayware is mobile adware which contains popup ads in your phone’s notification bar.

Symantec reported a 20% increase in grayware application variants recently, for a total of 3,655 types.  Norton research shows that more than 60% of Android apps contain adware or other grayware.  Of these:

  • 63% were found to have leaked the device’s phone number
  • 37% leaked device location
  • 35% leaked installed application information

There are security apps such as Norton Mobile and Trend Micro Mobile Security that can protect your phone from malware and annoying grayware, but perhaps the best thing to do is understand what happens when you install a new app.  Many potentially unwanted app behaviors are written on purpose and documented in the app’s user agreement.  Reading app disclosures and agreements before installing is the best practice.

When an app first installs, it asks you for permissions.  To combat grayware, you should question what an app really needs permission to do.

Does your new weather app really need permissions to access your contacts and calendars?  Often when prompted for access you should just say no.

Permission to Do What?

There are hundreds of types of permissions, and many apps ask for more permissions than they need.  Most people don’t know what they mean. They just enable everything.  This is a bad practice.  You should disable everything unless you know why the app needs it.  The more restricted you keep your apps the safer your data will be.  Here’s a list of a few of the most common permissions:

  • Storage: modify/delete storage contents – apps that store pictures and video will require this.
  • Network communication: full access – many apps need to access the internet, this often relates to ads as well
  • Your location: network-based – weather and travel apps, free games, often contain ads so they can deliver targeted ads based on your location.
  • System tools: prevent device from sleeping – usually means that when you’re using the app, it will keep your phone from going to sleep or from entering into a reduced power mode.
  • Your personal information: read contact data – most social media or messaging apps will request access to your contact information
  • Root: super user access – When an app asks for root access you should seriously consider whether it needs super user access.  Firewalls and backup apps often require root access.  Most apps don’t

Android vs IOS which is safer?

There are millions of apps available for download.  There are twice as many apps on the Google Play store then on the Apple® AppStore.  The number alone at Google Play makes it a more dangerous place to find apps.  If the app is available for iPhone and Android there is a higher probability that it is safer, but no guarantee.

There’s no doubt Android is a bit more of a risk than iOS, but, with the right precautions, it can still be a safe platform. If you must install apps from anywhere on an Android phone, at least do everything you can to ensure they’re safe before you let them loose on your contacts, messages and social media accounts. Install a scanning app such as Norton Mobile Security,  or Google Play Protect and use it wisely on new downloads to prevent any malicious activity.

What about Jailbreaking my phone?

Sometimes an app developer does not play by the rules and the only way to get the app to the public is to recommend jailbreaking your phone.  Jailbreaking your device frees the OS to run unapproved applications.  The process of jailbreaking is legal but it’s not a good practice.   Jailbreaking allows unapproved code, voids your warranty, and can cause stability and security concerns.

Also, if your company issues you a work phone this would generally be prohibited.  Most companies have policies for what you can do with their phone when using it for work.  Unless you’re a tech guru and the risk is worth the reward, jailbreaking is a bad idea.  I refuse to do this on my personal devices.

Is this app Secure?

Apple® AppStore has made it mandatory for all developers to require new apps use a secure connection such as https.   The Android developer platform has also just finalized this process in 2018.   Still, older grandfathered apps exist on app stores that were original approved using unsecure http.  So, check the reviews, and check the date of the last review.  If its 3 years old, perhaps its time to look for a better solution.  Also, it is a good practice to update your apps anytime there is a security update.    A trendy app is no longer great if your connection to their server is compromised on public Wi-Fi.  So, stick to the Official app stores and update your apps often.

Does Spectrum Financial have an app?

I’m glad you asked!  Now would be a great time to download the Spectrum Access app available at both the Apple® AppStore and Google Play™ It’s a secure way for our clients to view

  • Aggregation of all household accounts
  • Account Activity, holdings, and balances
  • Performance Summary
  • Quarterly Statements
  • General tax and beneficiary reports
  • Invoices

A Life of Financial Freedom

The paragraphs below are excerpts from the book, Wealth Conundrum written by Spectrum’s CEO and Head Portfolio Manager Ralph Doudera. In Chapter 10 of his book, Ralph offers his opinion and suggestions for leading a life of financial freedom. If you would like a free copy of the complete book, please contact emily@investspectrum.com with your name and mailing information.

Chapter 10: A Life of Financial Freedom

Anyone can achieve a life of financial freedom if they understand how to play the game.

Over the years I have learned not to make it my sole object in life to accumulate great wealth. However, I have achieved some success in discovering wealth-building rules that work even for those not yet ready to begin a lifestyle of giving. I wish someone had told me about them when I started out.

Financial freedom is a common desire of everyone, but like everything else there is a right way and a wrong way to go about it. How you take the journey determines the quality of life you experience once you get there.

Principle 1: Dedicate Your Possessions

Dr. E. Stanley Jones used to say, “A road that perhaps more than any other leads to self-atrophy is undedicated money.”

Principle 2: Start Early

It cannot be emphasized enough the impact that time has on compound interest. Get started early. Don’t wait. If you’re going to need lumber when you are 65, you don’t want to plant acorns when you are 50.

Principle 3: Set Personal Financial Goals

Each person needs to set personal financial goals, and then establish a plan to achieve them. Determine what you want to do with your wealth, how much you will need, and when you will need it. Then begin planning carefully what income streams you will use to produce that wealth.

Principle 4: Pay Yourself Before Spending

The next principle is to “pay yourself” by setting aside some of your income in a separate account before that money becomes accessible for expenses. This could be a retirement or investment account that is not easily accessible, so it does not turn into a “deferred spending” account. I recommend setting aside a minimum of 10 to 20 percent of income for personal investment. Then go ahead and enjoy spending and giving away the rest! This percentage will vary depending on age and family situation, but 10 to 20 percent of income should be a benchmark.

Principle 5: Build Wealth Slowly, And Be Patient

The basic concept of wealth building is to build it slowly. Avoid get-rich-quick schemes. The faster you try to get rich, the quicker you lose money on risky ventures. Each of my newsletters includes a Proverb by one of the wealthiest men who ever lived, Solomon: “Steady plodding brings prosperity, hasty speculation brings poverty.” Proverbs 21: 5

Time is a necessary ingredient for investments to work in your favor. Your investment may start out as small as an acorn, but it increases by a certain percentage each year, and eventually through exponential growth it’s a mighty oak tree. If you stand watching a teakettle, it takes forever to boil, but if you walk away and do something else, before you know it, it whistles!

Every person alive can be financially independent if they take the right actions, and take responsibility for their own destiny.

Investments work the same way. When your money is invested, stop watching it and enjoy life instead of worrying about it every day. Before you know it, the funds will double, and then double again.

Principle 6: Lotteries are For Losers

Lotteries are one of the largest revenue generators for state governments, and participants, in their ignorance, don’t seem to mind contributing. The lottery contributes to the inherited cure of entitlement programs. It plays on the mindset of getting something for nothing. Whenever I see someone buying a lottery ticket, I feel badly for them and wish I could help them understand this principle: Regular saving will make everyone wealth, given enough time, but lotteries are for losers.

Principle 7: Spend Less Than You Earn

This stewardship concept seems simple in theory but plays havoc with our lives when we have a “natural” mindset. Normally, if we have the money and want something, we buy it. We have to help ourselves save by putting some money out of reach.

No millionaire on this planet got that way by spending 100% of the money he or she made.

Principle 8: Record Your Expenses

A key to accountability is keeping track of where you spend your money. When I got my first job, my wife and I kept a logbook where we kept track of every dollar that we spent. I mean literally every dollar. If you don’t know where your money is going, you can’t figure out how to spend less, how to budget, and how to save.

Principle 9: Compound Interest

The two words: COMPOUND INTEREST should be capitalized whenever used together. Compound interest is a secret of wealth that very few people understand. Principal (money), time, and rate of

growth come together in such a dynamic force that if one could live long enough, and maintain a steady growth rate, he would end up with all the money in the world. Did you ever wonder why all the rich people are old?! It’s compound interest!

Albert Einstein said compound interest is the greatest mathematical discovery of all time, not E=mc².

Principle 10: Use IRA and Other Tax-Deferred Investments

A tax deferred investment account is a powerful concept over time. An IRA or company retirement plan is a good idea because earnings on the investment are not subject to taxes as the money grows. (The contributions may also be deductible against current income.) For example, $10,000 placed into an IRA earning 10% interest will be worth $174,000 in 30 years if the earnings are not subject to annual income taxes, but worth only $76,000 if in a taxable account subject to taxation in a 30% tax bracket.

If a college graduate invested in an IRA all the money he or she would otherwise have spent on their first new car, when they turned age 65 they would be a millionaire, even after adjusting for inflation.

Maximize your contributions to any qualified retirement program such as a 401(k), particularly if there is an employee matching contribution. Annuities (both fixed and variable) are a good tax-deferred investment idea. Unlike a qualified retirement IRA, which has contribution limits, there are no limits on how much can be invested in an investment annuity. A Roth IRA also fits in this tax-free category, where funds are not deductible when invested, but grow tax-free, and are also tax-free when paid out. This should be one of the first investments most young people should consider.

Principle 11: Never Borrow To Buy A Depreciating Asset

People who use credit cards to purchase things and pay 12 to 20 percent interest rates will forever live in poverty. My longstanding rule of financial prosperity has always been “never borrow money to purchase anything that does not increase in value.” If you don’t have the money, don’t buy it. Use credit cards only for convenience and pay them off in full each month.

Principle 12: Don’t Buy A Car Until You First Save The Money

One time I was searching the classifieds for a used car and saw an ad looking for someone to take over car payments. When I called and asked how much cash he wanted for the car, he said he didn’t know. He only knew what the payments were, and he probably owed more than the value of the car. Don’t buy a car until you have saved enough money to pay for it. An exception for this may be if the car is used for business to generate income or if needed to get to work, but newer used cars can be cost-effective.

Principle 13: Borrow Money Only For Investments or Home Mortgages

Borrowing funds to purchase higher yielding assets may make sense if you are able to evaluate the risks involved. One example would be purchasing a piece of income-producing property where the income exceeds the debt service. This concept can create wealth if the property appreciates over time.

However, if your tenant moves out, you must assume the risk of making the payments on the loan, as well as potentially watching the property drop in value.

Home mortgage debt may be the one exception that I would suggest to people who are disciplined and able to invest wisely. By taking out a long-term, low-interest, tax-deductible mortgage and by creating a separate side investment fund instead of paying off the mortgage early, you can eventually be in a position to pay off the debt if you choose. Meanwhile, you will be earning income by investing separately with your other funds. Of course, this will only work if you don’t spend the funds and if you earn a higher return on your investments than the interest you are paying for your mortgage.

I recognize that many people may be more comfortable having no debt, as it certainly does give a more secure feeling to have no mortgage payments. But if you have the option of paying off the mortgage at any time, you are not putting yourself into a position of having to make payments from wages. Each person’s financial freedom number is reached when passive income is equal to expenses.

Principle 14: Stay Out Of Debt

Other than exceptions like the investment use of debt noted above, stay out of debt. If you stay out of debt, you will never become enslaved to lenders. There is a Proverb that states, “The borrower is servant to the lender.” Proverbs 22:7. If you are already in debt, you need to work out a plan to get out as soon as possible. Howard Dayton’s book Your Money Counts gives practical methods to do just that. It is a classic guide to earning, spending, saving, budgeting, investing, and giving. I highly recommend it. It also covers important issues such as training your children in these four areas: routine responsibilities, exposure to work, earning extra money at home, and working for others. A small group study is also available with this book in most metropolitan areas in the U.S. through Crown Ministries. Another resource is Financial Peace taught by Dave Ramsey.

Principle 15: Minimize Risk By Diversification

By diversification—using several different investment strategies simultaneously—risk can be significantly reduced. Don’t put all of your investment eggs in one basket. Build a portfolio of diverse investments like stocks, bonds, real estate and possibly other investment vehicles. If you ran a business and made only one product, you would be very vulnerable to market swings. Everything would have to go perfectly. It never does. If you have real estate, diversify geographically. If you live in a town with one factory or the community is heavily depending on one industry or government influence, there may be more risk involved than meets the eye.

Diversify stocks and bonds by various trading strategies. Personally, I have found that “buy and hold” investing subjects me to more risk than I am willing to take, so I have implemented various trading strategies that reduce risk. By doing this I have personally escaped the Bear markets of 1987, 1990, 2002, and 2008 with minimal losses, keeping most of the gains of the prior Bull markets. If you want to send supplies down a fast running river, you can put it all on one big raft, or send it down on five smaller ones. If you lose one, you have four left.

Principle 16: Minimize Losses, Maximize Gains

Don’t be afraid to take small losses. In fact, in my investment business I take many more losses than gains because I keep them small and let the profits run. If you sell your winners too quickly and your losers too slowly, you will eventually end up holding all losers. Remember, if you lose 50% of your money in a bad investment, you need to get a 100% return just to get back to even, so minimizing losses is one of the first principles of wealth building. A 75% loss requires a 300% gain to return to the original investment.

A drawdown is an investment term for temporarily losing money. Everyone has drawdowns, whether they are aware of them or not. Some people think that if they buy a stock that goes down in price that they do not have a loss until they sell it. They are wrong. Markets adjust constantly, and losses are one of the guaranteed aspects of investing.

The key to success is to minimize losses and maximize gains. You will take losses, but keep losses small and gains large is the key to success. Sometimes it is a challenge to find an advisor who can do that for you. Everyone talks about the stock they bought at 5 and sold at 100, but I would guess that this person’s serious money portfolio did not do very well.

I am often asked questions like this: “I lost 25% of my money in a mutual fund retirement account. How do I recover from that loss?” I would answer with this question: “If you bought a house today as an investment that you knew you weren’t going to sell until retirement age, and the appraisal dropped 25% from where you bought it, what would you do?” You would probably buy more, but use a different realtor for advice. I formed Spectrum Financial for the express purpose of investing the money of family, friends and clients the way I would invest my own. I would encourage anyone who may need investment help to refer to the resource section in the back of the book. You can also call our office at 757-463-7600 or visit our website at investspectrum.com

Principle 17: Protect Your Wealth With Insurance

Insurance is an important protection against unexpected financial loss. My basic philosophy on insurance is not to insure the small things that you can financially replace, but insure the things that are too big to replace. For example, use larger deductibles and self-insure whatever you can. Insure for a high amount with a larger deductible liability policy.

* Disability Insurance

Is the most important insurance for a wage earner who has not had time to accumulate assets. Many people would never think of not insuring their house or car, but if you lost your house or car, you could replace them if you still had an income. Income replacement due to loss of health is not possible to replace. If you had a goose that laid golden eggs, would you insure the eggs or the goose?

* Life Insurance

Life insurance is needed for families to insure adequate family income through the critical years of education, or maybe to pay estate taxes or other liabilities at death. The debate for term versus permanent insurance will go on forever, but my suggestion is to calculate how much you need, then figure out how much of the need is temporary (term) and how much is permanent (whole life) and get some of both.

* Universal Variable Life Insurance

This is a product that allows you to mix term insurance and whole life investment in one policy. Any extra funds that are paid into the policy in excess of the term cost will go directly to the investment account, which can be directed into an interest-bearing or stock or bond market investment account that will grow on a tax-favored basis.

Actually, life insurance is an efficient tool for passing wealth on from generation to generation. If properly arranged, it can be set up to avoid any estate taxes, and then “reforest” their estate with family-owned life insurance that may be passed tax-free to heirs at death. A qualified financial planner can assist you, particularly one who specializes in charitable estate planning. Anyone who may be subject to estate taxes should carefully consider this very creative area of planning. Estate taxes are not mandatory for a family with creative philanthropic planning techniques.

Principle 18: Consider A Charitable Trust

On my recommendation, my dad has set up a trust that benefits charity and pays income for ten years to his grandchildren during the time they will likely need funds most, during their early marriage years. He is making a gift of appreciated real estate to a charitable remainder trust that can sell it without paying any capital gains tax and invest the proceeds in income-producing stocks and bonds. His grandchildren receive income from the trust for 10 years. After 10 years, his favorite charity receives the balance in the trust. Each year, he gets an opportunity to talk to each of the grandchildren and advise them on how to invest the trust income they are receiving. Meanwhile, he receives an income tax deduction for the present calculated value of the charitable gift. He also removes the asset from being subject to estate taxes at his death. If he dies prior to the ten years, the trust continues to pay income to the grandchildren for the remainder of the ten-year period, and then the charity receives the remainder of the gift.

My dad gives while he is alive so he is able to see what happens with his gift, and he also has the opportunity to interact with his grandchildren every year. He gets both tax benefits and eternal benefits. On hearing about the plan, one granddaughter indicated her desire to take her entire first year payment and put it toward building a church in a Third World country. I jokingly told my dad that I want him to have a big mansion in Heaven because I will be coming to visit with all my kids. There is an upper limit on what an individual can use in a lifetime. Decide how much is enough, then give the rest. Everyone with wealth will eventually make a charitable gift to someone- when they die. Be proactive. Give now.

(end of excerpt)

Financial freedom is something that requires thoughtfulness, discipline, planning and time. These are a few suggestions to achieve financial freedom, and not an extensive list. As an investment firm Spectrum Financial is able to come along side our clients to assist in the management of their wealth- whatever the size. Our job is to minimize losses and maximize gains as best we can so that our clients can pursue their own ideas of what financial freedom means. If you have any questions please do not hesitate to call our office so that we can guide you on your financial journey.

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Spectrum Financial, Inc 2019