Some Trends To Consider

Russ Koesterich, BlackRocks Portfolio Manager for their Global Allocation Team recently attended the Miliken Institute's global conference.  He came back from that and wrote about a few trends he thinks are important.  Below are his highlights:

Technology will remain a powerful, deflationary force for a very long time.

Russ says on an intuitive level we understand Tech's deflationary impacts based on what we see  every time we pull out our smart phones and shop online.  He thinks what is less obvious is the potential for an acceleration in this trend. he noted that one very well placed tech investor at the conference spoke about a one-million fold increase in processing power over the coming decades. That would open up fields that have hitherto remained less impacted by technology, notably health care and finance. The example he uses is the future use of robotic diagnostics and remote medicine becomes much more realistic  as computing power continues to expand.  He also thinks that finance is not immune from this trend.  

The better part of emerging market {EM} potential remains untapped.

Russ noted that emerging markets  EM is still coming off a cyclical downturn that left it with near pariah status with many investors. In he noted that, "While the stocks have rallied sharply year-to-date, the real potential lies in the future, particularly for EM infrastructure. The vast majority of emerging and frontier markets remain at a very early stage of development. Investment in EM infrastructure will be additive in almost all EM countries and offers the potential for attractive yield in a yield starved world".

Finally Russ also noted that these trends were likely to dominate over the short or even intermediate term. However,  he thinks investors should keep these in mind when regarding longer-term investment allocations and  to "remind us of the potential of new technology and new markets to change the investing landscape".

Go read the whole think below at the BlackRock Blog.  Investors should bookmark that blog as it has a ton of informative posts.  It's a good once a week review in my opinion.

Link:  What I learned At the Miliken Conference.

*Long ETFs related to healthcare, finance and emerging markets in both client and personal accounts. We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.  

Chart Talk {The Long View}

Here without much extra comment is a monthly chart of the S&P 500 ETF {SPY} going back to the mid-90s.  Notice that longer-term trendline {in green} going back to the lows in 2009 has remained intact all these years even during market sell-offs.  

Chart is from Tradingview.com although the annotations are mine.  You can double-click on this chart to make it larger.

*Long ETFs related to the S&P 500 in both clients and personal accounts.  Currently short SPY and ETFs related to the S&P 500 in a personal account related to an options strategy not employed in client accounts.  We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.  

Memorial Day

Happy Memorial Day!

One of the highlights of the year in our town of River Forest is the Memorial Day parade which runs right down our street passing in front of Global HQ.  To honor this day we fly two American flags between now and the 4th of July.

The flag you see off to the side of Global HQ was carried by my brother-in-law who flew Harrier jets for the Marines in Afghanistan. We honor his service as well as the services of all prior family members and all others who are serving or who have served in our armed forces.   

This year we want to honor these folks, both past and present on both sides of our families, for their service to the United States of America.  I have tried to include both immediate and extended family members, but will apologize in advance for any inaccuracies or exclusions.  Please note that any mistakes were inadvertent:

The Honor Roll  includes:

Cornelius Murray {Revolutionary War-Pennsylvania}
James Gignilliat {Revolutionary War-South Carolina}

Capt. {Brevet} William H. Murray {Civil War-Co. K. 19th Indiana Volunteer Regiment}

Col. William Orr {Civil War-19th Indiana Volunteer Regiment}

Donn P. Murray, MD {WWI}

Brig. Gen. Leigh R. Gignilliat {WWI, Supt. Culver Military Academy, 1910-1939}

Fredrick R. Hazard Jr. {WWI & WWII}
Paul C. Gignilliat {U.S. Navy}

C.M. Hazard {U.S Army}

Richard J. English {U.S. Army-Reserve}

Lt. Col.  Michael Franzak {USMC (Ret.)-Afghanistan-Distinguished Flying Cross}

God Speed and God Bless to you all!

Happy Memorial Day everybody!

Summer Hours

Memorial Day begins the summer season on Wall Street.  For the most part that can be characterized by slow starts on Monday and lazy Fridays in terms of trading.  We have our own schedule for summers in terms of posting and here it is.  This week we will post Tuesday, Wednesday and Thursday.  The rest of the summer we'll be on a schedule that will basically be either Monday or Tuesday, then Wednesday and Thursday.  We won't be publishing on Fridays.  

Rest assured we'll break in as needed.

Hopefully the beginning of the summer season will bring warmer weather to the midwest and less rain!

Chart Talk {05.26.17}

I think it's useful to compare how this bull market measures compared to previous rallies.  Fortunately the folks over at chart of the day do a pretty good job of doing this for us.  Here's their take on it.

"With the S&P 500 trading near record high territory, today's chart provides some perspective on the current rally by plotting all major S&P 500 rallies of the last 86 years. With the S&P 500 up 118% since its October 2011 lows (the 2011 correction resulted in a significant 19.4% decline), the current rally is above average in magnitude and the second longest rally since the Great Depression."
Notes:
- A major stock market rally has been defined as a S&P 500 gain of 30% or more (following a correction of at least 15%).
- The S&P 500 was not adjusted for inflation or dividends.
- Selected rallies were labeled with the year in which they began.
- There are 252 trading days in a year (100 trading days equal about 4.8 calendar months).

Link:  Chart of the Day Website.

Paying Off Debt Or Trying To Figure Out How To Save A Few Dollars? Here Are Some Examples.

We recently ran an article on "Strategies to Pay Back Your Student Loans".  From time to time Business Insider.com runs article on debt repayment.  Here are some real world examples of people who have figured out some ways to find extra money in order to get out of debt and also to save.  Take a read for some inspiration or ideas.

"How 6 real people paid off thousands in debt — without windfalls or 6-figure jobs"

"A 20-something who's banked $170,000 shares the simple strategy that helps him save 65% of his income"

"How one 26-year-old banked nearly $150,000 in savings as part of a plan to retire by age 37"

"We're paying off $124,000 in student loans using this handy spreadsheet"

Finally here's one easy way to save some cash.  Make your own coffee.  I have owned for about 15 years a very simple expresso machine.  It bit the dust last week.  Here it is in the recycling bin.  

Rip Coffee Machine!

I drink a couple of cups of coffee every day.  Most days it's been made right out of the machine pictured above now headed for the recycling yard.  I figure my cost per cup all in at between 10-15 cents a cup.  At two cups a day that's a significant savings over your generic latte at the local coffee emporium.  I figure I've saved myself about $5,000 dollars by using that little machine.  A pretty good return on investment on what was then about an $80 machine.  

Back Friday.  

A Chart The Bulls Might Not Like To See

This is a chart you don't want to see if you're bullish on stocks right now.  Basically it's a chart of investor sentiment which is right now showing elevated levels.  The theory on this is that as more investors become bullish, the amount of money that can be committed to stocks declines because all those who want to invest have largely done so.  

A few thoughts on this.  First such indicators are not perfect.  Also sentiment corrections can happen via time as well as price.  By that I mean a market that runs in place for a certain period of time can dampen the animal spirits just like a market correction.  Finally markets can stay elevated in terms of sentiment for longer period than most investors think.  That is also true for markets trading at depressed levels of sentiment.  

Still this is not the most uplifting thing to view as sentiment is a pretty decent indicator of performance over time.  Something to watch going forward.

Abnormalreturns.com: 05.22.2017: Monday Links

A Quick Thought After A Bad Day

Today was a bad day for stocks with the major indices all down over a percent.  Before we get too excited about this, let's remember that all the convulsions that happened in the markets brings most major averages back to where they were about two weeks ago.  The rest of this year's gains are still intact.  I don't know what tomorrow is going to bring but even if we see more of the same we're nowhere near correction territory, although markets are over-bought.  

A bit of profit taking was and is to be expected at some point and perhaps this is it.

Back Tuesday next week unless there's a reason to break in.

The End Of A Journey

Back in August of 2013 we opened a branch of the firm on the campus of St. Louis University.  That employee went off to college with a full head of steam and has emerged as a remarkable young woman.  She will be graduating with a degree in Education.  As, such we will be closing the "SLU branch" over the coming weekend.  Since I'll be out of pocket we won't be posting until Tuesday of next week.  

This weekend will mark the end of an era as the last of my "employees" finishes school.  All three will be out now on their own, marking their own place in the world.  So far their "boss" likes what he sees in their potential.  

They say that childhood is a long process of saying goodbye and at the end it's the parents who have the last and hardest farewell.  That will certainly be true this weekend.  The last chick flies the coop on Saturday, just shy by about a week when we welcomed the first addition to our family back in 1990.  My father said after my son was born that "you'll turn around once and he'll be ten and turn around once more and he'll be off to school".  Add one more turn to that and all three have struck out on the own into the world, tilting at windmills by themselves.  

God Bless to each of them and a special shout out to Margaret Leigh English, 2017 graduate, with honors, St. Louis University.

Her "boss" is going to try real hard not to shed any tears!

"Don't adventures ever have an end? I suppose not. Someone else always has to carry on the story.....There was only one Road; that it was like a great river: its springs were at every doorstep, and every path was its tributary. "It's a dangerous business, going out of your door. You step into the Road, and if you don't keep your feet, there is no knowing where you might be swept off to."  Bilbo Baggins.  "The Fellowship of the Ring."

"I will not say: do not weep; for not all tears are an evil."  Gandalf-"The Return of the King." 

Go raibh grásta Dé leat, mo chuisle mo stór!

*Long Kleenex and Memories!  

Barron's: "Buy Europe"

So look what starred over at Barron's this weekend!  Barron's cover story talks about the relative value in Europe versus the US.  It might as well been an article on international investing as a follow on story also covered emerging markets.  Some of what they covered in the article was familiar if you have been reading me.  They did, however, point outs some valuation numbers and fundamental statistics for EAFE {Europe, Australia, Far East} to bolster their argument:

PE {2017 Estimates}:  S&P 500:  18.2      EAFE:  15.3

Price/Cash Flow:         S&P 500:  12.8       EAFE:    9.7

Return on Equity:        S&P 500:  16.2%   EAFE:  10.6%

Dividend Yield:           S&P 500:    2.0%   EAFE:    3.2%

L-T Debt/Capital         S&P 500:  42.5%   EAFE:  34.0%

These numbers are not necessarily cheap on a historical basis but they look better on a relative basis to the US.  These numbers may be low if the rest of the world's growth rate does better than expected consensus.

Finally we discussed last week in our post on "Gundlach and Emerging Markets" on the value in investment and media circles of a well known and influential investor like Jeffrey Gundlach making an investment statement. Gundlach rang the gong on emerging markets but the investment universe seems to have translated what he said to most markets beyond the US.  Calls like his provides cover for the investment class to begin changing direction in a way they may not have been willing to go prior to when he spoke.  It is likely Barron's had this article in the works prior to Gundlach pegged emerging markets, but his call certainly adds heft to what Barrons wrote and probably made it easier for Barron's editors to run the article when they did.  

Note:  The Barron's article may be behind a paywall.

Nothing in this column should be considered investment advice.  Investors should do their own homework and/or discuss all investments discussed in this or any post from our firm with their advisors before making any decisions.  Investors should carefully weigh the risks versus their own unique investment profiles before making any investment decisions.  Better yet, just hire us!  

Also please note that Lumen Capital Management has made investment in certain foreign related ETFs on behalf of its clients and in personal accounts in the past month.  We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.  

Long ETFs related to the S&P 500 and certain foreign ETFs  in both client and personal accounts.  These positions can change at anytime without notice.  

Chart Talk {05.15.17}

There's been a lot of chatter the past week or so on investing overseas.  We talked about this as well last week here.   I thought today I'd show you one other consideration.  Below are two charts but these are different than the ones we usually post here.  These charts compare to securities against each other and show which is doing better on a performance basis.  The two charts I'm showing today pit the iShares Emerging Market ETF vs the S&P 500 and the one below that shows the iShares Europe, Australia, Far East ETF again vs the S&P 500.  Charts are generated via Tradingview.com and you can double-click on them to make them larger.  These are weekly charts so we can get a better representation of scale.

In both of these charts you can see the charts have been in downward trending patterns, putting in a series of lower lows and lower highs going back years now.  In these comparison charts that is indicative of the fact that the S&P 500 has massively out-performed foreign markets now for many years.  That started changing last year when both of these ratio charts quit going down.  Both have now spent months putting in basing patterns and have finally broken through downward sloping multi-year trend lines {shown as that green downward sloping line on the charts}.  

That sort of divergence is the type of thing that investors who follow money flows pay attention to, particularly after years in which one group has taken it on the chin and is now showing signs of life.  Now nothing in these charts says that these indices couldn't rollover again and the evidence is early on out-performance longer term.  Also these could do better than the S&P 500 and still go down if markets around the world went into a decline.  All these would tell you is that their decline would be less than the markets if things fall apart. These are simply another way to weigh the evidence on where money may be flowing in the future.   

Right now money is flowing into international stocks and these comparison charts show you the evidence of that.

I will be posting Tuesday and Wednesday this week as I will then be traveling to my daughters graduation from college.  I'll be back sometime early next week.  I don't know yet whether that will be Monday or Tuesday.

Nothing in this column should be considered investment advice.  Investors should do their own homework and/or discuss all investments discussed in this or any post from our firm with their advisors before making any decisions.  Investors should carefully weigh the risks versus their own unique investment profiles before making any investment decisions.  Better yet, just hire us!  

Also please note that Lumen Capital Management has made investment in certain foreign related ETFs on behalf of its clients and in personal accounts in the past month.  We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.  

Long ETFs related to the S&P 500 and certain foreign ETFs  in both client and personal accounts.  These positions can change at anytime without notice.  

Why We Don't Recommend Securities On This Blog

So I recently an into somebody I know who reads my blog but does not work with us.  He wanted to know why I don't post recommendations of my investments, which are currently almost exclusively ETFs, on this site.   I've covered this before but I'll go over it again today.

Primarily I write all of my columns for the clients of my firm Lumen Capital Management, LLC.  Next I write for friends of the firm and then I write for the general audience.  Since only my clients pay me and since I understand their investment profiles, I'm happy discussing with my clients the risk/reward characteristics of investments I make for them.  I'm happy discussing with them why a certain investment {primarily ETFs} is or is not bought for their accounts, why I think it is a good investment along with the risks of the investment as I currently understand them.  Since this is the only group with whom I have that conviction, these are the only people who get to know what we are buying or selling.  If you want to know what we're doing with client assets then you'll have to hire me.

We may from time to time discuss bigger picture overviews of the markets or certain sectors we think are worth commenting upon or even mention individual stocks as part of the overall commentary for that day.  We do not make any investment recommendations in these posts and we certainly do not recommend individual stocks.  When we make these comments, especially regarding sectors or different asset classes, we stress that any investor that is not a client of our firm needs to do their homework, talk to their advisor or better yet to hire us before acting on anything they read on our blog.  If you decide to invest in any security based on what you read here then you are on your own!  We may or may not come back to revisit any topic or overview article on this blog.  We will attempt to give appropriate disclosures on client and personal holdings related to the article but we will not discuss on this blog any individual security we may buy or sell.  In particular we are under no obligation to report here when we might decide an investment has become unattractive and we have sold it or parts of it out of client or personal accounts.

Also, if you invest based on what you read on this blog then you should consider that I may be wrong, particularly in the short-term.  I am not what some might call a short-term trader for clients.  In general my time horizon for an investment can be anywhere between 6-18 months and often is longer.  I currently hold many investments that stretch back multiple years.  For these investments, and for the clients who hold them, the near term may not matter so much.  Frankly most of my clients don't remember if I bought investment XYZ at $22 only to see it move to $20 before it finally began its move higher.  If you are a trader and make short-term decisions based on what you read here then there is a high probability that you will lose money.  Also I may just be wrong or early on my analysis of an investment theme.

Hope that explains what I'm trying to convey in these posts.  The best thing to remember if you read my blog is that if you are not a client and you invest based on anything you read here, you're on your own!

Back Monday.

Thoughts {05.10.17}

Can't believe that nobody has equated the firing of FBI director James B. Comey to the character Ned Stark on the hit TV series "Game of Thrones".  Ned, like Comey, takes the fall when the prevailing political powers in the capital decides he's getting too close to the truth on certain matters and that his time is up.  In Ned's case what falls is his head.  

The prevailing narrative this morning seems to be that Comey was axed {just not in the same way as Ned Stark} because he was getting too close to the truth on the President's  Russian connections.  Only time will tell on that.  If you think about it though, neither Democrats or Republicans had reason to love Comey.  Comey seems to be a straight shooter that doesn't bend to the prevailing political winds.  The Republicans had no love for him on this whole Russian thing and the Democrats are still smarting from Comey's part in last year's election.  The Democrats rising to defend him yesterday are some of the same folks that wanted his head a few months ago.  

The person with the most to lose in the FBI Director's firing seems to be the President.  The firing gives the appearance of being hastily conceived and poorly executed.  Also it gives ammunition to those who believe President Trump has something to hide with his Russian connections.  Calls on both sides of the political aisle for a Special Prosecutor should be disconcerting to the President.  

The odds that Vice-President Pence will become President at some point have increased in the past 24 hours.  

The last President to fire an FBI director was Bill Clinton.

Markets are muted in their reaction to this after initial selling off last night on the news.  We'll have to see if this political issue becomes a crises that spills over into the economic realm over the next few weeks.

Back Friday

Gundlach and Emerging Markets

Every year the Sohn Foundation puts on an investment symposium in New York City in order to raise money for charity.  They have some of Wall Street's most well known investors come serve up investment ideas to a conference hall packed of investors and media types.  Yesterday at the conference, Doubleline's Jeffrey Gundlach caused a bit of a stir  when he recommended buying emerging markets ETFs and shorting the S&P 500.  

Briefly, here's what Gundlach said yesterday about investing abroad.  He noted that emerging markets cyclically adjusted price-earnings or CAPE ratio is half that of the United States".  He also said that he felt there was "not a lot of upside" left in being long the S&P 500, while noting  that the trend going back to 2010 of the S&P 500 out-performing emerging market stocks had been broken".  We've also discussed several times in the past year our reasons for looking abroad for investments.  You can go read us here, {four reasons why you should still invest abroad} here {10 year chart of expected returns on different markets around the world} and most recently here {where we noticed the beginning of a change in relative strength between US and foreign equities} to get some idea on why we've thought for quite awhile that investors would be best served longer term by having investments in these markets.

First, the reason you might want to pay attention to what Gundlach says is that often he's right.  Gundlach correctly predicted the Federal Reserve would keep interest rates low back at the end of 2015 and early 2016 when the stock market last blew a gasket on fears of a Fed tightening into the teeth of what was then seen as a slowing economy.  In investment circles though he is best remembered for correctly predicting that Donald Trump would become our next President back last year when most of the world thought Trump's prospects were dim.   

The second reason is that on a relative basis, money has been flowing  into many international markets and investment styles since last year.  This performance chart of international markets shows that broadly they have held their own or slightly outperformed the S&P 500 since last summer.  

Performance Chart From Stockcharts.com.

You can double-click on the chart to make it larger.

Another reason to take a look at these investments is for dividends.  Many international stocks and ETFs pay dividends well above what you can earn investing at home.  Case in point is the S&P 500.  It currently pays about a 1.90% dividend.  The Vanguard FTSE Europe ETF {VGK} has a current stated dividend yield of 3.20%, the WisdomTree Emerging Markets High Dividend ETF {DEM}.  Even if the markets stagnate for a bit, you are paid to wait by holding onto these funds.   {Please note that I currently am an investor in both VGK and DEM in both personal and client accounts and both clients and personal accounts invest in ETFs related to the S&P 500.  I am also personally short SPY as part of a trade in a personal account of mine.  I do not short stocks or ETFs for clients.}

The last reason I'll give you today on why you might want to pay attention to what Gunlach says is that an investor like that has heft in both investor and media circles.  Look, it's not like investors haven't known for quite awhile that the US markets are expensive versus its peers abroad.  It's just that international markets have basically languished for the better part of a decade while the US markets were off to the races.  Money follows performance and investors for the most part have chosen to ride the train that took them where they wanted to go in the faster manner possible.  A call like Gundlach's provides cover for both the media and institutional investment here to begin changing direction in a way they may have been unwilling to go prior to yesterday.   These ETFs may not react right away as some of these markets are now over-bought by our work.  However, the institutional memory of what Gundlach said yesterday could put a floor under these names so that money may begin rotating away from the US into markets abroad in the back half of the year, especially if economic conditions stay the same here and we see relative improvement in overseas economies.

Finally note the following.  Again, these markets have had a decent run this year so don't be surprised if at some point we don't see a bit of a sell-off abroad.  Also these markets can be more volatile than US shares.  Make sure you can stomach the volatility before you make any investments in this area.  

See below for all disclaimers.

Nothing in this column should be considered investment advice.  Investors should do their own homework and/or discuss all investments discussed in this or any post from our firm with their advisors before making any decisions.  Investors should carefully weigh the risks versus their own unique investment profiles before making any investment decisions.  Better yet, just hire us!  

Also please note that Lumen Capital Management has made investment in certain foreign related ETFs on behalf of its clients and in personal accounts in the past month.  We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.  

Besides the DEM, VGK and related S&P 500 we are long the ETFs shown in the above performance chart in both client and personal accounts with the exception of ILF.  Again these positions can change at anytime without notice.  Positions can vary between clients based on several factors including length of time investing with us and a clients risk/reward profile.

Oh and one last thing.  Gundlach also discussed yesterday on CNBC the myth of passive investing.  We'll come back to that subject at another time.

Back Thursday.

Chart Talk {05.08.17}

Below are two charts of crude oil, both showing the beating it's taken over the past couple of years.  The both charts are of West Texas Intermediate oil. The first one looks at oil on a weekly basis going back a few years and the 2nd is the daily chart since November.   I'm not going into the fundamentals on crude oil today.  I just want to show what the money's been doing so I've kept these charts real simple because they tell the story best.  Oil's been caught in a down draft. It's been in a huge bear market longer term.  It's well below its 200 week moving average and from a money flow standpoint it seems all the dollars have been rushing away from this commodity for a long period of time.  

Below on the daily chart you can see we had a bit of a bump after the election.  Crude touched that downward sloping trendline in red on the chart back in April then promptly collapsed.  Now it's bumping along towards an area it's found some support in the past, somewhere between 42-44.  Sentiment in the sector is terrible right now and it is very oversold by our work.  We'll need to watch this in the coming weeks for clues to see if we're close to a bottom in oil or whether this decline has more legs and could potentially test it's old lows in the mid-20s from 2016.

*Long ETFs related to energy  in both client and personal accounts although positions can change at any time without notice here or via any other form of media, including but not limited to print or electronic.

You can double-click on the charts to make them larger. Charts are from Tradingview.com

Strategies to Pay Back Your Student Loans

Many students today are placed in a difficult financial situation at a very young age. A college education is critical these days as an entrance to a career that offers opportunities for advancement, but that education costs money. Today, education is paid for by many students via loans. I’ve recently talked to many young people about their student loans and since this topic has generated a lot of interest, I want to discuss some thoughts and strategies for paying these down. If you have a child, grandchild or know somebody who has loans then do me a favor and pass this on to them if you have a chance as I’m writing this mainly for the college aged and younger adult crowd. While I’m no expert on the mechanics of the student loan system, the strategies involved in paying of these loans are similar to other types of debt, with the exception that for the most part student loans cannot be discharged in bankruptcy. As such there are strategies that can be used to pay these down faster and hopefully pay less interest over the life of the loan.

Economic Woes

First, if you have little or no debt give whoever it was that paid for college a big hug. Heck you might even splurge and take them out to dinner. They have done you a great service as you’re likely starting out in life thousands of dollars ahead of many of your peers.

Unfortunately, that’s not the case for most students and in many cases parents probably feel guilty that their children had to take on this burden. Believe me that was likely not their intent when they planned for college so I think it’s important for students to understand something of what many parents went through. Our generation was hit extremely hard by the last decade’s rolling economic recessions. Many parents spent what in better times would have likely been some of their most productive earnings years just trying to make ends meet. The 2007-2010 years is now being referred to as the Great Recession and it came along right in time for many of today’s students to go off to college. Many parents spent those years just trying to pay the bills. Even if they still found a few extra dollars to invest for college, the US stock market spent over a decade going nowhere and it had two bear markets where stocks lost better than 50% of their value. Think of it this way, a dollar invested in 2000 for your college could have been worth less the day you enrolled in college, depending on when you attended school. Neither the recessions nor market collapses were a great environment for college savings.

It’s A Worthy Investment

First, let's think of this debt as an investment in your future. This may be a cliche you’ve heard many times over, but it’s true. If you have the average $30,000 in student loans, then for about the price of a new car you’ve invested in a system of learning or perhaps a field of discipline that should result in higher wages for you over the years than if you had never gone to college. If a university degree means you can earn on average 20-40% more over your lifetime, then the return on your investment will dwarf the debt many times over. You’ve invested in yourself, and that’s not the same as borrowing money for a car that depreciates quickly and doesn’t generate income for you.

Loan Options

Regardless of the reasons that required you to take out student loans, you still need to pay off the debt. As with any loan, the goal is to pay down the principal as quickly as possible in order to pay less interest over the life of the loan. Since student loans are almost impossible to discharge in bankruptcy, and the few ways to receive government forgiveness on these loans don’t usually apply to most people, here are some payment strategies to consider as you start to repay those loans.

Consolidate Your Loans

Your first step when tackling your loans is to decide if consolidation is right for you. Two things to consider when researching your consolidation options are whether you can refinance your loans at a lower rate, and what timeframe or loan term will work for you.

There are many financial companies that offer consolidation, and they will help you crunch the numbers to see if it’s a viable option for you, so do your research online and talk to others who have gone through this process. Many of these companies can be researched on the web. One caveat to consolidation is that federal loans carry specific protections if you find yourself financially strapped and having a difficult time repaying your loans, such as deferment or an income-based repayment plan. Private loans may not offer the same protections; so if you think you could run into repayment trouble, do your homework and look at the fine print.

Consider Repayment Timeframe

The standard payment period for most loans is ten years. If your loans fall within this period, you will pay less in interest than those using longer time frames, and your interest rate will also likely be lower. Unfortunately, you will be stuck with a higher monthly payment.

If you have a considerable amount of debt, you may want to take the maximum amount of time to pay off your loan, usually 25-30 years. The monthly payment is less but it will ultimately cost you much more in interest over the full term of the loan and the interest rate will likely be higher. The lower monthly payment could give you more breathing room to apply extra funds to your loan as your financial situation changes and improves. Just because you have a 25-year term doesn’t mean you have to take that long to pay it back. Having the flexibility to pay a lower monthly amount might be to your advantage, particularly as you are starting your career.

Paying It Back

Once you’ve figured out if you can consolidate your loans and how long you are going to take to pay off the debt, then you should find a way to pay off the loan as quickly as possible. You will still need to pay back every penny of the principal, but you can reduce the amount of interest you pay. Every dollar you pay off earlier is less interest charged to you over the life of the loan, so make paying off this debt a priority if possible. If you want to see this in action, there are handy calculators available to show you how the numbers add up. Now let’s look at two common methods for paying down debt and how they apply to student loans by using the following examples:

Student A has four years of undergraduate college and has accrued debt at the following amounts and interest rate: $4,000 at 6.25%, $8,000 at 6.35%, $7,000 at 6.00% and $9,500 at 6.15%. Student B has three years of undergraduate loans at these levels and amounts: $5,000 at 6.15%, $4,500 at 6.35%, $6,000 at 6.25% and three years of graduate school at the following: $20,000 at 6.75%, $20,000 at 6.875% and $18,000 at 7%.

Snowball and Avalanche

Two of the most common and popular early payment methods are called the snowball method and the debt avalanche method. Students who use the snowball method pay off loans by size, smallest loan to largest. After the smallest is paid off, they roll the money you were paying on that loan into the next loan and keep at the system until all the loans are paid off. The theory behind this is that it helps you to stay on track if you can see some progress in the loans diminishing. Using this example our students would pay extra principal down on their loans in this order.

Student A:                              Student B:

$4,000 @ 6.25%                    $ 4,500 @ 6.35%

$7,000 @ 6.00%                    $ 5,000 @ 6.15%

$8,000 @ 6.35%                    $ 6,000 @ 6.25%

$9,500 @ 6.15%                    $18,000 @ 7.00%.

                                                $20,000 @ 6.875%

                                                $20,000 @ 6.75%

The debt avalanche approach has you allocate extra money beyond your required monthly payment to the loan with the highest interest rate. As you pay these down, you start tackling the loan with the next highest interest until the debt is extinguished. This is what the avalanche method would look like for our hypothetical students:

Student A:                                Student B:

$8,000 @ 6.35%                     $18,000 @ 7.00%

$4,000 @ 6.25%                     $20,000 @ 6.875%

$9,500 @ 6.15%                     $20,000 @ 6.75%

$7,000 @ 6.00%                      $ 4,500 @ 6.35%.

                                                 $ 6,000 @ 6.25%

                                                 $ 5,000 @ 6.15%

Note that the debt avalanche approach would likely save you more money in interest as you are paying down the highest loans first but it could be potentially the least psychologically satisfying as you don’t see your loans disappear as quick. Of course you could also use some combination of these approaches.

Give It Your All

The important thing is that you make a disciplined effort to pay down the debt as early as possible. This can be easier if you have just graduated from college and haven’t grown accustomed to a higher standard of living in your first few years out of school. If possible, make repaying your debt your number one personal finance goal with any extra discretionary income. Even paying an extra $50 per month can make a difference in the long run.

Get creative with finding extra money to put towards your loans. Research profitable side jobs or hobbies that will bring in a secondary cash flow. Let your family know that you would appreciate money to pay down your debt instead of a new pair or shoes or gift cards for Christmas or birthday presents. Make it a goal to use every extra dollar to get rid of your loans. Don’t forget to celebrate your achievements. Build an incentive system so as you reach different goals on your loan repayment, you can look forward to a special dinner or fun activity.

I’m happy to discuss student loan debt with young people. If this is you, or if you have a child or grandchild with student loans, call me at 708.488.0115 or email us at lumencapital@hotmail.com or pass my information on to them.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 708.488.0115 or emailing him at lumencapital@hotmail.com.

Back Friday.

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How Could Active Portfolio Management Work Today?

Last week  I discussed some of the odds stacked against active management of equity portfolios.  Besides the issues I addressed in that post, active managers have all sorts of other well known headwinds to outperformance: fees, taxes, portfolio turnover and stock selection are just a few of these.  The world also seems to have decided that active management is dead.  All you have to do is witness the explosive growth of ETFs to understand that investors are voting with their dollars and feet towards the active side.

Today though I'm going to do the unthinkable {at least for anything you've read here over the past decade or so} and tell you how I think an active portfolio could outperform a passive one going forward.  My formula is pretty simple formula and I'll lay it out below.

First you have to have a highly researched and concentrated portfolio of names.  Ten would be ideal, twenty stocks would be the ceiling.  You would likely have to actively trade around these positions due to market volatility and be ruthless about paring names that aren't performing if you have something in your research box that you think has better fundamentals.  You would have to mine the portfolio for losses in order to mitigate the effects of capital gains.  Also you would have to be willing to give up some of the profits by hedging the positions, most likely with options or futures.  Finally you would need to have the fortitude to let your winning names run.

Now here's the problem as I see it for most investors and active managers.  They don't have the research capabilities to run that sort of concentrated portfolio and any organization that does isn't likely to bear the cost of having that kind of staff today unless they can also be employed in other forms of investing.  Most won't take the time to do the sort of capital gains mitigation that I think you would need for this to work and most have little to no understanding of the options or futures markets.  Finally my guess is that you could only manage about a $100 million dollars or so in a strategy like this for it to be effective, so I don't think you're going to see a lot of managers scurrying out there to set portfolios like these up today.  Of course this sounds like the original formula that hedge funds used back in the day before they became so huge and it is how many of these rose to the size they have become.  Today though a fund of $100 million wants to get to a billion dollars of assets and the size simply becomes a hurdle that is harder to overcome.

You don't have to worry about me trying to go out and invest this way.  Also I think it would be harder to scale unless done in the limited partnership/hedge fund formate, but if I was going to actively manage a portfolio of equities for clients today, above is the formula that I would use.