​“Beware of wolves in sheep’s clothing” is a common quote that I would imagine that just about everyone has heard at least a few times during their lives.  The saying goes all the way back to biblical times where Matthew warns believers to “Watch out for false prophets.  They come to you in sheep’s clothing, but inwardly they are ferocious wolves. – Matthew 7:15.”

During the day, the religious elite used a series of expanding rules and regulations to ensnare the faithful, while in many cases disregarding or excepting out of those same rules.
 
Huh, what does that sound like today? 
 
 
Wall Street Perfected Wolves in Sheep’s Clothing
 
Wall Street perfected the art of wearing sheep’s clothing!  Never has there been a more ferocious group than the wolves of Wall Street.
 
A recent examples is its exemplary work to confuse retail investors over the issue “best interests.”  Best interest is whether your advisor is looking out for your interest or his/her.  Clue – it is supposed to be in your best interest.
 
As a registered investment advisor, it has been mandated for as many years as we have been advisors (and then some) that we must look out for the best interest of the client, even if it is not in our best interest.  This is the way it should be!
 
On the flip side, commission-based broker and advisor competitors, regulated by FINRA under Rule 2111, have only had to meet a “suitability standard” for any investment or product that they might push your way.  This suitability standard requires that the adviser or firm have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer.
 
This standard is the rough equivalent of licking one’s finger and sticking it in the air to determine which direction the wind is blowing.  It is inaccurate at best and highly suspect in its application, especially when a big sales commission is at stake.  This is why there are shops today where the solution to every financial issue of their clients is an annuity or some other financial product.  How can such narrow products be suitable for everyone?  Clue – they are not!
 
Our industry has attempted to clean up this behavioral discrepancy between advisors, like us, and the average commission based broker or adviser, but even the best attempts to do so by the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) ended up as hollowed out versions of the originally proposed legislation after Wall Street’s lawyers and lobbyists got involved.
 
This has left the general public confused and allowed those same FINRA regulated brokers/advisors to hide behind fancy disclosures that proport to look out for your best interests but in reality are full of so many holes that they are really nothing more than a modified version of the suitability standard.
 
 
Wolves in the Multi-Family Office Space

If you are like me, you have probably been rubbing your eyes, cocking your head to the side and looking perplexed.  No amount of CNN or Fox News, depending on your political perspective, can sooth the gnawing feeling in your stomach that something is not right, something has changed!
 
Our founding fathers regularly gathered at taverns to discuss the politics of the day.  There were surely differences of opinion, but somehow, in most cases, they were able to discuss those differences and agree to disagree.  But not today, we are strongly divided today, and it appears to me there is little tolerance for opposing points of view.  It is “my way or the highway buddy!”
 
The pandemic has not helped as it is now harder than ever to meet and gather to discuss the news of the day without of proper mask or social distancing.  Even the favorite meeting places of our founding fathers (the local bar or tavern) are now closed or only partially open due to the virus.
 
Life has certainly entered a “New Normal” or paradigm and it’s much more stressful, at least to me.
 
However, what seems like chaos is really part of God’s bigger plan and the changes in our attitudes towards one another and our economy, part of cyclical changes that have occurred in the past and strangely tend to repeat themselves throughout history over and over again. 
 
The Coming Cycle
 
Although we can paint a short-term picture of rising markets, which will benefit investors, we would also like to counter that optimism with what we believe is knocking on the proverbial financial door and that is a more difficult cycle.
 
In a whitepaper entitled, The Allegory of the Hawk and the Serpent, the hedge fund group, Artemis Capital Management, makes the case in a 100 year back test of the markets that there are periods of secular growth and periods of sec
​ular change.
 
The secular growth stages they call The Serpent.  They define these periods as times when secular growth is driven by positive demographics, economic expansion, technological innovation, globalization and economic prosperity.  These periods eventually become corrupted by greed, as fiat devaluations and debt expansions replace fundamentals as the drivers of asset price gains that are not unlike a Serpent devouring its own tail.
 
The Hawk signifies the forces of secular change and ultimately destroys the corrupted growth cycle of the Serpent.  The left-wing of the Hawk represents the deflationary path, whereby an aging population leads to low inflation, faltering growth, a financial crash and then debt default.  The right-wing of the Hawk represents inflation, fiat default, and helicopter money.  According to the writer, neither path is mutually exclusive, and they often occur sequentially.

The reason we are outlining these secular forces is that we believe the cycle is changing and we are transitioning from the Serpent to the Hawk.  This transition will be more challenging and involves a different approach to money management than what has worked so effectively over the past 30-40 years.
 
The Under-Performance of Traditional Portfolios
 
I was recently on a client call with an investment manager in Pennsylvania.  I raised the possible scenario of declining equity markets and rising bond yields (causing bond prices to decline).  I asked what happens to your so called “safe assets” (i.e. bonds) if this scenario unfolds?
 
Their response was “that they build portfolios for the long-term and that over the long-term a pure equity and bond portfolio complement each other and produce good risk adjusted returns.”  Now I don’t disagree with this statement, but how do you define long-term?  If it is longer than ones working lifetime (time to save) then it is really of no value to the average investor in my opinion.
 
It seemed to me to be rather a close-minded response, especially when I asked if and how they might transition the portfolios for rising commodity, precious metals or volatility in the coming years should we transition to a more inflationary environment or even a stagflationary environment?
 
As you can see from the Artemis Capital graphic below that during a transition from the Serpent to the Hawk, we tend to be at secular lows for volatility, correlations and yields.

​These above lows are what propelled traditional equity and fixed income portfolios to new highs but with these market constructs now moving off the lows and potentially higher, it is time to think differently.
 
We cannot do this paper justice in the time and space we have in this blog update, but the bottom line of their research is that periods of deflation and then sequential inflation require the traditional portfolio of stocks and bonds be augmented with holdings in precious metals, commodity trend following and volatility trading strategies to perform well in the New Normal of the secular Hawk.
 
The following chart from the Wall Street Journal demonstrates just that for the inflation side of the equation:

Notice how the S&P 500 and Intermediate Bond returns suffer in such an environment.
 
The whitepaper instead argues that non-correlated holdings in precious metals, commodity trend following and volatility trading work with the traditional equity and bond holdings to stabilize returns and reduce risk in the Hawk period, as seen below.

​They further make the point that a portfolio that is roughly equal in allocation between equities, bonds, precious metals, commodity trend following, and volatility trading has outperformed the more traditional 60% equity and 40% bond portfolio over the past 100 years, especially in the Hawk periods and likely will do so again in the coming Secular Hawk period.  They call this portfolio a Dragon Portfolio (see below).

​We are not trying to scare you with this information, instead what we are suggesting is you need to make sure your investment advisor or manager is focused on this potential cycle change and has a plan for when and how to transition your more traditional stock and bond portfolios into other more favorable asset classes, like commodity trend following, precious metals and volatility trading, when the time is right.
 
A pure stock and bond portfolio will likely struggle in this cycle’s periods of alternating deflation and then inflation as seen in the chart below, especially in the periods like 1964-1983 when stagflation was prevalent.

On the other hand, our trend following models are already hard at work identifying turning points whereby equity portfolios need hedging or fixed income portfolio duration should be neutralized (i.e., hedged). 
 
Those same models are also used in determining the best time to be in assets that benefit from deflation (where we are now) and inflation (where we expect we will be in the future).  We have even rolled out a brand-new portfolio similar to the Dragon Portfolio outlined above to help clients best thrive during the coming cycle.
 
So, when you sit down with your investment advisor or manager and you ask the question I asked above and they give you same kind of close-minded response, maybe it’s time to explore your options?  As you can see in the above 100 year back test from Artemis, such a close-minded approach could be extremely costly to your portfolio(s) in the future.
 
Let me know what you think in the comments section below.

​When I was growing up, my father would constantly chastise me to “get a job, you need to pay for one-half of your college education.”  Although his education policy was clear, I found this approach tended to emphasize making money over extracurricular involvement.

As a result, I had an egg route at age 14.  A paper route at age 16 and worked at a Kroger in Indianapolis as a bag boy (or a Courtesy Clerk in today’s more politically correct world).  I later worked every summer during college including stints as a house painter, a bakery oven construction worker and a pizza chef for Godfather’s Pizza.   That is the same chain that the recently deceased Herman Cain was famous for turning around.
 
The emphasis in my case was purely on the money side.  On the positive side, it did help me limit my student loan debt to a mere $2,500 upon graduation.  Yes, I know the joke…what would that be in today’s dollars?  Ha ha!
 
With my kids, I was a bit less stern.  The idea was they would pay around half their education but with many jobs unavailable until 18 or after and the fact that my kids were not the entrepreneurs that I was, they were allowed to pay for their half with student loans and grants or scholarships.
 
What is your policy?

Whether it was my education or that of my kids, in both cases, we were provided, or we provided, a clear policy towards college and post graduate education.
 
With so many kids approaching college, getting ready to head to college or just logging in for college, do you have an Education Policy?
 
Let me give you four (4) reasons why you should:
 

1. It provides a clear idea to your children of their part in paying for college or post graduate education.
2. It allows your financial planner to better pinpoint your true expected future cost for your children’s education and whether you can achieve your financial goals, whatever they may be.
3. It forces all parties involved to think through the cost benefit side of college and puts a more value on the college experience.
4. Depending on your policy, it could help teach your children the value of money and the high cost of such schooling.  This may in turn push some students to explore other alternatives like community college or trade schools.

 
What does a sample policy look like?
 
Here are a few examples, but I would encourage each couple or parent to develop their own policy for their own special circumstances.
 
Policy Example #1
 
When you finish high school, you are on your own.  Your parents do not have the resources to help you so you should focus your energies on getting the best grades you can so you can get as many grants and scholarships as possible or consider other alternatives, like community college or trade school, where you can work while in school to pay for those costs.
 
Policy Example #2
 
We will pay for 100% of your educational costs for a four-year degree from an in-state college or university, including tuition, fees, room, board and a monthly stipend.   We will only pay up to the cost of attending a four-year, in-state college or university, including the above items, should you choose to attend an out of state institution.  Essentially you will be responsible for the difference in the total cost over and above the total four-year cost of a similar in-state college or university.
 
We will not pay for any post graduate costs but will credit and pay for some of those costs up to the amount of scholarships or grants you earn during your undergraduate program at an in-state school.
 
Policy Example #3
 
We will pay for 50% of your educational costs for a four-year degree from any college or university, including tuition, fees, room, board.  We will also provide you a monthly stipend to cover any other costs.   
 
We will not pay for any post graduate costs, that will be your sole responsibility.
 
I can go on and on as there are lots of possibilities.  However, the key point is that it is important to develop such a policy that is uniquely yours and to make your children aware of such a policy as early as possible.
 
I know there are going to be those out there that say this puts too much pressure on a child, but I would argue it also provides clarity.  It allows the parents and the child to start discussing what might be the child’s responsibility and how they can prepare, such as work in high school or college.  Finally, it may incentivize the child to work harder in school to take advantage of all possible grants or scholarships if college is part of their plans.
 
Obviously, every child is different, and it is tough for most teens to know exactly what they want to do with their lives, but a well-crafted education policy will provide for a dialogue if nothing else.
 
Let me know your thoughts in the comment boxes below.